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As filed with the Securities and Exchange Commission on August 29, 2000
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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
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Pre-Effective Amendment No.
-- ---
Post-Effective Amendment No. 23 X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. X
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(Check appropriate box or boxes.)
FIRST FUNDS
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(Exact name of Registrant as Specified in Charter)
370 17th Street, Suite 3100
Denver, CO 80202
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 442-1941
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Russell C. Burk, Secretary
First Funds
370 17th Street, Suite 3100
Denver, CO 80202
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(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)
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on , pursuant to paragraph (b)
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X 60 days after filing pursuant to paragraph (a) (1)
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on , pursuant to paragraph (a) (1)
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75 days after filing pursuant to paragraph (a) (2)
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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 Bond,
Intermediate Bond, U.S. Treasury Money Market, U.S. Government Money Market,
Municipal Money Market and Cash Reserve Portfolios
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[FIRST FUNDS LOGO]
CAPITAL APPRECIATION PORTFOLIO
Prospectus
Dated October ___, 2000
CLASS I
CLASS II
CLASS III
CLASS IV
[PHOTO]
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.
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TABLE OF CONTENTS
Page
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Investment Objective, Principal Strategies and Risks.........................................................................1
Performance..................................................................................................................2
Fees and Expenses of the Portfolio...........................................................................................3
Investment Details...........................................................................................................4
Who Manages the Portfolio?...................................................................................................6
Portfolio Managers...........................................................................................................7
How to Invest in the Portfolio...............................................................................................8
Distribution Plans and Shareholder Servicing Plans..........................................................................17
Financial Highlights........................................................................................................18
Appendix...................................................................................................................A-1
Additional Information about the Portfolio..........................................................................Back Cover
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</TABLE>
No person has been authorized to give any information or to make any
representation that is not contained in this Prospectus, or in the Statement of
Additional Information that is incorporated herein by reference, in connection
with the offering made by this Prospectus and, if given or made, such
information or representations must not be relied upon. Also, this Prospectus
does not constitute an offering by the Trust or its Distributor in any
jurisdiction where such an offering would not be lawful.
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INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS
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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.
PRINCIPAL INVESTMENT STRATEGIES -- Under normal market conditions, DMC currently
intends to invest at least 80% of the Portfolio's total assets in equity
securities of companies with market capitalizations generally between $200
million and $2 billion at the time of purchase, with an average market
capitalization of the Portfolio not to exceed $1.5 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 -- You may be interested in the Portfolio if you are comfortable
with above-average risk and intend to make a long-term investment commitment.
Like all managed funds, there is a risk that the Investment Adviser's strategy
for managing the Portfolio may not achieve the desired results. In addition, the
price of common stock moves up and down in response to corporate earnings and
developments, interest rate movements, economic and market conditions and
anticipated events. As a result, the price of the Portfolio's investments may go
down and you could lose money on your investment.
The Portfolio's share price may fluctuate more than that of funds primarily
invested in stocks of large companies. Occasionally, small company securities
may under perform as compared to the securities of larger companies. They may
also pose greater risk due to narrow product lines, limited financial resources,
less depth in management or a limited trading market for their stocks.
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 A DEPOSIT OR ANY
OTHER OBLIGATION OF A BANK, IS NOT INSURED, ENDORSED, OR GUARANTEED BY THE FDIC,
A BANK OR ANY GOVERNMENT AGENCY, AND INVOLVES INVESTMENT RISK INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
SHOULD I INVEST IN THE CAPITAL APPRECIATION PORTFOLIO?
The Portfolio may be appropriate for you if:
o 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.
o You are seeking long-term capital appreciation in your investment.
o 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.
o You are not seeking current income or the preservation of capital.
FUND FACTS
GOAL:
Long-term capital appreciation
PRINCIPAL INVESTMENTS:
o Common Stocks
o Small Company Stocks
CLASSES OF SHARES OFFERED IN THIS PROSPECTUS:
o Class I
o Class II
o Class III
o Class IV
CO-INVESTMENT ADVISERS:
o First Tennessee Bank National Association
("First Tennessee")
o Investment Advisers, Inc. ("IAI" or "Adviser")
o Delaware Management Company ("DMC"
or "Adviser")
PORTFOLIO MANAGERS:
o Gerald S. Frey
o Marshall T. Bassett
o John A. Heffern
o Jeffrey W. Hynoski
o Stephan T. Lampe
o Lori P. Wachs
o Francis J. Houghton, Jr.
o Barry Gladstein
DISTRIBUTOR:
o ALPS Mutual Funds Services, Inc. ("ALPS")
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PERFORMANCE
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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.
The performance of Class I shares shown in the bar chart reflects the expenses
associated with those shares from year to year.
Year-By-Year Total Return (Class I)
[GRAPH]
<TABLE>
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12/31/98 = 1.59%
12/31/99 = ____%
</TABLE>
Best Quarter (quarter ended ) -- ______%
Worst Quarter (quarter ended )
Year-to-date return (as of September 30th 2000) -- ______%
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 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. The table also compares the average annual returns of each class
of shares of the Portfolio for the periods shown to the performance of the
Russell 2000(TM) Growth Index. The Portfolio has changed its benchmark index to
the Russell 2000(TM) Growth Index primarily because the market capitalization
characteristics of the Russell 2000(TM) Growth Index better reflect the
investment strategy and market capitalization of the Portfolio.
Average Annual Total Return
(for the period ended December 31, 1999)
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INCEPTION DATE 1 YEAR SINCE INCEPTION
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<S> <C> <C> <C>
CLASS I 9/2/97 ______% ______%
CLASS II 10/2/97 ______% ______%
CLASS III 10/2/97 ______% ______%
CLASS IV*/ 8/3/99 N/A N/A
RUSSELL 2500C(TM) GROWTH 9/2/97 ______% ______%
RUSSELL 2000(TM) GROWTH
</TABLE>
*/Information for Class IV shares is not included in the table because the Class
has not been in existence for one full calendar year. Once Class IV shares have
been in existence for one full calendar year, the performance of Class IV shares
will be included in the table along with the other classes of shares.
WHAT IS THE RUSSELL 2000(TM) GROWTH INDEX?
The Russell 2000(TM) Growth Index measures the performance of those Russell
2000(TM) Index companies with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000(TM) Growth Index is not a mutual fund and you
cannot invest in it directly. Also, the performance of the Russell 2000(TM)
Growth Index does not reflect the costs associated with operating a mutual fund,
such as buying, selling, and holding securities.
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FEES AND EXPENSES OF THE PORTFOLIO
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
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<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) CLASS I CLASS II CLASS III CLASS IV
------- -------- --------- --------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on None 5.75% None None
purchases as a percentage of offering price
Maximum deferred sales charge (load) None None 1.00%*/ 5.00%
(as a percentage of original purchase price
or redemption proceeds, as applicable)
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from portfolio assets)
Management Fees .85% .85% .85% .85%
Distribution (12b-1) Fees .00% .00% .75% 1.00%
OTHER EXPENSES .59% .96% .99% .74%
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TOTAL PORTFOLIO OPERATING EXPENSES 1.44% 1.81% 2.59% 2.59%
==== ==== ==== ====
</TABLE>
*/Applied to redemptions made during the first year after purchase. No deferred
sales charges are imposed on redemptions from Class III after one year from date
of purchase.
EXAMPLE -- The following example is 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 example shows 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. The example 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 $ 147 $ 748 $ 362 $ 762 $ 262 $ 262
After 3 years $ 455 $1,112 $ 805 $1,105 $ 805 $ 805
After 5 years $ 786 $1,498 $1,374 $1,574 $1,374 $1,374
After 10 years $1,722 $2,577 $2,920 $2,731 $2,920 $2,731
</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 Class IV shares.
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INVESTMENT DETAILS
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INVESTMENT OBJECTIVE -- The objective of the Portfolio is to seek long-term
capital appreciation by investing at least 65% of its total assets in equity
securities of medium and smaller capitalization companies.
PRINCIPAL INVESTMENT STRATEGIES -- Under normal market conditions, DMC currently
intends to invest at least 80% of the Portfolio's total assets in equity
securities of companies with market capitalizations generally between $200
million and $2 billion at the time of purchase, with an average market
capitalization of the Portfolio not to exceed $1.5 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.
In selecting investments for the Portfolio, DMC analyzes 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 DMC believes possess unusual values.
PRINCIPAL RISKS -- The following table describes the securities in which the
Portfolio typically invests and the principal risks associated with those
securities.
<TABLE>
<CAPTION>
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SECURITIES PRINCIPAL RISKS ASSOCIATED WITH THE SECURITY
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<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
in the corporation's profits and losses, proportionate rapidly and unpredictably. This risk is common to
to the number of shares they own. all 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 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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SMALL COMPANY STOCKS: Common stocks issued by LIQUIDITY RISK -- The risk that certain securities or
companies with smaller market capitalizations. 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.
MARKET RISK
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
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SECURITIES PRINCIPAL RISKS ASSOCIATED WITH THE SECURITY
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<S> <C>
MONEY MARKET FUNDS: Open-ended mutual funds CREDIT RISK -- The risk that the issuer of a security,
that invest in commercial paper, banker's or a party to a contract, will default or otherwise not
acceptances, repurchase agreements, government honor a financial obligation.
securities, certificates of deposit, and other highly
liquid and safe securities, and pay money market INTEREST RATE RISK -- The risk of a decline in market
rates of interest. 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.
INFLATION RISK -- The risk that your investment will
not provide enough income to keep pace with
inflation.
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SECURITIES OF FOREIGN ISSUERS: Securities issued by: FOREIGN INVESTMENT RISK -- The risk that foreign
(1) companies organized outside the United States, securities may be adversely affected by political
(2) companies whose securities are principally traded instability of the issue's country, changes in currency
outside of the United States, and (3) foreign exchange rates, foreign economic conditions, or
governments and agencies or instrumentalities of regulatory and reporting standards that are less
foreign governments. Securities of foreign issuers stringent than those of the United States. Foreign
include American Depositary Receipts (ADRs), investment risks will normally be greatest when a
which are U.S. dollar-denominated securities. Fund invests in issuers located in emerging
countries.
LIQUIDITY RISK
MARKET RISK
VALUATION RISK
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REPURCHASE AGREEMENTS AND REVERSE REPURCHASE CREDIT RISK
AGREEMENTS: Repurchase agreements involve the
purchase of a security by a purchaser and a
simultaneous agreement by the seller (generally a
bank or dealer) to repurchase the security from the
purchaser at a specified date or on demand. This
technique offers a method of earning income on idle
cash. Reverse repurchase agreements involve the
sale of a security to another party (generally a bank
or dealer) in return for cash and an agreement to buy
the security back at a specified price and time.
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</TABLE>
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In addition to the securities identified above, the Portfolio may, from time to
time, engage in the following non-principal 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.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities which
are preferred stock or debt obligations that pay a fixed dividend or interest
payment and are convertible into common stock at a specified price or conversion
ratio.
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.
DMC 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 DMC 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 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, and their associated risks, in which
the Portfolio invests, please refer to the SAI.
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.
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WHO MANAGES THE PORTFOLIO?
--------------------------------------------------------------------------------
First Tennessee (530 Oak Court Drive, Memphis, Tennessee) and DMC (2005 Market
Street, Philadelphia, Pennsylvania) serve as Co-Investment Advisers to the
Portfolio. At a meeting on May 17, 2000, shareholders of the Portfolio approved
an Investment Advisory and Management Agreement between First Funds and DMC
naming DMC as Co-Adviser to the Portfolio. Effective June 1, 2000, DMC replaced
Investment Advisers, Inc. as Co-Adviser to the Portfolio. First Tennessee, among
other things, provides investment management evaluations to the Board of
Trustees of First Funds (the "Trustees"), monitors the activities of DMC,
including DMC's Portfolio transactions, and coordinates DMC's activities with
the Portfolio's custodian, transfer agent, administrator, and independent
accountants. DMC 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.
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 serves as an investment
adviser to individual, corporate and institutional advisory clients, pension
plans and collective investment funds, with approximately $____ billion in
assets under administration (including nondiscretionary
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accounts) and $____ billion in assets under management as of June 30, 2000, as
well as experience in supervising sub-advisers.
DMC is responsible for the day-to-day investment and reinvestment of the
Portfolio's assets in accordance with its investment objective and policies. DMC
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, DMC is entitled to receive from
the Portfolio a monthly management fee at the annual rate of 0.70% on 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.
As of March 31, 2000, DMC had approximately $46 billion under management in a
wide range of asset classes for institutional investors, large private trusts
and mutual fund shareholders. DMC is organized as a series of Delaware
Management Business Trust ("DMBT"), a business trust organized under the laws of
the State of Delaware. DMC and DMBT are part of the Delaware Investments family
of companies, which are located at 2005 Market Street, Philadelphia, PA 19103.
They are indirect, wholly-owned subsidiaries of Lincoln National Corporation,
Centre Square, West Tower, 1500 Market St., Suite 3900, Philadelphia, PA
19102-2112 ("LNC"). LNC is a publicly-owned company whose shares are traded on
the New York Stock Exchange.
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PORTFOLIO MANAGERS
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[PHOTO OF CAP AP TEAM]
GERALD S. FREY is Vice President/Senior Portfolio Manager of DMC and joined the
company in 1996. Prior to joining DMC, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has 22 years' experience in
the money management business and holds a bachelor's degree in Economics from
Bloomsburg University and attended Wilkes College and New York University.
MARSHALL T. BASSETT is Vice President of DMC and joined the company in 1997.
Prior to joining DMC, he served as Vice President in Morgan Stanley Asset
Management's Emerging Growth Group, where he analyzed small growth companies.
Prior to that, he was a trust officer at Sovran Bank and Trust Company. Mr.
Bassett received his bachelor's degree and MBA from Duke University.
JOHN A. HEFFERN is Vice President of DMC and joined the company in 1997. Prior
to joining DMC, he was a Senior Vice President, Equity Research at NatWest
Securities Corporation's Specialty Finance Services unit and a Principal and
Senior Regional Bank Analyst at Alex, Brown & Sons. Mr. Heffern holds a
bachelor's degree and an MBA from the University of North Carolina at Chapel
Hill.
JEFFREY W. HYNOSKI is Vice President of DMC and joined the company in 1998.
Prior to joining DMC, he served as a Vice President for Bessemer Trust Company
in the mid and large capitalization growth group. Prior to that, Mr. Hynoski
held positions at Lord Abbett & Co. and Cowen Asset Management. Mr. Hynoski
holds a bachelor's degree in Finance from the University of Delaware and an MBA
from Pace University.
STEPHAN T. LAMPE is Vice President of DMC and joined the company in 1995. Prior
to joining DMC, he served as a manager at Price Waterhouse. Mr. Lampe is a
Certified Public Accountant. Mr. Lampe earned a bachelor's degree and an MBA
from the University of Pennsylvania's Wharton School.
LORI P. WACHS is Vice President of DMC and joined the company in 1992. Prior to
joining DMC, she was with Goldman Sachs, where she was an equity analyst for two
years. Ms. Wachs earned a bachelor's degree in Finance and Oriental Studies from
the University of Pennsylvania's Wharton School.
FRANCIS J. HOUGHTON, Jr. is Vice President of DMC and joined the company in
1990. Prior to joining DMC, he served as Chairman of BMI Capital Corporation;
Portfolio Manager for Neuberger & Berman; Partner, Member of the Executive
Committee and Director of Research for Oppenheimer & Company, Inc.; and Vice
President and Portfolio
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Manager of J.M. Hartwell & Company. Mr. Houghton earned a BBA from Manhattan
College and attended NYU Graduate School of Business Administration.
BARRY S. GLADSTEIN is Vice President/Portfolio Analyst of DMC and joined the
company in 1995. Prior to joining DMC, he held positions with Cigna Corporation
and Arthur Young and Company. Mr. Gladstein earned a bachelor's degree from
Binghamton University and an MBA from the University of Pennsylvania's Wharton
School. He is a Certified Public Accountant.
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HOW TO INVEST IN THE PORTFOLIO
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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 in which you would like to invest.
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 described later in this
prospectus, the sales load may be waived. The sales load is reflected in the
offering price of 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. 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 eight years from the date of purchase, Class IV shares automatically
convert to Class II shares. Class IV shares also incur distribution fees.
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 accounts
("Institutional Accounts"). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions, and other entities serving in a trust,
advisory, agency, custodial or similar capacity (each an "Institutional
Investor" and collectively "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.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to Boston Financial Data
Services (the "Transfer Agent"). 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
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availability), an Institutional Investor must call the Transfer Agent at
1-800-442-1941, (option 2) prior to the close of business (normally 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 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 converted to Class III
shares will not be subject to the 1% CDSC in year 1. Institutional Investors
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.
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 the close of business (normally 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 P.O. Box 8050, Boston, MA 02266. 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 the NYSE 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
DMC's opinion, they are of a size that would disrupt management of the
Portfolio.
In order to allow DMC 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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<PAGE> 13
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 of the Portfolio".
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/First Horizon Card Program" (a consumer discount
card program provided by First Horizon Strategic Alliances, Inc., a subsidiary
of First Tennessee), the minimum initial investment is $250, and subsequent
investments may be in any amount of $25 or greater.
If you are an employee of First Tennessee or any of its affiliates and you
participate in the Systematic Investing Program, the minimum initial investment
is $50, and subsequent investments may be in any amount of $25 or greater.
If your balance in the Portfolio falls below the applicable minimum investment
requirement due to redemption, you may be given 30 days' notice to reestablish
the minimum balance. If you do not reestablish the minimum balance, your account
may be closed and the proceeds mailed to you at the address on record. Shares
will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash or third party checks 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
prior to the close of business (normally 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.
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 Data Services, 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 completed application.
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 First Funds account. First, an 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,
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<PAGE> 14
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 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.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's name,
your 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 (if required) 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 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 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 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 the close of business (normally 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 the Transfer Agent.
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 the
NYSE is closed, the Portfolio's NAV may be affected on days when investors do
not have access to the Portfolio to purchase or redeem shares.
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<PAGE> 15
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 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.
HOW DO I REDEEM THROUGH MY INVESTMENT PROFESSIONAL?
On your behalf, the broker of record listed on your account may redeem shares.
Proceeds from the redemption can only be sent to your address of record.
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.
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.
SYSTEMATIC EXCHANGE PROGRAM
This account option may be added to your account if you would like to
automatically withdraw from one First Funds account into another First Funds
account on a regular basis. Please note that there may be a tax liability
associated with redemptions made from your mutual fund investment. Talk to your
Investment Professional regarding your specific tax situation.
The systematic exchange program is established between identically registered
accounts. New accounts must meet the account minimum standards listed
previously. Systematic exchanges are only made among the same share class,
except for the Money Market Portfolios, which are not subject to sales charges.
Call First Funds at 1-800-442-1941 (option 2) for more details on establishing
this program. See "How Are Exchanges Made?" for more information on exchanges.
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 or
eliminate 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 (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:
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<PAGE> 16
<TABLE>
<CAPTION>
TOTAL SALES LOAD FOR CLASS II SHARES
------------------------------------
As a % of offering Broker-Dealer
Amount of Transaction price per share As a % of NAV Reallowance
--------------------- ------------------ ------------- -------------
<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 broker-dealer reallowance may be changed from time to time.
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 other defined
contribution 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 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).
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<PAGE> 17
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 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 for 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, any shares purchased in accounts established prior to
November 2, 1998 are not subject to the CDSC.
CLASS IV
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. See
discussion under "Distribution Plans and Shareholder Servicing Plans."
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<PAGE> 18
DEFERRED SALES CHARGES. A CDSC of up to 5.00% is imposed on redemptions of Class
IV shares based on the lower of the shares' cost and the current net asset
value. 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. In addition, the CDSC imposed on redemptions
of Class IV shares may be waived for Systematic Withdrawal Plans with respect to
up to 10% per year of the account value at the time of establishment.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
1 2 3 4 5 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.
ALL CLASSES
HOW ARE PORTFOLIO SHARES VALUED?
The price at which you buy, sell or exchange Portfolio shares is the share price
or net asset value (NAV). The share price for each Class of shares of the
Portfolio is determined by adding the value of each Class' proportional share of
the Portfolio's investments, cash and other assets, deducting each Class'
proportional share of liabilities, and then dividing that value by the total
number of the shares outstanding in that Class.
The Portfolio is open for business each day that the NYSE is 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). Share price is not calculated on the days that the NYSE is
closed.
When the Portfolio calculates the share price for each share Class, it values
the securities it holds at market value. Sometimes market quotes from some
securities are not available or are not representative of market value. Examples
would be when events occur that materially affect the value of a security at a
time when the security is not trading or when the securities are illiquid. In
that case, securities may be valued in good faith at fair value, using
consistently applied procedures decided on by the Trustees of First Funds.
WHAT ARE MY 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, if any, are declared and paid
annually. 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 First Funds. Not all First Funds Portfolios
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 of 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 the close of business (normally 4:00 p.m.
Eastern Time) on any Business Day.
Investors in Class II or Class IV shares wishing to exchange into one of the
Money Market Portfolios that do not offer these classes will receive Class III
shares.
If you exchange shares subject to a CDSC the transaction will not be subject to
the CDSC. However, when you redeem the shares acquired through the exchange, the
redemption may be subject to the CDSC, depending upon when you originally
purchased the shares. The CDSC will be computed using the schedule of any
Portfolio into or from which you have exchanged your shares that would result in
your paying the highest CDSC applicable to your class of
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<PAGE> 19
shares. Also, Institutional Investors converted to Class III shares will not be
subject to the 1% CDSC in year 1.
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 DMC
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 DMC'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 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." If you purchase shares just prior to a distribution of
income or capital gains, the purchase price will reflect the amount of the
upcoming distribution, but you will be taxed on the entire amount of the
distribution received, even though, as an economic matter, the distribution
simply constitutes a return of your capital. This is known as "buying a
dividend".
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
16
<PAGE> 20
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.
--------------------------------------------------------------------------------
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 "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 and III shares of the Portfolio. Under the Shareholder Servicing Plans,
certain broker-dealers, banks, and other financial institutions (collectively
"Service Organizations") are paid 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.
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.
17
<PAGE> 21
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The Financial Highlights Table is presented to help you understand the
Portfolio's financial performance since inception. Certain information reflects
financial results for a single Portfolio share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche 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 Year For the Period
Ended June 30, Ended June 30,
-------------- --------------
1999/\ 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 (0.09) (0.03)
Net realized and unrealized gain (loss) on
investments (0.16) 0.77
-------------- --------------
Total from investment operations (0.25) 0.74
-------------- --------------
Distributions:
Net realized gain (0.24) --
-------------- --------------
Net asset value, end of period $ 10.25 $ 10.74
============== ==============
TOTAL RETURN+ (2.16)% 7.40%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 33,803 $ 37,014
Ratio of expenses to average daily net assets(1) 1.29% 1.16%*
Ratio of net investment loss to average net assets (1.00)% (0.54)%*
Portfolio turnover rate 47% 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. 1.44% 1.36%*
</TABLE>
<TABLE>
<CAPTION>
CLASS II
---------------------------------
For the Year For the Period
Ended June 30, Ended June 30,
-------------- --------------
1999/\ 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 (0.13) (0.05)
Net realized and unrealized gain (loss) on
investments (0.14) 0.25
-------------- --------------
Total from investment operations (0.27) 0.20
-------------- --------------
Distributions:
Net realized gain (0.24) --
-------------- --------------
Net asset value, end of period $ 10.20 $ 10.71
============== ==============
TOTAL RETURN+*** (2.35)% 1.90%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 2,051 $ 1,400
Ratio of expenses to average daily net assets(1) 1.66% 1.52%*
Ratio of net investment loss to average net assets (1.37)% (0.90)%*
Portfolio turnover rate 47% 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. 1.81% 1.72%*
</TABLE>
* Annualized.
** Classes I and II commenced operations on September 2, 1997 and October 2,
1997, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
/\ Per share amounts calculated based on the average shares outstanding during
the period.
18
<PAGE> 22
CAPITAL APPRECIATION PORTFOLIO
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS III
---------------------------------
For the Year For the Period
Ended June 30, Ended June 30,
-------------- --------------
1999/\ 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 (0.19) (0.10)
Net realized and unrealized gain (loss) on
investments (0.17) 0.23
-------------- --------------
Total from investment operations (0.36) 0.13
-------------- --------------
Distributions:
Net realized gain (0.24) --
-------------- --------------
Net asset value, end of period $ 10.04 $ 10.64
============== ==============
TOTAL RETURN+ (3.22)% 1.24%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 392 $ 590
Ratio of expenses to average daily net assets(1) 2.44% 2.28%*
Ratio of net investment loss to average net assets (2.15)% (1.65)%*
Portfolio turnover rate 47% 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 2.59% 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.
/\ Per share amounts calculated based on the average shares outstanding during
the period.
19
<PAGE> 23
--------------------------------------------------------------------------------
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, DMC
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
A-1
<PAGE> 24
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 DMC 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 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.
A-2
<PAGE> 25
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[FIRST FUNDS LETTERHEAD]
--------------------------------------------------------------------------------
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. Copies of this information may also be obtained,
upon payment of a duplicating fee, by electronic request at the following e-mail
address: [email protected].
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 1-202-942-8090.
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 FREE OF CHARGE, OR TO OBTAIN OTHER INFORMATION ABOUT THE PORTFOLIO AND
TO MAKE SHAREHOLDER INQUIRIES, 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).
================================================================================
[FIRST TENNESSEE LOGO] =========================================
Investment Advisor FIRST FUNDS
o Are NOT insured by the FDIC or
any other governmental agency.
o Are NOT bank deposits or
other obligations of or guaranteed
by First Tennessee Bank National
Association or any of its affiliates.
[ALPS LOGO] o Involve investment risks, including
Sponsor and Distributor the possible loss of the principal
amount invested.
=========================================
Investment Company Act File No. 811-6589
<PAGE> 29
FIRST FUND
Discipline, Consistency, Patience(SM)
U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
PROSPECTUS
Dated October __, 2000
CLASS I
CLASS II
CLASS III
CLASS IV
[GRAPHIC]
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> 30
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Investment Objective, Principal Strategies and Risks
U.S. Treasury Money Market Portfolio....................................... 1
U.S. Government Money Market Portfolio..................................... 4
Municipal Money Market Portfolio........................................... 7
Cash Reserve Portfolio..................................................... 10
Performance
U.S. Treasury Money Market Portfolio....................................... 2
U.S. Government Money Market Portfolio..................................... 5
Municipal Money Market Portfolio........................................... 8
Cash Reserve Portfolio..................................................... 11
Fees and Expenses of the Portfolio
U.S. Treasury Money Market Portfolio....................................... 3
U.S. Government Money Market Portfolio..................................... 6
Municipal Money Market Portfolio........................................... 9
Cash Reserve Portfolio..................................................... 12
Investment Details.............................................................. 13
Who Manages the Portfolio?...................................................... 17
Portfolio Managers.............................................................. 17
How to Invest in the Portfolio.................................................. 17
Distribution Plans and Shareholder Servicing Plans.............................. 24
Financial Highlights............................................................ 25
Appendix........................................................................ A-1
Additional Information about the Portfolios..................................... Back Cover
</TABLE>
No person has been authorized to give any information or to make any
representation that is not contained in this Prospectus, or in the Statement of
Additional Information that is incorporated herein by reference, in connection
with the offering made by this Prospectus and, if given or made, such
information or representations must not be relied upon. Also, this Prospectus
does not constitute an offering by the Trust or its Distributor in any
jurisdiction where such an offering would not be lawful.
<PAGE> 31
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS OF THE
U.S. TREASURY MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE -- The objective of the U.S. Treasury Money Market
Portfolio (the "Portfolio") is to seek as high a level of current income as is
consistent with the preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGY -- The Portfolio may invest in U.S. Treasury
bills, notes, and bonds and in other direct obligations of the U.S. Treasury.
The Portfolio also may invest in repurchase and reverse repurchase agreements.
Under normal market conditions, the Portfolio will seek to invest 100% of its
net assets in the securities described above.
PRIMARY RISKS -- The primary risks of investing in this Fund are interest rate
risk and credit risk.
- INTEREST RATE RISK. When interest rates change, the value of the Portfolio's
holdings will be affected. An increase in interest rates tends to reduce the
market value of debt securities, while a decline in interest rates tends to
increase their values.
- CREDIT RISK. The value of the debt securities held by the Portfolio fluctuates
with the credit quality of the issuers of those securities. Credit risk relates
to the ability of the issuer to make payments of principal and interest when
due, including default 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.
AN INVESTMENT IN THE PORTFOLIO IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
SHOULD I INVEST IN THE U.S. TREASURY MONEY MARKET PORTFOLIO?
The Portfolio may be appropriate for you if:
- You require stability of principal.
- You are seeking a money market mutual fund for the cash portion of
your asset allocation program.
- You are looking for an investment with a lower degree of risk during
uncertain economic times or periods of stock market volatility.
- You consider yourself a saver rather than an investor.
(REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN EFFECTIVE, BALANCED INVESTMENT
PLAN.)
The U.S. Treasury Money Market Portfolio, the U.S. Government Money Market
Portfolio, the Municipal Money Market Portfolio, and the Cash Reserve Portfolio
are each referred to as the "Portfolio" or a "Portfolio" and together as the
"Portfolios" or the "Money Market Portfolios."
FUND FACTS
GOAL:
The U.S. Treasury Money Market Portfolio seeks as high a level of current
income as is consistent with the preservation of principal and liquidity and
the maintenance of a stable share price of $1.00.
PRINCIPAL INVESTMENTS:
- U.S. Treasury bills, notes and bonds
- Repurchase and reverse repurchase agreements
CLASSES OF SHARES OFFERED IN THIS PROSPECTUS:
- Class I
- Class II
- Class III
- Class IV
AVERAGE PORTFOLIO MATURITY:
60 days or less
INVESTMENT ADVISER:
- First Tennessee Bank National Association ("First Tennessee" or "Adviser")
INVESTMENT SUB-ADVISER:
- BlackRock Institutional Management Corporation ("BIMC" or "Sub-Adviser")
DISTRIBUTOR:
- ALPS Mutual Funds Services, Inc. ("ALPS")
1
<PAGE> 32
PERFORMANCE OF THE U.S. TREASURY MONEY MARKET PORTFOLIO
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.
The performance of Class I shares shown in the bar chart reflects the expenses
associated with those shares from year to year.
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
12/31/93 = 2.83%
12/31/94 = 3.87%
12/31/95 = 5.62%
12/31/96 = 5.11%
12/31/97 = 5.13%
12/31/98 = 5.01%
Best Quarter (quarter ended June 30, 1995) -- 1.44%
Worst Quarter (quarter ended March 31, 1993) -- 0.68%
Year-to-date return (as of September 30, 1999) -- 3.25%
The table below lists the U.S. Treasury Money Market 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. If you would like to know the current 7
day yield of the U.S. Treasury Money Market Portfolio, please call ALPS at
1-800-442-1941.
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 11/12/92 5.01% 4.94% 4.55%
CLASS II*/ N/A N/A N/A
CLASS III 8/8/95 4.80% N/A 4.90%
CLASS IV*/ N/A N/A N/A
</TABLE>
*/Information for Class II and Class IV shares is not included in the table
because these Classes were not operational as of the date of this prospectus.
2
<PAGE> 33
FEES AND EXPENSES OF THE U.S. TREASURY MONEY MARKET PORTFOLIO
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) CLASS I CLASS II CLASS III CLASS IV
------- -------- --------- --------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on None None None None
purchases as a percentage of offering price
Maximum deferred sales charge (load) None None None None
(as a percentage of original purchase price
or redemption proceeds, as applicable)
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from portfolio assets) CLASS I CLASS II CLASS III CLASS IV
------- -------- --------- --------
<S> <C> <C> <C> <C>
MANAGEMENT FEES*/ .25% .25% .25% .25%
DISTRIBUTION (12b-1) FEES .00% .00% .45%***/ .50%
OTHER EXPENSES**/ .44% .66%****/ .41% .66%****/
--- --- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES .69% .91% 1.11% 1.41%
--- --- ---- ----
</TABLE>
*/First Tennessee, as Investment Adviser, has voluntarily agreed to waive a
portion of the investment management fee that it is entitled to receive under
the Investment Advisory and Management Agreement to the extent such fee exceeds
.08% of the Portfolio's average net assets.
**/ First Tennessee, as Co-administrator, has voluntarily agreed to waive its
entire co-administration fee (.05%) that it is entitled to receive under the
Co-administration Agreement. ALPS, as administrator, has voluntarily agreed to
waive its entire administration fee (.075%) that it is entitled to receive under
the Administration Agreement.
***/The Trustees have agreed to limit the 12b-1 fees applicable to Class III
shares to .25%.
****/Because Class II and Class IV shares are not operational at the date of
this prospectus, this amount is estimated.
EXAMPLE -- The following example is 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 example shows 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. The example assumes a 5% average
annual return and that you reinvest all of your dividends. Your actual costs may
be higher or lower.
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III CLASS IV
<S> <C> <C> <C> <C>
After 1 year $70 $93 $113 $144
After 3 years $221 $290 $353 $446
After 5 years $384 $504 $611 $771
After 10 years $858 $1,119 $1,350 $1,689
</TABLE>
3
<PAGE> 34
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS OF THE
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE -- The objective of the U.S. Government Money Market
Portfolio (the "Portfolio") is to seek as high a level of current income as is
consistent with the preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGY -- Under normal market conditions, the Portfolio
will invest at least 65% of its assets in instruments issued or guaranteed as to
principal and interest by the U.S. government or by any of its agencies or
instrumentalities. Most of the securities held by the Portfolio are backed by
the full faith and credit of the U.S. government. The Portfolio also may invest
in repurchase and reverse repurchase agreements.
PRIMARY RISKS -- The primary risks of investing in this Fund are interest rate
risk and credit risk.
- INTEREST RATE RISK. When interest rates change, the value of the Portfolio's
holdings will be affected. An increase in interest rates tends to reduce the
market value of debt securities, while a decline in interest rates tends to
increase their values.
- CREDIT RISK. The value of the debt securities held by the Portfolio fluctuates
with the credit quality of the issuers of those securities. Credit risk relates
to the ability of the issuer to make payments of principal and interest when
due, including default 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.
AN INVESTMENT IN THE PORTFOLIO IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
SHOULD I INVEST IN THE U.S. GOVERNMENT MONEY MARKET PORTFOLIO?
The Portfolio may be appropriate for you if:
- You require stability of principal.
- You are seeking a money market mutual fund for the cash portion of
your asset allocation program.
- You are looking for an investment with a lower degree of risk during
uncertain economic times or periods of stock market volatility.
- You consider yourself a saver rather than an investor.
(REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN EFFECTIVE, BALANCED INVESTMENT
PLAN.)
FUND FACTS
GOAL:
The U.S. Government Money Market Portfolio seeks as high a level of current
income as is consistent with the preservation of principal and liquidity and
the maintenance of a stable share price of $1.00.
PRINCIPAL INVESTMENTS:
- U.S. Treasury bills, notes and bonds
- Repurchase and reverse repurchase agreements
- Variable or floating rate instruments
CLASSES OF SHARES OFFERED IN THIS PROSPECTUS:
- Class I
- Class II
- Class III
AVERAGE PORTFOLIO MATURITY:
90 days or less
INVESTMENT ADVISER:
- First Tennessee
INVESTMENT SUB-ADVISER:
- BIMC
DISTRIBUTOR:
- ALPS
4
<PAGE> 35
PERFORMANCE OF THE U.S. GOVERNMENT MONEY MARKET PORTFOLIO
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.
The performance of Class I shares shown in the bar chart reflects the expenses
associated with those shares from year to year.
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
[BAR GRAPH]
12/31/93 = 2.97%
12/31/94 = 4.20%
12/31/95 = 5.72%
12/31/96 = 5.20%
12/31/97 = 5.32%
12/31/98 = 5.18%
Best Quarter (quarter ended June 30, 1995) -- 1.45%
Worst Quarter (quarter ended June 30, 1993) -- 0.71%
Year-to-date return (as of September 30, 1999) -- 3.49%
The table below lists the U.S. Government Money Market 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. If you would like to know the current 7
day yield of the U.S. Government Money Market Portfolio, please call ALPS at
1-800-442-1941.
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 11/12/92 5.18% 5.12% 4.72%
CLASS II*/ N/A N/A N/A
CLASS III 8/8/95 4.80% N/A 4.93%
</TABLE>
*/Information for Class II shares is not included in the table because this
Class was not operational as of the date of this prospectus.
5
<PAGE> 36
FEES AND EXPENSES OF THE U.S. GOVERNMENT MONEY MARKET PORTFOLIO
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on None None None
purchases as a percentage of offering price
Maximum deferred sales charge (load) None None None
(as a percentage of original purchase price
or redemption proceeds, as applicable)
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from portfolio assets) CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Management Fees*/ .25% .25% .25%
Distribution (12b-1) Fees .00% .00% .45%***/
Other Expenses**/ .31% .65%****/ .40%
--- --- ----
Total Portfolio Operating Expenses .56% .90% 1.10%
--- --- ----
</TABLE>
*/First Tennessee, as Investment Adviser, has voluntarily agreed to waive a
portion of the investment management fee that it is entitled to receive under
the Investment Advisory and Management Agreement to the extent such fee exceeds
.10% of the Portfolio's average net assets.
**/First Tennessee, as Co-administrator, is entitled to receive an annual fee
of .05% of the Portfolio's average net assets. First Tennessee has voluntarily
agreed to limit the fee that it is entitled to receive as Co-administrator to
.025% of the Portfolio's average net assets.
***/The Trustees have agreed to limit the 12b-1 fees applicable to Class III
shares to .25%.
****/Because Class II is not currently operational, this amount is estimated.
EXAMPLE -- The following example is 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 example shows 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. The example assumes a 5% average
annual return and that you reinvest all of your dividends. Your actual costs may
be higher or lower.
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
After 1 year $57 $92 $112
After 3 years $179 $287 $350
After 5 years $313 $498 $606
After 10 years $701 $1,107 $1,339
</TABLE>
6
<PAGE> 37
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS OF THE
MUNICIPAL MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE -- The objective of the Municipal Money Market Portfolio
(the "Portfolio") is to seek as high a level of federally tax-exempt income as
is consistent with the preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGY -- Under normal market conditions, the Portfolio
will invest at least 65% of its total assets in high-quality, short-term
municipal obligations. The Portfolio also may invest in high-quality, long-term,
fixed, variable, or floating rate instruments (including tender option bonds)
that have interest rates, maturities, and prices comparable to similar
short-term instruments. Under normal market conditions, the investments of the
Portfolio will be managed in a manner so that at least 80% of the income earned
by the Portfolio will be exempt from federal income tax. The Portfolio also may
invest in repurchase and reverse repurchase agreements.
PRIMARY RISKS -- The primary risks of investing in this Fund are interest rate
risk, credit risk and taxable risk.
- INTEREST RATE RISK. When interest rates change, the value of the Portfolio's
holdings will be affected. An increase in interest rates tends to reduce the
market value of debt securities, while a decline in interest rates tends to
increase their values.
- CREDIT RISK. The value of the debt securities held by the Portfolio fluctuates
with the credit quality of the issuers of those securities. Credit risk relates
to the ability of the issuer to make payments of principal and interest when
due, including default risk.
- TAXABLE INCOME RISK. The risk that income earned on municipal obligations may
be subject to state or and local taxes or may be treated as a preference item
for determining the federal alternative minimum tax.
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.
AN INVESTMENT IN THE PORTFOLIO IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
SHOULD I INVEST IN THE MUNICIPAL MONEY MARKET PORTFOLIO?
The Portfolio may be appropriate for you if:
- You require stability of principal.
- You are seeking a money market mutual fund for the cash portion of
your asset allocation program.
- You are looking for an investment with a lower degree of risk during
uncertain economic times or periods of stock market volatility.
- You consider yourself a saver rather than an investor.
(REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN EFFECTIVE, BALANCED INVESTMENT
PLAN.)
FUND FACTS
GOAL:
The Municipal Money Market Portfolio seeks as high a level of federally
tax-exempt income as is consistent with the preservation of principal and
liquidity and the maintenance of a stable share price of $1.00.
PRINCIPAL INVESTMENTS:
- Tax, revenue or bond anticipation notes
- Tax-exempt commercial paper
- Municipal lease obligations
- Resource recovery bonds
- Standby commitments
- Zero coupon bonds
CLASSES OF SHARES OFFERED IN THIS PROSPECTUS:
- Class I
- Class II
- Class III
AVERAGE PORTFOLIO MATURITY:
90 days or less
INVESTMENT ADVISER:
- First Tennessee
INVESTMENT SUB-ADVISER:
- BIMC
DISTRIBUTOR:
- ALPS
7
<PAGE> 38
PERFORMANCE OF THE MUNICIPAL MONEY MARKET PORTFOLIO
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.
The performance of Class I shares shown in the bar chart reflects the expenses
associated with those shares from year to year.
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
[BAR GRAPH]
12/31/93 = 2.30%
12/31/94 = 2.77%
12/31/95 = 3.77%
12/31/96 = 3.34%
12/31/97 = 3.36%
12/31/98 = 3.16%
Best Quarter (quarter ended June 30, 1995) -- 0.99%
Worst Quarter (quarter ended June 30, 1993) -- 0.54%
Year-to-date return (as of September 30, 1999) -- 2.13%
The table below lists the Municipal Money Market 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. If you would like to know the current 7
day yield of the Municipal Money Market Portfolio, please call ALPS at
1-800-442-1941.
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 11/12/92 3.16% 3.28% 3.10%
CLASS II*/ N/A N/A N/A
CLASS III 7/28/95 2.83% N/A 3.05%
</TABLE>
*/Information for Class II shares is not included in the table because this
Class was not operational as of the date of this prospectus.
8
<PAGE> 39
FEES AND EXPENSES OF THE MUNICIPAL MONEY MARKET PORTFOLIO
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on None None None
purchases as a percentage of offering price
Maximum deferred sales charge (load) None None None
(as a percentage of original purchase price
or redemption proceeds, as applicable)
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from portfolio assets) CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
MANAGEMENT FEES*/ .25% .25% .25%
DISTRIBUTION (12b-1) FEES .00% .00% .45%***/
OTHER EXPENSES**/ .25% .61%****/ .36%
--- --- ----
TOTAL PORTFOLIO OPERATING EXPENSES .50% .86% 1.06%
=== === ====
</TABLE>
*/First Tennessee, as Investment Adviser, has voluntarily agreed to waive a
portion of the investment management fee that it is entitled to receive under
the Investment Advisory and Management Agreement to the extent such fee exceeds
.10% of the Portfolio's average net assets.
**/First Tennessee , as Co-administrator, is entitled to receive an annual fee
of .05% of the Portfolio's average net assets. First Tennessee has voluntarily
agreed to limit the fee that it is entitled to receive as Co-administrator to
.025% of the Portfolio's average net assets.
***/The Trustees have agreed to limit the 12b-1 fees applicable to Class III
shares to .25%.
****/Because Class II is not currently operational, this amount is estimated.
EXAMPLE -- The following example is 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 example shows 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. The example assumes a 5% average
annual return and that you reinvest all of your dividends. Your actual costs may
be higher or lower.
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
After 1 year $ 51 $ 88 $ 108
After 3 years $160 $ 274 $ 337
After 5 years $280 $ 477 $ 585
After 10 years $628 $1,060 $1,293
</TABLE>
9
<PAGE> 40
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS OF THE
CASH RESERVE PORTFOLIO
INVESTMENT OBJECTIVE -- The objective of the Cash Reserve Portfolio (the
"Portfolio") is to seek as high a level of current income as is consistent with
the preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGY -- The Portfolio may invest in a broad range of
high-quality, short-term, U.S. dollar-denominated money market obligations,
including, but not limited to: certificates of deposit, commercial paper,
bankers' acceptances, and notes issued by U.S. banks. The securities in which
the Portfolio typically invests are issued by issuers in the financial services
industry, including, foreign and domestic banks, insurance companies, brokerage
firms, and consumer and industrial finance companies. The Portfolio also may
invest in repurchase and reverse repurchase agreements.
PRIMARY RISKS -- The primary risks of investing in this Fund are interest rate
risk, credit risk and foreign risks.
- INTEREST RATE RISK. When interest rates change, the value of the
Portfolio's holdings will be affected. An increase in interest rates tends to
reduce the market value of debt securities, while a decline in interest rates
tends to increase their values.
- CREDIT RISK. The value of the debt securities held by the Portfolio
fluctuates with the credit quality of the issuers of those securities. Credit
risk relates to the ability of the issuer to make payments of principal and
interest when due, including default risk.
- FOREIGN RISKS. The risk that foreign securities may be adversely
affected by political instability of the issuer's country, changes in currency
exchange rates, foreign economic conditions, or regulatory and reporting
standards that are less stringent than those of the United States. Foreign
investment risks will normally be greatest when a Fund invests in issuers
located in emerging countries.
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.
AN INVESTMENT IN THE PORTFOLIO IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
SHOULD I INVEST IN THE CASH RESERVE PORTFOLIO?
The Portfolio may be appropriate for you if:
- You require stability of principal.
- You are seeking a money market mutual fund for the cash portion of your
asset allocation program.
- You are looking for an investment with a lower degree of risk during
uncertain economic times or periods of stock market volatility.
- You consider yourself a saver rather than an investor.
(REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN EFFECTIVE, BALANCED INVESTMENT
PLAN.)
FUND FACTS
GOAL:
The Cash Reserve Portfolio seeks as high a level of current income as is
consistent with the preservation of principal and liquidity and the maintenance
of a stable share price of $1.00.
PRINCIPAL INVESTMENTS:
- Certificates of deposit
- Commercial paper
- Bankers' acceptances
- Bank notes
- U.S. government obligations
CLASSES OF SHARES OFFERED IN THIS PROSPECTUS:
- Class I
- Class II
- Class III
INVESTMENT ADVISER:
- First Tennessee
INVESTMENT SUB-ADVISER:
- BIMC
DISTRIBUTOR:
- ALPS
10
<PAGE> 41
PERFORMANCE OF THE CASH RESERVE PORTFOLIO
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.
The performance of Class I shares shown in the bar chart reflects the expenses
associated with those shares from year to year.
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
[BAR GRAPH]
12/31/95 5.74%
12/31/96 5.18%
12/31/97 5.37%
12/31/98 5.32%
Best Quarter (quarter ended June 30, 1995) -- 1.45%
Worst Quarter (quarter ended December 31, 1998) -- 1.23%
Year-to-date return (as of September 30, 1999) -- 3.57%
The table below lists the Cash Reserve 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. If you would like to know the current 7 day yield of the Cash
Reserve Portfolio, please call ALPS at 1-800-442-1941.
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 9/26/94 5.32% N/A 5.39%
CLASS II*/ N/A N/A N/A
CLASS III 7/28/95 5.06% N/A 5.09%
</TABLE>
*/Information for Class II shares is not included in the table because this
Class was not operational as of the date of this prospectus.
11
<PAGE> 42
FEES AND EXPENSES OF THE CASH RESERVE PORTFOLIO
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on None None None
purchases as a percentage of offering price
Maximum deferred sales charge (load) None None None
(as a percentage of original purchase price
or redemption proceeds, as applicable)
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from portfolio assets) CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Management Fees*/ .25% .25% .25%
Distribution (12b-1) Fees .00% .00% .45%***/
Other Expenses**/ .31% .58%****/ .33%
--- --- ----
TOTAL PORTFOLIO OPERATING EXPENSES .56% .83% 1.03%
=== === ====
</TABLE>
*/First Tennessee, as Investment Adviser, has voluntarily agreed to waive a
portion of the investment management fee that it is entitled to receive under
the Investment Advisory and Management Agreement to the extent such fee exceeds
.10% of the Portfolio's average net assets.
**/First Tennessee, as Co-administrator, is entitled to receive an annual fee
of .05% of the Portfolio's average net assets. First Tennessee has voluntarily
agreed to limit the fee that it is entitled to receive as Co-administrator to
.025% of the Portfolio's average net assets.
***/The Trustees have agreed to limit the 12b-1 fees applicable to Class III
shares to .25%.
****/Because Class II is not currently operational, this amount is estimated.
EXAMPLE -- The following example is 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 example shows 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. The example assumes a 5% average
annual return and that you reinvest all of your dividends. Your actual costs may
be higher or lower.
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
After 1 year $ 57 $ 85 $ 105
After 3 years $179 $ 265 $ 328
After 5 years $313 $ 460 $ 568
After 10 years $701 $1,025 $1,258
</TABLE>
12
<PAGE> 43
INVESTMENT DETAILS
OUR INVESTMENT STRATEGY -- Each Portfolio seeks as high a level of current
income as is consistent with the preservation of capital and liquidity by
investing in a portfolio of high quality money market instruments. Pursuant to
procedures adopted by the Trustees, each Portfolio may purchase only high
quality money market obligations that satisfy the investment restrictions of the
applicable Portfolio and that the Sub-Adviser believes present minimal credit
risks. To be considered high quality, a security must be a U.S. government
security; or rated in accordance with applicable rules in one of the two highest
rating categories for short-term obligations by at least two nationally
recognized rating services (or by one, if only one rating service has rated the
security); or, if unrated, judged to be of equivalent quality by BIMC. Also,
with limited exceptions, each Portfolio must limit its investments to
obligations with remaining maturities of 397 days or less, as determined in
accordance with applicable rules adopted by the SEC. Each Portfolio also must
maintain a dollar-weighted average maturity of 90 days or less.
The Cash Reserve Portfolio also may invest in U.S. dollar-denominated
obligations of foreign banks or foreign branches of U.S. banks where BIMC deems
the instrument to present minimal credit risks. Such investments may include
Eurodollar Certificates of Deposit (ECDs), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits (ETDs), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits (CTDs), which are essentially the same U.S.
dollar-denominated instruments as ETDs, except that they are issued by Canadian
offices of major Canadian banks; and Yankee Certificates of Deposit (Yankee
CDs), which are U.S. dollar-denominated certificates of deposit issued by a U.S.
branch of a foreign bank and held in the United States.
CONCENTRATION RISK -- The Municipal Money Market Portfolio and Cash Reserve
Portfolio each may invest up to 25% of their total assets in a particular
industry. The Municipal Money Market Portfolio may invest any portion of its
assets in industrial revenue bonds (IRBs) backed by private issuers, and may
invest up to 25% of its total assets in IRBs related to a single industry. The
Municipal Money Market Portfolio may also invest 25% or more of its total assets
in securities whose revenue sources are from similar types of projects, e.g.,
education, electric utilities, health care, housing, transportation, or water,
sewer, and gas utilities. The Cash Reserve Portfolio may invest 25% or more of
its total assets in securities in the financial services industry. Therefore,
developments affecting a single issuer or industry, or securities financing
similar types of projects, could have a significant effect on the Portfolios'
performance.
PRINCIPAL RISKS -- The following table describes the securities in which the
Portfolios typically invests and the principal risks associated with those
securities.
13
<PAGE> 44
<TABLE>
<CAPTION>
SECURITIES PRINCIPAL RISKS ASSOCIATED WITH THE SECURITY
---------- --------------------------------------------
<S> <C>
COMMERCIAL PAPER: Unsecured promissory CREDIT RISK -- The risk that the issuer of a security, or a party to a
notes that corporations typically issue contract, will default or otherwise not honor a financial obligation.
to finance current operations and other
expenditures. 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 interest rates. Longer
term securities of the type in which a Portfolio invests offer less stability
and tend to be more sensitive to changes in interest rates, 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 a Portfolio would like to sell
them or it may be difficult for a Portfolio to sell the investment for the
value the Portfolio has placed on it.
INDUSTRIAL REVENUE BONDS: Revenue bonds CREDIT RISK
that are backed by a state of a private
issuer. INTEREST RATE RISK
LIQUIDITY RISK
CORPORATE DEBT OBLIGATIONS: Corporate CALL RISK -- The risk that an issuer will exercise its right to pay principal
debt obligations include bonds, notes, on an obligation held by a Portfolio (such as a mortgage backed security)
debentures, and other obligations of earlier than expected. This may happen when there is a decline in interest
corporate entities to pay interest rates. Under these circumstances, the Portfolio may be unable to recoup all of
and repay principal. its initial investment and will also suffer from having to reinvest in lower
yielding securities.
CREDIT RISK
EXTENSION RISK -- The risk that an issuer will exercise its right to pay
principal on an obligation held by a Portfolio (such as a mortgage-backed
security) later than expected. This may happen when there is a rise in
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will also suffer from the inability to invest in
higher yielding securities.
INTEREST RATE RISK
LIQUIDITY RISK
</TABLE>
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<TABLE>
<CAPTION>
SECURITIES PRINCIPAL RISKS ASSOCIATED WITH THE SECURITY
---------- --------------------------------------------
<S> <C>
U.S. GOVERNMENT OBLIGATIONS: U.S. CALL RISK
government obligations are debt
obligations issued or guaranteed by the EXTENSION RISK
U.S. Treasury or by an agency or
instrumentality of the U.S. government. INTEREST RATE RISK
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. There is no guarantee
that the government will support these
obligations if it is not required to do
so, and, therefore, they involve more
risk than other government obligations.
MUNICIPAL OBLIGATIONS (IN GENERAL): CREDIT RISK
Securities that are issued to raise
money for various public purposes, INTEREST RATE RISK
including general purpose financing for
state and local governments as well as TAXABLE INCOME RISK -- The risk that income earned on municipal obligations
financing for specific projects or may be subject to state or and local taxes or may be treated as a preference
public facilities. Municipal obligations item for determining the federal alternative minimum tax.
may be backed by the full taxing power
of a municipality or by the revenues LIQUIDITY RISK
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.
MUNICIPAL LEASE OBLIGATIONS: Securities CREDIT RISK
issued by state and local governments or
authorities to acquire land and a wide INTEREST RATE RISK
variety of equipment and facilities.
These obligations typically are not LIQUIDITY RISK
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 holding the securities.
Certificates of Participation in
municipal lease obligations or
installment sales contracts entitle the
holder to a proportionate interest in
the lease purchase payments made.
SECURITIES OF FOREIGN ISSUERS: FOREIGN RISKS -- The risk that foreign securities may be adversely affected by
Securities issued by: political instability of the issuer's country, changes in currency exchange
(1) Companies organized outside the rates, foreign economic conditions, or regulatory and reporting standards that
United States, (2) companies whose are less stringent than those of the United States. Foreign investment risks
securities are principally traded will normally be greatest when a Fund invests in issuers located in emerging
outside of the United States, and (3) countries.
foreign governments and agencies or
instrumentalities of foreign
governments. Securities of foreign
issuers includes American Depositary
Receipts (ADRs), which are U.S.
dollar-denominated securities.
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
SECURITIES PRINCIPAL RISKS ASSOCIATED WITH THE SECURITY
---------- --------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS AND REVERSE CREDIT RISK
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.
TAX-EXEMPT COMMERCIAL PAPER: Promissory CREDIT RISK
notes issued by municipalities to help
finance short-term capital or operating INTEREST RATE RISK
needs.
LIQUIDITY RISK
</TABLE>
In addition to the securities identified above, the Portfolio may, from time to
time, engage in the following non-principal investment practices or techniques:
BORROWING FROM BANKS. The Portfolios may borrow money from banks (up to 33 1/3%
of the Portfolio's total assets) for temporary or emergency purposes.
DERIVATIVE INSTRUMENTS. The Municipal Money Market and Cash Reserve Portfolios
also may invest in instruments and securities generally known as derivative
investments. These investments may include the use of derivative/synthetic
municipals (e.g., tender option bonds and certificates of participation), zero
coupon bonds, and stripped fixed-income obligations.
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.
BIMC may not buy any of these instruments or use any of these techniques unless
it believes that doing so will help the Portfolios achieve its investment
objective. Use of these instruments and techniques can alter the risk and return
characteristics of a Portfolio. They also may result in a loss of principal if
BIMC judges market conditions incorrectly or employs a strategy that does not
correlate well with the investment strategy of the Portfolios.
LENDING SECURITIES. The Portfolios 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.
YEAR 2000 AND EURO READINESS. Mutual funds and businesses around the world could
be adversely affected if computers do not properly process date-related
information with respect to the Year 2000. Similar adverse affects could result
if computers do not properly process information based on the conversion of the
Euro, the new currency of the European Union which took effect on January 1,
1999. The Portfolios have received reasonable assurances from its service
providers that they are addressing these issues to preserve smooth trading,
pricing, shareholder accounting, custodial and other operations. There can be no
assurances, however, that all problems will be avoided.
These computer problems could also adversely affect the Portfolio's investments.
Improperly functioning computers may disrupt securities markets generally or
result in overall economic uncertainty. Individual companies may also be
adversely affected by the cost of fixing their computers.
For more information about the securities in which the Portfolios invests,
please refer to the Appendix to this Prospectus and the SAI.
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<PAGE> 47
WHO MANAGES THE PORTFOLIOS?
First Tennessee, 530 Oak Court Dr., Memphis, Tennessee, serves as the investment
adviser to each Portfolio and, with the prior approval of the Board of Trustees
(the "Trustees") has engaged BlackRock to act as Sub-Adviser to the Portfolios.
Subject to First Tennessee's supervision, BlackRock is responsible for the
day-to-day investment management of the Portfolios, including providing
investment research and credit analysis concerning portfolio investments and
conducting a continuous program of investment of portfolio assets in accordance
with the investment policies and objectives of the Portfolios.
For managing its investment and business affairs, each Portfolio is obligated to
pay First Tennessee a monthly management fee at the annual rate of .25% of
aggregate average net assets of all the Money Market Portfolios through $1
billion, and .22% on amounts greater than $1 billion. First Tennessee has
voluntarily agreed to waive a portion of the fee that it is entitled to receive
under the Investment Advisory and Management Agreement (the "Agreement") to the
extent such fees exceed .08% of the U.S. Treasury Money Market Portfolio's
average net assets and .10% of the U.S. Government Money Market, Municipal Money
Market and Cash Reserve Portfolio's average net assets. First Tennessee serves
as an investment adviser to individual, corporate and institutional advisory
clients, pension plans and collective investment funds, with approximately
$22.0 billion in assets under administration (including nondiscretionary
accounts) and $9.4 billion in assets under management as of June 30, 1999, as
well as experience in supervising sub-advisers.
BIMC (formerly known as PNC Institutional Management Corporation), 400 Bellevue
Parkway, Wilmington, Delaware, serves as the Sub-Adviser for each Portfolio
subject to the supervision of First Tennessee, pursuant to the authority granted
to it under its Sub-Advisory Agreement with First Tennessee. BIMC is an
indirect, wholly owned subsidiary of PNC Bank Corp. (PNC Bank), a multi-bank
holding company. BIMC was organized in 1973 to perform advisory services for
investment companies. BIMC changed its name in 1998 following a reorganization
of its investment management operations. PNC Bank and its predecessors have been
in the business of managing the investments of fiduciary and other accounts
since 1847. BIMC advises or manages approximately 48 short-term liquid asset
portfolios, including money market portfolios, with total assets of
approximately $43.7 billion as of June 30, 1999.
HOW TO INVEST IN THE PORTFOLIOS
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 accounts
("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 (each an
"Institutional Investor" and collectively "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 Portfolios.
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 the close of business (normally 2:00 p.m. Eastern Time) on any Business
Day (as defined in the section "How Are Portfolios Shares Valued?") and the
funds are received by the Transfer Agent that day, the investment will earn
17
<PAGE> 48
dividends declared 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 Portfolios require 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 the close of business (normally 2:00 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 Portfolios 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
Portfolios. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the
Portfolios 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 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 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 another class of shares. 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 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 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 the close of business (normally 2:00 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 P.O. Box 8050, Boston, MA, 02266.
WHAT CLASSES OF SHARES DO THE MONEY MARKET PORTFOLIOS OFFER?
The U.S. Treasury Money Market Portfolio offers investors four different
classes of shares. The other Money Market Portfolios offer investors three
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 in which you would
like to invest.
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, III AND IV SHARES. Class II, III, and IV shares are offered to
investors with a lower investment minimum. These classes also incur varying
levels of distribution or shareholder servicing fees. Class IV shares are only
offered by the U.S. Treasury Money Market Portfolio.
Pursuant to the Investment Company Act of 1940, as amended, if making immediate
payment of redemption proceeds could adversely affect a 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 the
NYSE is closed, each Portfolio's NAV may be affected on days when investors do
not have access to the Portfolios 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
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<PAGE> 49
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 Portfolios also reserve the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
BIMC's opinion, they are of a size that would disrupt management of a Portfolio.
In order to allow BIMC to manage the Portfolios 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 Portfolios and
their agents will not be responsible for any losses resulting from unauthorized
telephone transactions if the Portfolios or their 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 Portfolios or their 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 structures to choose between.
See "Fees and Expenses of the Portfolios".
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/First Horizon Card Program" (a consumer discount
card program provided by First Horizon 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. However, the Portfolios, at
their own discretion, reserve the right to waive the minimum initial investment
from $1,000 to $100 for certain programs offered by First Tennessee.
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 a 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 or third party checks 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).
Each 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 Portfolios and their agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolios or their 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 a Portfolio or you may invest in a
Portfolio through your Investment Professional (see "How Do I Invest Through My
Investment Professional" below). Shares will be
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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 the close of business (normally 2:00
p.m. Eastern Time) in order for you to receive that day's share price. An
investor will earn dividends declared 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 Data Services, 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:
BY MAIL: Make your check payable to FIRST FUNDS [NAME OF 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 completed application.
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 First Funds account. First, an 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 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 Portfolios
are 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 through the day prior to redemption. If an 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 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 (if required) as described below.
A signature guarantee is designed to protect you, the Portfolios, and their
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your 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 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 by bank
transfer or wire. For your protection, all telephone calls are recorded. Also,
neither First Funds, First Tennessee, BIMC, nor the Transfer Agent or any of
their agents will be responsible for acting on telephone instructions they
20
<PAGE> 51
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 a 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 your
account to accommodate wire transactions. If telephone instructions are received
before the close of business (normally 2:00 p.m. Eastern Time), proceeds of the
redemption will be wired as federal funds on the same 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 the Transfer Agent.
BY CHECK: You may request on your Account Application or by written request to
the Trust that a Portfolio provide you with Redemption Checks ("Checks") which
you can write on your account. In order to establish the checkwriting option,
you must manually sign a signature card. Corporations, trusts and other
organizations should call or write the Portfolio's Distributor before submitting
signature cards as additional documents may be required to establish the
checkwriting service. The Trust will send checks only to the registered owner(s)
of the account and only to the address listed in the Trust's records. You may
make checks payable to the order of any person in the amount of $250 or more.
When a Check is presented to the Transfer Agent for payment, the Transfer Agent,
as your agent, will cause a Portfolio to redeem a sufficient number of your
shares to cover the amount of the Check. Shares earn dividends through the day
prior to the day that the redemption is processed. There is no charge to you for
the use of the Checks; however, the Transfer Agent will impose a charge for
stopping payment of a Check upon request, or if the Transfer Agent cannot honor
a Check due to insufficient funds or other valid reasons. A Portfolio cannot
guarantee a stop payment order on a Check. You must submit any request to
reverse a stop payment order in writing
You may not write a Check to redeem shares which you purchase by check until
your check clears. If the amount of the Check is greater than the value of the
shares in your account, the Check will be returned marked "insufficient funds."
Checks written on amounts subject to the hold described above will be returned
marked "uncollected." If your check does not clear, you will be responsible for
any loss the Portfolio or its service providers incur.
Checkwriting is not available for participants in retirement plan accounts, to
shareholders who hold shares in certificate form or to shareholders who are
subject to Internal Revenue Service (IRS) backup withholding. You may not use a
Check to close an account. The Trust may terminate or alter the checkwriting
service at any time.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolios 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 the
NYSE is closed, a Portfolio's NAV may be affected on days when investors do not
have access to the Portfolios 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 Portfolios through a program of services offered or administered
by your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
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HOW DO I REDEEM THROUGH MY INVESTMENT PROFESSIONAL?
On your behalf, the broker of record listed on your account may redeem shares.
Proceeds from the redemption can only be sent to your address of record.
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 each 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.
SYSTEMATIC EXCHANGE PROGRAM
This account option may be added to your account if you would like to
automatically withdraw from one First Funds account into another First Funds
account on a regular basis. Please note that there may be a tax liability
associated with redemptions made from your mutual fund investment. Talk to your
Investment Professional regarding your specific tax situation.
The systematic exchange program is established between identically registered
accounts. New accounts must meet the account minimum standards listed
previously. Systematic exchanges are only made among the same share class,
except for the Money Market Portfolios, which are not subject to sales charges.
Call First Funds at 1-800-442-1941 (option 2) for more details on establishing
this program. See "How Are Exchanges Made?" for more information on exchanges.
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 Portfolios under one of several
tax-deferred plans. These plans let you invest for retirement and defer or
eliminate the tax on your investment income. Minimums may differ from those
listed previously under "Investment Requirements." Plans include Individual
Retirement Accounts (IRAs) Roth IRAs, Education IRAs, Rollover IRAs, Keogh
Plans, and Simplified Employee Pension Plans (SEP-IRAs).
ALL CLASSES
HOW ARE PORTFOLIOS SHARES VALUED?
The price at which you buy, sell or exchange Portfolios shares is the share
price or net asset value (NAV). The share price for each Class of shares of the
Portfolios is determined by adding the value of each Class' proportional share
of the Portfolio's investments, cash and other assets, deducting each Class'
proportional share of liabilities, and then dividing that value by the total
number of the shares outstanding in that Class.
The Portfolios are open for business each day that the NYSE is open (a "Business
Day"). The NAV is calculated at the close of the Portfolios' business day,
(normally 2:00 p.m. Eastern Time). Share price is not calculated on the days
that the NYSE is closed.
The Trustees have established procedures designed to maintain a stable net asset
value of $1.00 per share, to the extent reasonably possible. More particularly,
the Trustees have approved and adopted procedures under Rule 2a-7. Under
guidelines of Rule 2a-7, the Portfolio uses the amortized cost method to value
its portfolio securities. The amortized cost method involves valuing a security
at its cost and amortizing any discount or premium over the period of maturity,
regardless of the impact of fluctuating interest rates on the market value of
the security.
WHAT ARE MY DISTRIBUTION OPTIONS?
Each Portfolio earns interest from its investments. These are passed along as
dividend distributions. Income dividends for the Portfolios are declared daily
and paid monthly. The Portfolios 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.
22
<PAGE> 53
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 Portfolios. 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. 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 First Funds. Not all First Funds Portfolios
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, each Portfolio's
shares may be exchanged for the same Class shares of other First Funds
Portfolios. The redemption and purchase will be made at the 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 the close of business (normally 2:00 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 or Class IV shares of other
First Funds Portfolios wishing to exchange into one of the Money Market
Portfolios that do not offer these classes will receive Class III shares.
If you exchange shares subject to a CDSC the transaction will not be subject to
the CDSC. However, when you redeem the shares acquired through the exchange, the
redemption may be subject to the CDSC, depending upon when you originally
purchased the shares. The CDSC will be computed using the schedule of any
Portfolio into or from which you have exchanged your shares that would result in
your paying the highest CDSC applicable to your class of 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
each Portfolio's performance and its shareholders, First Tennessee and BIMC
discourage frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolios reserve the right to refuse any specific
purchase order, including certain purchases by exchange if, in BIMC's opinion, a
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 a Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of that Portfolio's assets. Although each Portfolio will attempt to
give prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolios reserve 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, Colorado 80202 to request
additional copies.
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
The Portfolios intend to distribute substantially all of their net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a
23
<PAGE> 54
fiscal year basis. Any net capital gains realized are normally distributed in
December. Income dividends for the Portfolios are declared daily and paid
monthly.
FEDERAL TAXES. Distributions of gains from the sale of assets held by a
Portfolio for more than one year generally are taxable to shareholders at the
applicable 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.
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
Portfolios will send each investor or, if Class I, each Institutional Investor,
an IRS Form 1099-DIV by January 31 of each year.
Federally tax-free interest earned by the Municipal Money Market 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 Municipal
Money Market Portfolio for more than one year result 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.
REDEMPTIONS AND EXCHANGES. A capital gain or loss may be realized when shares of
a Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolios 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.
OTHER TAX INFORMATION. The information above is only a summary of some of the
federal tax consequences generally affecting the Portfolios and their
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 each Portfolio is suitable given your particular tax
situation.
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 Portfolios to withhold 31% of taxable
distributions from your account.
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 shares of each Portfolio and Class IV shares
of the U.S. Treasury Money Market Portfolio (each a "Distribution Plan" and
together the "Distribution Plans"). The 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 up to .45% of the average
net assets of each Portfolio that are attributable to Class III shares and an
amount up to .50% of the average net assets of the U.S. Treasury Money Market
Portfolio that are attributable to Class IV shares. The Trustees have limited
the amount that may be paid under the Class III Distribution Plan to .25%. 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 "Investment
Professionals") as compensation for selling Class III and IV shares and for
providing ongoing sales support services.
The Trustees have also adopted a Shareholder Servicing Plan on behalf of Class
II shares of each Portfolio and Class IV shares of the U.S. Treasury Money
Market Portfolio. Under the Shareholder Servicing Plans, certain broker-dealers,
banks, and other financial institutions (collectively "Service Organizations")
are paid, as compensation for shareholder services and account maintenance, an
amount equal to .25% of the average net assets of each Portfolio that are
attributable to Class II shares and an amount equal to .25% of the average net
assets of the U.S. Treasury Money Market Portfolio that are attributable to
Class IV shares. 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.
24
<PAGE> 55
FINANCIAL HIGHLIGHTS
The Financial Highlights Table is presented to help you understand the
Portfolios' financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate that an investor would have earned on an investment
in each Portfolio (assuming reinvestment of all dividends and distributions).
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Portfolios' financial statements, is included in the Portfolios' annual
report, which is available upon request by calling First Funds at 1-800-442-1941
(option 1).
U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------
For the Year
Ended June 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.044 0.051 0.050 0.052 0.050
------- ------- ------- ------- -------
Distributions:
Net investment income (0.044) (0.051) (0.050) (0.052) (0.050)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN+ 4.51% 5.19% 5.09% 5.30% 5.10%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 7,309 $19,314 $ 6,141 $75,703 $67,377
Ratio of expenses to average net assets (1) 0.51% 0.45% 0.37% 0.36% 0.36%
Ratio of net investment income to average net assets 4.57% 5.09% 5.01% 5.19% 5.00%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets
had such waivers not occurred is as follows. 0.69% 0.63% 0.55% 0.56% 0.63%
</TABLE>
<TABLE>
<CAPTION>
CLASS III
------------------------------------------------------------
For the Year
Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996**
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment operations:
Net investment income 0.042 0.049 0.047 0.044
------- ------- ------- -------
Distributions:
Net investment income (0.042) (0.049) (0.047) (0.044)
------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
TOTAL RETURN+ 4.27% 5.03% 4.84% 4.47%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 4,661 $42,288 $61,135 $ 3,528
Ratio of expenses to average net assets (1) 0.73% 0.62% 0.62% 0.62%*
Ratio of net investment income to average net assets 4.35% 4.92% 4.76% 4.93%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.91% 0.80% 0.80% 0.82%*
</TABLE>
* Annualized.
** Class III commenced operations on August 8, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
25
<PAGE> 56
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------
For the Year
Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.047 0.052 0.051 0.053 0.053
------- ------- ------- ------- -------
Distributions:
Net investment income (0.047) (0.052) (0.051) (0.053) (0.053)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN+ 4.81% 5.37% 5.23% 5.37% 5.39%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $94,079 $88,255 $94,541 $88,111 $88,057
Ratio of expenses to average net assets(1) 0.39% 0.35% 0.35% 0.33% 0.31%
Ratio of net investment income to average net assets 4.71% 5.24% 5.11% 5.28% 5.27%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.56% 0.52% 0.53% 0.53% 0.58%
</TABLE>
<TABLE>
<CAPTION>
CLASS III
------------------------------------------------------------
For the Year
Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996**
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment operations:
Net investment income 0.043 0.049 0.048 0.044
------- ------- ------- -------
Distributions:
Net investment income (0.043) (0.049) (0.048) (0.044)
------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
TOTAL RETURN+ 4.42% 5.05% 4.91% 4.49%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 1,674 $ 2,513 $ 3,486 $ 228
Ratio of expenses to average net assets (1) 0.73% 0.65% 0.65% 0.65%*
Ratio of net investment income to average net assets 4.37% 4.94% 4.81% 4.96%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.90% 0.82% 0.83% 0.85%*
</TABLE>
* Annualized.
** Class III commenced operations on August 8, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
26
<PAGE> 57
FINANCIAL HIGHLIGHTS
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------
For the Year
Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.029 0.033 0.033 0.035 0.034
------- ------- ------- ------- -------
Distributions:
Net investment income (0.029) (0.033) (0.033) (0.035) (0.034)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN+ 2.92% 3.33% 3.32% 3.52% 3.48%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $56,438 $36,279 $45,988 $71,665 $94,078
Ratio of expenses to average net assets(1) 0.33% 0.38% 0.35% 0.32% 0.30%
Ratio of net investment income to average net assets 2.87% 3.28% 3.25% 3.50% 3.44%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.50% 0.56% 0.53% 0.52% 0.57%
</TABLE>
<TABLE>
<CAPTION>
CLASS III
--------------------------------------------------------------------
For the Year
Ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996**
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment operations:
Net investment income 0.025 0.030 0.030 0.030
------- ------- ------- -------
Distributions:
Net investment income (0.025) (0.030) (0.030) (0.030)
------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
TOTAL RETURN+ 2.56% 3.06% 3.03% 3.03%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 5,333 $ 3,929 $12,886 $ 2,905
Ratio of expenses to average net assets(1) 0.68% 0.63% 0.62% 0.58%*
Ratio of net investment income to average net assets 2.52% 3.03% 2.98% 3.24%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.86% 0.81% 0.79% 0.78%*
</TABLE>
* Annualized.
** Class III commenced operations on July 28, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
27
<PAGE> 58
FINANCIAL HIGHLIGHTS
CASH RESERVE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------------------
For the Year
Ended June 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995**
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.048 0.053 0.051 0.053 0.042
------- ------- ------- ------- -------
Distributions:
Net investment income (0.048) (0.053) (0.051) (0.053) (0.042)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN+ 4.94% 5.46% 5.23% 5.39% 4.27%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $29,351 $40,242 $14,241 $16,369 $15,460
Ratio of expenses to average net assets(1) 0.39% 0.36% 0.40% 0.42% 0.43%*
Ratio of net investment income to average net assets 4.84% 5.33% 5.13% 5.22% 5.48%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.56% 0.54% 0.57% 0.61% 0.70%*
</TABLE>
<TABLE>
<CAPTION>
CLASS III
------------------------------------------------------------
For the Year
Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996**
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment operations:
Net investment income 0.046 0.051 0.049 0.047
------- ------- ------- -------
Distributions:
Net investment income (0.046) (0.051) (0.049) (0.047)
------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
TOTAL RETURN+ 4.67% 5.21% 5.00% 4.78%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $62,961 $58,243 $35,592 $24,190
Ratio of expenses to average net assets(1) 0.66% 0.60% 0.64% 0.62%*
Ratio of net investment income to average net assets 4.58% 5.09% 4.88% 5.02%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.83% 0.77% 0.82% 0.81%*
</TABLE>
* Annualized.
** Classes I and III commenced operations on September 26, 1994 and July 28,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
28
<PAGE> 59
APPENDIX
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO'S INVESTMENTS
The following information provides brief description of the securities in which
each Portfolio may invest and the transactions it may make. Each 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 each Portfolio's investment objective and policies.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. Each 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 a Portfolio's share price, yield, and return. Ordinarily, a
Portfolio will not earn interest on obligations until they are delivered.
DEMAND FEATURES AND STAND-BY COMMITMENTS. A demand features is a put that
entitles the security holder to repayment of the principal amount of the
underlying security at any time or at specified intervals. A standby commitment
is a put that entitles the security holder to same-day settlement at amortized
cost plus accrued interest.
ILLIQUID INVESTMENTS. Under guidelines established by the Trustees, BIMC
determines the liquidity of a 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 a
Portfolio to sell them promptly at an acceptable price. Each Portfolio may
invest up to 10% of its net assets in illiquid investments and private
placement.
RESTRICTED SECURITIES. Each 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. BIMC
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, BIMC 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.
REFUNDING CONTRACTS. Each 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 a 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. 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 a Portfolio to sell them at par value plus accrued interest on short
notice.
A-1
<PAGE> 60
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[FIRST FUNDS LETTERHEAD]
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
If you would like more information about the Portfolios, the following documents
are available free upon request.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the Portfolios. 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 Portfolios at the address or phone number listed below.
Information about the Portfolios (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 Portfolios. 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 Portfolios' annual and semi-annual reports provide additional information
about the Portfolios' investments. The annual report contains a discussion of
the market conditions and investment strategies that significantly affected the
Portfolios' performance during the last fiscal year.
TO OBTAIN THE SAI OR THE MOST RECENT ANNUAL OR SEMI-ANNUAL REPORT FOR THE
PORTFOLIO FREE OF CHARGE, OR TO OBTAIN OTHER INFORMATION ABOUT THE PORTFOLIO
AND TO MAKE SHAREHOLDER INQUIRIES, 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. 811-6589
[FIRST TENNESSEE LOGO]
Investment Adviser
[ALPS LOGO]
Member NASD
SPONSOR AND DISTRIBUTOR
FIRST FUNDS
- Are NOT insured by the FDIC or any other governmental agency.
- Are NOT bank deposits or other obligations of or guaranteed by First
Tennessee Bank National Association or any of its affiliates.
- Involve investment risks, including the possible loss of the principal
amount invested.
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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 OCTOBER ___, 2000
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of First Funds: Growth & Income, Capital
Appreciation, Bond and Intermediate Bond Portfolios (Portfolios) dated October
__ , 2000, 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, 2000 and the Semi-Annual Report for the six-month period ended
December 31, 1999, 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.
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INVESTMENT RESTRICTIONS AND LIMITATIONS................................ 2
INVESTMENT INSTRUMENTS................................................. 3
PORTFOLIO TRANSACTIONS................................................. 9
VALUATION OF PORTFOLIO SECURITIES...................................... 10
PERFORMANCE............................................................ 11
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................... 13
DISTRIBUTIONS AND TAXES................................................ 14
TRUSTEES AND OFFICERS.................................................. 15
INVESTMENT ADVISORY AGREEMENTS......................................... 16
CODE OF ETHICS......................................................... 17
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS........................... 18
DESCRIPTION OF THE TRUST............................................... 21
FINANCIAL STATEMENTS................................................... 22
APPENDIX............................................................... 23
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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)
Delaware Management Company (DMC)
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
Boston Financial Data Services (Boston Financial or the Transfer Agent)
Custodian
State Street Bank & Trust Company (State Street or the Custodian)
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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 of such purchase, (a) more than 5% of a Portfolio's total
assets would be invested in the securities of that issuer; or (b) such
a Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that each Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that each
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of such a Portfolio's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent a
Portfolio from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent a Portfolio from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities); or
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limit
does not apply to purchases of debt securities or to repurchase
agreements;
(9) Each Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end or closed-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.
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THE FOLLOWING LIMITATIONS OF EACH PORTFOLIO ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) Each Portfolio does not currently intend during the coming year to
purchase securities on margin, except that each Portfolio may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
(ii) Each Portfolio may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes 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 of such purchase, 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 Delaware Management Company (DMC) act as
Co-Advisers to the Capital Appreciation Portfolio. The activities of the
Sub-Advisers and DMC 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.
The prospectuses discuss the investment objectives of the Portfolios and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Portfolios may invest, and certain risks attendant to
such investment.
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
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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 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
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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 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 DMC'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 DMC 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 DMC 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 DMC'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.
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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 DMC determine the
liquidity of each respective Portfolio's investments and, through reports from
the Sub-Adviser and DMC, the Trustees monitor investments in illiquid
instruments. In determining the liquidity of each Portfolio's investments, a
Sub-Adviser and DMC 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 DMC 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 DMC, 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 DMC, as the case may
be.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
each Portfolio may be obligated to pay all or part of the registration expense
and a considerable period may elapse between the time it decides to seek
registration and the time each Portfolio may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, each Portfolio might obtain a less favorable
price than prevailed when it decided to seek registration of the security.
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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 DMC to be of good standing. Furthermore, they will only be made
if, in the appropriate Sub-Adviser's or DMC's judgment, the consideration to be
earned from such loans would justify the risk.
First Tennessee, Highland, Martin and DMC 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 DMC 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
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allowing them to expire or by exercising the option. If the option is allowed to
expire, a Portfolio will lose the entire premium it paid. If a Portfolio
exercises the option, it completes the sale of the underlying instrument at the
strike price. A Portfolio may also terminate a put option position by closing it
out in the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When a Portfolio writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Portfolio assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the option
chooses to exercise it. The Portfolios may seek to terminate their positions in
put options they write before exercise by closing out the options in the
secondary market at their current price. If the secondary market is not liquid
for a put option a Portfolio has written, however, the Portfolio must continue
to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover its
position.
If security prices rise, a put writer would generally expect to profit, although
its gain would be limited to the amount of the premium it received. If security
prices remain the same over time, it is likely that the writer will also profit,
because it should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates each Portfolio to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. Each Portfolio may purchase and write options in combination
with each other, or in combination with forward contracts, to adjust the risk
and return characteristics of the overall position. For example, the Portfolios
may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
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
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options markets and the securities markets, from structural differences in how
options and securities are traded, or from imposition of daily price fluctuation
limits or trading halts.
The Portfolios may purchase or sell options contracts with a greater or lesser
value than the securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in the Portfolios' options positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or result in
losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market will exist
for any particular options contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for the Portfolios to enter into new positions or close out existing
positions. If the secondary market for a contract is not liquid because of price
fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require the Portfolios to continue
to hold a position until delivery or expiration regardless of changes in its
value. As a result, the Portfolios' access to other assets held to cover its
options or futures positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Portfolios greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
ASSET COVERAGE FOR OPTIONS POSITIONS. The Portfolios will comply with guidelines
established by the SEC with respect to coverage of options strategies by mutual
funds and, if the guidelines so require, will set aside appropriate liquid
assets in a segregated custodial account in the amount prescribed. Securities
held in a segregated account cannot be sold while the option strategy is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Portfolios'
assets could impede portfolio management or the Portfolios' ability to meet
redemption requests or other current obligations.
DIRECTED BROKERAGE. During the fiscal year ended June 30, 2000, First Funds
directed brokerage transactions to brokers for research services totaling
_____________ in shares and $_____________ in related commissions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of securities are placed on behalf of the
respective Portfolios by Highland, Martin and DMC (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
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<PAGE> 72
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
$______ , $493,450 and $167,413 during the fiscal years ended June 30, 2000,
1999, and 1998, respectively. The Capital Appreciation Portfolio paid brokerage
commissions in the amounts of $________ and $55,043 during the fiscal years
ended June 30, 2000 and 1999 and $57,106 for the fiscal period ended June 30,
1998. During the fiscal years ended June 30, 2000, 1999, and 1998, 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 the brokerage commissions or similar fees
paid by each Portfolio on portfolio transactions is legally permissible and
advisable. Each Portfolio seeks to recapture soliciting broker-dealer fees on
the tender of portfolio securities, but at present no other recapture
arrangements are in effect. The Trustees intend to continue to review whether
recapture opportunities are available and are legally permissible, and, if so,
to determine, in the exercise of their business judgment, whether it would be
advisable for each Portfolio to seek such recapture.
When two or more Portfolios are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance with a
formula considered by the Trustees and each Portfolio's respective Adviser to be
equitable to each Portfolio. In some cases this system could have a detrimental
effect on the price or value of the security as far as each Portfolio is
concerned. In other cases, however, the ability of each Portfolio to participate
in volume transactions will produce better executions for each Portfolio. It is
the current opinion of the Trustees that the desirability of retaining the
Portfolios' 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 are 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
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<PAGE> 73
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. State Street Bank & Trust, the Fund Accountant, 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,
2000, the 30-day yields for Class I, II and III of the Bond Portfolio were
______, ______ and ______, respectively; and _______, _______ and _______ for
the Intermediate Bond Portfolio, respectively.
TOTAL RETURNS for each Class of each Portfolio quoted in advertising reflect all
aspects of return, including the effect of reinvesting dividends and capital
gain distributions (if any), and any change in NAV over the period. Average
annual total
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<PAGE> 74
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, 2000 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>
Growth & Income PortfolioCapital Appreciation
Bond Portfolio
Intermediate Bond
</TABLE>
CUMULATIVE TOTAL RETURNS reflect the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, or a series of redemptions, over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Where applicable,
sales loads may or may not be included.
Each Portfolio may compare the performance of each of its Classes or the
performance of securities in which it 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, Inc., 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.
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<PAGE> 75
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 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, 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.
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: Thanksgiving Day, Christmas
Day, New Year's Day, Dr. Martin Luther King Jr. Day, Washington's Birthday, Good
Friday, Memorial Day, Independence Day and Labor 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
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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 each Portfolio's Class II shares' maximum 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.
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
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federal income taxes, shareholders may be subject to state and local taxes on
distributions received from each Portfolio. Investors should consult their tax
advisors to determine whether each Portfolio is suitable to their particular tax
situation.
TRUSTEES AND OFFICERS
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 78, Trustee Mr. Batchelor currently serves as director
4325 Woodcrest Drive, Memphis, TN of two non-profit organizations, MTM
Foundation and the White Foundation. Mr.
Batchelor also operates a management
consultant business on a limited basis, and
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 what
was First American State Bank in Memphis,
TN. He formerly served as Chairman, Memphis
Union Mission, TN, as well as a charity and
a non-profit foundation.
-------------------------------------------------------------------------------------------------------------
JOHN A. DECELL, age 64, Trustee Mr. DeCell is the proprietor of DeCell &
5178 Wheelis Dr., Suite 2, Memphis, Company (real estate and business
TN consulting), and President of Capital
Advisers, Inc. (real estate consulting and
asset management).
-------------------------------------------------------------------------------------------------------------
L. R. JALENAK, JR., age 69, Trustee Mr. Jalenak was Chairman of the Board (1990
6094 Apple Tree Drive, Suite 11, -1993 (retired)), Cleo Inc. (manufacturer of
Memphis,TN gift-related products), a Gibson Greetings
Company. Mr. Jalenak is also a Director of
Perrigo Company (1988 - present), Lufkin
Industries (1990 - present), Dyersburg
Corporation (1990 - present), was President
and CEO (until 1990) of Cleo Inc., and was a
Director of Gibson Greetings, Inc. from 1983
to 1991.
-------------------------------------------------------------------------------------------------------------
LARRY W. PAPASAN, age 59, Trustee Mr. Papasan is President of Smith & Nephew,
5114 Winton Place, Memphis, TN Inc. (orthopedic 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 61, Trustee Mr. Rantzow was Vice President/Director, Ron
5790 Shelby Avenue, Memphis, TN Miller Associates, Inc. (manufacturer). Mr.
Rantzow was Managing Partner (until 1990) of
the Memphis office of Ernst & Young.
-------------------------------------------------------------------------------------------------------------
*JEREMY O. MAY, age 30, Treasurer Mr. May is a Vice President and Director of
370 17th Street, Denver, CO Mutual Fund Operations at ALPS Mutual Funds
Services, Inc. (ALPS),
-------------------------------------------------------------------------------------------------------------
</TABLE>
- 15 -
<PAGE> 78
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 42, Secretary Mr. Burk is General Counsel of ALPS. Prior
370 17th Street, Denver CO to joining ALPS, Mr. Burk served as
Securities Counsel for Security Life of
Denver, a wholly-owned subsidiary of ING.
-------------------------------------------------------------------------------------------------------------
</TABLE>
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. The
Trustees were compensated as follows for their services provided during the
Trust's fiscal year ended June 30:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Pension or Aggregate
Retirement Estimated Compensation
Aggregate Benefits Annual From the Trust
Compensation Accrued As Benefits and Fund
from the Part of Fund Upon Complex Paid
Name Trust Expenses Retirement to Trustees
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Batchelor $16,000 $0 $0 $16,000
Trustee
John A. DeCell $16,000 $0 $0 $16,000
Trustee
L.R. Jalenak, Jr. $16,000 $0 $0 $16,000
Trustee
Larry W. Papasan $16,000 $0 $0 $16,000
Trustee
Richard C. Rantzow $16,000 $0 $0 $16,000
Trustee
--------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1999, 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.
At a meeting on May 17, 2000, shareholders of the Capital Appreciation Portfolio
(the "Portfolio") of First Funds approved an Investment Advisory and Management
Agreement between First Funds and Delaware Management Company ("DMC") naming DMC
as Co-Adviser to the Capital Appreciation Portfolio. By vote of a majority of
shareholder of the Capital Appreciation Portfolio, DMC replaced Investment
Advisers, Inc., ("IAI") as co-adviser to that Portfolio.
- 16 -
<PAGE> 79
First Tennessee and Delaware Management Company, Philadelphia, Pennsylvania, act
as Co-Advisers to the Capital Appreciation Portfolio. Subject to the direction
of the Trustees and monitoring by First Tennessee, DMC directs the investments
of this Portfolio in accordance with the Portfolio's investment objective,
policies and limitations.
In addition to First Tennessee's and DMC'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, each 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 .30% and .30% of the average net assets
of the Bond and Intermediate Bond Portfolios, respectively. The fee waivers may
be discontinued at any time. For the fiscal years ended June 30, 2000, 1999, and
1998, First Tennessee earned $_________, $5,385,198, and $3,169,117 from the
Growth & Income Portfolio, respectively, before waiving $________, $1,242,738,
and $731,335 of its fees, respectively. For the fiscal years ended June 30,
2000, 1999, and 1998, First Tennessee earned $________, $1,272,593, and $887,260
from the Bond Portfolio, respectively, before waiving $________, $925,522, and
$645,280 of its fees, respectively. For the fiscal year ended June 30, 2000,
First Tennessee earned $______ from the Capital Appreciation Portfolio before
waiving $______ of its fees. For the fiscal year ended June 30, 2000, First
Tennessee earned $ from the Intermediate Bond Portfolio before waiving $______
of its fees. For the fiscal year ended June 30, 1999, First Tennessee earned
$49,965 and $1,073,039, respectively, from the Capital Appreciation and
Intermediate Bond Portfolios before waiving these amounts. 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 year ended June 30, 2000, IAI earned $________ and
DMC earned $________ from the Capital Appreciation Portfolio. For the fiscal
year ended June 30, 1999, IAI earned $233,170 from the Capital Appreciation
Portfolio. 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 Co-Adviser to the Capital Appreciation Portfolio, DMC 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 DMC's Investment Advisory and Management Agreement with the
Trust, the Sub-Advisers, subject to the supervision of First Tennessee, and DMC
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 DMC 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.
CODE OF ETHICS
Each Portfolio permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of the
Code of Ethics (the "Code") that has been adopted by the Portfolios' Board of
Trustees. Access Persons are required to follow the guidelines established by
the Code in connection with all personal securities transactions and are subject
to certain prohibitions on personal trading. Each Portfolio's Adviser, pursuant
to
- 17 -
<PAGE> 80
Rule 17j-1 and other applicable laws, and pursuant to the Code, must adopt
and enforce its own Code of Ethics appropriate to its operations. The Board of
Trustees is required to review and approve the Code of Ethics for the Adviser
and Distributor. The Adviser is also required to report to the Portfolios' Board
of Trustees on a quarterly basis with respect to the administration and
enforcement of such Code of Ethics, including any violations thereof which may
potentially affect the Portfolios.
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, 2000, 1999, and 1998, ALPS earned
administration fees in the amount of $________, $1,242,738, and $731,335,
respectively, from the Growth & Income Portfolio. For the fiscal years ended
June 30, 2000,1999, and 1998, ALPS earned administration fees in the amount of
$________, $347,071, and $241,980 from the Bond Portfolio, respectively. For the
fiscal years ended June 30, 2000 and 1999, ALPS earned administration fees in
the amounts of $_______ and $49,965 from the Capital Appreciation Portfolio.
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 years ended June 30, 2000 and 1999, ALPS
earned administration fees in the amounts of $______ and $321,911 from the
Intermediate Bond Portfolio before waiving $________ and $2,867 of its fees,
respectively. For the fiscal period 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, 2000,
1999, and 1998, First Tennessee earned co-administration fees in the amount of
$________, $414,246, and $243,778 from the Growth & Income Portfolio,
respectively. For the fiscal years ended June 30, 2000, 1999, and 1998, First
Tennessee earned co-administration fees in the amount of $________, $115,690,
and $80,660 from the Bond Portfolio, respectively. For the fiscal years ended
June 30, 2000 and 1999, First Tennessee earned co-administration fees in the
amount of $________, $16,655 and $________, $107,304, from the Capital
Appreciation and Intermediate Bond Portfolios, 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 up to .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.
- 18 -
<PAGE> 81
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 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 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 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 shares of each Portfolio
and up to 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,
analysis 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.
- 19 -
<PAGE> 82
For the fiscal year ended June 30, 2000, Class III of the Growth & Income,
Capital Appreciation, Bond and Intermediate Bond Portfolios paid distribution
fees in the amounts of $_____ , $______ , $______ and $_____ , respectively. All
of these fees were paid as compensation to dealers. For the fiscal period ended
June 30, 2000, Class IV of the Growth & Income and Capital Appreciation
Portfolios paid distribution fees in the amounts of $______ and $____ ,
respectively.
SHAREHOLDER SERVICE PLAN. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services Plans
to compensate Agency Institutions for individual shareholder services and
account maintenance. These functions include: maintaining account records for
each shareholder who beneficially owns Class II and Class III shares; answering
questions and handling correspondence from shareholders about their accounts;
handling the transmission of funds representing the purchase price or redemption
proceeds; issuing confirmations for transactions in Class II and Class III
shares by shareholders; assisting customers in completing application forms;
communicating with the transfer agent; and providing account maintenance and
account level support for all transactions. For these services the participating
Agency Institutions are paid a service fee at the annual rate of up to .25% of
average net assets of Class II and Class III.
For the fiscal year ended June 30, 2000, the Growth & Income, Capital
Appreciation, Bond and Intermediate Bond 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
Class III
</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 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.
- 20 -
<PAGE> 83
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Growth & Income Portfolio, Capital Appreciation Portfolio,
Bond Portfolio and Intermediate Bond 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's 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 June 30, 2000, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios
[UPDATE BY AMENDMENT]
<TABLE>
<CAPTION>
Total % of Total Outstanding
Name and Address Portfolio Class Shares Owned Class Held in Class
---------------- --------- ----- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
</TABLE>
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.
- 21 -
<PAGE> 84
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. Deloitte & Touche LLP, 555 Seventeenth Street, Suite
3600, Denver, Colorado 80202, serves as the Trust's independent accountant. The
independent accountant examines the annual financial statements for the Trust
and provides other audit, tax, and related services.
FINANCIAL STATEMENTS
Each Portfolio's financial statements and financial highlights for the fiscal
year ended June 30, 2000, and the six-month period ended December 31, 1999, 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. Each Portfolio's financial statements and financial highlights are
incorporated herein by reference.
The Portfolios' financial statements for the year ended June 30, 2000 were
audited by Deloitte & Touche LLP, whose report thereon is included in the
Portfolios' annual report.
- 22 -
<PAGE> 85
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.
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<PAGE> 86
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in highest-rated categories.
The ratings from AA to BBB may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
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<PAGE> 87
FIRST FUNDS
U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I,
CLASS II, CLASS III AND CLASS IV
_______, 2000
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of First Funds (Trust): U.S. Treasury Money
Market Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio, and Cash Reserve Portfolio dated _________, 2000. Please retain this
Statement for future reference. The Portfolios' financial statements and
financial highlights, included in the Annual Report for the fiscal year ended
June 30, 2000 and the Semi-Annual Report dated December 31, 1999, 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>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
INVESTMENT RESTRICTIONS AND LIMITATIONS.....................................................................................2
INVESTMENT INSTRUMENTS......................................................................................................4
PORTFOLIO TRANSACTIONS......................................................................................................8
VALUATION OF PORTFOLIO SECURITIES...........................................................................................9
PERFORMANCE.................................................................................................................9
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................................................................11
DISTRIBUTIONS AND TAXES....................................................................................................12
TRUSTEES AND OFFICERS......................................................................................................13
INVESTMENT ADVISORY AGREEMENTS.............................................................................................14
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS...............................................................................15
DESCRIPTION OF THE TRUST...................................................................................................18
FINANCIAL STATEMENTS.......................................................................................................19
APPENDIX...................................................................................................................21
</TABLE>
Investment Adviser
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)
Sub-Adviser
BlackRock Institutional Management Corporation (BIMC 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
Boston Financial Data Services (Boston Financial or the Transfer Agent)
Custodian
State Street Bank & Trust Company (State Street or the Custodian)
<PAGE> 88
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 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, 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 and illiquid securities,
any investment in such securities that exceed the applicable limitations set
forth below or limitations imposed by rules adopted by the SEC will be reduced
promptly to meet such 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 (the 1940 Act)) 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 U.S. TREASURY MONEY MARKET, U.S. GOVERNMENT
MONEY MARKET, MUNICIPAL MONEY MARKET AND CASH RESERVE PORTFOLIOS
THE FOLLOWING ARE THE FUNDAMENTAL LIMITATIONS FOR EACH PORTFOLIO SET FORTH IN
THEIR ENTIRETY. THE PORTFOLIOS 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 of such purchase, (a) more than 5% of a Portfolio's total
assets would be invested in the securities of that issuer; or (b) a
Portfolio would hold more than 10% of the outstanding voting securities
of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that each Portfolio may (i) borrow money for
temporary or emergency purposes (not for leveraging or investment) and
(ii) engage in reverse repurchase agreements for any purpose; provided
that (i) and (ii) in combination do not exceed 33 1/3% of a Portfolio's
total assets (including the amount borrowed) less liabilities (other
than borrowings). Any borrowings that come to exceed this amount will
be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that each
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or with respect to the Municipal Money Market
Portfolio, tax-exempt obligations issued or guaranteed by a territory
or possession or a state or local government, or a political
subdivision of any of the foregoing) if, as a result of such purchase,
25% or more of a Portfolio's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry, except that the Cash Reserve Portfolio will invest 25%
or more of its total assets in the financial 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);
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<PAGE> 89
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation 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 management investment company with substantially the
same fundamental investment objectives, policies, and limitations as
that Portfolio.
THE FOLLOWING LIMITATIONS OF EACH PORTFOLIO ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolios do not currently intend during the coming year to
purchase the voting securities of any issuer.
(ii) The Portfolios do not currently intend during the coming year to
purchase a security (other than a security insured or guaranteed by the
U.S. government or any of its agencies or instrumentalities) if, as a
result of such purchase, more than 5% of a Portfolio's total assets
would be invested in the securities of a single issuer; provided that
each Portfolio may invest up to 25% of its total assets in the first
tier securities of a single issuer for up to three business days.
(iii) The Portfolios do 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.
(iv) The Portfolios 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)). A Portfolio will not purchase any security
while borrowings (excluding reverse repurchase agreements) representing
more than 5% of its total assets are outstanding.
(v) The Portfolios do not currently intend during the coming year to
purchase any security, if, as a result of such purchase, more than 10%
of a Portfolio's 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.
(vi) The Portfolios do not currently intend during the coming year to
purchase or sell futures contracts or call options. This limitation
does not apply to options attached to, or acquired or traded together
with, their underlying securities, and does not apply to securities
that incorporate features similar to options or futures contracts.
(vii) The Portfolios do not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities, to repurchase agreements or to loans of portfolio
securities.
(viii) The Portfolios do not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or
leases.
(ix) 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 that Portfolio.
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<PAGE> 90
INVESTMENT INSTRUMENTS
First Tennessee serves as Investment Adviser to the Portfolios, and with the
prior approval of the Board of Trustees (the Trustees), has engaged BlackRock
Institutional Management Corporation to act as Sub-Adviser to each of the
Portfolios, including providing investment research and credit analysis
concerning Portfolio investments and conducting a continuous program of
investment of Portfolio assets in accordance with the investment policies and
objectives of each Portfolio.
RULE 2a-7. The Money Market Portfolios seek to maintain a stable net asset value
per share by limiting Portfolio investments in accordance with the terms of Rule
2a-7 under the 1940 Act which sets forth limitations on the quality, maturity
and other investment characteristics of registered investment companies which
hold themselves out as money market funds.
ASSET-BACKED SECURITIES. The Cash Reserve Portfolio may include pools of
mortgages, loans, receivables or other assets. Payment of principal and interest
may be largely dependent upon the cash flows generated by the assets backing the
securities, and, in certain cases, supported by letters of credit, surety bonds,
or other credit enhancements. The value of asset-backed securities may also be
affected by the creditworthiness of the servicing agent for the pool, the
originator of the loans or receivables, or the financial institution(s)
providing the credit support.
COMMERCIAL PAPER. The Cash Reserve Portfolio may purchase commercial paper rated
at the time of purchase A-1 by Standard & Poor's Corporation (S&P) or Prime-1 by
Moody's Investors Service, Inc. (Moody's). The Portfolio may also purchase
unrated commercial paper determined to be of comparable quality at the time of
purchase by BIMC, pursuant to guidelines approved by the Trustees.
DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by each Portfolio to purchase or sell specific securities at a predetermined
price and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered.
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 each Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with the
Portfolios' other investments. If each 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, each Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When each Portfolio has sold a security on a
delayed-delivery basis, each 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, each 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.
FEDERALLY-TAXABLE OBLIGATIONS. Municipal Money Market 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. 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 BIMC are of high quality. These would
include obligations issued or guaranteed by the U.S. government, its agencies or
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<PAGE> 91
instrumentalities, obligations of domestic banks, and repurchase agreements. The
Portfolio will purchase taxable obligations only if they meet its quality
requirements as set forth in the Prospectus.
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 state legislatures 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 Trustees would reevaluate the
Portfolio's investment objectives and policies.
Municipal Money Market 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, BIMC, under the
supervision of First Tennessee, determines the liquidity of Municipal Money
Market Portfolio and Cash Reserve Portfolio's investments and, through reports
from BIMC, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Portfolios' investments, BIMC may consider
various factors including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolios' rights and
obligations relating to the investment). Investments currently considered by
Cash Reserve Portfolio to be illiquid include repurchase agreements not
entitling the holder to payment of principal and interest within seven days, and
some restricted securities and time deposits determined by BIMC to be illiquid.
Investments currently considered by Municipal Money Market Portfolio to be
illiquid include some restricted securities and municipal lease obligations
determined by BIMC to be illiquid. In the absence of market quotations, illiquid
investments are valued for purposes of monitoring amortized cost valuation at
fair value as determined in good faith by the Trustees. If through a change in
values, net assets or other circumstances, the Portfolios were in a position
where more than 10% of their net assets were invested in illiquid securities,
the Trustees would seek to take appropriate steps to protect liquidity.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS, DOMESTIC BRANCHES OF
FOREIGN BANKS, AND FOREIGN BRANCHES OF DOMESTIC BANKS. Cash Reserve Portfolio
may purchase bank obligations, such as certificates of deposit, bankers'
acceptances, bank notes and time deposits, including instruments issued or
supported by the credit of U.S. or foreign banks or savings institutions that
have total assets at the time of purchase in excess of $1 billion. The assets of
a bank or savings institution will be deemed to include the assets of its
domestic and foreign branches for purposes of the Portfolio's investment
policies. Investments in short-term bank obligations may include obligations of
foreign banks and domestic branches of foreign banks, and also foreign branches
of domestic banks.
MUNICIPAL LEASE OBLIGATIONS. Municipal Money Market 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 purchases, or
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<PAGE> 92
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.
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 and marked to
market daily. Each Portfolio may enter into a repurchase agreement with respect
to any security in which it is authorized to invest even though the underlying
security matures in more than one year. 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 to present
minimal credit risks by BIMC.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Portfolio
sells a portfolio instrument 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 BIMC. 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,
Municipal Money Market Portfolio and Cash Reserve 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 the Portfolios may
be permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Portfolios
might obtain a less favorable price than prevailed when they decided to seek
registration of the security. However, in general, the Portfolios anticipate
holding restricted securities to maturity or selling them in an exempt
transaction.
SHORT SALES AGAINST THE BOX. A Portfolio may sell securities short when it owns
or has the right to obtain securities equivalent in kind or amount to the
securities sold short. Short sales could be used to protect the net asset value
per share (NAV) of that Portfolio in anticipation of increased interest rates
without sacrificing the current yield of the securities sold short. If a
Portfolio enters into a short sale against the box, it will be required to set
aside securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and will be
required to hold such securities while the short sale is outstanding. A
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales against the box.
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. Municipal Money Market
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
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separate from or in conjunction with the purchase of securities subject to such
commitments. In the latter case, the Portfolio would pay a higher price for the
securities acquired, thus reducing their yield to maturity. Standby commitments
will not affect the dollar-weighted average maturity of the Portfolio, or the
valuation of the securities underlying the commitments.
Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. BIMC may rely
upon its evaluation of a bank's credit in determining whether to support an
instrument supported by a letter of credit. In evaluating a foreign bank's
credit, BIMC 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.
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,
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, Municipal Money Market
Portfolio effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. Subject to applicable regulatory
requirements, the Portfolio may buy tender option bonds if the agreement gives
the Portfolio the right to tender the bond to its sponsor no less frequently
than once every 397 days. In selecting tender option bonds for the Portfolio,
BIMC will consider the creditworthiness of the issuer of the underlying bond,
the custodian, and the third party provider of the tender option. In certain
instances, a sponsor may terminate a tender option if, for example, the issuer
of the underlying bond defaults on interest payments.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS) are obligations that
bear variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate securities have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments 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.
A demand instrument with a conditional demand feature must have received both a
short-term and a long-term high quality rating, or, if unrated, have been
determined to be of comparable quality pursuant to procedures adopted by the
Trustees. A demand instrument with an unconditional demand feature may be
acquired solely in reliance upon a short-term high quality rating or, if
unrated, upon a finding of comparable short-term quality pursuant to procedures
to be adopted by the Trustees.
Municipal Money Market Portfolio and Cash Reserve 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
Portfolios to tender (or put) their bonds to an institution at periodic
intervals and to receive the principal amount thereof. The Portfolios consider
variable rate instruments structured in this way (Participating VRDOs) to be
essentially equivalent to other VRDOs they purchase. The IRS has not ruled
whether the interest on participating VRDOs is tax exempt and accordingly,
Municipal Money Market Portfolio and Cash Reserve Portfolio intend to purchase
these instruments based on opinions of BIMC's fund counsel.
Municipal Money Market Portfolio and Cash Reserve Portfolio may invest in
variable or floating rate instruments that ultimately mature in more than 397
days, if the Portfolios acquire a right to sell the instruments that meets
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certain requirements set forth in Rule 2a-7. A variable rate instrument
(including instruments subject to a demand feature) that matures in 397 days or
less may be deemed to have a maturity equal to the earlier of the period
remaining until the next readjustment of the interest rate or the date on which
principal can be recovered on demand. A variable rate instrument that matures in
greater than 397 days but that is subject to a demand feature that is 397 days
or less may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand. A floating
rate instrument that matures in more than 397 days but that is subject to a
demand feature may be deemed to have a maturity equal to the period remaining
until the principal amount may be recovered through demand. A floating rate
instrument that matures in 397 days or less shall be deemed to have a maturity
of one day.
U.S. Government Money Market Portfolio and Cash Reserve Portfolio may invest in
variable and floating rate instruments of the U.S. Government, its agencies and
instrumentalities, with remaining maturities of 397 days or more provided that
they are deemed to have a maturity of less than 397 days as defined in
accordance with the rules of the SEC. A variable rate instrument that matures in
397 days or more may be deemed to have a maturity equal to the period remaining
until the next readjustment of the interest rate.
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, a Portfolio takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.
PORTFOLIO TRANSACTIONS
First Tennessee and BIMC (collectively, the Advisers) are responsible for
decisions to buy and sell securities for each Portfolio, broker-dealer
selection, and negotiation of commission rates. Since purchases and sales of
portfolio securities by the Portfolios are usually principal transactions, the
Portfolios incur little or no brokerage commissions. Portfolio securities are
normally purchased directly from the issuer or from a market maker for the
securities. The purchase price paid to dealers serving as market makers may
include a spread between the bid and asked prices. The Portfolios may also
purchase securities from underwriters at prices, which include a commission paid
by the issuer to the underwriter. No brokerage commissions were paid by the
Portfolios during the last three fiscal years.
Each Portfolio does not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity. Each Portfolio
requires that investments mature within 397 days or less, as determined in
accordance with the rules of the SEC. The amortized cost method of valuing
portfolio securities requires that each Portfolio maintain an average weighted
portfolio maturity of 90 days or less. Both policies may result in relatively
high portfolio turnover, but since brokerage commissions are not normally paid
on money market instruments, the high rate of portfolio turnover is not expected
to have a material effect on the Portfolios' net income or expenses.
The Advisers' primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order. To the
extent that the executions and prices offered by more than one dealer are
comparable, the Advisers may, at their discretion, effect transactions with
dealers that furnish statistical, research and other information or services
which are deemed by the Advisers to be beneficial to the Portfolios' investment
program. Certain research services furnished by dealers may be useful to the
Advisers with clients other than the Portfolios. Similarly, any research
services received by the Advisers through placement of portfolio transactions of
other clients may be of value to the Advisers in fulfilling their obligations to
the Portfolios. The Advisers are of the opinion that the material received is
beneficial in supplementing their research and analysis, and therefore, may
benefit the Portfolios by improving the quality of their investment advice. The
advisory fee paid by the Portfolios is not reduced because the Advisers receive
such services.
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<PAGE> 95
The Advisers and their affiliates manage several other investment accounts, some
of which may have objectives similar to that of the Portfolios. It is possible
that at times, identical securities will be acceptable for one or more of such
investment accounts. However, the position of each account in the securities of
the same issue may vary and the length of time that each account may choose to
hold its investment in the securities of the same issue may likewise vary. The
timing and amount of purchase by each account will also be determined by its
cash position. If the purchase or sale of securities consistent with the
investment policies of each Portfolio and one or more of these accounts is
considered at or about the same time, transactions in such securities will be
allocated in good faith among the Portfolios and such accounts in a manner
deemed equitable by the Advisers. The Advisers may combine such transactions, in
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution. The allocation and combination of
simultaneous securities purchases on behalf of each Portfolio will be made in
the same way that such purchases are allocated among or combined with those of
other such investment accounts. Simultaneous transactions could adversely affect
the ability of each Portfolio to obtain or dispose of the full amount of a
security, which it seeks to purchase or sell.
Except to the extent permitted by law, portfolio securities will not be
purchased from or sold to or through any "affiliated person," as defined in the
1940 Act, of the Advisers.
VALUATION OF PORTFOLIO SECURITIES
Each Portfolio values its investments on the basis of amortized cost. This
technique involves valuing an instrument at its cost as adjusted for
amortization of premium or accretion of discount rather than its value based on
current market quotations or appropriate substitutes, which reflect current
market conditions. The amortized cost value of an instrument may be higher or
lower than the price each Portfolio would receive if it sold the instrument.
Valuing each Portfolio's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act, as
amended. Each Portfolio must adhere to certain conditions under Rule 2a-7.
The Trustees and First Tennessee oversee BIMC's adherence to Securities and
Exchange Commission (SEC) rules concerning money market funds, and the Trustees
have established procedures designed to stabilize each Portfolio's NAV at $1.00.
At such intervals as they deem appropriate, the Trustees consider the extent to
which NAV calculated by using market valuations would deviate from $1.00 per
share. If the Trustees believe that a deviation from each Portfolio's amortized
cost per share may result in material dilution or other unfair results to
shareholders, the Trustees have agreed to take such corrective action, if any,
as they deem appropriate to eliminate or reduce, to the extent reasonably
practicable, the dilution or unfair results. Such corrective action could
include selling portfolio instruments prior to maturity to realize capital gains
or losses or to shorten average portfolio maturity; withholding dividends;
redeeming shares in kind; establishing NAV by using available market quotations;
and such other measures as the Trustees may deem appropriate.
During periods of declining interest rates, yield based on amortized cost may be
higher than the yield based on market valuations. Under these circumstances, a
shareholder would be able to obtain a somewhat higher yield than would result if
a Portfolio utilized market valuations to determine its NAV. The converse would
apply in a period of rising interest rates.
PERFORMANCE
From time to time, each Class of each Portfolio may quote the CURRENT YIELD and
EFFECTIVE YIELD for each Class in advertisements or in reports or other
communications with shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The net change in
value of a hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the one original share and
dividends declared on both the original share and any additional shares. This
income is then annualized; that is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but,
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when annualized, the income earned by an investment is assumed to be reinvested.
The effective yield will be slightly higher than the current yield because of
the compounding effect of this assumed reinvestment. In addition to the current
yield, yields may be quoted in advertising based on any historical seven-day
period.
Yield information may be useful in reviewing performance and for providing a
basis for comparison with other investment alternatives. Yield will fluctuate,
unlike investments, which pay a fixed yield for 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. The 7-day yields
as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
Class I Class III
------- ---------
<S> <C> <C>
U.S. Treasury Money Market % %
------ ------
U.S. Government Money Market % %
------ ------
Municipal Money Market % %
------ ------
Cash Reserve % %
------ ------
</TABLE>
Municipal Money Market 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 4.0%. 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 1999:
1999 TAX RATES AND TAX-EQUIVALENT YIELDS
<TABLE>
<CAPTION>
Taxable
Income* Federal If individual tax-exempt yield is:
Tax 2.00% 3.00% 4.00%
single return joint return Bracket** Then taxable equivalent yield is:
<S> <C> <C> <C> <C> <C>
$0-$25,750 $0-$43,050 15% 2.35% 3.53% 4.71%
$25,750-$62,450 $43,050-$104,050 28% 2.78% 4.17% 5.56%
$62,450-$130,250 $104,050-$158,550 31% 2.90% 4.35% 5.80%
$130,250-$283,150 $158-550-$283,150 36% 3.13% 4.69% 6.25%
$283,150-above $283,150-above 39.6% 3.31% 4.97% 6.62%
</TABLE>
* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1999 tax rates.
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** Excludes the impact of the phase out 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.
The Portfolio may invest a portion of its assets in obligations that are subject
to 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.
Each Portfolio may compare the performance of each of its Classes or the
performance of securities in which it or each of its Classes may invest to other
mutual funds, especially to those with similar investment objectives. These
comparisons may be based on data published by IBC USA (Publications), Inc. of
Ashland, MA, or by Lipper Analytical Services, Inc. (Lipper, sometimes referred
to as Lipper Analytical Services), an independent service located in Summit, New
Jersey that monitors the performance of mutual funds. Lipper generally ranks
funds on the basis of total return, assuming reinvestment of distributions, but
does not take sales charges or redemption fees into consideration, and is
prepared without regard to tax consequences. Lipper may also rank funds based on
yield. In addition to the mutual fund rankings, each Portfolio's performance may
be compared to mutual fund performance indices prepared by Lipper. The MONEY
FUND AVERAGES' (Government and Tax-Free), which is reported in the MONEY FUND
REPORT, covers money market funds.
From time to time each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications or 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 compare its performance to the yields or averages of other
money market securities as reported by the Federal Reserve Bulletin, by
TeleRate, a financial information network, or by Salomon Brothers Inc., a
broker-dealer firm; and other fixed-income investments such as certificates of
deposit (CDs). The principal value and interest rate of CDs and money market
securities are fixed at the time of purchase whereas yield will fluctuate.
Unlike some CDs and certain other money market securities, money market mutual
funds, and each Portfolio in particular, are not insured by the Federal Deposit
Insurance Corporation (FDIC). Investors should give consideration to the quality
and maturity of the Portfolio securities of the respective investment companies
when comparing investment alternatives. 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. Each Portfolio may reference the growth and variety of money market
mutual funds and First Tennessee's or Sub-Adviser's skill and participation in
the industry.
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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following holiday closings have been scheduled: Thanksgiving Day, Christmas
Day, New Year's Day, Dr. Martin Luther King Jr. Day, Washington's Birthday, Good
Friday, Memorial Day, Independence Day and Labor Day. Although First Tennessee
expects the same holiday schedule to be observed in the future, the New York
Stock Exchange (NYSE) and the Federal Reserve Bank of New York (New York Federal
Reserve) may modify their holiday schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing 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.
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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.
DISTRIBUTIONS AND TAXES
DIVIDENDS. Dividends will not normally qualify for the dividends-received
deduction available to corporations, since the Portfolios' income is primarily
derived from interest income and short-term capital gains. Depending upon state
law, a portion of each Portfolio's dividends attributable to interest income
derived from U.S. government securities may be exempt from state and local
taxation. It is not anticipated that dividends attributable to U.S. government
securities will be exempt from Tennessee income tax. The Portfolios will provide
information on the portion of each Portfolio's dividends, if any, that qualifies
for this exemption.
Dividends derived from Municipal Money Market 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. Municipal Money Market Portfolio
will send a tax statement showing the amount of tax-exempt distributions for the
past calendar year, and will send an IRS Form 1099-DIV by January 31 if the
Portfolio makes any taxable distributions. It is not anticipated that the
Portfolio's distributions will be exempt from Tennessee income tax.
Each Portfolio's distributions are taxable when they are paid whether taken in
cash or reinvested in additional shares, except that distributions declared in
December and paid in January are taxable as if paid on December 31. Each
Portfolio will send an IRS Form 1099-DIV by January 31.
CAPITAL GAIN DISTRIBUTIONS. Each Portfolio may distribute short-term capital
gains once a year or more often as necessary to maintain their NAVs at $1.00 per
share or to comply with distribution requirements under federal tax law. Each
Portfolio does not anticipate earning long-term capital gains on securities
held.
TAX STATUS OF THE TRUST. Each Portfolio has qualified and intends to qualify as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the Code), so that each Portfolio will not be liable for
federal income or excise taxes on net investment income or capital gains to the
extent that these are distributed to shareholders in accordance with applicable
provisions of the Code. The Portfolios also intend to comply with other federal
tax rules applicable to regulated investment companies. The Portfolios'
principal place of business is located in Denver, Colorado. The Portfolios
intend to comply with Colorado tax rules applicable to registered investment
companies.
STATE AND LOCAL TAX ISSUES. For mutual funds organized as business trusts, state
law provides for a pass-through of the state and local income tax exemption
afforded to direct owners of U.S. government securities. Some states limit this
pass-through to mutual funds that invest a certain amount in U.S. government
securities, and some types of securities, such as repurchase agreements and some
agency backed securities, may not qualify for this pass-through benefit. The tax
treatment of dividend distributions from U.S. Treasury Money Market Portfolio
and U.S. Government Money Market Portfolio will be the same as if a shareholder
directly owned a proportionate share of the U.S. government securities in the
Portfolio. Because the income earned on most U.S. government securities in which
the Portfolios invest is exempt from the state and local income taxes, the
portion of dividends from the
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Portfolios attributable to these securities will also be free from income taxes.
The exemption from state and local income taxation does not preclude states from
assessing other taxes on the ownership of U.S. government securities.
OTHER TAX INFORMATION. The information above is only a summary of some of the
tax consequences generally affecting each Portfolio and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders may be subject to state and local taxes on
distributions received from each Portfolio. Investors should consult their tax
advisors to determine whether each Portfolio is suitable to their particular tax
situation.
Federal income tax will be withheld at a 20% rate on any eligible rollover
distributions that are not transferred directly to another qualified plan or
IRA. Actual income tax may be higher or lower and will be due when tax forms for
the year are filed. Taxes will not be withheld in cases of direct rollover into
an IRA or another qualified plan.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each Trustee
or officer that is an "interested person" (as defined in the 1940 Act) by virtue
of his affiliation with First Tennessee or ALPS, is indicated by an asterisk
(*).
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address, and Age with Trust During Past 5 Years
---------------------- ---------------- --------------------
<S> <C> <C>
THOMAS M. BATCHELOR, age 78, Trustee Mr. Batchelor currently serves as director of two non-profit
4325 Woodcrest Drive, Memphis, TN organizations, MTM Foundation and the White Foundation. Mr.
Batchelor also operates a management consultant business on a
limited basis, and 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 what was First American
State Bank in Memphis, TN. He formerly served as Chairman,
Memphis Union Mission, TN, as well as a charity and a non-profit
foundation.
JOHN A. DECELL, age 64, 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 69, Trustee Mr. Jalenak was Chairman of the Board (1990 -1993 (retired)),
6094 Apple Tree Drive, Suite 11, Memphis, TN Cleo Inc. (manufacturer of gift-related products), a Gibson
Greetings Company. Mr. Jalenak is also a Director of Perrigo
Company (1988 - present), Lufkin Industries (1990 - present),
Dyersburg Corporation (1990 - present), was President and CEO
(until 1990) of Cleo Inc., and was a Director of Gibson
Greetings, Inc. from 1983 to 1991.
LARRY W. PAPASAN, age 59, 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.
</TABLE>
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TRUSTEES AND OFFICERS
<TABLE>
<S> <C> <C>
RICHARD C. RANTZOW, age 61, Trustee Mr. Rantzow was Vice President/Director, Ron Miller Associates,
5790 Shelby Avenue, Memphis, TN Inc. (manufacturer). Mr. Rantzow was Managing Partner (until
1990) of the Memphis office of Ernst & Young.
*JEREMY O. MAY, age 31, 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 42, 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>
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. The
Trustees were compensated as follows for their services provided during the
Trust's fiscal year ended June 30,2000:
<TABLE>
<CAPTION>
Pension Or Aggregate
Retirement Estimated Compensation
Aggregate Benefits Annual From The Trust
Compensation Accrued As Benefits And Fund
From the Part of Fund Upon Complex Paid
Trust Expenses Retirement To Trustees
------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
Thomas M. Batchelor
Trustee $ $0 $0 $
John A. DeCell
Trustee $ $0 $0 $
L. R. Jalenak, Jr.
Trustee $ $0 $0 $
Larry W. Papsan, $ $0 $0 $
Trustee
Richard C. Rantzow
Trustee $ $0 $0 $
</TABLE>
As of _______ 30, 2000, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.
INVESTMENT ADVISORY AGREEMENTS
Each Portfolio employs First Tennessee Bank National Association, Memphis,
Tennessee, to furnish investment advisory and other services to the Portfolio.
Under the Investment Advisory and Management Agreement with each Portfolio,
First Tennessee is authorized to appoint one or more sub-advisers at First
Tennessee's expense. BlackRock Institutional Management Corporation, formerly
known as PNC Institutional Management Corporation, Wilmington, Delaware, acts as
Sub-Adviser and, subject to the direction of the Trustees and of First
Tennessee, directs the investments of each Portfolio in accordance with its
investment objective, policies and limitations.
In addition to First Tennessee's fee 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
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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, each Portfolio's proportionate share of
insurance premiums and Investment Company Institute dues, and costs of
registering shares under federal and state securities laws. Each Portfolio also
is liable for such nonrecurring expenses as may arise, including costs of
litigation to which each Portfolio is a party, and its obligation under the
Declaration of Trust to indemnify its officers and Trustees with respect to such
litigation.
For managing its investment and business affairs, each Portfolio pays First
Tennessee its prorated portion of a monthly management fee at the annual rate of
.25% of aggregate average monthly net assets of all Money Market Portfolios of
the Trust managed by First Tennessee through $1 billion, and .22% on amounts
greater than $1 billion. First Tennessee has voluntarily agreed to waive its fee
to .08%, .10%, .10% and .10% of the U.S. Treasury Money Market, U.S. Government
Money Market, Municipal Money Market and Cash Reserve Portfolios' average net
assets. These fee waivers may be discontinued at any time. For the fiscal year
ended June 30, 2000, First Tennessee earned $____, $____, $____ and $____ from
the U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio, and Cash Reserve Portfolio,
respectively, before waiving $____, $____, $____ and $____, for the respective
Portfolios. For the fiscal year ended June 30, 1999, First Tennessee earned
$137,925, $234,187, $124,234 and $238,787 from the U.S. Treasury Money Market,
U.S. Government Money Market, Municipal Money Market and Cash Reserve
Portfolios, respectively, before waiving $83,083, $137,583, $72,802 and $140,357
for the respective Portfolios. For the fiscal year ended June 30, 1998, First
Tennessee earned $137,999, $238,922, $131,526 and $166,825 from the U.S.
Treasury Money Market, U.S. Government Money Market, Municipal Money Market and
Cash Reserve Portfolios, respectively, before waiving $82,799, $143,353, $78,915
and $100,095 for the respective Portfolios.
Under the Investment Advisory and Management Agreement, First Tennessee is
authorized, at its own expense, to hire sub-advisers to provide investment
advice to each Portfolio. As Sub-Adviser, BIMC is paid by First Tennessee a
monthly sub-advisory fee at the annual rate of .08% of aggregate average monthly
net assets of all money market Portfolios of the Trust advised by BIMC, through
$500 million, .06% of the next $500 million, and .05% on amounts greater than $1
billion. Under the terms of the subadvisory agreement with First Tennessee,
BIMC, subject to the supervision of First Tennessee, supervises the day-to-day
operations of each Portfolio and provides investment research and credit
analysis concerning each Portfolio's investments, conducts a continual program
of investment of each Portfolio's assets and maintains the books and records
required in connection with its duties under each sub-advisory agreement. In
addition, BIMC keeps First Tennessee informed of the developments materially
affecting each Portfolio.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. is the
Administrator and Distributor to each Portfolio under separate Administration
and General Distribution Agreements with respect 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 receive from each Portfolio a
monthly fee at the annual rate of .075% of average net assets. ALPS has
voluntarily agreed to waive its entire administration fee it is entitled to
receive from the U.S. Treasury Money Market Portfolio. This fee waiver may be
discontinued at any time.
For each Portfolio's fiscal year ended June 30, 2000, ALPS earned administration
fees in the amounts of $____, $____, $____ and $____ from the U.S. Treasury
Money Market Portfolio, U.S. Government Money Market Portfolio, Municipal Money
Market Portfolio, and Cash Reserve Portfolio, respectively, before waiving $____
for the U.S. Treasury Money Market Portfolio. For each Portfolio's fiscal year
ended June 30, 1999, ALPS earned
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<PAGE> 102
administration fees in the amounts of $40,106, $68,205, $36,053 and $69,596 from
the U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio and Cash Reserve Portfolio,
respectively, before waiving $1,423 for the U.S. Treasury Money Market
Portfolio. For each Portfolio's fiscal year ended June 30, 1998, ALPS earned
administration fees in the amount of $41,400, $71,676, $39,458 and $50,048 from
the U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio and the Cash Reserve Portfolio,
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 II, III and IV are obligated to pay
ALPS monthly an additional annual fee of up to .25%, .45% and .50% 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 II, Class III or
Class IV shares. See "Distribution Plans" below. First Tennessee and its
affiliates neither participate in nor are responsible for the underwriting of
Portfolio shares. Consistent with applicable law, affiliated brokers of First
Tennessee may receive commissions or asset-based fees.
CO-ADMINISTRATOR. 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. First Tennessee has
voluntarily agreed to waive its co-administration fee to .000%, .025%, .025% and
.025% of the U.S. Treasury Money Market, U.S. Government Money Market, Municipal
Money Market and Cash Reserve Portfolios' average net assets. These fee waivers
may be discontinued at any time. For each Portfolio's fiscal year ended June 30,
2000, First Tennessee earned co-administration fees in the amount of $____,
$____, $____ and $____ from the U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, Municipal Money Market Portfolio and Cash
Reserve Portfolio, respectively, before waiving $____, $____, $____ and $____,
respectively. For each Portfolio's fiscal year ended June 30, 1999, First
Tennessee earned co-administration fees in the amount of $26,738, $45,470,
$24,036 and $46,397 from the U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, Municipal Money Market Portfolio and the Cash
Reserve Portfolio, respectively, before waiving $11,892, $22,930, $12,134 and
$23,393, respectively. For each Portfolio's fiscal year ended June 30, 1998,
First Tennessee earned co-administration fees in the amount of $27,600, $47,784,
$26,305 and $33,365 from the U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, Municipal Money Market Portfolio and Cash
Reserve Portfolio, respectively, before waiving $13,800, $23,892, $13,153 and
$16,682, respectively.
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 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 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 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 PLANS. The Trustees of the Trust have adopted a Distribution Plan
on behalf of Class III of each Portfolio and Class IV of the U.S. Treasury Money
Market Portfolio (collectively the "Distribution Plans") 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 Distribution
Plans to allow Class III of each Portfolio and Class IV of the U.S. Treasury
Money Market Portfolio and ALPS to
16
<PAGE> 103
incur distribution expenses. The Distribution Plans provide for payment of a
distribution fee (12b-1 fee) of up to 0.45% of the average net assets of Class
III of each Portfolio and 0.50% of the average net assets of Class IV of the
U.S. Treasury Money Market Portfolio. The Trustees have limited the fees payable
by Class III of each Portfolio to .25% of each Class III's average net assets.
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 U.S. Treasury Money Market Portfolio, may enter into servicing
agreements (Service Agreements) with banks, broker-dealers or other institutions
(Agency Institutions). The Distribution Plans provide 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,
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 Distribution Plans
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.
The Distribution Plans have 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 Distribution Plan will benefit each Portfolio and its
shareholders. To the extent that the Distribution Plans give ALPS greater
flexibility in connection with the distribution of shares of the class,
additional sales of shares may result.
The Distribution 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 Distribution 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 distribution-related expenses and receives $2 under a Distribution
Plan, the $1 difference could be said to be a profit for ALPS. Because ALPS is
reimbursed for its out-of-pocket direct promotional expenses, a Distribution
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 Distribution Plan,
these may be used as ALPS may elect. Since the amount payable under the
Distribution Plans will be commingled with ALPS's general funds, including the
revenues it receives in the conduct of its business, it is possible that certain
of ALPS's overhead expenses will be paid out of Plan fees and that these
expenses may include items such as the costs of leases, depreciation,
communications, salaries, training and supplies. Each Portfolio believes that
such expenses, if paid, will be paid only indirectly out of the fees being paid
under the Plan.
For fiscal year ended June 30, 2000, Class III of the U.S. Treasury Money
Market, U.S. Government Money Market, Municipal Money Market and Cash Reserve
Portfolios paid distribution fees in the amounts of $____, $____, $____ and
$____, respectively. For the fiscal year ended June 30, 2000, Class IV of the
U.S. Treasury Money Market Portfolio paid distribution fees in the amount of
$____. All of these fees were paid as compensation to dealers.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II of each Portfolio and Class IV of the U.S. Treasury
Money Market Portfolio have adopted Shareholder Services Plans to compensate
Agency Institutions for individual shareholder services and account maintenance.
These functions include: maintaining account records for each shareholder who
beneficially owns Class II or Class 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
17
<PAGE> 104
transactions in Class II 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
of each Portfolio and Class IV of the U.S. Treasury Money Market Portfolio.
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, controlling, or distributing
the shares of a registered, open-end investment company continuously engaged in
the issuance of its shares and prohibit banks generally from issuing,
underwriting, selling or distributing securities. The same laws and regulations
generally permit a bank or bank affiliate to act as an investment adviser and
co-administrator and to purchase shares of the investment company as agent for
and upon the order of a customer. In the Trust's and Investment Adviser's
opinion, banks and their affiliates may be paid for investment advisory,
shareholder servicing, recordkeeping and co-administration functions. Changes in
federal or state statutes and regulations pertaining to the permissible
activities of banks and their affiliates or subsidiaries, as well as further
judicial or administrative decisions or interpretations, could prevent a bank
from continuing to perform all or a part of the contemplated services. If a bank
or its affiliates were prohibited from so acting, the Trustees would consider
what actions, if any, would be necessary to continue to provide efficient and
effective shareholder services. In such event, changes in the operation of the
Portfolios might occur, including possible termination of any automatic
investment or redemption or other services then being provided by any bank. It
is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences. The Portfolios may execute
portfolio transactions with and purchase securities issued by depository
institutions that receive payments under the Plans. No preference will be shown
in the selection of investments for the instruments of such depository
institutions. In addition, state securities laws on this issue may differ from
the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to state
law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. U.S. Treasury Money Market Portfolio, U.S. Government Money
Market Portfolio, Municipal Money Market Portfolio, and Cash Reserve 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, each with multiple 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's 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
18
<PAGE> 105
indemnification out of each Portfolio's property of any shareholders held
personally liable for the obligations of each Portfolio. The Declaration of
Trust also provides that each Portfolio shall, upon request, assume the defense
of any claim made against any shareholder for any act or obligation of a
Portfolio and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio itself would be unable to meet its
obligations. The Trustees believe that, in view of the above, the risk of
personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
As of September 30, 2000, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:
<TABLE>
<CAPTION>
Total % of Total Outstanding
Name and Address Portfolio Class Shares Owned Class Held in Class
---------------- --------- ----- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
</TABLE>
[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.
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. Deloitte & Touche LLP, 555 Seventeenth Street, Suite
3600, Denver, Colorado 80202, serves as the Trust's independent accountant. The
independent accountant examines the annual financial statements for the Trust
and provides other audit, tax, and related services.
FINANCIAL STATEMENTS
The Portfolios' financial statements and financial highlights for the fiscal
year ended June 30, 2000, and the six-month period ended December 31, 1999, are
included in the Trust's Annual and Semi-Annual Reports, which are separate
reports supplied independent of this Statement of Additional Information. The
Portfolios' financial statements and financial highlights are incorporated
herein by reference.
19
<PAGE> 106
The Portfolios' financial statements for the year ended June 30, 2000, were
audited by Deloitte & Touche LLP, whose report thereon is included in the
Portfolios' annual report.
20
<PAGE> 107
APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
o Broad margins in earning coverage of fixed financial charges and with
high internal cash generation.
o Well established access to a range of financial markets and assured
sources of alternate liquidity.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1- This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
21
<PAGE> 108
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 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 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 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.
<PAGE> 109
(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)
(11) Investment Advisory and Management Agreement
between First Funds on behalf of the Capital
Appreciation Portfolio and Delaware
Management Company dated June 1, 2000 is
filed electronically herewith.
(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 Agency
Institution.(3)
<PAGE> 110
(7) Form of Selling Dealer Agreement between
ALPS Mutual Funds Services, Inc., and
selected dealers.(3)
(8) Form of Bank Agency Agreement between ALPS
Mutual Funds Services, Inc., and banks.(3)
(9) Power of Attorney dated September 25,
1998.(2)
(f) Not Applicable.
(g) Custody Agreement between First Funds and
State Street Bank & Trust Company dated May
7, 1999.(3)
(h) Transfer Agency Agreement between First
Funds and State Street Bank & Trust Company
dated May 7. 1999.(3)
(i) Opinion and Consent of Baker, Donelson,
Bearman & Caldwell to be provided by
amendment.
(j) Opinion and Consent of Deloitte & Touche,
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.(3)
(2) Form of Distribution Plan for First Funds
Class III shares.(3)
(3) Form of Distribution Plan for First Funds
Class IV shares.(3)
(4) Form of Shareholder Services Plan for First
Funds Class IV shares.(3)
(n) Not Applicable.
(o) Form of Plan Providing for Multiple Classes
of Shares pursuant to Rule 18f-3.(4)
(p) (1) Code of Ethics for ALPS Mutual Funds
Services, Inc. to be provided by amendment.
(2) Code of Ethics for First Tennessee Bank
National Association to be provided by
amendment.
(3) Code of Ethics for Delaware Management
Corporation to be provided by amendment.
<PAGE> 111
(4) Code of Ethics for BlackRock Institutional
Management Corporation to be provided by
amendment.
(5) Code of Ethics for Highland Capital
Management Corporation to be provided by
amendment.
(6) Code of Ethics for Martin & Company, Inc. to
be provided by amendment.
----------
(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.
(3) Incorporated by reference to Post-Effective Amendment No. 17 to the Trust's
Registration Statement.
(4) Incorporated by reference to Post-Effective Amendment No. 22 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 weather
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
officer 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
<PAGE> 112
against public policy as expressed in the
Act and will be governed by the final
adjudication of such issue.
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 Professor Education
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
Executive Officer, Mid-America investment 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)
</TABLE>
<PAGE> 113
<TABLE>
<S> <C> <C> <C>
Director, Highland Capital Management Investment Advisor
Corp.(11)
Chairman and Director, First Horizon Consumer access/
Strategic Alliances, Inc.(12) discount 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 Securitization
Securities, Inc.(17) conduit
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, Chairman of the Ralph Horn President, Chairman of the Board, Bank holding company
Board, Chief Executive Chief Executive Officer and Director,
Officer and Director FTNC(7)
Director, Harrah's Entertainment, Casino, entertainment
Inc.(20)
Director Mid-America Apartment Real estate
Communities, Inc.(6) investment trust
Director, President, John C. Kelley, Jr. Executive Vice President, Director, Bank holding company
Business Financial Services/ FTNC(7)
Memphis Financial Services
Director, Check Consultants, Inc.(7) Check processing and
related services
</TABLE>
<PAGE> 114
<TABLE>
<S> <C> <C> <C>
Director, Check Consultants Company Check processing and
of Tennessee(7) related services
Director, First Tennessee Housing Public welfare
Corporation(21) investments
Director, First Tennessee Equipment Equipment financing
Finance Corporation(22)
Director R. Brad Martin Chairman of the Board, Chief Retail
Executive Officer, Saks,
Incorporated(23)
Director, Harrah's Entertainment Casino, entertainment
Inc.(20)
Director, Pilot Corporation(18) Retail operator of
convenience stores
and travel centers
Director Joseph Orgill, III Chairman of the Board, West Union Distributor and
Corporation(24) manufacturer 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 Bottler of soft
Treasurer of Coca Cola Enterprises, drink products
Inc.(27)
Director Michael D. Rose Director, Nextera Enterprises, Business consulting
Inc.(28)
Director, General Mills, Inc.(29) Food processing
Director, Ashland Inc.(30) Oil company
</TABLE>
<PAGE> 115
<TABLE>
<S> <C> <C> <C>
Director, Darden Restaurants, Inc.(31) Restaurant
Director, Stein Mart, Inc.(32) Retail
Director, FelCor Lodging Trust, Hotel
Inc.(33)
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
Inc.(36) aggregate materials
producer
</TABLE>
<PAGE> 116
<TABLE>
<S> <C> <C> <C>
Director, Astec Industries, Inc.(37) Construction
aggregate materials
producer
Executive Vice President, Susan Schmidt Bies Executive Vice President, Auditor, Bank holding company
Auditor FTNC(7)
Executive Vice President Harry A. Johnson, III Executive Vice President and General Bank holding company
and General Counsel Counsel of FTNC(7)
Executive Vice George Perry Lewis Director, First Tennessee Brokerage, Broker Dealer
President-Group Manager, Inc.(38)
money Management
Director, Highland Capital Management Investment Adviser
Corp.(11)
Director, Hickory Venture Capital Venture 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 President John P. O'Connor, Jr. Executive Vice President and Chief Bank holding company
and Chief Credit Officer Credit Officer of FTNC(7)
Executive Vice Sarah Meyerrose Executive Vice President Employee Bank holding company
President-Employee Services Services of FTNC(7)
Executive Vice President, Elbert L. Thomas, Jr. Executive Vice President and Chief Bank holding company
Chief Financial Officer Financial Officer of FTNC(7)
Director, First Tennessee ABS, REIT/REMIC
Inc.(42)
</TABLE>
<PAGE> 117
<TABLE>
<S> <C> <C> <C>
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 President, Charles Burkett Director, Highland Capital Management Investment Adviser
Affluent Market Manager Corp.(11)
Executive Vice President David L. Berry None
Executive Vice President William E. Woodson Director, Martin & Co., Inc.(16) Investment Adviser
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
</TABLE>
<PAGE> 118
<TABLE>
<S> <C> <C> <C>
Senior Vice President Maureen MacIver None
Senior Vice President Otis M. Clayton 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 First Larry B. Martin Director, Martin & Co., Inc.(16) Investment Adviser
Tennessee Bank-Knoxville
President, First Tennessee Lew Weems Director, Martin & Co., Inc.(16) Investment Adviser
Bank-Knoxville
</TABLE>
NOTES:
* All directors of FTB are also directors of its parent, First Tennessee
National Corporation, which controls FTB. Messrs. Glass, Horn, Johnson, Keen,
Kelley, Lewis, O'Connor and Thomas and Ms. Bies and Ms. Meyerrose are considered
executive officers of FTNC.
----------
(1) J.L. Kellogg Graduate School of Management, 875 N. Michigan Ave., Suite
2945, Chicago, IL 60611
(2) Factory Card Outlet Cop., 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 Floor 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
<PAGE> 119
(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
(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, Inc., 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
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, Treasurer, Edward J. Goldstein None
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
</TABLE>
<PAGE> 120
<TABLE>
<S> <C> <C>
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
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
<PAGE> 121
Item 27. Principal Underwriters
(1) The sold 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, DIAMONDS Trust, Select Sector SPDR
Trust, Nasdaq 100 Trust, Firsthand Funds,
and Holland Balanced Fund.
(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 Officers with
Business Address* Registrant Underwriter
------------------ -------------------------- ---------------------------
<S> <C> <C>
W. Robert Alexander None Chairman, Chief Executive Officer
and Secretary
Arthur J. Lucey None Vice Chairman and Director
Thomas A. Carter None Chief Financial Officer
Edmund J. Burke None President and Director
Jeremy May Treasurer Vice President
Russell C. Burk Secretary General Counsel
John W. Hannon, Jr. None Director
Rick A. Pederson None Director
Chris Woessner None Director
</TABLE>
* 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
<PAGE> 122
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> 123
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. 23 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 29th day of
August, 2000.
FIRST FUNDS
By: /s/ Richard C. Rantzow
----------------------
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.
<TABLE>
<S> <C> <C>
/s/ Richard C. Rantzow
----------------------
Richard C. Rantzow* President and Trustee August 29, 2000
/s/ L.R. Jalenak, Jr.
---------------------
L.R. Jalenak, Jr.* Trustee August 29, 2000
/s/ Jeremy O. May
-----------------
Jeremy O. May* Treasurer August 29, 2000
/s/ Thomas M. Batchelor
-----------------------
Thomas M. Batchelor* Trustee August 29, 2000
/s/ John A. DeCell
------------------
John A. DeCell* Trustee August 29, 2000
/s/ Larry W. Papasan
--------------------
Larry W. Papasan* Trustee August 29, 2000
</TABLE>
*Signature affixed by Desiree M. Franklin pursuant to a power of attorney dated
September 25, 1998, and incorporated by reference to Post-Effective Amendment
No. 16 to the Trust's Registration Statement.
<PAGE> 124
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
d(11) Investment Advisory and Management Agreement between
First Funds on behalf of the Capital Appreciation
Portfolio and Delaware Management Company dated June
1, 2000.
</TABLE>
