LOGO
The shares offered in this prospectus represent interests in MARSHALL SMALL-CAP
STOCK FUND ("Fund"), a diversified investment portfolio of Marshall Funds, Inc.
(the "Corporation"), an open-end management investment company (a mutual fund).
The investment objective of the Fund is to seek appreciation of capital. The
Corporation has the following eleven separate investment portfolios. Each
portfolio (individually, a "Marshall Fund" and collectively, the "Marshall
Funds") offers its own shares and has a distinct investment goal to meet
specific investor needs.
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EQUITY FUNDS TAX-FREE INCOME FUND
- MARSHALL EQUITY INCOME FUND - MARSHALL INTERMEDIATE TAX-FREE FUND
- MARSHALL VALUE EQUITY FUND
- MARSHALL STOCK FUND
- MARSHALL MID-CAP STOCK FUND
- MARSHALL INTERNATIONAL STOCK FUND
- MARSHALL SMALL-CAP STOCK FUND
INCOME FUNDS MONEY MARKET FUND
- MARSHALL SHORT-TERM INCOME FUND - MARSHALL MONEY MARKET FUND
- MARSHALL INTERMEDIATE BOND FUND
- MARSHALL GOVERNMENT INCOME FUND
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</TABLE>
This prospectus relates only to shares of the Fund and contains the information
you should read and know before you invest. 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 ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
THE PRINCIPAL AMOUNT INVESTED.
The Fund has also filed a Statement of Additional Information dated September 1,
1996 with the Securities and Exchange Commission ("SEC"). 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 or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge, obtain other information, or
make inquiries about the Fund by writing to or calling Marshall Funds Investor
Services at 1-414-287-8555, 1-800-236-FUND(3863), or 1-800-236-8554, or M&I
Brokerage Services, Inc. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
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.
September 1, 1996
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TABLE OF CONTENTS
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PAGE
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Table of Contents.................................................................................. 2
Summary of Investment Information.................................................................. 3
Who May Want To Invest In The Corporation?.................................................... 3
Who Manages The Funds?........................................................................ 3
What About Investment Risks?.................................................................. 3
How to Buy And Sell Shares?................................................................... 4
Summary of Fund Expenses........................................................................... 5
Fund Objective and Policies........................................................................ 6
How to Buy Fund Shares............................................................................. 7
Minimum Investments........................................................................... 7
Net Asset Value............................................................................... 8
How to Redeem Shares............................................................................... 8
Additional Conditions......................................................................... 9
Exchange Privilege................................................................................. 10
Telephone Transactions............................................................................. 10
Marshall Funds, Inc. Information................................................................... 11
Organization and History...................................................................... 11
Management.................................................................................... 11
Distribution of Fund Shares................................................................... 11
Administration of the Fund......................................................................... 12
Brokerage Transactions........................................................................ 13
Expenses of the Fund.......................................................................... 13
Certificates and Confirmations................................................................ 13
Dividends and Capital Gains................................................................... 13
Common Stock and Voting Rights................................................................ 13
Performance Information............................................................................ 14
Portfolio Investments and Strategies............................................................... 14
Additional Investment Risks................................................................... 18
Tax Information.................................................................................... 19
Federal Income Tax............................................................................ 19
State and Local Taxes......................................................................... 19
Effect of Banking Laws............................................................................. 19
Addresses.......................................................................................... 20
</TABLE>
2
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SUMMARY OF INVESTMENT INFORMATION
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WHO MAY WANT TO INVEST IN THE CORPORATION?
The Corporation offers investment opportunities to a wide range of investors,
from those who may be investing for the short term and wish to take little
investment risk to those with long-term goals willing to bear the risks of the
stock market for potentially greater rewards. The Corporation currently offers
the following eleven professionally-managed, diversified portfolios:
- MARSHALL 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 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 STOCK FUND--seeks growth of capital and income by investing
primarily in common stocks of companies with an established market;
- MARSHALL 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--seeks long-term capital growth by
investing primarily in equity securities of companies and governments
outside the United States;
- MARSHALL SMALL-CAP STOCK FUND--seeks appreciation of capital by investing
primarily in common and preferred stocks issued by small-sized companies
whose market capitalizations are under $1 billion;
- MARSHALL 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--seeks to maximize total return
consistent with current income by investing primarily in
intermediate-term high-grade bonds and notes;
- MARSHALL 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 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--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 Marshall 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 MARSHALL
INTERNATIONAL STOCK FUND.
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WHAT ABOUT INVESTMENT RISKS?
All mutual funds, including the Marshall Funds, take investment risks. The STOCK
FUNDS must contend with the volatility and unpredictability of the U.S. stock
market. The MARSHALL INTERNATIONAL STOCK FUND may experience additional
uncertainty in foreign markets and with foreign currency transactions. The
MARSHALL SMALL-CAP STOCK FUND involves special risks since it invests primarily
in stocks of smaller-capitalized companies, which have historically been more
volatile than stocks of larger companies. 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 increase with the
lengthening of their maturities. Some of the Marshall 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 Marshall Fund may invest at
3
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" and "Additional Investment Risks."
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 explains the investment potential and corresponding risks associated
with different types of mutual funds and investments. The Marshall Funds are
listed under the relevant categories.
At the top of the chart are equity funds and stocks, 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 and bonds, which offer a middle range of potential risk
and return. At the bottom of the chart are money market funds and money market
instruments, 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.
HIGHER POTENTIAL RETURN AND RISK
Equity Funds and Stocks
Marshall Small-Cap Stock Fund
Marshall International Stock Fund
Marshall Mid-Cap Stock Fund
Marshall Stock Fund
Marshall Value Equity Fund
Marshall Equity Income Fund
Income Funds and Bonds [ARTWORK]
Marshall Government Income Fund
Marshall Intermediate Tax-Free Fund
Marshall Intermediate Bond Fund
Marshall Short-Term Income Fund
Money Market Funds and
Money Market Instruments
Marshall Money Market Fund
LOWER POTENTIAL RETURN AND RISK
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HOW TO BUY AND SELL SHARES?
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You may buy and sell shares of any of the Marshall Funds through several related
Marshall & Ilsley companies 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 Marshall 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 Marshall 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."
4
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SUMMARY OF FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)...................... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).............................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)........................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................. None
Exchange Fee....................................................................................... None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fees.................................................................................... 1.00%
12b-1 Fees (after waiver)(1)....................................................................... 0.00%
Total Other Expenses............................................................................... 0.62%
Shareholder Servicing Fee............................................................ 0.25%
Total Annual Fund Operating Expenses..................................................... 1.62%
</TABLE>
(1) The Fund has no present intention of paying or accruing 12b-1 fees during
the fiscal year ending August 31, 1997. If the Fund were paying or accruing
12b-1 fees, the Fund would be able to pay up to 0.25% of its average daily net
assets for 12b-1 fees. See "Marshall Funds, Inc. Information."
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending August 31, 1997. During
the course of this period, expenses may be more or less than the average
amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS
COSTS AND EXPENSES THAT A SHAREHOLDER WILL BEAR, EITHER DIRECTLY OR INDIRECTLY.
FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING
IN THE FUND" AND "MARSHALL FUNDS, INC. INFORMATION." Wire-transferred
redemptions may be subject to an additional fee.
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EXAMPLE 1 YEAR 3 YEARS
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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 Fund charges no
redemption fees....................................................................... $16 $ 51
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THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING AUGUST 31, 1997.
5
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FUND OBJECTIVE AND
POLICIES
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The investment objective of the 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
small-sized companies whose market capitalizations are under $1 billion. The
Fund's investment 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. The investment
objective of the Fund cannot be changed without shareholder approval. While the
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 the 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.
Acceptable investments for the Fund include the following:
- common stocks of U.S. companies that are either listed on the New York or
American Stock Exchange, or other domestic exchange, or traded in
over-the-counter markets;
- 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 (see "Convertible Securities" in the "Portfolio and
Investments and 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) 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, of comparable quality
as determined by the adviser;
- American Depositary Receipts ("ADRs") (limited to 20% of the Fund's net
assets);
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- put and call options on securities and indices and futures contracts;
- swap transactions, including interest rate and index-based swaps;
- commercial paper rated "investment grade" by an NRSRO, or, if unrated, of
comparable quality as determined by the Fund's adviser;
- foreign and domestic Bank Instruments (as defined under "Portfolio
Investments and Strategies");
- warrants (no more than 5% of the Fund's net assets);
- repurchase agreements; and
- shares of other investment companies.
Notwithstanding the limits set forth above, the Fund may invest up to 5% of its
net assets in foreign securities other than ADRs. In addition, the Fund may also
engage in borrowing.
6
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HOW TO BUY FUND SHARES
- -------------------------------------------------------------
You can buy shares of the 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 3:00 p.m. (Central Time) to get that day's net asset
value. See "Net Asset Value" below. The Fund reserves the right to reject any
purchase request.
Investors may purchase Fund shares by contacting Marshall Funds Investor
Services ("MFIS") at 1-800-236-FUND(3863) or 1-800-236-8554, by placing a
purchase order through any M&I Bank employing a representative of M&I Brokerage
Services, or by any of the following methods.
You may place a purchase order through any authorized broker-dealer or financial
institution, including a broker-dealer or institution that may charge a
transaction fee for this service. If you purchase shares of the Fund through a
program of services offered or administered by a broker-dealer, financial
institution, or other service provider, you should read the program materials,
including information relating to fees, in conjunction with the Fund's
prospectus. Certain features of the Fund may not be available or may be modified
in connection with the program of services provided.
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") may
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-FUND(3863) or 1-800-236-8554, or through any
other authorized broker-dealer.
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MINIMUM INVESTMENTS
$1,000 To open an Account
$50 To add to an Account
(including through a
Systematic Investment
Program)
</TABLE>
The Fund may waive or lower these minimums from time to time, such as for M&I
Corp. employees.
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PHONE Contact MFIS. Complete an
1-800-236-FUND application for a new account.
(3863) OR If you authorized telephone
1-800-236-8554 exchange privileges in your
LOGO account application or by sub-
sequent authorization form, you may exchange shares
from another Marshall Fund having an identical
shareholder registration. See "Telephone
Transactions" on page 10 for more information.
</TABLE>
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MAIL To open a new Fund account, send
LOGO in your completed account
application and a check payable
to "Marshall Funds" to:
Marshall Funds Investor
Services
P.O. Box 1348
Milwaukee, WI 53201-1348
To add to your existing Fund Account, send in your
check, payable to the Fund, to the same address.
Indicate your Fund account number on the check.
PERSON Bring in your completed account
LOGO application (for new accounts)
and a check to Marshall Funds
Investor Services, 1000 North
Water Street (M-F 8-5 Central
Time), to any M&I Bank employing
a representative of M&I Brokerage
Services, or to any authorized
broker or dealer.
</TABLE>
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WIRE - First notify MFIS at
LOGO 1-800-236-FUND(3863) or
1-800-236-8554 by 3:00 p.m.
(Central Time).
- Then wire the money to:
M&I Marshall & Ilsley Bank
ABA Number 075000051
Credit to: Federated Shareholder
Services Company Deposit
Account Number 27480
Further credit to:
Marshall Small-Cap Stock
Fund
Re: [Shareholder name and
account number]
- If a new Fund Account, fax to
MFIS at 1-414-287-8511 and mail
a completed account application
to the Fund at the address
above under "Mail."
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7
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SYSTEMATIC You can have money automati-
INVESTMENT cally withdrawn from your
PROGRAM (EXISTING checking account on predeter-
ACCOUNTS ONLY) mined dates and invest it in
the Fund at the next Fund
share price determined after
MFIS receives the order. Investors purchasing shares
through the Systematic Investment Program are not
subject to the $1,000 minimum investment
requirement. Call MFIS at 1-800-236-FUND(3863) or
1-800-236-8554 to apply for this program.
</TABLE>
ADDITIONAL INFORMATION ABOUT ORDERS BY:
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CHECK If your check does not clear,
LOGO your purchase will be can-
celed and you will be charged
a $15 fee. Purchases ordered
by check are considered received after your check
is converted by MFIS into federal funds, which is
generally the next business day after MFIS re-
ceives your check.
</TABLE>
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WIRE Your bank may charge a fee
LOGO for wiring funds. Wire orders
are accepted only on days
when the Fund, M&I Bank and the Federal Reserve
wire system are open for business.
</TABLE>
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NET ASSET VALUE
- ------------------------------------------------------------
Shares of the 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 at or after the close of the New York Stock Exchange
(normally 3:00 p.m. Central time), Monday through Friday, except on: (i) days on
which there are not sufficient changes in the value of the 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.
It is the responsibility of MFIS, M&I Brokerage Services, any authorized
broker-dealer, financial institution or other service provider that has entered
into an agreement with the Fund, its distributor, or administrative or
shareholder services agent, to promptly submit purchase orders to the Fund.
The Fund's net asset value per share fluctuates. The net asset value for Fund
shares is determined by adding the market value of all securities and other
assets of the Fund, subtracting the liabilities of the Fund, and dividing the
remainder by the total number of outstanding shares. The net asset value of
shares of the Fund and the other Marshall Funds are listed daily in your
newspaper's mutual fund quotations section under the bold heading "MARSHALL
FUNDS."
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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, M&I Brokerage Services or any authorized
broker-dealer, financial institution or service provider. It is the
responsibility of MFIS, M&I Brokerage Services and any authorized broker-dealer,
financial institution or service provider to promptly submit redemption requests
to the Fund. Trust customers of M&I Trust Companies should contact their account
officer in order to make redemption requests. Redemption requests for the Fund
must be received by 3:00 p.m. (Central time) 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.
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PHONE If you have authorized the
1-800-236-FUND telephone redemption privi-
(3863) OR lege in your account appli-
1-800-236-8554 cation or by a subsequent
(EXCEPT RETIREMENT authorization form, you may
ACCOUNTS) redeem shares by tele-
LOGO 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 "Telephone Transactions" on
page 10 for more information.
</TABLE>
8
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MAIL Send in your written request
LOGO to the following address,
indicating your name, the
Fund's
name, your account number, and the number of
shares or the dollar amount you want to redeem to:
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-FUND(3863), or 1-800-236-8554.
PERSON Bring in written redemption
LOGO request with the information
described in "Mail" above to
any M&I Bank employing a representative of M&I
Brokerage Services, MFIS, 1000 North Water Street
(M-F 8-5 Central Time), or to any authorized
broker or dealer.
</TABLE>
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WIRE/ELECTRONIC Upon written request, re-
TRANSFER demption proceeds can be
LOGO 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 payments of
redemption orders will only be accepted on days
on which the Fund, M&I Bank, and the Federal
Reserve wire system are open for business.
Wire-transferred redemptions may be subject to an
additional fee.
</TABLE>
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SYSTEMATIC If you have a Fund account
WITHDRAWAL balance of at least
PROGRAM $10,000, then 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, M&I Brokerage
Services or an authorized broker-dealer, financial
institution or service provider to apply for this
program.
</TABLE>
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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 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, the 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. 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.
9
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EXCHANGE PRIVILEGE
- -------------------------------------------------------------
You may exchange shares of a Marshall Fund (including the Fund's shares) for
shares of any of the other Marshall Funds at net asset value without a sales
charge, provided you have received a copy of the current prospectus of the other
Marshall Fund, and you meet the investment minimum of the Marshall Fund. The
exchange privilege is available to shareholders residing in any state in which
the Marshall Fund shares you are acquiring may legally be sold.
Upon receipt of proper instructions and all necessary supporting documents, the
Marshall Fund's 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.
With the exception of Marshall Money Market Fund, the other Marshall Funds
currently offer only one class of shares. If such funds should add a second
class of shares, exchanges may be limited to shares of the same class of each
Marshall Fund.
EXCHANGING SECURITIES FOR FUND SHARES. The Fund may accept securities in
exchange for Fund shares. The Fund will allow such exchanges only upon prior
approval of the Fund and a determination by the Fund and the adviser 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. The Fund acquires the exchanged
securities for investment and not for resale.
Any interest accrued or dividends declared but not paid 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.
- -------------------------------------------------------------
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 Marshall Fund shares by exchanging between Marshall
Fund accounts that have identical shareholder registrations. Customers of other
broker-dealers, financial institutions, or service providers should contact
their account officer. 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 Marshall 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 the
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 Marshall 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.
10
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MARSHALL FUNDS, INC.
INFORMATION
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- -------------------------------------------------------------
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. Pursuant to an investment advisory contract with the
Corporation, M&I Investment Management Corp. serves as the investment adviser
(the "Adviser") to the Fund, subject to direction by the Directors. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase and sale of portfolio instruments, for which it
receives an annual fee from the Fund.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Marshall Funds and their
portfolio securities. These codes recognize that such persons owe a fiduciary
duty to the Marshall Funds' shareholders and must place the interests of
shareholders ahead of the employees' own interests. Among other things, the
codes: require preclearance and periodic reporting of personal securities
transactions; prohibit personal transactions in securities being purchased or
sold, or being considered for purchase or sale, by the Marshall Funds; prohibit
purchasing securities in initial public offerings; and prohibit taking profits
on securities held for less than sixty days. Violations of the codes are subject
to review by the Board of Directors, and could result in severe penalties.
ADVISORY FEES. The Adviser is entitled to receive an annual investment advisory
fee equal to 1.00%. The fee paid by the Fund 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 Fund. 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 at its sole discretion.
Investment decisions for the Fund will be made independently from those of any
fiduciary or other accounts that may be managed by the Adviser or its
affiliates. If, however, such accounts, the Fund, or the Adviser 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 Fund pays or receives,
or the size of the position it obtains, it may also enable the Fund 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
April 30, 1996, M&I Investment Management Corp. had approximately $7.3 billion
in assets under management and has managed investments for individuals and
institutions since its inception in 1973. The Adviser has managed the Fund since
its inception, has managed the other Marshall Funds since 1992, and managed the
Newton Funds (predecessors to certain of the Marshall Funds) 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 Fund 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.
The Fund is co-managed by Steve D. Hayward and David Lettenberger. Prior to
joining M&I Investment Management Corp. as Vice President in December 1993, Mr.
Hayward served as Senior Portfolio Manager of AMOCO Corporation and managed two
aggressive growth-oriented mutual funds for American Asset Capital Management.
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. Prior
to joining M&I Investment Management Corp. in 1993, Mr. Lettenberger was
employed by M&I Marshall & IIsley Bank. He has been an analyst on the Marshall
Mid-Cap Stock Fund since the fund's inception during 1993. Mr. Lettenberger
holds a B.B.A. degree in Finance and Economics from Marquette University and has
completed the Chartered Financial Analyst program.
- -------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
- -------------------------------------------------------------
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for shares of the Marshall Funds and a number of other
investment companies. The distributor may offer certain items of
11
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 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 Fund's
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 Fund.
DISTRIBUTION PLAN. Under a Rule 12b-1 Plan (the "Plan"), the Fund may pay to
the distributor an amount computed at an annual rate of 0.25% of the average
daily net asset value of Fund shares to finance any activity which is
principally intended to result in the sale of the shares subject to the Plan
("Plan Shares"). The distributor may, from time to time and for such periods as
it deems appropriate, voluntarily reduce its compensation under the Plan. The
Fund has no present intention of paying or accruing any fees under the Plan
during the fiscal year ending August 31, 1997.
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 the Fund reasonably requests. 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 Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, 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 amount or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings 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 broker-dealers, institutions and other service providers
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.
- -------------------------------------------------------------
ADMINISTRATION OF THE
FUND
- -------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services ("FAS"), a
subsidiary of Federated Investors, provides the Fund with certain administrative
personnel and services necessary to operate the Fund, such as legal and
accounting services. FAS provides these services for an annual fee equal to .12
of 1% of the Fund's average daily net assets.
The administrative fee received during any fiscal year shall be at least
$50,000. FAS may choose voluntarily to reimburse a portion of its fee at any
time.
SHAREHOLDER SERVICING ARRANGEMENTS. The Fund has entered into a Shareholder
Services Agreement
12
with Federated Shareholder Services Company, a subsidiary of Federated
Investors, under which the Fund may make payments up to 0.25% of the average
daily net asset value of shares of the Fund to obtain certain personal services
for shareholders and to maintain shareholder accounts ("Shareholder Services").
Under the Shareholder Services Agreement, Federated Shareholder Services will
either perform Shareholder Services directly or will select broker-dealers,
financial institutions or other service providers to perform Shareholder
Services (including Marshall Funds Investor Services, a division of M&I Trust
Company). Broker-dealers, financial institutions or other service providers will
receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay broker-dealers, financial institutions and other service
providers supplemental fees for their performance of sales services,
distribution-related support services, or Shareholder Services.
- -------------------------------------------------------------
BROKERAGE TRANSACTIONS
- -------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser 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 may give consideration to those
firms which have sold or are selling shares of the Fund and other mutual funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and select brokers and dealers subject to review by the
Directors.
- -------------------------------------------------------------
EXPENSES OF THE FUNDS
- -------------------------------------------------------------
The 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; Directors' fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Corporation, the Fund, and
shares of the 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 the Fund up to the amount of its advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
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CERTIFICATES AND CONFIRMATIONS
- -------------------------------------------------------------
As transfer agent for the Fund, Federated Shareholder 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 the
Fund. You may contact MFIS to direct the transfer agent to issue you
certificates or deliver certificates for redemption or credit to your account.
Federated Shareholder Services Company is a subsidiary of Federated Investors.
The Fund will 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 to cover the cost of obtaining this
information.
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DIVIDENDS AND CAPITAL GAINS
- -------------------------------------------------------------
Dividends of the Fund are declared and paid quarterly. Only shareholders
invested in the Fund on the record date of the dividend declaration are paid
that dividend. Capital gains, when realized by the Fund, will be distributed at
least once every 12 months. Unless you request cash payments by writing to the
Fund, your dividends and capital gains are automatically reinvested in
additional shares of the Fund on payment dates at the ex-dividend date net asset
value.
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COMMON STOCK AND VOTING RIGHTS
- -------------------------------------------------------------
The Directors have authorized the issuance of shares of Common Stock
representing ownership interests in the Fund. You are entitled to one vote for
each full share of Common Stock and proportionate fractional votes for
fractional shares. All shares of each Marshall Fund or class in the Corporation
have equal voting rights and will generally vote in the aggregate and not by
Marshall Fund or class, unless required by law. For example, only shares of a
particular Marshall Fund or class are entitled to vote on matters affecting that
Marshall Fund or class. Voting rights are not
13
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 Investment Company Act of 1940 or applicable law. Directors may
be removed by the Directors or 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.
- -------------------------------------------------------------
PERFORMANCE INFORMATION
- -------------------------------------------------------------
From time to time, the Fund may advertise total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the 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 Fund is calculated by dividing the net investment income per
share (as defined by the SEC) earned by a class of shares over a thirty-day
period by the offering price per share of that class of shares on the last day
of the period. This number is then annualized using semi-annual compounding. The
yield does not necessarily reflect income actually earned by that class of
shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
From time to time, the advertisements for the Fund may refer to ratings,
rankings, and other information in certain financial publications and/or compare
the performance of the Fund to certain indices.
The Fund is the successor to the portfolio of a collective trust fund managed by
the Adviser. It is anticipated that, at the Fund's commencement of operations,
the assets from the collective trust fund will be transferred to the Fund in
exchange for Fund shares. The Adviser has represented that the Fund's investment
objective, policies and limitations are in all material respects identical to
those of the collective trust fund.
The Fund's total return for the period from November 1, 1995 (date of
commencement of operations of the collective trust fund) to June 30, 1996 was
77.49%. The quoted performance data includes the performance of the collective
trust fund for periods before the Fund's registration statement became
effective, as adjusted to reflect the Fund's anticipated expenses as set forth
in the "Expenses of the Fund" section of this prospectus. The collective trust
fund was not registered under the Investment Company Act of 1940 ("1940 Act")
and therefore was not subject to certain investment restrictions that are
imposed by the 1940 Act. If the collective trust fund had been registered under
the 1940 Act, the performance may have been adversely affected.
- -------------------------------------------------------------
PORTFOLIO INVESTMENTS
AND STRATEGIES
- -------------------------------------------------------------
ASSET-BACKED SECURITIES. The Fund 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 Adviser. 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 Fund
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 Fund 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 FDIC. To a limited
extent (up to 5% of the Fund's total assets), the Fund 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 Fund will treat securities credit enhanced with a
bank's irrevocable letter of credit or unconditional guaranty as Bank
Instruments.
CONVERTIBLE SECURITIES. The Fund 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
14
determined by the Adviser. 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 Adviser 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. The 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 Adviser, 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.
DEPOSITARY RECEIPTS. The Fund may invest 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. 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
the 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.
ILLIQUID SECURITIES. These are any securities the Fund owns which it may not be
able to sell quickly (within seven days) at a fair price. The Fund's investments
in illiquid securities may not exceed 15% of its net assets.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, the Fund
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
total assets to broker/ dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the Adviser has determined are creditworthy
under guidelines established by the Directors and will receive collateral in the
form of cash, U.S. government securities or other high quality liquid money
market instruments equal to at least 100% of the value of the securities loaned.
Collateral received in the form of cash may be invested in highly liquid
investments, including repurchase agreements and other money market instruments.
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. The 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. 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. The 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 the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and Federal Home Loan National Mortgage Corporation ("Freddie
Mac").
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 Fund
15
invests 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.
OPTIONS ON SECURITIES OR INDICES AND FUTURES CONTRACTS. In order to hedge
against market shifts, the Fund may purchase put and call options on securities
or securities indices. In addition, the 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. The 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 50% of the net assets of the Fund. The 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 the 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 expiration dates and are purchased from a
clearing corporation. Exchange-traded options generally have a continuous liquid
market while over-the-counter options may not. 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.
The Fund may invest in futures for bona fide hedging purposes. Although the Fund
has the ability to invest up to 5% of its net assets in futures for other than
bona fide hedging purposes, it has no present intention of doing so. The ability
to engage in futures transactions is a fundamental investment policy. For
hedging purposes only, the 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 the 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 the 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.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities will be sold whenever the Fund's
Adviser 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 Fund anticipates its portfolio turnover rate will not exceed
200%. 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 the Fund's portfolio will be based upon investment
considerations and will not be limited by any other considerations when the
Fund's Adviser 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 circum-
16
stances 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.
The Fund's Adviser will evaluate downgraded securities on a case-by-case basis
and will sell any security determined not to be an acceptable investment.
RESTRICTED SECURITIES. The Fund may invest in restricted securities. These are
securities in which the Fund normally invests but which are subject to legal
restrictions when the Fund sells them. Restricted securities which are not
determined by the Directors to be liquid will be limited to 5% of the Fund's
total assets.
REPURCHASE AGREEMENTS. The securities in which the Fund invests 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 the 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 the Fund, the Fund could receive less than the repurchase price on any sale
of such securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund 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
total assets in any one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund 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 the 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 Fund will only purchase shares of other open-end investment companies whose
sales loads, if any, are less than 1.00% of their offering prices.
SWAP TRANSACTIONS. As one way of managing its exposure to different types of
investments, the Fund may invest up to 5% of its net assets in swap
transactions, including interest rate and index-based swaps. See "Investment
Objectives and Policies--Swap Transactions" in the Statement of Additional
Information.
TEMPORARY INVESTMENTS. When the Adviser judges that market conditions warrant a
defensive investment position, the Fund 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, and/or securities of other investment companies. The
Fund's temporary investments must be of comparable quality to its primary
investments.
U.S. GOVERNMENT SECURITIES. The Fund 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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause the 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, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions
17
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
- -------------------------------------------------------------
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 the Fund reinvests the payments and any unscheduled
prepayments of principal received, the 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 re-
registration 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.
STOCK MARKET. As with other mutual funds that invest primarily in equity
securities, the Fund is 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.
SMALL CAPITALIZATION STOCKS. However, because the Fund invests primarily
in small capitalization stocks, there are some additional risk factors
associated with an investment in the Fund. In particular, stocks in the
small capitalization sector of the United States equity market have
historically been more volatile in price than larger capitalization stocks,
such as those included in the S&P 500. This is because, among other things,
small companies have less certain growth prospects than 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 greater volatility, the stocks of small companies may, to
some degree, fluctuate independently of the stocks of large companies. That
is, the stocks of small companies may decline in price as the prices of
large company stocks rise or vice versa. Therefore, investors should expect
that the Fund, which invests primarily in small capitalization stocks, to
be more
18
volatile than, and may fluctuate independently of, broad stock market
indices such as the S&P 500.
FUTURES AND OPTIONS. When the 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 Adviser 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 Adviser 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
- -------------------------------------------------------------
The Fund will not pay federal income tax because it 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. The 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 Marshall Funds
of the Corporation, if any, will not be combined for tax purposes with those
realized by any of the other Marshall Funds, including the Fund.
Unless otherwise exempt, you are required to pay federal income tax on any
dividends and other distributions received, including capital gains
distributions. These tax consequences apply whether dividends are received in
cash or as additional shares. Distributions representing long-term capital
gains, if any, will be taxable to you as long-term capital gains no matter how
long you have held your shares. Information on the tax status of dividends and
distributions is provided annually.
- --------------------------------------------------------------
STATE AND LOCAL TAXES
- --------------------------------------------------------------
State laws differ on this issue, and you are urged to consult with your tax
adviser regarding the status of your account under state and local tax laws,
including treatment of distributions as income or return of capital.
- --------------------------------------------------------------
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 the Fund. In such event, the Directors would consider alternative
advisers and means of continuing available investment services.
19
- --------------------------------------------------------------------------------
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
MARSHALL SMALL-CAP STOCK FUND Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Investment Adviser
M & I Investment Management Corp. 1000 North Water Street
Milwaukee, Wisconsin 53202
- -----------------------------------------------------------------------------------------------------
Custodian
Marshall & Ilsley Trust Company 1000 North Water Street
Milwaukee, Wisconsin 53202
- -----------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------------
</TABLE>
Marshall Funds Investor Services
1000 North Water Street
PO Box 1348
Milwaukee, Wisconsin 53201-1348
1-414-287-8555,
1-800-236-FUND(3863),
or 1-800-236-8554
TDD: Speech and Hearing Impaired Services
800-209-3520
http://www.marshallfunds.com
Federated Securities Corp.
Distributor
G01756-01 (9/96)
20
MARSHALL SMALL-CAP STOCK FUND
(A PORTFOLIO OF MARSHALL FUNDS, INC.)
STATEMENT OF ADDITIONAL INFORMATION
September 1, 1996
This Statement of Additional Information should be read with the
prospectus, dated September 1, 1996, for shares of Marshall Small-Cap
Stock Fund (``Fund').
This Statement is not a prospectus itself. You may request a copy of a
prospectus or a paper copy of this Statement of Additional Information,
if you have received it electronically, free of charge, by writing or
calling Marshall Funds Investor Services at 1-414-287-8555, 1-800-FUND
(3863) or 1-800-236-8554 or 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 7
FUNDAMENTAL LIMITATIONS 7
NON-FUNDAMENTAL LIMITATIONS 8
MARSHALL FUNDS, INC. MANAGEMENT 10
OFFICERS AND DIRECTORS 10
FUND OWNERSHIP 12
DIRECTORS' COMPENSATION 12
INVESTMENT ADVISORY SERVICES 12
ADVISER TO THE FUND 12
ADVISORY FEES 13
STATE EXPENSE LIMITATIONS 13
OTHER SERVICES 13
ADMINISTRATAIVE SERVICES 13
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 13
CUSTODIAN 13
INDEPENDENT PUBLIC ACCOUNTANTS 13
BROKERAGE TRANSACTIONS 13
DISTRIBUTION PLAN 14
DETERMINING MARKET VALUE 14
MARKET VALUES 14
REDEMPTION IN KIND 15
BANKING LAWS 15
TAX STATUS 16
THE FUNDS' TAX STATUS 16
SHAREHOLDERS' TAX STATUS 16
CAPITAL GAINS 16
TOTAL RETURN 16
YIELD 16
PERFORMANCE COMPARISONS 17
ECONOMIC AND MARKET INFORMATION 18
APPENDIX 19
THIS STATEMENT CONTAINS ADDITIONAL INFORMATION ABOUT THE MARSHALL FUNDS,
INC. (THE `CORPORATION'') AND ITS MARSHALL SMALL-CAP STOCK FUND. 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.
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. The Fund will exchange or convert the
convertible securities held in its portfolio into shares of the underlying
common stocks when, in the Adviser'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 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.
DERIVATIVE CONTRACTS AND SECURITIES. The term derivative has traditionally
been applied to certain contracts (including, futures, forward, option and
swap contracts that `derive'' their value from changes in the value of an
underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these
contracts are also referred to as `derivatives.'' The term has also been
applied to securities `derived'' from the cash flows from underlying
securities, mortgages or other obligations. Derivative contracts and
securities can be used to reduce or increase the volatility of an
investment portfolio's total performance. While the response of certain
derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable sections of its prospectus or this statement of additional
information. To the extent that the Fund invests in securities that could
be characterized as derivatives, it will only do so in a manner consistent
with its investment objective, policies, and limitations.
FOREIGN SECURITIES. Investments in foreign securities, particularly those
of non-governmental issuers, involve considerations which are not
ordinarily associated with investments in domestic issues. These
considerations include the possibility of expropriation, the unavailability
of financial information or the difficulty of interpreting financial
information prepared under foreign accounting standards, less liquidity and
more volatility in foreign securities markets, the impact of political,
social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to
enforce contractual obligations abroad than would be the case in the United
States because of differences in the legal systems. Transaction costs in
foreign securities may be higher. the adviser will consider these and
other factors before investing in foreign securities and will not make such
investments unless, in its opinion, such investment will meet the Fund's
standards and objectives.
ECDs, ETDs, Yankee CDs, and Europaper are subject to somewhat different
risks than 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 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 the Fund's adviser in selecting these investments.
FUTURES AND OPTIONS TRANSACTIONS. As a means of reducing fluctuations in
the net asset value of shares of the 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. The 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. The 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.
The 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, the 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 the 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 for other than bona fide hedging purposes, 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, the 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.
The 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. The 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 the 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 the 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, the 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 the 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 the 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. The 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 the 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. The 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. The 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.
The 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. The 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. The 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 the Fund of options on stock indices will be subject to the
ability of the Fund's Adviser 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. The 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.
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 the 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 perfectly with the prices of
the securities 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. In addition, the Fund's Adviser could
be incorrect in its expectations about the direction or extent of
market factors such as stock price movements. 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 the Fund's
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. The 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, the 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 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 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.
LENDING OF PORTFOLIO SECURITIES. The collateral received when the 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.
INTEREST ONLY AND PRINCIPAL ONLY INVESTMENTS. Some of the securities
purchased by the 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 Fund. 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 Fund's 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.
REPURCHASE AGREEMENTS. The 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 the 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
Fund believes 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 Fund and allow
retention or disposition of such securities. The Fund 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
to be creditworthy pursuant to guidelines established by the Directors.
RESTRICTED SECURITIES. The Fund 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 Fund, 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 Fund 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 Fund believes 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 Fund intends, 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 the Fund's
Adviser), as liquid and not subject to the investment limitation applicable
to illiquid securities. In addition, because Section 4(2) commercial paper
is liquid, the Fund does not intend to subject such paper to the limitation
applicable to restricted securities.
REVERSE REPURCHASE AGREEMENTS. The 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.
SWAP TRANSACTIONS. In a standard swap transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or
realized on particular predetermined investments or instruments, which may
be adjusted for an interest factor. The gross returns to be exchanged or
`swapped'' between the parties are generally calculated with respect to a
`notional amount,'' which is the return on or increase in value of a
particular dollar amount invested at a particular interest rate, or in a
`basket'' of securities representing a particular index. For example, a
$10 million LIBOR swap would require one party to pay the equivalent of the
London Interbank Offer Rate on $10 million principal amount in exchange for
the right to receive the equivalent of a fixed rate of interest on $10
million principal amount. Neither party to the swap would actually advance
$10 million to the other.
The Fund expects to enter into swap transactions primarily to hedge against
changes in the price of other portfolio securities. For example, the Fund
may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest
based on a market index. Interest accrued on the hedged note would then
equal or exceed the Fund's obligations under the swap, while changes in the
market value of the swap would largely offset any changes in the market
value of the note. The Fund may also enter into swaps and caps to preserve
or enhance a return or spread on a portfolio security. The Fund does not
intend to use these transactions in a speculative manner.
The Fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis, and
the Fund will segregate liquid assets in an aggregate net asset value at
least equal to the accrued excess, if any, on each business day. If the
Fund enters into a swap on other than a net basis, the Fund will segregate
liquid assets in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Adviser has determined that,
as a result, the swap market has become relatively liquid. Interest rate
caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than other swaps. To the extent swaps, caps or floors are determined
by the investment adviser to be illiquid, they will be included in the
Fund's limitation on investments in illiquid securities. To the extent the
Fund sells caps and floors, it will maintain in a segregated account cash
and/or U.S. government securities having an aggregate net asset value at
least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to caps and floors.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover,
even if the Adviser is correct in its forecasts, there is a risk that the
swap position may correlate imperfectly with the price of the portfolio
security being hedged.
Swap transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect
to a default on an interest rate swap is limited to the net asset value of
the swap together with the net amount of interest payments owed to the Fund
by the defaulting party. A default on a portfolio security hedged by an
interest rate swap would also expose the Fund to the risk of having to
cover its net obligations under the swap with income from other portfolio
securities.
WARRANTS. The Fund 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
Fund. 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 the Fund
sufficient to make payment for the securities to be purchased are
segregated on the 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 Fund 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 Fund will not issue senior securities except that the Fund may borrow
money, directly or through reverse repurchase agreements, in amounts up to
one-third of the value of its total assets including the amounts borrowed;
and except to the extent that a Fund is permitted to enter into futures
contracts, options or forward contracts. The 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. The Fund will not purchase any securities
while any borrowings in excess of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, the 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 Fund will not lend any of their assets except portfolio securities.
Loans may not exceed one-third of the value of the Fund's total assets.
This shall not prevent the 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 Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase and sell
futures contracts and related options.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although the 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,
the 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.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of its total assets in any one
industry. However, investing in U.S. government securities shall not be
considered investments in any one industry.
UNDERWRITING
The 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 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 Fund will not invest more than 15% of the value of its 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.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its 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
The Fund will not purchase or retain the securities of any issuer if the
Officers and Directors of the Corporation or of the Fund's Adviser, 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 Fund 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 Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund may invest in warrants, but it 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, the 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
the Fund in units with or attached to securities may be deemed to be
without value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The 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 Fund 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 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
Except for bona fide hedging purposes, the 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.
The 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.
The Fund will not write call options in excess of 50% of the value of its
net 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 Fund will not invest more than 5% of its
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
(including securities subject to restrictions on resale under Rule 144A of
the Securities Exchange Act of 1934) which meet the criteria for liquidity
as established by the Directors. If state requirements change, these
restrictions may be changed without notice to shareholders.
The Fund does not intend to borrow money in excess of 5% of the value of
its total assets in the coming fiscal year.
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, birth dates,
principal occupations during the past five years, and present positions,
including any affiliation with Marshall & Ilsley Corp., Federated
Investors, Federated Securities Corp., Federated Shareholder Services
Company, and Federated Services Company.
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
October 22, 1930
Chairman, Director and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director, Executive Vice
President, 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
March 27, 1934
Director
Independent Financial Consultant; retired, Senior Vice President of
Finance, In-Sink-Erator Division of Emerson Electric.
Ody J. Fish
547 Progress Drive
Hartland, WI
June 16, 1925
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
September 4, 1917
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
January 9, 1958
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
May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, The
Proprietary Client Management and Services Group, 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
September 3, 1959
Secretary
Senior Corporate Counsel, Federated Investors.
* This Director is deemed to be an `interested person'' of the Fund or
the Corporation as defined in the Investment Company Act of 1940.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
DIRECTORS' COMPENSATION
NAME, AGGREGATE
POSITION WITH COMPENSATION
CORPORATION FROM CORPORATION*#
Edward C. Gonzales,
Chairman, Director, and Treasurer
$ -0-
John DeVincentis,
$ 11,000
Director
Ody J. Fish,
$ 11,000
Director
Paul E. Hassett,
$ 11,000
Director
* Information is furnished for the fiscal year ended August 31, 1995. The
Corporation is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Corporation which is
comprised of eleven portfolios.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is M&I Investment Management Corp.
("Adviser"). The Adviser shall not be liable to the Corporation, the Fund
or any shareholder of the Fund 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 its investment advisory services, the Adviser receives an annual
advisory fee from the Fund, as described in the prospectus.
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 the 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 the 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.
OTHER SERVICES
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, Pittsburgh, Pennsylvania, through its
registered transfer agent, maintains all necessary shareholder records.
For its services, the transfer agent receives a fee based on the size, type
and number of accounts and transactions made by shareholders. The fee is
based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
The transfer agent may employ third parties, including Marshall & Ilsley
Trust Company, to provide sub-accounting and sub-transfer agency services.
In exchange for these services, the transfer agent may pay such third-party
providers a per account fee and 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. 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.
INDEPENDENT PUBLIC ACCOUNTANTS
The Independent Public Accountants for the Fund are Arthur Andersen LLP.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund, or to the
Adviser, 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 and its 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 in advising the Fund and other accounts. To the extent that receipt
of these services may supplant services for which the Adviser or its
affiliates might otherwise have paid, it would tend to reduce their
expenses.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
DISTRIBUTION PLAN
The Corporation has adopted a plan for the 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 Fund 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 Fund hopes 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 Fund 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 Fund 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 Fund.
DETERMINING MARKET VALUE
MARKET VALUES
Market values of portfolio securities of the Fund are determined as
follows:
o for domestic equity 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 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 Adviser, 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 Fund 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.
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 the 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 FUND'S TAX STATUS
The Fund will pay no federal income tax because the 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.
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 Fund if the Fund
were a regular corporation, and to the extent designated by the Fund as so
qualifying. Otherwise, these dividends and any short-term capital gains
are taxable as ordinary income. 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 the 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.
YIELD
The yield for the Fund 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.
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.
PERFORMANCE COMPARISONS
The 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. In additon to various other indices, the financial
publications and/or indices which the Fund uses in advertising may include:
o RUSSELL 1000 GROWTH INDEX consists of those Russell 2000 securities
with a greater-than-average growth orientation. Securities in this
index tend to exhibit higher price-to-book and price-earnings ratios,
lower dividend yields and higher forecasted growth rates.
o RUSSELL 2000 INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be
used to compare to the total returns of funds whose portfolios are
invested primarily in small capitalization common stocks.
o STANDARD & POORS RATINGS GROUP SMALL STOCK INDEX is a broadly
diversified index consisting of approximately 600 small
capitalization common stocks that can be used to compare to the total
returns of funds whose portfolios are invested primarily in small
capitalization common stocks.
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 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 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.
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar cost averaging, and systematic investment. In addition, the Fund
can compare its performance , or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute (`ICI''). For example,
according to the ICI, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as business and institutions, have entrusted over $3 trillion to the
more than 5,500 mutual funds available.
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 edged." 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.
Marshall Funds Investor Services
1000 North Water Street
PO Box 1348
Milwaukee, Wisconsin 53201-1348
414-287-8555 or 800-236-8554
TDD: Speech and Hearing Impaired Services
800-209-3520
http://www.mitrust.com
Federated Securities Corp.
Distributor
Cusip 572353829
G01756-02(9/96)
