MARSHALL FUNDS(R)
-------------------------
CHOICES FOR CONFIDENT INVESTING
Marshall Funds, Inc. (the "Corporation" or "Marshall Funds") is an open-end,
management investment company (a mutual fund). The Corporation has the following
eleven separate investment portfolios. Each portfolio ("Fund") offers its own
shares and has a distinct investment goal to meet specific investor needs.
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
EQUITY FUNDS TAX-FREE INCOME FUNDS
- MARSHALL STOCK FUND - MARSHALL SHORT-TERM TAX-FREE FUND
- MARSHALL VALUE EQUITY FUND - MARSHALL INTERMEDIATE TAX-FREE FUND
- MARSHALL EQUITY INCOME FUND
- MARSHALL MID-CAP STOCK FUND
- MARSHALL INTERNATIONAL STOCK FUND
INCOME FUNDS MONEY MARKET FUND
- MARSHALL SHORT-TERM INCOME FUND - MARSHALL MONEY MARKET FUND
- MARSHALL INTERMEDIATE BOND FUND
- MARSHALL GOVERNMENT INCOME FUND
</TABLE>
This prospectus contains the information you should read and know before you
invest in any of the Funds. Keep this prospectus for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, MARSHALL & ILSLEY CORP. OR ANY OF ITS BANKING
SUBSIDIARIES ("M&I CORP."), AND THE SHARES ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE MONEY MARKET FUND ATTEMPTS TO
MAINTAIN A STABLE $1.00 NET ASSET VALUE PER SHARE, BUT IT CANNOT GUARANTEE THAT
IT WILL ALWAYS BE ABLE TO DO SO. THE INTERNATIONAL STOCK FUND MAY BORROW MONEY
TO INVEST, WHICH MAY BE CONSIDERED A SPECULATIVE ACTIVITY AND MAY INVOLVE
GREATER RISK AND EXPENSE TO THIS FUND.
The Funds have also filed a Statement of Additional Information dated January 1,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Funds by
writing to or calling Marshall Funds Investor Services at 414-287-8555 or
1-800-236-8554 or M&I Brokerage Services, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus
January 1, 1995
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Contents.................................................................................. 2
Summary of Investment Information.................................................................. 3
Who May Want To Invest In the Marshall Funds?................................................. 3
Who Manages The Funds?........................................................................ 3
How to Buy And Sell Shares.................................................................... 3
What About Investment Risks?.................................................................. 4
Summary of Fund Expenses........................................................................... 5
Financial Highlights............................................................................... 7
Fund Objective and Policies........................................................................ 13
The EQUITY FUNDS.............................................................................. 13
The INCOME FUNDS.............................................................................. 14
The TAX-FREE INCOME FUNDS..................................................................... 15
The MONEY MARKET FUND......................................................................... 16
How to Buy Fund Shares............................................................................. 17
Minimum Investments........................................................................... 17
Net Asset Value............................................................................... 18
How to Redeem Shares............................................................................... 19
Additional Conditions......................................................................... 20
Exchange Privilege................................................................................. 21
Telephone Transactions............................................................................. 21
Marshall Funds, Inc. Information................................................................... 22
Organization and History...................................................................... 22
Management.................................................................................... 22
Distribution of Fund Shares................................................................... 24
Administration of the Funds........................................................................ 25
Brokerage Transactions........................................................................ 25
Expenses of the Funds......................................................................... 25
Shareholder Information............................................................................ 25
Certificates and Confirmations................................................................ 25
Dividends and Capital Gains................................................................... 25
Common Stock and Voting Rights................................................................ 26
Performance Information............................................................................ 26
Portfolio Investments and Strategies............................................................... 27
Additional Investment Risks................................................................... 34
Tax Information.................................................................................... 37
Federal Income Tax............................................................................ 37
State and Local Taxes......................................................................... 38
Effect of Banking Laws............................................................................. 38
Standard & Poor's Corporation...................................................................... 38
Addresses.......................................................................................... 39
</TABLE>
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SUMMARY OF INVESTMENT INFORMATION
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WHO MAY WANT TO INVEST IN THE MARSHALL FUNDS?
The Marshall Funds offer investment opportunities to a wide range of investors,
from those who may be investing for the short-term to those with long-term
goals. The Corporation currently offers the following eleven professionally
managed, diversified portfolios:
- MARSHALL STOCK FUND ("STOCK FUND")--seeks growth of capital and income by
investing primarily in common stocks of companies with an established
market (such as those with a large market capitalization);
- MARSHALL VALUE EQUITY FUND ("VALUE EQUITY FUND")--seeks long-term capital
growth and income by investing primarily in common and preferred stocks
selected on the basis of traditional research including assessment of
earnings, dividend growth and risk volatility of the company's industry;
- MARSHALL EQUITY INCOME FUND ("EQUITY INCOME FUND")--seeks above-average
dividend income with appreciation of capital by investing primarily in
common and preferred stock of companies with large capitalization;
- MARSHALL MID-CAP STOCK FUND ("MID-CAP STOCK FUND")--seeks appreciation of
capital by investing primarily in common and preferred stocks issued by
medium-sized companies whose market capitalizations generally range from
$200 million to $7.5 billion;
- MARSHALL INTERNATIONAL STOCK FUND ("INTERNATIONAL STOCK FUND")--seeks
long-term capital growth by investing primarily in equity securities of
companies and governments outside the United States;
- MARSHALL SHORT-TERM INCOME FUND ("SHORT-TERM INCOME FUND")--seeks to
maximize total return consistent with current income by investing
primarily in short- to intermediate-term high-grade bonds and notes;
- MARSHALL INTERMEDIATE BOND FUND ("INTERMEDIATE BOND FUND")--seeks to
maximize total return consistent with current income by investing
primarily in intermediate-term high-grade bonds and notes;
- MARSHALL GOVERNMENT INCOME FUND ("GOVERNMENT INCOME FUND")--seeks to
provide current income by investing primarily in securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government or U.S. government agencies or instrumentalities;
- MARSHALL SHORT-TERM TAX-FREE FUND ("SHORT-TERM TAX-FREE FUND")--seeks to
provide current income which is exempt from federal income tax by
investing in short-term high-grade municipal securities that generate
such income;
- MARSHALL INTERMEDIATE TAX-FREE FUND ("INTERMEDIATE TAX-FREE FUND")--seeks
to provide as high a level of income which is exempt from federal income
tax as is consistent with preservation of capital by investing in
high-grade municipal securities that generate such income; and
- MARSHALL MONEY MARKET FUND ("MONEY MARKET FUND")--seeks to provide
current income consistent with stability of principal by investing in
money market instruments maturing in 397 days or less. Shares of the
MONEY MARKET FUND are offered in two separate classes: CLASS A SHARES and
CLASS B SHARES.
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WHO MANAGES THE FUNDS?
M&I Investment Management Corp. serves as investment adviser (the "Adviser") to
the Funds. The Adviser is owned by Marshall & Ilsley Corp. ("M&I Corp.") of
Milwaukee, Wisconsin. Templeton Investment Counsel, Inc. of Ft. Lauderdale,
Florida serves as subadviser (the "Subadviser") to the INTERNATIONAL STOCK FUND.
- --------------------------------------------------------------------------------
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HOW TO BUY AND SELL SHARES?
You may buy and sell shares of any of the Funds by telephone, by mail or in
person. All shares are both sold and redeemed at net asset value without any
sales charges. Your first purchase in any Fund must be at least $1,000 and your
later purchases must be at least $50 each. These minimums may be waived or
lowered from time to time in certain instances, such as for M&I Corp. employees.
The Corporation also offers you the privilege of exchanging shares of one Fund
for another at net asset value without any sales charge. For more information,
please see "How to Buy Fund Shares," "How to Redeem Fund Shares," "Exchange
Privilege" and "Telephone Transactions."
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHAT ABOUT INVESTMENT RISKS?
All mutual funds, including these Funds, take investment risks. The STOCK FUNDs
must contend with the volatility and unpredictability of the U.S. stock market.
The INTERNATIONAL STOCK FUND may experience additional uncertainty in foreign
markets and with foreign currency transactions. The INCOME FUNDS invest heavily
in debt securities, whose values move in the opposite direction of prevailing
interest rates and whose exposure to market price fluctuation increases with the
length of their maturities. Some of the Funds may use options and futures
contracts to hedge their investments or increase their income, although the
successful use of such investment techniques cannot be guaranteed and may result
in a loss instead. Each Fund may invest at least some of its assets in
mortgage-backed securities and may lend its portfolio securities to other
institutions. The risks associated with these and other investments are fully
explained under "Portfolio Investments and Strategies."
In all types of investments, reward and risk go hand in hand. If you seek high
investment returns, you must be willing to assume a comparably higher level of
risk. On the other hand, if you are comfortable with only a small amount of
risk, you should not expect a large return. Set forth below is a risk/reward
chart that depicts the investment potential and corresponding risks associated
with different types of mutual funds. The Marshall Funds are listed under the
relevant categories.
At the top of the chart are equity funds, which have historically produced over
the long-term a higher level of return than other types of investments, but also
have the highest potential risk. In the middle of the chart are income funds,
which offer a middle range of potential risk and return. At the bottom of the
chart are money market funds, which have a lower amount of risk and return. As
with any investment, however, past performance does not predict future
performance. Your investment return will vary, and the redemption value of your
mutual fund shares may be lower than their original purchase price.
Equity Funds
Marshall International Stock Fund
Marshall Mid-Cap Stock Fund
Marshall Stock Fund
Marshall Value Equity Fund
Marshall Equity Income Fund
Income Funds
Marshall Intermediate Tax-Free Fund
Marshall Intermediate Bond Fund
Marshall Government Income Fund
Marshall Short-Term Tax-Free Fund
Marshall Short-Term Income Fund
Money Market Funds
Marshall Money Market Fund
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
VALUE EQUITY MID-CAP INTERNATIONAL SHORT-TERM
STOCK EQUITY INCOME STOCK STOCK INCOME
FUND FUND FUND FUND FUND* FUND
------------- ----------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES..... None None None None None None
ANNUAL FUND OPERATING EXPENSES (As a
percentage of average net assets)
Management Fee (after waiver)(1)..... 0.75% 0.64% 0.63% 0.53% 1.00% 0.22%
12b-1 Fees (2)....................... None None None None None None
Total Other Expenses (after waiver)
(3)................................ 0.24% 0.36% 0.38% 0.48% 0.51% 0.28%
Shareholder Servicing
Fee...................... 0.02%
------------- ----------- ------------ ------------- -------------- ------------
Total Annual Fund Operating Expenses
(4)................................ 0.99% 1.00% 1.01% 1.01% 1.51% 0.50%
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT SHORT-TERM INTERMEDIATE MONEY MARKET FUND
BOND INCOME TAX-FREE TAX-FREE CLASS A CLASS B
FUND FUND FUND FUND SHARES SHARES
------------- ----------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES..... None None None None None None
ANNUAL FUND OPERATING EXPENSES (As a
percentage of average net assets)
Management Fee (after waiver)(1)..... 0.50% 0.36% 0.00% 0.12% 0.21% 0.21%
12b-1 Fees (2)....................... None None None None None 0.30%
Total Other Expenses (after waiver)
(3)................................ 0.21% 0.50% 0.52% 0.50% 0.19% 0.19%
Shareholder Servicing
Fee...................... 0.02%
------------- ----------- ------------ ------------- -------------- ------------
Total Annual Fund Operating Expenses
(4)................................ 0.71% 0.86% 0.52% 0.62% 0.40% 0.70%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser for all of the Funds except the Stock Fund and International
Stock Fund. The adviser may terminate this voluntary waiver at any time at its
sole discretion. The maximum management fee is 0.75% for the Value Equity Fund,
Equity Income Fund, Mid-Cap Stock Fund and Government Income Fund; 0.60% for the
Short-Term Income Fund, Intermediate Bond Fund and Intermediate Tax-Free Fund;
and 0.50% for the Short-Term Tax-Free Fund and Money Market Fund - Class A
Shares and Class B Shares.
(2) The International Stock Fund has no present intention of paying or accruing
12b-1 fees during the fiscal year ending August 31, 1995. If the International
Stock Fund were paying or accruing 12b-1 fees, it would be able to pay up to
0.25% of its average daily net assets to the distributor.
(3) Absent the voluntary waivers by the custodian and administrator, Total Other
Expenses were 0.25% for the Stock Fund, 0.40% for the Value Equity Fund, 0.42%
for the Equity Income Fund, 0.54% for the Mid-Cap Stock Fund, 0.29% for the
Short-Term Income Fund, 0.22% for the Intermediate Bond Fund, 0.51% for the
Government Income Fund, 0.73% for the Short-Term Tax-Free Fund and 0.61% for the
Intermediate Tax-Free Fund. The custodian and administrator may terminate these
waivers at any time at their sole discretion.
(4) Absent the voluntary waivers described above in notes 1 and 3, Total Annual
Fund Operating Expenses were 1.00% for the Stock Fund, 1.15% for the Value
Equity Fund, 1.17% for the Equity Income Fund, 1.29% for the Mid-Cap Stock Fund,
0.89% for the Short-Term Income Fund, 0.82% for the Intermediate Bond Fund,
1.26% for the Government Income Fund, 1.23% for the Short-Term Tax-Free Fund,
1.21% for the Intermediate Tax-Free Fund, 0.69% for the Money Market Fund -
Class A Shares and 0.99% for the Money Market Fund - Class B Shares.
* Annual Fund Operating Expenses in this table for the International Stock Fund
were calculated as a percentage of projected average net assets, and are based
on average expenses expected to be incurred during the fiscal year ending August
31, 1995. During the course of this period, expenses may be more or less than
the average amounts shown above.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds will bear either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Marshall Funds, Inc. Information" and "Administration of the Funds."
Wire-transferred redemptions may be subject to an additional fee.
Long-term shareholders invested in the Money Market Fund - Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charges
permitted under the rules of the National Association of Securities Dealers,
Inc. ("NASD"). However, in order for a Class B Shareholder to exceed the NASD's
maximum front-end sales charge of 6.25%, a continuous investment in the Class B
Shares for 96.2 years would be required.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period. The Funds
charge no redemption fees.
<TABLE>
<CAPTION>
VALUE EQUITY MID-CAP INTERNATIONAL SHORT-TERM
STOCK EQUITY INCOME STOCK STOCK INCOME
FUND FUND FUND FUND FUND FUND
------------- ----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Year................................. $10 $10 $10 $10 $15 $5
3 Years................................ $32 $32 $32 $32 $48 $16
5 Years................................ $55 $55 $56 $56 N/A $28
10 Years............................... $121 $123 $124 $124 N/A $63
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT SHORT-TERM INTERMEDIATE MONEY MARKET FUND
BOND INCOME TAX-FREE TAX-FREE CLASS A CLASS B
FUND FUND FUND FUND SHARES SHARES
------------- ----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Year................................. $7 $9 $5 $6 $4 $7
3 Years................................ $23 $27 $17 $20 $13 $22
5 Years................................ $40 $48 $29 $35 $22 $39
10 Years............................... $88 $106 $65 $78 $51 $87
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The International Stock Fund example is based on estimated data for the fiscal
year ending August 31, 1995.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following tables have been audited by Arthur Andersen LLP, the Funds'
independent public accountants. Their reports, each dated October 11, 1994, are
included in the respective Annual Reports for the Funds, which are incorporated
by reference. These tables should be read in conjunction with each Fund's
financial statements and notes thereto, which may be obtained free of charge
from the Fund.
Further information about the performance of the Funds is contained in the
Funds' Annual Reports dated August 31, 1994, which can be obtained free of
charge.
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MARSHALL STOCK FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1994 1993*
- -------------------------------------------------------------------------------------------------------- ------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.08 $10.00
- --------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------
Net investment income 0.07 0.10
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.03) 0.07
- -------------------------------------------------------------------------------------------------------- ------ -----
Total from investment operations 0.04 0.17
- -------------------------------------------------------------------------------------------------------- ------ -----
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.07) (0.09 )
- -------------------------------------------------------------------------------------------------------- ------ -----
NET ASSET VALUE, END OF PERIOD $10.05 $10.08
- -------------------------------------------------------------------------------------------------------- ------ -----
------ -----
TOTAL RETURN*** 0.44% 1.67 %
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------
Expenses 0.99% 0.94 %(b)
- --------------------------------------------------------------------------------------------------------
Net investment income 0.77% 1.39 %(b)
- --------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.01% 0.03 %(b)
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $250,155 $309,128
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 86% 98 %
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</TABLE>
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MARSHALL VALUE EQUITY FUND
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1994**
- ------------------------------------------------------------------------------------------------------------ -----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------
Net investment income 0.12
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.93
- ----------------------------------------------------------------------------------------------------------- -----------
Total from investment operations 1.05
- ----------------------------------------------------------------------------------------------------------- -----------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.10)
- ----------------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.95
- ----------------------------------------------------------------------------------------------------------- -----------
-----------
TOTAL RETURN*** 10.59%
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Expenses 1.00%(b)
- -----------------------------------------------------------------------------------------------------------
Net investment income 1.82%(b)
- -----------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.15%(b)
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $218,755
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 39%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from November 23, 1992 (date of initial
public investment) to August 31, 1993.
** Reflects operation for the period from October 1, 1993 (date of initial
public investment) to August 31, 1994.
*** Based on net asset value.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL EQUITY INCOME FUND
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1994*
- ------------------------------------------------------------------------------------------------------------- ----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------
Net investment income 0.28
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.09)
- ------------------------------------------------------------------------------------------------------------ -----------
Total from investment operations 0.19
- ------------------------------------------------------------------------------------------------------------ -----------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.23)
- ------------------------------------------------------------------------------------------------------------ -----------
NET ASSET VALUE, END OF PERIOD $ 9.96
- ------------------------------------------------------------------------------------------------------------ -----------
-----------
TOTAL RETURN** 2.02%
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
Expenses 1.01%(b)
- ------------------------------------------------------------------------------------------------------------
Net investment income 3.30%(b)
- ------------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.16%(b)
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $49,396
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 44%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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- --------------------------------------------------------------------------------
MARSHALL MID-CAP STOCK FUND
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1994*
- ------------------------------------------------------------------------------------------------------------- ----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------
Net investment income 0.02
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.29)
- ------------------------------------------------------------------------------------------------------------ -----------
Total from investment operations (0.27)
- ------------------------------------------------------------------------------------------------------------ -----------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.01)
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.03)
- ------------------------------------------------------------------------------------------------------------ -----------
Total distributions (0.04)
- ------------------------------------------------------------------------------------------------------------ -----------
NET ASSET VALUE, END OF PERIOD $ 9.69
- ------------------------------------------------------------------------------------------------------------ -----------
-----------
TOTAL RETURN** (2.74%)
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
Expenses 1.01%(b)
- ------------------------------------------------------------------------------------------------------------
Net investment income 0.23%(b)
- ------------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.28%(b)
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $53,642
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 113%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 1, 1993 (date of initial
public investment) to August 31, 1994.
** Based on net asset value.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL SHORT-TERM INCOME FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------
1994 1993*
- ------------------------------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------
Net investment income 0.45 0.40
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.25) (0.05 )
- ------------------------------------------------------------------------------------------------------- ------ -------
Total from investment operations 0.20 0.35
- ------------------------------------------------------------------------------------------------------- ------ -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.44) (0.40 )
- ------------------------------------------------------------------------------------------------------- ------ -------
NET ASSET VALUE, END OF PERIOD $ 9.71 $ 9.95
- ------------------------------------------------------------------------------------------------------- ------ -------
------ -------
TOTAL RETURN*** 2.05% 3.57 %
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------------
Expenses 0.50% 0.50 %(b)
- -------------------------------------------------------------------------------------------------------
Net investment income 4.58% 4.91 %(b)
- -------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.39% 0.51 %(b)
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $100,452 $74,742
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate 185% 79 %
- -------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL INTERMEDIATE BOND FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------
1994 1993**
- ------------------------------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.40 $10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------
Net investment income 0.61 0.46
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.81) 0.33
- ------------------------------------------------------------------------------------------------------- ------ -------
Total from investment operations (0.20) 0.79
- ------------------------------------------------------------------------------------------------------- ------ -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.67) (0.39 )
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.17) --
- ------------------------------------------------------------------------------------------------------- ------ -------
Total distributions (0.84) (0.39 )
- ------------------------------------------------------------------------------------------------------- ------ -------
NET ASSET VALUE, END OF PERIOD $ 9.36 $10.40
- ------------------------------------------------------------------------------------------------------- ------ -------
------ -------
TOTAL RETURN*** (2.02%) 7.99 %
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------------
Expenses 0.71% 0.70 %(b)
- -------------------------------------------------------------------------------------------------------
Net investment income 6.26% 6.08 %(b)
- -------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.11% 0.10 %(b)
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $357,740 $346,808
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate 228% 220 %
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from November 2, 1992 (date of initial
public investment) to August 31, 1993.
** Reflects operations for the period from November 23, 1992 (date of initial
public investment) to August 31, 1993.
*** Based on net asset value.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL GOVERNMENT INCOME FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1994 1993*
- -------------------------------------------------------------------------------------------------------- ------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.22 $10.00
- --------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------
Net investment income 0.64 0.47
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.78) 0.16
- -------------------------------------------------------------------------------------------------------- ------ -----
Total from investment operations (0.14) 0.63
- -------------------------------------------------------------------------------------------------------- ------ -----
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.68) (0.41 )
- --------------------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.14) --
- -------------------------------------------------------------------------------------------------------- ------ -----
Total distributions (0.82) (0.41 )
- -------------------------------------------------------------------------------------------------------- ------ -----
NET ASSET VALUE, END OF PERIOD $ 9.26 $10.22
- -------------------------------------------------------------------------------------------------------- ------ -----
------ -----
TOTAL RETURN** (1.34%) 6.40 %
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------
Expenses 0.86% 0.85 %(b)
- --------------------------------------------------------------------------------------------------------
Net investment income 6.58% 6.56 %(b)
- --------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.40% 0.33 %(b)
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $64,823 $57,822
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 175% 218 %
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 14, 1992 (date of initial
public investment) to August 31, 1993.
** Based on net asset value.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL SHORT-TERM TAX-FREE FUND
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1994*
- ------------------------------------------------------------------------------------------------------------- ----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------
Net investment income 0.18
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.08)
- ------------------------------------------------------------------------------------------------------------ -----------
Total from investment operations 0.10
- ------------------------------------------------------------------------------------------------------------ -----------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.18)
- ------------------------------------------------------------------------------------------------------------ -----------
NET ASSET VALUE, END OF PERIOD $ 9.92
- ------------------------------------------------------------------------------------------------------------ -----------
-----------
TOTAL RETURN** 0.98%
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
Expenses 0.52%(b)
- ------------------------------------------------------------------------------------------------------------
Net investment income 3.22%(b)
- ------------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.71%(b)
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $24,903
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 37%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL INTERMEDIATE TAX-FREE FUND
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1994*
- ------------------------------------------------------------------------------------------------------------- ----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------
Net investment income 0.19
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.29)
- ------------------------------------------------------------------------------------------------------------ -----------
Total from investment operations (0.10)
- ------------------------------------------------------------------------------------------------------------ -----------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.19)
- ------------------------------------------------------------------------------------------------------------ -----------
NET ASSET VALUE, END OF PERIOD $ 9.71
- ------------------------------------------------------------------------------------------------------------ -----------
-----------
TOTAL RETURN** (0.94%)
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
Expenses 0.62%(b)
- ------------------------------------------------------------------------------------------------------------
Net investment income 3.58%(b)
- ------------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.59%(b)
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $35,212
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 45%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 2, 1994 (date of initial
public investment) to August 31, 1994.
** Based on net asset value.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARSHALL MONEY MARKET FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1994 1993*
------ ------
<S> <C> <C>
CLASS A SHARES (FORMERLY, TRUST SHARES)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $1.00
- --------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------
Net investment income 0.03 0.02
- -------------------------------------------------------------------------------------------------------- ------ -----
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02 )
- -------------------------------------------------------------------------------------------------------- ------ -----
NET ASSET VALUE, END OF PERIOD $ 1.00 $1.00
- -------------------------------------------------------------------------------------------------------- ------ -----
------ -----
TOTAL RETURN*** 3.41% 2.33 %
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------
Expenses 0.40% 0.40 %(b)
- --------------------------------------------------------------------------------------------------------
Net investment income 3.40% 2.97 %(b)
- --------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.29% 0.28 %(b)
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $967,988 $775,890
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1994 1993**
------ ------
<S> <C> <C>
CLASS B SHARES (FORMERLY, INVESTMENT SHARES)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $1.00
- --------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------
Net investment income 0.03 0.02
- -------------------------------------------------------------------------------------------------------- ------ -----
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02 )
- -------------------------------------------------------------------------------------------------------- ------ -----
NET ASSET VALUE, END OF PERIOD $ 1.00 $1.00
- -------------------------------------------------------------------------------------------------------- ------ -----
------ -----
TOTAL RETURN*** 3.11% 1.89 %
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------
Expenses 0.70% 0.72 %(b)
- --------------------------------------------------------------------------------------------------------
Net investment income 3.39% 2.72 %(b)
- --------------------------------------------------------------------------------------------------------
Expense waiver (a) 0.29% 0.28 %(b)
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $11,929 $1,980
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from November 23, 1992 (date of initial
public investment) to August 31, 1993.
** Reflects operation for the period from December 17, 1992 (date of initial
public investment) to August 31, 1993.
*** Based on net asset value.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
- -------------------------------------------------------------
FUND OBJECTIVE AND
POLICIES
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without shareholder approval. While a Fund
cannot assure that it will achieve its investment objective, it attempts to do
so by following the investment policies described below.
Unless indicated otherwise, the investment policies of a Fund may be changed by
the Board of Directors ("Directors") without shareholder approval. However,
shareholders will be notified before any material change in these policies
becomes effective.
For additional information about investment limitations, strategies that one or
more Funds may employ, and certain investment policies, please refer to the
"Portfolio Investments and Strategies" section of this prospectus.
-------------------------------------------------------------
------------------------------------------------------------
THE EQUITY FUNDS
MARSHALL STOCK FUND
The investment objective of the STOCK FUND is to provide growth of capital and
income. The Fund pursues this objective by investing primarily in a
professionally managed and diversified portfolio of common stocks of companies
with an established market and a history of stable earnings and/or growing
dividends. Under normal market conditions, the Fund intends to invest at least
65% of its total assets in equity securities, i.e., common stocks and preferred
stocks. As a general matter, the Fund expects these investments to generate
income. The Fund's investment approach is based on the conviction that over the
long-term the economy will continue to expand and that this economic growth will
be reflected in the growth of revenues and earnings of major corporations.
MARSHALL VALUE EQUITY FUND
The investment objective of the VALUE EQUITY FUND is to provide long-term
capital growth and income. The Fund pursues this objective through the
application of a value-oriented approach by investing in a broadly diversified
portfolio of common stocks, securities convertible into common stocks and
preferred stocks of medium to large capitalization companies selected on the
basis of traditional research including assessment of earnings, dividend growth
and risk/volatility of the company's industry. Under normal market conditions,
the Fund intends to invest at least 65% of its total assets in these equity
securities. In most market conditions, the stocks comprising the Fund's assets
will exhibit traditional value characteristics such as having a price/earnings
ratio less than the Standard & Poor's 500 Stock Price Index ("S&P 500"), higher
than average dividend yields, lower than average price to book value, and stocks
of companies with unrecognized or undervalued assets.
MARSHALL EQUITY INCOME FUND
The investment objective of the EQUITY INCOME FUND is to provide above-average
dividend income with appreciation of capital. The Fund pursues this objective by
investing in a broadly diversified portfolio of common and preferred stocks.
Under normal market conditions, the Fund intends to invest at least 65% of its
total assets in equity securities that generate dividend income. The Fund will
seek to achieve dividend income at a level of 100 basis points (or 1%) above
that earned on the stocks that comprise the S&P 500. The Fund's Adviser believes
it possible to achieve a dividend level above stocks comprising the S&P 500 by
concentrating or overweighing the Fund's investments in stocks or sectors of the
stock market that have higher yields than the stocks in the S&P 500 as a whole,
such as utilities, financial institutions, and energy. However, the Fund and its
Adviser cannot assure that the Fund can meet this level of income.
MARSHALL MID-CAP STOCK FUND
The investment objective of the MID-CAP STOCK FUND is to seek appreciation of
capital. The Fund will pursue this objective by investing, under normal market
conditions, at least 65% of its total assets in common and preferred stocks
issued by medium-sized companies whose market capitalizations generally range
from $200 million to $7.5 billion. The Fund's Adviser will invest primarily in
equity securities of companies with above-average earnings growth prospects or
in companies where significant fundamental changes are taking place. These
changes could include significant new products, services, or methods of
distribution; restructuring or reallocating business; or significant share price
appreciation.
MARSHALL INTERNATIONAL STOCK FUND
The investment objective of the INTERNATIONAL STOCK FUND is long-term capital
growth. The Fund pursues this objective through a flexible policy of investing
in stocks and debt obligations of companies and governments outside the United
States. Under normal market conditions, at least 65% of the Fund's total assets
will be invested in securities of issuers domiciled in at least three different
nations outside the United States, and at least 65% of the Fund's total assets
will be invested in equity securities, i.e., common stocks and preferred stocks.
The Fund may also invest up to 35% of its total assets in debt securities,
warrants or rights to subscribe to or purchase equity
securities, or securities convertible into common or preferred stocks when, in
the judgment of the Fund's Subadviser, the capital appreciation available
through such investments outweigh the potential for capital growth through
investment in equity securities. Certain debt securities can provide the
potential for capital appreciation based on various factors such as changes in
interest rates, economic and market conditions, improvement in an issuer's
ability to repay principal and pay interest, and ratings upgrades. The Fund may
invest in debt or preferred securities which have equity features, such as
conversion or exchange rights, or which carry warrants to purchase common stock
or other equity interests. Such equity features enable the holder of the bond or
preferred security to benefit from increases in the market price of the
underlying equity security. Any income realized by the Fund will be incidental
to its investment objective of long-term capital growth. In selecting
securities, the Fund's Subadviser attempts to identify those companies in
various countries and industries where economic and political factors, including
currency movements, are likely to produce above-average opportunities for
capital appreciation.
THE EQUITY FUNDS' ACCEPTABLE INVESTMENTS.
Acceptable investments include the following:
- common stocks of U.S. companies that are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets; the
INTERNATIONAL STOCK FUND may also invest in common stocks of foreign
companies;
- preferred stocks;
- convertible securities rated investment grade by a nationally recognized
statistical rating organization ("NRSRO") (such as BBB or better by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or Baa or better by Moody's Investors Services, Inc.
("Moody's")) or, if unrated, of comparable quality as determined by the
Fund's Adviser or Subadviser (see "Convertible Securities" in the
"Portfolios and Investment Strategies" section);
- U.S. Government Securities, including certain Mortgage-Backed Securities
(as defined under "Portfolio Investments and Strategies");
- debt obligations (including bonds, notes and debentures); except for
INTERNATIONAL STOCK FUND, these must be issued by U.S. corporations and
rated in the top three categories by an NRSRO (such as A or better by
S&P, Fitch or Moody's) or, if unrated, the Fund's Adviser must determine
them to be of comparable quality; the INTERNATIONAL STOCK FUND may
purchase debt obligations issued by foreign corporations and governments
that are rated investment grade by an NRSRO (such as BBB or better by S&P
or Fitch, or Baa or better by Moody's) or, if unrated, are determined by
the Fund's Subadviser to be of comparable quality;
- American Depositary Receipts ("ADRs"); except for INTERNATIONAL STOCK
FUND, each Fund is limited to 20% of its net assets;
- Global Depositary Receipts ("GDRs") and European Depositary Receipts
("EDRs") (only the INTERNATIONAL STOCK FUND);
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- put and call options on securities and indices and futures contracts
(currently the STOCK FUND does not intend to engage in these transactions
and the other EQUITY FUNDS may engage in these transactions subject to
the limits discussed in the "Portfolio Investments and Strategies"
section);
- Prime Commercial Paper (as defined under "Portfolio Investments and
Strategies");
- foreign and domestic Bank Instruments (as defined under "Portfolio
Investments and Strategies");
- warrants (no more than 5% of an EQUITY FUND'S net assets);
- repurchase agreements; and
- shares of other investment companies.
Notwithstanding the limits set forth above, each
EQUITY FUND (except the INTERNATIONAL STOCK FUND, which has no limit) may invest
up to 5% of its net assets in foreign securities other than ADRs. Additional
information about investments, investment limitations and strategies, and
certain investment policies appears in the "Portfolio Investments and
Strategies" section of this prospectus.
-------------------------------------------------------------
------------------------------------------------------------
THE INCOME FUNDS
MARSHALL SHORT-TERM INCOME FUND
The investment objective of the SHORT-TERM INCOME FUND is to maximize total
return consistent with current income. The Fund pursues this objective by
investing in a diversified portfolio of short- to intermediate-term high-grade
bonds and notes. The Fund will maintain an average dollar-weighted maturity of
six months to three years. The targeted duration of the Fund will be 1.5 years
or less.
MARSHALL INTERMEDIATE BOND FUND
The investment objective of the INTERMEDIATE BOND FUND is to maximize total
return consistent with current income. The Fund pursues this objective by
investing in a diversified portfolio of intermediate-term high-grade bonds and
notes. The Fund will maintain an average dollar-weighted maturity of three to
ten years. The Fund will invest, under normal circumstances, at least 65% of the
value of its total assets in bonds.
MARSHALL GOVERNMENT INCOME FUND
The investment objective of the GOVERNMENT INCOME FUND is to provide current
income. The Fund pursues this objective by investing primarily in U.S.
government securities, including those issued by U.S. government agencies and
instrumentalities. Under normal circumstances, the Fund will invest at least 65%
of the value of its total assets in U.S. government securities (not including
privately issued mortgage-related securities).
THE INCOME FUNDS' ACCEPTABLE INVESTMENTS.
Acceptable investments include the following:
- domestic issues of corporate debt obligations (including bonds, notes and
debentures) rated in the top three categories by an NRSRO (such as A or
better by Moody's, S&P, or Fitch) or, if unrated, determined by the
Fund's Adviser to be of comparable quality;
- U.S. Government Securities (as defined under "Portfolio Investments and
Strategies");
- Prime Commercial Paper (as defined under "Portfolio Investments and
Strategies");
- domestic Bank Instruments (as defined under "Portfolio Investments and
Strategies");
- repurchase agreements;
- master demand notes;
- Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Municipal Securities (except the GOVERNMENT INCOME FUND) (as defined
under "Portfolio Investments and Strategies"); and
- securities of other investment companies.
The GOVERNMENT INCOME FUND reserves the right to engage in options, futures and
options on futures, although it does not intend to invest in them in excess of
5% of its net assets. Additional information about investments, investment
limitations and strategies, and certain investment policies appears in the
"Portfolio Investments and Strategies" section of this prospectus.
-------------------------------------------------------------
------------------------------------------------------------
THE TAX-FREE INCOME FUNDS
MARSHALL SHORT-TERM TAX-FREE FUND
The investment objective of the SHORT-TERM TAX-FREE FUND is to provide current
income which is exempt from federal income tax. Under normal circumstances, the
SHORT-TERM TAX-FREE FUND will maintain an average dollar-weighted portfolio
maturity of up to three years.
MARSHALL INTERMEDIATE TAX-FREE FUND
The investment objective of the INTERMEDIATE TAX-FREE FUND is to provide as high
a level of income which is exempt from federal income tax, as is consistent with
preservation of capital. Under normal circumstances, the INTERMEDIATE TAX-FREE
FUND will maintain an average dollar-weighted portfolio maturity of three to ten
years.
THE TAX-FREE INCOME FUNDS' ACCEPTABLE INVESTMENTS. The TAX-FREE INCOME FUNDS
pursue their objectives by investing in a diversified portfolio of high-grade
Municipal Securities (as defined under "Portfolio Investments and Strategies").
As a matter of investment policy which cannot be changed without shareholder
approval, under normal market conditions, at least 80% of each TAX-FREE INCOME
FUND'S net assets will be invested in Municipal Securities, the income from
which is exempt from federal income tax (including the federal alternative
minimum tax). Interest income of the TAX-FREE INCOME FUNDS that is exempt from
federal income tax retains its tax-free status when distributed to shareholders.
Municipal Securities are debt obligations issued by or on behalf of states,
territories and possessions of the United States, including the District of
Columbia, and any political subdivision or financing authority of any of these,
the income from which is, in the opinion of qualified legal counsel or the
Funds' Adviser, exempt from federal income tax. These securities will be:
- rated in the top three categories by an NRSRO (such as A or better by
Moody's, S&P or Fitch), except that up to 5% of the Fund's net assets may
be invested in the fourth highest rating category of an NRSRO (such as
BBB by S&P or Fitch, or Baa by Moody's);
- guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;
- fully collateralized by an escrow of U.S. government securities or other
securities acceptable to the Funds' Adviser, including certain
Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1) or Moody's highest municipal commercial
paper rating (P-1) or S&P's highest municipal commercial paper rating
(SP-1) or Fitch's highest short-term municipal obligations rating (FIN-1+
or FIN-1) or the highest rating by another NRSRO;
- unrated if, at the time of purchase, other Municipal Securities of that
issuer are rated the same quality as described above by an NRSRO; or
- unrated if determined to be of comparable quality to one of the foregoing
rating categories by the Funds' Adviser.
The TAX-FREE INCOME FUNDS also reserve the right to engage in options, futures
and options on futures transactions, although they do not intend to invest in
them in excess of 5% of their respective net assets. Additional information
about investments, investment limitations and strategies, and certain investment
policies appears in the "Portfolio Investments and Strategies" section of this
prospectus.
-------------------------------------------------------------
------------------------------------------------------------
THE MONEY MARKET FUND
The investment objective of the MONEY MARKET FUND is to provide current income
consistent with stability of principal. The Fund pursues this objective by
investing exclusively in a portfolio of money market instruments maturing in 397
days or less. The average maturity of securities in the Fund's portfolio,
computed on a dollar-weighted basis, will be 90 days or less.
Shares of the MONEY MARKET FUND are offered in two classes of shares: CLASS A
SHARES (formerly designated as Trust Shares) and CLASS B SHARES (formerly
designated as Investment Shares). CLASS A SHARES are sold to customers of M&I
Corp. and its affiliates or retail customers of institutions that have not
entered into a marketing arrangement or do not provide sales and/or
administrative services for the sale of MONEY MARKET FUND shares. CLASS B SHARES
are sold through institutions and other entities that have entered into
marketing arrangements to make MONEY MARKET FUND shares available to their
clients, customers or other specified groups of investors, or that have agreed
to provide sales and/or administrative services as agents for holders of CLASS B
SHARES.
THE MONEY MARKET FUND'S ACCEPTABLE INVESTMENTS. The MONEY MARKET FUND invests in
high-quality money market instruments that are denominated and payable in U.S.
dollars and are either rated in the highest short-term rating category by NRSROs
or are of comparable quality to securities having such ratings. Examples of
these instruments include, but are not limited to:
- issues of domestic and foreign corporate debt obligations, including
bonds, notes, and debentures;
- commercial paper, including Eurodollar commercial paper ("Europaper");
- domestic and foreign Bank Instruments (as defined under "Portfolio
Investments and Strategies");
- demand master notes;
- U.S. Government Securities, except for Mortgage-Backed Securities (as
defined under "Portfolio Investments and Strategies");
- repurchase agreements;
- guaranteed investment contracts;
- funding agreements; and
- short-term tranches of Asset-Backed Securities (as defined under
"Portfolio Investments and Strategies").
The MONEY MARKET FUND is subject to Rule 2a-7 under the Investment Company Act
of 1940, as amended (the "Act"), as discussed later in this Prospectus under
"Portfolio Investments and Strategies--Regulatory Compliance."
-------------------------------------------------------------
HOW TO BUY FUND SHARES
You can buy shares of a Fund at net asset value, without a sales charge, on any
day the New York Stock Exchange is open for business. Your order must be
received by the Fund by 12:00 p.m. (Central Time) for the MONEY MARKET FUND or
3:00 p.m. (Central Time) for all Funds to get that day's net asset value. See
"Net Asset Value" below. Each Fund reserves the right to reject any purchase
request.
Trust customers of Marshall & Ilsley Trust Company ("M&I Trust Company"), M&I
Marshall & Ilsley Trust Company of Arizona and Marshall & Ilsley Trust Company
of Florida (these companies will be referred to as "M&I Trust Companies") should
contact their account officer in order to make purchase requests. Texas
residents must purchase shares through M&I Brokerage Services, Inc. ("M&I
Brokerage Services") at 1-800-236-8554. All other investors may purchase Fund
shares by contacting Marshall Funds Investor Services ("MFIS") at
1-800-236-8554, by placing a purchase order through any authorized broker or
dealer, including through any M&I Bank employing a representative of M&I
Brokerage Services, or by any of the following methods.
-------------------------------------------------------------
------------------------------------------------------------
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
$1,000 To open an Account
$50 To add to an Account
(including through a
Systematic Investment
Program)
</TABLE>
The Funds may waive or lower these minimums from time to time, such as for M&I
Corp. employees.
<TABLE>
<S> <C>
PHONE Contact MFIS. Complete an
1-800-236-8554 application for a new
account. If you authorized
telephone exchange privileges
in your account application
or by subsequent
authorization form, you may
exchange shares from another
Fund having an identical
shareholder registration. See
"Telephone Transactions"
below for more information.
MAIL To open a new Fund account, send
in your completed account
application and a check payable
to "[Name of Fund]" to:
Marshall Funds Investor Services
P.O. Box 1348
Milwaukee, WI 53201-1348
To add to your existing Fund
Account, send in your check, pay-
able to the Fund, to the same
address. Indicate your Fund ac-
count number on the check.
PERSON Bring in your completed account
application (for new accounts)
and a check to any M&I Bank
employing a representative of M&I
Brokerage Services, or to any
authorized broker or dealer.
WIRE -First notify MFIS at
1-800-236-8554 by 12:00 p.m.
(Central Time) for the MONEY
MARKET FUND and 3:00 p.m.
(Central Time) for the other
Funds.
- Then wire the money to:
M&I Marshall & Ilsley Bank
ABA Number 0750051
Credit to: Boston Financial
Data Services Deposit
Account Number 27480
Further credit to:
[Identify name of Fund]
Re: [Shareholder name and
account number]
- If a new Account, mail a com-
pleted account application to
the Fund at the address above
under "Mail."
</TABLE>
<TABLE>
<S> <C>
SYSTEMATIC You can have money auto-
INVESTMENT matically withdrawn from your
PROGRAM checking account on predeter-
(EXISTING mined dates and invest it in
ACCOUNTS ONLY) a Fund at the next Fund share
price determined after MFIS
receives the order. Call MFIS
at 1-800-236-8554 to apply
for this program.
CASH SWEEP You can have cash accumula-
PROGRAMS tions in demand deposit ac-
(MONEY MARKET counts with subsidiaries or
FUND ONLY) affiliates of M&I Corp. auto-
matically invested in the
MONEY MARKET FUND on a day
selected by the institution
and its customer or when the
demand deposit account
reaches a predetermined
dollar amount. For more
information, contact MFIS
at 1-800-236-8554.
</TABLE>
ADDITIONAL INFORMATION ABOUT ORDERS BY:
<TABLE>
<S> <C>
CHECK If your check does not clear,
your purchase will be can-
celed and you will be charged
a $15 fee. Purchase orders by
check are considered received
after your check is converted
by MFIS into federal funds,
which is generally the next
business day after MFIS
receives your check.
WIRE Your bank may charge a fee
for wiring funds. Wire orders
are accepted only on days
when the Funds, M&I Bank and
the Federal Reserve wire
system are open for business.
If your purchase order for
the MONEY MARKET FUND is
received by 12:00 p.m.
(Central Time) and your wire
is received by M&I Bank by
3:00 p.m. (Central Time),
you will begin receiving
dividends on that day.
</TABLE>
-------------------------------------------------------------
------------------------------------------------------------
NET ASSET VALUE
Shares of a Fund are sold at their share price, which is the net asset value
without any sales charge, next determined after your order is received. The net
asset value is determined for the MONEY MARKET FUND at 12:00 p.m. (Central Time)
and 3:00 p.m. (Central Time), and for all other Funds at or after the close of
the New York Stock Exchange, Monday through Friday, except on: (i) days on which
there are not sufficient changes in the value of a Fund's portfolio securities
that its net asset value might be materially affected; (ii) days during which no
shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Each Fund's share price fluctuates, except that the MONEY MARKET FUND attempts
to maintain a stable $1 share price, although this cannot be guaranteed. The net
asset value of many of the Funds are listed daily in your newspaper's mutual
fund quotations section under the bold heading "MARSHALL FUNDS." A Fund's net
asset value is determined by adding the market value of all portfolio securities
and other assets, subtracting liabilities, and dividing by the number of
outstanding shares. Like most other money market funds, the MONEY MARKET FUND
uses the amortized cost method to value its portfolio securities in order to
help maintain a stable $1 share price.
-------------------------------------------------------------
HOW TO REDEEM SHARES
You may redeem your Fund shares at their net asset value next determined after
the Fund receives the redemption request. Redemptions will be made on days when
the Fund computes its net asset value. See "Net Asset Value" above. Telephone or
written requests for redemptions must be received in proper form as described
below and can be made through MFIS or M&I Brokerage Services. It is the
responsibility of MFIS and M&I Brokerage Services to promptly submit redemption
requests to a Fund. Trust customers of M&I Trust Companies should contact their
account officer in order to make redemption requests. Redemption requests for
the Funds must be received by 12:00 p.m. (Central Time) for the MONEY MARKET
FUND or 3:00 p.m. (Central time) for all Funds in order for shares to be
redeemed at that day's net asset value. Redemption proceeds will normally be
mailed, or wired if by written request, the following business day, but in no
event more than seven days, after the request is made. See "Wire/Electronic
Transfer" below.
<TABLE>
<S> <C>
PHONE If you have authorized the
1-800-236-8554 telephone redemption privi-
(EXCEPT RETIREMENT lege in your account appli-
ACCOUNTS) cation or by a subsequent
authorization form, you may
redeem shares by tele-
phone. If you are a Trust
customer, or a customer of
M&I Brokerage Services, you
must contact your account
officer or account
representative. [See "Tele-
phone Transactions" for
more information.]
MAIL Send in your written request
to the following address,
indicating your name, the
Fund name, your account
number, and the number of
shares or the dollar amount
you want to redeem:
Marshall Funds Investor
Services
P.O. Box 1348
Milwaukee, WI 53201-1348
If you want to redeem shares
held in certificate form, you
must properly endorse the
certificated shares and send
them by registered or
certified mail. Additional
documentation may be required
from corporations, executors,
administrators, trustees, or
guardians. For additional
assistance, call
1-800-236-8554.
PERSON Bring in written redemption
request with the information
described in "Mail" above to
any M&I Bank employing a
representative of M&I Broker-
age Services, or to any
authorized broker or dealer.
</TABLE>
<TABLE>
<S> <C>
WIRE/ELECTRONIC Upon written request, re-
TRANSFER demption proceeds can be
directly deposited by Elec-
tronic Funds Transfer or
wired directly to a
domestic commercial bank
previously designated by
you in your account
application or by
subsequent form. Wire pay-
ments of redemption orders
will only be accepted on
days on which the Funds,
M&I Bank, and the Federal
Reserve wire system are
open for business. Wire-
transferred redemptions may
be subject to an addi-
tional fee. Redemption re-
quests for the MONEY MARKET
FUND must be
received by 12:00 p.m.
(Central time) if you want
the proceeds to be wired
the same day.
SYSTEMATIC If you have a Fund account
WITHDRAWAL balance of at least
PROGRAM $10,000, you can have
(EXISTING predetermined amounts of at
ACCOUNTS ONLY) least $100 automatically
redeemed from your Fund ac-
count on predetermined
dates on a monthly or
quarterly basis. Contact
MFIS or M&I Brokerage
Services to apply for this
program.
CHECKWRITING You can redeem shares of
(MONEY MARKET the MONEY MARKET FUND by
FUND ONLY) writing a check in amounts
of at least $250. You must
have completed the check-
writing section of your ac-
count application and the
attached signature card, or
have completed a subse-
quent application form,
which you can obtain from
MFIS. The Fund will then
provide you with the
checks. Your check is
treated as a redemption or-
der for Fund shares equal
to the amount of the check.
A check for an amount in
excess of your available
Fund account balance will
be returned marked "insuf-
ficient funds." See "Re-
demption Before Purchase
Instruments Clear" below.
Checks cannot be used to
close your Fund account
balance.
</TABLE>
-------------------------------------------------------------
------------------------------------------------------------
ADDITIONAL CONDITIONS
SIGNATURE GUARANTEES. In the following instances, you must have a signature
guarantee on written redemption requests:
- when you are requesting a redemption of $50,000 or more,
- when you want a redemption to be sent to an address other than the one
you have on record with the Fund,
- or when you want the redemption payable to someone other than the
shareholder of record.
Notaries do not guarantee signatures. A notary public seal is not an acceptable
replacement for a signature guarantee. Instead, the signatures must be
guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund, which is administered by the
FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Corporation and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Corporation may elect in
the future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Corporation and its transfer agent
reserve the right to amend these standards at any time without notice.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR. When you purchase Fund shares by
check or through the Automated Clearing House system, the proceeds from the
redemption of those shares (whether redeemed by mail, by telephone or by
checkwriting) are not available, and the shares may not be exchanged, until MFIS
is reasonably certain that the purchase check has cleared, which could take up
to seven calendar days.
ACCOUNTS WITH LOW BALANCES. Due to the high cost of maintaining accounts with
low balances, a Fund may redeem shares in your account and pay you the proceeds
if your account balance falls below the required minimum value of $1,000. This
requirement does not apply, however, if the balance falls below the required
minimum because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, you will be notified in writing
and allowed 30 days to purchase additional shares to meet the minimum account
balance requirement.
EXCHANGE PRIVILEGE
You may exchange shares of a Fund for shares of any of the other Funds at net
asset value without a sales charge, provided you have received a copy of the
current prospectus of the other Fund, and you meet the investment minimum of the
Fund. The exchange privilege is available to shareholders residing in any state
in which the Fund shares you are acquiring may legally be sold.
Upon receipt of proper instructions and all necessary supporting documents, the
Fund shares you submit for exchange will be redeemed at the next-determined net
asset value. Written exchange instructions may require a signature guarantee.
See "Signature Guarantees" above. An exchange is treated as a sale for federal
income tax purposes and, depending on the circumstances, you may realize a short
or long-term capital gain or loss. The exchange privilege may be terminated at
any time, and you will be notified of such termination. You may obtain further
information on the exchange privilege by calling MFIS.
TELEPHONE TRANSACTIONS
If you have completed a telephone authorization section in your account
application or have completed an authorization form obtained through MFIS or M&I
Brokerage Services, you may telephone instructions to MFIS to redeem Fund shares
or to request a purchase of Fund shares by exchanging between Fund accounts that
have identical shareholder registrations. Trust customers should contact their
account officer. Telephone exchange instructions must be received before 3:00
p.m. (Central Time) for shares to be exchanged the same day. However, you will
not receive a dividend of the Fund into which you exchange on the date of the
exchange. Telephone redemption requests are subject to the time requirements
explained above in "How to Redeem Fund Shares."
Shares held in certificate form cannot be exchanged or redeemed by telephone.
Instead, you must forward the certificates to the transfer agent through MFIS
for credit to your mutual fund account before they can be exchanged or redeemed.
Shareholders requesting a telephone exchange or redemption service authorize a
Fund and its agents to act upon their telephonic instructions to exchange or
redeem shares from any account for which they have authorized such services.
Telephone instructions may be recorded. If reasonable procedures are not
followed by the Funds, they may be liable for losses due to unauthorized or
fraudulent telephone instructions.
The telephone privileges may be modified or terminated at any time. You will be
notified of such modification or termination. During times of drastic economic
or market changes, you may experience difficulty in making exchanges or
redemptions by telephone through banks, brokers, and other financial
institutions. In such cases, you should make the exchange or redemption request
in writing and send it by overnight mail.
-------------------------------------------------------------
MARSHALL FUNDS, INC.
INFORMATION
-------------------------------------------------------------
------------------------------------------------------------
ORGANIZATION AND HISTORY
The Corporation was incorporated under the laws of Wisconsin on July 31, 1992.
The Corporation may offer separate series of shares representing interests in
separate portfolios of securities, and the shares in any one portfolio may be
offered in separate classes.
-------------------------------------------------------------
------------------------------------------------------------
MANAGEMENT
BOARD OF DIRECTORS. The Directors are responsible for managing the business
affairs of the Corporation and for exercising all of the powers of the
Corporation except those reserved for the shareholders.
INVESTMENT ADVISER AND SUBADVISER. Pursuant to an investment advisory contract
with the Corporation, M&I Investment Management Corp. serves as the investment
adviser (the "Adviser") to each Fund, subject to direction by the Directors.
With respect to the INTERNATIONAL STOCK FUND, the Adviser has entered into a
Subadvisory Contract with Templeton Investment Counsel, Inc. ("TICI" or
"Subadviser"), which gives TICI complete discretion to purchase, manage and sell
portfolio securities for the INTERNATIONAL STOCK FUND, subject to the Fund's
investment objective, policies and limitations. Although the Corporation's
Directors and the officers, and the Adviser do not evaluate the investment
merits of TICI's individual security selections, TICI's activities are subject
to their oversight.
ADVISORY FEES. The Adviser is entitled to receive an annual investment advisory
fee equal to a percentage of each Fund's average daily net assets as follows:
0.50% of MONEY MARKET FUND and SHORT-TERM TAX-FREE FUND; 0.60% of SHORT-TERM
INCOME FUND, INTERMEDIATE BOND FUND and INTERMEDIATE TAX-FREE FUND; 0.75% of
GOVERNMENT INCOME FUND, STOCK FUND, VALUE EQUITY FUND, EQUITY INCOME FUND and
MID-CAP STOCK FUND; and 1.00% of INTERNATIONAL STOCK FUND. Out of the fee paid
by the INTERNATIONAL STOCK FUND to the Adviser, TICI is entitled to receive an
annual fee equal to 0.50% of the INTERNATIONAL STOCK FUND'S daily net assets up
to $70 million and 0.40% of such assets in excess thereof. The fees of 0.75 of
1% or more may be higher than the advisory fees paid by mutual funds in general
but is comparable to the fee paid by many mutual funds with objectives and
policies similar to the Funds. The investment advisory contract allows the
voluntary waiver in whole or in part of the investment advisory fees or the
reimbursement of expenses by the Adviser from time to time. The Adviser can
terminate any voluntary waiver of its fees or reimbursement of expenses at any
time in its sole discretion.
Investment decisions for the Funds will be made independently from those of any
fiduciary or other accounts that may be managed by the Adviser, Subadviser or
their affiliates. If, however, such accounts, a Fund, or the Adviser or
Subadviser for its own account, are simultaneously engaged in transactions
involving the same securities, the transactions may be combined and allocated to
each account. Although this system may adversely affect the price the Funds pay
or receive, or the size of the position they obtain, it may also enable the
Funds to benefit from lower transaction costs.
ADVISER'S BACKGROUND. M&I Investment Management Corp. is a registered investment
adviser and a wholly owned subsidiary of Marshall & Ilsley Corp., a registered
bank holding company headquartered in Milwaukee, Wisconsin. As of December 1,
1994, M&I Investment Management Corp. had approximately $6.9 billion in assets
under management and has managed investments for individuals and institutions
since its inception in 1973. The Adviser has managed the Corporation's
portfolios since 1992, and managed the Newton Funds (predecessors to certain of
these portfolios) since 1985. As part of its regular banking operations,
affiliates of the Adviser may make loans to public companies. Thus, it may be
possible, from time to time, for the Funds to hold or acquire securities of
issuers which are also lending clients of the Adviser's affiliates. The lending
relationship will not be a factor in the selection of securities.
SUBADVISER'S BACKGROUND. TICI is a registered investment adviser and a
professional investment counseling firm which has been handling investment
services since 1979. As of October 31, 1994, TICI had discretionary investment
of $12.1 billion in assets. TICI is indirectly owned by Franklin Resources, Inc.
which engages in various aspects of the financial services industry through its
subsidiaries.
TICI and its affiliates serve as advisers for a wide variety of mutual funds and
private clients in many nations. TICI, its affiliates and their predecessors
have been investing globally over the past 52 years and provide investment
management and advisory services to a worldwide client base, including over 3.0
million mutual fund shareholders, foundations and endowments, employee benefit
plans and individuals. TICI and its affiliates have approximately 3,200
employees in ten different countries and a global network of over 50 investment
research sources. TICI is supported by the Templeton organization's large staff
of research analysts, traders and other investment specialists based in Fort
Lauderdale, Nassau, New York, Edinburgh, Toronto, Hong Kong, Melbourne, and
Singapore. Templeton's research analysts use a disci-
plined, long-term approach to value-oriented global and international investing.
Securities are selected for the INTERNATIONAL STOCK FUND'S portfolio from a list
of eligible securities maintained and constantly updated by Templeton's analysts
on the basis of fundamental analysis, which utilizes a global database of
information on issuers. TICI believes that the Templeton organization's team
approach benefits INTERNATIONAL STOCK FUND investors by bringing together many
disciplines and leveraging the organization's extensive resources.
PORTFOLIO MANAGEMENT TEAM. The STOCK FUND is managed by Charles L. Mehlhouse.
Mr. Mehlhouse has been a Vice President with M&I Investment Management Corp.
since May 1993. Mr. Mehlhouse also served as Managing Director of Texas Commerce
Investment Management Company in Houston from 1987 to 1993. Mr. Mehlhouse is a
Chartered Financial Analyst and holds an M.A. degree from Michigan State
University as well as a B.A. degree from Macalester College.
The VALUE EQUITY FUND is managed by Gerry M. Sandel who has been a Vice
President with M&I Investment Management Corp. since October 1993. Mr. Sandel
previously served as Vice President, Chairman of the Stock Selection Committee
and Director of Equity Research at Acorn Asset Management Corporation,
Bloomfield Hills, Michigan from June 1991 to September 1993. From 1987 to 1991,
Mr. Sandel served as a Vice President, Equity Research Analyst and Portfolio
Manager at Abraham & Sons Asset Management, Inc., Chicago, Illinois. Mr. Sandel
holds a Master of International Management degree from the American Graduate
School in Phoenix, Arizona and a B.S. degree from the University of Southern
Mississippi in Hattiesburg.
The EQUITY INCOME FUND is managed by Bruce P. Hutson, who has been a Vice
President with M&I Investment Management Corp. since 1973 and has been a member
of the Equity Policy Group, which manages mutual funds, since January 1990. Mr.
Hutson holds a B.B.A. degree from the University of Wisconsin-Whitewater.
Effective December 1993, the MID-CAP STOCK FUND is managed by Steven D. Hayward.
Prior to joining M&I Investment Management Corp. as a Vice President in December
1993, Mr. Hayward served as Senior Portfolio Manager of Amoco Corporation. Mr.
Hayward, who is a Chartered Financial Analyst, received a B.A. in Economics from
North Park College, and an M.B.A. in Finance from Loyola University.
The INTERNATIONAL STOCK FUND is managed by James E. Chaney, Senior Vice
President of TICI. Prior to joining the Templeton organization in 1991, Mr.
Chaney spent six years with GE Investments, where he was vice president of
international equities. He also has another seven years experience as an
international consulting engineer and project manager for Camp, Dresser & McKee,
Inc. and American British Consultants. Mr. Chaney holds an M.B.A. with Honors
from Columbia University, an M.S. in Engineering from Northeastern University,
with a B.S. in Engineering from the University of Massachusetts-Amherst.
The SHORT-TERM INCOME FUND, INTERMEDIATE BOND FUND, and GOVERNMENT INCOME FUND
are managed by Lawrence J. Pavelec, and effective July 1994, the SHORT-TERM
INCOME FUND is co-managed by Mark D. Pittman. Mr. Pavelec is a Vice President
and the Director of Fixed Income for M&I Investment Management Corp. Mr. Pavelec
joined Marshall & Ilsley Bank in 1982 and M&I Investment Management Corp. in
September 1985. Since 1988, he has been managing total return fixed income
portfolios. He has been a member of M&I Investment Management Corp.'s Fixed
Income Policy Group since 1985 and became Chairman in August 1993. He has
managed the SHORT-TERM INCOME FUND since its inception in December 1992, and
assumed the management of the INTERMEDIATE BOND FUND and GOVERNMENT INCOME FUND
in August 1993. Mr. Pavelec is a Chartered Financial Analyst and holds a B.S.
degree from the University of Wisconsin-LaCrosse. Mr. Pittman is an Assistant
Vice President of M&I Investment Management Corp., which he joined in June 1994.
Prior to that time, he spent five years with Valley Trust Company managing fixed
income portfolios and common trust funds. In addition, he was a member of the
Valley Trust Company Investment Committee and Asset Allocation Committee. Mr.
Pittman is a Chartered Financial Analyst and holds M.B.A. and B.B.A. degrees in
Finance from the University of Wisconsin-Madison.
The TAX-FREE INCOME FUNDS are managed by John D. Boritzke, who is a Vice
President for M&I Investment Management Corp. responsible for tax-exempt fixed
income portfolio management. He joined M&I Investment Management Corp. in
November 1983. Since 1985, he has been managing tax-exempt fixed income
portfolios. In addition, he has managed the M&I Municipal Bond Fund since 1985
and continues to manage the M&I Arizona Municipal Bond Fund, which he has
managed since its inception in 1989. Both of these funds are common trust funds
of Marshall & Ilsley Trust Company. Mr. Boritzke has been a member of M&I
Investment Management Corp.'s Fixed Income Policy Group since 1985. He is a
Chartered Financial Analyst and holds M.B.A. and B.S. degrees from Marquette
University.
-------------------------------------------------------------
------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for shares of the Funds and a number of other investment
companies. The distributor may offer certain items of nominal value from time to
time to any shareholder or investor in connection with the sale of Fund shares.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers, dealers and
administrators (including depository or other institutions such as commercial
banks and savings and loan associations) to provide distribution and/or
administrative services for which they will receive fees from the distributor
based upon shares owned by their clients or customers. These administrative
services include distributing
prospectuses and other information, providing account assistance, and
communicating or facilitating purchases and redemptions of the Funds' shares.
The fees are calculated as a percentage of the average aggregate net asset value
of shareholder accounts held during the period for which the brokers, dealers,
and administrators provide services. Any fees paid for these services by the
distributor will be reimbursed by the Adviser and not the Funds.
DISTRIBUTION PLAN. Under a Rule 12b-1 Plan (the "Plan"), the MONEY MARKET FUND
will pay to the distributor on behalf of CLASS B SHARES an amount computed at an
annual rate of 0.30 of 1% of the average daily net asset value of CLASS B
SHARES, and INTERNATIONAL STOCK FUND may pay the distributor an amount computed
at an annual rate of 0.25% of
the INTERNATIONAL STOCK FUND's average daily net assets, in each case to finance
any activity which is principally intended to result in the sale of the shares
subject to the Plan ("Plan Shares"). The INTERNATIONAL STOCK FUND has no present
intention of paying or accruing 12b-1 fees during the fiscal year ending
August 31, 1995. The distributor may, from time to time and for such periods as
it deems appropriate, voluntarily reduce its compensation under the Plan.
The distributor may select certain entities to provide sales and/or
administrative services as agents for holders of Plan Shares. Administrative
services may include, but are not limited to, the following functions: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Plan Shares; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as these Funds reasonably request. Such entities
will receive fees from the distributor based upon Plan Shares owned by their
clients or customers. The schedules of such fees and the basis upon which such
fees will be paid will be determined from time to time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law. In addition, some
state securities laws may require administrators to register as brokers and
dealers.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor, the Adviser or their
affiliates, at their own expense and out of their own assets, may also provide
other compensation to institutions in connection with sales of Fund shares or as
financial assistance for providing substantial marketing, sales and operational
support. The support may include initiating
customer accounts, providing sales literature, or participating in sales,
educational and training seminars (including those held at recreational
facilities). Such assistance will be predicated upon the amount of shares of the
Fund or the Corporation the institution sells or may sell and/or upon the type
and nature of sales, operational or marketing support furnished by the
institution. Any payments made by the distributor may be reimbursed by the
Adviser or its affiliates.
From time to time M&I Trust Company may pay amounts, from its own funds, to
individual or corporate affiliates of M&I Corp., or others for their services
relating to investments made in the Funds. These amounts may include payments to
M&I Brokerage Services, which vary based upon the amount invested and the type
of Fund purchased.
-------------------------------------------------------------
ADMINISTRATION OF THE
FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate the Funds. Such services include certain
shareholder servicing, legal and accounting services. Federated Administrative
Services provides these services at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE CORPORATION
- ------------------ -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may choose voluntarily to reimburse
a portion of its fee at any time.
SHAREHOLDER SERVICING ARRANGEMENTS. Marshall Funds Investor Services ("MFIS"),
Milwaukee, Wisconsin, a subsidiary of M&I Corp. is the shareholder servicing
agent for the Funds. As such, MFIS provides shareholder services which include,
but are not limited to, distributing prospectuses and other information,
providing shareholder assistance, and communicating or facilitating purchases
and redemptions of shares. Each Fund may pay MFIS a fee equal to approximately
0.02 of 1% of the average daily net asset value of Fund shares for which MFIS
provides shareholder services. MFIS may voluntarily choose to waive all or a
portion of its fee at any time.
-------------------------------------------------------------
------------------------------------------------------------
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser and TICI look for prompt execution of the order at a
favorable price. In working with dealers, the Adviser and TICI will generally
utilize those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained elsewhere.
In selecting among firms believed to meet these criteria, the Adviser and TICI
may give consideration to those firms which have sold or are selling shares of
the Funds and other funds distributed by Federated Securities Corp. or
Franklin/Templeton Distributors, Inc. The Adviser and TICI make decisions on
portfolio transactions and select brokers and dealers subject to review by the
Directors.
-------------------------------------------------------------
------------------------------------------------------------
EXPENSES OF THE FUNDS
Each Fund pays all of its own expenses and its allocable share of the
Corporation's expenses. These expenses include, but are not limited to, the cost
of: organizing the Corporation and continuing its existence; Director's fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Corporation, the Funds, and
shares of each Fund with federal and state securities authorities; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming shares; fees for
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing, mailing, auditing, and certain accounting and
legal expenses; reports to shareholders; meetings of Directors and shareholders
and proxy solicitations therefor; insurance premiums; association membership
dues; and such non-recurring and extraordinary items as may arise. However, the
Adviser may voluntarily reimburse some expenses and, in addition, has undertaken
to reimburse each Fund up to the amount of its advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
-------------------------------------------------------------
SHAREHOLDER INFORMATION
-------------------------------------------------------------
------------------------------------------------------------
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Upon written request, you can receive
share certificates without charge, but only for whole shares of a Fund. You may
contact MFIS to direct the transfer agent to issue you certificates or deliver
certificates for redemption or credit to your account.
The MONEY MARKET FUND sends you monthly confirmations to report all transactions
such as purchases, redemptions, and dividends paid during the month. The other
Funds send you a detailed confirmation of each purchase or redemption or
dividend payment. At a minimum, you will receive a monthly statement. You may
request photocopies of confirmations for transactions affecting your account in
prior years at a fee of $5 per year per Fund to cover the cost of obtaining this
information.
-------------------------------------------------------------
------------------------------------------------------------
DIVIDENDS AND CAPITAL GAINS
Dividends of the MONEY MARKET FUND, INCOME FUNDS and TAX-FREE INCOME FUNDS are
declared daily and paid monthly. Dividends of the EQUITY FUNDS are declared and
paid quarterly, except for the INTERNATIONAL STOCK FUND, which declares and pays
dividends annually. Only shareholders invested in the particular
Fund on the record date of the dividend declaration are paid that dividend.
Capital gains, when realized by a Fund, will be distributed at least once every
12 months. Unless you request cash payments by writing to your Fund, your
dividends and capital gains are automatically reinvested in additional shares of
the respective Fund on payment dates at the ex-dividend date net asset value.
-------------------------------------------------------------
------------------------------------------------------------
COMMON STOCK AND VOTING RIGHTS
The Directors have authorized the issuance of shares of Common Stock
representing ownership interests in each of the Funds. You are entitled to one
vote for each full share of Common Stock and proportionate fractional votes for
fractional shares. All shares of each Fund or class in the Corporation have
equal voting rights and will generally vote in the aggregate and not by Fund or
class, unless required by law. For example, only shares of a particular Fund or
class are entitled to vote on matters affecting that Fund or class. Voting
rights are not cumulative; consequently, the holders of more than 50% of the
Corporation's shares of Common Stock can elect the entire Board of Directors.
The Corporation does not intend to hold annual meetings of shareholders, unless
required by the Act or applicable law. Directors may be removed by the
shareholders at a special meeting, which may be called by the Directors upon
written request of shareholders owning at least 10% of the Corporation's
outstanding voting shares.
As of December 12, 1994, Mitra & Co., Marshall & Ilsley Trust Operations,
Milwaukee, Wisconsin, acting in various capacities for numerous accounts, was
the owner of record of more than 25% of the outstanding shares of the designated
Fund: 15,514,080 shares (65.15%) of STOCK FUND; 2,642,237 shares (45.22%) of
EQUITY INCOME FUND; 3,550,038 shares (50.59%) of MID-CAP STOCK FUND; 4,706,699
shares (60.08%) of INTERNATIONAL STOCK FUND; 4,571,183 shares (46.56%) of
SHORT-TERM INCOME FUND; 21,533,163 shares (59.80%) of INTERMEDIATE BOND FUND;
3,522,116 shares (40.18%) of GOVERNMENT INCOME FUND; and 1,224,091 shares
(48.03%) of SHORT-TERM TAX-FREE FUND; and therefore, may for certain purposes,
be deemed to control these Funds and be able to affect the outcome of certain
matters presented for a vote of shareholders. As of December 12, 1994, Maril &
Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, acting in various
capacities for numerous accounts, was the owner of record of more than 25% of
the outstanding shares of the designated Fund: 4,989,416 shares (26.19%) of
VALUE EQUITY FUND; 2,205,123 shares (37.74%) of EQUITY INCOME FUND; 1,898,378
shares (27.05%) of MID-CAP STOCK FUND; 2,609,798 shares (33.31%) of
INTERNATIONAL STOCK FUND; 3,114,469 shares (31.72%) of SHORT-TERM INCOME FUND;
930,323 shares (36.50%) of SHORT-TERM TAX-FREE FUND; 3,830,580 shares (89.42%)
of INTERMEDIATE TAX-FREE FUND; and therefore, may for certain purposes, be
deemed to control these Funds and be able to affect the outcome of certain
matters presented for a vote of shareholders. As of December 12, 1994, Maril &
Co., Milwaukee, Wisconsin, acting in various capacities for numerous accounts,
was the owner of record of 802,331,332 shares (74.27%) of MONEY MARKET
FUND-CLASS A SHARES (FORMERLY, TRUST SHARES); and therefore, may for certain
purposes, be deemed to control this Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders. As of December 12, 1994,
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, acting in
various capacities for numerous accounts, was the owner of record of 6,476,270
shares (33.99%) of VALUE EQUITY FUND; and therefore, may for certain purposes,
be deemed to control this Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders.
-------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, all of the Funds may advertise total return and yield, the
MONEY MARKET FUND may advertise its effective yield, and the TAX-FREE INCOME
FUNDS may advertise their tax-equivalent yields.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield for the MONEY MARKET FUND represents the annualized rate of income
earned on an investment in its shares over a seven-day period. It is the
annualized dividends earned during the period on the investment, shown as a
percentage of the investment. The effective yield is calculated similarly to the
yield, but, when annualized, the income earned by an investment is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The CLASS A
SHARES and CLASS B SHARES of the MONEY MARKET FUND will each have their own
yields. Because CLASS A SHARES are not subject to 12b-1 fees, their yields will
be higher than yields of CLASS B SHARES.
The yield for the other Funds is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by a Fund over a thirty-day period by the offering price per share of the Fund
on the last day of the period.
This number is then annualized using semi-annual compounding. The tax-equivalent
yield is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that a TAX-FREE INCOME FUND would have had to earn to equal its
actual yield, assuming a specific tax rate. The yield and the tax-equivalent
yield do not necessarily reflect income actually earned by a Fund and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
From time to time, the Funds may advertise their performance using certain
reporting services and/or compare their performance to certain indices.
-------------------------------------------------------------
PORTFOLIO INVESTMENTS AND STRATEGIES
ASSET-BACKED SECURITIES. The EQUITY FUNDS and the INCOME FUNDS may invest in
Asset-Backed Securities rated, at the time of purchase, in the top three rating
categories by an NRSRO (A or better by S&P, Fitch or Moody's) or, if unrated, of
comparable quality as determined by the Fund's Adviser or Subadviser. The MONEY
MARKET FUND may invest in short-term tranches of Asset Backed-Securities that
meet the rating and maturity requirements of Rule 2a-7. However, only the INCOME
FUNDS expect that they might exceed 5% of their respective net assets in these
securities. Asset-Backed Securities have structural characteristics similar to
Mortgage-Backed Securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Funds may invest in
Asset-Backed Securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
BANK INSTRUMENTS. The Funds may invest in domestic Bank Instruments, which are
instruments (including time and savings deposits, bankers' acceptances and
certificates of deposit) of banks and savings and loans that have capital,
surplus and undivided profits of over $100 million or for which the principal
amount of the instrument is insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, which are administered by the Federal Deposit
Insurance Corporation. The INTERNATIONAL STOCK FUND, the MONEY MARKET FUND, and
to a limited extent the other EQUITY FUNDS may purchase foreign Bank
Instruments, which include Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs").
ECDs are U.S. dollar-denominated certificates of deposits issued by foreign
branches of U.S. banks or foreign banks. Yankee CDs are U.S. dollar-denominated
certificates of deposits issued in the U.S. by branches and agencies of foreign
banks. ETDs are U.S. dollar-denominated deposits in foreign branches of U.S.
banks or foreign banks. The INCOME FUNDS and the TAX-FREE INCOME FUNDS reserve
the right to invest in foreign Bank Instruments, although they do not presently
intend to so invest. The Funds will treat securities credit enhanced with a
bank's irrevocable letter of credit or unconditional guaranty as Bank
Instruments.
BORROWING. While each of the Funds is permitted as a fundamental investment
policy to borrow money from banks or through reverse repurchase agreements
(arrangements in which a Fund sells a portfolio instrument for a percentage of
its cash value with an agreement to buy it back on a set date) in amounts of up
to one-third of its total assets ("net" assets for the MONEY MARKET FUND,
SHORT-TERM INCOME FUND and INTERMEDIATE BOND FUND), and pledge some assets as
collateral, only the International Stock Fund expects that it might exceed 5%.
This is because the INTERNATIONAL STOCK FUND, unlike the other Funds, may borrow
money to purchase some of its portfolio securities, i.e., it may use "leverage."
Leveraging tends to exaggerate the effect on the Fund's net asset value of
changes in the value of its portfolio securities. Also, the Fund must pay
interest on borrowed money and may incur other costs, and these expenses could
exceed the income received or capital appreciation realized by the Fund from the
securities it purchases with borrowed money.
CONVERTIBLE SECURITIES. The EQUITY FUNDS may invest in convertible securities
which are rated, at the time of purchase, investment grade by an NRSRO (such as
BBB or better by S&P or Fitch, or Baa or better by Moody's), or, if unrated, are
of comparable quality as determined by the Fund's Adviser or Subadviser.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible bonds, convertible preferred stock or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The investment characteristics of
each convertible security vary widely, which allows convertible securities to be
employed for different investment objectives. In selecting a convertible
security, the Fund's Adviser or Subadviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying security for capital appreciation.
Convertible bonds and convertible preferred stocks generally retain the
investment characteristics of fixed income securities until they have been
converted but also react to movements in the underlying equity securities. The
holder is entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used in whole
or in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. Convertible securities are senior to equity securities,
and therefore have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality. A Fund will
exchange or convert the convertible securities held in its portfolio into shares
of the underlying common stocks when, in the opinion of the Fund's Adviser or
Subadviser, the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. Otherwise, the Fund will
hold or trade the convertible securities.
CREDIT ENHANCEMENT. Certain of a Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Funds
typically evaluate the credit quality and ratings of credit enhanced securities
based upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. However, credit
enhanced securities will not be treated as having been issued by the credit
enhancer for diversification purposes, unless the Fund has invested more than
10% of its assets in securities issued, guaranteed or otherwise credit enhanced
by the credit enhancer, in which case the securities will be treated as having
been issued both by the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. Each of the Funds may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the securities at
their principal amount (usually with accrued interest) within a fixed period
(usually seven days following a demand by the Funds). The demand feature may be
issued by the issuer of the underlying securities, a dealer in the securities or
by another third party, and may not be transferred separately from the
underlying security. A Fund uses these arrangements to provide it with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
DEMAND MASTER NOTES. The SHORT-TERM INCOME FUND, INTERMEDIATE BOND FUND and
MONEY MARKET FUND may invest in variable amount demand master notes. Demand
notes are short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as the Funds) payable upon demand by
either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment. Many master notes give
the Funds the option of increasing or decreasing the principal amount of the
master note on a daily or weekly basis within certain limits. Demand master
notes usually provide for floating or variable rates of interest.
DEPOSITARY RECEIPTS. The INTERNATIONAL STOCK FUND may invest in foreign issuers
by purchasing sponsored or unsponsored ADRs, GDRs and EDRs (collective,
"Depositary Receipts"). The other EQUITY FUNDS may invest only in ADRs. ADRs are
Depositary Receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Ownership of unsponsored
Depositary Receipts may not entitle a Fund to financial or other reports from
the issuer of the underlying security, to which it would be entitled as the
owner of sponsored Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities.
FIXED RATE DEBT OBLIGATIONS. The Funds may invest in fixed rate securities,
including fixed rate securities with short-term characteristics. Fixed rate
securities with short-term characteristics are long-term debt obligations but
are treated in the market as having short maturities because call features of
the securities may make them callable within a short
period of time. A fixed rate security with short-term characteristics would
include a fixed income security priced close to call or redemption price or
fixed income security approaching maturity, where the expectation of call or
redemption is high.
Fixed rate securities exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates of interest. This is
because floating rate securities, as described below, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities pay
a fixed rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates the value of a fixed rate security is likely
to fall. Fixed rate securities with short-term characteristics are not subject
to the same price volatility as fixed rate securities without such
characteristics. Therefore, they behave more like floating rate securities with
respect to price volatility.
FLOATING RATE DEBT OBLIGATIONS. The Funds may invest in floating rate debt
obligations, including increasing rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above prevailing
market rates. The interest rate paid on these securities is then reset
periodically (commonly every 90 days to an increment over some predetermined
interest rate index). Commonly utilized indices include the three-month Treasury
bill rate, the 180-day Treasury bill rate, the one-month
or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities. Increasing rate securities' rates
are reset periodically at different levels on a predetermined scale. These
levels of interest are ordinarily set at progressively higher increments over
time. Some increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer the
option to convert the increasing rate of interest to a fixed rate under such
terms, conditions, and limitations as are described in each issuer's prospectus.
FOREIGN CURRENCY TRANSACTIONS. The INTERNATIONAL STOCK FUND may enter into
foreign currency transactions to obtain the necessary currencies to settle
securities transactions. Currency transactions may be conducted either on a spot
or cash basis at prevailing rates or through forward foreign currency exchange
contracts.
The INTERNATIONAL STOCK FUND may also enter into foreign currency transactions
to protect its assets against adverse changes in foreign currency exchange rates
or exchange control regulations. Such changes could unfavorably affect the value
of Fund assets which are denominated in foreign currencies, such as foreign
securities or funds deposited in foreign banks, as measured in U.S. dollars.
Although foreign currency exchanges may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund. Further,
the Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations.
Cross-hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability that
is the subject of the hedge.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES. The INTERNATIONAL STOCK FUND may enter into a forward
foreign currency exchange contract ("forward contract"), which is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time
the INTERNATIONAL STOCK FUND enters into a forward contract, Fund
assets with a value equal to the Fund's obligation under the forward
contract are segregated on the Fund's records and are maintained until
the contract has been settled. The Fund generally will not enter into a
forward contract with a term of more than one year. The Fund will
generally enter into a forward contract to provide the proper currency
to settle a securities transaction at the time the transaction occurs
("trade date"). The period between trade date and settlement date will
vary between twenty-four hours and thirty days, depending upon local
custom.
The INTERNATIONAL STOCK FUND may also protect against the decline of a
particular foreign currency by entering into a forward contract to sell
an amount of that currency approximating the value of all or a portion
of the Fund's assets denominated in that currency ("hedging"). The
success of this type of short-term hedging strategy is highly uncertain
due to the difficulties of predicting shortterm currency market
movements and of precisely matching forward contract amounts and the
constantly changing value of the securities involved. Although the
Fund's Subadviser will consider the likelihood of changes in currency
values when making investment decisions, the Subadviser believes
that it is important to be able to enter into forward contracts when it
believes the interests of the Fund will be served. The Fund will not
enter into forward contracts for hedging purposes in a particular
currency in an amount in excess of the Fund's assets denominated in
that currency.
The INTERNATIONAL STOCK FUND may purchase and write put and call
options on foreign currencies for the purpose of protecting against
declines in the U.S. dollar value of foreign currency-denominated
portfolio securities and against increases in the U.S. dollar cost of
such securities to be acquired. As in the case of other kinds of
options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium
received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the
event of rate movements adverse to the Fund's position, it may forfeit
the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by the Fund
are traded on U.S. and foreign exchanges or over-the-counter.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase securities
for a fixed price at a date beyond customary settlement time. The INTERNATIONAL
STOCK FUND may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on the Fund's records at
the trade date and maintained until the transaction has been settled. Risk is
involved if the value of the security declines before settlement. Although the
Fund enters into forward commitments with the intention of acquiring the
security, it may dispose of the commitment prior to settlement and realize a
short-term profit or loss.
ILLIQUID SECURITIES. These are any securities a Fund owns which it may not be
able to sell quickly (within seven days) at a fair price. The MONEY MARKET FUND
must limit such investments to 10% of its net assets while the other Funds may
not exceed 15% of their respective net assets.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, each of
the Funds is permitted as a fundamental investment policy to lend portfolio
securities on a short-term or long-term basis, or both, up to one-third of the
value of its respective total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
or Subadviser has determined are creditworthy under guidelines established by
the Directors and will receive collateral in the form of cash or U.S. government
securities equal to at least 100% of the value of the securities loaned. There
is the risk that when lending portfolio securities, the securities may not be
available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
MORTGAGE-BACKED SECURITIES. All of the Funds except for the MONEY MARKET FUND
may invest in Mortgage-Backed Securities rated, at the time of purchase, in the
top three rating categories by an NRSRO (A or better by S&P, Fitch or Moody's),
or, if unrated, of comparable quality as determined by the Fund's Adviser or
Subadviser. Mortgage-Backed Securities are securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property. All of the Funds except for the MONEY MARKET
FUND may invest in Mortgage-Backed Securities that are issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities, such as
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae") and Federal Home Loan National Mortgage
Corporation ("Freddie Mac"). Additionally, the INCOME FUNDS may invest in
Mortgage-Backed Securities (i) issued by private issuers that represent an
interest in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities or
(ii) issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage
securities ("ARMS") are pass-through mortgage securities with
adjustable rather than fixed interest rates. The ARMS in which the
Funds invest are issued by Ginnie Mae, Fannie Mae, and Freddie Mac and
are actively traded. The underlying mortgages which collateralize ARMS
issued by Ginnie Mae are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional
residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage
obligations ("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates,
but may be collateralized by whole loans or private pass-through
securities. CMOs may have fixed or floating rates of interest.
The SHORT-TERM INCOME FUND and INTERMEDIATE BOND FUND will only invest
in CMOs which are rated in the top three rating categories by an NRSRO
(A or better by S&P, Fitch or Moody's), and which may be (a)
collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of
mortgages in which payment of principal and interest is guaranteed by
the issuer and such guarantee is collateralized by U.S. government
securities; or (c) collateralized by pools of mortgages without a
government guarantee as to payment of principal and interest, but which
have some form of credit enhancement.
The GOVERNMENT INCOME FUND may invest in CMOs which may be: (i)
collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) collateralized by pools
and mortgages in which payment of principal and interest are guaranteed
by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) privately issued securities in which the proceeds
of the issuance are invested in Mortgage-Backed Securities and payment
of the principal and interest is supported by the credit of any agency
or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS. Real estate mortgage
investment conduits ("REMICs") are offerings of multiple class real
estate Mortgage-Backed Securities which qualify and elect treatment as
such under provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships, corporations,
associations or a segregated pool of mortgages. Once REMIC status is
elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of
which may offer adjustable rates, and a single class of "residual
interests." To qualify as a REMIC, substantially all of the assets of
the entity must be in assets directly or indirectly secured principally
by real property.
MUNICIPAL SECURITIES. The TAX-FREE INCOME FUNDS, the SHORT-TERM INCOME FUND and
the INTERMEDIATE BOND FUND may invest in Municipal Securities, which are
generally issued to finance public works such as airports, bridges, highways,
housing, hospitals, mass transportation projects, schools, streets, and water
and sewer works. They are also issued to repay outstanding obligations, to raise
funds for general operating expenses, and to make loans to other public
institutions and facilities.
Municipal Securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned
corporations. The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases local
employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
MUNICIPAL LEASES. The TAX-FREE INCOME FUNDS may purchase municipal
leases, which are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and
may be considered to be illiquid. They may take the form of a lease, an
installment purchase contract, a conditional sales contract, or a
participation interest in any of these.
PARTICIPATION INTERESTS. The TAX-FREE INCOME FUNDS may purchase
interests in Municipal Securities from financial institutions such as
commercial and investment banks, savings and loan associations and
insurance
companies. These interests may take the form of participations,
beneficial interests in a trust, partnership interests or any other
form of indirect ownership that allows the Funds to treat the income
from the investment as exempt from federal income tax. The financial
institutions from which the Funds purchase participation interests
frequently provide or obtain irrevocable letters of credit or
guarantees to attempt to assure that the participation interests are of
acceptable quality. The Funds invest in these participation interests
in order to obtain credit enhancement or demand features that would not
be available through direct ownership of the underlying Municipal
Securities.
OPTIONS ON SECURITIES OR INDICES AND FUTURES CONTRACTS. (These are not
applicable to the MONEY MARKET FUND, SHORT-TERM INCOME FUND, or INTERMEDIATE
BOND FUND. The INTERNATIONAL STOCK FUND may invest more than 5% of its net
assets in these investments. The MID-CAP STOCK FUND may invest more than 5% of
its net assets in futures. None of the other Funds intends to invest more than
5% of its net assets in these investments. The ability to engage in futures
transactions is a fundamental investment policy.) In order to hedge against
market shifts, a Fund may purchase put and call options on securities or
securities indices. In addition, a Fund may seek to generate income to offset
operating expenses and/or may hedge a portion of its portfolio investments
through writing (i.e., selling) covered put and call options. An option on a
security is a contract that permits the purchaser of the option, in return for
the premium paid, the right to buy a specified security (in the case of a call
option) or to sell a specified security (in the case of a put option) from or to
the writer of the option at a designated price during the term of the option. An
option on a securities index permits the purchaser of the option, in return for
the premium paid, the right to receive from the seller cash equal to the
difference between the closing price of the index and the exercise price of the
option. A Fund may write a call or put option only if the option is "covered."
This means that so long as the Fund is obligated as the writer of a call option,
it will own the underlying securities subject to the call, or hold a call at the
same exercise price, for the same exercise period, and on the same securities as
the written call. A put is covered if the Fund maintains liquid assets with a
value equal to the exercise price in a segregated account, or holds a put on the
underlying securities at an equal or greater exercise price. The value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the total assets of a Fund. A Fund will not purchase put or call
options if the aggregate premium paid for such options would exceed 5% of its
total assets at the time of the purchase.
Options purchased or written by a Fund may be traded on United States and
foreign exchanges or in the over-the-counter markets. Over-the-counter options
are two-party contracts with price and terms negotiated between buyer and
seller. In contrast, exchange-traded options are third-party contracts with
standardized strike prices and expirations dates and are purchased from a
clearing corporation. Exchange-traded options generally have a continuous liquid
market while over-the-counter options may not. A Fund purchases and writes
options only with investment dealers and other financial institutions (such as
commercial banks or savings and loan associations) deemed creditworthy by the
Fund's investment adviser or subadviser.
For hedging purposes only, a Fund may buy and sell covered financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date. When a Fund enters into a futures contract, it
must make an initial deposit, known as "initial margin," as a partial guarantee
of its performance under the contract. As the value of the security, index, or
currency fluctuates, either party to the contract is required to make additional
margin payments, known as "variation margin," to cover any additional obligation
it may have under the contract. In addition, when a Fund enters into a futures
contract, it will segregate assets to "cover" its position in accordance with
the Act. See "Investment Objectives and Policies - Futures and Options
Transactions" in the Statement of Additional Information.
PRIME COMMERCIAL PAPER. The Funds may pur-
chase Prime Commercial Paper, which is a short-term debt obligation that matures
in 270 days or less, is issued by banks, corporations or other institutions, and
is rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by
Fitch.
PORTFOLIO TURNOVER. Although none of the Funds intends to invest for the purpose
of seeking short-term profits, securities will be sold whenever the Fund's
Adviser or Subadviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The annual rate of portfolio turnover for the SHORT-TERM
INCOME FUND,
GOVERNMENT INCOME FUND and INTERMEDIATE BOND FUND may exceed that of certain
other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater transaction expenses which
must be borne directly by the Fund and, thus, indirectly by its shareholders. In
addition, a high rate of portfolio turnover may result in the realization of
larger amounts of capital gains which, when distributed to the Fund's
shareholders, are taxable to them. Nevertheless, transactions for a Fund's
portfolio will be based upon investment considerations and will not be limited
by any other considerations when the Fund's investment adviser or subadviser
deems it appropriate to make changes in the Fund's portfolio.
RATINGS. Securities rated in the fourth highest investment grade category (Baa
by Moody's, or BBB by S&P or Fitch) have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than higher rated
securities. The Fund's Statement of Additional Information contains complete
descriptions of ratings.
A Fund's Adviser or Subadviser will evaluate downgraded securities on a
case-by-case basis and will sell any security determined not to be an acceptable
investment.
An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by S&P
or Prime-1 by Moody's are all considered rated in the highest short-term rating
category. The MONEY
MARKET FUND will follow applicable regulations in determining whether a security
rated by more than one NRSRO can be treated as being in the highest short-term
rating category; currently, such securities must be rated by two NRSROs in their
highest rating category. Single rated securities which are rated in a highest
rating category by an NRSRO and unrated securities may be treated as "First
Tier" securities and are eligible for purchase by the MONEY MARKET FUND, subject
to a determination of comparability by the adviser. Acquisition of such
securities must be ratified by the Directors quarterly.
REGULATORY COMPLIANCE. The MONEY MARKET FUND may follow non-fundamental
operational policies that are more restrictive than its fundamental investment
limitations, as set forth in this prospectus and the Statement of Additional
Information, in order to comply with applicable laws and regulations. In
particular, the MONEY MARKET FUND will comply with the various requirements of
Rule 2a-7 under the Act, which regulates money market mutual funds. For example,
Rule 2a-7 generally prohibits the investment of more than 5% of the MONEY MARKET
FUND'S total assets in the securities of any one issuer, although the MONEY
MARKET FUND'S fundamental investment limitation only requires such 5%
diversification with respect to 75% of its assets. The MONEY MARKET FUND will
also determine the effective maturity of its investments, as well as its ability
to consider a security as having received the requisite short-term ratings by
NRSROs, according to Rule 2a-7. The MONEY MARKET FUND may change these
operational policies to reflect changes in the laws and regulations without
shareholder approval.
RESTRICTED SECURITIES. Each of the Funds may invest in restricted securities.
These are securities in which each Fund normally invests but which are subject
to legal restrictions when a Fund sells them. Restricted securities which are
not determined by the Directors to be liquid will be limited to 5% of total
assets for the EQUITY FUNDS and 10% of total assets for all other Funds.
REPURCHASE AGREEMENTS. The securities in which the Funds invest may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or other securities to a Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price. To the
extent that the original seller does not repurchase the securities from a Fund,
the Fund could receive less than the repurchase price on any sale of such
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each of the Funds may invest in the
securities of other investment companies, but will not own more than 3% of the
total outstanding voting stock of any investment company, invest more than 5% of
its respective total assets in any one investment company, or invest more than
10% of its respective total assets in investment companies in general. Except
for the INTERNATIONAL STOCK FUND, the Funds will invest in other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio instruments. Although the Adviser will
waive its investment advisory fee on that portion of a Fund's assets invested in
securities of open-end investment companies, there will still be some
duplication of expenses caused by one investment company investing in another.
The INTERNATIONAL STOCK FUND may invest indirectly in foreign capital markets by
purchasing shares of closed-end investment companies, but generally only in
open-market transactions involving only customary brokerage commissions.
Sometimes the Fund may pay a premium over net asset value for such shares.
The Funds will only purchase shares of other open-end investment companies whose
sales loads, if any, are less than 1.00% of their offering prices.
TEMPORARY INVESTMENTS. When the Adviser or Subadviser judges that market
conditions warrant a defensive investment position (this rarely applies to the
MONEY MARKET FUND), each of the Funds may temporarily invest without limit in
short-term debt obligations (money market instruments). These investments
include commercial paper, bank instruments, U.S. government obligations,
repurchase agreements, securities of other investment companies, taxable or
tax-free Municipal Securities (for the TAX-FREE INCOME FUNDS) and foreign
securities (for the INTERNATIONAL STOCK FUND). The TAX-FREE INCOME FUNDS do not
currently intend to make any taxable investments although they are permitted to
do so. Each Fund's temporary investments must be of comparable quality to its
primary investments.
U.S. GOVERNMENT SECURITIES. All of the Funds may invest in U.S. Government
Securities, which generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations (including
Mortgage-Backed Securities, bonds, notes and discount notes) issued or
guaranteed by the following U.S. government agencies or instrumentalities:
Federal Home Loan Banks, Federal National Mortgage Association, Government
National Mortgage Association, Bank for Cooperatives (including Central Bank for
Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks, Tennessee
Valley Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, The Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union Administration.
These securities are backed by: the full faith and credit of the U.S. Treasury;
the issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; the discretionary authority of the U.S. government to
purchase certain obligations of agencies or instrumentalities; or the credit of
the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Federal Farm Credit Banks; Federal Home Loan Banks; Federal National Mortgage
Association; The Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
VARIABLE RATE DEMAND NOTES. Each of the Funds may purchase variable rate demand
notes, which are long-term debt instruments that have variable or floating
interest rates and provide the Fund with the right to tender the security for
repurchase at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities to
trade at par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on a published interest
rate or interest rate index. Many variable rate demand notes allow a Fund to
demand the repurchase of the security on not more than seven days prior notice.
Other notes only permit a Fund to tender the security at the time of each
interest rate adjustment or at other fixed intervals.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase portfolio
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which a Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause a Fund to miss a price or yield considered to be advantageous.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. Accordingly, a Fund may pay more or less than the market value of the
securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser or
Subadviser deems it appropriate to do so. In addition, a Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
-------------------------------------------------------------
------------------------------------------------------------
ADDITIONAL INVESTMENT RISKS
DEBT MARKET. In the debt market, prices move inversely to interest rates. A
decline in market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market interest rates
results in a decline in market prices of outstanding debt obligations. In either
case, the amount of change in market prices of debt obligations in response to
changes in market interest rates generally depends on the maturity of the debt
obligations: the debt obligations with the longest maturities will experience
the greatest market price changes.
The market value of debt obligations, and therefore each Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Funds' Adviser or
Subadviser. The Funds' Adviser or Subadviser could be incorrect in its
expectations about the direction or extent of these market factors. Although
debt obligations with longer maturities offer potentially greater returns, they
have greater exposure to market price fluctuation. Conse-
quently, to the extent a Fund is significantly invested in debt obligations with
longer maturities, there is a greater possibility of fluctuation in the Fund's
net asset value.
MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-Backed and Asset-Backed Securities generally pay
back principal and interest over the life of the security. At the time
a Fund reinvests the payments and any unscheduled prepayments of
principal received, such Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-Backed and Asset-Backed Securities are
subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans
or the collateral supporting Asset-Backed Securities may be prepaid
without penalty or premium. Prepayment risks on Mortgage-Backed
Securities tend to increase during periods of declining mortgage
interest rates because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on Mortgage-Backed
Securities are also affected by other factors, such as the frequency
with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although Asset-Backed Securities generally
are less likely to experience substantial prepayments than are
Mortgage-Backed Securities, certain factors that affect the rate of
prepayments on Mortgage-Backed Securities also affect the rate of
prepayments on Asset-Backed Securities.
While Mortgage-Backed Securities generally entail less risk of a
decline during periods of rapidly rising interest rates,
Mortgage-Backed Securities may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
Mortgage-Backed Securities are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss
of a holder's principal investment to the extent of the premium paid.
Conversely, if Mortgage-Backed Securities are purchased at a discount,
both a scheduled payment of principal and an unscheduled prepayment of
principal would increase current and total returns and would accelerate
the recognition of income, which would be taxed as ordinary income when
distributed to shareholders.
Asset-Backed Securities present certain risks that are not presented by
Mortgage-Backed Securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of Asset-Backed Securities backed by motor vehicle
installment purchase obligations permit the service of such receivables
to retain possession of the underlying obligations. If the service
sells these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of
the related Asset-Backed Securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and
obligor moves to another state, such reregistration could defeat the
original security interest in the vehicle in certain cases. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for
the holders of Asset-Backed Securities backed by automobile receivables
may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.
MUNICIPAL SECURITIES. Yields on Municipal Securities depend on a
variety of factors, including: the general conditions of the shortterm
municipal note market and of the municipal bond market; the size of the
particular offering; the maturity of the obligations; and the rating of
the issue. The ability of a Fund to achieve its investment objective
also depends on the continuing ability of the issuers of Municipal
Securities and demand features, or the credit enhancers of either, to
meet their obligations for the payment of interest and principal when
due.
STOCK MARKET. As with other mutual funds that invest primarily in equity
securities, the EQUITY FUNDS are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time, and the United States equity market tends to be cyclical,
experiencing both periods when stock prices generally increase and periods when
stock prices generally decrease.
MEDIUM CAPITALIZATION STOCKS. Stocks in the medium capitalization
sector of the United States equity market tend to be slightly more
volatile in price than larger capitalization stocks, such as those
included in the S&P 500. This is because, among other things,
medium-sized companies have less certain growth prospects in larger
companies, have a lower degree of liquidity in the equity market, and
tend to have a greater sensitivity to changing economic conditions.
Further, in addition to exhibiting slightly higher volatility, the
stocks of medium-sized companies may, to some degree, fluctuate
independently of the stocks of large companies. That is, the stocks of
medium-sized companies may decline in price as the price of large
company stocks rises or vice versa. Therefore, investors should expect
that the MID-CAP STOCK FUND, which invests primarily in medium
capitalization stocks, will be slightly more volatile than, and may
fluctuate independently of, broad stock market indices such as the S&P
500.
FOREIGN SECURITIES. Investing in non-U.S. securities carries substantial risks
in addition to those associated with domestic investments. (Excluding Foreign
Money Market Instruments and Depositary Receipts, only the INTERNATIONAL STOCK
FUND intends to invest more than 5% of its net assets in Foreign Securities).
The risks associated with investing in foreign securities include: risks of
adverse political and economic developments (including possible governmental
seizure or nationalization of assets); the possible imposition of exchange
controls or other governmental restrictions; default in foreign government
securities; foreign companies are not generally subject to uniform financial
reporting, auditing and accounting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies; less
readily available market quotations on foreign companies; the possibility of
less publicly available information on foreign securities and their issuers;
differences in government regulation and supervision of foreign stock exchanges,
brokers, listed companies, and banks; generally lower foreign stock market
volume; the likelihood that foreign securities may be less liquid or more
volatile; foreign brokerage commissions and other transaction costs (such as
custodial services) may be higher; unreliable mail service between countries;
restrictions on foreign investments in other jurisdictions; difficulties which
may be encountered in obtaining or enforcing a court judgment abroad and
affecting repatriation of capital invested abroad; and delays or problems in
settlement of foreign transactions, which could adversely affect shareholder
equity or cause the Fund to miss attractive investment opportunities. In
addition, foreign securities may be subject to foreign taxes, which reduce yield
and total return.
In an attempt to reduce some of these risks, the INTERNATIONAL STOCK FUND
diversifies its investments broadly among foreign countries, including both
developed and developing countries. At least three different countries will
always be represented in the INTERNATIONAL STOCK FUND'S portfolio.
The INTERNATIONAL STOCK FUND occasionally takes advantage of the unusual
opportunities for higher returns available from investing in developing
countries. Investments in companies domiciled in developing countries may be
subject to potentially higher risks and volatility than investments in developed
countries with more mature economies. These risks include: (i) less social,
political and economic stability; (ii) the small current size of the markets for
such securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and greater price volatility; (iii) certain
national policies which may restrict the INTERNATIONAL STOCK FUND'S investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) the absence of developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property; (v) the absence, until recently in
certain Eastern European countries, of a capital market structure or
market-oriented economy; and (vi) the possibility that recent favorable economic
developments in Eastern Europe may be slowed or reversed by unanticipated
political or social events in such countries.
EXCHANGE RATES. Foreign securities may be denominated in foreign
currencies although only the INTERNATIONAL STOCK FUND intends to invest
in such foreign currency-denominated securities to a significant
extent. Therefore, the value in U.S. dollars of the INTERNATIONAL STOCK
FUND'S assets and income may be affected by changes in exchange rates
and regulations. Although the INTERNATIONAL STOCK FUND values its
assets daily in U.S. dollars, it will not convert its holding of
foreign currencies to U.S. dollars daily. When the INTERNATIONAL STOCK
FUND converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference
between the prices at which they buy and sell currencies.
FOREIGN MONEY MARKET INSTRUMENTS. ECDs, ETDs, Yankee CDs, and Europaper
are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international,
economic, and political developments, foreign
governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the
issuing bank, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for
ECDs, ETDs, and Yankee CDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to
the same regulatory requirements that apply to domestic banks, such as
reserve requirements, loan limitations, examinations, accounting,
auditing, and recordkeeping, and the public availability of
information. These factors will be carefully considered by a Fund's
Adviser or Subadviser in selecting these investments.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such
as the INTERNATIONAL STOCK FUND. When such policies are instituted, the
Fund will abide by them.
FUTURES AND OPTIONS. When a Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Fund's Adviser or Subadviser could be incorrect in its expectations about
the direction or extent of market factors such as interest or currency exchange
rate movements. In these events, the Fund may lose money on the futures contract
or option. Also, it is not certain that a secondary market for positions in
futures contracts or for options will exist at all times. Although the Fund's
Adviser or Subadviser will consider liquidity before entering into such
transactions, there is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures contract or option
at any particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market.
-------------------------------------------------------------
TAX INFORMATION
-------------------------------------------------------------
------------------------------------------------------------
FEDERAL INCOME TAX
None of the Funds will pay federal income tax because each expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
other Funds of the Corporation, if any, will not be combined for tax purposes
with those realized by any of the other Funds.
Unless otherwise exempt, you are required to pay federal income tax on any
dividends and other distributions received. However, shareholders of SHORT-TERM
TAX-FREE FUND and INTERMEDIATE TAX-FREE FUND are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds; but, under the Tax Reform Act of 1986,
dividends representing net interest earned on certain "private-activity"
municipal bonds may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.
Dividends of the TAX-FREE INCOME FUNDS representing net interest income earned
on some temporary investments and any realized net short-term gains are taxed as
ordinary income.
Investment income received by the INTERNATIONAL STOCK FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries that
entitle the INTERNATIONAL STOCK FUND to reduced tax rates or exemptions on this
income. The effective rate of foreign tax cannot be predicted since the amount
of INTERNATIONAL STOCK FUND'S assets to be invested within various countries is
unknown. However, the INTERNATIONAL STOCK FUND intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
If more than 50% of the value of the INTERNATIONAL STOCK FUND'S assets at the
end of the tax year is represented by stock or securities of foreign
corporations, the INTERNATIONAL STOCK FUND intends to qualify for certain
Internal Revenue Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Internal
Revenue Code may limit a shareholder's ability to claim a foreign tax credit.
Furthermore, shareholders who elect to deduct their portion of the INTERNATIONAL
STOCK FUND'S foreign taxes rather than take the foreign tax credit must itemize
deductions on their income tax returns.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
-------------------------------------------------------------
------------------------------------------------------------
STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue, and you should consult your
tax adviser for specific details.
-------------------------------------------------------------
EFFECT OF BANKING LAWS
M&I Corp. believes, based on the advice of its counsel, that M&I Investment
Management Corp. may perform the services contemplated by the investment
advisory agreement with the Corporation without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such present or future statutes
and regulations, could prevent M&I Investment Management Corp. or M&I Corp. from
continuing to perform all or a part of the above services for its customers
and/or a Fund. In such event, the Directors would consider alternative advisers
and means of continuing available investment services.
-------------------------------------------------------------
STANDARD & POOR'S
CORPORATION
"Standard & Poor's," "S&P," "S&P 500," "Standard & Poor's 500" and "500" are
trademarks of Standard & Poor's Corporation.
The Funds are not sponsored, endorsed, sold or promoted by or affiliated with
Standard & Poor's Corporation.
- --------------------------------------------------------------------------------
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
MARSHALL STOCK FUND Federated Investors Tower
MARSHALL VALUE EQUITY FUND Pittsburgh, Pennsylvania 15222-3779
MARSHALL EQUITY INCOME FUND
MARSHALL MID-CAP STOCK FUND
MARSHALL INTERNATIONAL STOCK FUND
MARSHALL SHORT-TERM INCOME FUND
MARSHALL INTERMEDIATE BOND FUND
MARSHALL GOVERNMENT INCOME FUND
MARSHALL SHORT-TERM TAX-FREE FUND
MARSHALL INTERMEDIATE TAX-FREE FUND
MARSHALL MONEY MARKET FUND
- -----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Adviser to all Funds
M & I Investment Management Corp. 1000 North Water Street
Milwaukee, Wisconsin 53202
- -----------------------------------------------------------------------------------------------------
Subadviser to MARSHALL INTERNATIONAL STOCK FUND
Templeton Investment Counsel, Inc. 500 East Broward Blvd.
Suite 2100
Ft. Lauderdale, Florida 33394-3091
- -----------------------------------------------------------------------------------------------------
Custodian
Marshall & Ilsley Trust Company 1000 North Water Street
Milwaukee, Wisconsin 53202
- -----------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Marshall Funds Investor Services P.O. Box 1348
Milwaukee, Wisconsin 53201-1348 OR
1000 North Water Street
Milwaukee, Wisconsin 53202-1348
- -----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -----------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------------
</TABLE>
Marshall Funds, Inc.
Statement of Additional Information
January 1, 1995
Equity Funds Tax-Free Income Funds
o Marshall Stock Fund o Marshall Short-Term
Tax-Free Fund
o Marshall Value Equity Fund o Marshall Intermediate
Tax-Free Fund
o Marshall Equity Income Fund
o Marshall Mid-Cap Stock Fund
o Marshall International Stock Fund
Income Funds Money Market Fund
o Marshall Short-Term Income Fund o Marshall Money Market
Fund
o Marshall Intermediate Bond Fund
o Marshall Government Income Fund
This Statement of Additional Information should be read with the
prospectus, dated January 1, 1995, for the funds listed above.
This Statement is not a prospectus itself. To receive a copy of
the prospectus, write or call Marshall Funds Investor Services at
414-287-8500 or 1-800-326-8560, M&I Brokerage Services, Inc., or
any M&I Bank.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
Policies and Acceptable
Investments 1
Investment Limitations 10
Selling Short and Buying on
Margin 10
Issuing Senior Securities and
Borrowing Money 10
Pledging Assets 10
Lending Cash or Securities 10
Investing in Commodities 10
Investing in Real Estate 11
Diversification of Investments 11
Concentration of Investments 11
Underwriting 11
Investing in Illiquid
Securities 11
Investing in New Issuers 12
Investing in Issuers Whose
Securities are Owned by
Officers and Directors of the
Corporation 12
Investing in Minerals 12
Purchasing Securities to
Exercise Control 12
Investing in Warrants 12
Investing in Securities of
Other Investment Companies 12
Investing in Options 12
Marshall Funds, Inc. Management 13
Officers and Directors 13
Fund Ownership 15
Investment Advisory Services 16
Adviser to the Fund 16
Advisory Fees 16
Subadviser to International
Stock Fund 17
State Expense Limitations 17
Shareholder Servicing
Arrangements 18
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 18
Custodian 18
Brokerage Transactions 19
Purchasing Shares with Securities 19
Distribution Plan 19
Determining Market Value 20
Use of the Amortized Cost
Method 20
Monitoring Procedures 20
Investment Restrictions 20
Market Values 21
Trading in Foreign Securities 21
Redemption in Kind 21
Banking Laws 22
Tax Status 22
The Funds' Tax Status 22
Foreign Taxes 23
Total Return 23
Yield 23
Effective Yield 24
Tax-Equivalent Yield 24
Tax-Equivalency Table 24
Performance Comparisons 25
Financial Statements 28
Appendix 29
This Statement contains additional information about the Marshall Funds,
Inc. (the "Corporation") and its eleven investment portfolios (the
"Funds"). This Statement uses the same terms as defined in the
prospectus.
Policies and Acceptable Investments
Asset-Backed Securities. Asset-Backed Securities are bonds or notes
backed by loans or accounts receivable originated by banks, or other
credit providers or financial institutions. Asset-Backed Securities may
be pooled and then divided into classes of securities, known as
tranches, and resold. Each tranche has a specified interest rate and
maturity. The cash flows from the underlying pool of Asset-Backed
Securities are applied first to pay interest and then to retire
securities. All principal payments are directed first to the shortest-
maturity tranche. When those securities are completely retired, all
principal payments are then directed to the next-shortest-maturity
tranche. This process continues until all of the tranches have been
completely retired. The Money Market Fund will invest in only the short-
term tranches, which will generally have a maturity not exceeding 397
days.
Average Maturity. For purposes of determining the dollar-weighted
average maturity of a Fund's portfolio, the maturity of a Municipal
Security will be its ultimate maturity. If it is probable that the
issuer of the security will take advantage of maturity-shortening
devices such as a call, refunding, or redemption provision, the maturity
date will be the date on which it is probable that the security will be
called, refunded, or redeemed. If the Municipal Security includes the
right to demand payment, the maturity of the security for purposes of
determining a Fund's dollar-weighted average portfolio maturity will be
the period remaining until the principal amount of the security can be
recovered by exercising the right to demand payment.
Borrowing. The International Stock Fund may borrow up to one-third of
the value of its total assets from banks to increase its holdings of
portfolio securities. The International Stock Fund is required to
maintain continuous asset coverage to 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings
to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if such liquidations of the
Fund's holdings may be disadvantageous from an investment standpoint.
Convertible Securities. When owned as part of a unit along with
warrants, which entitle the holder to buy the common stock, convertible
securities function as convertible bonds, except that the warrants
generally will expire before the bonds' maturity. A Fund will exchange
or convert the convertible securities held in its portfolio into shares
of the underlying common stocks when, in the adviser's or subadviser's
opinion, the investment characteristics of the underlying common shares
will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In evaluating
these matters with respect to a particular convertible security, the
Fund's adviser or subadviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
Duration. Duration is a commonly used measure of potential volatility
in the price of a bond, or other fixed income security, or in a
portfolio of fixed income securities, prior to maturity. Volatility is
the magnitude of the change in the price of a bond relative to a given
change in the market rate of interest. A bond's price volatility
depends on three primary variables: the bond's coupon rate; maturity
date; and the level of market yields of similar fixed income securities.
Generally, bonds with lower coupons or longer maturities will be more
volatile than bonds with higher coupons or shorter maturities. Duration
combines these variables into a single measure.
Duration is calculated by dividing the sum of time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When a
Fund invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Funds.
Foreign Currency Hedging Transactions. In order to hedge against
foreign currency exchange rate risks, the International Stock Fund may
enter into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call options on
foreign currencies, as described below. The Fund may also conduct its
foreign currency exchange transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market.
The International Stock Fund may enter into forward foreign currency
exchange contracts ("forward contracts") to attempt to minimize the risk
to the Fund from adverse changes in the relationship between the U.S.
dollar and foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future
date which is individually negotiated and privately traded by currency
traders and their customers. The Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of
a security denominated in a foreign currency in order to "lock in" the
U.S. dollar price of the security. In addition, for example, when the
Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an
amount of that foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency;
or when the Fund believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, it may enter into a forward contract
to buy that foreign currency for a fixed dollar amount. This second
investment practice is generally referred to as "cross-hedging." Because
in connection with the Fund's forward foreign currency transactions an
amount of the Fund's assets equal to the amount of the purchase will be
held aside or segregated to be used to pay for the commitment, the Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or
to limit any potential risk. The segregated account will be marked to
market on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission ("CFTC"), the CFTC
may in the future assert authority to regulate forward contracts. In
such event, the Fund's ability to utilize forward contracts in the
manner set forth above may be restricted. Forward contracts may limit
potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it
had not engaged in such contracts.
The International Stock Fund may purchase and write put and call options
on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases
in the dollar cost of foreign securities to be acquired. As is the case
with other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount
of the premium received, and the Fund could be required to purchase or
sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates,
although, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or
purchased by the Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
The International Stock Fund may enter into exchange-traded contracts
for the purchase or sale for future delivery of foreign currencies
("foreign currency futures"). This investment technique will be used
only to hedge against anticipated future changes in exchange rates which
otherwise might adversely affect the value of the Fund's portfolio
securities or adversely affect the prices of securities that the Fund
intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the Fund's
subadviser to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the Fund may not
achieve the anticipated benefits of foreign currency futures or may
realize losses.
Funding Agreements. The Money Market Fund may purchase funding
agreements ("Agreements"), which are investment instruments issued by
highly rated U.S. insurance companies. Pursuant to such Agreements, the
Money Market Fund may make cash contributions to a deposit fund of the
insurance company's general or separate accounts. The insurance company
then credits to the Money Market Fund guaranteed interest. The
insurance company may assess periodic charges against an Agreement for
expense and service costs allocable to it, and the charges will be
deducted from the value of the deposit fund. The purchase price paid for
an Agreement becomes part of the general assets of the issuer, and the
Agreement is paid from the general assets of the issuer.
The Money Market Fund will only purchase Agreements from issuers which,
at the time of purchase, meet quality and credit standards established
by the Money Market Fund's adviser. Generally, Agreements are not
assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in Agreements does
not currently exist. Also, the Money Market Fund may not receive the
principal amount of an Agreement from the insurance company on seven
days' notice or less. Therefore, Agreements are typically considered to
be illiquid investments.
Futures and Options Transactions. (This is not applicable to the Money
Market Fund, Short-Term Income Fund, or Intermediate Bond Fund.) As a
means of reducing fluctuations in the net asset value of shares of a
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling futures contracts and options on futures contracts,
and buying put and call options on portfolio securities and securities
indices. A Fund may also write covered put and call options on portfolio
securities to attempt to increase its current income or to hedge a
portion of its portfolio investments. The Fund will maintain its
positions in securities, option rights, and segregated cash subject to
puts and calls until the options are exercised, closed, or have expired.
An option position on futures contracts may be closed out over-the-
counter or on a nationally recognized exchange which provides a
secondary market for options of the same series.
Futures Contracts. A Fund may purchase and sell financial futures
contracts to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates
and market conditions without necessarily buying or selling the
securities. Although some financial futures contracts call for
making or taking delivery of the underlying securities, in most
cases these obligations are closed out before the settlement date.
The closing of a contractual obligation is accomplished by
purchasing or selling an identical offsetting futures contract.
Other financial futures contract by their terms call for cash
settlements.
A Fund also may purchase and sell stock index futures contracts
with respect to any stock index traded on a recognized stock
exchange or board of trade to hedge against changes in prices.
Stock index futures contracts are based on indices that reflect the
market value of common stock of the firms included in the indices.
An index futures contract is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal
to the differences between the value of the index at the close of
the last trading day of the contract and the price at which the
index contract was originally written. No physical delivery of the
underlying securities in the index is made. Instead, settlement in
cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract.
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of security called
for in the contract ("going short") and the buyer who agrees to
take delivery of the security ("going long") at a certain time in
the future. For example, in the fixed income securities market,
prices move inversely to interest rates. A rise in rates means a
drop in price. Conversely, a drop in rates means a rise in price.
In order to hedge its holdings of fixed income securities against a
rise in market interest rates, the Fund could enter into contracts
to deliver securities at a predetermined price (i.e., "go short")
to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated
holding period. The Fund would "go long" (agree to purchase
securities in the future at a predetermined price) to hedge against
a decline in market interest rates.
"Margin" In Futures Transactions. Unlike the purchase or sale of a
security, a Fund does not pay or receive money upon the purchase or
sale of a futures contract. Rather, the Fund is required to deposit
an amount of "initial margin" in cash, U.S. government securities
or highly-liquid debt securities with its custodian (or the broker,
if legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does
not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund
upon termination of the futures contract, assuming all contractual
obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal to
the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the
Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value,
the Fund will mark to market its open futures positions. The Fund
is also required to deposit and maintain margin when it writes call
options on futures contracts. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such
futures contracts is unleveraged.
To the extent required to comply with CFTC Regulation 4.5 and
thereby avoid status as a "commodity pool operator," the Fund will
not enter into a futures contract, or purchase an option thereon,
if immediately thereafter the initial margin deposits for futures
contracts held by it, plus premiums paid by it for open options on
futures contracts, would exceed 5% of the market value of the
Fund's total assets, after taking into account the unrealized
profits and losses on those contracts it has entered into; and,
provided further, that in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%. Second, the Fund will not enter into
these contracts for speculative purposes; rather, these
transactions are entered into only for bona fide hedging purposes,
or other permissible purposes pursuant to regulations promulgated
by the CFTC. Third, since the Fund does not constitute a commodity
pool, it will not market itself as such, nor serve as a vehicle for
trading in the commodities futures or commodity options markets.
Finally, because the Fund will submit to the CFTC special calls for
information, the Fund will not register as a commodities pool
operator.
Put Options on Financial and Stock Index Futures Contracts. A Fund
may purchase listed put options on financial and stock index
futures contracts to protect portfolio securities against decreases
in value resulting from market factors, such as an anticipated
increase in interest rates or decrease in stock prices. Unlike
entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a
specified price, the purchase of a put option on a futures contract
entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the
specified price.
Generally, if the hedged portfolio securities decrease in value
during the term of an option, the related futures contracts will
also decrease in value and the option will increase in value. In
such an event, the Fund will normally close out its option by
selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option
will be large enough to offset both the premium paid by the Fund
for the original option plus the decrease in value of the hedged
securities.
Alternatively, a Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than
the strike price of the option) and exercise the option. The Fund
would then deliver the futures contract in return for payment of
the strike price. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
A Fund may write listed put options on financial or stock index
futures contracts to hedge its portfolio against a decrease in
market interest rates or increase in stock prices. A Fund will use
these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the
time it enters into the transaction. When a Fund writes (sells) a
put on a futures contract, it receives a cash premium in exchange
for granting to the purchaser of the put the right to receive from
the Fund, at the strike price, a short position in such futures
contract (the Fund undertakes the obligation to assume a long
futures position), even though the strike price upon exercise of
the option is greater than the value of the futures position
received by such holder. As market interest rates decrease or stock
prices increase, the market price of the underlying futures
contract normally increases. As the market value of the underlying
futures contract increases, the buyer of the put option has less
reason to exercise the put because the buyer can sell the same
futures contract at a higher price in the market. If the value of
the underlying futures position is not such that exercise of the
option would be profitable to the option holder, the option will
generally expire without being exercised. The premium received by
the Fund can then be used to offset the higher prices of portfolio
securities to be purchased in the future.
It will generally be the policy of a Fund, in order to avoid the
exercise of an option sold by it, to cancel its obligation under
the option by entering into a closing purchase transaction, if
available, unless it is determined to be in the Fund's interest to
deliver the underlying futures position. A closing purchase
transaction consists of the purchase by the Fund of an option
having the same term as the option sold by the Fund, and has the
effect of canceling the Fund's position as a seller. The premium
which the Fund will pay in executing a closing purchase transaction
may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying
futures position at the time of each transaction. If the hedge is
successful, the cost of buying the second option will be less than
the premium received by the Fund for the initial option.
Call Options on Financial And Stock Index Futures Contracts. In
addition to purchasing put options on futures, a Fund may write
(sell) listed and over-the-counter call options on financial and
stock index futures contracts to hedge its portfolio. When the Fund
writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of
the option if the option is exercised. As stock prices fall or
market interest rates rise, causing the prices of futures to go
down, the Fund's obligation under a call option on a future (to
sell a futures contract) costs less to fulfill, causing the value
of the Fund's call option position to increase. In other words, as
the underlying futures price goes down below the strike price, the
buyer of the option has no reason to exercise the call, so that the
Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio
securities.
Prior to the expiration of a call written by a Fund, or exercise of
it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the
second option will be less than the premium received by the Fund
for the initial option. The net premium income of the Fund will
then substantially offset the decrease in value of the hedged
securities.
An additional way in which a Fund may hedge against decreases in
market interest rates or increases in stock prices is to buy a
listed call option on a financial or stock index futures contract.
A Fund will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transaction. When a
Fund purchases a call on a financial futures contract, it receives
in exchange for the payment of a cash premium the right, but not
the obligation, to enter into the underlying futures contract at a
strike price determined at the time the call was purchased,
regardless of the comparative market value of such futures position
at the time the option is exercised. The holder of a call option
has the right to receive a long (or buyer's) position in the
underlying futures contract. As market interest rates fall or
stock prices increase, the value of the underlying futures contract
will normally increase, resulting in an increase in value of the
Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium
paid, the Fund could exercise its option and buy the futures
contract below market price. Prior to the exercise or expiration
of the call option, the Fund could sell an identical call option
and close out its position. If the premium received upon selling
the offsetting call is greater than the premium originally paid,
the Fund has completed a successful hedge.
Limitation on Open Futures Positions. A Fund will not maintain
open positions in futures contracts it has sold or call options it
has written on futures contracts if, in the aggregate, the value of
the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts.
If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to
bring its open futures and options positions within this
limitation.
Purchasing Put and Call Options on Securities. A Fund may purchase
put options on portfolio securities to protect against price
movements in the Fund's portfolio securities. A put option gives
the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the
term of the option. A Fund may purchase call options on securities
acceptable for purchase to protect against price movements by
"locking in" on a purchase price for the underlying security. A
call option gives the Fund, in return for a premium, the right to
buy the underlying security from the seller at a specified price
during the term of the option.
Writing Covered Call and Put Options on Portfolio Securities. A
Fund may also write covered call and put options to generate income
and thereby protect against price movements in the Fund's portfolio
securities. As writer of a call option, the Fund has the obligation
upon exercise of the option during the option period to deliver the
underlying security upon payment of the exercise price. The Fund
may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash or U.S.
government securities in the amount of any additional
consideration). As a writer of a put option, the Fund has the
obligation to purchase a security from the purchaser of the option
upon the exercise of the option. In the case of put options, the
Fund will segregate cash or U.S. Treasury obligations with a value
equal to or greater than the exercise price of the underlying
securities.
Stock Index Options. A Fund may purchase or sell put or call
options on stock indices listed on national securities exchanges or
traded in the over-the-counter market. A stock index fluctuates
with changes in the market values of the stocks included in the
index. Upon the exercise of the option, the holder of a call
option has the right to receive, and the writer of a put option has
the obligation to deliver, a cash payment equal to the difference
between the closing price of the index and the exercise price of
the option. The effectiveness of purchasing stock index options
will depend upon the extent to which price movements in the Fund's
portfolio correlate with price movements of the stock index
selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss from
the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case
of certain indices, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly,
successful use by a Fund of options on stock indices will be
subject to the ability of the Fund's adviser or subadviser to
predict correctly movements in the directions of the stock market
generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of
individual stocks.
Over-the-Counter Options. A Fund may generally purchase and write
over-the-counter options on portfolio securities or in securities
indices in negotiated transactions with the buyers or writers of
the options when options on the portfolio securities held by the
Fund or when the securities indices are not traded on an exchange.
The Fund purchases and writes options only with investment dealers
and other financial institutions (such as commercial banks or
savings and loan associations) deemed creditworthy by the Fund's
adviser or sub-adviser.
Over-the-counter options are two-party contracts with price and
terms negotiated between buyer and seller. In contrast, exchange-
traded options are third-party contracts with standardized strike
prices and expiration dates and are purchased from a clearing
corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
Risks. When a Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities or
foreign currency subject to the futures contracts may not correlate
perfectly with the prices of the securities or currency in the
Fund's portfolio. This may cause the futures contract and any
related options to react differently to market changes than the
portfolio securities or foreign currency. In addition, a Fund's
adviser or sub-adviser could be incorrect in its expectations about
the direction or extent of market factors such as stock price
movements or foreign currency exchange rate fluctuations. In these
events, the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although a
Fund's adviser or sub-adviser will consider liquidity before
entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for
any particular futures contract or option at any particular time.
A Fund's ability to establish and close out futures and options
positions depends on this secondary market. The inability to close
these positions could have an adverse effect on the Fund's ability
to hedge its portfolio.
To minimize risks, a Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum of
the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of
the market value of the Fund's total assets after taking into
account the unrealized profits and losses on those contracts it has
entered into; and, provided further, that in the case of an option
that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing such 5%. When a Fund purchases
futures contracts, an amount of cash and cash equivalents, equal to
the underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such
futures contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to
collateralize the position as discussed above.
Guaranteed Investment Contracts. The Money Market Fund may purchase
guaranteed investment contracts ("GICs"), which are investment
instruments issued by highly rated U.S. insurance companies or banks.
Pursuant to such contracts, the Money Market Fund may make cash
contributions to a deposit fund of the issuer. The issuer then credits
to the Money Market Fund guaranteed interest. The issuer may assess
periodic charges against a GIC for expense and service costs allocable
to it, and the charges will be deducted from the value of the deposit
fund. The purchase price paid for a GIC becomes part of the general
assets of the issuer, and the contract is paid from the general assets
of the issuer.
The Money Market Fund will only purchase GICs from issuers which, at the
time of purchase, meet quality and credit standards established by the
Money Market Fund's adviser. Generally, GICs are not assignable or
transferable without the permission of the issuing insurance companies,
and an active secondary market in GICs does not currently exist. Also,
the Money Market Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less. Therefore, GICs are
typically considered to be illiquid investments.
Lending of Portfolio Securities. The collateral received when a Fund
lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities
are on loan, the borrower pays the Fund any dividends or interest paid
on such securities. Loans are subject to termination at the option of
the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated
portion of the interest earned on the cash or equivalent collateral to
the borrower or placing broker. If the Fund does not have the right to
vote securities on loan, it would terminate the loan and regain the
right to vote if that were considered important with respect to the
investment.
Mortgage-Backed Securities. The following is additional information
about Mortgage-Backed Securities.
Adjustable Rate Mortgage Securities ("ARMS") . Unlike conventional
bonds, ARMS pay back principal over the life of the ARMS rather
than at maturity. Thus, a holder of the ARMS, such as a Fund,
would receive monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing
payments on the underlying mortgages. At the time that a holder of
the ARMS reinvest the payments and any unscheduled prepayments of
principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on
the existing ARMS. As a consequence, ARMS may be a less effective
means of "locking in" long-term interest rates than other types of
U.S. government securities.
Not unlike other U.S. government securities, the market value of
ARMS will generally vary inversely with changes in market interest
rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates
decline.
While ARMS generally entail less risk of a decline during periods
of rapidly rising rates, ARMS may also have less potential for
capital appreciation than other similar investments (e.g.,
investments with comparable maturities) because, as interest rates
decline, the likelihood increases that mortgages will be prepaid.
Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some
loss of a holder's principal investment to the extent of the
premium paid. Conversely, if ARMS are purchased at a discount,
both a scheduled payment of principal and an unscheduled prepayment
of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
Collateralized Mortgage Obligations ("CMOs"). The following
example illustrates how mortgage cash flows are prioritized in the
case of CMOs - most of the CMOs in which the Income Funds invest
use the same basic structure: (1) several classes of securities
are issued against a pool of mortgage collateral. The most common
structure contains four classes of securities. The first three (A,
B, and C bonds) pay interest at their stated rates beginning with
the issue date, and the final class (Z bond) typically receives any
excess income from the underlying investments after payments are
made to the other classes and receives no principal or interest
payments until the shorter maturity classes have been retired, but
then receives all remaining principal and interest payments. (2)
The cash flows from the underlying mortgages are applied first to
pay interest and then to retire securities. (3) The classes of
securities are retired sequentially. All principal payments are
directed first to the shortest-maturity class (or A bond). When
those securities are completely retired, all principal payments are
then directed to the next shortest-maturity security (or B bond).
This process continues until all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro
rata, as with pass-through securities, the cash flows and average
lives of CMOs are more predictable, and there is a period of time
during which the investors in the longer-maturity classes receive
no principal paydowns. The interest portion of these payments is
distributed by the Fund as income, and the capital portion is
reinvested.
Interest Only and Principal Only Investments. Some of the
securities purchased by a Fund may represent an interest solely in
the principal repayments or solely in the interest payments on
Mortgage-Backed Securities (stripped mortgage-backed securities or
"SMBSs"). SMBSs are usually structured with two classes and
receive different proportions of the interest and principal
distributions on the pool of underlying mortgage-backed securities.
Due to the possibility of prepayments on the underlying mortgages,
SMBSs may be more interest-rate sensitive than other securities
purchased by the Funds. If prevailing interest rates fall below
the level at which SMBSs were issued, there may be substantial
prepayments on the underlying mortgages, leading to the relatively
early prepayments of principal-only SMBSs (the principal-only or
"PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class).
Because the yield to maturity of an IO class is extremely sensitive
to the rate of principal payments (including prepayments) on the
related underlying mortgage-backed securities, it is possible that
the Fund might not recover its original investment on interest-only
SMBSs if there are substantial prepayments on the underlying
mortgages. The Funds' inability to fully recoup their investments
in these securities as a result of a rapid rate of principal
prepayments may occur even if the securities are rated by an NRSRO.
Therefore, interest-only SMBSs generally increase in value as
interest rates rise and decrease in value as interest rates fall,
counter to changes in value experienced by most fixed income
securities.
Municipal Securities. Examples of Municipal Securities include, but are
not limited to: tax and revenue anticipation notes ("TRANs") issued to
finance working capital needs in anticipation of receiving taxes or
other revenues; tax anticipation notes ("TANs") issued to finance
working capital needs in anticipation of receiving taxes; revenue
anticipation notes ("RANs") issued to finance working capital needs in
anticipation of receiving revenues; bond anticipation notes ("BANs")
that are intended to be refinanced through a later issuances of longer-
term bonds; municipal commercial paper and other short-term notes;
variable rate demand notes; municipal bonds (including bonds having
serial maturities and pre-refunded bonds) and leases; construction loan
notes insured by the Federal Housing Administration and financed by the
Federal or Government National Mortgage Associations; and participation,
trust and partnership interests in any of the foregoing obligations.
Diversification of the Tax-Free Income Funds' investments is obtained
geographically by purchasing issues of Municipal Securities
representative of various areas of the U.S. and general obligations of
states, cities and school districts as well as some revenue issues which
meet the Funds' acceptable quality criteria.
Municipal Leases. The Tax-Free Income Funds may purchase Municipal
Securities in the form of participation interests that represent an
undivided proportional interest in lease payments by a governmental
or nonprofit entity. The lease payments and other rights under the
lease provide for and secure payments on the certificates. Lease
obligations may be limited by municipal charter or the nature of
the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not
appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide
that the participants cannot accelerate lease obligations upon
default. The participants would only be able to enforce lease
payments as they became due. In the event of a default or failure
of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to
obtain an acceptable substitute source of payment.
Under the criteria currently established by the Directors, the
Funds' investment adviser must consider the following factors in
determining the liquidity of municipal lease securities: (1) the
frequency of trades and quotes for the security; (2) the volatility
of quotations and trade prices for the security; (3) the number of
dealers willing to purchase or sell the security and the number of
potential purchasers; (4) dealer undertakings to make a market in
the security; (5) the nature of the security and the nature of the
marketplace trades; (6) the rating of the security and the
financial condition and prospects of the issuer of the security;
(7) such other factors as may be relevant to the Funds' ability to
dispose of the security; (8) whether the lease can be terminated by
the lessee; (9) the potential recovery, if any, from a sale of the
leased property upon termination of the lease; (10) the lessee's
general credit strength; (11) the likelihood that the lessee will
discontinue appropriating funding for the leased property because
the property is no longer deemed essential to its operations; and
(12) any credit enhancement or legal recourse provided upon an
event of nonappropriation or other termination of the lease.
Variable Rate Municipal Securities. Variable interest rates
generally reduce changes in the market value of Municipal
Securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate Municipal
Securities than for fixed income obligations. Many Municipal
Securities with variable interest rates purchased by a Fund are
subject to repayment of principal (usually within seven days) on
the Fund's demand. For purposes of determining the Funds' average
maturity, the maturities of these variable rate demand Municipal
Securities (including participation interests) are the longer of
the periods remaining until the next readjustment of their interest
rates or the periods remaining until their principal amounts can be
recovered by exercising the right to demand payment. The terms of
these variable rate demand instruments require payment of principal
and accrued interest from the issuer of the municipal obligations,
the issuer of the participation interests, or a guarantor of either
issuer.
Portfolio Turnover The estimated annual rate of portfolio turnover
generally will not exceed 50% for the International Stock Fund, 100% for
the Stock Fund, Value Equity Fund, Equity Income Fund, Mid-Cap Stock
Fund, Short-Term Income Fund and Tax-Free Income Funds, and 150% for the
Intermediate Bond Fund and Government Income Fund. A portfolio turnover
rate of 100% occurs when all the securities in the Fund's portfolio were
replaced once in a period of one year.
For the fiscal year ended August 31, 1994 and for the period from
November 23, 1992 (date of initial public investment), to August 31,
1993, the portfolio turnover rates for Stock Fund were 86% and 98%,
respectively. For the period from October 1, 1993 (date of initial
public investment), to August 31, 1994, the portfolio turnover rate for
the Value Equity Fund was 39%. For the period from October 1, 1993
(date of initial public investment) to August 31, 1994, the portfolio
turnover rate for Equity Income Fund was 44%. For the period from
October 1, 1993 (date of initial public investment) to August 31, 1994,
the portfolio turnover rate for Mid-Cap Stock Fund was 113%. For the
fiscal year ended August 31, 1994 and for the period from November 2,
1992 (date of initial public investment), to August 31, 1993, the
portfolio turnover rates for Short-Term Income Fund were 185% and 79%,
respectively. For the fiscal year ended August 31, 1994 and for the
period from November 23, 1992 (date of initial public investment), to
August 31, 1993, the portfolio turnover rates for Intermediate Bond Fund
were 228% and 220%, respectively. For the fiscal year ended August 31,
1994 and for the period from December 14, 1992 (date of initial public
investment), to August 31, 1993, the portfolio turnover rates for
Government Income Fund were 175% and 218%, respectively. For the period
from February 2, 1994 (date of initial public investment) to August 31,
1994, the portfolio turnover rates for Short-Term Tax-Free Fund and
Intermediate Tax-Free Fund were 37% and 45%, respectively.
The higher portfolio turnover rate for the Intermediate Bond Fund and
Government Income Fund for the fiscal year ended August 31, 1994, was
due to two factors. A dollar roll strategy was employed to enhance
return and the significant change in interest rates led to portfolio
repositioning. The anticipated annual rate of portfolio turnover of
these Funds is generally not expected to exceed 150% in the future. The
anticipated annual turnover rate for the Short-Term Income Fund also is
generally not expected to exceed 150%. The fact that this Fund holds a
high percentage of securities with short maturities leads to a naturally
higher rate of turnover. In addition, the consolidaton of positions due
to asset growth and the use of dollar roll transactions contributed to a
higher than anticipated portfolio turnover rate for the fiscal year
ended August 31, 1994.
The higher portfolio turnover rate for the Mid-Cap Stock Fund for the
fiscal year ended August 31, 1994, was due to the fact that perfomance
does not reflect a full twelve months of operation, and therefore, the
portfolio turnover rate may be higher than if the Fund had a complete
fiscal year. In addition, because of general market conditions, certain
sectors and industries moved in and out of favor quicker than normal,
and therefore, the Fund repositioned its investments in various
industries and sectors, thus causing more turnover.
The higher portfolio turnover rate for the Intermediate Bond Fund and
Government Income Fund for the period ended August 31, 1993, was a
result of the fact that the first fiscal year was the initial start-up
period for the Funds and, therefore, the portfolio turnover would be
expected to be substantially greater than on a fund with a longer
operation history. The higher portfolio turnover rate is also due to
the dollar roll transactions strategy which was employed to enhance
return. Although there were increased taxes because these transactions
generated additional income, there was no additional brokerage
commissions because these transactions were done on a net basis.
However, the Funds paid mark-ups on the securities which represented the
spread between bid and asked prices.
Repurchase Agreements. Each Fund requires its custodian to take
possession of the securities subject to repurchase agreements and these
securities are marked to market daily. To the extent that the original
seller does not repurchase the securities from a Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
In the event that such a defaulting seller files for bankruptcy or
becomes insolvent, disposition of such securities by the Fund might be
delayed pending court action. The Funds believe that, under the regular
procedures normally in effect for custody of the portfolio securities
subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Funds and allow retention or disposition of
such securities. The Funds will only enter into repurchase agreements
with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by a Fund's adviser or subadviser to be
creditworthy pursuant to guidelines established by the Directors.
Restricted Securities. The Funds may invest in commercial paper issued
in reliance on the exemption from restriction afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is
generally sold to institutional investors, such as the Funds, who agree
that they are purchasing the paper for investment purposes and not with
a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold
to other institutional investors like the Funds through or with the
assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Funds
believe that Section 4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for liquidity established
by the Directors are quite liquid. The Funds intend, therefore, to
treat the restricted securities which meet the criteria for liquidity
established by the Directors, including Section 4(2) commercial paper
(as determined by a Fund's adviser or subadviser), as liquid and not
subject to the investment limitation applicable to illiquid securities.
In addition, because Section 4(2) commercial paper is liquid, the Funds
intend to not subject such paper to the limitation applicable to
restricted securities.
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements. This transaction is similar to borrowing cash. In
a reverse repurchase agreement, the Fund transfers possession of a
portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market
value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and maintained until the transaction is settled. During
the period any reverse repurchase agreements are outstanding, but only
to the extent necessary to assure completion of the reverse repurchase
agreements, the Money Market Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or before
the expiration date on the reverse repurchase agreement.
Warrants. The Equity Funds may purchase warrants. Warrants are
basically options to purchase common stock at a specific price (usually
at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life
ranging from less than a year to twenty years or may be perpetual.
However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage
increase or decrease in the market price of the underlying common stock.
When-Issued and Delayed Delivery Transactions. These transactions are
made to secure what is considered to be an advantageous price or yield
for the Funds. Settlement dates may be a month or more after entering
into these transactions, and the market values of the securities
purchased may vary from the purchase prices. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of a Fund sufficient to make payment for the securities to be
purchased are segregated on a Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled.
Investment Limitations
Fundamental Limitations
The following investment limitations are fundamental and cannot be
changed without shareholder approval.
Selling Short and Buying on Margin
The Funds will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. A deposit
or payment by a Fund of initial or variation margin in connection with
futures contracts, forward contracts or related options transactions is
not considered the purchase of a security on margin.
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that each Fund may
borrow money, directly or through reverse repurchase agreements, in
amounts up to one-third of the value of its total assets ("net" assets
in the case of the Money Market Fund, Short-Term Income Fund, and
Intermediate Bond Fund) including the amounts borrowed; and except to
the extent that a Fund is permitted to enter into futures contracts,
options or forward contracts. Except for the International Stock Fund,
a Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of its portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous.
Except for the International Stock Fund, a Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, each Fund may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of its total assets at the time of the
pledge. For purposes of this limitation, the following are not deemed to
be pledges: margin deposits for the purchase and sale of futures
contracts and related options; and segregation of collateral
arrangements made in connection with options activities, forward
contracts or the purchase of securities on a when-issued basis.
Lending Cash or Securities
The Funds will not lend any of their assets except portfolio securities.
Except for the International Stock Fund, loans may not exceed one-third
of the value of a Fund's total assets. This shall not prevent a Fund
from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies, and limitations.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, except for the Short-Term Income
Fund, the Intermediate Bond Fund, and the Money Market Fund, a Fund may
purchase and sell futures contracts and related options, and the
International Stock Fund may also enter into forward contracts and
related options.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests, although a Fund may invest in the securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or which represent
interests in real estate.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, a Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer or if it would own more than 10% of the
outstanding voting securities of such issuer.
Under this limitation, the Tax Free Income Funds will consider each
governmental subdivision, including states and the District of Columbia,
territories, possessions of the United States, or their political
subdivisions, agencies, authorities, instrumentalities, or similar
entities, a separate issuer if its assets and revenues are separate from
those of the governmental body creating it and the security is backed
only by its own assets and revenues. Industrial developments bonds
backed only by the assets and revenues of a nongovernmental user are
considered to be issued solely by that user. If in the case of an
industrial development bond or government-issued security, a
governmental or some other entity guarantees the security, such
guarantee would be considered a separate security issued by the
guarantor, subject to a limit on investments in the guarantor of 10% of
total assets.
Concentration of Investments
(Tax-Free Income Funds only)
Neither Tax-Free Income Fund will invest 25% or more of the value of its
total assets in any one industry, except for temporary defensive
purposes, each Fund may invest 25% or more of the value of its total
assets in cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies, or instrumentalities, and repurchase
agreements collateralized by such securities.
In addition, each Tax-Free Income Fund may invest more than 25% of the
value of its total assets in obligations issued by any state, territory,
or possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political
subdivisions, including tax-exempt project notes guaranteed by the U.S.
government, regardless of the location of the issuing municipality.
This policy applies to securities which are related in such a way that
an economic, business, or political development affecting one security
would also affect the other securities (such as securities paid from
revenues from selected projects in transportation, public works,
education, or housing).
(All Other Funds)
A Fund will not invest 25% or more of its total assets in any one
industry. However, investing in U.S. government securities (and
domestic bank instruments for the Money Market Fund) shall not be
considered investments in any one industry.
Underwriting
A Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted (the term "restricted" does not
apply to the Tax-Free Income Funds) securities which the Fund may
purchase pursuant to its investment objective, policies and limitations.
Non-Fundamental Limitations
The following investment limitations are non-fundamental and, therefore,
may be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change in these
limitations becomes effective.
Investing in Illiquid Securities
The Funds will not invest more than 15% (10% for the Money Market Fund)
of the value of their net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days
after notice, non-negotiable fixed time deposits with maturities over
seven days, over-the-counter options, guaranteed investment contracts,
and certain securities not determined by the Directors to be liquid
(including certain municipal leases).
Investing in New Issuers
The Funds will not invest more than 5% of the value of their total
assets in securities of issuers which have records of less than three
years of continuous operations, including the operation of any
predecessor.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Corporation
A Fund will not purchase or retain the securities of any issuer if the
Officers and Directors of the Corporation or of the Fund's advisers,
owning individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
Investing in Minerals
The Funds will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except they may purchase
the securities of issuers which invest in or sponsor such programs.
Purchasing Securities to Exercise Control
The Equity Funds and the Tax-Free Income Funds will not purchase
securities of a company for the purpose of exercising control or
management.
Investing in Warrants
The Equity Funds may invest in warrants, but each Equity Fund will not
invest more than 5% of its net assets in warrants, including those
acquired in units or attached to other securities. To comply with
certain state restrictions, each Equity Fund will limit its investment
in such warrants not listed on the New York or American Stock Exchanges
to 2% of its net assets. (If state restrictions change, this latter
restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants will be valued at the
lower of cost or market, except that warrants acquired by a Fund in
units with or attached to securities may be deemed to be without value.
Although the Tax-Free Income Funds do not intend to invest in
warranties, they are subject to this investment limitation to comply
with certain state restrictions.
Investing in Securities of Other Investment Companies
Each Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Funds will purchase securities
of closed-end investment companies only in open market transactions
involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization, or acquisition of assets. The
Money Market Fund will limit its investments in other investment
companies to those of money market funds having investment objectives
and policies similar to its own. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment
companies. In accordance with certain state restrictions, each Fund
will limits its investments in securities of other investment companies
to those with sales loads of less than 1.00% of the offering price of
such securities.
Investing in Options
A Fund may not invest more than 5% of the value of its total assets in
the sum of (a) premiums on open option positions on futures contracts,
plus (b) initial margin deposits on futures contracts.
A Fund will not purchase put options or write call options on securities
unless the securities are held in the Fund's portfolio or unless the
Fund is entitled to them in deliverable form without further payment or
has segregated cash in the amount of any further payment.
A Fund will not write call options in excess of 25% of the value of its
total assets.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction. For purposes of its policies
and limitations, the Fund considers instruments (such as certificates of
deposit and demand and time deposits) issued by a U.S. branch of a
domestic bank or savings and loan having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items."
In order to permit the sale of the Fund's shares in certain states, the
Fund may make commitments more restrictive than the investment
limitations described above. If state requirements change, these
restrictions may be changed without notice to shareholders. In this
regard, to comply with certain state restrictions, the Equity Funds will
not invest more than 5%, and all the other Funds will not invest more
than 10%, of their respective total assets in securities subject to
restrictions on resale under the Securities Act of 1933, except for
commercial paper issued under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which meet the criteria for
liquidity as established by the Directors. If state requirements
change, these restrictions may be changed without notice to
shareholders.
Marshall Funds, Inc. Management
The Corporation was established as a Wisconsin corporation under the
laws of the State of Wisconsin on July 31, 1992. The Corporation's
authorized capital consists of 50,000,000,000 shares of common stock
with a par value of $.0001 per share. Shareholders of each Fund are
entitled: (i) to one vote per full share of Common Stock; (ii) to such
distributions as may be declared by the Corporation's Directors out of
funds legally available; and (iii) upon liquidation of the Corporation,
to participate ratably in the assets of the Fund available for
distribution. Each share of the Fund gives the shareholder one vote in
the election of Directors and other matters submitted to shareholders
for vote. All shares of each portfolio or class in the Corporation have
equal voting rights, except that only shares of a particular portfolio
or class are entitled to vote on matters affecting that portfolio or
class. There are no conversion or sinking fund provisions applicable to
the shares, and the holders have no preemptive rights and may not
cumulate their votes in the election of Directors. Consequently, the
holders of more than 50% of the Corporation's shares of common stock
voting for the election of Directors can elect the entire Board of
Directors, and, in such event, the holders of the Corporation's
remaining shares voting for the election of Directors will not be able
to elect any person or persons to the Board of Directors.
The Wisconsin Business Corporation Law (the "WBCL") permits registered
investment companies, such as the Corporation, to operate without an
annual meeting of shareholders under specified circumstances if an
annual meeting is not required by the Act. The Corporation has adopted
the appropriate provisions in its By-laws and does not anticipate
holding an annual meeting of shareholders to elect Directors unless
otherwise required by the Act. Directors may be removed by the
shareholders at a special meeting. A special meeting of the
shareholders may be called by the Directors upon written request of
shareholders owning at least 10% of the Corporation's outstanding voting
shares.
The shares are redeemable and are transferable. All shares issued and
sold by the Corporation will be fully paid and nonassessable except as
provided in WBCL Section 180.0622(2)(b). Fractional shares of common
stock entitle the holder to the same rights as whole shares of common
stock except the right to receive a certificate evidencing such
fractional shares.
The definitions of the terms "series" and "class" in the WBCL differ
from the meanings assigned to those terms in the prospectus and this
Statement of Additional Information. The Articles of Incorporation of
the Corporation reconcile this inconsistency in terminology, and provide
that the prospectus and Statement of Additional Information may define
these terms consistently with the use of those terms under the Act and
the Internal Revenue Code.
Officers and Directors
Officers and Directors are listed with their addresses, principal
occupations, and present positions, including any affiliation with
Marshall & Ilsley Corp., Federated Investors, Federated Securities
Corp., Federated Services Company, and Federated Administrative
Services.
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
Chairman, Director and Treasurer
Director, Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated Management,
and Federated Research; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee, Director, Vice President
and/or Treasurer of certain investment companies advised or distributed
by affiliates of Federated Investors.
John DeVincentis
4700 21st Street
Racine, WI 53406
Director
Independent Financial Consultant; retired, Senior Vice President of
Finance, In-Sink-Erator Division of Emerson Motors.
Ody J. Fish
247 Progress Drive
Hartland, WI
Director
Formerly, Director, Newton Income Fund, Inc. and Newton Growth Fund,
Inc.; Private Investor; formerly President Pal-O-Pak Insulation Company.
Paul E. Hassett
1630 Capital Avenue
Madison, WI
Director
Formerly, Director, Newton Income Fund, Inc. and Newton Growth Fund,
Inc.; Retired, formerly President, Wisconsin Manufacturers and Commerce.
James F. Duca, II
1000 N. Water Street
Milwaukee, WI
President
Vice President, Marshall & Ilsley Trust Company; Vice President,
Marshall & Ilsley Trust Company of Florida, formerly Secretary, Marshall
& Ilsley Trust Company and Marshall & Ilsley Trust Company of Florida.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private
Label Management, Federated Investors; Vice President and Assistant
Treasurer of certain funds for which Federated Securities Corp. is the
principal distributor.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
* This Director is deemed to be an "interested person" of a Fund or the
Corporation as defined in the Investment Company Act of 1940.
Fund Ownership
Officers and Directors of the Corporation own less than 1% of each
Fund's outstanding shares.
As of December 12, 1994, the following shareholders of record owned 5%
or more of a Fund's outstanding shares:
Stock Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 1,693,797 shares (7.11%); Maril & Co., Marshall & Ilsley
Trust Co., Milwaukee, Wisconsin, owned approximately 2,492,875 shares
(10.47%); and Mitra & Co., Milwaukee, Wisconsin, owned approximately
15,514,080 shares (65.15%).
Value Equity Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 6,476,270 shares (33.99%); Maril & Co., Marshall & Ilsley
Trust Co., Milwaukee, Wisconsin, owned approximately 4,989,416 shares
(26.19%); and Mitra & Co., Marshall & Ilsley Trust Operations, owned
approximately 6,749,013 shares (35.42%).
Equity Income Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 380,212 shares (6.51%); Maril & Co., Marshall & Ilsley
Trust Co., Milwaukee, Wisconsin, owned approximately 2,205,123 shares
(37.74%); Mitra & Co., Marshall & Ilsley Trust Operations, Milwaukee,
Wisconsin, owned approximately 2,642,237 shares (45.22%); and Miaz &
Co., Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 341,442 shares (5.84%).
Mid-Cap Stock Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 1,067,644 shares (15.21%); Maril & Co., Marshall & Ilsley
Trust Co., Milwaukee, Wisconsin, owned approximately 1,898,378 shares
(27.05%); and Mitra & Co., Marshall & Ilsley Trust Operations,
Milwaukee, Wisconsin, owned approximately 3,550,038 shares (50.59%).
International Stock Fund
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 2,609,798 shares (33.31%); and Mitra & Co., Marshall &
Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately4,706,699 shares (60.08%).
Short-Term Income Fund
Vallee, Marshall & Ilesley Trust Operations, Milwaukee, Wisconsin, owned
approximately 507,977 shares (5.17%);
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin , owned
approximately 3,114,469 shares (31.72%); Mitra & Co., Marshall & Ilsley
Trust Operations, Milwaukee, Wisconsin, owned approximately 4,571,183
shares (46.56%); and Miaz & Co., Marshall & Ilsley Trust Operations,
Milwaukee, Wisconsin, owned approximately 669,353 shares (6.82%).
Intermediate Bond Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 3,820,842 shares (10.61%); Maril & Co., Marshall & Ilsely
Trust Operations, Milwaukee, Wisconsin, owned approximately 7,225,002
shares (20.06%); and Mitra & Co., Marshall & Ilsely Trust Operations,
Milwaukee, Wisconsin, owned approximately 21,533,163 shares (59.80%).
Government Income Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 508,182 shares (5.80%); Maril & Co., Marshall & Ilsely
Trust Operations, Milwaukee, Wisconsin, owned approximately 1,699,101
shares (19.38%); and Mitra & Co., Marshall & Ilsely Trust Operations,
Milwaukee, Wisconsin, owned approximately 3,522,116 shares (40.18%).
Short-Term Tax-Free Fund
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 197,542 shares (7.75%); Maril & Co., Marshall & Ilsley
Trust Co., Milwaukee, Wisconsin, owned approximately 930,323 shares
(36.50%); and Mitra & Co., Marshall & Ilsley Trust Co., Milwaukee,
Wisconsin, owned approximately 1,224,091 shares (48.03%).
Intermediate Tax-Free Fund
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 3,830,580 shares (89.42%).
Money Market Fund
Maril & Co., Milwaukee, Wisconsin, owned approximately 802,331 of the
Class A Shares (formerly Trust Shares) of the Fund (74.27%); Miaz & Co.,
Milwaukee, Wisconsin, owned approximately 56,959 of the Class A Shares
(formerly Trust Shares) of the Fund (5.27%); Hedberg Foundation Inc.,
Janesville, Wisconsin, owned approximately 3,941,947 of the Class B
Shares (formerly Investment Shares) of the Fund (20.78%); and Kronseder
Farms Inc., Franklin, Wisconsin, owned approximately 1,178,678 of the
Class B Shares (formerly Investment Shares) of the Fund (6.21%).
Investment Advisory Services
Adviser to the Fund
The Funds' investment adviser is M&I Investment Management Corp.
("Adviser"). The Adviser shall not be liable to the Corporation, the
Funds or any shareholder of the Funds for any losses that may be
sustained in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties imposed upon it by its contract with the Corporation.
Because of the internal controls maintained by the Adviser's affiliates
to restrict the flow of non-public information, Fund investments are
typically made without any knowledge of the Adviser or its affiliates'
lending relationships with an issuer.
Advisory Fees
For the fiscal year ended August 31, 1994, and for the period from
November 23, 1992 (date of initial public investment), to August 31,
1993, the Adviser earned fees from Stock Fund of $1,877,194 and
$1,572,056, respectively. For the period from October 1, 1993 (date of
initial public investment), to August 31, 1994, the Adviser earned fees
from Value Equity Fund of $310,939, of which $45,477 was voluntarily
waived. For the period from October 1, 1993 (date of initial public
investment), to August 31, 1994, the Adviser earned fees from Equity
Income Fund of $245,116, of which $39,343 was voluntarily waived. For
the period from October 1, 1993 (date of initial public investment) to
August 31, 1994, the Adviser earned fees from Mid-Cap Stock Fund of
$189,976 of which $56,834 was voluntarily waived. For the fiscal year
ended August 31, 1994, and for the period from November 2, 1992 (date of
initial public investment), to August 31, 1993, the Adviser earned fees
from Short-Term Income Fund of $575,101 and $200,259, of which $361,083
and $152,661, respectively, were voluntarily waived. For the fiscal
year ended August 31, 1994, and for the period from November 23, 1992
(date of initial public investment), to August 31, 1993, the Adviser
earned fees from Intermediate Bond Fund of $1,873,380 and $1,288,544, of
which $296,925 and $135,214, respectively, were voluntarily waived. For
the fiscal year ended August 31, 1994, and for the period from December
14, 1992 (date of initial public investment), to August 31, 1993, the
Adviser earned fees from Government Income Fund of $436,508 and
$267,763, respectively, of which $224,038 and $106,039, respectively,
were voluntarily waived. For the period from February 2, 1994 (date of
initial public investment), to August 31, 1994, the Adviser earned fees
from Short-Term Tax-Free Fund and Intermediate Tax-Free Fund of $49,536
and $95,876, respectively, of which $49,536 and $77,214, respectively,
were voluntarily waived. For the fiscal year ended August 31, 1994, and
for the period from September 23, 1992 (start of business), to August
31, 1993, the Adviser earned fees from Money Market Fund of $4,623,880
and $2,775,543, respectively, of which $2,639,185 and $1,368,267,
respectively were voluntarily waived.
Subadviser to International Stock Fund
Templeton Investment Counsel, Inc. ("TICI") is the subadviser to the
International Stock Fund under the terms of a Subadvisory Contract
between the Adviser and TICI. It is the Adviser's responsibility to
select, subject to review and approval by the Corporation's Directors, a
subadviser for the International Stock Fund that has distinguished
itself in its area of expertise in asset management and to review the
subadviser's continued performance. Subject to the supervision and
direction of the Corporation's Directors, the Adviser provides
investment management evaluation services principally by performing
initial due diligence on TICI and thereafter monitoring TICI's
performance through quantitative and qualitative analysis, as well as
periodic in-person, telephonic and written consultations with TICI. In
evaluating TICI, the Adviser considers, among other factors, TICI's
level of expertise; relative performance and consistency of performance
over a minimum period of time; level of adherence to investment
discipline or philosophy; personnel, facilities and financial strength;
and quality of service and client communications. The Adviser has
responsibility for communicating performance expectations and
evaluations to TICI and ultimately recommending to the Corporation's
Directors whether TICI's contract should be renewed, modified or
terminated. The Adviser provides written reports to the Directors
regarding the results of its evaluation and monitoring functions. The
Adviser is also responsible for conducting all operations of the
International Stock Fund, except those operations contracted to TICI,
the custodian, the transfer agent, and the administrator. Although
TICI's activities are subject to oversight by the Directors and officers
of the Corporation, neither the Directors, the officers, nor the Adviser
evaluates the investment merits of TICI's individual security
selections. TICI has complete discretion to purchase, manage and sell
portfolio securities for the International Stock Fund, subject to the
International Stock Fund's investment objective, policies and
limitations. However, TICI will furnish to the Adviser such investment
advice, statistical and other factual information as may from time to
time be reasonably requested by the Adviser. TICI is a Florida
corporation and an indirect wholly-owned subsidiary of Franklin
Resources, Inc. ("Franklin"), a publicly traded company whose shares are
listed on the New York Stock Exchange. Charles B. Johnson, Rupert H.
Johnson, Jr. and R. Martin Wiskemann are principal shareholders of
Franklin and own, respectively, approximately 20%, 16% and 10% of its
outstanding shares. Messrs. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers.
Research services may be provided to TICI by various affiliates,
including Templeton, Galbraith & Hansberger Ltd. and Templeton
Quantitative Advisors, Inc., corporations registered under the
Investment Advisers Act of 1940, and Templeton Management Limited, a
Canadian company. The research services include information, analytical
reports, computer screening studies, statistical data, and factual
resumes pertaining to securities in the United States and in various
foreign nations. Such supplemental research, when utilized, is subject
to analysis by TICI before being incorporated into the investment
advisory process. TICI pays these affiliates compensation and
reimbursement of expenses as mutually agreed upon, without cost to the
Fund. These affiliates and TICI are independent contractors and in no
sense is any of them an agent for the other. Any of them is free to
discontinue such research services at any time on 30 days' notice
without cost or penalty.
It is understood that TICI may have advisory, management, service or
other contracts with other individuals or entities, and may have other
interests and businesses. When a security proposed to be purchased or
sold for the International Stock Fund is also to be purchased or sold
for other accounts managed by TICI at the same time, TICI shall make
such purchases or sales on a pro-rata, rotating or other equitable basis
so as to avoid any one account being preferred over any other account.
Although this may adversely affect the price the International Stock
Fund pays or receives, or the size of the position it obtains, it may
also enable TICI to negotiate lower transaction costs.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If a Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1 1/2%
per year of the remaining average net assets, the Adviser will reimburse
the Fund for its expenses over the limitation. If a Fund's monthly
projected operating expenses exceed this limitation, the advisory fees
paid will be reduced by the amount of the excess, subject to an annual
adjustment. If the expense limitation is exceeded, the amount to be
reimbursed by the Adviser will be limited, in any single fiscal year, by
the amount of its advisory fees.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Administrative Services
For the fiscal year ended August 31, 1994, and for the period from
November 23, 1992 (date of initial public investment), to August 31,
1993, Federated Administrative Services ("FAS ") received fees from
Stock Fund of $241,079 and $215,215, respectively, of which $0 and $910,
respectively, were voluntarily waived. For the period from October 1,
1993 (date of initial public investment), to August 31, 1994, FAS
received fees from Value Equity Fund of $54,953, of which $9,451 was
voluntarily waived. For the period from October 1, 1993 (date of
initial public investment), to August 31, 1994, FAS received fees from
Equity Income Fund of $45,481, of which $10,965 was voluntarily waived.
For the period from October 1, 1993 (date of initial public investment),
to August 31, 1994, FAS received fees from Mid-Cap Stock Fund of $45,481
of which $12,101 was voluntarily waived. For the fiscal year ended
August 31, 1994, and for the period from November 2, 1992 (date of
initial public investment), to August 31, 1993, FAS received fees from
Short-Term Income Fund of $91,808 and $41,371, respectively, of which $0
and $7,440, respectively, were voluntarily waived. For the fiscal year
ended August 31, 1994, and for the period from November 23, 1992 (date
of initial public investment), to August 31, 1993, FAS received fees
from Intermediate Bond Fund of $300,278 and $219,987, respectively, of
which $0 and $870, respectively, were voluntarily waived. For the
fiscal year ended August 31, 1994, and for the period from December 14,
1992 (date of initial public investment), to August 31, 1993, FAS
received fees from Government Income Fund of $55,895 and $36,945,
respectively, of which $0 and $601, respectively, were voluntarily
waived. For the period from February 2, 1994 (date of initial public
investment), to August 31, 1994, FAS received fees from Short-Term Tax-
Free Fund and Intermediate Tax-Free Fund of $28,767 and $28,767,
respectively, of which $19,393 and $13,646, respectively, were
voluntarily waived. For the fiscal year ended August 31, 1994, and for
the period from September 23, 1992 (start of business), to August 31,
1993, FAS received fees from Money Market Fund of $887,132 and $571,068,
respectively, of which $0 and $2,010, respectively, were voluntarily
waived.
Shareholder Servicing Arrangements
For the fiscal year ended August 31, 1994 and for the period from
November 23, 1992 (date of initial public investment) to August 31,
1993, Marshall Funds Investors Services ("MFIS") earned $37,544 and
$31,441, respectively from Stock Fund, of which $0 and $31,441,
respectively, were voluntarily waived; $46,835 and $32,214, respectively
from Intermediate Bond Fund, of which $0 and $32,214 respectively, were
voluntarily waived. For the fiscal year ended August 31, 1994 and for
the period from November 2, 1992 (date of initial public investment), to
August 31, 1993, MFIS earned $14,377 and $5,006, respectively from Short-
Term Income Fund, of which, $0 and $5,006, respectively, were
voluntarily waived. For the fiscal year ended August 31, 1994 and for
the period from September 23, 1992 (start of business), to August 31,
1993, MFIS earned $138,716 and $83,266, respectively from Money Market
Fund, of which $0 and $83,266, respectively, were voluntarily waived.
For the period from October 1, 1993 (date of initial public investment),
to August 31, 1994, MFIS earned a shareholder servicing fee of $4,902
for Equity Income Fund and $6,219 from Value Equity Fund.
Transfer Agent, Dividend Disbursing Agent, and Portfolio Accounting
Services
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund. It also provides certain
accounting and recordkeeping services with respect to the Fund's
portfolio of investments.
Federated Services Company receives a fee based on the size, type and
number of accounts and transactions made by shareholders. Federated
Services Company also maintains the Fund's accounting records. The fee
is based on the level of the Fund's average net assets for the period
plus out-of-pocket expenses.
Custodian
Marshall & Ilsley Trust Company ("M&I Trust Company"), Milwaukee,
Wisconsin, a subsidiary of Marshall & Ilsley Corp. is custodian for the
securities and cash of the Fund. For its services as custodian, M&I
Trust Company receives an annual fee, payable monthly, based on a
percentage of a Fund's average aggregate daily net assets. In addition,
M&I Trust Company is reimbursed for its out-of-pocket expenses, which
include postage, telephone supplies, and wire charges. M&I Trust Company
has entered into agreements with foreign subcustodians approved by the
Directors pursuant to Rule 17f-5 under the Act. The foreign
subcustodians may not hold certificates for the securities in their
custody, but instead have book records with domestic and foreign
securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the
services of the foreign subcustodians is based on a schedule of charges
agreed on from time to time.
Brokerage Transactions
The Adviser and/or TICI may select brokers and dealers who offer
brokerage and research services. These services may be furnished
directly to a Fund, the Adviser, or TICI and may include: advice as to
the advisability of investing in securities; security analysis and
reports; economic studies; industry studies; receipt of quotations for
portfolio evaluations; and similar services.
The Adviser, TICI, and their affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services
to execute securities transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Research services provided by brokers and dealers may be used by the
Adviser and TICI in advising the Funds and other accounts. To the extent
that receipt of these services may supplant services for which the
Adviser, TICI, or their affiliates might otherwise have paid, it would
tend to reduce their expenses.
For the fiscal year ended August 31, 1994, and for the period from
November 23, 1992 (date of initial public investment), to August 31,
1993, the Stock Fund paid $596,430 and $669,571, respectively, in
brokerage commissions on brokerage transactions. For the period from
October 1, 1993 (date of the initial public investment), to August 31,
1994, the Value Equity Fund paid $236,601 in brokerage commissions on
brokerage transactions. For the period from October 1, 1993 (date of
the initial public investment), to August 31, 1994, the Equity Income
Fund paid $37,398 in brokerage commissions on brokerage transactions.
For the period from October 1, 1993 (date of the initial public
investment), to August 31, 1994, the Mid-Cap Stock Fund paid $109,864
in brokerage commissions on brokerage transactions.
Purchasing Shares with Securities
A Fund may accept securities in exchange for its shares. A Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and its adviser(s) that the securities to be
exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies
of the Fund, must have a readily ascertainable market value, and must be
liquid. The market value of any securities exchanged in an initial
investment, plus any cash, must be at least equal to the minimum
investment in the Fund. A Fund acquires the exchanged securities for
investment and not for resale.
Securities accepted by a Fund will be valued in the same manner as the
Fund values its assets. The basis of the exchange will depend on the net
asset value of Fund shares on the day the securities are valued. One
share of the Fund will be issued for the equivalent amount of securities
accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription or other rights attached to the securities become the
property of the Fund, along with the securities.
If an exchange is permitted, it will be treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities
exchanged for Fund shares, a gain or loss may be realized by the
investor.
Distribution Plan
The Corporation has adopted a plan for the International Stock Fund and
for Class B Shares (formerly designated Investment Shares) of the Money
Market Fund ("Plan Shares") pursuant to Rule 12b-1 (the "Plan") which
was promulgated by the Securities and Exchange Commission pursuant to
the Act. The Plan provides that the Fund's distributor, Federated
Securities Corp., shall act as the distributor of Plan Shares, and it
permits the payment of fees to brokers, dealers and administrators for
distribution and/or administrative services. The Plan is designed to (i)
stimulate brokers, dealers and administrators to provide distribution
and/or administrative support services to the Funds and holders of Plan
Shares. These services are to be provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and
include, but are not limited to: providing office space, equipment,
telephone facilities, and various personnel, including clerical,
supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investment of client account cash
balances; answering routine client inquiries regarding the Plan Shares;
assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Funds reasonably
request.
Other benefits which the Funds hope to achieve through the Plan include,
but are not limited to, the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of holders of
Plan Shares by having them rapidly invested in the Funds with a minimum
of delay and administrative detail; and (3) an efficient and reliable
records system for holders of Plan Shares and prompt responses to
shareholder requests and inquiries concerning their accounts.
By adopting the Plan, the Directors expect that the Funds will be able
to achieve a more predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more efficient portfolio
management and assist the Funds in seeking to achieve their investment
objectives. By identifying potential investors in Plan Shares whose
needs are served by the Funds' objectives and properly servicing these
accounts, the Funds may be able to curb sharp fluctuations in rates of
redemptions and sales. Currently, no fee is being accrued for the
International Stock Fund. For the fiscal year ended August 31, 1994,
the Money Market Fund paid $14,553 to the distributor on behalf of the
Class B Shares (formerly designated Investment Shares).
Determining Market Value
Use of the Amortized Cost Method (Money Market Fund only)
The Directors have decided that the best method for determining the
value of portfolio instruments for the Money Market Fund is amortized
cost. Under this method, portfolio instruments are valued at the
acquisition cost as adjusted for amortization of premium or accumulation
of discount rather than at current market value.
The Money Market Fund's use of the amortized cost method of valuing
portfolio instruments depends on its compliance with the provisions of
Rule 2a-7 (the "Rule") promulgated by the Securities and Exchange
Commission under the Act. Under the Rule, the Directors must establish
procedures reasonably designed to stabilize the net asset value per
share, as computed for purposes of distribution and redemption, at $1.00
per share, taking into account current market conditions and the Fund's
investment objective.
Under the Rule, the Money Market Fund is permitted to purchase
instruments which are subject to demand features or standby commitments.
As defined by the Rule, a demand feature entitles the Fund to receive
the principal amount of the instrument from the issuer or a third party
on (1) no more than 30 days' notice or (2) at specified intervals not
exceeding 397 days on no more than 30 days' notice. A standby commitment
entitles the Fund to achieve same-day settlement and to receive an
exercise price equal to the amortized cost of the underlying instrument
plus accrued interest at the time of exercise.
The Money Market Fund acquires instruments subject to demand features
and standby commitments to enhance the instrument's liquidity. The Fund
treats demand features and standby commitments as part of the underlying
instruments, because the Fund does not acquire them for speculative
purposes and cannot transfer them separately from the underlying
instruments. Therefore, although the Fund defines demand features and
standby commitments as "puts," the Fund does not consider them to be
corporate investments for purposes of its investment policies.
Monitoring Procedures. The Directors' procedures include monitoring the
relationship between the amortized cost value per share and the net
asset value per share based upon available indications of market value.
The Directors will decide what, if any, steps should be taken if there
is a difference of more than 0.5 of 1% between the two values. The
Directors will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity) to
minimize any material dilution or other unfair results arising from
differences between the two methods of determining net asset value.
Investment Restrictions. The Rule requires that the Money Market Fund
limit its investments to instruments that, in the opinion of the
Directors, present minimal credit risks and have received the requisite
rating from one or more NRSROs. If the instruments are not rated, the
Directors must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instrument with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Money
Market Fund will invest its available cash to reduce the average
maturity to 90 days or less as soon as possible. Shares of investment
companies purchased by the Fund will meet these same criteria and will
have investment policies consistent with Rule 2a-7.
Under the amortized cost method of valuation, neither the amount of
daily income nor the net asset value is affected by any unrealized
appreciation or depreciation of the portfolio. In periods of declining
interest rates, the indicated daily yield on shares of the Money Market
Fund, computed based upon amortized cost valuation, may tend to be
higher than a similar computation made by using a method of valuation
based upon market prices and estimates. In periods of rising interest
rates, the indicated daily yield on shares of the Fund computed the same
way may tend to be lower than a similar computation made by using a
method of calculation based upon market prices and estimates.
Market Values (All Other Funds)
Market values of portfolio securities of Funds other than the Money
Market Fund are determined as follows:
o for domestic equity securities and foreign securities, according
to the last reported sales price on a recognized securities
exchange, if available;
o in the absence of recorded sales for domestic equity securities,
according to the mean between the last closing bid and asked
prices;
o in the absence of reported sales prices for foreign securities or
if the foreign security is traded over-the-counter, according to
the last reported bid price;
o for domestic bonds and other fixed income securities, at the last
sales price on a national securities exchange if available,
otherwise as determined by an independent pricing service;
o for domestic short-term obligations, according to the mean between
bid and asked price as furnished by an independent pricing
service;
o for short-term obligations with remaining maturities of less than
60 days at the time of purchase, at amortized cost, which
approximates fair value; or
o at fair value as determined in good faith by the Directors.
If a security is traded on more than one exchange, the price on the
primary market for that security, as determined by the Fund's adviser or
subadviser, is used. Prices provided by independent pricing services
may be determined without relying exclusively on quoted prices and may
reflect institutional trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data.
The Funds will value futures contracts, and options on stocks, stock
indices and futures contracts at their market values established by the
exchanges at the close of option trading on such exchanges unless the
Directors determine in good faith that another method of valuing these
positions is necessary.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing its net asset
value, the International Stock Fund values foreign securities at the
latest closing price on the exchange on which they are traded
immediately prior to the closing of the New York Stock Exchange. Certain
foreign currency exchange rates may also be determined at the latest
rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars
at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined
and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities
may be valued at their fair value as determined in good faith by the
Directors, although the actual calculation may be done by others.
Redemption in Kind
Although the Corporation intends to redeem shares in cash, it reserves
the right under certain circumstances to pay the redemption price in
whole or in part by a distribution of securities from a Fund's
portfolio. To the extent available, such securities will be readily
marketable.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Directors determine to be fair and equitable.
The Corporation has elected to be governed by Rule 18f-1 under the Act,
which obligates the Corporation to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of a Fund's net asset
value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur transaction costs.
Banking Laws
Banking laws and regulations presently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any
bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end
management investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, or
distributing securities. However, such banking laws and regulations do
not prohibit such a holding company, affiliate, or banks generally from
acting as investment adviser, transfer agent or custodian to such an
investment company or from purchasing shares of such a company as agent
for and upon the order of such a customer. M&I Corp. is subject to such
banking laws and regulations.
M&I Corp. believes, based on the advice of its counsel, that M&I
Investment Management Corp. may perform the services contemplated by the
investment advisory agreement with the Corporation without violation of
the Glass-Steagall Act or other applicable banking laws or regulations.
Changes in either federal or state statutes and regulations relating to
the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of such present or future statutes and regulations,
could prevent M&I Investment Management Corp. or M&I Corp. from
continuing to perform all or a part of the services described in the
prospectus for its customers and/or the Fund. If M&I Investment
Management Corp. and M&I Corp. were prohibited from engaging in these
activities, the Directors would consider alternative advisers and means
of continuing available investment services. In such event, changes in
the operation of the Fund may occur, including possible termination of
any automatic or other Fund share investment and redemption services
then being provided by M&I Investment Management Corp. and M&I Brokerage
Services or MFIS. It is not expected that existing shareholders would
suffer any adverse financial consequences if another adviser with
equivalent abilities to M&I Investment Management Corp. is found as a
result of any of these occurrences.
State securities laws governing the ability of depository institutions
to act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks
and financial institutions may be required to register as dealers
pursuant to state law.
Tax Status
The Funds' Tax Status
The Funds will pay no federal income tax because each Fund expects to
meet the requirements of Subchapter M of the Internal Revenue Code
applicable to regulated investment companies and to receive the special
tax treatment afforded to such companies. To qualify for this treatment,
each Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
There are tax uncertainties with respect to whether increasing rate
securities will be treated as having an original issue discount. If it
is determined that the increasing rate securities have original issue
discount, a holder will be required to include as income in each taxable
year, in addition to interest paid on the security for that year, an
amount equal to the sum of the daily portions of original issue discount
for each day during the taxable year that such holder holds the
security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a
taxable exchange. In the event it is determined that an extension of
maturity is a taxable exchange, a holder will recognize a taxable gain
or loss, which will be a short-term capital gain or loss if the holder
holds the security as a capital asset, to the extent that the value of
the security with an extended maturity differs from the adjusted basis
of the security deemed exchanged therefor.
Foreign Taxes
Investment income on certain foreign securities may be subject to
foreign withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes
to which a Fund would be subject. However, if a Fund may invest in the
stock of certain foreign corporations that constitute a Passive Foreign
Investment Company (PFIC), then federal income taxes may be imposed on a
Fund upon disposition of PFIC investments.
Shareholders' Tax Status
The dividends received deduction for corporations will apply to ordinary
income distributions to the extent the distribution represents amounts
that would qualify for the dividends received deduction to the Equity
Funds if the Equity Funds were a regular corporation, and to the extent
designated by the Equity Funds as so qualifying. Otherwise, these
dividends and any short-term capital gains are taxable as ordinary
income. No portion of any income dividends paid by the other Funds is
eligible for the dividends received deduction available to corporations.
These dividends, and any short-term capital gains, are taxable as
ordinary income.
Capital Gains
Capital gains, when experienced by the Fund, could result in an increase
in dividends. Capital losses could result in a decrease in dividends.
When a Fund realizes net long-term capital gains, it will distribute
them at least once every 12 months.
Total Return
The average annual total return for a Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned
at the end of the period by the net asset value per share at the end of
the period. The number of shares owned at the end of the period is based
on the number of shares purchased at the beginning of the period with
$1,000, adjusted over the period by any additional shares, assuming the
quarterly reinvestment of any dividends and distributions.
Stock Fund's average annual total return for the one-year period ended
August 31, 1994, and for the period from November 23, 1992 (date of
initial public investment), to August 31, 1994 were 0.44% and 1.19%,
respectively. Value Equity Fund's cumulative total return for the
period from September 30, 1993 (start of performance), to August 31,
1994, was 10.59%. Equity Income Fund's cumulative total return for the
period from October 1, 1993 (date of initial public investment) to
August 31, 1994, was 2.02%. Mid-Cap Stock Fund's cumulative total
return for the period from October 1, 1993 (date of initial public
investment) to August 31, 1994, was (2.74%). Short-Term Income Fund's
average annual total return for the one-year period ended August 31,
1994, and for the period from November 2, 1993 (date of initial public
investment), to August 31, 1994 were 2.05% and 3.06%, respectively.
Intermediate Bond Fund's average annual total return for the one-year
period ended August 31, 1994, and for the period from November 23, 1992
(date of initial public investment), to August 31, 1994 were (2.02%) and
3.23%, respectively. Government Income Fund's average annual total
return for the fiscal year ended August 31, 1994, and for the period
from December 14, 1992 (date of initial public investment) to August 31,
1994 were (1.34%) and 2.86%, respectively. Short-Term Tax Free Fund's
average annual total return for the period from February 2, 1994 (date
of initial public investment) to August 31, 1994, was 0.98%.
Intermediate-Tax-Free Fund's average annual total return for the period
from February 2, 1994 (date of initial public investment) to August 31,
1994, was (0.94%).
Yield
The Money Market Fund calculates the yield for both classes of shares
daily, based upon the seven days ending on the day of the calculation,
called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned
from the original one Share and all dividends declared on the
original and any purchased shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The Money Market Fund's yield for Class A Shares (formerly Trust Shares)
for the seven-day period ended August 31, 1994, was 4.31%. The Fund's
yield for Class B Shares (formerly Investment Shares) was 4.01% for the
same period.
The yield for the other Funds is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by the Fund over a thirty-day period by the offering
price per share of the Fund on the last day of the period. This value is
annualized using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by
the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends
or other distributions paid to shareholders. Stock Fund's yield for the
30-day period ended August 31, 1994, was 0.81%. Value Equity Income
Fund's yield for the 30-day period ended August 31, 1994, was 1.74%.
Equity Income Fund's yield for the 30-day period ended August 31, 1994,
was 3.30%. Mid-Cap Stock Fund's yield for the 30-day period ended
August 31, 1994, was 0.29%. Short-Term Income Fund's yield for the 30-
day period ended August 31, 1994, was 5.42%. Intermediate Bond Fund's
yield for the 30-day period ended August 31, 1994, was 5.79%.
Government Income Fund's yield for the 30-day period ended August 31,
1994, was 6.34%. Short-Term Tax-Free Fund's yield for the 30-day period
ended August 31, 1994, was 3.74%. Intermediate Tax-Free Fund's yield
for the 30-day period ended August 31, 1994, was 4.27%.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in a Fund, performance will be reduced for those shareholders paying
those fees.
Effective Yield (Money Market Fund only)
The Money Market Fund's effective yield for both classes of shares is
computed by compounding the unannualized base period return by: adding 1
to the base period return; raising the sum to the 365/7th power; and
subtracting 1 from the result. The Money Market Fund's effective yield
for Class A Shares (formerly Trust Shares) for the seven-day period
ended August 31, 1994, was 4.40%. The Money Market Fund's effective
yield for Class B Shares (formerly Investment Shares) was 4.09% for the
same period.
Tax-Equivalent Yield (Tax-Free Income Funds only)
The tax-equivalent yield of the Tax-Free Income Funds is calculated
similarly to the yield, but is adjusted to reflect the taxable yield
that these Funds would have had to earn to equal its actual yield,
assuming a 39.6% tax rate (the maximum marginal federal rate for
individuals) and assuming that income is 100% tax-exempt. Short-Term
Tax-Free Fund's tax-equivalent yield for the 30-day period ended August
31, 1994, was 5.19%. The tax-equivalent yield for Intermediate Tax-Free
Fund was 5.93% for the same period.
Tax-Equivalency Table
The Tax-Free Income Funds may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in these Funds' portfolio generally remains free from federal
income tax* and is often free from state and local taxes as well. As
the table on the next page indicates, a "tax-free" investment is an
attractive choice for investors, particularly in times of narrow spreads
between tax-free and taxable yields.
TAX-FREE YIELD VS. TAXABLE YIELD
1994 Federal Income Tax Bracket:
15.00% 28.00% 31.00% 36.00%
39.60%
Joint Return:$1-36,900 $36,901-89,150$89,151-140,000$140,001-250,000Over $
250,000
Single Return:$1-22,000$22,101-53,500$53,501-115,000$115,001-250,000Over $
250,000
Tax-Free
Yield Taxable Yield Equivalent
2.50% 2.94% 3.47% 3.62% 3.91%
4.14%
3.00 3.53 4.17 4.35 4.69%
4.97%
3.50 4.12 4.86 5.07 5.47%
5.79%
4.00 4.71 5.56 5.80 6.25%
6.62%
4.50 5.29 6.25 6.52 7.03%
7.45%
5.00 5.88 6.94 7.25 7.81%
8.28%
5.50 6.47 7.64 7.97 8.59%
9.11%
6.00 7.06 8.33 8.70 9.38%
9.93%
6.50 7.65 9.03 9.42 10.16%
10.76%
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of the Funds.
* Some portion of the Tax-Free Funds' income may be subject to the
federal alternative minimum tax and state and local taxes.
Performance Comparisons
A Fund's performance depends upon such variables as: portfolio quality;
average portfolio maturity; type of instruments in which the portfolio
is invested; changes in interest rates and market value of portfolio
securities; changes in Fund or class expenses; the relative amount of
Fund cash flow; and various other factors.
Investors may use financial publications and/or indices to obtain a more
complete view of a Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Morgan Stanley Capital International Europe, Australia And Far
East Index (EAFE) is a market capitalization weighted foreign
securities index, which is widely used to measure the performance
of European, Australian and New Zealand and Far Eastern stock
markets. The index covers approximately 1,020 companies drawn from
18 countries in the above regions. The index values its securities
daily in both U.S. dollars and local currency and calculates total
returns monthly. EAFE U.S. dollar total return is a net dividend
figure less Luxembourg withholding tax. The EAFE is monitored by
Capital International, S.A., Geneva, Switzerland.
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in net asset value over a specific period of time. From
time to time, a Fund will quote its Lipper ranking in advertising
and sales literature.
o Consumer Price Index is generally considered to be a measure of
inflation.
o Dow Jones Industrial Average ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public
utilities, and transportation companies. Produced by the Dow Jones
& Company, it is cited as a principal indicator of market
conditions.
o Standard & Poor's Daily Stock Price Index Of 500 Common Stocks, a
composite index of common stocks in industry, transportation,
financial, and public utility companies. The Standard & Poor's
index assumes reinvestment of all dividends paid by stocks listed
on the index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in the
Standard & Poor's figures.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates
more than 1,000 NASDAQ-listed mutual funds of all types, according
to their risk-adjusted returns. The maximum rating is five stars,
and ratings are effective for two weeks.
o Bank Rate Monitor National Index, Miami Beach, Florida, is a
financial reporting service which publishes weekly average rates
of 50 leading bank and thrift institution money market deposit
accounts. The rates published in the index are an average of the
personal account rates offered on the Wednesday prior to the date
of publication by ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. Account
minimums range upward from $2,500 in each institution and
compounding methods vary. If more than one rate is offered, the
lowest rate is used. Rates are subject to change at any time
specified by the institution.
o Donoghue's Money Fund Report publishes annualized yields of over
300 taxable money market funds on a weekly basis and through its
Money Market Insight publication reports monthly and 12 month-to-
date investment results for the same money funds.
o Lipper Growth and Income Fund Average is an average of the
performance, adjusted for capital gains distributions and income
dividends, of the Lipper Growth and Income Fund category. Lipper
calculations do not include the sales charges imposed by other
funds.
o Lipper Growth and Income Fund Index is an index of the net asset
value weighted performance, adjusted for capital gains
distributions and income dividends, of the largest thirty growth
and income funds provided by Lipper Analytical Services. Lipper
calculations do not include the sale charges imposed by other
funds.
o Lipper Growth Fund Average is an average of the performance,
adjusted for capital gains distributions and income dividends, of
the Lipper Growth Fund category. Lipper calculations do not
include the sale charges imposed by other funds.
o Lipper Growth Fund Index is an index of the net asset weighted
performance, adjusted for capital gains distributions and income
dividends, off the largest thirty growth funds provided by Lipper
Analytical Services. Lipper calculations do not include the sale
charges imposed by other funds.
o Lipper Equity Income Fund Average is an average of the
performance, adjusted for capital gains distributions and income
dividends, of the Lipper Equity Income Fund category. Lipper
calculations do not include the sale charges imposed by other
funds.
o Lipper Equity Income Fund Index is an index of the net asset value
weighted performance, adjusted for capital gain distributions and
income dividends, of the largest thirty equity income funds
provided by Lipper Analytical Services. Lipper calculations do
not include the sale charges imposed by other funds.
o The S&P/BARRA Value Index and the S&P/BARRA Growth Index are
constructed by Standard & Poor's and BARRA, Inc., an investment
technology and consulting company, by separating the S&P 500 Index
into value stocks and growth stocks. The S&P/BARRA Growth and
S&P/BARRA Value Indices are constructed by dividing the stocks in
the S&P 500 Index according to their price-to-book ratios. The
S&P/BARRA Growth Index, contains companies with higher price-to-
earnings ratios, low dividends yields, and high earnings growth
(concentrated in electronics, computers, health care, and drugs).
The Value Index contains companies with lower price-to-book ratios
and has 50% of the capitalization of the S&P 500 Index. These
stocks tend to have lower price-to-earnings ratios, high dividend
yields, and low historical and predicted earnings growth
(concentrated in energy, utility and financial sectors). The
S&P/BARRA Value and S&P/BARRA Growth Indices are capitalization-
weighted and rebalanced semi-annually. Standard & Poor's/BARRA
calculates these total return indices with dividends reinvested.
o The S&P/BARRA Equity Income Index is constructed by sorting the
constituents of the S&P 500 according to their yields. The S&P
500 is divided into two halves, such that the total capitalization
of the higher yield firms approximately equals that of the lower
yield firms. These higher yielding stocks constitute the
S&P/BARRA Equity Income Index, which is capitalization-weighted
and rebalanced semi-annually. These higher yielding firms tend to
display low historical and predicted earnings growth (concentrated
in utilities, financial and energy sections). BARRA, an
investment technology and consulting company, calculates the total
return of the index with dividends reinvested.
o Standard & Poor's Midcap 400 Stock Price Index, a composite index
of 400 common stocks with market capitalizations between $200
million and $7.5 billion in industry, transportation, financial,
and public utility companies. The Standard & Poor's index assumes
reinvestment of all dividends paid by stocks listed on the index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's
figures.
o Merrill Lynch 1-3 Year Treasury Index is an unmanaged index
tracking short-term U.S. government securities with maturities
between 1 and 2.99 years. The index is produced by Merrill Lynch,
Pierce, Fenner & Smith, Inc.
o Merrill Lynch Corporate Master is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or
better. These quality parameters are based on the composites of
ratings assigned by Standard & Poor's Corporation and Moody's
Investors Service, Inc. Only bonds with a minimum maturity of one
year are included.
o Merrill Lynch 1-Year Treasury Bill Index is comprised of the most
recently issued one-year U.S. Treasury bills. Index returns are
calculated as total returns for periods of one, three, six and
twelve months as well as year-to-date.
o Merrill Lynch Corporate A-Rated (1-3 Year) Bond Index is a
universe of corporate bonds and notes with maturities between 1-3
years and rated A3 or higher.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include: non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporation; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Traced by Lehman Brothers, Inc., the index calculates
total return for one-month, three-month, twelve-month, and ten-
year periods and year-to-date.
o Lehman Brothers Intermediate Government/Corporate Bond Index is a
universe of government and corporate bonds rated BBB or higher
with maturities between 1-10 years.
o The Salomon Brothers Total Rate-of-Return Index for mortgage pass
through securities reflects the entire mortgage pass through
market and reflects their special characteristics. The index
represents data aggregated by mortgage pool and coupon within a
given sector. A market weighted portfolio is constructed
considering all newly created pools and coupons.
o The Merrill Lynch Taxable Bond Indices include U.S. Treasury and
agency issues and were designed to keep pace with structural
changes in the fixed income market. The performance indicators
capture all rating changes, new issues, and any structural changes
of the entire market.
o Lehman Brothers Mortgage-Backed Securities Index is a universe of
fixed rate securities backed by mortgage pools of Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corp. (FHLMC), and Federal National Mortgage Association (FNMA).
o Lehman Brothers Five-Year State General Obligations Bonds is an
index comprised of all state general obligation debt issues with
maturities between four and six years. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures are
total returns calculated for one, three, and twelve month periods
as well as year-to-date. Total returns are also calculated as of
the index inception, December 31, 1979.
o Lehman Brothers Three-Year State General Obligations Bonds is an
index comprised of the same issues noted above except that the
maturities range between two and four years. Index figures are
total returns calculated for the same periods as listed above.
Investors may also consult the fund evaluation consulting universes
listed below. Consulting universes may be composed of pension, profit
sharing, commingled, endowment/foundation, and mutual funds.
o Fiduciary Consulting Grid Universe, for example, is composed of
over 1,000 funds, representing 350 different investment managers,
divided into subcategories based on asset mix. The funds are
ranked quarterly based on performance and risk characteristics.
o SEI Data Base for equity funds includes approximately 900 funds,
representing 361 money managers, divided into fund types based on
investor groups and asset mix. The funds are ranked every three,
six, and twelve months.
o Mercer Meidinger, Inc. compiles a universe of approximately 600
equity funds, representing about 500 investment managers, and
updates their rankings each calendar quarter as well as on a one,
three, and five year basis.
Advertisements and other sales literature for a Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in a Fund based on quarterly reinvestment of dividends over a
specified period of time.
Financial Statements
The financial statements for the fiscal period ended August 31, 1994,
are incorporated herein by reference from the Funds' Annual Reports
dated August 31, 1994 (File Nos. 33-48907 and 811-58433). A copy of the
Annual Report for a Fund may be obtained without charge by contacting
Marshall Funds Investor Services at the address located on the back
cover of the combined prospectus or by calling Marshall Funds Investor
Services at 414-287-8500 or 1-800-236-8560.
Appendix
Standard and Poor's Ratings Group Bond Ratings
AAA--Debt rated AAA has the highest rating assigned by Standard &
Poor's. 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 higher rated 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 than debt in
higher rated categories.
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 higher
rated categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
PLUS (+) OR MINUS (-):--The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Moody's Investors Service, Inc. Corporate Bond Ratings
AAA--Bonds which are 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A--Bonds which are 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 which are 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.
NR--Not rated by Moody's.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment.
NR--NR indicates that Fitch does not rate the specific issue.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. The issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Services, Inc. Commercial Paper Ratings
P-1--Issuers rated PRIME-1 (for 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: conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation;
and well-established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (for related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Fitch Investors Service, Inc. Short-Term Ratings
F-1+--(Exceptionally Strong Credit Quality). Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1--(Very Strong Credit Quality). Issues assigned to this rating
reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2--(Good Credit Quality). Issues carrying this rating have a
satisfactory degree of assurance for timely payment but the margin of
safety is not as great as the F-1+ and F-1 categories.
Standard and Poor's Ratings Group Municipal Bond Ratings
AAA -- Debt rated AAA has the highest rating assigned by Standard &
Poor's. 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 higher rated 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 than debt in
higher rated categories.
NR -- NR indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that Standard
& Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or minus (-): The ratings "AA" and "A" may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
Moody's Investors Service, Inc. Municipal Bond Ratings
Aaa -- Bonds which are 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A -- Bonds which are 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 some time in the future.
NR -- Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in the generic rating
classification of "Aa" and "A" in its corporate or municipal 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.
Standard and Poor's Corporation Municipal Note Ratings
SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc. Short-Term Debt Ratings
MIG1/VMIG1 -- This designation denotes best quality. There is a present
strong protection by established cash flows, superior liquidity support
or demonstrated broad based access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
G00714-02 (1/1/95)
