MARSHALL FUNDS(R)
-------------------------
CHOICES FOR CONFIDENT INVESTING
Marshall Funds, Inc. (the "Corporation") is an open-end, management investment
company (a mutual fund). The Corporation has the following eleven separate
investment portfolios. Each portfolio ("Fund") offers its own shares and has a
distinct investment goal to meet specific investor needs.
<TABLE>
<S> <C>
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EQUITY FUNDS TAX-FREE INCOME FUNDS
- MARSHALL EQUITY INCOME FUND - MARSHALL SHORT-TERM TAX-FREE FUND
- MARSHALL VALUE EQUITY FUND - MARSHALL INTERMEDIATE TAX-FREE FUND
- MARSHALL STOCK FUND
- MARSHALL MID-CAP STOCK FUND
- MARSHALL INTERNATIONAL STOCK FUND
INCOME FUNDS MONEY MARKET FUND
- MARSHALL SHORT-TERM INCOME FUND - MARSHALL MONEY MARKET FUND
- MARSHALL INTERMEDIATE BOND FUND
- MARSHALL GOVERNMENT INCOME FUND
</TABLE>
This prospectus contains the information you should read and know before you
invest in any of the Funds. Keep this prospectus for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, MARSHALL & ILSLEY CORP. OR ANY OF ITS BANKING
SUBSIDIARIES ("M&I CORP."), AND THE SHARES ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE MONEY MARKET FUND ATTEMPTS TO
MAINTAIN A STABLE $1.00 NET ASSET VALUE PER SHARE, BUT IT CANNOT GUARANTEE THAT
IT WILL ALWAYS BE ABLE TO DO SO. THE INTERNATIONAL STOCK FUND MAY BORROW MONEY
TO INVEST, WHICH MAY BE CONSIDERED A SPECULATIVE ACTIVITY AND MAY INVOLVE
GREATER RISK AND EXPENSE TO THIS FUND.
The Funds have also filed a Statement of Additional Information dated December
31, 1995, with the Securities and Exchange Commission. The information contained
in the Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Statement of Additional
Information which is in paper form only, 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 Funds by writing to or calling Marshall
Funds Investor Services at 414-287-8555 or 1-800-236-8554 or M&I Brokerage
Services, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus
December 31, 1995
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Contents.................................................................................. 2
Summary of Investment Information.................................................................. 3
Who May Want To Invest In the Marshall Funds?................................................. 3
Who Manages The Funds?........................................................................ 3
How to Buy And Sell Shares.................................................................... 3
What About Investment Risks?.................................................................. 4
Summary of Fund Expenses........................................................................... 5
Financial Highlights............................................................................... 6
Fund Objective and Policies........................................................................ 8
The EQUITY FUNDS.............................................................................. 8
The INCOME FUNDS.............................................................................. 9
The TAX-FREE INCOME FUNDS..................................................................... 10
The MONEY MARKET FUND......................................................................... 11
How to Buy Fund Shares............................................................................. 12
Net Asset Value............................................................................... 13
How to Redeem Shares............................................................................... 13
Additional Conditions......................................................................... 14
Exchange Privilege................................................................................. 15
Telephone Transactions............................................................................. 15
Marshall Funds, Inc. Information................................................................... 16
Organization and History...................................................................... 16
Management.................................................................................... 16
Distribution of Fund Shares................................................................... 18
Administration of the Funds........................................................................ 19
Brokerage Transactions........................................................................ 19
Expenses of the Funds......................................................................... 19
Shareholder Information............................................................................ 19
Certificates and Confirmations................................................................ 19
Dividends and Capital Gains................................................................... 20
Common Stock and Voting Rights................................................................ 20
Performance Information............................................................................ 20
Portfolio Investments and Strategies............................................................... 21
Additional Investment Risks................................................................... 28
Tax Information.................................................................................... 30
Federal Income Tax............................................................................ 30
State and Local Taxes......................................................................... 31
Effect of Banking Laws............................................................................. 31
Standard & Poor's Corporation...................................................................... 31
Addresses.......................................................................................... 32
</TABLE>
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SUMMARY OF INVESTMENT INFORMATION
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WHO MAY WANT TO INVEST IN THE MARSHALL FUNDS?
The Marshall Funds offer investment opportunities to a wide range of investors,
from those who may be investing for the short-term to those with long-term
goals. The Corporation currently offers the following eleven professionally
managed, diversified portfolios:
- MARSHALL EQUITY INCOME FUND ("EQUITY INCOME FUND")--seeks above-average
dividend income with appreciation of capital by investing primarily in
common and preferred stock of companies with large capitalizations;
- MARSHALL VALUE EQUITY FUND ("VALUE EQUITY FUND")--seeks long-term capital
growth and income by investing primarily in common and preferred stocks
selected on the basis of traditional research including assessment of
earnings, dividend growth and risk volatility of the company's industry;
- MARSHALL STOCK FUND ("STOCK FUND")--seeks growth of capital and income by
investing primarily in common stocks of companies with an established
market (such as those with a large market capitalization);
- MARSHALL MID-CAP STOCK FUND ("MID-CAP STOCK FUND")--seeks appreciation of
capital by investing primarily in common and preferred stocks issued by
medium-sized companies whose market capitalizations generally range from
$200 million to $7.5 billion;
- MARSHALL INTERNATIONAL STOCK FUND ("INTERNATIONAL STOCK FUND")--seeks
long-term capital growth by investing primarily in equity securities of
companies and governments outside the United States;
- MARSHALL SHORT-TERM INCOME FUND ("SHORT-TERM INCOME FUND")--seeks to
maximize total return consistent with current income by investing
primarily in short-to intermediate-term high-grade bonds and notes;
- MARSHALL INTERMEDIATE BOND FUND ("INTERMEDIATE BOND FUND")--seeks to
maximize total return consistent with current income by investing
primarily in intermediate-term high-grade bonds and notes;
- MARSHALL GOVERNMENT INCOME FUND ("GOVERNMENT INCOME FUND")--seeks to
provide current income by investing primarily in securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government or U.S. government agencies or instrumentalities;
- MARSHALL SHORT-TERM TAX-FREE FUND ("SHORT-TERM TAX-FREE FUND")--seeks to
provide current income which is exempt from federal income tax by
investing in short-term high-grade municipal securities that generate
such income;
- MARSHALL INTERMEDIATE TAX-FREE FUND ("INTERMEDIATE TAX-FREE FUND")--seeks
to provide as high a level of income which is exempt from federal income
tax as is consistent with preservation of capital by investing in
high-grade municipal securities that generate such income; and
- MARSHALL MONEY MARKET FUND ("MONEY MARKET FUND")--seeks to provide
current income consistent with stability of principal by investing in
money market instruments maturing in 397 days or less. Shares of the
MONEY MARKET FUND are offered in two separate classes: CLASS A SHARES and
CLASS B SHARES.
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WHO MANAGES THE FUNDS?
M&I Investment Management Corp. serves as investment adviser (the "Adviser") to
the Funds. The Adviser is owned by Marshall & Ilsley Corp. ("M&I Corp.") of
Milwaukee, Wisconsin. Templeton Investment Counsel, Inc. of Ft. Lauderdale,
Florida serves as subadviser (the "Subadviser") to the INTERNATIONAL STOCK FUND.
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HOW TO BUY AND SELL SHARES?
You may buy and sell shares of any of the Funds by telephone, by mail or in
person. All shares are both sold and redeemed at net asset value without any
sales charges. Your first purchase in any Fund must be at least $1,000 and your
later purchases must be at least $50 each. These minimums may be waived or
lowered from time to time in certain instances, such as for M&I Corp. employees.
The Corporation also offers you the privilege of exchanging shares of one Fund
for another at net asset value without any sales charge. For more information,
please see "How to Buy Fund Shares," "How to Redeem Fund Shares," "Exchange
Privilege" and "Telephone Transactions."
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WHAT ABOUT INVESTMENT RISKS?
All mutual funds, including these Funds, take investment risks. The EQUITY FUNDS
must contend with the volatility and unpredictability of the U.S. stock market.
The INTERNATIONAL STOCK FUND may experience additional uncertainty in foreign
markets and with foreign currency transactions. The INCOME FUNDS invest heavily
in debt securities, whose values move in the opposite direction of prevailing
interest rates and whose exposure to market price fluctuation increases with the
length of their maturities. Some of the Funds may use options and futures
contracts to hedge their investments or increase their income, although the
successful use of such investment techniques cannot be guaranteed and may result
in a loss instead. Each Fund may invest at least some of its assets in
mortgage-backed securities and may lend its portfolio securities to other
institutions. The risks associated with these and other investments are fully
explained under "Portfolio Investments and Strategies."
In all types of investments, reward and risk go hand in hand. If you seek high
investment returns, you must be willing to assume a comparably higher level of
risk. On the other hand, if you are comfortable with only a small amount of
risk, you should not expect a large return. Set forth below is a risk/reward
chart that depicts the investment potential and corresponding risks associated
with different types of mutual funds. The Marshall Funds are listed under the
relevant categories.
At the top of the chart are equity funds, which have historically produced over
the long-term a higher level of return than other types of investments, but also
have the highest potential risk. In the middle of the chart are income funds,
which offer a middle range of potential risk and return. At the bottom of the
chart are money market funds, which have a lower amount of risk and return. As
with any investment, however, past performance does not predict future
performance. Your investment return will vary, and the redemption value of your
mutual fund shares may be lower than their original purchase price.
Equity Funds
Marshall International Stock Fund
Marshall Mid-Cap Stock Fund
Marshall Stock Fund
Marshall Value Equity Fund
Marshall Equity Income Fund
Income Funds
Marshall Intermediate Tax-Free Fund
Marshall Intermediate Bond Fund
Marshall Government Income Fund
Marshall Short-Term Tax-Free Fund
Marshall Short-Term Income Fund
Money Market Funds
Marshall Money Market Fund
LOGO
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SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
EQUITY VALUE MID-CAP INTERNATIONAL SHORT-TERM
INCOME EQUITY STOCK STOCK STOCK INCOME
FUND FUND FUND FUND FUND FUND
------------- ----------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES...................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average
net assets)
Management Fee (after
waiver)(1).................... 0.66% 0.75% 0.74% 0.67% 0.96% 0.20%
12b-1 Fees (2)................. None None None None 0.00% None
Total Other Expenses........... 0.35% 0.21% 0.24% 0.34% 0.58% 0.31%
Shareholder Servicing
Fee................. 0.02%
------------- ----------- ------------ ------------- -------------- ------------
Total Annual Fund Operating
Expenses (4).................. 1.01% 0.96% 0.98% 1.01% 1.54% 0.51%
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT SHORT-TERM INTERMEDIATE MONEY MARKET FUND
BOND INCOME TAX-FREE TAX-FREE CLASS A CLASS B
FUND FUND FUND FUND SHARES SHARES
------------- ----------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES...................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average
net assets)
Management Fee (after
waiver)(1).................... 0.52% 0.49% 0.03% 0.17% 0.24% 0.24%
12b-1 Fees..................... None None None None None 0.30%
Total Other Expenses (after
waiver and expense
reimbursement) (3)............ 0.19% 0.37% 0.48% 0.44% 0.17% 0.17%
Shareholder Servicing
Fee................. 0.02%
------------- ----------- ------------ ------------- -------------- ------------
Total Annual Fund Operating
Expenses (4).................. 0.71% 0.86% 0.51% 0.61% 0.41% 0.71%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser for all of the Funds except the Value Equity Fund. The
adviser may terminate this voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.75% for the Stock Fund, Equity Income Fund,
Mid-Cap Stock Fund and Government Income Fund; 1.00% for the International Stock
Fund; 0.60% for the Short-Term Income Fund, Intermediate Bond Fund and
Intermediate Tax-Free Fund; and 0.50% for the Short-Term Tax-Free Fund and Money
Market Fund - Class A and Class B Shares.
(2) The International Stock Fund has no present intention of paying or accruing
12b-1 fees during the fiscal year ending August 31, 1996. If the International
Stock Fund were paying or accruing 12b-1 fees, the International Stock 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."
(3) Total Other Expenses were 0.79% for the Short-Term Tax-Free Fund absent the
voluntary expense reimbursement by the adviser and the voluntary waiver by the
administrator and 0.47% for the Intermediate Tax-Free Fund absent the voluntary
waiver by the administrator. The administrator and adviser may terminate this
waiver and reimbursement at any time at their sole discretion.
(4) Total Fund Operating Expenses were 1.10% for the Equity Income Fund, 0.99%
for the Stock Fund, 1.09% for the Mid-Cap Stock Fund, 1.58% for the
International Stock Fund, 0.91% for the Short-Term Income Fund, 0.79% for the
Intermediate Bond Fund, 1.12% for the Government Income Fund, 1.29% for the
Short-Term Tax-Free Fund, 1.07% for the Intermediate Tax-Free Fund, 0.67% for
the Money Market Fund - Class A Shares, and 0.97% for the Money Market Fund -
Class B Shares absent the voluntary waivers described above in notes 1 and 3.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds will bear either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Marshall Funds, Inc. Information" Wire-transferred redemptions may be
subject to an additional fee.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period. The Funds
charge no redemption fees.
<TABLE>
<CAPTION>
EQUITY VALUE MID-CAP INTERNATIONAL SHORT- TERM
INCOME EQUITY STOCK STOCK STOCK INCOME
FUND FUND FUND FUND FUND FUND
------------- ----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Year........................... $10 $10 $10 $10 $16 $5
3 Years.......................... $32 $31 $31 $32 $49 $16
5 Years.......................... $56 $53 $54 $56 $85 $29
10 Years......................... $124 $118 $121 $124 $185 $64
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT SHORT- TERM INTERMEDIATE MONEY MARKET FUND
BOND INCOME TAX-FREE TAX-FREE CLASS A CLASS B
FUND FUND FUND FUND SHARES SHARES
------------- ----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Year........................... $7 $9 $5 $6 $4 $7
3 Years.......................... $23 $28 $16 $20 $13 $23
5 Years.......................... $40 $48 $29 $34 $23 $40
10 Years......................... $88 $106 $64 $76 $52 $88
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
The following table has been audited by Arthur Andersen LLP, the Funds'
independent public accountants. Their report dated October 13, 1995, is included
in the Annual Report for the Funds, which is incorporated by reference. This
table should be read in conjunction with the Funds' financial statements and
notes thereto, which may be obtained free of charge from the Funds.
Further information about the performance of the Funds is contained in the
Funds' Annual Report dated August 31, 1995, which may be obtained free of
charge.
<TABLE>
<CAPTION>
DIVIDENDS TO
NET ASSET NET REALIZED SHAREHOLDERS
VALUE, NET AND UNREALIZED TOTAL FROM FROM NET
BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT INVESTMENT
PERIOD ENDED AUGUST 31, OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME
- ----------------------------------------- ---------- ---------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
EQUITY INCOME FUND
1994(b)................................. $10.00 0.28 (0.09) 0.19 (0.23)
1995.................................... $ 9.96 0.33 1.26 1.59 (0.33)
VALUE EQUITY FUND
1994(b)................................. $10.00 0.12 0.93 1.05 (0.10)
1995.................................... $10.95 0.22 1.22 1.44 (0.20)
STOCK FUND
1993(a)................................. $10.00 0.10 0.07 0.17 (0.09)
1994.................................... $10.08 0.07 (0.03) 0.04 (0.07)
1995.................................... $10.05 0.09 1.59 1.68 (0.09)
MID-CAP STOCK FUND
1994(b)................................. $10.00 0.02 (0.29) (0.27) (0.01)
1995.................................... $ 9.69 (0.00) 2.61 2.61 (0.01)
INTERNATIONAL STOCK FUND
1995(g)................................. $10.00 0.20 0.01 0.21 (0.05)
SHORT-TERM INCOME FUND
1993(c)................................. $10.00 0.40 (0.05) 0.35 (0.40)
1994.................................... $ 9.95 0.45 (0.25) 0.20 (0.44)
1995.................................... $ 9.71 0.56 0.05 0.61 (0.58)
INTERMEDIATE BOND FUND
1993(a)................................. $10.00 0.46 0.33 0.79 (0.39)
1994.................................... $10.40 0.61 (0.81) (0.20) (0.67)
1995.................................... $ 9.36 0.61 0.16 0.77 (0.62)
GOVERNMENT INCOME FUND
1993(d)................................. $10.00 0.47 0.16 0.63 (0.41)
1994.................................... $10.22 0.64 (0.78) (0.14) (0.68)
1995.................................... $ 9.26 0.60 0.26 0.86 (0.62)
SHORT-TERM TAX-FREE FUND
1994(e)................................. $10.00 0.18 (0.08) 0.10 (0.18)
1995.................................... $ 9.92 0.39 0.13 0.52 (0.39)
INTERMEDIATE TAX-FREE FUND
1994(e)................................. $10.00 0.19 (0.29) (0.10) (0.19)
1995.................................... $ 9.71 0.42 0.20 0.62 (0.42)
MONEY MARKET FUND--CLASS A SHARES
1993(a)................................. $1.00 0.02 -- 0.02 (0.02)
1994.................................... $1.00 0.03 -- 0.03 (0.03)
1995.................................... $1.00 0.05 -- 0.05 (0.05)
MONEY MARKET FUND--CLASS B SHARES
1993(f)................................. $1.00 0.02 -- 0.02 (0.02)
1994.................................... $1.00 0.03 -- 0.03 (0.03)
1995.................................... $1.00 0.05 -- 0.05 (0.05)
<CAPTION>
DISTRIBUTIONS TO
SHAREHOLDERS FROM DISTRIBUTIONS TO
NET REALIZED GAIN SHAREHOLDERS IN
ON INVESTMENT EXCESS OF NET
PERIOD ENDED AUGUST 31, TRANSACTIONS INVESTMENT INCOME
- ----------------------------------------- ----------------- -----------------
<S> <C> <C>
EQUITY INCOME FUND
1994(b)................................. -- --
1995.................................... -- --
VALUE EQUITY FUND
1994(b)................................. -- --
1995.................................... (0.11) --
STOCK FUND
1993(a)................................. -- --
1994.................................... -- --
1995.................................... -- --
MID-CAP STOCK FUND
1994(b)................................. (0.03) --
1995.................................... -- 0.00
INTERNATIONAL STOCK FUND
1995(g)................................. 0.00 --
SHORT-TERM INCOME FUND
1993(c)................................. -- --
1994.................................... -- --
1995.................................... -- --
INTERMEDIATE BOND FUND
1993(a)................................. -- --
1994.................................... (0.17) --
1995.................................... -- --
GOVERNMENT INCOME FUND
1993(d)................................. -- --
1994.................................... (0.14) --
1995.................................... -- --
SHORT-TERM TAX-FREE FUND
1994(e)................................. -- --
1995.................................... -- --
INTERMEDIATE TAX-FREE FUND
1994(e)................................. -- --
1995.................................... -- --
MONEY MARKET FUND--CLASS A SHARES
1993(a)................................. -- --
1994.................................... -- --
1995.................................... -- --
MONEY MARKET FUND--CLASS B SHARES
1993(f)................................. -- --
1994.................................... -- --
1995.................................... -- --
(a) Reflects operations for the period from November 23, 1992 (date of initial public investment) to August 31, 1993.
(b) Reflects operations for the period from October 1, 1993 (date of initial public investment) to August 31, 1994.
(c) Reflects operations for the period from November 2, 1992 (date of initial public investment) to August 31, 1993.
(d) Reflects operations for the period from December 14, 1992 (date of initial public investment) to August 31, 1993.
(e) Reflects operations for the period from February 2, 1994 (date of initial public investment) to August 31, 1994.
(f) Reflects operations for the period from December 17, 1992 (date of initial public investment) to August 31, 1993.
(g) Reflects operations for the period from September 2, 1994 (date of initial public investment) to August 31, 1995.
(h) Based on net asset value.
(i) Computed on an annualized basis.
(j) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above.
</TABLE>
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MARSHALL FUNDS
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
---------------------------------------
NET ASSET NET NET ASSETS, PORTFOLIO
TOTAL VALUE, END TOTAL INVESTMENT EXPENSE END OF PERIOD TURNOVER
DISTRIBUTIONS OF PERIOD RETURN(H) EXPENSES INCOME WAIVER (J) (000 OMITTED) RATE
- ------------- ----------- --------- -------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(0.23) $ 9.96 2.02% 1.01%(i) 3.30%(i) 0.16%(i) $ 49,396 44%
(0.33) $ 11.22 16.40% 1.01% 3.45% 0.09% $ 107,499 43%
(0.10) $ 10.95 10.59% 1.00%(i) 1.82%(i) 0.15%(i) $ 218,755 39%
(0.31) $ 12.08 13.57% 0.96% 1.98% 0.00% $ 220,436 78%
(0.09) $ 10.08 1.67% 0.94%(i) 1.39%(i) 0.03%(i) $ 309,128 98%
(0.07) $ 10.05 0.44% 0.99% 0.77% 0.01% $ 250,155 86%
(0.09) $ 11.64 16.85% 0.98% 0.88% 0.01% $ 257,019 79%
(0.04) $ 9.69 (2.74%) 1.01%(i) 0.23%(i) 0.28%(i) $ 53,642 113%
(0.01) $ 12.30 27.06% 1.01% (0.13%) 0.08% $ 108,256 157%
(0.05) $ 10.16 2.11% 1.54%(i) 2.42%(i) 0.04%(i) $ 94,048 61%
(0.40) $ 9.95 3.57% 0.50%(i) 4.91%(i) 0.51%(i) $ 74,742 79%
(0.44) $ 9.71 2.05% 0.50% 4.58% 0.39% $ 100,452 185%
(0.58) $ 9.74 6.47% 0.51% 5.78% 0.40% $ 84,273 194%
(0.39) $ 10.40 7.99% 0.70%(i) 6.08%(i) 0.10%(i) $ 346,808 220%
(0.84) $ 9.36 (2.02%) 0.71% 6.26% 0.11% $ 357,740 228%
(0.62) $ 9.51 8.58% 0.71% 6.50% 0.08% $ 344,071 232%
(0.41) $ 10.22 6.40% 0.85%(i) 6.56%(i) 0.33%(i) $ 57,822 218%
(0.82) $ 9.26 (1.34%) 0.86% 6.58% 0.40% $ 64,823 175%
(0.62) $ 9.51 9.78% 0.86% 6.54% 0.26% $ 103,708 360%
(0.18) $ 9.92 0.98% 0.52%(i) 3.22%(i) 0.71%(i) $ 24,903 37%
(0.39) $ 10.05 5.41% 0.51% 3.95% 0.78% $ 21,422 71%
(0.19) $ 9.71 (0.94%) 0.62%(i) 3.58%(i) 0.59%(i) $ 35,212 45%
(0.42) $ 9.91 6.58% 0.61% 4.35% 0.47% $ 46,051 105%
(0.02) $ 1.00 2.33% 0.40%(i) 2.97%(i) 0.28%(i) $ 775,890 --
(0.03) $ 1.00 3.41% 0.40% 3.40% 0.29% $ 967,988 --
(0.05) $ 1.00 5.57% 0.41% 5.44% 0.26% $1,128,623 --
(0.02) $ 1.00 1.89% 0.72%(i) 2.72%(i) 0.28%(i) $ 1,980 --
(0.03) $ 1.00 3.11% 0.70% 3.39% 0.29% $ 11,929 --
(0.05) $ 1.00 5.25% 0.71% 5.21% 0.26% $ 30,331 --
</TABLE>
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FUND OBJECTIVE AND
POLICIES
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without shareholder approval. While a Fund
cannot assure that it will achieve its investment objective, it attempts to do
so by following the investment policies described below.
Unless indicated otherwise, the investment policies of a Fund may be changed by
the Board of Directors ("Directors") without shareholder approval. However,
shareholders will be notified before any material change in these policies
becomes effective. For purposes of each EQUITY FUND'S respective 65% investment
policy, total assets shall be determined without regard to collateral for any
securities lending activity. Additional information about investments,
investment limitations and strategies, and certain investment policies appears
in the "Portfolio Investments and Strategies" section of this prospectus.
For additional information about investment limitations, strategies that one or
more Funds may employ, and certain investment policies, please refer to the
"Portfolio Investments and Strategies" section of this prospectus.
-------------------------------------------------------------
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THE EQUITY FUNDS
MARSHALL EQUITY INCOME FUND
The investment objective of the EQUITY INCOME FUND is to provide above-average
dividend income with appreciation of capital. The Fund pursues this objective by
investing in a broadly diversified portfolio of common and preferred stocks.
Under normal market conditions, the Fund intends to invest at least 65% of its
total assets in equity securities that generate dividend income. The Fund will
seek to achieve dividend income at a level of 100 basis points (or 1%) above
that earned on the stocks that comprise the S&P 500. The Fund's Adviser believes
it possible to achieve a dividend level above stocks comprising the S&P 500 by
concentrating or overweighing the Fund's investments in stocks or sectors of the
stock market that have higher yields than the stocks in the S&P 500 as a whole,
such as utilities, financial institutions, and energy.
MARSHALL VALUE EQUITY FUND
The investment objective of the VALUE EQUITY FUND is to provide long-term
capital growth and income. The Fund pursues this objective through the
application of a value-oriented approach by investing in a broadly diversified
portfolio of common stocks, securities convertible into common stocks and
preferred stocks of medium to large capitalization companies selected on the
basis of traditional research including assessment of earnings, dividend growth
and risk/volatility of the company's industry. Under normal market conditions,
the Fund intends to invest at least 65% of its total assets in these equity
securities. In most market conditions, the stocks comprising the Fund's assets
will exhibit traditional value characteristics such as having a price/earnings
ratio less than the Standard & Poor's 500 Stock Price Index ("S&P 500"), higher
than average dividend yields, lower than average price to book value, and stocks
of companies with unrecognized or undervalued assets.
MARSHALL STOCK FUND
The investment objective of the STOCK FUND is to provide growth of capital and
income. The Fund pursues this objective by investing primarily in a
professionally managed and diversified portfolio of common stocks of companies
with an established market and a history of stable earnings and/or growing
dividends. Under normal market conditions, the Fund intends to invest at least
65% of its total assets in equity securities, i.e., common stocks and preferred
stocks. As a general matter, the Fund expects these investments to generate
income. The Fund's investment approach is based on the conviction that over the
long-term the economy will continue to expand and that this economic growth will
be reflected in the growth of revenues and earnings of major corporations.
MARSHALL MID-CAP STOCK FUND
The investment objective of the MID-CAP STOCK FUND is to seek appreciation of
capital. The Fund will pursue this objective by investing, under normal market
conditions, at least 65% of its total assets in common and preferred stocks
issued by medium-sized companies whose market capitalizations generally range
from $200 million to $7.5 billion. The Fund's Adviser will invest primarily in
equity securities of companies with above-average earnings growth prospects or
in companies where significant fundamental changes are taking place. These
changes could include significant new products, services, or methods of
distribution; restructuring or reallocating business; or significant share price
appreciation.
MARSHALL INTERNATIONAL STOCK FUND
The investment objective of the INTERNATIONAL STOCK FUND is long-term capital
growth. The Fund pursues this objective through a flexible policy of investing
in stocks and debt obligations of companies and governments outside the United
States. Under normal market conditions, at least 65% of the Fund's total assets
will be invested in securities of issuers domiciled in at least three different
nations outside the United States, and at least 65% of the Fund's total assets
will be invested in equity securities, i.e., common stocks and preferred stocks.
The Fund may also
invest up to 35% of its total assets in debt securities, warrants or rights to
subscribe to or purchase equity securities, or securities convertible into
common or preferred stocks when, in the judgment of the Fund's Subadviser, the
capital appreciation available through such investments outweigh the potential
for capital growth through investment in equity securities. Certain debt
securities can provide the potential for capital appreciation based on various
factors such as changes in interest rates, economic and market conditions,
improvement in an issuer's ability to repay principal and pay interest, and
ratings upgrades. The Fund may invest in debt or preferred securities which have
equity features, such as conversion or exchange rights, or which carry warrants
to purchase common stock or other equity interests. Such equity features enable
the holder of the bond or preferred security to benefit from increases in the
market price of the underlying equity security. Any income realized by the Fund
will be incidental to its investment objective of long-term capital growth. In
selecting securities, the Fund's Subadviser attempts to identify those companies
in various countries and industries where economic and political factors,
including currency movements, are likely to produce above-average opportunities
for capital appreciation.
THE EQUITY FUNDS' ACCEPTABLE INVESTMENTS.
Acceptable investments include the following:
- common stocks of U.S. companies that are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets; the
INTERNATIONAL STOCK FUND may also invest in common stocks of foreign
companies;
- preferred stocks;
- convertible securities rated investment grade by a nationally recognized
statistical rating organization ("NRSRO") (such as BBB or better by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or Baa or better by Moody's Investors Services, Inc.
("Moody's")) or, if unrated, of comparable quality as determined by the
Fund's Adviser or Subadviser (see "Convertible Securities" in the
"Portfolios and Investment Strategies" section);
- U.S. Government Securities, including certain Mortgage-Backed Securities
(as defined under "Portfolio Investments and Strategies");
- debt obligations (including bonds, notes and debentures); except for
INTERNATIONAL STOCK FUND, these must be issued by U.S. corporations and
rated in the top three categories by an NRSRO (such as A or better by
S&P, Fitch or Moody's) or, if unrated, the Fund's Adviser must determine
them to be of comparable quality; the INTERNATIONAL STOCK FUND may
purchase debt obligations issued by foreign corporations and governments
that are rated investment grade by an NRSRO (such as BBB or better by S&P
or Fitch, or Baa or better by Moody's) or, if unrated, are determined by
the Fund's Subadviser to be of comparable quality;
- American Depositary Receipts ("ADRs"); except for INTERNATIONAL STOCK
FUND, each Fund is limited to 20% of its net assets;
- Global Depositary Receipts ("GDRs") and European Depositary Receipts
("EDRs") (only the INTERNATIONAL STOCK FUND);
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- put and call options on securities and indices and futures contracts;
- swap transactions, including interest rate and index-based swaps;
- Prime Commercial Paper (as defined under "Portfolio Investments and
Strategies");
- foreign and domestic Bank Instruments (as defined under "Portfolio
Investments and Strategies");
- warrants (no more than 5% of an EQUITY FUND'S net assets);
- repurchase agreements; and
- shares of other investment companies.
Notwithstanding the limits set forth above, each EQUITY FUND (except the
INTERNATIONAL STOCK FUND, which has no limit) may invest up to 5% of its net
assets in foreign securities other than ADRs.
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THE INCOME FUNDS
MARSHALL SHORT-TERM INCOME FUND
The investment objective of the SHORT-TERM INCOME FUND is to maximize total
return consistent with current income. The Fund pursues this objective by
investing in a diversified portfolio of short-to intermediate-term high-grade
bonds and notes. The Fund will maintain an average dollar-weighted maturity of
six months to three years.
MARSHALL INTERMEDIATE BOND FUND
The investment objective of the INTERMEDIATE BOND FUND is to maximize total
return consistent with current income. The Fund pursues this objective by
investing in a diversified portfolio of intermediate-term high-grade bonds and
notes. The Fund will maintain an average dollar-weighted maturity of three to
ten years. The Fund will invest, under normal circumstances, at least 65% of the
value of its total assets in bonds.
MARSHALL GOVERNMENT INCOME FUND
The investment objective of the GOVERNMENT INCOME FUND is to provide current
income. The Fund pursues this objective by investing primarily in U.S.
government securities, including those issued by U.S. government agencies and
instrumentalities. Under normal circumstances, the Fund will invest at least 65%
of the value of its total assets in U.S. government securities (not including
privately issued mortgage-related securities).
THE INCOME FUNDS' ACCEPTABLE INVESTMENTS.
Acceptable investments include the following:
- domestic issues of corporate debt obligations (including bonds, notes and
debentures) rated in the top three categories by an NRSRO (such as A or
better by Moody's, S&P, or Fitch) or, if unrated, determined by the
Fund's Adviser to be of comparable quality;
- U.S. Government Securities (as defined under "Portfolio Investments and
Strategies");
- Prime Commercial Paper (as defined under "Portfolio Investments and
Strategies");
- domestic Bank Instruments (as defined under "Portfolio Investments and
Strategies");
- repurchase agreements;
- master demand notes;
- Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Municipal Securities (except the GOVERNMENT INCOME FUND) (as defined
under "Portfolio Investments and Strategies");
- swap transactions, including interest rate and index-based swaps; and
- securities of other investment companies.
The GOVERNMENT INCOME FUND may also engage in options, futures and options on
futures for bona fide hedging purposes. Additional information about
investments, investment limitations and strategies, and certain investment
policies appears in the "Portfolio Investments and Strategies" section of this
prospectus.
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THE TAX-FREE INCOME FUNDS
MARSHALL SHORT-TERM TAX-FREE FUND
The investment objective of the SHORT-TERM TAX-FREE FUND is to provide current
income that is exempt from federal income tax. Under normal circumstances, the
SHORT-TERM TAX-FREE FUND will maintain an average dollar-weighted portfolio
maturity of up to three years.
MARSHALL INTERMEDIATE TAX-FREE FUND
The investment objective of the INTERMEDIATE TAX-FREE FUND is to provide as high
a level of income that is exempt from federal income tax as is consistent with
preservation of capital. Under normal circumstances, the INTERMEDIATE TAX-FREE
FUND will maintain an average dollar-weighted portfolio maturity of three to ten
years.
THE TAX-FREE INCOME FUNDS' ACCEPTABLE INVESTMENTS. The Tax-Free Income Funds
pursue their objectives by investing in a diversified portfolio of high-grade
Municipal Securities (as defined under "Portfolio Investments and Strategies").
As a matter of investment policy that cannot be changed without shareholder
approval, under normal market conditions, at least 80% of each TAX-FREE INCOME
FUND'S net assets will be invested in Municipal Securities, the income from
which is exempt from federal income tax (including the federal alternative
minimum tax). Interest income of the TAX-FREE INCOME FUNDS that is exempt from
federal income tax retains its tax-free status when distributed to shareholders.
Municipal Securities are debt obligations issued by or on behalf of states,
territories and possessions of the United States, including the District of
Columbia, and any political subdivision or financing authority of any of these,
the income from which is, in the opinion of qualified legal counsel or the
Funds' Adviser, exempt from federal income tax. These securities will be:
- rated in the top three categories by an NRSRO (such as A or better by
Moody's, S&P or Fitch), except that up to 5% of the Fund's net assets may
be invested in the fourth highest rating category of an NRSRO (such as
BBB by S&P or Fitch, or Baa by Moody's);
- guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;
- fully collateralized by an escrow of U.S. government securities or other
securities acceptable to the Funds' Adviser, including certain
Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1) or Moody's highest municipal
commercial paper rating (P-1) or S&P's highest municipal commercial paper
rating (SP-1) or Fitch's highest short-term municipal obligations rating
(FIN-1+ or FIN-1) or the highest rating by another NRSRO;
- unrated if, at the time of purchase, other Municipal Securities of that
issuer are rated the same quality as described above by an NRSRO; or
- unrated if determined to be of comparable quality to one of the foregoing
rating categories by the Funds' Adviser.
The TAX-FREE INCOME FUNDS may also engage in options, futures and options on
futures for bona fide hedging purposes. The Funds may also invest in swap
transactions, including interest rate and index-based swaps. Additional
information about investments, investment limitations and strategies, and
certain investment policies appears in the "Portfolio Investments and
Strategies" section of this prospectus.
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THE MONEY MARKET FUND
The investment objective of the MONEY MARKET FUND is to provide current income
consistent with stability of principal. The Fund pursues this objective by
investing exclusively in a portfolio of money market instruments maturing in 397
days or less. The average maturity of securities in the Fund's portfolio,
computed on a dollar-weighted basis, will be 90 days or less. While there is no
assurance that the MONEY MARKET FUND will achieve its investment objective, it
endeavors to do so by complying with the various requirements of Rule 2a-7 under
the Investment Company Act of 1940 which regulates money market mutual funds and
by following the investment policies described in this prospectus.
Shares of the MONEY MARKET FUND are offered in two classes of shares: CLASS A
SHARES and CLASS B SHARES. CLASS A SHARES are sold to customers of M&I Corp. and
its affiliates or retail customers of institutions that have not entered into a
marketing arrangement or do not provide sales and/or administrative services for
the sale of MONEY MARKET FUND shares. CLASS B SHARES are sold through
institutions and other entities that have entered into marketing arrangements to
make MONEY MARKET FUND shares available to their clients, customers or other
specified groups of investors, or that have agreed to provide sales and/or
administrative services as agents for holders of CLASS B SHARES.
THE MONEY MARKET FUND'S ACCEPTABLE INVESTMENTS. The MONEY MARKET FUND invests in
high-quality money market instruments that are denominated and payable in U.S.
dollars and are either rated in the highest short-term rating category by NRSROs
or are of comparable quality to securities having such ratings. Examples of
these instruments include, but are not limited to:
- issues of domestic and foreign corporate debt obligations, including
bonds, notes, and debentures;
- commercial paper, including Eurodollar commercial paper ("Europaper");
- domestic and foreign Bank Instruments (as defined under "Portfolio
Investments and Strategies");
- demand master notes;
- U.S. Government Securities, except for Mortgage-Backed Securities (as
defined under "Portfolio Investments and Strategies");
- repurchase agreements;
- guaranteed investment contracts;
- funding agreements; and
- short-term tranches of Asset-Backed Securities (as defined under
"Portfolio Investments and Strategies").
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HOW TO BUY FUND SHARES
You can buy shares of a Fund at net asset value, without a sales charge, on any
day the New York Stock Exchange is open for business. Your order must be
received by the Fund by 12:00 p.m. (Central Time) for the MONEY MARKET FUND or
3:00 p.m. (Central Time) for all other Funds to get that day's net asset value.
See "Net Asset Value" below. Each Fund reserves the right to reject any purchase
request.
Investors may purchase Fund shares by contacting Marshall Funds Investor
Services ("MFIS") at 1-800-236-8554, by placing a purchase order through any
authorized broker or dealer, including through any M&I Bank employing a
representative of M&I Brokerage Services, or by any of the following methods.
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 1-800-236-8554.
<TABLE>
<S> <C>
MINIMUM INVESTMENTS
$1,000 To open an Account
$50 To add to an Account
(including through a
Systematic Investment
Program)
</TABLE>
The Funds may waive or lower these minimums from time to time, such as for M&I
Corp. employees.
<TABLE>
<S> <C>
PHONE Contact MFIS. If you autho-
1-800-236-8554 rized telephone exchange priv-
LOGO ileges in your account
application or by sub-
sequent authorization form, you may exchange shares
from another Fund having an identical shareholder
registration. See "Telephone Transactions" on page
15 for more information.
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 Fund
Investor Services, 1000 N. Water
St. (M-F 8-5 Central Time), any
M&I Bank employing a representa-
tive of M&I Brokerage Services,
or to any authorized broker or
dealer.
WIRE -First notify MFIS at
LOGO 1-800-236-8554 by 12:00 p.m.
(Central Time) for the MONEY
MARKET FUND and 3:00 p.m.
(Central Time) for the other
Funds.
- Then wire the money to:
M&I Marshall & Ilsley Bank
ABA Number 075000051
Credit to: Boston Financial
Data Services Deposit
Account Number 27480
Further credit to:
[Identify name of Fund]
Re: [Shareholder name and
account number]
- If a new Account, fax to
Marshall Funds Investor Services
at 414-287-8511 and mail a com-
pleted account application to
the Fund at the address above
under "Mail."
SYSTEMATIC You can have money automati-
INVESTMENT cally withdrawn from your
PROGRAM checking account on predeter-
mined dates and invest it in a
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 require-
ment. Call MFIS at 1-800-236-8554 to apply for this
program.
</TABLE>
ADDITIONAL INFORMATION ABOUT ORDERS BY:
<TABLE>
<S> <C>
CHECK If your check does not clear,
LOGO your purchase will be can-
celed and you will be charged
a $15 fee. Purchase orders by
check are considered received after your check is
converted by MFIS into federal funds, which is
generally the next business day after MFIS
receives your check.
</TABLE>
<TABLE>
<S> <C>
WIRE Your bank may charge a fee
LOGO for wiring funds. Wire orders
are accepted only on days
when the Funds, M&I Bank and the Federal Reserve
wire system are open for business. If your
purchase order for the MONEY MARKET FUND is
received by 12:00 p.m. (Central Time) and your
wire is received by M&I Bank by 3:00 p.m. (Central
Time), you will begin receiving dividends on that
day.
</TABLE>
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NET ASSET VALUE
Shares of a Fund are sold at their share price, which is the net asset value
without any sales charge, next determined after your order is received. The net
asset value is determined for the MONEY MARKET FUND at 12:00 p.m. (Central Time)
and 3:00 p.m. (Central Time), and for all other Funds at or after the close of
the New York Stock Exchange, Monday through Friday, except on: (i) days on which
there are not sufficient changes in the value of a Fund's portfolio securities
that its net asset value might be materially affected; (ii) days during which no
shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Each Fund's share price fluctuates, except that the MONEY MARKET FUND attempts
to maintain a stable $1 share price, although this cannot be guaranteed. The net
asset value of many of the Funds are listed daily in your newspaper's mutual
fund quotations section under the bold heading "MARSHALL FUNDS." A Fund's net
asset value is determined by adding the market value of all portfolio securities
and other assets, subtracting liabilities, and dividing by the number of
outstanding shares. Like most other money market funds, the MONEY MARKET FUND
uses the amortized cost method to value its portfolio securities in order to
help maintain a stable $1 share price.
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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 or M&I Brokerage Services. It is the
responsibility of MFIS and M&I Brokerage Services to promptly submit redemption
requests to a Fund. Trust customers of M&I Trust Companies should contact their
account officer in order to make redemption requests. Redemption requests for
the Funds must be received by 12:00 p.m. (Central Time) for the Money Market
Fund or 3:00 p.m. (Central time) for all Funds in order for shares to be
redeemed at that day's net asset value. Redemption proceeds will normally be
mailed, or wired if by written request, the following business day, but in no
event more than seven days, after the request is made. See "Wire/Electronic
Transfer" below.
<TABLE>
<S> <C>
PHONE If you have authorized the
1-800-236-8554 telephone redemption privi-
(EXCEPT RETIREMENT lege in your account appli-
ACCOUNTS) cation or by a subsequent
LOGO authorization form, you may
redeem shares by tele-
phone. If you are a Trust customer, or a customer
of M&I Brokerage Services, you must contact your
account officer or account representative. [See
"Telephone Transactions" for more information.]
MAIL Send in your written request
LOGO to the following address,
indicating your name, the
Fund
name, your account number, and the number of
shares or the dollar amount you want to redeem:
Marshall Funds Investor Services
P.O. Box 1348
Milwaukee, WI 53201-1348
If you want to redeem shares held in certificate
form, you must properly endorse the certificated
shares and send them by registered or certified
mail. Additional documentation may be required
from corporations, executors, administrators,
trustees, or guardians. For additional
assistance, call 1-800-236-8554.
</TABLE>
<TABLE>
<S> <C>
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, Marshall Funds Investor Ser-
vices, 1000 N. Water St. (M-F 8-5 Central Time),
or to any authorized broker or dealer.
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 Funds, M&I Bank, and the Federal
Reserve wire system are open for business.
Wire-transferred redemptions may be subject to an
additional fee. Redemption requests for the MONEY
MARKET FUND must be received by 12:00 p.m. (Central
time) if you want the proceeds to be wired the same
day.
SYSTEMATIC If you have a Fund account
WITHDRAWAL balance of at least
PROGRAM $10,000, you can have
(EXISTING predetermined amounts of at
ACCOUNTS ONLY) least $100 automatically
redeemed from your Fund ac-
count on predetermined dates on a monthly or
quarterly basis. Contact MFIS or M&I Brokerage
Services to apply for this program.
CHECKWRITING You can redeem shares of
(MONEY MARKET the MONEY MARKET FUND by
FUND ONLY) writing a check in amounts
LOGO of at least $250. You must
have completed the check-
writing section of your account application and the
attached signature card, or have completed a
subsequent application form, which you can obtain
from MFIS. The Fund will then provide you with the
checks. Your check is treated as a redemption
order for Fund shares equal to the amount of the
check. A check for an amount in excess of your
available Fund account balance will be returned
marked "insufficient funds." See "Redemption Before
Purchase Instruments Clear" below. Checks cannot be
used to close your Fund account balance.
</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 and loan association whose deposits are insured
by the Savings Association Insurance Fund, which is administered by the
FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Corporation and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Corporation may elect in
the future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Corporation and its transfer agent
reserve the right to amend these standards at any time without notice.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR. When you purchase Fund shares by
check or through the Automated Clearing House system, the proceeds from the
redemption of those shares (whether redeemed by mail, by telephone or by
checkwriting) are not available, and the shares may not be exchanged, until MFIS
is reasonably certain that the purchase check has cleared, which could take up
to seven calendar days.
ACCOUNTS WITH LOW BALANCES. Due to the high cost of maintaining accounts with
low balances, a Fund may redeem shares in your account and pay you the proceeds
if your account balance falls below the required minimum value of $1,000.
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.
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EXCHANGE PRIVILEGE
You may exchange shares of a Fund for shares of any of the other Funds at net
asset value without a sales charge, provided you meet the investment minimum of
the Fund. The exchange privilege is available to shareholders residing in any
state in which the Fund shares you are acquiring may legally be sold.
Upon receipt of proper instructions and all necessary supporting documents, the
Fund shares you submit for exchange will be redeemed at the next-determined net
asset value. Written exchange instructions may require a signature guarantee.
See "Signature Guarantees" above. An exchange is treated as a sale for federal
income tax purposes and, depending on the circumstances, you may realize a short
or long-term capital gain or loss. The exchange privilege may be terminated at
any time, and you will be notified of such termination. You may obtain further
information on the exchange privilege by calling MFIS.
-------------------------------------------------------------
TELEPHONE TRANSACTIONS
If you have completed a telephone authorization section in your account
application or have completed an authorization form obtained through MFIS or M&I
Brokerage Services, you may telephone instructions to MFIS to redeem Fund shares
or to request a purchase of Fund shares by exchanging between Fund accounts that
have identical shareholder registrations. Trust customers should contact their
account officer. Telephone exchange instructions must be received before 3:00
p.m. (Central Time) for shares to be exchanged the same day. However, you will
not receive a dividend of the Fund into which you exchange on the date of the
exchange. Telephone redemption requests are subject to the time requirements
explained above in "How to Redeem Fund Shares."
Shares held in certificate form cannot be exchanged or redeemed by telephone.
Instead, you must forward the certificates to the transfer agent through MFIS
for credit to your mutual fund account before they can be exchanged or redeemed.
Shareholders requesting a telephone exchange or redemption service authorize a
Fund and its agents to act upon their telephonic instructions to exchange or
redeem shares from any account for which they have authorized such services.
Telephone instructions may be recorded. If reasonable procedures are not
followed by the Funds, they may be liable for losses due to unauthorized or
fraudulent telephone instructions.
The telephone privileges may be modified or terminated at any time. You will be
notified of such modification or termination. During times of drastic economic
or market changes, you may experience difficulty in making exchanges or
redemptions by telephone through banks, brokers, and other financial
institutions. In such cases, you should make the exchange or redemption request
in writing and send it by overnight mail.
-------------------------------------------------------------
MARSHALL FUNDS, INC.
INFORMATION
-------------------------------------------------------------
------------------------------------------------------------
ORGANIZATION AND HISTORY
The Corporation was incorporated under the laws of Wisconsin on July 31, 1992.
The Corporation may offer separate series of shares representing interests in
separate portfolios of securities, and the shares in any one portfolio may be
offered in separate classes.
-------------------------------------------------------------
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MANAGEMENT
BOARD OF DIRECTORS. The Directors are responsible for managing the business
affairs of the Corporation and for exercising all of the powers of the
Corporation except those reserved for the shareholders.
INVESTMENT ADVISER AND SUBADVISER. Pursuant to an investment advisory contract
with the Corporation, M&I Investment Management Corp. serves as the investment
adviser (the "Adviser") to each Fund, subject to direction by the Directors.
With respect to the INTERNATIONAL STOCK FUND, the Adviser has entered into a
Subadvisory Contract with Templeton Investment Counsel, Inc. ("TICI" or
"Subadviser"), which gives TICI complete discretion to purchase, manage and sell
portfolio securities for the INTERNATIONAL STOCK FUND, subject to the Fund's
investment objective, policies and limitations. Although the Corporation's
Directors and officers, and the Adviser do not evaluate the investment merits of
TICI's individual security selections, TICI's activities are subject to their
oversight.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Corporation and its
portfolio securities. These codes recognize that such persons owe a fiduciary
duty to the Corporation's shareholders and must place the interests of
shareholders ahead of the employees' own interest. 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 Corporation; prohibit
purchasing securities in initial public offering; and prohibit taking profits or
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 a percentage of each Fund's average daily net assets as follows:
0.50% of MONEY MARKET FUND and SHORT-TERM TAX-FREE FUND; 0.60% of SHORT-TERM
INCOME FUND, INTERMEDIATE BOND FUND and INTERMEDIATE TAX-FREE FUND; 0.75% of
GOVERNMENT INCOME FUND, STOCK FUND, VALUE EQUITY FUND, EQUITY INCOME FUND and
MID-CAP STOCK FUND; and 1.00% of INTERNATIONAL STOCK FUND. Out of the fee paid
by the INTERNATIONAL STOCK FUND to the Adviser, TICI is entitled to receive an
annual fee equal to 0.50% of the INTERNATIONAL STOCK FUND'S daily net assets up
to $70 million and 0.40% of such assets in excess thereof. The fees of 0.75 of
1% or more may be higher than the advisory fees paid by mutual funds in general
but is comparable to the fee paid by many mutual funds with objectives and
policies similar to the Funds. The investment advisory contract allows the
voluntary waiver in whole or in part of the investment advisory fees or the
reimbursement of expenses by the Adviser from time to time. The Adviser can
terminate any voluntary waiver of its fees or reimbursement of expenses at any
time in its sole discretion.
Investment decisions for the Funds will be made independently from those of any
fiduciary or other accounts that may be managed by the Adviser, Subadviser or
their affiliates. If, however, such accounts, a Fund, or the Adviser or
Subadviser for its own account, are simultaneously engaged in transactions
involving the same securities, the transactions may be combined and allocated to
each account. Although this system may adversely affect the price the Funds pay
or receive, or the size of the position they obtain, it may also enable the
Funds to benefit from lower transaction costs.
ADVISER'S BACKGROUND. M&I Investment Management Corp. is a registered investment
adviser and a wholly owned subsidiary of Marshall & Ilsley Corp., a registered
bank holding company headquartered in Milwaukee, Wisconsin. As of December 1,
1995, M&I Investment Management Corp. had approximately $7.25 billion in assets
under management and has managed investments for individuals and institutions
since its inception in 1973. The Adviser has managed the Corporation's
portfolios since 1992, and managed the Newton Funds (predecessors to certain of
these portfolios) since 1985. As part of its regular banking operations,
affiliates of the Adviser may make loans to public companies. Thus, it may be
possible, from time to time, for the Funds to hold or acquire securities of
issuers which are also lending clients of the Adviser's affiliates. The lending
relationship will not be a factor in the selection of securities.
SUBADVISER'S BACKGROUND. TICI is a registered investment adviser and a
professional investment counseling firm which has been handling investment
services since 1979. As of December 1, 1995, TICI had discretionary investment
of approximately $13.7 billion in assets. TICI is indirectly owned by Franklin
Resources, Inc., which engages in various aspects of the financial services
industry through its subsidiaries.
TICI and its affiliates serve as advisers for a wide variety of mutual funds and
private clients in many nations. TICI, its affiliates and their predecessors
have been investing globally over the past 52 years and provide investment
management and advisory services to a worldwide client base, including over 3.0
million mutual fund shareholders, foundations and endowments, employee benefit
plans and individuals. TICI and its affiliates have approximately 3,200
employees in ten different countries and a global network of over 50 investment
research sources. TICI is supported by the Templeton organization's large staff
of research analysts, traders and other investment specialists based in Fort
Lauderdale, Nassau, New York, Edinburgh, Toronto, Hong Kong, Melbourne, and
Singapore. Templeton's research analysts use a disciplined, long-term approach
to value-oriented global and international investing. Securities are selected
for the INTERNATIONAL STOCK FUND'S portfolio from a list of eligible securities
maintained and constantly updated by Templeton's analysts on the basis of
fundamental analysis, which utilizes a global database of information on
issuers. TICI believes that the Templeton organization's team approach benefits
INTERNATIONAL STOCK FUND investors by bringing together many disciplines and
leveraging the organization's extensive resources.
PORTFOLIO MANAGEMENT TEAM. The EQUITY INCOME FUND is managed by Bruce P. Hutson,
who has been a Vice President of M&I Investment Management Corp. since 1973 and
has been a member of the Equity Policy Group since January 1990. Mr. Hutson
holds a B.B.A. degree from the University of Wisconsin-Whitewater.
The VALUE EQUITY FUND is managed by Gerry M. Sandel who has been a Vice
President of M&I Investment Management Corp. since October 1993. Mr. Sandel
previously served as Vice President, Chairman of the Stock Selection Committee
and Director of Equity Research at Acorn Asset Management Corporation,
Bloomfield Hills, Michigan from June 1991 to September 1993. From 1987 to 1991,
Mr. Sandel served as a Vice President, Equity Research Analyst and Portfolio
Manager at Abraham & Sons Asset Management, Inc., Chicago, Illinois. Mr. Sandel
is a Chartered Financial Analyst and holds a Master of International Management
degree from the American Graduate School in Phoenix, Arizona and a B.S. degree
from the University of Southern Mississippi in Hattiesburg.
The STOCK FUND is managed by Charles L. Mehlhouse. Mr. Mehlhouse has been a Vice
President of M&I Investment Management Corp. since May 1993. Mr. Mehlhouse also
served as Managing Director of Texas Commerce Investment Management Company in
Houston from 1987 to 1993. Mr. Mehlhouse is a Chartered Financial Analyst and
holds an M.A. degree from Michigan State University as well as a B.A. degree
from Macalester College.
The MID-CAP STOCK FUND is managed by Steven D. Hayward. Prior to joining M&I
Investment Management Corp. as a Vice President in December 1993, Mr. Hayward
served as Senior Portfolio Manager of Amoco Corporation. Mr. Hayward, who is a
Chartered Financial Analyst, received a B.A. in Economics from North Park
College, and an M.B.A. in Finance from Loyola University.
The INTERNATIONAL STOCK FUND is managed by James E. Chaney, Senior Vice
President of TICI. Prior to joining the Templeton organization in 1991, Mr.
Chaney spent six years with GE Investments, where he was vice president of
international equities. He also has another seven years experience as an
international consulting engineer and project manager for Camp, Dresser & McKee,
Inc. and American British Consultants. Mr. Chaney holds an M.B.A. with Honors
from Columbia University, an M.S. in Engineering from Northeastern University,
with a B.S. in Engineering from the University of Massachusetts-Amherst.
The SHORT-TERM INCOME FUND AND INTERMEDIATE BOND FUND, are managed by Mark
Pittman. Mr. Pittman is an Assistant Vice President of M&I Investment Management
Corp., which he joined in June 1994. Prior to that time, he spent five years
with Valley Trust Company managing fixed income portfolios and common trust
funds. In addition, he was a member of the Valley Trust Company Investment
Committee and Asset Allocation Committee. Mr. Pittman is a Chartered Financial
Analyst and holds M.B.A. and B.B.A. degrees in Finance from the University of
Wisconsin-Madison.
The GOVERNMENT INCOME FUND is managed by Lawrence J. Pavelec. Mr. Pavelec is a
Vice President and the Director of Fixed Income for M&I Investment Management
Corp. Mr. Pavelec joined Marshall & Ilsley Bank in 1982 and M&I Investment
Management Corp. in September 1985. Since 1988, he has been managing total
return fixed income portfolios. He has been a member of M&I Investment
Management Corp.'s Fixed Income Policy Group since 1985 and became Chairman in
August 1993. He has managed the GOVERNMENT INCOME FUND since August 1993. Mr.
Pavelec is a Chartered Financial Analyst and holds a B.S. degree from the
University of Wisconsin-LaCrosse.
The TAX-FREE INCOME FUNDS are managed by John D. Boritzke, who is a Vice
President for M&I Investment Management Corp. responsible for tax-exempt fixed
income portfolio management. He joined M&I Investment Management Corp. in
November 1983. Since 1985, he has been managing tax-exempt fixed income
portfolios. In addition, he has managed the M&I
Municipal Bond Fund since 1985 and continues to manage the M&I Arizona Municipal
Bond Fund, which he has managed since its inception in 1989. Both of these funds
are common trust funds of Marshall & Ilsley Trust Company. Mr. Boritzke has been
a member of M&I Investment Management Corp.'s Fixed Income Policy Group since
1985. He is a Chartered Financial Analyst and holds M.B.A. and B.S. degrees from
Marquette University.
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DISTRIBUTION OF FUND SHARES
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for shares of the Funds and a number of other investment
companies. The distributor may offer certain items of nominal value from time to
time to any shareholder or investor in connection with the sale of Fund shares.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers, dealers and
administrators (including depository or other institutions such as commercial
banks and savings and loan associations) to provide distribution and/or
administrative services for which they will receive fees from the distributor
based upon shares owned by their clients or customers. These administrative
services include distributing prospectuses and other information, providing
account assistance, and communicating or facilitating purchases and redemptions
of the Funds' shares. The fees are calculated as a percentage of the average
aggregate net asset value of shareholder accounts held during the period for
which the brokers, dealers, and administrators provide services. Any fees paid
for these services by the distributor will be reimbursed by the Adviser and not
the Funds.
DISTRIBUTION PLAN. Under a Rule 12b-1 Plan (the "Plan"), the MONEY MARKET FUND
will pay to the distributor on behalf of CLASS B SHARES an amount computed at an
annual rate of 0.30 of 1% of the average daily net asset value of CLASS B
SHARES, and INTERNATIONAL STOCK FUND may pay the distributor an amount computed
at an annual rate of 0.25% of the INTERNATIONAL STOCK FUND'S average daily net
assets, in each case to finance any activity which is principally intended to
result in the sale of the shares subject to the Plan ("Plan Shares"). The
INTERNATIONAL STOCK FUND has no present intention of paying or accruing 12b-1
fees during the fiscal year ending August 31, 1996. The distributor may, from
time to time and for such periods as it deems appropriate, voluntarily reduce
its compensation under the Plan.
The distributor may select certain entities to provide sales and/or
administrative services as agents for holders of Plan Shares. Administrative
services may include, but are not limited to, the following functions: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Plan Shares; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as these Funds reasonably request. Such entities
will receive fees from the distributor based upon Plan Shares owned by their
clients or customers. The schedules of such fees and the basis upon which such
fees will be paid will be determined from time to time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law. In addition, some
state securities laws may require administrators to register as brokers and
dealers.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor, the Adviser or their
affiliates, at their own expense and out of their own assets, may also provide
other compensation to institutions in connection with sales of Fund shares or as
financial assistance for providing substantial marketing, sales and operational
support. The support may include initiating customer accounts, providing sales
literature, or participating in sales, educational and training seminars
(including those held at recreational facilities). Such assistance will be
predicated upon the amount of shares of the Fund or the Corporation the
institution sells or may sell and/or upon the type and nature of sales,
operational or marketing support furnished
by the institution. Any payments made by the distributor may be reimbursed by
the Adviser or its affiliates.
From time to time M&I Trust Company may pay amounts, from its own funds, to
individual or corporate affiliates of M&I Corp., or others for their services
relating to investments made in the Funds. These amounts may include payments to
M&I Brokerage Services, which vary based upon the amount invested and the type
of Fund purchased.
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ADMINISTRATION OF THE
FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate the Funds. Such services include certain
shareholder servicing, legal and accounting services. Federated Administrative
Services provides these services at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE CORPORATION
- ------------------ -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may choose voluntarily to reimburse
a portion of its fee at any time.
SHAREHOLDER SERVICING ARRANGEMENTS. Marshall Funds Investor Services ("MFIS"),
Milwaukee, Wisconsin, a division of M&I Trust Company, is the shareholder
servicing agent for the Funds. As such, MFIS provides shareholder services which
include, but are not limited to, distributing prospectuses and other
information, providing shareholder assistance, and communicating or facilitating
purchases and redemptions of shares. Each Fund may pay MFIS a fee equal to
approximately 0.02 of 1% of the average daily net asset value of Fund shares for
which MFIS provides shareholder services. MFIS may voluntarily choose to waive
all or a portion of its fee at any time.
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BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser and TICI look for prompt execution of the order at a
favorable price. In working with dealers, the Adviser and TICI will generally
utilize those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained elsewhere.
In selecting among firms believed to meet these criteria, the Adviser and TICI
may give consideration to those firms which have sold or are selling shares of
the Funds and other funds distributed by Federated Securities Corp. or Franklin/
Templeton Distributors, Inc. The Adviser and TICI make decisions on portfolio
transactions and select brokers and dealers subject to review by the Directors.
-------------------------------------------------------------
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EXPENSES OF THE FUNDS
Each Fund pays all of its own expenses and its allocable share of the
Corporation's expenses. These expenses include, but are not limited to, the cost
of: organizing the Corporation and continuing its existence; Director's fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Corporation, the Funds, and
shares of each Fund with federal and state securities authorities; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming shares; fees for
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing, mailing, auditing, and certain accounting and
legal expenses; reports to shareholders; meetings of Directors and shareholders
and proxy solicitations therefor; insurance premiums; association membership
dues; and such non-recurring and extraordinary items as may arise. However, the
Adviser may voluntarily reimburse some expenses and, in addition, has undertaken
to reimburse each Fund up to the amount of its advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
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SHAREHOLDER INFORMATION
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CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Upon written request, you can receive
share certificates without charge, but only for whole shares of a Fund. You may
contact MFIS to direct the transfer agent to issue you certificates or deliver
certificates for redemption or credit to your account.
The MONEY MARKET FUND sends you monthly confirmations to report all transactions
such as purchases, redemptions, and dividends paid during the month. The other
Funds send you a detailed confirmation of each purchase or redemption or
dividend payment. At a minimum, you will receive a monthly statement. You may
request photocopies of confirmations for transactions affecting your account in
prior years at a fee of $5 per year per Fund to cover the cost of obtaining this
information.
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DIVIDENDS AND CAPITAL GAINS
Dividends of the MONEY MARKET FUND, INCOME FUNDS and TAX-FREE INCOME FUNDS are
declared daily and paid monthly. Dividends of the EQUITY FUNDS are declared and
paid quarterly, except for the INTERNATIONAL STOCK FUND, which declares and pays
dividends annually. Only shareholders invested in the particular Fund on the
record date of the dividend declaration are paid that dividend. Capital gains,
when realized by a Fund, will be distributed at least once every 12 months.
Unless you request cash payments by writing to your Fund, your dividends and
capital gains are automatically reinvested in additional shares of the
respective Fund on payment dates at the ex-dividend date net asset value.
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COMMON STOCK AND VOTING RIGHTS
The Directors have authorized the issuance of shares of Common Stock
representing ownership interests in each of the Funds. Shareholders are entitled
to one vote for each full share of Common Stock and proportionate fractional
votes for fractional shares. All shares of each Fund or class in the Corporation
have equal voting rights and will generally vote in the aggregate and not by
Fund or class, unless required by law. For example, only shares of a particular
Fund or class are entitled to vote on matters affecting that Fund or class.
Voting rights are not cumulative; consequently, the holders of more than 50% of
the Corporation's shares of Common Stock can elect the entire Board of
Directors.
The Corporation does not intend to hold annual meetings of shareholders, unless
required by the Act or applicable law. Directors may be removed by the
shareholders at a special meeting, which may be called by the Directors upon
written request of shareholders owning at least 10% of the Corporation's
outstanding voting shares.
As of December 4, 1995, Mitra & Co., Marshall & Ilsley Trust Operations,
Milwaukee, Wisconsin, acting in various capacities for numerous accounts, was
the owner of record of more than 25% of the outstanding shares of the designated
Fund: 4,345,607 shares (40.40%) of EQUITY INCOME FUND; 6,729,514 shares (39.36%)
of VALUE EQUITY FUND; 13,468,060 shares (61.68%) of STOCK FUND; 4,313,247 shares
(49.75%) of MID-CAP STOCK FUND; 4,344,995 shares (42.96%) of INTERNATIONAL STOCK
FUND; 4,392,447 shares (52.21%) of SHORT-TERM INCOME FUND; 22,356,810 shares
(60.63%) of INTERMEDIATE BOND FUND; 4,142,034 shares (35.60%) of GOVERNMENT
INCOME FUND; and 910,711 shares (44.27%) of SHORT-TERM TAX-FREE FUND; and
therefore, may for certain purposes, be deemed to control these Funds and be
able to affect the outcome of certain matters presented for a vote of
shareholders. As of December 4, 1995, Maril & Co., Marshall & Ilsley Trust Co.,
Milwaukee, Wisconsin, acting in various capacities for numerous accounts, was
the owner of record of more than 25% of the outstanding shares of the designated
Fund: 4,432,677 shares (41.21%) of EQUITY INCOME FUND; 5,633,714 shares (32.95%)
of VALUE EQUITY FUND; 3,008,454 shares (34.70%) of MID-CAP STOCK FUND; 4,456,069
shares (44.06%) of INTERNATIONAL STOCK FUND; 2,425,957 shares (28.84%) of
SHORT-TERM INCOME FUND; 9,810,659 shares (26.60%) of INTERMEDIATE BOND FUND;
855,432 shares (41.58%) of SHORT-TERM TAX-FREE FUND; 4,015,906 shares (79.83%)
of INTERMEDIATE TAX-FREE FUND; and therefore, may for certain purposes, be
deemed to control these Funds and be able to affect the outcome of certain
matters presented for a vote of shareholders. As of December 4, 1995, Maril &
Co., Milwaukee, Wisconsin, acting in various capacities for numerous accounts,
was the owner of record of 723,296 shares (70.13%) of MONEY MARKET FUND-CLASS A
SHARES; and therefore, may for certain purposes, be deemed to control this Fund
and be able to affect the outcome of certain matters presented for a vote of
shareholders. As of December 4, 1995, M & I BSS Appleton, Appleton, Wisconsin,
acting in various capacities for numerous accounts, was the owner of record of
22,894,633 shares (43.29%) of MONEY MARKET FUND-CLASS B SHARES; and therefore,
may for certain purposes, be deemed to control this Fund and be able to affect
the outcome of certain matters presented for a vote of shareholders.
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PERFORMANCE INFORMATION
From time to time, all of the Funds may advertise total return and yield, the
MONEY MARKET FUND may advertise its effective yield, and the TAX-FREE INCOME
FUNDS may advertise their tax-equivalent yields.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield for the MONEY MARKET FUND represents the annualized rate of income
earned on an investment in its shares over a seven-day period. It is the
annualized dividends earned during the period on the investment, shown as a
percentage of the investment. The effective yield is calculated similarly to the
yield, but, when annualized, the income earned by an investment is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The CLASS A
SHARES and CLASS B SHARES of the MONEY MARKET FUND will each have their own
yields. Because CLASS A SHARES are not subject to 12b-1
fees, their yields will be higher than yields of CLASS B SHARES.
The yield for the other Funds is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by a Fund over a thirty-day period by the offering price per share of the Fund
on the last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that a TAX-FREE INCOME FUND would have
had to earn to equal its actual yield, assuming a specific tax rate. The yield
and the tax-equivalent yield do not necessarily reflect income actually earned
by a Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
From time to time, the Funds may advertise their performance using certain
reporting services and/or compare their performance to certain indices.
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PORTFOLIO INVESTMENTS
AND STRATEGIES
ASSET-BACKED SECURITIES. The EQUITY FUNDS and the INCOME FUNDS may invest in
Asset-Backed Securities rated, at the time of purchase, in the top three rating
categories by an NRSRO (A or better by S&P, Fitch or Moody's) or, if unrated, of
comparable quality as determined by the Fund's Adviser or Subadviser. The MONEY
MARKET FUND may invest in short-term tranches of Asset Backed-Securities that
meet the rating and maturity requirements of Rule 2a-7. However, only the INCOME
FUNDS expect that they might exceed 5% of their respective net assets in these
securities. Asset-Backed Securities have structural characteristics similar to
Mortgage-Backed Securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Funds may invest in
Asset-Backed Securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
BANK INSTRUMENTS. The Funds may invest in domestic Bank Instruments, which are
instruments (including time and savings deposits, bankers' acceptances and
certificates of deposit) of banks and savings and loans that have capital,
surplus and undivided profits of over $100 million or for which the principal
amount of the instrument is insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, which are administered by the Federal Deposit
Insurance Corporation. The INTERNATIONAL STOCK FUND, THE MONEY MARKET FUND, and
to a limited extent the other EQUITY FUNDS may purchase foreign Bank
Instruments, which include Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs").
ECDs are U.S. dollar-denominated certificates of deposits issued by foreign
branches of U.S. banks or foreign banks. Yankee CDs are U.S. dollar denominated
certificates of deposits issued in the U.S. by branches and agencies of foreign
banks. ETDs are U.S. dollar-denominated deposits in foreign branches of U.S.
banks or foreign banks. The INCOME FUNDS and the TAX-FREE INCOME FUNDS reserve
the right to invest in foreign Bank Instruments, although they do not presently
intend to so invest. The Funds will treat securities credit-enhanced with a
bank's irrevocable letter of credit or unconditional guaranty as Bank
Instruments.
BORROWING. While each of the Funds is permitted as a fundamental investment
policy to borrow money from banks or through reverse repurchase agreements
(arrangements in which a Fund sells a portfolio instrument for a percentage of
its cash value with an agreement to buy it back on a set date) in amounts of up
to one-third of its total assets ("net" assets for the MONEY MARKET FUND,
SHORT-TERM INCOME FUND and INTERMEDIATE BOND FUND), and pledge some assets as
collateral, only the INTERNATIONAL STOCK FUND expects that it might exceed 5%.
This is because the INTERNATIONAL STOCK FUND, unlike the other Funds, may borrow
money to purchase some of its portfolio securities, i.e., it may use "leverage."
Leveraging tends to exaggerate the effect on the Fund's net asset value of
changes in the value of its portfolio securities. Also, the Fund must pay
interest on borrowed money and may incur other costs, and these expenses could
exceed the income received or capital appreciation realized by the Fund from the
securities it purchases with borrowed money.
CONVERTIBLE SECURITIES. The EQUITY FUNDS may invest in convertible securities
which are rated, at the time of purchase, investment grade by an NRSRO (such as
BBB or better by S&P or Fitch, or Baa or better by Moody's), or, if unrated, are
of comparable quality as determined by the Fund's Adviser or Subadviser.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible bonds, convertible preferred stock or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The investment characteristics of
each convertible security vary widely, which allows convertible securities to be
employed for
different investment objectives. In selecting a convertible security, the Fund's
Adviser or Subadviser evaluates the investment characteristics of the
convertible security as a fixed income instrument, and the investment potential
of the underlying security for capital appreciation.
Convertible bonds and convertible preferred stocks generally retain the
investment characteristics of fixed income securities until they have been
converted but also react to movements in the underlying equity securities. The
holder is entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used in whole
or in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. Convertible securities are senior to equity securities,
and therefore have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality. A Fund will
exchange or convert the convertible securities held in its portfolio into shares
of the underlying common stocks when, in the opinion of the Fund's Adviser or
Subadviser, the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. Otherwise, the Fund will
hold or trade the convertible securities.
CREDIT ENHANCEMENT. Certain of a Fund's acceptable investments may have been
credit-enhanced by a guaranty, letter of credit or insurance. The Funds
typically evaluate the credit quality and ratings of credit-enhanced securities
based upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. However,
credit-enhanced securities will not be treated as having been issued by the
credit enhancer for diversification purposes, unless the Fund has invested more
than 10% of its assets in securities issued, guaranteed or otherwise
credit-enhanced by the credit enhancer, in which case the securities will be
treated as having been issued both by the issuer and the credit enhancer. The
bankruptcy, receivership or default of the credit enhancer will adversely affect
the quality and marketability of the underlying security.
DEMAND FEATURES. Each of the Funds may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the securities at
their principal amount (usually with accrued interest) within a fixed period
(usually seven days following a demand by the Funds). The demand feature may be
issued by the issuer of the underlying securities, a dealer in the securities or
by another third party, and may not be transferred separately from the
underlying security. A Fund uses these arrangements to provide it with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
DEMAND MASTER NOTES. THE SHORT-TERM INCOME FUND, INTERMEDIATE BOND FUND AND
MONEY MARKET FUND may invest in variable amount demand master notes. Demand
notes are short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as the Funds) payable upon demand by
either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment. Many master notes give
the Funds the option of increasing or decreasing the principal amount of the
master note on a daily or weekly basis within certain limits. Demand master
notes usually provide for floating or variable rates of interest.
DEPOSITARY RECEIPTS. The INTERNATIONAL STOCK FUND may invest in foreign issuers
by purchasing sponsored or unsponsored ADRs, GDRs and EDRs (collective,
"Depositary Receipts"). The other EQUITY FUNDS may invest only in ADRs. ADRs are
Depositary Receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Ownership of unsponsored
Depositary Receipts may not entitle a Fund to financial or other reports from
the issuer of the underlying security, to which it would be entitled as the
owner of sponsored Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities.
FIXED RATE DEBT OBLIGATIONS. The Funds may invest in fixed rate securities,
including fixed rate secu-
rities with short-term characteristics. Fixed rate securities with short-term
characteristics are long-term debt obligations but are treated in the market as
having short maturities because call features of the securities may make them
callable within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call or
redemption price or fixed income security approaching maturity, where the
expectation of call or redemption is high.
Fixed rate securities exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates of interest. This is
because floating rate securities, as described below, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities pay
a fixed rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates the value of a fixed rate security is likely
to fall. Fixed rate securities with short-term characteristics are not subject
to the same price volatility as fixed rate securities without such
characteristics. Therefore, they behave more like floating rate securities with
respect to price volatility.
FLOATING RATE DEBT OBLIGATIONS. The Funds may invest in floating rate debt
obligations, including increasing rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above prevailing
market rates. The interest rate paid on these securities is then reset
periodically (commonly every 90 days to an increment over some predetermined
interest rate index). Commonly utilized indices include the three-month Treasury
bill rate, the 180-day Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial paper
rates, or the longer-term rates on U.S. Treasury securities. Increasing rate
securities' rates are reset periodically at different levels on a predetermined
scale. These levels of interest are ordinarily set at progressively higher
increments over time. Some increasing rate securities may, by agreement, revert
to a fixed rate status. These securities may also contain features which allow
the issuer the option to convert the increasing rate of interest to a fixed rate
under such terms, conditions, and limitations as are described in each issuer's
prospectus.
FOREIGN CURRENCY TRANSACTIONS. The INTERNATIONAL STOCK FUND may enter into
foreign currency transactions to obtain the necessary currencies to settle
securities transactions. Currency transactions may be conducted either on a spot
or cash basis at prevailing rates or through forward foreign currency exchange
contracts.
The INTERNATIONAL STOCK FUND may also enter into foreign currency transactions
to protect its assets against adverse changes in foreign currency exchange rates
or exchange control regulations. Such changes could unfavorably affect the value
of Fund assets which are denominated in foreign currencies, such as foreign
securities or funds deposited in foreign banks, as measured in U.S. dollars.
Although foreign currency exchanges may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund. Further,
the Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations.
Cross-hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability that
is the subject of the hedge.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
The INTERNATIONAL STOCK FUND may enter into a forward foreign currency exchange
contract ("forward contract"), which is an obligation to purchase or sell an
amount of a particular currency at a specific price and on a future date agreed
upon by the parties.
Generally, no commission charges or deposits are involved. At the time the
INTERNATIONAL STOCK FUND enters into a forward contract, Fund assets with a
value equal to the Fund's obligation under the forward contract are segregated
on the Fund's records and are maintained until the contract has been settled.
The Fund generally will not enter into a forward contract with a term of more
than one year. The Fund will generally enter into a forward contract to provide
the proper currency to settle a securities transaction at the time the
transaction occurs ("trade date"). The period between trade date and settlement
date will vary between twenty-four hours and thirty days, depending upon local
custom.
The INTERNATIONAL STOCK FUND may also protect against the decline of a
particular foreign currency by entering into a forward contract to sell an
amount of that currency approximating the value of all or a portion of the
Fund's assets denominated in that currency ("hedging"). The success of this type
of short-term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the securities
involved. Although the Fund's Subadviser will consider the likelihood of changes
in currency values when making investment decisions, the Subadviser believes
that it is important to be able
to enter into forward contracts when it believes the interests of the Fund will
be served. The Fund will not enter into forward contracts for hedging purposes
in a particular currency in an amount in excess of the Fund's assets denominated
in that currency.
The INTERNATIONAL STOCK FUND may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in the U.S.
dollar value of foreign currency-denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be acquired. As in the
case of other kinds of options, however, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be written or
purchased by the Fund are traded on U.S. and foreign exchanges or
over-the-counter.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase securities
for a fixed price at a date beyond customary settlement time. The INTERNATIONAL
STOCK FUND may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on the Fund's records at
the trade date and maintained until the transaction has been settled. Risk is
involved if the value of the security declines before settlement. Although the
Fund enters into forward commitments with the intention of acquiring the
security, it may dispose of the commitment prior to settlement and realize a
short-term profit or loss.
ILLIQUID SECURITIES. These are any securities a Fund owns which it may not be
able to sell quickly (within seven days) at a fair price. The MONEY MARKET FUND
must limit such investments to 10% of its net assets while the other Funds may
not exceed 15% of their respective net assets.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, each of
the Funds is permitted as a fundamental investment policy to lend portfolio
securities on a short-term or long-term basis, or both, up to one-third of the
value of its respective total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
or Subadviser has determined are creditworthy under guidelines established by
the Directors and will receive collateral in the form of cash or U.S. government
securities equal to at least 100% of the value of the securities loaned. There
is the risk that when lending portfolio securities, the securities may not be
available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
MORTGAGE-BACKED SECURITIES. All of the Funds except for the MONEY MARKET FUND
may invest in Mortgage-Backed Securities rated, at the time of purchase, in the
top three rating categories by an NRSRO (A or better by S&P, Fitch or Moody's),
or, if unrated, of comparable quality as determined by the Fund's Adviser or
Subadviser. Mortgage-Backed Securities are securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property. All of the Funds except for the MONEY MARKET
FUND may invest in Mortgage-Backed Securities that are issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities, such as
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae") and Federal Home Loan National Mortgage
Corporation ("Freddie Mac"). Additionally, the INCOME FUNDS may invest in
Mortgage-Backed Securities (i) issued by private issuers that represent an
interest in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities or
(ii) issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMS") are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Funds invest are issued by Ginnie Mae,
Fannie Mae, and Freddie Mac and are actively traded. The underlying mortgages
which collateralize ARMS issued by Ginnie Mae are fully guaranteed by the
Federal Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The SHORT-TERM INCOME FUND and INTERMEDIATE BOND FUND will only invest in CMOs
which are rated in the top three rating categories by an NRSRO (A or better by
S&P, Fitch or Moody's), and which may be (a) collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; or (c) collateralized by pools of mortgages without a
government guarantee as to payment of principal and interest, but which have
some form of credit enhancement.
The GOVERNMENT INCOME FUND may invest in CMOs which may be: (i) collateralized
by pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government;
(ii) collateralized by pools and mortgages in which payment of principal and
interest are guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or (iii) privately issued securities in which the
proceeds of the issuance are invested in Mortgage-Backed Securities and payment
of the principal and interest is supported by the credit of any agency or
instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS. Real estate mortgage investment
conduits ("REMICs") are offerings of multiple class real estate Mortgage-Backed
Securities which qualify and elect treatment as such under provisions of the
Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations or a segregated pool of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates, and a single class of "residual interests." To qualify as a
REMIC, substantially all of the assets of the entity must be in assets directly
or indirectly secured principally by real property.
MUNICIPAL SECURITIES. The TAX-FREE INCOME FUNDS, the SHORT-TERM INCOME FUND and
the INTERMEDIATE BOND FUND may invest in Municipal Securities, which are
generally issued to finance public works such as airports, bridges, highways,
housing, hospitals, mass transportation projects, schools, streets, and water
and sewer works. They are also issued to repay outstanding obligations, to raise
funds for general operating expenses, and to make loans to other public
institutions and facilities.
Municipal Securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
MUNICIPAL LEASES. The TAX-FREE INCOME FUNDS may purchase municipal leases, which
are obligations issued by state and local governments or authorities to finance
the acquisition of equipment and facilities and may be considered to be
illiquid. They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation interest in any of these.
PARTICIPATION INTERESTS. The TAX-FREE INCOME FUNDS may purchase interests in
Municipal Securities from financial institutions such as commercial and
investment banks, savings and loan associations and insurance companies. These
interests may take the form of participations, beneficial interests in a trust,
partnership interests or any other form of indirect ownership that allows the
Funds to treat the income from the investment as exempt from federal income tax.
The financial institutions from which the Funds purchase participation interests
frequently provide or obtain irrevocable letters of credit or guarantees to
attempt to assure that the participation interests are of acceptable quality.
The Funds invest in these participation interests in order to obtain credit
enhancement or demand features that would not be available through direct
ownership of the underlying Municipal Securities.
OPTIONS ON SECURITIES OR INDICES AND FUTURES CONTRACTS. In order to hedge
against market shifts, a Fund may purchase put and call options on securities or
securities indices. In addition, a Fund may seek to generate income to offset
operating expenses and/or may hedge a portion of its portfolio investments
through writing (i.e., selling) covered put and call options. An option on a
security is a contract that
permits the purchaser of the option, in return for the premium paid, the right
to buy a specified security (in the case of a call option) or to sell a
specified security (in the case of a put option) from or to the writer of the
option at a designated price during the term of the option. An option on a
securities index permits the purchaser of the option, in return for the premium
paid, the right to receive from the seller cash equal to the difference between
the closing price of the index and the exercise price of the option. A Fund may
write a call or put option only if the option is "covered." This means that so
long as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the call, or hold a call at the same exercise
price, for the same exercise period, and on the same securities as the written
call. A put is covered if the Fund maintains liquid assets with a value equal to
the exercise price in a segregated account, or holds a put on the underlying
securities at an equal or greater exercise price. The value of the underlying
securities on which options may be written at any one time will not exceed 25%
of the total assets of a Fund. A Fund will not purchase put or call options if
the aggregate premium paid for such options would exceed 5% of its net assets at
the time of the purchase.
Options purchased or written by a Fund may be traded on United States and
foreign exchanges or in the over-the-counter markets. Over-the-counter options
are two-party contracts with price and terms negotiated between buyer and
seller. In contrast, exchange-traded options are third-party contracts with
standardized strike prices and expirations dates and are purchased from a
clearing corporation. Exchange-traded options generally have a continuous liquid
market while over-the-counter options may not. A Fund purchases and writes
options only with investment dealers and other financial institutions (such as
commercial banks or savings and loan associations) deemed creditworthy by the
Fund's investment adviser or subadviser.
The Funds, other than the MONEY MARKET FUND, SHORT-TERM INCOME FUND, or
INTERMEDIATE BOND FUND, may invest in futures for bona fide hedging purposes.
Although the Funds have the ability to invest up to 5% of their respective net
assets in futures for other than bona fide hedging purposes, they have no
present intention to do so. The ability to engage in futures transactions is a
fundamental investment policy. For hedging purposes only, a Fund may buy and
sell covered financial futures contracts, stock index futures contracts, foreign
currency futures contracts and options on any of the foregoing. A financial
futures contract is an agreement between two parties to buy or sell a specified
debt security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date. When a Fund
enters into a futures contract, it must make an initial deposit, known as
"initial margin," as a partial guarantee of its performance under the contract.
As the value of the security, index, or currency fluctuates, either party to the
contract is required to make additional margin payments, known as "variation
margin," to cover any additional obligation it may have under the contract. In
addition, when a Fund enters into a futures contract, it will segregate assets
to "cover" its position in accordance with the Act. See "Investment Objectives
and Policies - Futures and Options Transactions" in the Statement of Additional
Information.
PRIME COMMERCIAL PAPER. The Funds may purchase Prime Commercial Paper, which is
a short-term debt obligation that matures in 270 days or less, is issued by
banks, corporations or other institutions, and is rated one of the two highest
rating categories for short-term obligations by an NRSRO or are of comparable
quality to securities having such ratings.
PORTFOLIO TURNOVER. Although none of the Funds intends to invest for the purpose
of seeking short-term profits, securities will be sold whenever the Fund's
Adviser or Subadviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The annual rate of portfolio turnover for the SHORT-TERM
INCOME FUND, GOVERNMENT INCOME FUND and INTERMEDIATE BOND FUND may exceed that
of certain other mutual funds with the same investment objective. A higher rate
of portfolio turnover involves correspondingly greater transaction expenses
which must be borne directly by the Fund and, thus, indirectly by its
shareholders. In addition, a high rate of portfolio turnover may result in the
realization of larger amounts of capital gains which, when distributed to the
Fund's shareholders, are taxable to them. Nevertheless, transactions for a
Fund's portfolio will be based upon investment considerations and will not be
limited by any other considerations when the Fund's investment adviser or
subadviser deems it appropriate to make changes in the Fund's portfolio.
RATINGS. Securities rated in the fourth highest investment grade category (Baa
by Moody's, or BBB by S&P or Fitch) have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than higher rated
securities. The Fund's Statement of Additional Information contains complete
descriptions of ratings.
A Fund's Adviser or Subadviser will evaluate downgraded securities on a
case-by-case basis and will sell any security determined not to be an acceptable
investment.
An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by S&P
or Prime-1 by Moody's are all considered rated in the highest short-term rating
category. The MONEY MARKET FUND will follow applicable regulations in
determining whether a security rated by more than one NRSRO can be treated as
being in the highest short-term rating category; currently, such securities must
be rated by two NRSROs in their highest rating category. The MONEY MARKET FUND
may purchase single rated securities that are rated in the highest rating
category by an NRSRO. Unrated securities may be treated as "First Tier"
securities and are also eligible for purchase by the MONEY MARKET FUND, subject
to a determination of comparability by the Adviser. Acquisition of such unrated
securities must be ratified by the Directors quarterly.
RESTRICTED SECURITIES. Each of the Funds may invest in restricted securities.
These are securities in which each Fund normally invests but which are subject
to legal restrictions when a Fund sells them. Restricted securities which are
not determined by the Directors to be liquid will be limited to 5% of total
assets for the EQUITY FUNDS and 10% of total assets for all other Funds.
REPURCHASE AGREEMENTS. The securities in which the Funds invest may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or other securities to a Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price. To the
extent that the original seller does not repurchase the securities from a Fund,
the Fund could receive less than the repurchase price on any sale of such
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each of the Funds may invest in the
securities of other investment companies, but will not own more than 3% of the
total outstanding voting stock of any investment company, invest more than 5% of
its respective total assets in any one investment company, or invest more than
10% of its respective total assets in investment companies in general. Except
for the INTERNATIONAL STOCK FUND, the Funds will invest in other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio instruments. Although the Adviser will
waive its investment advisory fee on that portion of a Fund's assets invested in
securities of open-end investment companies, there will still be some
duplication of expenses caused by one investment company investing in another.
The INTERNATIONAL STOCK FUND may invest indirectly in foreign capital markets by
purchasing shares of closed-end investment companies, but generally only in
open-market transactions involving only customary brokerage commissions.
Sometimes the Fund may pay a premium over net asset value for such shares.
The Funds will only purchase shares of other open-end investment companies whose
sales loads, if any, are less than 1.00% of their offering prices.
SWAP TRANSACTIONS. As one way of managing its exposure to different types of
investments, each of the Funds (except the MONEY MARKET FUND) may invest up to
5% of their respective 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 or Subadviser judges that market
conditions warrant a defensive investment position (this rarely applies to the
MONEY MARKET FUND), each of the Funds may temporarily invest without limit in
short-term debt obligations (money market instruments). These investments
include commercial paper, bank instruments, U.S. government obligations,
repurchase agreements, securities of other investment companies, taxable or
tax-free Municipal Securities (for the TAX-FREE INCOME FUNDS) and foreign
securities (for the INTERNATIONAL STOCK FUND). The TAX-FREE INCOME FUNDS do not
currently intend to make any taxable investments although they are permitted to
do so. Each Fund's temporary investments must be of comparable quality to its
primary investments.
U.S. GOVERNMENT SECURITIES. All of the Funds may invest in U.S. Government
Securities, which generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations (including
Mortgage-Backed Securities, bonds, notes and discount notes) issued or
guaranteed by the following U.S. government agencies or instrumentalities:
Federal Home Loan Banks, Federal National Mortgage Association, Government
National Mortgage Association, Bank for Cooperatives (including Central Bank for
Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks, Tennessee
Valley Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, The Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union Administration.
These securities are backed by: the full faith and credit of the U.S. Treasury;
the issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; the discretionary authority of the U.S. government to
purchase certain obligations of agencies or instrumentalities; or the credit of
the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Federal Farm Credit Banks; Federal Home Loan Banks; Federal National Mortgage
Association; The Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
VARIABLE RATE DEMAND NOTES. Each of the Funds may purchase variable rate demand
notes, which are long-term debt instruments that have variable or floating
interest rates and provide the Fund with the right to tender the security for
repurchase at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities to
trade at par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on a published interest
rate or interest rate index. Many variable rate demand notes allow a Fund to
demand the repurchase of the security on not more than seven days prior notice.
Other notes only permit a Fund to tender the security at the time of each
interest rate adjustment or at other fixed intervals.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase portfolio
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which a Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause a Fund to miss a price or yield considered to be advantageous.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. Accordingly, a Fund may pay more or less than the market value of the
securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser or
Subadviser deems it appropriate to do so. In addition, a Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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ADDITIONAL INVESTMENT RISKS
DEBT MARKET. In the debt market, prices move inversely to interest rates. A
decline in market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market interest rates
results in a decline in market prices of outstanding debt obligations. In either
case, the amount of change in market prices of debt obligations in response to
changes in market interest rates generally depends on the maturity of the debt
obligations: the debt obligations with the longest maturities will experience
the greatest market price changes.
The market value of debt obligations, and therefore each Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Funds' Adviser or
Subadviser. The Funds' Adviser or Subadviser could be incorrect in its
expectations about the direction or extent of these market factors. Although
debt obligations with longer maturities offer potentially greater returns, they
have greater exposure to market price fluctuation. Consequently, to the extent a
Fund is significantly invested in debt obligations with longer maturities, there
is a greater possibility of fluctuation in the Fund's net asset value.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and Asset-Backed
Securities generally pay back principal and interest over the life of the
security. At the time a Fund reinvests the payments and any unscheduled
prepayments of principal received, such Fund may receive a rate of interest
which is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-Backed and Asset-Backed Securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting Asset-Backed Securities may be prepaid without penalty or premium.
Prepayment risks on Mortgage-Backed Securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
Mortgage-Backed Securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although Asset-Backed Securities generally are less
likely to experience substantial prepayments than are Mortgage-Backed
Securities, certain factors that affect the rate of prepayments on
Mortgage-Backed Securities also affect the rate of prepayments on Asset-Backed
Securities.
While Mortgage-Backed Securities generally entail less risk of a decline during
periods of rapidly rising interest rates, Mortgage-Backed Securities may also
have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if Mortgage-Backed Securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of
the premium paid. Conversely, if Mortgage-Backed Securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal would increase current and total returns and would accelerate the
recognition of income, which would be taxed as ordinary income when distributed
to shareholders.
Asset-Backed Securities present certain risks that are not presented by
Mortgage-Backed Securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of Asset-Backed Securities backed by
motor vehicle installment purchase obligations permit the service of such
receivables to retain possession of the underlying obligations. If the service
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related Asset-
Backed Securities. Further, if a vehicle is registered in one state and is then
re-registered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of Asset-Backed Securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
MUNICIPAL SECURITIES. Yields on Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term municipal note
market and of the municipal bond market; the size of the particular offering;
the maturity of the obligations; and the rating of the issue. The ability of a
Fund to achieve its investment objective also depends on the continuing ability
of the issuers of Municipal Securities and demand features, or the credit
enhancers of either, to meet their obligations for the payment of interest and
principal when due.
STOCK MARKET. As with other mutual funds that invest primarily in equity
securities, the EQUITY FUNDS are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time, and the United States equity market tends to be cyclical,
experiencing both periods when stock prices generally increase and periods when
stock prices generally decrease.
MEDIUM CAPITALIZATION STOCKS. Stocks in the medium capitalization sector of
the United States equity market tend to be slightly more volatile in price
than larger capitalization stocks, such as those included in the S&P 500.
This is because, among other things, medium-sized companies have less
certain growth prospects in larger companies, have a lower degree of
liquidity in the equity market, and tend to have a greater sensitivity to
changing economic conditions. Further, in addition to exhibiting slightly
higher volatility, the stocks of medium-sized companies may, to some
degree, fluctuate independently of the stocks of large companies. That is,
the stocks of medium-sized companies may decline in price as the price of
large company stocks rises or vice versa. Therefore, investors should
expect that the MID-CAP STOCK FUND, which invests primarily in medium
capitalization stocks, will be slightly more volatile than, and may
fluctuate independently of, broad stock market indices such as the S&P 500.
FOREIGN SECURITIES. Investing in non-U.S. securities carries substantial risks
in addition to those associated with domestic investments. (Excluding Foreign
Money Market Instruments and Depositary Receipts, only the INTERNATIONAL STOCK
FUND intends to invest more than 5% of its net assets in Foreign Securities).
The risks associated with investing in foreign securities include: risks of
adverse political and economic developments (including possible governmental
seizure or nationalization of assets); the possible imposition of exchange
controls or other governmental restrictions; default in foreign government
securities; foreign companies are not generally subject to uniform financial
reporting, auditing and accounting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies; less
readily available market quotations on foreign companies; the possibility of
less publicly available information on foreign securities and their issuers;
differences in government regulation and supervision of foreign stock exchanges,
brokers, listed companies, and banks; generally lower foreign stock market
volume; the likelihood that foreign securities may be less liquid or more
volatile; foreign brokerage commissions and other transaction costs (such as
custodial services) may be higher; unreliable mail service between countries;
restrictions on foreign investments in other jurisdictions; difficulties which
may be encountered in obtaining or enforcing a court judgment abroad and
affecting repatriation of capital invested abroad; and delays or problems in
settlement of foreign transactions, which could adversely affect shareholder
equity or cause the Fund to miss attractive investment opportunities. In
addition, foreign securities may be subject to foreign taxes, which reduce yield
and total return.
In an attempt to reduce some of these risks, the INTERNATIONAL STOCK FUND
diversifies its investments broadly among foreign countries, including both
developed and developing countries. At least three different countries will
always be represented in the INTERNATIONAL STOCK FUND'S portfolio.
The INTERNATIONAL STOCK FUND occasionally takes advantage of the unusual
opportunities for higher returns available from investing in developing
countries. Investments in companies domiciled in developing countries may be
subject to potentially higher risks and volatility than investments in developed
countries with more mature economies. These risks include: (i) less social,
political and economic stability; (ii) the small current size of the markets for
such securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and greater price volatility; (iii) certain
national policies which may restrict the INTERNATIONAL STOCK FUND'S investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) the absence of developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property; (v) the absence, until recently in
certain Eastern European countries, of a capital market structure or
market-oriented economy; and (vi) the possibility that recent favorable economic
developments in Eastern Europe may be slowed or reversed by unanticipated
political or social events in such countries.
EXCHANGE RATES. Foreign securities may be denominated in foreign currencies
although only the INTERNATIONAL STOCK FUND intends to invest in such
foreign currency-denominated securities to a significant extent. Therefore,
the value in U.S. dollars of the INTERNATIONAL STOCK FUND'S assets and
income may be affected by changes in exchange rates and regulations.
Although the INTERNATIONAL STOCK FUND values its assets daily in U.S.
dollars, it will not convert its holding of foreign currencies to U.S.
dollars daily. When the INTERNATIONAL STOCK FUND converts its holdings to
another currency, it may incur conversion costs. Foreign exchange dealers
realize a profit on the difference between the prices at which they buy and
sell currencies.
FOREIGN MONEY MARKET INSTRUMENTS. ECDs, ETDs, Yankee CDs, and Europaper are
subject to somewhat different risks than domestic obligations of domestic
issuers. Examples of these risks include international, economic, and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign withholding
or other taxes on interest income, difficulties in obtaining or enforcing a
judgment against the issuing bank, and the possible impact of interruptions
in the flow of international currency transactions. Different risks may
also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks,
such as reserve requirements, loan limitations, examinations, accounting,
auditing, and recordkeeping, and the public availability of information.
These factors will be carefully considered by a Fund's Adviser or
Subadviser in selecting these investments.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as
the INTERNATIONAL STOCK FUND. When such policies are instituted, the Fund
will abide by them.
FUTURES AND OPTIONS. When a Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Fund's Adviser or Subadviser could be incorrect in its expectations about
the direction or extent of market factors such as interest or currency exchange
rate movements. In these events, the Fund may lose money on the futures contract
or option. Also, it is not certain that a secondary market for positions in
futures contracts or for options will exist at all times. Although the Fund's
Adviser or Subadviser will consider liquidity before entering into such
transactions, there is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures contract or option
at any particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market.
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TAX INFORMATION
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FEDERAL INCOME TAX
None of the Funds will pay federal income tax because each expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
other Funds of the Corporation, if any, will not be combined for tax purposes
with those realized by any of the other Funds.
Unless otherwise exempt, you are required to pay federal income tax on any
dividends and other distri-
butions received. However, shareholders of SHORTTERM TAX-FREE FUND and
INTERMEDIATE TAX-FREE FUND are not required to pay the federal regular income
tax on any dividends received from the Fund that represent net interest on
tax-exempt municipal bonds; but, under the Tax Reform Act of 1986, dividends
representing net interest earned on certain "private-activity" municipal bonds
may be included in calculating the federal individual alternative minimum tax or
the federal alternative minimum tax for corporations. Dividends of the TAX-FREE
INCOME FUNDS representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
Investment income received by the INTERNATIONAL STOCK FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries that
entitle the INTERNATIONAL STOCK FUND to reduced tax rates or exemptions on this
income. The effective rate of foreign tax cannot be predicted since the amount
of INTERNATIONAL STOCK FUND'S assets to be invested within various countries is
unknown. However, the INTERNATIONAL STOCK FUND intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
If more than 50% of the value of the INTERNATIONAL STOCK FUND'S assets at the
end of the tax year is represented by stock or securities of foreign
corporations, the INTERNATIONAL STOCK FUND intends to qualify for certain
Internal Revenue Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Internal
Revenue Code may limit a shareholder's ability to claim a foreign tax credit.
Furthermore, shareholders who elect to deduct their portion of the INTERNATIONAL
STOCK FUND'S foreign taxes rather than take the foreign tax credit must itemize
deductions on their income tax returns.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
-------------------------------------------------------------
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STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue, and you should consult your
tax adviser for specific details.
-------------------------------------------------------------
EFFECT OF BANKING LAWS
M&I Corp. believes, based on the advice of its counsel, that M&I Investment
Management Corp. may perform the services contemplated by the investment
advisory agreement with the Corporation without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such present or future statutes
and regulations, could prevent M&I Investment Management Corp. or M&I Corp. from
continuing to perform all or a part of the above services for its customers
and/or a Fund. In such event, the Directors would consider alternative advisers
and means of continuing available investment services.
-------------------------------------------------------------
STANDARD & POOR'S
CORPORATION
"Standard & Poor's," "S&P," "S&P 500," "Standard & Poor's 500" and "500" are
trademarks of Standard & Poor's Corporation.
The Funds are not sponsored, endorsed, sold or promoted by or affiliated with
Standard & Poor's Corporation.
- --------------------------------------------------------------------------------
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
MARSHALL EQUITY INCOME FUND Federated Investors Tower
MARSHALL VALUE EQUITY FUND Pittsburgh, Pennsylvania 15222-3779
MARSHALL STOCK FUND
MARSHALL MID-CAP STOCK FUND
MARSHALL INTERNATIONAL STOCK FUND
MARSHALL SHORT-TERM INCOME FUND
MARSHALL INTERMEDIATE BOND FUND
MARSHALL GOVERNMENT INCOME FUND
MARSHALL SHORT-TERM TAX-FREE FUND
MARSHALL INTERMEDIATE TAX-FREE FUND
MARSHALL MONEY MARKET FUND
- -----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Adviser to all Funds
M & I Investment Management Corp. 1000 North Water Street
Milwaukee, Wisconsin 53202
- -----------------------------------------------------------------------------------------------------
Subadviser to MARSHALL INTERNATIONAL STOCK FUND
Templeton Investment Counsel, Inc. 500 East Broward Blvd.
Suite 2100
Ft. Lauderdale, Florida 33394-3091
- -----------------------------------------------------------------------------------------------------
Custodian
Marshall & Ilsley Trust Company 1000 North Water Street
Milwaukee, Wisconsin 53202
- -----------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Marshall Funds Investor Services P.O. Box 1348
Milwaukee, Wisconsin 53201-1348 OR
1000 North Water Street
Milwaukee, Wisconsin 53202-1348
- -----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -----------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------------
</TABLE>
Marshall Funds 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
Federated Securities Corp.
Distributor
MARSHALL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1995
EQUITY FUNDS TAX-FREE INCOME FUNDS
oMARSHALL EQUITY INCOME FUND o MARSHALL SHORT-TERM TAX-FREE FUND
oMARSHALL VALUE EQUITY FUND O MARSHALL INTERMEDIATE TAX-FREE FUND
OMARSHALL STOCK FUND
OMARSHALL MID-CAP STOCK FUND
OMARSHALL INTERNATIONAL STOCK FUND
INCOME FUNDS MONEY MARKET FUND
oMARSHALL SHORT-TERM INCOME FUND
OMARSHALL MONEY MARKET FUND
OMARSHALL INTERMEDIATE BOND FUND
OMARSHALL GOVERNMENT INCOME FUND
This Statement of Additional Information should be read with the
prospectus, dated December 31, 1995, for the funds listed above. 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 414-287-8500 or 1-800-326-8560 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 10
FUNDAMENTAL LIMITATIONS 10
NON-FUNDAMENTAL LIMITATIONS 12
MARSHALL FUNDS, INC. MANAGEMENT 13
OFFICERS AND DIRECTORS 14
FUND OWNERSHIP 16
DIRECTORS' COMPENSATION 17
INVESTMENT ADVISORY SERVICES 17
ADVISER TO THE FUND 17
ADVISORY FEES 17
SUBADVISER TO INTERNATIONAL STOCK
FUND 18
STATE EXPENSE LIMITATIONS 19
ADMINISTRATIVE SERVICES 19
SHAREHOLDER SERVICING ARRANGEMENTS
19
TRANSFER AGENT, DIVIDEND DISBURSING
AGENT, AND PORTFOLIO ACCOUNTING
SERVICES 20
CUSTODIAN 20
BROKERAGE TRANSACTIONS 20
PURCHASING SHARES WITH SECURITIES21
DISTRIBUTION PLAN 21
DETERMINING MARKET VALUE 22
USE OF THE AMORTIZED COST METHOD
22
MARKET VALUES 22
TRADING IN FOREIGN SECURITIES 23
REDEMPTION IN KIND 23
BANKING LAWS 23
TAX STATUS 24
THE FUNDS' TAX STATUS 24
FOREIGN TAXES 24
SHAREHOLDERS' TAX STATUS 24
CAPITAL GAINS 25
TOTAL RETURN 25
YIELD 25
EFFECTIVE YIELD 26
TAX-EQUIVALENT YIELD 26
TAX-EQUIVALENCY TABLE 26
PERFORMANCE COMPARISONS 27
FINANCIAL STATEMENTS 29
APPENDIX 30
THIS STATEMENT CONTAINS ADDITIONAL INFORMATION ABOUT THE MARSHALL FUNDS, INC.
(THE "CORPORATION") AND ITS ELEVEN INVESTMENT PORTFOLIOS (THE "FUNDS"). THIS
STATEMENT USES THE SAME TERMS AS DEFINED IN THE PROSPECTUS.
POLICIES AND ACCEPTABLE INVESTMENTS
ASSET-BACKED SECURITIES. Asset-Backed Securities are bonds or notes backed by
loans or accounts receivable originated by banks, or other credit providers or
financial institutions. Asset-Backed Securities may be pooled and then divided
into classes of securities, known as tranches, and resold. Each tranche has a
specified interest rate and maturity. The cash flows from the underlying pool of
Asset-Backed Securities are applied first to pay interest and then to retire
securities. All principal payments are directed first to the shortest-maturity
tranche. When those securities are completely retired, all principal payments
are then directed to the next-shortest-maturity tranche. This process continues
until all of the tranches have been completely retired. The MONEY MARKET FUND
will invest in only the short-term tranches, which will generally have a
maturity not exceeding 397 days.
AVERAGE MATURITY. For purposes of determining the dollar-weighted average
maturity of a Fund's portfolio, the maturity of a Municipal Security will be its
ultimate maturity. If it is probable that the issuer of the security will take
advantage of maturity-shortening devices such as a call, refunding, or
redemption provision, the maturity date will be the date on which it is probable
that the security will be called, refunded, or redeemed. If the Municipal
Security includes the right to demand payment, the maturity of the security for
purposes of determining a Fund's dollar-weighted average portfolio maturity will
be the period remaining until the principal amount of the security can be
recovered by exercising the right to demand payment.
BORROWING. The INTERNATIONAL STOCK FUND may borrow up to one-third of the value
of its total assets from banks to increase its holdings of portfolio securities.
The INTERNATIONAL STOCK FUND is required to maintain continuous asset coverage
to 300% with respect to such borrowings and to sell (within three days)
sufficient portfolio holdings to restore such coverage if it should decline to
less than 300% due to market fluctuations or otherwise, even if such
liquidations of the Fund's holdings may be disadvantageous from an investment
standpoint.
CONVERTIBLE SECURITIES. When owned as part of a unit along with warrants, which
entitle the holder to buy the common stock, convertible securities function as
convertible bonds, except that the warrants generally will expire before the
bonds' maturity. A Fund will exchange or convert the convertible securities
held in its portfolio into shares of the underlying common stocks when, in the
adviser's or subadviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objective. Otherwise, the Fund will hold or trade the convertible securities.
In evaluating these matters with respect to a particular convertible security,
the Fund's adviser or subadviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
DURATION. Duration is a commonly used measure of potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of fixed
income securities, prior to maturity. Volatility is the magnitude of the change
in the price of a bond relative to a given change in the market rate of
interest. A bond's price volatility depends on three primary variables: the
bond's coupon rate; maturity date; and the level of market yields of similar
fixed income securities. Generally, bonds with lower coupons or longer
maturities will be more volatile than bonds with higher coupons or shorter
maturities. Duration combines these variables into a single measure.
Duration is calculated by dividing the sum of time-weighted values of the cash
flows of a bond or bonds, including interest and principal payments, by the sum
of the present values of the cash flows. When a Fund invests in mortgage pass-
through securities, its duration will be calculated in a manner which requires
assumptions to be made regarding future principal prepayments. A more complete
description of this calculation is available upon request from the Funds.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the INTERNATIONAL STOCK FUND may enter into
forward foreign currency exchange contracts and foreign currency futures
contracts, as well as purchase put or call options on foreign currencies, as
described below. The Fund may also conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
The INTERNATIONAL STOCK FUND may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The Fund may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. In addition, for example, when
the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency; or when the Fund
believes that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a forward contract to buy that foreign currency for
a fixed dollar amount. This second investment practice is generally referred to
as "cross-hedging." Because in connection with the Fund's forward foreign
currency transactions an amount of the Fund's assets equal to the amount of the
purchase will be held aside or segregated to be used to pay for the commitment,
the Fund will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked to market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, the Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for the Fund than if it
had not engaged in such contracts.
The INTERNATIONAL STOCK FUND may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of foreign portfolio securities and against increases in the dollar cost
of foreign securities to be acquired. As is the case with other kinds of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuation in exchange
rates, although, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies to be written or purchased by the Fund will
be traded on U.S. and foreign exchanges or over-the-counter.
The INTERNATIONAL STOCK FUND may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies ("foreign currency
futures"). This investment technique will be used only to hedge against
anticipated future changes in exchange rates which otherwise might adversely
affect the value of the Fund's portfolio securities or adversely affect the
prices of securities that the Fund intends to purchase at a later date. The
successful use of foreign currency futures will usually depend on the ability of
the Fund's subadviser to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
FUNDING AGREEMENTS. The MONEY MARKET FUND may purchase funding agreements
("Agreements"), which are investment instruments issued by highly rated U.S.
insurance companies. Pursuant to such Agreements, the MONEY MARKET FUND may make
cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to the MONEY MARKET FUND
guaranteed interest. The insurance company may assess periodic charges against
an Agreement for expense and service costs allocable to it, and the charges will
be deducted from the value of the deposit fund. The purchase price paid for an
Agreement becomes part of the general assets of the issuer, and the Agreement is
paid from the general assets of the issuer.
The MONEY MARKET FUND will only purchase Agreements from issuers which, at the
time of purchase, meet quality and credit standards established by the MONEY
MARKET FUND's adviser. Generally, Agreements are not assignable or transferable
without the permission of the issuing insurance companies, and an active
secondary market in Agreements does not currently exist. Also, the MONEY MARKET
FUND may not have the right to receive the principal amount of an Agreement
from the insurance company on seven days' notice or less. Therefore, Agreements
are typically considered to be illiquid investments.
FUTURES AND OPTIONS TRANSACTIONS. (This is not applicable to the MONEY MARKET
FUND, SHORT-TERM INCOME FUND, or INTERMEDIATE BOND FUND.) As a means of
reducing fluctuations in the net asset value of shares of a Fund, the Fund may
attempt to hedge all or a portion of its portfolio by buying and selling futures
contracts and options on futures contracts, and buying put and call options on
portfolio securities and securities indices. A Fund may also write covered put
and call options on portfolio securities to attempt to increase its current
income or to hedge a portion of its portfolio investments. The Fund will
maintain its positions in securities, option rights, and segregated cash subject
to puts and calls until the options are exercised, closed, or have expired. An
option position on futures contracts may be closed out over-the-counter or on a
nationally recognized exchange which provides a secondary market for options of
the same series.
FUTURES CONTRACTS. A Fund may purchase and sell financial futures contracts
to hedge against the effects of changes in the value of portfolio securities
due to anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. Although some financial
futures contracts call for making or taking delivery of the underlying
securities, in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is accomplished by
purchasing or selling an identical offsetting futures contract. Other
financial futures contract by their terms call for cash settlements.
A Fund also may purchase and sell stock index futures contracts with respect
to any stock index traded on a recognized stock exchange or board of trade
to hedge against changes in prices. Stock index futures contracts are based
on indices that reflect the market value of common stock of the firms
included in the indices. An index futures contract is an agreement pursuant
to which two parties agree to take or make delivery of an amount of cash
equal to the differences between the value of the index at the close of the
last trading day of the contract and the price at which the index contract
was originally written. No physical delivery of the underlying securities in
the index is made. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in the
fixed income securities market, prices move inversely to interest rates. A
rise in rates means a drop in price. Conversely, a drop in rates means a
rise in price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into contracts
to deliver securities at a predetermined price (i.e., "go short") to protect
itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. The
Fund would "go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest rates.
"MARGIN" IN FUTURES TRANSACTIONS. Unlike the purchase or sale of a
security, a Fund does not pay or receive money upon the purchase or sale of
a futures contract. Rather, the Fund is required to deposit an amount of
"initial margin" in cash, U.S. government securities or highly-liquid debt
securities with its custodian (or the broker, if legally permitted). The
nature of initial margin in futures transactions is different from that of
margin in securities transactions in that initial margin in futures
transactions does not involve the borrowing of funds by the Fund to finance
the transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or
receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount one would
owe the other if the futures contract expired. In computing its daily net
asset value, the Fund will mark to market its open futures positions. The
Fund is also required to deposit and maintain margin when it writes call
options on futures contracts. When the Fund purchases futures contracts, an
amount of cash and cash equivalents, equal to the underlying commodity value
of the futures contracts (less any related margin deposits), will be
deposited in a segregated account with the Fund's custodian (or the broker,
if legally permitted) to collateralize the position and thereby insure that
the use of such futures contracts is unleveraged.
To the extent required to comply with CFTC Regulation 4.5 and thereby avoid
status as a "commodity pool operator," the Fund will not enter into a
futures contract 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 net
assets, after taking into account the unrealized profits and losses on those
contracts it has entered into; and, provided further, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing such 5%. Second, the Fund will not enter into
these contracts for speculative purposes; rather, these transactions are
entered into only for bona fide hedging purposes, or other permissible
purposes pursuant to regulations promulgated by the CFTC. Third, since the
Fund does not constitute a commodity pool, it will not market itself as
such, nor serve as a vehicle for trading in the commodities futures or
commodity options markets. Finally, because the Fund will submit to the CFTC
special calls for information, the Fund will not register as a commodities
pool operator.
PUT OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS. A Fund may
purchase listed put options on financial and stock index futures contracts
to protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates or
decrease in stock prices. Unlike entering directly into a futures contract,
which requires the purchaser to buy a financial instrument on a set date at
a specified price, the purchase of a put option on a futures contract
entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in value
and the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the hedge
is successful, the proceeds received by the Fund upon the sale of the second
option will be large enough to offset both the premium paid by the Fund for
the original option plus the decrease in value of the hedged securities.
Alternatively, a Fund may exercise its put option to close out the position.
To do so, it would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the option)
and exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out nor
exercises an option, the option will expire on the date provided in the
option contract, and only the premium paid for the contract will be lost.
A Fund may write listed put options on financial or stock index futures
contracts to hedge its portfolio against a decrease in market interest rates
or increase in stock prices. A Fund will use these transactions to attempt
to protect its ability to purchase portfolio securities in the future at
price levels existing at the time it enters into the transaction. When a
Fund writes (sells) a put on a futures contract, it receives a cash premium
in exchange for granting to the purchaser of the put the right to receive
from the Fund, at the strike price, a short position in such futures
contract (the Fund undertakes the obligation to assume a long futures
position), even though the strike price upon exercise of the option is
greater than the value of the futures position received by such holder. As
market interest rates decrease or stock prices increase, the market price of
the underlying futures contract normally increases. As the market value of
the underlying futures contract increases, the buyer of the put option has
less reason to exercise the put because the buyer can sell the same futures
contract at a higher price in the market. If the value of the underlying
futures position is not such that exercise of the option would be profitable
to the option holder, the option will generally expire without being
exercised. The premium received by the Fund can then be used to offset the
higher prices of portfolio securities to be purchased in the future.
It will generally be the policy of a Fund, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering
into a closing purchase transaction, if available, unless it is determined
to be in the Fund's interest to deliver the underlying futures position. A
closing purchase transaction consists of the purchase by the Fund of an
option having the same term as the option sold by the Fund, and has the
effect of canceling the Fund's position as a seller. The premium which the
Fund will pay in executing a closing purchase transaction may be higher than
the premium received when the option was sold, depending in large part upon
the relative price of the underlying futures position at the time of each
transaction. If the hedge is successful, the cost of buying the second
option will be less than the premium received by the Fund for the initial
option.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS. In addition to
purchasing put options on futures, a Fund may write (sell) listed and over-
the-counter call options on financial and stock index futures contracts to
hedge its portfolio. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any time
during the life of the option if the option is exercised. As stock prices
fall or market interest rates rise, causing the prices of futures to go
down, the Fund's obligation under a call option on a future (to sell a
futures contract) costs less to fulfill, causing the value of the Fund's
call option position to increase. In other words, as the underlying futures
price goes down below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the premium received for
the option. This premium can substantially offset the drop in value of the
Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
An additional way in which a Fund may hedge against decreases in market
interest rates or increases in stock prices is to buy a listed call option
on a financial or stock index futures contract. A Fund will use these
transactions to attempt to protect its ability to purchase portfolio
securities in the future at price levels existing at the time it enters into
the transaction. When a Fund purchases a call on a financial futures
contract, it receives in exchange for the payment of a cash premium the
right, but not the obligation, to enter into the underlying futures contract
at a strike price determined at the time the call was purchased, regardless
of the comparative market value of such futures position at the time the
option is exercised. The holder of a call option has the right to receive a
long (or buyer's) position in the underlying futures contract. As market
interest rates fall or stock prices increase, the value of the underlying
futures contract will normally increase, resulting in an increase in value
of the Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, the
Fund could exercise its option and buy the futures contract below market
price. Prior to the exercise or expiration of the call option, the Fund
could sell an identical call option and close out its position. If the
premium received upon selling the offsetting call is greater than the
premium originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS. A Fund will not maintain open
positions in futures contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the open positions
(marked to market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on those open positions,
adjusted for the correlation of volatility between the hedged securities and
the futures contracts. If this limitation is exceeded at any time, the Fund
will take prompt action to close out a sufficient number of open contracts
to bring its open futures and options positions within this limitation.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. A Fund may purchase put
options on portfolio securities to protect against price movements in the
Fund's portfolio securities. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the writer (seller) at
a specified price during the term of the option. A Fund may purchase call
options on securities acceptable for purchase to protect against price
movements by "locking in" on a purchase price for the underlying security.
A call option gives the Fund, in return for a premium, the right to buy the
underlying security from the seller at a specified price during the term of
the option.
WRITING COVERED CALL AND PUT OPTIONS ON PORTFOLIO SECURITIES. A Fund may
also write covered call and put options to generate income and thereby
protect against price movements in the Fund's portfolio securities. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash or
U.S. government securities in the amount of any additional consideration).
As a writer of a put option, the Fund has the obligation to purchase a
security from the purchaser of the option upon the exercise of the option.
In the case of put options, the Fund will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price of the
underlying securities.
STOCK INDEX OPTIONS. A Fund may purchase or sell put or call options on
stock indices listed on national securities exchanges or traded in the over-
the-counter market. A stock index fluctuates with changes in the market
values of the stocks included in the index. Upon the exercise of the
option, the holder of a call option has the right to receive, and the writer
of a put option has the obligation to deliver, a cash payment equal to the
difference between the closing price of the index and the exercise price of
the option. The effectiveness of purchasing stock index options will depend
upon the extent to which price movements in the Fund's portfolio correlate
with price movements of the stock index selected. Because the value of an
index option depends upon movements in the level of the index rather than
the price of a particular stock, whether the Fund will realize a gain or
loss from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by a Fund of
options on stock indices will be subject to the ability of the Fund's
adviser or subadviser to predict correctly movements in the directions of
the stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
OVER-THE-COUNTER OPTIONS. A Fund may generally purchase and write over-the-
counter options on portfolio securities or in securities indices in
negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund or when the securities
indices are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions (such
as commercial banks or savings and loan associations) deemed creditworthy by
the Fund's adviser or sub-adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third-party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options may
not.
RISKS. When a Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities or foreign currency
subject to the futures contracts may not correlate perfectly with the prices
of the securities or currency in the Fund's portfolio. This may cause the
futures contract and any related options to react differently to market
changes than the portfolio securities or foreign currency. In addition, a
Fund's adviser or sub-adviser could be incorrect in its expectations about
the direction or extent of market factors such as stock price movements or
foreign currency exchange rate fluctuations. In these events, the Fund may
lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although a Fund's adviser or sub-
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. A Fund's ability to establish and close out futures and
options positions depends on this secondary market. The inability to close
these positions could have an adverse effect on the Fund's ability to hedge
its portfolio.
To minimize risks, a Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total
assets after taking into account the unrealized profits and losses on those
contracts it has entered into; and, provided further, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing such 5%. When a Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. When the Fund
sells futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
GUARANTEED INVESTMENT CONTRACTS. The MONEY MARKET FUND may purchase guaranteed
investment contracts ("GICs"), which are investment instruments issued by highly
rated U.S. insurance companies or banks. Pursuant to such contracts, the MONEY
MARKET FUND may make cash contributions to a deposit fund of the issuer. The
issuer then credits to the MONEY MARKET FUND guaranteed interest. The issuer may
assess periodic charges against a GIC for expense and service costs allocable to
it, and the charges will be deducted from the value of the deposit fund. The
purchase price paid for a GIC becomes part of the general assets of the issuer,
and the contract is paid from the general assets of the issuer.
The MONEY MARKET FUND will only purchase GICs from issuers which, at the time of
purchase, meet quality and credit standards established by the MONEY MARKET
FUND's adviser. Generally, GICs are not assignable or transferable without the
permission of the issuing insurance companies, and an active secondary market in
GICs does not currently exist. Also, the MONEY MARKET FUND may not have the
right to receive the principal amount of a GIC from the insurance company on
seven days' notice or less. Therefore, GICs are typically considered to be
illiquid investments.
LENDING OF PORTFOLIO SECURITIES. The collateral received when a Fund lends
portfolio securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are subject to
termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. If the Fund does not have the
right to vote securities on loan, it would terminate the loan and regain the
right to vote if that were considered important with respect to the investment.
MORTGAGE-BACKED SECURITIES. The following is additional information about
Mortgage-Backed Securities.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS") . Unlike conventional bonds,
ARMS pay back principal over the life of the ARMS rather than at maturity.
Thus, a holder of the ARMS, such as a Fund, would receive monthly scheduled
payments of principal and interest, and may receive unscheduled principal
payments representing payments on the underlying mortgages. At the time
that a holder of the ARMS reinvest the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of
"locking in" long-term interest rates than other types of U.S. government
securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable
maturities) because, as interest rates decline, the likelihood increases
that mortgages will be prepaid. Furthermore, if ARMS are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may result
in some loss of a holder's principal investment to the extent of the premium
paid. Conversely, if ARMS are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal would
increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The following example
illustrates how mortgage cash flows are prioritized in the case of CMOs -
most of the CMOs in which the INCOME FUNDS invest use the same basic
structure: (1) several classes of securities are issued against a pool of
mortgage collateral. The most common structure contains four classes of
securities. The first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date, and the final class (Z bond)
typically receives any excess income from the underlying investments after
payments are made to the other classes and receives no principal or interest
payments until the shorter maturity classes have been retired, but then
receives all remaining principal and interest payments. (2) The cash flows
from the underlying mortgages are applied first to pay interest and then to
retire securities. (3) The classes of securities are retired sequentially.
All principal payments are directed first to the shortest-maturity class (or
A bond). When those securities are completely retired, all principal
payments are then directed to the next shortest-maturity security (or B
bond). This process continues until all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. The interest
portion of these payments is distributed by the Fund as income, and the
capital portion is reinvested.
INTEREST ONLY AND PRINCIPAL ONLY INVESTMENTS. Some of the securities
purchased by a Fund may represent an interest solely in the principal
repayments or solely in the interest payments on Mortgage-Backed Securities
(stripped mortgage-backed securities or "SMBSs"). SMBSs are usually
structured with two classes and receive different proportions of the
interest and principal distributions on the pool of underlying mortgage-
backed securities. Due to the possibility of prepayments on the underlying
mortgages, SMBSs may be more interest-rate sensitive than other securities
purchased by the Funds. If prevailing interest rates fall below the level
at which SMBSs were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early prepayments of
principal-only SMBSs (the principal-only or "PO" class) and a reduction in
the amount of payments made to holders of interest-only SMBSs (the interest-
only or "IO" class). Because the yield to maturity of an IO class is
extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage-backed securities, it is
possible that the Fund might not recover its original investment on
interest-only SMBSs if there are substantial prepayments on the underlying
mortgages. The Funds' inability to fully recoup their investments in these
securities as a result of a rapid rate of principal prepayments may occur
even if the securities are rated by an NRSRO. Therefore, interest-only
SMBSs generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by
most fixed income securities.
MUNICIPAL SECURITIES. Examples of Municipal Securities include, but are not
limited to: tax and revenue anticipation notes ("TRANs") issued to finance
working capital needs in anticipation of receiving taxes or other revenues; tax
anticipation notes ("TANs") issued to finance working capital needs in
anticipation of receiving taxes; revenue anticipation notes ("RANs") issued to
finance working capital needs in anticipation of receiving revenues; bond
anticipation notes ("BANs") that are intended to be refinanced through a later
issuances of longer-term bonds; municipal commercial paper and other short-term
notes; variable rate demand notes; municipal bonds (including bonds having
serial maturities and pre-refunded bonds) and leases; construction loan notes
insured by the Federal Housing Administration and financed by the Federal or
Government National Mortgage Associations; and participation, trust and
partnership interests in any of the foregoing obligations. Diversification of
the TAX-FREE INCOME FUNDS' investments is obtained geographically by purchasing
issues of Municipal Securities representative of various areas of the U.S. and
general obligations of states, cities and school districts as well as some
revenue issues which meet the Funds' acceptable quality criteria.
MUNICIPAL LEASES. The TAX-FREE INCOME FUNDS may purchase Municipal
Securities in the form of participation interests that represent an
undivided proportional interest in lease payments by a governmental or
nonprofit entity. The lease payments and other rights under the lease
provide for and secure payments on the certificates. Lease obligations may
be limited by municipal charter or the nature of the appropriation for the
lease. In particular, lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. Furthermore,
a lease may provide that the participants cannot accelerate lease
obligations upon default. The participants would only be able to enforce
lease payments as they became due. In the event of a default or failure of
appropriation, unless the participation interests are credit enhanced, it is
unlikely that the participants would be able to obtain an acceptable
substitute source of payment.
Under the criteria currently established by the Directors, the Funds'
investment adviser must consider the following factors in determining the
liquidity of municipal lease securities: (1) the frequency of trades and
quotes for the security; (2) the volatility of quotations and trade prices
for the security; (3) the number of dealers willing to purchase or sell the
security and the number of potential purchasers; (4) dealer undertakings to
make a market in the security; (5) the nature of the security and the nature
of the marketplace trades; (6) the rating of the security and the financial
condition and prospects of the issuer of the security; (7) such other
factors as may be relevant to the Funds' ability to dispose of the security;
(8) whether the lease can be terminated by the lessee; (9) the potential
recovery, if any, from a sale of the leased property upon termination of the
lease; (10) the lessee's general credit strength; (11) the likelihood that
the lessee will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to its operations; and
(12) any credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease.
VARIABLE RATE MUNICIPAL SECURITIES. Variable interest rates generally
reduce changes in the market value of Municipal Securities from their
original purchase prices. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or depreciation is less for
variable rate Municipal Securities than for fixed income obligations. Many
Municipal Securities with variable interest rates purchased by a Fund are
subject to repayment of principal (usually within seven days) on the Fund's
demand. For purposes of determining the Funds' average maturity, the
maturities of these variable rate demand Municipal Securities (including
participation interests) are the longer of the periods remaining until the
next readjustment of their interest rates or the periods remaining until
their principal amounts can be recovered by exercising the right to demand
payment. The terms of these variable rate demand instruments require
payment of principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
PORTFOLIO TURNOVER. The VALUE EQUITY FUND experienced a higher turnover rate
for the fiscal period ended August 31, 1995. During this period, the Fund's
turnover rate was 78% versus 39% for the prior fiscal period. The higher rate
reflects the August 1994 conversion of the former Valley Bank Equity Fund into
the VALUE EQUITY FUND. Without this conversion, it is estimated the VALUE EQUITY
FUND'S turnover rate would approximate 50%.
The higher portfolio turnover rate for the MID-CAP STOCK FUND for the fiscal
year ended August 31, 1995, was due to general market conditions. Sector
rotation within the market was much quicker than normal as certain sectors and
industries moved in and out of favor on a frequent basis. This volatility
required the Fund to reposition its investments more frequently, thus causing
more turnover. An additional factor contributing to portfolio turnover was the
inordinate number of issues that were moved out of the S&P Mid-Cap 400 Index and
into the S&P 500. The Adviser's discipline requires that stocks be sold as they
move out of our market capitalization range, and with the strong market
appreciation during the past year, a significant number of Mid-Cap turnover rate
issues moved above their target range and out of the S&P Mid-Cap 400.
The higher portfolio turnover rate for the GOVERNMENT INCOME FUND for the fiscal
year ended August 31, 1995, was the result of a significantly stronger bond
market. The bond market reversed the trend to higher rates experienced in 1994.
The yield on a 10-year Treasury note fell 154 basis points from December 31,
1994 to the fiscal year end. The portfolio was restructured to better perform in
a falling interest rate environment with faster mortgage prepayments.
The higher level of turnover in the SHORT-TERM TAX-FREE FUND for the fiscal year
ended 1995 was a result of strategic shifts in strategy during the year. As it
became apparent the Federal Reserve would ease, the Fund's average maturity of
holdings was lengthened by swapping shorter maturity items into longer maturity
items. Also, the Fund's Adviser sought to minimize the Fund's daily liquidity
requirements in order to remain fully invested.
As the INTERMEDIATE TAX-FREE FUND grew in asset size, some consolidation trades
were made to increase the average size of each holdings. Also, an effort was
made to actively sell some shorter maturity holdings in favor of lengthening.
These two tactical shifts resulted in higher levels of turnover than the prior
fiscal year.
REPURCHASE AGREEMENTS. Each Fund requires its custodian to take possession of
the securities subject to repurchase agreements and these securities are marked
to market daily. To the extent that the original seller does not repurchase the
securities from a Fund, the Fund could receive less than the repurchase price on
any sale of such securities. In the event that such a defaulting seller files
for bankruptcy or becomes insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Funds believe that, under the regular
procedures normally in effect for custody of the portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Funds and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by a Fund's adviser or
subadviser to be creditworthy pursuant to guidelines established by the
Directors.
RESTRICTED SECURITIES. The Funds may invest in commercial paper issued in
reliance on the exemption from restriction afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to institutional
investors, such as the Funds, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Funds through or
with the assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Funds believe that
Section 4(2) commercial paper and possibly certain other restricted securities
which meet the criteria for liquidity established by the Directors are quite
liquid. The Funds intend, therefore, to treat the restricted securities which
meet the criteria for liquidity established by the Directors, including Section
4(2) commercial paper (as determined by a Fund's adviser or subadviser), as
liquid and not subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Funds intend to not subject such paper to the limitation applicable to
restricted securities.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled. During the period any reverse
repurchase agreements are outstanding, but only to the extent necessary to
assure completion of the reverse repurchase agreements, the MONEY MARKET FUND
will restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date on the reverse repurchase agreement.
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 Funds expect to enter into swap transactions primarily to hedge against
changes in the price of other portfolio securities. For example, the Funds may
hedge against changes in the market value of a fixed rate note by entering into
a concurrent swap that requires the Funds 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 Funds'
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 Funds may also
enter into swaps and caps to preserve or enhance a return or spread on a
portfolio security. The Funds do not intend to use these transactions in a
speculative manner.
The Funds will usually enter into swaps on a net basis (i.e., the two payment
streams are netted out), with a 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 Funds' obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis, and the Funds will segregate liquid
assets in an aggregate net asset value at least equal to the accrued excess, if
any, on each business day. If a Fund enters into a swap on other than a net
basis, a Fund will segregate liquid assets in the full amount accrued on a daily
basis of a Fund's obligations with respect to the swap. If there is a default by
the other party to such a transaction, the Funds 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 and Sub-Adviser have
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 a Fund's
limitation on investments in illiquid securities. To the extent a 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 a 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 or Sub-Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of a Fund would diminish compared with what it would have
been if these investment techniques were not utilized. Moreover, even if the
Adviser or Sub-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 a Fund by the defaulting party.
A default on a portfolio security hedged by an interest rate swap would also
expose a Fund to the risk of having to cover its net obligations under the swap
with income from other portfolio securities.
WARRANTS. The EQUITY FUNDS may purchase warrants. Warrants are basically
options to purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates after
which they are worthless. In addition, if the market price of the common stock
does not exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or decrease in the
market price of the underlying common stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. These transactions are made to
secure what is considered to be an advantageous price or yield for the Funds.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of a Fund sufficient to make payment for the
securities to be purchased are segregated on a Fund's records at the trade date.
These assets are marked to market daily and are maintained until the transaction
has been settled.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS
The following investment limitations are fundamental and cannot be changed
without shareholder approval.
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for clearance
of purchases and sales of portfolio securities. A deposit or payment by a Fund
of initial or variation margin in connection with futures contracts, forward
contracts or related options transactions is not considered the purchase of a
security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Funds will not issue senior securities except that each Fund may borrow
money, directly or through reverse repurchase agreements, in amounts up to one-
third of the value of its total assets ("net" assets in the case of the MONEY
MARKET FUND, SHORT-TERM INCOME FUND, and INTERMEDIATE BOND FUND) including the
amounts borrowed; and except to the extent that a Fund is permitted to enter
into futures contracts, options or forward contracts. Except for the
INTERNATIONAL STOCK FUND, a Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of its portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. Except
for the INTERNATIONAL STOCK FUND, a Fund will not purchase any securities while
any borrowings in excess of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, each Fund may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of its total assets at the time of the pledge. For purposes of this
limitation, the following are not deemed to be pledges: margin deposits for the
purchase and sale of futures contracts and related options; and segregation of
collateral arrangements made in connection with options activities, forward
contracts or the purchase of securities on a when-issued basis.
LENDING CASH OR SECURITIES
The Funds will not lend any of their assets except portfolio securities. Except
for the INTERNATIONAL STOCK FUND, loans may not exceed one-third of the value of
a Fund's total assets. This shall not prevent a Fund from purchasing or holding
U.S. government obligations, money market instruments, variable rate demand
notes, bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective, policies, and
limitations.
INVESTING IN COMMODITIES
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, except for the SHORT-TERM INCOME FUND,
the INTERMEDIATE BOND FUND, and the MONEY MARKET FUND, a Fund may purchase and
sell futures contracts and related options, and the International Stock Fund may
also enter into forward contracts and related options.
INVESTING IN REAL ESTATE
The Funds will not purchase or sell real estate, including limited partnership
interests, although a Fund may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities which are
secured by real estate or which represent interests in real estate.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets, a
Fund will not purchase securities issued by any one issuer (other than cash,
cash items or securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities and repurchase agreements
collateralized by such securities) if as a result more than 5% of the value of
its total assets would be invested in the securities of that issuer or if it
would own more than 10% of the outstanding voting securities of such issuer.
Under this limitation, the TAX FREE INCOME FUNDS will consider each governmental
subdivision, including states and the District of Columbia, territories,
possessions of the United States, or their political subdivisions, agencies,
authorities, instrumentalities, or similar entities, a separate issuer if its
assets and revenues are separate from those of the governmental body creating it
and the security is backed only by its own assets and revenues. Industrial
developments bonds backed only by the assets and revenues of a nongovernmental
user are considered to be issued solely by that user. If in the case of an
industrial development bond or government-issued security, a governmental or
some other entity guarantees the security, such guarantee would be considered a
separate security issued by the guarantor, subject to a limit on investments in
the guarantor of 10% of total assets.
CONCENTRATION OF INVESTMENTS
(TAX-FREE INCOME FUNDS ONLY)
Neither TAX-FREE INCOME FUND will invest 25% or more of the value of its total
assets in any one industry, except for temporary defensive purposes, each Fund
may invest 25% or more of the value of its total assets in cash or cash items,
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, and repurchase agreements collateralized by such securities.
In addition, each TAX-FREE INCOME FUND may invest more than 25% of the value of
its total assets in obligations issued by any state, territory, or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, including tax-exempt
project notes guaranteed by the U.S. government, regardless of the location of
the issuing municipality. This policy applies to securities which are related
in such a way that an economic, business, or political development affecting one
security would also affect the other securities (such as securities paid from
revenues from selected projects in transportation, public works, education, or
housing).
(ALL OTHER FUNDS)
A Fund will not invest 25% or more of its total assets in any one industry.
However, investing in U.S. government securities (and domestic bank instruments
for the MONEY MARKET FUND) shall not be considered investments in any one
industry.
UNDERWRITING
A Fund will not underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of restricted (the term "restricted" does not apply to the TAX-FREE INCOME
FUNDS) securities which the Fund may purchase pursuant to its investment
objective, policies and limitations.
NON-FUNDAMENTAL LIMITATIONS
The following investment limitations are non-fundamental and, therefore, may be
changed by the Directors without shareholder approval. Shareholders will be
notified before any material change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 15% (10% for the MONEY MARKET FUND) of the
value of their net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over seven days, over-the-counter
options, guaranteed investment contracts, and certain securities not determined
by the Directors to be liquid (including certain municipal leases).
INVESTING IN NEW ISSUERS
The Funds will not invest more than 5% of the value of their total assets in
securities of issuers which have records of less than three years of continuous
operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND DIRECTORS OF THE
CORPORATION
A Fund will not purchase or retain the securities of any issuer if the Officers
and Directors of the Corporation or of the Fund's advisers, owning individually
more than 1/2 of 1% of the issuer's securities, together own more than 5% of the
issuer's securities.
INVESTING IN MINERALS
The Funds will not purchase interests in oil, gas, or other mineral exploration
or development programs or leases, except they may purchase the securities of
issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The EQUITY FUNDS and the TAX-FREE INCOME FUNDS will not purchase securities of a
company for the purpose of exercising control or management.
INVESTING IN WARRANTS
The EQUITY FUNDS may invest in warrants, but each EQUITY FUND will not invest
more than 5% of its net assets in warrants, including those acquired in units or
attached to other securities. To comply with certain state restrictions, each
EQUITY FUND will limit its investment in such warrants not listed on the New
York or American Stock Exchanges to 2% of its net assets. (If state restrictions
change, this latter restriction may be revised without notice to shareholders.)
For purposes of this investment restriction, warrants will be valued at the
lower of cost or market, except that warrants acquired by a Fund in units with
or attached to securities may be deemed to be without value. Although the TAX-
FREE INCOME FUNDS do not intend to invest in warranties, they are subject to
this investment limitation to comply with certain state restrictions.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company, will
invest no more than 5% of total assets in any one investment company, and will
invest no more than 10% of its total assets in investment companies in general.
The Funds will purchase securities of closed-end investment companies only in
open market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are acquired in
a merger, consolidation, reorganization, or acquisition of assets. The MONEY
MARKET FUND will limit its investments in other investment companies to those of
money market funds having investment objectives and policies similar to its own.
The adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies. In accordance with certain state
restrictions, each Fund will limits its investments in securities of other
investment companies to those with sales loads of less than 1.00% of the
offering price of such securities.
INVESTING IN OPTIONS
Except for bona fide hedging purposes, a Fund may not invest more than 5% of the
value of its net assets in the sum of (a) premiums on open option positions on
futures contracts, plus (b) initial margin deposits on futures contracts.
A Fund will not purchase put options or write call options on securities unless
the securities are held in the Fund's portfolio or unless the Fund is entitled
to them in deliverable form without further payment or has segregated cash in
the amount of any further payment.
A Fund will not write call options in excess of 25% of the value of its total
assets.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. For purposes of its policies and limitations, the Fund considers
instruments (such as certificates of deposit and demand and time deposits)
issued by a U.S. branch of a domestic bank or savings and loan having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
In order to permit the sale of the Fund's shares in certain states, the Fund may
make commitments more restrictive than the investment limitations described
above. If state requirements change, these restrictions may be changed without
notice to shareholders. In this regard, to comply with certain state
restrictions, the EQUITY FUNDS will not invest more than 5%, and all the other
Funds will not invest more than 10%, of their respective total assets in
securities subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Directors. If state requirements change, these
restrictions may be changed without notice to shareholders.
REGULATORY COMPLIANCE. The MONEY MARKET FUND may follow non-fundamental
operational policies that are more restrictive than its fundamental investment
limitations, as set forth in the prospectus and this statement of additional
information, in order to comply with applicable laws and regulations. In
particular, the MONEY MARKET FUND will comply with the various requirements of
Rule 2a-7 under the Act, which regulates money market mutual funds. For example,
Rule 2a-7 generally prohibits the investment of more than 5% of the MONEY MARKET
FUND'S total assets in the securities of any one issuer, although the MONEY
MARKET FUND'S fundamental investment limitation only requires such 5%
diversification with respect to 75% of its assets. The MONEY MARKET FUND will
also determine the effective maturity of its investments, as well as its ability
to consider a security as having received the requisite short-term ratings by
NRSROs, according to Rule 2a-7. The MONEY MARKET FUND may change these
operational policies to reflect changes in the laws and regulations without
shareholder approval.
MARSHALL FUNDS, INC. MANAGEMENT
The Corporation was established as a Wisconsin corporation under the laws of the
State of Wisconsin on July 31, 1992. The Corporation's authorized capital
consists of 50,000,000,000 shares of common stock with a par value of $.0001 per
share. Shareholders of each Fund are entitled: (i) to one vote per full share
of Common Stock; (ii) to such distributions as may be declared by the
Corporation's Directors out of funds legally available; and (iii) upon
liquidation of the Corporation, to participate ratably in the assets of the Fund
available for distribution. Each share of the Fund gives the shareholder one
vote in the election of Directors and other matters submitted to shareholders
for vote. All shares of each portfolio or class in the Corporation have equal
voting rights, except that only shares of a particular portfolio or class are
entitled to vote on matters affecting that portfolio or class. There are no
conversion or sinking fund provisions applicable to the shares, and the holders
have no preemptive rights and may not cumulate their votes in the election of
Directors. Consequently, the holders of more than 50% of the Corporation's
shares of common stock voting for the election of Directors can elect the entire
Board of Directors, and, in such event, the holders of the Corporation's
remaining shares voting for the election of Directors will not be able to elect
any person or persons to the Board of Directors.
The Wisconsin Business Corporation Law (the "WBCL") permits registered
investment companies, such as the Corporation, to operate without an annual
meeting of shareholders under specified circumstances if an annual meeting is
not required by the Act. The Corporation has adopted the appropriate provisions
in its By-laws and does not anticipate holding an annual meeting of shareholders
to elect Directors unless otherwise required by the Act. Directors may be
removed by the shareholders at a special meeting. A special meeting of the
shareholders may be called by the Directors upon written request of shareholders
owning at least 10% of the Corporation's outstanding voting shares.
The shares are redeemable and are transferable. All shares issued and sold by
the Corporation will be fully paid and nonassessable except as provided in WBCL
Section 180.0622(2)(b). Fractional shares of common stock entitle the holder to
the same rights as whole shares of common stock except the right to receive a
certificate evidencing such fractional shares.
The definitions of the terms "series" and "class" in the WBCL differ from the
meanings assigned to those terms in the prospectus and this Statement of
Additional Information. The Articles of Incorporation of the Corporation
reconcile this inconsistency in terminology, and provide that the prospectus and
Statement of Additional Information may define these terms consistently with the
use of those terms under the Act and the Internal Revenue Code.
OFFICERS AND DIRECTORS
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Marshall & Ilsley Corp.,
Federated Investors, Federated Securities Corp., Federated Services Company, and
Federated Administrative Services.
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
October 22, 1930
Chairman, Director and Treasurer
Director, Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management, and Federated
Research; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee, Director, Vice President and/or Treasurer of certain
investment companies advised or distributed by affiliates of Federated
Investors.
John DeVincentis
4700 21st Street
Racine, WI 53406
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, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959
Secretary
Senior Corporate Counsel, Federated Investors.
* This Director is deemed to be an "interested person" of a Fund or the
Corporation as defined in the Investment Company Act of 1940.
FUND OWNERSHIP
Officers and Directors of the Corporation own less than 1% of each Fund's
outstanding shares.
As of December 4, 1995, the following shareholders of record owned 5% or more of
a Fund's outstanding shares:
EQUITY INCOME FUND
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 4,432,677 shares (41.21%); Mitra & Co., Marshall & Ilsley Trust
Operations, Milwaukee, Wisconsin, owned approximately 4,345,607 shares (40.40%);
and Miaz & Co., Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 600,180 shares (5.58%).
VALUE EQUITY FUND
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 3,191,562 shares (18.67%); Maril & Co., Marshall & Ilsley Trust
Co., Milwaukee, Wisconsin, owned approximately 5,633,714 shares (32.95%); and
Mitra & Co., Marshall & Ilsley Trust Operations, owned approximately 6,729,514
shares (39.36%).
STOCK FUND
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 3,535,073 shares (16.19%); and Mitra & Co., Milwaukee, Wisconsin,
owned approximately 13,468,060 shares (61.68%).
MID-CAP STOCK FUND
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 3,008,454 shares (34.70%); and Mitra & Co., Marshall & Ilsley
Trust Operations, Milwaukee, Wisconsin, owned approximately 4,313,247 shares
(49.75%).
INTERNATIONAL STOCK FUND
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 4,456,069 shares (44.06%); and Mitra & Co., Marshall & Ilsley
Trust Operations, Milwaukee, Wisconsin, owned approximately 4,344,995 shares
(42.96%).
SHORT-TERM INCOME FUND
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin , owned
approximately 2,425,957 shares (28.84%); Mitra & Co., Marshall & Ilsley Trust
Operations, Milwaukee, Wisconsin, owned approximately 4,392,447 shares (52.21%);
and Miaz & Co., Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 524,437 shares (6.23%).
INTERMEDIATE BOND FUND
Maril & Co., Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 9,810,659 shares (26.60%); and Mitra & Co., Marshall & Ilsley
Trust Operations, Milwaukee, Wisconsin, owned approximately 22,356,810 shares
(60.63%).
GOVERNMENT INCOME FUND
Maril & Co., Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 4,251,591 shares (36.54%); and Mitra & Co., Marshall & Ilsley
Trust Operations, Milwaukee, Wisconsin, owned approximately 4,142,034 shares
(35.60%).
SHORT-TERM TAX-FREE FUND
Vallee, Marshall & Ilsley Trust Operations, Milwaukee, Wisconsin, owned
approximately 165,013 shares (8.02%); Maril & Co., Marshall & Ilsley Trust Co.,
Milwaukee, Wisconsin, owned approximately 855,432 shares (41.58%); and Mitra &
Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned approximately
910,711 shares (44.27%).
INTERMEDIATE TAX-FREE FUND
Maril & Co., Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned
approximately 4,015,906 shares (79.83%); and Mitra & Co., Marshall & Ilsley
Trust Operations, Milwaukee, Wisconsin, owned approximately 529,254 shares
(10.52%).
MONEY MARKET FUND
Maril & Co., Milwaukee, Wisconsin, owned approximately 723,296,638 of the Class
A Shares of the Fund (70.13%); Miaz & Co., Milwaukee, Wisconsin, owned
approximately 65,231,980 of the Class A Sharesof the Fund (6.33%); M & I BSS
Appleton, Appleton, Wisconsin, owned approximately 25,699,369 of the Class B
Shares of the Fund (48.59%); and Kronseder Farms Inc., Franklin, Wisconsin,
owned approximately 2,864,263 of the Class B Shares of the Fund (5.42%).
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 Funds' investment adviser is M&I Investment Management Corp. ("Adviser").
The Adviser shall not be liable to the Corporation, the Funds or any shareholder
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Corporation. Because of the internal controls maintained by the Adviser's
affiliates to restrict the flow of non-public information, Fund investments are
typically made without any knowledge of the Adviser or its affiliates' lending
relationships with an issuer.
ADVISORY FEES
For the fiscal year ended August 31, 1995 and for the period from October 1,
1993 (date of initial public investment), to August 31, 1994, the Adviser earned
fees from EQUITY INCOME FUND of $584,150 and $245,116, respectively, of which
$69,757 and $39,343, respectively, were voluntarily waived. For the fiscal year
ended August 31, 1995 and for the period from October 1, 1993 (date of initial
public investment), to August 31, 1994, the Adviser earned fees fromVALUE EQUITY
FUND of $1,592,905 and $310,939, respectively, of which $0 and $45,477,
respectively, were voluntarily waived. For the fiscal year ended August 31,
1995, 1994, and for the period from November 23, 1992 (date of initial public
investment), to August 31, 1993, the Adviser earned fees from STOCK FUND of
$1,813,889, $1,877,194 and $1,572,056, respectively, of which $17,481 was
voluntarily waived for fiscal year ended August 31, 1995. For the fiscal year
ended August 31, 1995 and for the period from October 1, 1993 (date of initial
public investment) to August 31, 1994, the Adviser earned fees from MID-CAP
STOCK FUND of $585,271 and $189,976, respectively, of which $64,161 and
$56,834, respectively, were voluntarily waived. For the period from September
2, 1994 (date of initial public investment), to August 31, 1995, the Adviser
earned fees from the INTERNATIONAL STOCK FUND of $727,503, of which $31,759 was
voluntarily waived. For the fiscal years ended August 31, 1995 and 1994, and
for the period from November 2, 1992 (date of initial public investment), to
August 31, 1993, the Adviser earned fees from SHORT-TERM INCOME FUND of
$537,366, $575,101, and $200,259, respectively, of which $355,637, $361,083,
and $152,661, respectively, were voluntarily waived. For the fiscal years ended
August 31, 1995 and 1994, and for the period from November 23, 1992 (date of
initial public investment), to August 31, 1993, the Adviser earned fees from
INTERMEDIATE BOND FUND of $2,046,206, $1,873,380, and $1,288,544, respectively,
of which $272,827, $296,925 and $135,214, respectively, were voluntarily waived.
For the fiscal years ended August 31, 1995 and 1994, and for the period from
December 14, 1992 (date of initial public investment), to August 31, 1993, the
Adviser earned fees from GOVERNMENT INCOME FUND of $635,592, $436,508, and
$267,763, respectively, of which $216,611, $224,038, and $106,039, respectively,
were voluntarily waived. For the fiscal year ended August 31, 1995 and for the
period from February 2, 1994 (date of initial public investment), to August 31,
1994, the Adviser earned fees from SHORT-TERM TAX-FREE FUND of $115,704 and
$49,536, respectively, of which $109,424 and $49,536, respectively, were
voluntarily waived. For the fiscal year ended August 31, 1995 and for the
period from February 2, 1994 (date of initial public investment), to August 31,
1994, the Adviser earned fees from INTERMEDIATE TAX-FREE FUND of $243,850 and
$95,876, respectively, of which $176,613 and $77,214, respectively, were
voluntarily waived. For the fiscal years ended August 31, 1995, 1994, and for
the period from September 23, 1992 (start of business), to August 31, 1993, the
Adviser earned fees from MONEY MARKET FUND of $5,435,257, $4,623,880 and
$2,775,543, respectively, of which $2,826,334, $2,639,185 and $1,368,267,
respectively were voluntarily waived.
SUBADVISER TO INTERNATIONAL STOCK FUND
Templeton Investment Counsel, Inc. ("TICI") is the subadviser to the
INTERNATIONAL STOCK FUND under the terms of a Subadvisory Contract between the
Adviser and TICI. It is the Adviser's responsibility to select, subject to
review and approval by the Corporation's Directors, a subadviser for the
INTERNATIONAL STOCK FUND that has distinguished itself in its area of expertise
in asset management and to review the subadviser's continued performance.
Subject to the supervision and direction of the Corporation's Directors, the
Adviser provides investment management evaluation services principally by
performing initial due diligence on TICI and thereafter monitoring TICI's
performance through quantitative and qualitative analysis, as well as periodic
in-person, telephonic and written consultations with TICI. In evaluating TICI,
the Adviser considers, among other factors, TICI's level of expertise; relative
performance and consistency of performance over a minimum period of time; level
of adherence to investment discipline or philosophy; personnel, facilities and
financial strength; and quality of service and client communications. The
Adviser has responsibility for communicating performance expectations and
evaluations to TICI and ultimately recommending to the Corporation's Directors
whether TICI's contract should be renewed, modified or terminated. The Adviser
provides written reports to the Directors regarding the results of its
evaluation and monitoring functions. The Adviser is also responsible for
conducting all operations of the INTERNATIONAL STOCK FUND, except those
operations contracted to TICI, the custodian, the transfer agent, and the
administrator. Although TICI's activities are subject to oversight by the
Directors and officers of the Corporation, neither the Directors, the officers,
nor the Adviser evaluates the investment merits of TICI's individual security
selections. TICI has complete discretion to purchase, manage and sell portfolio
securities for the INTERNATIONAL STOCK FUND, subject to the INTERNATIONAL STOCK
FUND's investment objective, policies and limitations. However, TICI will
furnish to the Adviser such investment advice, statistical and other factual
information as may from time to time be reasonably requested by the Adviser.
TICI is a Florida corporation and an indirect wholly-owned subsidiary of
Franklin Resources, Inc. ("Franklin"), a publicly traded company whose shares
are listed on the New York Stock Exchange. Charles B. Johnson, Rupert H.
Johnson, Jr. and R. Martin Wiskemann are principal shareholders of Franklin and
own, respectively, approximately 20%, 16% and 10% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Research services may be provided to TICI by various affiliates, including
Templeton, Galbraith & Hansberger Ltd. and Templeton Quantitative Advisors,
Inc., corporations registered under the Investment Advisers Act of 1940, and
Templeton Management Limited, a Canadian company. The research services include
information, analytical reports, computer screening studies, statistical data,
and factual resumes pertaining to securities in the United States and in various
foreign nations. Such supplemental research, when utilized, is subject to
analysis by TICI before being incorporated into the investment advisory process.
TICI pays these affiliates compensation and reimbursement of expenses as
mutually agreed upon, without cost to the Fund. These affiliates and TICI are
independent contractors and in no sense is any of them an agent for the other.
Any of them is free to discontinue such research services at any time on 30
days' notice without cost or penalty.
It is understood that TICI may have advisory, management, service or other
contracts with other individuals or entities, and may have other interests and
businesses. When a security proposed to be purchased or sold for the
INTERNATIONAL STOCK FUND is also to be purchased or sold for other accounts
managed by TICI at the same time, TICI shall make such purchases or sales on a
pro-rata, rotating or other equitable basis so as to avoid any one account being
preferred over any other account. Although this may adversely affect the price
the INTERNATIONAL STOCK FUND pays or receives, or the size of the position it
obtains, it may also enable TICI to negotiate lower transaction costs.
For the period from September 2, 1994 (date of initial public investment), to
August 31, 1995, TICI earned fees from the INTERNATIONAL STOCK FUND of $363,752,
of which $15,880 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations established by
certain states for investment companies whose shares are registered for sale in
those states. If a Fund's normal operating expenses (including the investment
advisory fee, but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30 million of
average net assets, 2% per year of the next $70 million of average net assets,
and 1 1/2% per year of the remaining average net assets, the Adviser will
reimburse the Fund for its expenses over the limitation. If a Fund's monthly
projected operating expenses exceed this limitation, the advisory fees paid will
be reduced by the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of its advisory fees.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
ADMINISTRATIVE SERVICES
For the fiscal year ended August 31, 1995 and for the period from October 1,
1993 (date of initial public investment), to August 31, 1994, FAS received fees
from EQUITY INCOME FUND of $70,707 and $45,481, respectively, of which $0 and
$10,965, respectively, was voluntarily waived. For the fiscal year ended August
31, 1995 and for the period from October 1, 1993 (date of initial public
investment), to August 31, 1994, FAS received fees from VALUE EQUITY FUND of
$193,180 and $54,953, respectively, of which $0 and $9,451, respectively, were
voluntarily waived. For the fiscal years ended August 31, 1995 and 1994, and for
the period from November 23, 1992 (date of initial public investment), to August
31, 1993, Federated Administrative Services ("FAS ") received fees from STOCK
FUND of $219,917, $241,079, and $215,215, respectively, of which $0, $0, and
$910, respectively, were voluntarily waived. For the fiscal year ended August
31, 1995 and for the period from October 1, 1993 (date of initial public
investment), to August 31, 1994, FAS received fees from MID-CAP STOCK FUND of
$70,878 and $45,481, respectively, of which $0 and $12,101, respectively, was
voluntarily waived. For the period from September 2, 1994 (date of initial
public investment), to August 31, 1995, FAS received fees from INTERNATIONAL
STOCK FUND of $66,944, of which $0 was voluntarily waived. For the fiscal years
ended August 31, 1995 and 1994, and for the period from November 2, 1992 (date
of initial public investment), to August 31, 1993, FAS received fees from SHORT-
TERM INCOME FUND of $81,509, $91,808, and $41,371, respectively, of which $0,
$0, and $7,440, respectively, were voluntarily waived. For the fiscal years
ended August 31, 1995 and 1994, and for the period from November 23, 1992 (date
of initial public investment), to August 31, 1993, FAS received fees from
INTERMEDIATE BOND FUND of $310,184, $300,278, and $219,987, respectively, of
which $0, $0 and $870, respectively, were voluntarily waived. For the fiscal
years ended August 31, 1995 and 1994, and for the period from December 14, 1992
(date of initial public investment), to August 31, 1993, FAS received fees from
GOVERNMENT INCOME FUND of $77,015, $55,895 and $36,945, respectively, of which
$0, $0, and $601, respectively, were voluntarily waived. For the fiscal year
ended August 31, 1995 and for the period from February 2, 1994 (date of initial
public investment), to August 31, 1994, FAS received fees from SHORT-TERM TAX-
FREE FUND of $50,000 and $28,767, respectively, of which $28,938 and $19,393,
respectively, were voluntarily waived. For the fiscal year ended August 31,
1995 and for the period from February 2, 1994 (date of initial public
investment), to August 31, 1994, FAS received fees from INTERMEDIATE TAX-FREE
FUND of $50,000 and $28,767, respectively, of which $13,052 and $13,646,
respectively, were voluntarily waived. For the fiscal years ended August 31,
1995 and 1994, and for the period from September 23, 1992 (start of business),
to August 31, 1993, FAS received fees from MONEY MARKET FUND of $988,602,
$887,132, and $571,068, respectively, of which $0, $0, and $2,010, respectively,
were voluntarily waived.
SHAREHOLDER SERVICING ARRANGEMENTS
For the fiscal years ended August 31, 1995 and 1994 and for the period from
November 23, 1992 (date of initial public investment) to August 31, 1993,
Marshall Funds Investors Services ("MFIS") earned shareholder servicing fees of
$43,568, $37,544, and $31,441, respectively from STOCK FUND, of which $0, $0,
and $31,441, respectively, were voluntarily waived; $61,234, $46,835, and
$32,214, respectively, from INTERMEDIATE BOND FUND, of which $0, $0, and
$32,214, respectively, were voluntarily waived. For the fiscal years ended
August 31, 1995 and 1994 and for the period from November 2, 1992 (date of
initial public investment), to August 31, 1993, MFIS earned shareholder
servicing fees of $15,860, $14,377, and $5,006, respectively, from SHORT-TERM
INCOME FUND, of which, $0, $0, and $5,006, respectively, were voluntarily
waived. For the fiscal years ended August 31, 1995 and 1994 and for the period
from September 23, 1992 (start of business), to August 31, 1993, MFIS earned
shareholder servicing fees of $194,970, $138,716 and $83,266, respectively, from
MONEY MARKET FUND, of which $0, $0, and $83,266, respectively, were voluntarily
waived. For the fiscal years ended August 31, 1995 and 1994 and for the period
from December 14, 1992 (date of initial public investment), to August 31, 1993,
MFIS earned shareholder servicing fees of $15,385, $8,730, and $5,355,
respectively, for GOVERNMENT INCOME FUND, of which $0, $0, and $5,355,
respectively, were voluntarily waived. For the fiscal year ended August 31,
1995 and for the period from October 1, 1993 (date of initial public
investment), to August 31, 1994, MFIS earned shareholder servicing fees of
$14,413 and $4,902, respectively, for EQUITY INCOME FUND; $38,070 and $6,219,
respectively, for VALUE EQUITY FUND; and $14,323 and $3,800, respectively, for
MID-CAP STOCK FUND. For the fiscal year ended August 31, 1995 and for the period
from February 2, 1994 (date of initial public investment) to August 31, 1994,
MFIS earned shareholder servicing fees of $4,092 and $1,486, respectively, from
SHORT-TERM TAX-FREE FUND and $7,339 and $2,397, respectively, from INTERMEDIATE
TAX-FREE FUND. For the period from September 2, 1994 (date of initial public
investment), to August 31, 1995, MFIS earned shareholder servicing fees of
$13,349 from INTERNATIONAL STOCK FUND.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for the shares of the Fund and dividend disbursing
agent for the Fund. It also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio of investments.
Federated Services Company receives a fee based on the size, type and number of
accounts and transactions made by shareholders. Federated Services Company also
maintains the Fund's accounting records. The fee is based on the level of the
Fund's average net assets for the period plus out-of-pocket expenses.
CUSTODIAN
Marshall & Ilsley Trust Company ("M&I Trust Company"), Milwaukee, Wisconsin, a
subsidiary of Marshall & Ilsley Corp. is custodian for the securities and cash
of the Fund. For its services as custodian, M&I Trust Company receives an
annual fee, payable monthly, based on a percentage of a Fund's average aggregate
daily net assets. M&I Trust Company has entered into agreements with foreign
subcustodians approved by the Directors pursuant to Rule 17f-5 under the Act.
The foreign subcustodians may not hold certificates for the securities in their
custody, but instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities. Compensation for the services of the foreign
subcustodians is based on a schedule of charges agreed on from time to time.
BROKERAGE TRANSACTIONS
The Adviser and/or TICI may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to a Fund, the
Adviser, or TICI and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services.
The Adviser, TICI, and their affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers and dealers may be used by the Adviser and
TICI in advising the Funds and other accounts. To the extent that receipt of
these services may supplant services for which the Adviser, TICI, or their
affiliates might otherwise have paid, it would tend to reduce their expenses.
For the fiscal year ended August 31, 1995 and for the period from October 1,
1993 (date of the initial public investment), to August 31, 1994, the EQUITY
INCOME FUND paid $137,799 and $37,398 in brokerage commissions on brokerage
transactions. For the fiscal year ended August 31, 1995 and for the period from
October 1, 1993 (date of the initial public investment), to August 31, 1994, the
VALUE EQUITY FUND paid $549,637 and $236,601, respectively, in brokerage
commissions on brokerage transactions. For the fiscal years ended August 31,
1995 and 1994, and for the period from November 23, 1992 (date of initial public
investment), to August 31, 1993, the STOCK FUND paid $369,668, $596,430 and
$669,571, respectively, in brokerage commissions on brokerage transactions. For
the fiscal year ended August 31, 1995 and for the period from October 1, 1993
(date of the initial public investment), to August 31, 1994, the MID-CAP STOCK
FUND paid $248,008 and $109,864 in brokerage commissions on brokerage
transactions. For the period from September 2, 1994 (date of initial public
investment), to August 31, 1995, the INTERNATIONAL STOCK FUND paid $276,073 in
brokerage commissions on brokerage transactions.
PURCHASING SHARES WITH SECURITIES
A Fund may accept securities in exchange for its shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and its adviser(s) that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. A Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
DISTRIBUTION PLAN
The Corporation has adopted a plan for the INTERNATIONAL STOCK FUND and for
Class B Shares of the MONEY MARKET FUND ("Plan Shares") pursuant to Rule 12b-1
(the "Plan") which was promulgated by the Securities and Exchange Commission
pursuant to the Act. The Plan provides that the Fund's distributor, Federated
Securities Corp., shall act as the distributor of Plan Shares, and it permits
the payment of fees to brokers, dealers and administrators for distribution
and/or administrative services. The Plan is designed to (i) stimulate brokers,
dealers and administrators to provide distribution and/or administrative
support services to the Funds and holders of Plan Shares. These services are to
be provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
providing office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investment of client account cash
balances; answering routine client inquiries regarding the Plan Shares;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Funds reasonably request.
Other benefits which the Funds hope to achieve through the Plan include, but are
not limited to, the following: (1) an efficient and effective administrative
system; (2) a more efficient use of assets of holders of Plan Shares by having
them rapidly invested in the Funds with a minimum of delay and administrative
detail; and (3) an efficient and reliable records system for holders of Plan
Shares and prompt responses to shareholder requests and inquiries concerning
their accounts.
By adopting the Plan, the Directors expect that the Funds will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Funds in seeking to achieve their investment objectives. By identifying
potential investors in Plan Shares whose needs are served by the Funds'
objectives and properly servicing these accounts, the Funds may be able to curb
sharp fluctuations in rates of redemptions and sales. Currently, no fee is
being accrued for the INTERNATIONAL STOCK FUND. For the fiscal year ended
August 31, 1995, the MONEY MARKET FUND paid $63,394 to the distributor on behalf
of the Class B Shares.
DETERMINING MARKET VALUE
USE OF THE AMORTIZED COST METHOD (MONEY MARKET FUND ONLY)
The Directors have decided that the best method for determining the value of
portfolio instruments for the MONEY MARKET FUND is amortized cost. Under this
method, portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
The MONEY MARKET FUND's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with the provisions of Rule 2a-7 (the
"Rule") promulgated by the Securities and Exchange Commission under the Act.
Under the Rule, the Directors must establish procedures reasonably designed to
stabilize the net asset value per share, as computed for purposes of
distribution and redemption, at $1.00 per share, taking into account current
market conditions and the Fund's investment objective.
Under the Rule, the MONEY MARKET FUND is permitted to purchase instruments which
are subject to demand features or standby commitments. As defined by the Rule, a
demand feature entitles the Fund to receive the principal amount of the
instrument from the issuer or a third party on (1) no more than 30 days' notice
or (2) at specified intervals not exceeding 397 days on no more than 30 days'
notice. A standby commitment entitles the Fund to achieve same-day settlement
and to receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
The MONEY MARKET FUND acquires instruments subject to demand features and
standby commitments to enhance the instrument's liquidity. The Fund treats
demand features and standby commitments as part of the underlying instruments,
because the Fund does not acquire them for speculative purposes and cannot
transfer them separately from the underlying instruments. Therefore, although
the Fund defines demand features and standby commitments as "puts," the Fund
does not consider them to be corporate investments for purposes of its
investment policies.
MONITORING PROCEDURES. The Directors' procedures include monitoring the
relationship between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The Directors will
decide what, if any, steps should be taken if there is a difference of more than
0.5 of 1% between the two values. The Directors will take any steps they
consider appropriate (such as redemption in kind or shortening the average
portfolio maturity) to minimize any material dilution or other unfair results
arising from differences between the two methods of determining net asset value.
INVESTMENT RESTRICTIONS. The Rule requires that the MONEY MARKET FUND limit its
investments to instruments that, in the opinion of the Directors, present
minimal credit risks and have received the requisite rating from one or more
NRSROs. If the instruments are not rated, the Directors must determine that
they are of comparable quality. The Rule also requires the Fund to maintain a
dollar-weighted average portfolio maturity (not more than 90 days) appropriate
to the objective of maintaining a stable net asset value of $1.00 per share. In
addition, no instrument with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the MONEY MARKET FUND will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible. Shares of investment companies purchased by the Fund will meet
these same criteria and will have investment policies consistent with Rule 2a-7.
Under the amortized cost method of valuation, neither the amount of daily income
nor the net asset value is affected by any unrealized appreciation or
depreciation of the portfolio. In periods of declining interest rates, the
indicated daily yield on shares of the MONEY MARKET FUND, computed based upon
amortized cost valuation, may tend to be higher than a similar computation made
by using a method of valuation based upon market prices and estimates. In
periods of rising interest rates, the indicated daily yield on shares of the
Fund computed the same way may tend to be lower than a similar computation made
by using a method of calculation based upon market prices and estimates.
MARKET VALUES (ALL OTHER FUNDS)
Market values of portfolio securities of Funds other than the MONEY MARKET FUND
are determined as follows:
o for domestic equity securities and foreign securities, according to the
last reported sales price on a recognized securities exchange, if
available;
o in the absence of recorded sales for domestic equity securities, according
to the mean between the last closing bid and asked prices;
o in the absence of reported sales prices for foreign securities or if the
foreign security is traded over-the-counter, according to the last reported
bid price;
o for domestic bonds and other fixed income securities, at the last sales
price on a national securities exchange if available, otherwise as
determined by an independent pricing service;
o for domestic short-term obligations, according to the mean between bid and
asked price as furnished by an independent pricing service;
o for short-term obligations with remaining maturities of less than 60 days
at the time of purchase, at amortized cost, which approximates fair value;
or
o at fair value as determined in good faith by the Directors.
If a security is traded on more than one exchange, the price on the primary
market for that security, as determined by the Fund's adviser or subadviser, is
used. Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Funds will value futures contracts, and options on stocks, stock indices and
futures contracts at their market values established by the exchanges at the
close of option trading on such exchanges unless the Directors determine in good
faith that another method of valuing these positions is necessary.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing its net asset value, the
INTERNATIONAL STOCK FUND values foreign securities at the latest closing price
on the exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also be
determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into
U.S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Directors, although the actual
calculation may be done by others.
REDEMPTION IN KIND
Although the Corporation intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Directors determine to be fair and equitable.
The Corporation has elected to be governed by Rule 18f-1 under the Act, which
obligates the Corporation to redeem shares for any one shareholder in cash only
up to the lesser of $250,000 or 1% of a Fund's net asset value during any 90-day
period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
BANKING LAWS
Banking laws and regulations presently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end management investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company, affiliate, or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of such a customer. M&I Corp. is subject to such banking
laws and regulations.
M&I Corp. believes, based on the advice of its counsel, that M&I Investment
Management Corp. may perform the services contemplated by the investment
advisory agreement with the Corporation without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such present or future statutes
and regulations, could prevent M&I Investment Management Corp. or M&I Corp. from
continuing to perform all or a part of the services described in the prospectus
for its customers and/or the Fund. If M&I Investment Management Corp. and M&I
Corp. were prohibited from engaging in these activities, the Directors would
consider alternative advisers and means of continuing available investment
services. In such event, changes in the operation of the Fund may occur,
including possible termination of any automatic or other Fund share investment
and redemption services then being provided by M&I Investment Management Corp.
and M&I Brokerage Services or MFIS. It is not expected that existing
shareholders would suffer any adverse financial consequences if another adviser
with equivalent abilities to M&I Investment Management Corp. is found as a
result of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because each Fund expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if the holder holds the security as a capital
asset, to the extent that the value of the security with an extended maturity
differs from the adjusted basis of the security deemed exchanged therefor.
FOREIGN TAXES
Investment income on certain foreign securities may be subject to foreign
withholding or other taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which a Fund would be subject.
However, if a Fund may invest in the stock of certain foreign corporations that
constitute a Passive Foreign Investment Company (PFIC), then federal income
taxes may be imposed on a Fund upon disposition of PFIC investments.
SHAREHOLDERS' TAX STATUS
The dividends received deduction for corporations will apply to ordinary income
distributions to the extent the distribution represents amounts that would
qualify for the dividends received deduction to the EQUITY FUNDS if the EQUITY
FUNDS were a regular corporation, and to the extent designated by the EQUITY
FUNDS as so qualifying. Otherwise, these dividends and any short-term capital
gains are taxable as ordinary income. No portion of any income dividends paid
by the other Funds is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Capital gains, when experienced by the Fund, could result in an increase in
dividends. Capital losses could result in a decrease in dividends. When a Fund
realizes net long-term capital gains, it will distribute them at least once
every 12 months.
TOTAL RETURN
The average annual total return for a Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the quarterly reinvestment of any dividends and distributions.
STOCK FUND'S average annual total return for the one-year period ended August
31, 1995 and for the period from November 23, 1992 (date of initial public
investment), to August 31, 1995 were 16.85% and 19.32%, respectively. VALUE
EQUITY FUND'S average annual total return for the one-year period ended August
31, 1995 and for the period from September 30, 1993 (date of initial public
investment), to August 31, 1995 were 13.57% and 25.60%, respectively. EQUITY
INCOME FUND'S average annual total return for the one-year period ended August
31, 1995 and for the period from October 1, 1993 (date of initial public
investment), to August 31, 1995 were 16.40% and 18.75%, respectively. MID-CAP
STOCK FUND'S average annual total return for the one-year period ended August
31, 1995 and for the period from October 1, 1993 (date of initial public
investment), to August 31, 1995 were 27.06% and 23.57%, respectively.
INTERNATIONAL STOCK FUND'S average annual total return for the period from
September 2, 1994 (date of initial public investment), to August 31, 1995 was
2.11%. SHORT-TERM INCOME FUND'S average annual total return for the one-year
period ended August 31, 1995 and for the period from November 2, 1993 (date of
initial public investment) to August 31, 1995 were 6.47% and 12.52%,
respectively.INTERMEDIATE BOND FUND's average annual total return for the one-
year period ended August 31, 1995, and for the period from November 23, 1992
(date of initial public investment), to August 31, 1995 were 8.58% and 14.89%,
respectively. GOVERNMENT INCOME FUND's average annual total return for the
fiscal year ended August 31, 1995, and for the period from December 14, 1992
(date of initial public investment) to August 31, 1995 were 9.78% and 15.24%,
respectively. SHORT-TERM TAX FREE FUND'S average annual total return for the
one-year period ended August 31, 1995 and for the period from February 2, 1994
(date of initial public investment), to August 31, 1995 were 5.41% and 6.44%,
respectively. INTERMEDIATE-TAX-FREE FUND's average annual total return for the
one-year period ended August 31, 1995 and for the period from February 2, 1994
(date of initial public investment), to August 31, 1995 were 6.58% and 5.58%,
respectively.
YIELD
The MONEY MARKET FUND calculates the yield for both classes of shares daily,
based upon the seven days ending on the day of the calculation, called the "base
period." This yield is computed by:
o determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net
change excluding capital changes but including the value of any additional
Shares purchased with dividends earned from the original one Share and all
dividends declared on the original and any purchased shares;
o dividing the net change in the account's value by the value of the account
at the beginning of the base period to determine the base period return;
and
o multiplying the base period return by 365/7.
The MONEY MARKET FUND's yield for Class A Shares for the seven-day period ended
August 31, 1995, was 5.55%. The Fund's yield for Class B Shares was 5.25% for
the same period.
The yield for the other Funds is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the offering price per share of the Fund
on the last day of the period. This value is annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a twelve-month period and
is reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders. EQUITY INCOME FUND's
yield for the 30-day period ended August 31, 1995, was 3.05%. VALUE EQUITY
INCOME FUND's yield for the 30-day period ended August 31, 1995, was 1.65%.
STOCK FUND's yield for the 30-day period ended August 31, 1995, was .88%. MID-
CAP STOCK FUND's yield for the 30-day period ended August 31, 1995, was (.40%).
SHORT-TERM INCOME FUND's yield for the 30-day period ended August 31, 1995, was
5.99%. INTERMEDIATE BOND FUND's yield for the 30-day period ended August 31,
1995, was 5.80%. GOVERNMENT INCOME FUND's yield for the 30-day period ended
August 31, 1995, was 6.23%. SHORT-TERM TAX-FREE FUND's yield for the 30-day
period ended August 31, 1995, was 3.88%. INTERMEDIATE TAX-FREE FUND's yield for
the 30-day period ended August 31, 1995, was 4.30%.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
performance will be reduced for those shareholders paying those fees.
EFFECTIVE YIELD (MONEY MARKET FUND ONLY)
The MONEY MARKET FUND's effective yield for both classes of shares is computed
by compounding the unannualized base period return by: adding 1 to the base
period return; raising the sum to the 365/7th power; and subtracting 1 from the
result. The MONEY MARKET FUND's effective yield for Class A Shares for the
seven-day period ended August 31, 1995, was 5.70%. The MONEY MARKET FUND's
effective yield for Class B Shares was 5.38% for the same period.
TAX-EQUIVALENT YIELD (TAX-FREE INCOME FUNDS ONLY)
The tax-equivalent yield of the TAX-FREE INCOME FUNDS is calculated similarly to
the yield, but is adjusted to reflect the taxable yield that these Funds would
have had to earn to equal its actual yield, assuming a 39.6% tax rate (the
maximum marginal federal rate for individuals) and assuming that income is 100%
tax-exempt. SHORT-TERM TAX-FREE FUND's tax-equivalent yield for the 30-day
period ended August 31, 1995, was 6.42%. The tax-equivalent yield for
INTERMEDIATE TAX-FREE FUND was 7.12% for the same period.
TAX-EQUIVALENCY TABLE
The TAX-FREE INCOME FUNDS may also use a tax-equivalency table in advertising
and sales literature. The interest earned by the municipal bonds in these
Funds' portfolio generally remains free from federal income tax* and is often
free from state and local taxes as well. As the table on the next page
indicates, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1995
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
SINGLE $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
Tax-Exempt
Yield Taxable Yield Equivalent
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.
*Some portion of the Tax-Free Funds' income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
A Fund's performance depends upon such variables as: portfolio quality; average
portfolio maturity; type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities; changes in
Fund or class expenses; the relative amount of Fund cash flow; and various other
factors.
Investors may use financial publications and/or indices to obtain a more
complete view of a Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST INDEX
(EAFE) is a market capitalization weighted foreign securities index, which
is widely used to measure the performance of European, Australian and New
Zealand and Far Eastern stock markets. The index covers approximately 1,020
companies drawn from 18 countries in the above regions. The index values
its securities daily in both U.S. dollars and local currency and calculates
total returns monthly. EAFE U.S. dollar total return is a net dividend
figure less Luxembourg withholding tax. The EAFE is monitored by Capital
International, S.A., Geneva, Switzerland.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specific period
of time. From time to time, a Fund will quote its Lipper ranking in
advertising and sales literature.
o CONSUMER PRICE INDEX is generally considered to be a measure of inflation.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is cited
as a principal indicator of market conditions.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, financial, and public
utility companies. The Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in the Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
o BANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading bank
and thrift institution money market deposit accounts. The rates published
in the index are an average of the personal account rates offered on the
Wednesday prior to the date of publication by ten of the largest banks and
thrifts in each of the five largest Standard Metropolitan Statistical
Areas. Account minimums range upward from $2,500 in each institution and
compounding methods vary. If more than one rate is offered, the lowest rate
is used. Rates are subject to change at any time specified by the
institution.
o DONOGHUE'S MONEY FUND REPORT publishes annualized yields of over 300
taxable money market funds on a weekly basis and through its Money Market
Insight publication reports monthly and 12 month-to-date investment results
for the same money funds.
o THE S&P/BARRA VALUE INDEX AND THE S&P/BARRA GROWTH INDEX are constructed by
Standard & Poor's and BARRA, Inc., an investment technology and consulting
company, by separating the S&P 500 Index into value stocks and growth
stocks. The S&P/BARRA Growth and S&P/BARRA Value Indices are constructed
by dividing the stocks in the S&P 500 Index according to their price-to-
book ratios. The S&P/BARRA Growth Index, contains companies with higher
price-to-earnings ratios, low dividends yields, and high earnings growth
(concentrated in electronics, computers, health care, and drugs). The
Value Index contains companies with lower price-to-book ratios and has 50%
of the capitalization of the S&P 500 Index. These stocks tend to have
lower price-to-earnings ratios, high dividend yields, and low historical
and predicted earnings growth (concentrated in energy, utility and
financial sectors). The S&P/BARRA Value and S&P/BARRA Growth Indices are
capitalization-weighted and rebalanced semi-annually. Standard &
Poor's/BARRA calculates these total return indices with dividends
reinvested.
o THE BARRA EQUITY INCOME INDEX is constructed by sorting the constituents of
the S&P 500 according to their yields. The S&P 500 is divided into two
halves, such that the total capitalization of the higher yield firms
approximately equals that of the lower yield firms. These higher yielding
stocks constitute the S&P/BARRA Equity Income Index, which is
capitalization-weighted and rebalanced semi-annually. These higher
yielding firms tend to display low historical and predicted earnings growth
(concentrated in utilities, financial and energy sections). BARRA, an
investment technology and consulting company, calculates the total return
of the index with dividends reinvested.
o STANDARD & POOR'S MIDCAP 400 STOCK PRICE INDEX, a composite index of 400
common stocks with market capitalizations between $200 million and $7.5
billion in industry, transportation, financial, and public utility
companies. The Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in the Standard & Poor's figures.
o MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking short-
term U.S. government securities with maturities between 1 and 2.99 years.
The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o MERRILL LYNCH CORPORATE MASTER is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better. These
quality parameters are based on the composites of ratings assigned by
Standard & Poor's Corporation and Moody's Investors Service, Inc. Only
bonds with a minimum maturity of one year are included.
o MERRILL LYNCH 1-YEAR TREASURY BILL INDEX is comprised of the most recently
issued one-year U.S. Treasury bills. Index returns are calculated as total
returns for periods of one, three, six and twelve months as well as year-
to-date.
o MERRILL LYNCH CORPORATE A-RATED (1-3 YEAR) BOND INDEX is a universe of
corporate bonds and notes with maturities between 1-3 years and rated A3 or
higher.
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporation; and publicly issued,
fixed rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds approximates
nine years. Traced by Lehman Brothers, Inc., the index calculates total
return for one-month, three-month, twelve-month, and ten-year periods and
year-to-date.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is a universe
of government and corporate bonds rated BBB or higher with maturities
between 1-10 years.
o THE SALOMON BROTHERS TOTAL RATE-OF-RETURN INDEX for mortgage pass through
securities reflects the entire mortgage pass through market and reflects
their special characteristics. The index represents data aggregated by
mortgage pool and coupon within a given sector. A market weighted
portfolio is constructed considering all newly created pools and coupons.
o THE MERRILL LYNCH TAXABLE BOND INDICES include U.S. Treasury and agency
issues and were designed to keep pace with structural changes in the fixed
income market. The performance indicators capture all rating changes, new
issues, and any structural changes of the entire market.
o LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is a universe of fixed
rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corp. (FHLMC), and Federal
National Mortgage Association (FNMA).
o LEHMAN BROTHERS FIVE-YEAR STATE GENERAL OBLIGATIONS BONDS is an index
comprised of all state general obligation debt issues with maturities
between four and six years. These bonds are rated A or better and represent
a variety of coupon ranges. Index figures are total returns calculated for
one, three, and twelve month periods as well as year-to-date. Total returns
are also calculated as of the index inception, December 31, 1979.
o LEHMAN BROTHERS THREE-YEAR STATE GENERAL OBLIGATIONS BONDS is an index
comprised of the same issues noted above except that the maturities range
between two and four years. Index figures are total returns calculated for
the same periods as listed above.
Investors may also consult the fund evaluation consulting universes listed
below. Consulting universes may be composed of pension, profit sharing,
commingled, endowment/foundation, and mutual funds.
o FIDUCIARY CONSULTING GRID UNIVERSE, for example, is composed of over 1,000
funds, representing 350 different investment managers, divided into
subcategories based on asset mix. The funds are ranked quarterly based on
performance and risk characteristics.
o SEI DATA BASE for equity funds includes approximately 900 funds,
representing 361 money managers, divided into fund types based on investor
groups and asset mix. The funds are ranked every three, six, and twelve
months.
o MERCER MEIDINGER, INC. compiles a universe of approximately 600 equity
funds, representing about 500 investment managers, and updates their
rankings each calendar quarter as well as on a one, three, and five year
basis.
Advertisements and other sales literature for a Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in a Fund based on
quarterly reinvestment of dividends over a specified period of time.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended August 31, 1995, are
incorporated herein by reference from the Funds' Annual Report dated August 31,
1995 (File Nos. 33-48907 and 811-58433). A copy of the Annual Report for a Fund
may be obtained without charge by contacting Marshall Funds Investor Services at
the address located on the back cover of the combined prospectus or by calling
Marshall Funds Investor Services at 414-287-8500 or 1-800-236-8560.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
NR--Not rated by Moody's.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment.
NR--NR indicates that Fitch does not rate the specific issue.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. The issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICES, INC. COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (for related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (for related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
F-1+--(Exceptionally Strong Credit Quality). Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--(Very Strong Credit Quality). Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--(Good Credit Quality). Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as great
as the F-1+ and F-1 categories.
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
NR -- NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Plus (+) or minus (-): The ratings "AA" and "A" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATINGS
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
NR -- Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in the generic rating
classification of "Aa" and "A" in its corporate or municipal bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD AND POOR'S CORPORATION MUNICIPAL NOTE RATINGS
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
