EQUITY AND INCOME FUNDS
Arrow Funds
Combined Annual Report
September 30, 1996
[Graphic]
Mark Twain Bank
Investment Adviser
PRESIDENT'S MESSAGE
Dear Investor:
I am pleased to present you with the Annual Report for your investment in
the Arrow Equity and Income Funds. This report covers the one-year period
from October 1, 1995 through September 30, 1996.
This report begins with a commentary by the portfolio manager, and follows
with a complete list of holdings and financial statements for Arrow Equity
Portfolio, Arrow Fixed Income Portfolio, and Arrow Municipal Income
Portfolio.
Please note the following performance summary for each Arrow fund over the
period:
* ARROW EQUITY PORTFOLIO produced a total return of 10.48% based on net
asset value, or 6.62% reflecting the fund's sales charge.* This return was
due to dividends of $0.18 per share, and a 9% increase in share price from
the first day of the period to the last day. At the end of the report
period, net assets stood at more than $55.6 million.
* ARROW FIXED INCOME PORTFOLIO paid dividends of $0.57 per share, while
achieving a total return of 2.12% based on net asset value, or -1.41%
reflecting the fund's sales charge.* The total return reflects a difficult
interest rate environment during the period that caused bond prices to fall.
At the end of the report period, net assets stood at more than $28.7
million.
* ARROW MUNICIPAL INCOME PORTFOLIO paid tax-free dividends of $0.47 per
share.** Through this dividend stream and a slight increase in net asset
value, the fund achieved a total return of 5.04%, or 1.37% reflecting the
fund's sales charge.* At the end of the report period, net assets stood at
more than $14.9 million.
Thank you for pursuing your financial goals through the Arrow Funds.
Consider reinvesting your earnings automatically in additional shares. It's
a convenient way to pursue the advantage of compounding -- and increase your
opportunity to participate in key financial markets over time.
Sincerely,
[Graphic]
Edward C. Gonzales
President
November 15, 1996
* Performance quoted reflects past performance. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
** Income may be subject to the federal alternative minimum tax and state
and local taxes.
ARROW EQUITY PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
The equity markets have been a pleasant surprise, to date, to just about
everyone. Especially the degree of strength registered by a majority of the
market averages. The second quarter ended June 30, 1996 saw the Standard &
Poor's Daily Stock Price Index of 500 Common Stocks ("S&P 500") return 4.5%
with the Dow Jones Average up a more modest 1.8%, but stocks were losing
momentum toward the quarter end. The downward trend continued through July
as the S&P lost 4.4% and the Dow dropped 2.0%.
The earlier euphoria was clearly missing from the stock market, as the
second half got under way. There was good reason for concern at that point.
Not only were legitimate issues being raised on the economic, inflation, and
interest rate fronts, but, valuation levels, (i.e., price-earnings ratios
and dividend yields) suggested that stocks were vulnerable to any
deterioration in market fundamentals.
However, the stock market began to recover during the month of August and
developed even more strength in September with most market averages reaching
record levels. This bull market, as all such markets, has been driven by
three factors: liquidity, rising earnings, and lower bond yields.
Liquidity has poured into both stocks and bonds and out of bank deposits,
money market funds, and "real" assets at a record pace. Cash flows into
equities so far this year have exceeded all of 1993's record high of $129
billion, by a wide margin.
This year's third quarter could represent the last difficult earnings
comparison of U.S. Corporations. While normally this could upset the
financial markets, companies have done an excellent job of lowering Wall
Street's expectations. Therefore, poor third quarter earnings may not
present a huge problem, however, having said that, we believe earnings on
average will be somewhat better than expected. Looking into the fourth
quarter and beyond, we believe economic growth will slow a bit. This fact,
in addition to what we believe is moderate (5%-6%) money growth, should help
keep both short- and long-term yields in check.
The most difficult environment for the equity markets is a recessionary
period. At this time we do not see a recession on the horizon, but with some
signs of the economy slowing, it's something to monitor. At the present time
we are cautiously optimistic. We view the equity market to be within a
fairly valued range. We continue to feel, however, it is more important to
search out attractive common stocks rather than concentrate on the "market."
ARROW EQUITY PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW EQUITY PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the
Arrow Equity Portfolio (the "Fund") from January 3, 1993 (start of
performance) to September 30, 1996, compared to the Standard & Poor's Daily
Stock Price Index of 500 Common Stocks ("S&P 500").
[Graphic] omitted, see appendix A
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after
deducting the maximum sales charge of 3.50% ($10,000 investment minus $350
sales charge = $9,650). The Fund's performance assumes the reinvestment of
all dividends and distributions. The S&P 500 is adjusted to reflect
reinvestment of dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The S&P 500 is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
ARROW FIXED INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
The Arrow Fixed Income Portfolio had total net assets of $28.7 million as of
September 30, 1996. The fund had an average maturity of 11.5 years, with 36%
of the fund's assets invested in U.S. Treasury and Government Agency issues,
and 57% invested in investment grade corporate bonds.
Interest rates, after moving substantially higher in the first quarter of
the year, settled into a trading range environment in the second and third
quarter. Thirty-year Treasury securities spent most of the period
fluctuating in a range of 7.20% on the high side, to 6.70% on the low side,
closing at a 6.92% yield on September 30, 1996. Stronger economic data in
the second quarter caused yields to rise, while weaker numbers in the third
quarter resulted in declining rates. Inflation in the U.S. economy continues
to be moderate. The Consumer Price Index core rate (the CPI less food and
energy prices), has risen 2.8% year to date through September versus 3% for
all of 1995. While 1996 has not been favorable for the bond market, a
continued slowing in the economy and favorable inflation numbers should
eventually result in lower long-term interest rates.
ARROW FIXED INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW FIXED INCOME PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the
Arrow Fixed Income Portfolio (the "Fund") from January 3, 1993 (start of
performance) to September 30, 1996, compared to the Lehman Brothers
Government/Corporate Total Index ("LBGCTI").
[Graphic] omitted, see appendix B
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after
deducting the maximum sales charge of 3.50% ($10,000 investment minus $350
sales charge = $9,650). The Fund's performance assumes the reinvestment of
all dividends and distributions. The LBGCTI is adjusted to reflect
reinvestment of dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBGCTI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.
ARROW MUNICIPAL INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
Interest rates increased beginning in the first quarter of 1996 on concerns
of fears of rising inflation due to higher commodity prices and stronger
economic growth. This continued until the latter part of the third quarter
when signs of economic strength began to ease. Thus far, inflation has
remained subdued.
Municipal supply remains somewhat low in many areas. This has enabled
municipal prices to remain firm, and thus municipals have outperformed
taxables for most of the year. Going forward, the economic signals are mixed
as to whether the economy will strengthen or weaken further going into 1997.
Therefore, the fund remains somewhat defensive with emphasis being placed on
intermediate average maturities and short to intermediate duration, along
with preference for premium coupon issues.
ARROW MUNICIPAL INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW MUNICIPAL INCOME PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the
Arrow Municipal Income Portfolio (the "Fund") from January 3, 1993 (start of
performance) to September 30, 1996, compared to the Lehman Brothers State
General Obligations Bond Index ("LBSGOBI").
[Graphic] omitted, see appendix C
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after
deducting the maximum sales charge of 3.50% ($10,000 investment minus $350
sales charge = $9,650). The Fund's performance assumes the reinvestment of
all dividends and distributions. The LBSGOBI is adjusted to reflect
reinvestment of dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBSGOBI is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 97.9%
CHEMICALS -- 0.5%
5,000 Eastman Chemical Co. $ 291,875
CONSUMER DURABLES -- 1.6%
34,000 Mattel, Inc. 879,750
CONSUMER NON-DURABLES -- 10.2%
8,000 Anheuser-Busch Cos., Inc. 301,000
2,000 Gillette Co. 144,250
20,000 IBP, Inc. 465,000
2,000 Nike, Inc., Class B 243,000
32,000 PepsiCo, Inc. 904,000
22,000 Philip Morris Cos., Inc. 1,974,500
35,000 UST, Inc. 1,036,875
10,000 V.F. Corp. 601,250
Total 5,669,875
ELECTRONIC TECHNOLOGY -- 7.9%
22,000 Hewlett-Packard Co. 1,072,500
13,000 Intel Corp. 1,240,688
3,000 (a)Sun Microsystems, Inc. 186,375
15,000 Texas Industries, Inc. 898,125
21,000 Varian Associates, Inc. 1,008,000
Total 4,405,688
ENERGY MINERALS -- 1.1%
7,000 Ashland, Inc. 278,250
5,000 Phillips Petroleum Co. 213,750
5,000 (a)Santa Fe Energy Resource, Inc. 71,250
2,000 Unocal Corp. 72,000
Total 635,250
</TABLE>
ARROW EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
ENTERTAINMENT -- 0.6%
15,000 Brunswick Corp. $ 360,000
FINANCE -- 28.9%
25,000 Aflac, Inc. 887,500
11,000 American International Group, Inc. 1,108,250
20,000 BankAmerica Corp. 1,642,500
4,000 Citicorp 362,500
10,000 Federal Home Loan Mortgage Corp. 978,750
20,000 Federal National Mortgage Association 697,500
80,000 Green Tree Financial Corp. 3,140,000
18,000 Household International, Inc. 1,480,500
37,500 MBNA Corp. 1,303,125
15,000 NationsBank Corp. 1,303,125
12,000 Norwest Corp. 490,500
25,000 Travelers Group, Inc. 1,228,125
5,500 Wells Fargo & Co. 1,430,000
Total 16,052,375
HEALTH SERVICES -- 1.3%
16,000 United Healthcare Corp. 666,000
HEALTH TECHNOLOGY -- 12.1%
25,000 Abbott Laboratories 1,231,250
15,000 (a)Amgen, Inc. 946,875
22,000 Medtronic, Inc. 1,410,750
15,000 Merck & Co., Inc. 1,055,625
30,000 Schering Plough Corp. 1,845,000
7,000 (a)Sofamor Danek Group, Inc. 216,125
Total 6,705,625
HOTELS -- 0.6%
12,000 Hilton Hotels Corp. 340,500
</TABLE>
ARROW EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
INDUSTRIAL SERVICES -- 3.7%
17,000 Fluor Corp. $ 1,045,500
20,000 Halliburton Co. 1,032,500
Total 2,078,000
MACHINERY & EQUIPMENT -- 7.2%
35,000 Chrysler Corp. 1,001,875
12,000 Deere & Co. 504,000
21,000 Dover Corp. 1,002,750
8,000 McDonnell-Douglas Corp. 420,000
20,000 Thermo Electron Corp. 810,000
2,000 United Technologies Corp. 240,250
Total 3,978,875
PROCESS INDUSTRIES -- 1.4%
15,750 Archer-Daniels-Midland Co. 303,188
7,000 Avery Dennison Corp. 388,500
3,000 (a)Sealed Air Corp. 111,750
Total 803,438
PRODUCER MANUFACTURING -- 10.7%
20,000 Allied Signal, Inc. 1,317,500
7,000 Armstrong World Industries, Inc. 436,625
3,000 General Electric Co. 273,000
17,000 Gleason Corp. 663,000
18,000 Illinois Tool Works, Inc. 1,298,250
16,000 Raychem Corp. 1,200,000
8,000 (a)U.S. Filter Corp. 273,000
9,000 Xerox Corp. 482,625
Total 5,944,000
</TABLE>
ARROW EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
RETAIL TRADE -- 1.9%
5,000 Family Dollar Stores, Inc. $ 86,875
8,000 Home Depot, Inc. 455,000
3,000 (a)Vons Companies, Inc. 128,625
15,000 Wal-Mart Stores, Inc. 395,625
Total 1,066,125
TECHNOLOGY SERVICES -- 5.5%
6,750 Computer Associates International, Inc. 403,312
5,000 Electronic Data Systems Corp. 306,875
60,000 Reynolds & Reynolds Co., Class A 1,567,500
10,000 (a)Sterling Software, Inc. 763,750
Total 3,041,437
TRANSPORTATION -- 1.4%
25,000 Illinois Central Corp. 790,625
UTILITIES -- 1.3%
14,000 AT&T Corp. 731,500
TOTAL COMMON STOCKS (IDENTIFIED COST $42,193,515) 54,440,938
MUTUAL FUNDS -- 1.9%
1,051,482 Goldman Sachs ILA Treasury Instruments 1,051,482
1,712 SEI Government Portfolio Money Market Fund 1,712
TOTAL MUTUAL FUNDS (AT NET ASSET VALUE) 1,053,194
TOTAL INVESTMENTS (IDENTIFIED COST $43,246,709)(B) $55,494,132
</TABLE>
(a) Non-income producing security.
(b) The cost of investments for federal tax purposes amounts to $43,285,853.
The net unrealized appreciation of investments on a federal tax basis
amounts to $12,208,279 which is comprised of $12,788,757 appreciation and
$580,478 depreciation at September 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($55,572,752) at September 30, 1996.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $43,246,709 and
tax cost $43,285,853) $ 55,494,132
Income receivable 108,385
Receivable for shares sold 290
Deferred expenses 2,988
Total assets 55,605,795
LIABILITIES:
Payable for shares redeemed $ 16,943
Accrued expenses 16,100
Total liabilities 33,043
Net Assets for 3,690,543 shares outstanding $ 55,572,752
NET ASSETS CONSIST OF:
Paid in capital $ 39,609,476
Net unrealized appreciation of investments 12,247,423
Accumulated net realized gain on investments 3,638,114
Undistributed net investment income 77,739
Total Net Assets $ 55,572,752
NET ASSET VALUE, AND REDEMPTION PROCEEDS PER SHARE:
($55,572,752 / 3,690,543 shares outstanding) $15.06
Offering Price Per Share (100/96.50 of $15.06)* $15.61
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 768,953
Interest 230,196
Total income 999,149
EXPENSES:
Investment advisory fee $ 368,254
Administrative personnel and services fee 71,420
Custodian fees 23,826
Transfer and dividend disbursing agent fees and expenses 28,471
Directors'/Trustees' fees 1,255
Auditing fees 13,085
Legal fees 3,221
Portfolio accounting fees 48,755
Distribution services fee 122,734
Share registration costs 17,853
Printing and postage 5,534
Insurance premiums 3,722
Miscellaneous 3,825
Total expenses 711,955
Waivers --
Waiver of investment advisory fee $ (13,853)
Waiver of distribution services fee (122,734)
Total waivers (136,587)
Net expenses 575,368
Net investment income 423,781
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 4,612,534
Net change in unrealized appreciation (depreciation) of investments (11,835)
Net realized and unrealized gain on investments 4,600,699
Change in net assets resulting from operations $ 5,024,480
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations --
Net investment income $ 423,781 $ 304,310
Net realized gain (loss) on investments ($4,600,860 net gain and
$664,284 net loss, respectively, as computed for federal tax purposes) 4,612,534 1,393,153
Net change in unrealized appreciation (depreciation) of investments (11,835) 10,831,819
Change in net assets resulting from operations 5,024,480 12,529,282
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (381,222) (291,654)
Distributions from net realized gains (218,057) --
Change in net assets resulting from distributions to shareholders (599,279) (291,654)
SHARE TRANSACTIONS --
Proceeds from sale of shares 12,339,545 12,062,494
Net asset value of shares issued to shareholders in payment of
distributions declared 47,007 17,333
Cost of shares redeemed (4,946,669) (10,891,483)
Change in net assets resulting from share transactions 7,439,883 1,188,344
Change in net assets 11,865,084 13,425,972
NET ASSETS:
Beginning of period 43,707,668 30,281,696
End of period (including undistributed net investment income of
$77,739 and $35,180, respectively) $ 55,572,752 $ 43,707,668
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.80 $ 9.74 $10.02 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.12 0.10 0.07 0.04
Net realized and unrealized gain (loss) on investments 1.32 4.05 (0.25) 0.02
Total from investment operations 1.44 4.15 (0.18) 0.06
LESS DISTRIBUTIONS
Distributions from net investment income (0.11) (0.09) (0.07) (0.04)
Distributions from net realized gain on investments (0.07) -- (0.03) --
Total distributions (0.18) (0.09) (0.10) (0.04)
NET ASSET VALUE, END OF PERIOD $15.06 $13.80 $ 9.74 $10.02
TOTAL RETURN(B) 10.48% 42.90% (1.84%) 0.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.28% 0.30% 0.28% 0.30%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $55,573 $43,708 $30,282 $31,159
Average commission rate paid $0.0756 -- -- --
Portfolio turnover 45% 45% 127% 54%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS -- 57.1%
AEROSPACE & DEFENSE -- 1.7%
$ 500,000 Rockwell International Corp., 6.75%, 9/15/2002 $ 497,115
BANKING -- 8.3%
1,000,000 Bank of Scotland, Edinburgh, 6.50%, 2/15/2011 899,200
500,000 BankAmerica Corp., 7.50%, 10/15/2002 511,315
500,000 NationsBank Corp., 6.50%, 3/15/2006 471,605
500,000 NationsBank Corp., 6.875%, 2/15/2005 487,495
Total 2,369,615
CONSUMER PRODUCTS -- 3.5%
1,000,000 Kimberly Clark Corp., 7.875%, 2/1/2023 1,007,580
FINANCE -- 11.7%
500,000 MBNA Corp., 6.875%, 10/1/1999 502,260
1,000,000 Merrill Lynch & Co., Inc., 7.00%, 4/27/2008 964,800
1,000,000 Smurfit Capital, 6.75%, 11/20/2005 961,580
1,000,000 Travelers Group, Inc., 6.25%, 12/1/2005 930,470
Total 3,359,110
INDUSTRIAL -- 12.4%
500,000 La Quinta Inns, Inc., 7.25%, 3/15/2004 483,910
1,000,000 Time Warner, Inc., 8.05%, 1/15/2016 952,020
1,000,000 USX Corp., 9.375%, 5/15/2022 1,115,670
1,000,000 WMX Technologies, Inc., 7.125%, 6/15/2001 1,013,000
Total 3,564,600
OIL & GAS -- 3.4%
1,000,000 Phillips Petroleum Co., 7.92%, 4/15/2023 989,110
</TABLE>
ARROW FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
UTILITIES -- 16.1%
$ 699,000 Arkansas Electric Co-op Corp., 7.33%, 6/30/2008 $ 703,718
1,000,000 Central LA Electric Co., 6.95%, 6/21/2006 968,770
1,000,000 Duke Power Co., 7.375%, 3/1/2023 942,640
500,000 Midwest Power Systems, Inc., 7.00%, 2/15/2005 493,505
1,000,000 Systems Energy Resources, 7.80%, 8/1/2000 997,407
500,000 United Telephone Co. of Florida, 7.25%, 12/15/2004 503,565
Total 4,609,605
TOTAL CORPORATE BONDS (IDENTIFIED COST $16,730,940) 16,396,735
GOVERNMENT BONDS -- 36.3%
FOREIGN MUNICIPAL -- 1.8%
500,000 Ontario Province, Canada, 7.375%, 1/27/2003 512,035
GOVERNMENT AGENCIES -- 5.2%
500,000 Federal Home Loan Bank, 6.32%, 2/1/2000 498,560
1,000,000 Federal National Mortgage Association, 7.55%, 6/10/2004 1,006,170
Total 1,504,730
U.S. TREASURY SECURITIES -- 29.3%
3,000,000 U.S. Treasury Bond, 7.50%, 11/15/2016 3,143,130
1,500,000 U.S. Treasury Note, 7.50%, 5/15/2002 1,571,310
500,000 U.S. Treasury Note, 7.50%, 11/15/2001 521,935
1,000,000 U.S. Treasury Note, 7.875%, 8/15/2001 1,058,340
2,000,000 U.S. Treasury Note, 8.00%, 5/15/2001 2,123,180
Total 8,417,895
TOTAL GOVERNMENT BONDS (IDENTIFIED COST $10,693,270) 10,434,660
</TABLE>
ARROW FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
PREFERRED STOCKS -- 5.1%
BANKING -- 3.3%
37,500 Midland Bank PLC, Pfd. $ 946,875
FINANCE -- 1.8%
20,000 SI Financing Trust, Pfd. 515,000
TOTAL PREFERRED STOCKS (IDENTIFIED COST $1,437,500) 1,461,875
MUTUAL FUND -- 0.2%
49,993 Goldman Sachs ILA Treasury Money Market Fund (AT NET ASSET VALUE) 49,993
TOTAL INVESTMENTS (IDENTIFIED COST $28,911,703)(A) $ 28,343,263
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $28,911,703.
The net unrealized depreciation of investments on a federal tax basis
amounts to $568,440 which is comprised of $123,625 appreciation and $692,065
depreciation at September 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($28,708,331) at September 30, 1996.
The following acronym is used throughout this portfolio:
PLC -- Public Limited Company
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost and tax cost $28,911,703) $ 28,343,263
Cash 101
Income receivable 540,372
Deferred expenses 3,692
Total assets 28,887,428
LIABILITIES:
Income distribution payable $161,371
Payable for shares redeemed 4,996
Accrued expenses 12,730
Total liabilities 179,097
Net Assets for 2,960,612 shares outstanding $ 28,708,331
NET ASSETS CONSIST OF:
Paid in capital $ 30,239,296
Net unrealized depreciation of investments (568,440)
Accumulated net realized loss on investments (962,525)
Total Net Assets $ 28,708,331
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
($28,708,331 / 2,960,612 shares outstanding) $9.70
Offering Price Per Share (100/96.50 of $9.70)* $10.05
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 43,219
Interest 2,032,179
Total income 2,075,398
EXPENSES:
Investment advisory fee $ 175,494
Administrative personnel and services fee 50,011
Custodian fees 23,517
Transfer and dividend disbursing agent fees and expenses 29,291
Directors'/Trustees' fees 2,863
Auditing fees 12,008
Legal fees 3,028
Portfolio accounting fees 49,252
Distribution services fee 73,047
Share registration costs 14,449
Printing and postage 3,086
Insurance premiums 3,751
Miscellaneous 6,147
Total expenses 445,944
Waivers --
Waiver of investment advisory fee $ (3,239)
Waiver of distribution services fee (73,047)
Total waivers (76,286)
Net expenses 369,658
Net investment income 1,705,740
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (184,315)
Net change in unrealized depreciation of investments (843,230)
Net realized and unrealized loss on investments (1,027,545)
Change in net assets resulting from operations $ 678,195
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations --
Net investment income $ 1,705,740 $ 1,895,110
Net realized loss on investments ($540,150 net loss and $227,158
net loss, respectively, as computed for federal tax purposes) (184,315) (595,593)
Net change in unrealized appreciation (depreciation) of investments (843,230) 2,957,493
Change in net assets resulting from operations 678,195 4,257,010
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (1,705,740) (1,895,110)
SHARE TRANSACTIONS --
Proceeds from sale of shares 6,570,600 6,044,571
Net asset value of shares issued to shareholders in payment of
distributions declared 27,485 31,130
Cost of shares redeemed (7,523,659) (10,519,098)
Change in net assets resulting from share transactions (925,574) (4,443,397)
Change in net assets (1,953,119) (2,081,497)
NET ASSETS:
Beginning of period 30,661,450 32,742,947
End of period $ 28,708,331 $ 30,661,450
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.06 $ 9.31 $10.75 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.57 0.59 0.59 0.44
Net realized and unrealized gain (loss) on investments (0.36) 0.75 (1.41) 0.75
Total from investment operations 0.21 1.34 (0.82) 1.19
LESS DISTRIBUTIONS
Distributions from net investment income (0.57) (0.59) (0.59) (0.44)
Distributions from net realized gain on investment
transactions -- -- (0.03) --
Total distributions (0.57) (0.59) (0.62) (0.44)
NET ASSET VALUE, END OF PERIOD $ 9.70 $10.06 $ 9.31 $10.75
TOTAL RETURN(B) 2.12% 14.89% (7.85%) 12.09%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.27% 1.22% 1.15% 1.05%*
Net investment income 5.84% 6.17% 5.86% 5.71%*
Expense waiver/reimbursement(c) 0.26% 0.26% 0.26% 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $28,708 $30,661 $32,743 $42,715
Portfolio turnover 55% 33% 28% 28%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CREDIT
RATINGS:
PRINCIPAL MOODY'S
AMOUNT OR S&P(B) VALUE
<C> <S> <S> <C>
(A)LONG-TERM MUNICIPALS -- 96.7%
CALIFORNIA -- 5.0%
$ 700,000 Long Beach CA, Harbor Revenue Bonds, 7.25%,
(Series A), 5/15/2019 AA- $ 741,622
GEORGIA -- 3.8%
500,000 Appling County, GA Development Authority, 7.00%,
Pollution Control Revenue Bonds, (Oglethorpe Power
Corp. Hatch Project) / (MBIA Insured), 1/1/2012 AAA 564,465
ILLINOIS -- 13.2%
500,000 Illinois Housing Development Authority, 6.40%,
Revenue Bonds, 8/1/2017 AA 511,315
400,000 Schaumburg, IL, 6.05%, GO UT Refunding Bonds,
12/1/2007 AA+ 417,180
500,000 Springfield, IL, 6.50%, Water Revenue Bonds, 3/1/2015 AA 523,230
485,000 Waukegan, IL, GO UT, 6.80%, 12/30/2007 A1 524,804
Total 1,976,529
INDIANA -- 3.4%
500,000 Ball State University, 6.125%, University Revenue Bonds
(Series G) / (FGIC Insured), 7/1/2014 AAA 516,750
IOWA -- 8.1%
500,000 Iowa Student Loan Liquidity Corporation, 6.75%,
Student Loan Revenue Bonds (Series B), 3/1/2004 Aa1 548,465
650,000 Ottumwa, IA, Community School District, 5.60%,
GO UT Bonds, (FSA Insured), 6/1/2010 AAA 656,520
Total 1,204,985
KENTUCKY -- 2.5%
350,000 Kentucky Higher Education Student Loan Corporation,
7.10%, Insured Student Loan Revenue Bonds (Series D),
12/1/2011 AA- 375,161
</TABLE>
ARROW MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
CREDIT
RATINGS:
PRINCIPAL MOODY'S
AMOUNT OR S&P(B) VALUE
<C> <S> <S> <C>
(A)LONG-TERM MUNICIPALS -- 96.7%
(A)LONG-TERM MUNICIPALS -- CONTINUED
MASSACHUSETTS -- 3.4%
$ 500,000 Massachusetts State, GO UT, 6.00%, (Series A), 6/1/2011 A+ $ 508,790
MISSISSIPPI -- 3.6%
500,000 Mississippi Higher Education Student Loan Revenue
Bonds, 7.50%, (Series C), 9/1/2009 A 537,410
MISSOURI -- 21.0%
340,000 Kansas City, MO, 6.40%, Sewer Authority Refunding
Revenue Bonds, 3/1/2010 AA- 356,249
500,000 Missouri State Environmental Improvement & Energy
Authority, 5.50%, Refunding Revenue Bonds, 12/1/2010 AA 500,620
145,000 Missouri State Housing Development Commission,
6.00%, SFM Revenue Bonds (Series A) / (GNMA COL),
6/1/2015 AAA 146,850
740,000 Missouri State Housing Development Commission,
6.625%, SFM Revenue Bonds (Series A) / (GNMA COL),
12/1/2017 AAA 763,895
300,000 Missouri State, 6.50%, HEFA Revenue Bonds (St. Louis
University) / (AMBAC Insured), 8/1/2016 AAA 321,876
1,000,000 Missouri State, Third State Building, 6.30%, GO UT
Bonds (Series B), 11/1/2012 AAA 1,052,430
Total 3,141,920
NEVADA -- 3.6%
500,000 Clark County, NV, 6.60%, Pollution Control, Refunding
Revenue Bonds (Series B), 6/1/2019 AAA 543,090
PENNSYLVANIA -- 4.7%
700,000 Delaware County, PA, 6.00%, GO UT Refunding Bonds,
11/15/2014 AA 710,857
TEXAS -- 11.8%
500,000 North Texas State Higher Education Student Loan
Revenue Bonds, 6.30%, (Series D), 4/1/2010 A 502,775
</TABLE>
ARROW MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
CREDIT
PRINCIPAL RATINGS:
AMOUNT MOODY'S
OR SHARES OR S&P(B) VALUE
<C> <S> <S> <C>
(A)LONG-TERM MUNICIPALS -- CONTINUED
TEXAS -- CONTINUED
$ 155,000 Texas State, 6.60%, GO UT Bonds (Series A)/(Veterans
Housing Assistance Fund), 12/1/2016 AA $ 158,704
1,000,000 Texas State, 7.00%, GO UT Water Development,
(Series A), 8/1/2011 AA 1,096,140
Total 1,757,619
VIRGINIA -- 3.9%
550,000 Virginia State, 6.55%, Housing Development Authority,
(Series B), 1/1/2011 AA+ 581,350
WASHINGTON -- 6.9%
725,000 King County, WA, School District #415 Kent, 6.00%,
GO UT Bonds (Series B), 12/1/2008 AA- 763,700
245,000 Washington State, 6.00%, Refunding Bonds
(Series R-92C), 9/1/2004 AA 260,338
Total 1,024,038
WISCONSIN -- 1.8%
255,000 Madison, WI, 6.75%, IDR (Madison Gas & Electric Co.),
4/1/2027 AA 270,157
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $14,094,610) 14,454,743
MUTUAL FUNDS -- 2.1%
317,640 Goldman Sachs & Co. (AT NET ASSET VALUE) 317,640
TOTAL INVESTMENTS (IDENTIFIED COST $14,412,250)(C) $14,772,383
</TABLE>
(a) At September 30, 1996, 27.4% of the total investments at market value
were subject to alternative minimum tax.
(b) Please refer to the Appendix of the Statement of Additional Information
for an explanation of the credit ratings. Current credit ratings are
unaudited.
(c) The cost of investments for federal income tax purposes amounts to
$14,412,250. The net unrealized appreciation of investments on a federal
tax basis amounts to $360,133 which is comprised of $375,063 appreciation
and $14,930 depreciation at September 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($14,946,961) at September 30, 1996.
The following acronyms are used throughout this portfolio:
AMBAC -- American Municipal Bond Assurance Corporation
COL -- Collateralized
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance, Inc.
GNMA -- Government National Mortgage Association
GO -- General Obligation
HEFA -- Health and Education Facilities Authority
IDR -- Industrial Development Revenue
MBIA -- Municipal Bond Investors Assurance
SFM -- Single Family Mortgage
UT -- Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $14,412,250) $ 14,772,383
Cash 100
Income receivable 251,546
Deferred expenses 2,372
Total assets 15,026,401
LIABILITIES:
Payable for shares redeemed $ 13,338
Income distribution payable 54,096
Accrued expenses 12,006
Total liabilities 79,440
Net Assets for 1,456,209 shares outstanding $ 14,946,961
NET ASSETS CONSIST OF:
Paid in capital $ 14,948,278
Net unrealized appreciation of investments 360,133
Accumulated net realized loss on investments (361,450)
Total Net Assets $ 14,946,961
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
($14,946,961 / 1,456,209 shares outstanding) $10.26
Offering Price Per Share (100/96.50 of $10.26)* $10.63
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 967,102
EXPENSES:
Investment advisory fee $ 119,078
Administrative personnel and services fee 50,011
Custodian fees 4,253
Transfer and dividend disbursing agent fees and expenses 31,296
Directors'/Trustees' fees 1,504
Auditing fees 13,033
Legal fees 3,510
Portfolio accounting fees 54,636
Distribution services fee 42,531
Share registration costs 14,028
Printing and postage 6,266
Insurance premiums 1,830
Miscellaneous 4,315
Total expenses 346,291
Waivers --
Waiver of investment advisory fee $ (100,366)
Waiver of distribution services fee (42,531)
Total waivers (142,897)
Net expenses 203,394
Net investment income 763,708
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 70,342
Net change in unrealized appreciation (depreciation) of investments (648)
Net realized and unrealized gain on investments 69,694
Change in net assets resulting from operations $ 833,402
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 763,708 $ 894,154
Net realized gain (loss) on investments ($284,885 net loss and $76,653
net loss, respectively, as computed for federal tax purposes) 70,342 (410,829)
Net change in unrealized appreciation (depreciation) of investments (648) 943,061
Change in net assets resulting from operations 833,402 1,426,386
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (763,708) (894,154)
SHARE TRANSACTIONS --
Proceeds from sale of shares 1,294,036 961,834
Net asset value of shares issued to shareholders in payment of
distributions declared 22,639 24,481
Cost of shares redeemed (4,175,893) (6,968,741)
Change in net assets resulting from share transactions (2,859,218) (5,982,426)
Change in net assets (2,789,524) (5,450,194)
NET ASSETS:
Beginning of period 17,736,485 23,186,679
End of period $ 14,946,961 $ 17,736,485
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.22 $ 9.87 $10.61 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.47 0.46 0.47 0.32
Net realized and unrealized gain (loss) on investments 0.04 0.35 (0.72) 0.61
Total from investment operations 0.51 0.81 (0.25) 0.93
LESS DISTRIBUTIONS
Distributions from net investment income (0.47) (0.46) (0.47) (0.32)
Distributions from net realized gain on investments -- -- (0.02) --
Total distributions (0.47) (0.46) (0.49) (0.32)
NET ASSET VALUE, END OF PERIOD $10.26 $10.22 $ 9.87 $10.61
TOTAL RETURN(B) 5.04% 8.46% (2.41%) 9.43%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.20% 1.09% 0.85% 0.72%*
Net investment income 4.49% 4.70% 4.62% 4.71%*
Expense waiver/reimbursement(c) 0.84% 0.80% 0.81% 0.85%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $14,947 $17,736 $23,187 $24,087
Portfolio turnover 20% 38% 27% 14%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 1, 1993 (date of
initial public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY AND INCOME FUNDS
COMBINED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
Arrow Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act") as an open-end, management investment company.
The Trust consists of four diversified portfolios (individually referred to
as the "Fund," or collectively as the "Funds"). The following portfolios are
included herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
<S> <S>
Arrow Equity Portfolio
("Equity Fund") Capital appreciation by investing primarily
in equity securities.
Arrow Fixed Income Portfolio Current income by investing primarily in a
("Fixed Income Fund") portfolio of U.S. government and investment
grade corporate securities.
Arrow Municipal Income Portfolio Current income which is exempt from federal
("Municipal Income Fund") regular income tax by investing primarily in
a diversified portfolio of municipal securities.
</TABLE>
The financial statements of Arrow Government Money Market Portfolio are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements.
These policies are in conformity with generally accepted accounting
principles.
INVESTMENT VALUATIONS -- Municipal bonds are valued by an independent
pricing service, taking into consideration yield, liquidity, risk, credit
quality, coupon, maturity, type of issue, and any other factors or market
data the pricing service deems relevant. U.S. government securities and
listed corporate bonds are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Listed
equity securities are valued at the last sale price reported on a national
securities exchange. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost, which approximates fair market
value. Investments in other open-end regulated investment companies are
valued at net asset value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
FEDERAL TAXES -- It is the Funds' policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At September 30, 1996, the Funds, for federal tax purposes, had capital loss
carryforwards, as noted below, which will reduce each Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Funds of
any liability for federal tax.
<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD CARRYFORWARD TOTAL
TO EXPIRE IN TO EXPIRE IN TO EXPIRE IN CAPITAL LOSS
FUND 2002 2003 2004 CARRYFORWARDS
<S> <C> <C> <C> <C>
Fixed Income Fund $24 $227,158 $540,150 $767,332
Municipal Income Fund -- 76,653 284,885 361,538
</TABLE>
Additionally, net capital losses on Fixed Income Fund of $195,217,
attributable to security transactions incurred after October 31, 1995 were
treated as arising on October 1, 1996, the first day of the Fund's next
taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES -- The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
each Fund's commencement date.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
EQUITY FUND 1996 1995
<S> <C> <C>
Shares sold 867,438 1,078,775
Shares issued to shareholders in payment of distributions declared 3,298 1,543
Shares redeemed (346,978) (1,023,386)
Net change resulting from share transactions 523,758 56,932
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
FIXED INCOME FUND 1996 1995
<S> <C> <C>
Shares sold 661,379 625,388
Shares issued to shareholders in payment of distributions declared 2,772 3,225
Shares redeemed (750,074) (1,100,149)
Net change resulting from share transactions (85,923) (471,536)
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
MUNICIPAL INCOME FUND 1996 1995
<S> <C> <C>
Shares sold 126,133 95,393
Shares issued to shareholders in payment of distributions declared 2,204 2,464
Shares redeemed (407,947) (712,089)
Net change resulting from share transactions (279,610) (614,232)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE -- Mark Twain Bank, the Funds' investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
based on a percentage of each Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
FUND ADVISORY FEE
<S> <C>
Equity Fund 0.75%
Fixed Income Fund 0.60%
Municipal Income Fund 0.70%
</TABLE>
The Adviser may voluntarily choose to waive any portion of its fee. The
Adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.
ADMINISTRATIVE FEE -- Federated Administrative Services ("FAS") provides the
Funds with certain administrative personnel and services. The fee paid to
FAS is based on the level of average aggregate net assets of the Funds' for
the period.
DISTRIBUTION SERVICES FEE -- The Funds have adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Funds will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended
to result in the sale of the Funds' shares. The Plan provides that the Funds
may incur distribution expenses up to 0.25% of average daily net assets,
annually, to compensate FSC. The distributor may voluntarily choose to waive
any portion of its fee. The distributor can modify or terminate this
voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES -- Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the
Funds. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES -- FServ also maintains the Funds' accounting
records for which it receives a fee. The fee is based on the level of each
Fund's average daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES -- Mark Twain Bank is the Funds' custodian. The fee is based
on the level of each Fund's average daily net assets for the period, plus
out-of-pocket expenses.
ORGANIZATIONAL EXPENSES -- Organizational expenses for the Funds were borne
initially by FAS. The Funds have agreed to reimburse FAS for the
organizational expenses during the five-year period following November 24,
1992 (the date the Trust became effective). For the year ended September
30, 1996, each Fund paid the following amounts to FAS pursuant to this
agreement:
<TABLE>
<CAPTION>
EXPENSES OF AMOUNTS REIMBURSED TO
ORGANIZING FAS FOR THE YEAR ENDED
FUND THE FUND SEPTEMBER 30, 1996
<S> <C> <C>
Equity Fund $17,560 $2,976
Fixed Income Fund 17,401 3,980
Municipal Income Fund 16,729 2,733
</TABLE>
GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for
the year ended September 30, 1996, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
<S> <C> <C>
Equity Fund $33,972,901 $20,199,315
Fixed Income Fund 15,666,332 15,491,532
Municipal Income Fund 3,302,159 5,767,406
</TABLE>
6. SUBSEQUENT EVENT
On October 27, 1996, Mark Twain Bancshares, Inc., the parent company of Mark
Twain Bank, entered into a definitive agreement whereby Mark Twain Bancshares
Inc. would merge with Mercantile Bancorp Inc., a bank holding company
headquartered in St. Louis (the "Merger"). As a result, upon completion of the
Merger, all existing subsidiaries of Mark Twain Bancshares Inc., including
Mark Twain Bank, will be merged into Mercantile Bancorp Inc. and its
subsidiaries. The Merger is expected to be completed in the second quarter of
1997, pending approval by both companies' shareholders as well as the receipt
of various regulatory approvals and the completion of other closing
conditions.
The Merger will result in a termination of the Adviser's current
investment advisory contract with the Arrow Funds. Accordingly, prior to the
completion of the Merger, the Trustees of the Funds will meet to consider
matters relating the Merger. It is anticipated that a Special Meeting of Fund
shareholders will be held to seek, among other things, approval of a new
investment advisory contract with a subsidiary of Mercantile Bancorp Inc. It
is anticipated that shareholders of a certain record date in 1997 will receive
proxy materials discussing these matters in detail, and will be entitled to
vote at the Special Meeting.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
ARROW FUNDS:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, for the Arrow Fund portfolios,
listed below, as of September 30, 1996, and the related statements of
operations, changes in net assets, and the financial highlights for each of
the years or periods listed below:
* Arrow Equity Portfolio -- statement of operations for the year ended
September 30, 1996, the statement of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for
each of the years or periods from January 4, 1993 (commencement of
operations) to September 30, 1996.
* Arrow Fixed Income Portfolio -- statement of operations for the year ended
September 30, 1996, the statement of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for
each of the years or periods from January 4, 1993 (commencement of
operations) to September 30, 1996.
* Arrow Municipal Income Portfolio -- statement of operations for the year
ended September 30, 1996, the statement of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights
for each of the years or periods from February 1, 1993 (commencement of
operations) to September 30, 1996.
These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements and the financial highlights. Investment
securities held in custody are confirmed to us by the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Arrow Equity Portfolio, Arrow Fixed Income Portfolio, and
Arrow Municipal Income Portfolio as of September 30, 1996, and the results
of their operations, changes in their net assets, and the financial
highlights for each of the periods listed above, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
November 6, 1996
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Edward C. Gonzales
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Edward C. Gonzales
President and Treasurer
J. Christopher Donahue
Executive Vice President
John W. McGonigle
Executive Vice President and Secretary
Charles L. Davis, Jr.
Vice President and Assistant Treasurer
Richard B. Fisher
Vice President
Gail Cagney
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal. Mark Twain Bank acts as investment
adviser for the funds. Mark Twain Brokerage Services, Inc. is a wholly owned
subsidiary of Mark Twain Bank. Possible conflicts of interest could arise
between potential investors in the Funds due to the affiliation of Mark
Twain Bank and Mark Twain Brokerage Services, Inc. and/or their existing
clients.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
[Graphic]
Mark Twain Bank
Investment Adviser
Federated Securities Corp., Distributor.
Cusip 042749101
Cusip 042749200
Cusip 042749309
3101409 (11/96)
APPENDIX
A. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The
Equity Portfolio is represented by a solid line, whereas the Standard &
Poor's Daily Stock Price Index of 500 Common Stocks (`S&P'' 500) is
represented by a broken dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment in the Equity Portfolio and the S&P 500 for the period from
January 3, 1993 to September 30, 1996. The `y'' axis reflects the cost of
the investment. The `x'' axis reflects computation periods from the ending
value of the hypothetical investment in the Equity Portfolio as compared to
the S&P 500; the ending values are $15,045 and $17,413, respectively.
Beneath the list of the components that correspond to the line graph are
the following total return data for the Equity Portfolio: total return
figures for the 1 year, and start of performance. The corresponding total
figures are as follows: 6.62%; and 11.55%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic
presentation.
B The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Fixed
Income Portfolio is represented by a solid line, whereas the Lehman
Brothers Government/Corporate Total Index (`LBGCTI''). is represented by a
broken dotted line. The line graph is a visual representation of a
comparison of change in value of a hypothetical investment in the Fixed
Income Portfolio and the LBGCTI for the period from January 3, 1993 to
September 30, 1996. The `y'' axis reflects the cost of the investment. The
`x'' axis reflects computation periods from the ending value of the
hypothetical investment in the Fixed Income Portfolio as compared to the
LBGCTI; the ending values are $11,694 and $12,760, respectively. Beneath
the list of the components that correspond to the line graph are the
following total return data for the Fixed Income Portfolio: total return
figures for the 1 year, and start of performance. The corresponding total
figures are as follows: -1.41%; and 4.28%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic
presentation.
C. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The
Municipal Income Portfolio is represented by a solid line, whereas the
Lehman Brothers State General Obligations Bond Index (`LBSGOBI'') is
represented by a broken dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment in the Municipal Income Portfolio and the LBSGOBI for the period
from January 3, 1993 to September 30, 1996. The `y'' axis reflects the
cost of the investment. The `x'' axis reflects computation periods from
the ending value of the hypothetical investment in the Municipal Portfolio
as compared to the LBSGOBI; the ending values are $11,740 and $13,255,
respectively. Beneath the list of the components that correspond to the
line graph are the following total return data for the Municipal Portfolio:
total return figures for the 1 year, and start of performance. The
corresponding total figures are as follows: 1.37%; and 4.48%, respectively.
The performance disclaimer and footnotes are listed directly under the
graphic presentation.
