SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934 (Amendment No.______)
Filed by the Registrant [ XX ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[XX] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or
Sec. 240.14a-12
ARROW FUNDS
(Name of Registrant as Specified In Its Charter)
Federated Investors
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[xx] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ ] Fee paid previously with preliminary proxy materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
_______________________________________________________________
2) Form, Schedule or Registration Statement No.:
_______________________________________________________________
3) Filing Party:
_______________________________________________________________
4) Date Filed:
_______________________________________________________________
EXHIBIT 17(b)
ARROW FUNDS
EQUITY PORTFOLIO
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF ARROW FUNDS ("ARROW")
FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT FEDERATED INVESTORS
TOWER, 19TH FLOOR, 1001 LIBERTY AVENUE, PITTSBURGH, PENNSYLVANIA 15222-3779 ON
NOVEMBER 12, 1997 AT 2:00 P.M. EASTERN TIME.
THE UNDERSIGNED HEREBY APPOINTS AND , AND EACH OF THEM, WITH FULL POWER OF
SUBSTITUTION, AS PROXIES OF THE UNDERSIGNED TO VOTE AT THE ABOVE-STATED SPECIAL
MEETING, AND AT ALL ADJOURNMENTS OR POSTPONEMENTS THEREOF, ALL SHARES OF
BENEFICIAL INTEREST EVIDENCING INTERESTS IN THE EQUITY PORTFOLIO HELD OF RECORD
BY THE UNDERSIGNED ON , 1997, THE RECORD DATE FOR THE MEETING, UPON THE
FOLLOWING MATTERS AND UPON ANY OTHER MATTER THAT MAY COME BEFORE THE MEETING, IN
THEIR DISCRETION.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON
AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE "FOR" PROPOSAL 1.
TO VOTE MARK AN X IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
EQUITY PORTFOLIO
VOTE ON PROPOSAL
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
ARROW AND THE ARCH FUND, INC. ("ARCH") AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS AND LIABILITIES OF ARROW'S EQUITY PORTFOLIO (THE "ARROW
PORTFOLIO") TO ARCH'S GROWTH EQUITY PORTFOLIO (THE "ARCH PORTFOLIO")
IN EXCHANGE FOR SHARES OF THE ARCH PORTFOLIO; (b) THE DISTRIBUTION OF
THE ARCH PORTFOLIO'S SHARES SO RECEIVED TO SHAREHOLDERS OF THE ARROW
PORTFOLIO; AND (c) THE TERMINATION UNDER STATE LAW OF ARROW.
ITEM 2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
SIGNATURE DATE SIGNATURE (JOINT OWNERS) (DATE)
ARROW FUNDS
FIXED INCOME PORTFOLIO
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF ARROW FUNDS ("ARROW")
FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT FEDERATED INVESTORS
TOWER, 19TH FLOOR, 1001 LIBERTY AVENUE, PITTSBURGH, PENNSYLVANIA 15222-3779 ON
NOVEMBER 12, 1997 AT 2:00 P.M. EASTERN TIME.
THE UNDERSIGNED HEREBY APPOINTS AND , AND EACH OF THEM, WITH FULL POWER OF
SUBSTITUTION, AS PROXIES OF THE UNDERSIGNED TO VOTE AT THE ABOVE-STATED SPECIAL
MEETING, AND AT ALL ADJOURNMENTS OR POSTPONEMENTS THEREOF, ALL SHARES OF
BENEFICIAL INTEREST EVIDENCING INTERESTS IN THE FIXED INCOME PORTFOLIO HELD OF
RECORD BY THE UNDERSIGNED ON , 1997, THE RECORD DATE FOR THE MEETING, UPON THE
FOLLOWING MATTERS AND UPON ANY OTHER MATTER THAT MAY COME BEFORE THE MEETING, IN
THEIR DISCRETION.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON
AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE "FOR" PROPOSAL 1.
TO VOTE MARK AN X IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
FIXED INCOME PORTFOLIO
VOTE ON PROPOSAL
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
ARROW AND THE ARCH FUND, INC. ("ARCH") AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL OF THE ASSETS AND
LIABILITIES OF ARROW'S FIXED INCOME PORTFOLIO (THE "ARROW PORTFOLIO") TO
ARCH'S GOVERNMENT & CORPORATE BOND PORTFOLIO (THE "ARCH PORTFOLIO") IN
EXCHANGE FOR SHARES OF THE ARCH PORTFOLIO; (b) THE DISTRIBUTION OF THE ARCH
PORTFOLIO'S SHARES SO RECEIVED TO SHAREHOLDERS OF THE ARROW PORTFOLIO; AND
(c) THE TERMINATION UNDER STATE LAW OF ARROW.
ITEM 2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
SIGNATURE DATE SIGNATURE (JOINT OWNERS) (DATE)
<PAGE>
ARROW FUNDS
MUNICIPAL INCOME PORTFOLIO
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF ARROW FUNDS ("ARROW")
FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT FEDERATED INVESTORS
TOWER, 19TH FLOOR, 1001 LIBERTY AVENUE, PITTSBURGH, PENNSYLVANIA 15222-3779 ON
NOVEMBER 12, 1997 AT 2:00 P.M. EASTERN TIME.
THE UNDERSIGNED HEREBY APPOINTS AND , AND EACH OF THEM, WITH FULL POWER OF
SUBSTITUTION, AS PROXIES OF THE UNDERSIGNED TO VOTE AT THE ABOVE-STATED SPECIAL
MEETING, AND AT ALL ADJOURNMENTS OR POSTPONEMENTS THEREOF, ALL SHARES OF
BENEFICIAL INTEREST EVIDENCING INTERESTS IN THE MUNICIPAL INCOME PORTFOLIO HELD
OF RECORD BY THE UNDERSIGNED ON , 1997, THE RECORD DATE FOR THE MEETING, UPON
THE FOLLOWING MATTERS AND UPON ANY OTHER MATTER THAT MAY COME BEFORE THE
MEETING, IN THEIR DISCRETION.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON
AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE "FOR" PROPOSAL 1.
TO VOTE MARK AN X IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- -------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
MUNICIPAL INCOME PORTFOLIO
VOTE ON PROPOSAL FOR / / AGAINST / / ABSTAIN / /
ITEM 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
ARROW AND THE ARCH FUND, INC. ("ARCH") AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS AND LIABILITIES OF ARROW'S MUNICIPAL INCOME PORTFOLIO
(THE "ARROW PORTFOLIO") TO ARCH'S NATIONAL MUNICIPAL BOND PORTFOLIO
(THE "ARCH PORTFOLIO") IN EXCHANGE FOR SHARES OF THE ARCH PORTFOLIO;
(b) THE DISTRIBUTION OF THE ARCH PORTFOLIO'S SHARES SO RECEIVED TO
SHAREHOLDERS OF THE ARROW PORTFOLIO; AND (c) THE TERMINATION UNDER
STATE LAW OF ARROW.
ITEM 2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR
OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP
NAME BY AUTHORIZED PERSON.
SIGNATURE DATE SIGNATURE (JOINT OWNERS) (DATE)
APPENDIX II
MANAGEMENT'S DISCUSSION
OF FUND PERFORMANCE
<PAGE>
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
Q. How will you manage this new Portfolio?
A. The Fund was launched on November 18, 1996, and invests in high-quality
municipal securities in various municipalities across the country. It will
maintain an average credit quality of around AA1 under present conditions. One
reason for this is that the municipal market generally has not paid much in
additional yield to investors who take on the added risk in lower-quality
issues. The Portfolio's average maturity initially will be approximately ten
years. However, that will change as market conditions warrant. The Portfolio's
income may be subject to certain state and local taxes and, depending on an
investor's tax status, the federal alternative minimum tax.
II-1
<PAGE>
- --------------------------------------------------------------------------------
Value of a $10,000 Investment
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Investor A Investor A Investor B Investor B Lehman Brothers Aggregate
(No Load) (Load)* (CDSC)** (No CDSC) Bond Index
<S> <C> <C> <C> <C> <C>
6/88 10,000 9,551 10,000 10,000 10,000
11/88 10,266 9,805 9,770 10,266 10,265
11/89 11,476 10,960 11,076 11,476 11,738
11/90 12,045 11,504 11,754 12,045 12,627
11/91 13,586 12,976 13,286 13,586 14,447
11/92 14,647 13,989 14,447 14,647 15,727
11/93 16,145 15,367 16,045 16,145 17,441
11/94 15,609 14,857 15,609 15,609 16,907
11/95 18,104 17,232 17,994 17,994 19,889
11/96 18,920 18,070 18,675 18,675 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
Investor A * -0.23% 5.86% 7.24%
- -------------------------------------------------------------------------
Investor B (No CDSD) 3.79% 6.57% 7.65%
- -------------------------------------------------------------------------
Investor B (CDSC) ** -1.12% 6.41% 7.65%
- -------------------------------------------------------------------------
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
Value of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
Lehman Brothers
Aggregate
Trust Institutional Bond Index
<S> <C> <C> <C>
6/88 10,000 10,000 10,000
11/88 10,266 10,266 10,265
11/89 11,476 11,476 11,738
11/90 12,045 12,045 12,627
11/91 13,616 13,586 14,447
11/92 14,724 14,647 15,727
11/93 16,278 16,145 17,441
11/94 15,785 15,609 16,907
11/95 18,359 18,104 19,889
11/96 19,244 18,920 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Trust 4.82% 7.16% 8.04%
- -------------------------------------------------------------------------
Institutional 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
</TABLE>
The ARCH Government & Corporate Bond Portfolio is measured against the Lehman
Brothers Aggregate Bond Index, an unmanaged Index comprised of the Lehman
Brothers Government-Corporate Bond Index and two Lehman Brothers asset-backed
securities Indices. Investors cannot purchase the Index directly, although they
can invest in the underlying securities. The performance of the Index does not
reflect the deduction of expenses associated with a mutual fund, such as sales
charges, investment-management and fund-accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares for periods prior to such date represent the
performance for Investor A shares of the Portfolio, which has been restated to
reflect the contingent deferred sales charges payable by holders of Investor B
shares who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What were the conditions in the taxable bond market during the 12 months
ended November 30, 1996?
A. The bond market has been volatile. The ten-year Treasury bond started the
period yielding 5.70%. That yield rose to 7.10% around mid-year, then fell to
6.10%. Investors worried that the Federal Reserve would raise short-term
interest rates around the middle of the summer, because the economy had grown so
quickly in the first quarter. Then the Fed didn't do anything, and the fear
receded--so bond prices started to rise again. We started to see another rally
toward the end of the 12-month period.
Q. How did you structure the Portfolio to address those conditions?
A. We invested about 75% of the Portfolio in Treasuries, with the rest in
mortgage-backed securities. Corporate bonds seemed very expensive to us, with
yields only about 12 one-hundredths of a percentage point higher than Treasury
yields--and they have much more credit risk than Treasury or agency debt. Thus,
we used mortgage-backed issues instead of corporates to enhance the Portfolio's
yield.
The Portfolio's average maturity rose from 8.6 years to 10.8 years during the
period. We increased the maturity to take advantage of higher interest rates. We
implemented the change by selling some of our shorter Treasuries and buying
five- to ten-year mortgages. Such securities recently provided 0.75 to 1.25
percentage points of extra yield over Treasuries of comparable maturities. In
fact, we increased our Portfolio's mortgage-backed exposure from 26% to 35%,
currently*.
Q. How did you manage credit risk in the Portfolio?
A. We currently have an average quality rating of AAA, the same rating that we
had at the beginning of the year. The Portfolio's holdings currently are
comprised almost entirely of United States Treasury and agency- guaranteed
mortgage debt. The Portfolio holds almost no corporate issues because we believe
that the small current yield advantage of corporates over Treasuries does not
justify corporate debt's additional credit risk.
Q. Where are you finding the best values in the bond market?
A. Mortgage-backed securities clearly offer the most value in our securities
universe. Our intent is to continue to increase the Portfolio's mortgage
exposure from the current 35% to the 40% to 45% level. Corporates will remain on
our watch list, and we will increase the Portfolio's corporate exposure when
their yields improve relative to yields on Treasury issues.*
Q. What is your outlook for the bond market and the Portfolio?
A. We're neutral on the market right now. We don't see anything fundamental
about the economy that would cause rates to rise or fall in the immediate
future. But we will pay close attention to the psychology of the market, which
can be a very different matter. People's expectations have a large effect on the
bond market, and we'll pay close attention to changes in those expectations.
That way, we'll be prepared to make changes in the Portfolio to reflect such
psychological factors.
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
II-2
<PAGE>
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").
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.
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").
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.
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.
II-3
<PAGE>
Dear Arrow Fund Shareholder:
The Board of Trustees of Arrow Funds has called a special meeting to consider a
proposal that could improve the level of services available to shareholders. At
this meeting, shareholders of the Arrow Equity, Arrow Fixed Income and Arrow
Municipal Income Portfolios (the "Arrow Portfolios") will be asked to approve a
proposal to combine the Arrow Portfolios with The ARCH Fund, Inc. - a $3 billion
mutual fund complex managed by Mississippi Valley Advisors Inc.
After carefully studying the merits of the proposal, the Board of Trustees has
determined that a consolidation between the two fund families will provide
substantial value for Arrow Portfolio shareholders. To move forward, however, a
majority of the shareholders of the Arrow Portfolios must first vote in favor of
the transaction. Accordingly, enclosed you'll find a proxy card for the upcoming
shareholder meeting scheduled to be held on November 12, 1997. IT IS IMPORTANT
THAT YOU COMPLETE, SIGN AND RETURN YOUR CARD AS SOON AS POSSIBLE TO ENSURE YOUR
VOTE IS COUNTED AT THE MEETING.
The Arrow Fund Board of Trustees unanimously endorses the proposed
reorganization that is discussed in detail in the combined proxy statement and
fund prospectus we've sent you. The consolidation of the Arrow Portfolios with
The ARCH Fund, Inc. will benefit shareholders in two key ways:
1. Shareholders will now be able to choose from 18 investment portfolios
versus the 4 investment portfolios that are now available through
Arrow Funds. The wide array of additional investment options will
include international, asset allocation and market index funds.
Shareholders will also be able to exchange from one portfolio to
another without incurring any transaction charges.
2. By combining the assets of the Arrow Portfolios and the ARCH Funds,
fund expense ratios may decline, which would ultimately translate
into better returns for fund shareholders.
The reorganization of the Arrow Portfolios into The ARCH Fund, Inc., pending
shareholder approval, is slated for late November 1997. In connection with the
reorganization, you should note the following:
- Trust shareholders will be able to continue to invest on a no
load basis.
- The reorganization will be a tax free event.
- Two Arrow portfolios - the Arrow Fixed Income Portfolio and the Arrow
Municipal Income Portfolio - will be combined into comparable ARCH
portfolios with similar
<PAGE>
investment objectives and policies and that are managed by the same
investment professionals at Mississippi Valley Advisors Inc. One
Arrow portfolio - the Arrow Equity Portfolio - will be reorganized
into a newly created portfolio within The ARCH Fund, Inc. and that
will continue to be managed by Carl Enloe who has managed the Arrow
Equity Portfolio since its inception. The remaining Arrow portfolio
- the Arrow Government Money Market Portfolio - will be liquidated
prior to the reorganization.
- The value of your investment will not change as a result of the
reorganization.
The enclosed materials should provide you with the necessary details to make an
informed decision about the proposal.
We are truly excited about the reorganization and the potential benefits it
provides to current shareholders who invest in the Arrow Portfolios. Hopefully,
you will agree by voting "yes" and returning your proxy card as soon as
possible.
Sincerely,
Chairman, Arrow Funds
<PAGE>
THE ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on November 12, 1997
To Arrow Shareholders:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders
("Shareholders") of the Fixed Income Portfolio, Municipal Income Portfolio and
Equity Portfolio (each, an "Arrow Portfolio") of Arrow Funds ("Arrow") will be
held at Federated Investors Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh,
Pennsylvania 15222-3779 on November 12, 1997 at 2:00 p.m. Eastern Time for the
following purposes:
ITEM 1. With respect to each Arrow Portfolio:
To consider and act upon a proposal to approve an Agreement and Plan
of Reorganization (the "Reorganization Agreement") and the
transactions contemplated thereby, including (a) the transfer of
substantially all of the assets and liabilities of Arrow's Fixed
Income, Municipal Income and Equity Portfolios to corresponding
investment portfolios (the "Arch Portfolios") of The ARCH Fund, Inc.
in exchange for shares of the Arch Portfolios; (b) the distribution
of the Arch Portfolios' shares so received to shareholders of the
Arrow Portfolios; and (c) the termination under state law of Arrow.
ITEM 2. With respect to each Arrow Portfolio:
To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
The proposed reorganization and related matters are described in the
attached Combined Proxy Statement/Prospectus. Appendix I to the Combined Proxy
Statement/Prospectus is a copy of the Reorganization Agreement.
Shareholders of record as of the close of business on _________, 1997 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment(s)
thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY ARROW'S BOARD
OF TRUSTEES. THIS IS IMPORTANT TO
<PAGE>
ENSURE A QUORUM AT THE SPECIAL MEETING. PROXIES MAY BE REVOKED AT ANY TIME
BEFORE THEY ARE EXERCISED BY SUBMITTING TO ARROW A WRITTEN NOTICE OF REVOCATION
OR A SUBSEQUENTLY EXECUTED PROXY OR BY ATTENDING THE SPECIAL MEETING AND VOTING
IN PERSON.
------------------------
Secretary
September ___, 1997
-2-
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
DATED SEPTEMBER __, 1997
ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
1-800-866-6040
THE ARCH FUND, INC.
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-452-ARCH (2724)
This Combined Proxy Statement/Prospectus is furnished in connection with
the solicitation of proxies by the Board of Trustees of Arrow Funds ("Arrow") in
connection with a Special Meeting (the "Meeting") of Shareholders
("Shareholders") of Arrow's Fixed Income, Municipal Income and Equity Portfolios
to be held on November 12, 1997 at 2:00 p.m. Eastern Time at Federated Investors
Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania 15222-3799, at
which Shareholders will be asked to consider and approve a proposed Agreement
and Plan of Reorganization dated __________, 1997 (the "Reorganization
Agreement"), by and between Arrow and The Arch Fund, Inc. ("Arch") and the
matters contemplated therein. A copy of the Reorganization Agreement is attached
as Appendix I.
Arrow and Arch are open-end, series, management investment companies. As a
result of the recent merger of Mark Twain Bancshares, Inc., the parent of
Arrow's former investment adviser, Mark Twain Bank, and Mercantile
Bancorporation Inc. (the "Holding Company Merger"), Mississippi Valley Advisors
Inc. ("MVA") and its affiliates are now providing investment advisory and other
services to both Arch and Arrow. MVA and its affiliates are subsidiaries of
Mercantile Bancorporation Inc. In reviewing the proposed reorganization (the
"Reorganization"), the Arrow Board considered the consummation of the Holding
Company Merger; the recommendation of MVA that Arrow and Arch be consolidated in
an effort to promote more efficient operations, eliminate duplicative costs and
enhance the distribution of shares by eliminating market overlap; the fact that
the Reorganization would constitute a tax-free reorganization; and the fact that
the interests of Shareholders would not be diluted as a result of the
Reorganization.
The Reorganization Agreement provides that initially each of the following
two investment portfolios of Arrow (collectively, the "Reorganizing Portfolios")
will transfer substantially all its assets and known liabilities to the existing
Arch investment
<PAGE>
portfolio (collectively, the "Existing Arch Portfolios")
identified below opposite its name:
<TABLE>
<CAPTION>
REORGANIZING PORTFOLIOS EXISTING ARCH PORTFOLIOS
- ----------------------- ------------------------
<S> <C>
Fixed Income Portfolio Government & Corporate
Bond Portfolio
Municipal Income Portfolio National Municipal Bond
Portfolio
</TABLE>
The Reorganization Agreement also provides that the following investment
portfolio of Arrow (the "Continuing Portfolio") will subsequently transfer all
its assets and known liabilities to the newly-organized Arch investment
portfolio (the "New Arch Portfolio") identified below opposite its name:
<TABLE>
<CAPTION>
CONTINUING PORTFOLIO NEW ARCH PORTFOLIO
- -------------------- ------------------
<S> <C>
Equity Portfolio Growth Equity Portfolio
</TABLE>
In exchange for the transfers of these assets and liabilities, Arch will
issue shares in the three Arch investment portfolios listed above (collectively,
the "Arch Portfolios") to the corresponding Arrow investment portfolios listed
above (collectively, the "Arrow Portfolios"). The initial transaction between
the Reorganizing Portfolios and the Existing Arch Portfolios is referred to
herein as the "Reorganizing Portfolios Transaction" and the subsequent
transaction between the Continuing Portfolio and the New Arch Portfolio is
referred to herein as the "Continuing Portfolio Transaction." The transactions
are expected to occur on or after November 14, 1997 and November 21, 1997,
respectively.
Prior to the Reorganizing Portfolios Transaction, it is expected that all
of the shareholders in the Arrow Government Money Market Portfolio will redeem
their shares in that portfolio.
The Arrow Portfolios have one class of shares outstanding. The Arch
Government & Corporate Bond and Arch Growth Equity Portfolios have four classes
of shares outstanding (Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares) and the Arch National Municipal Bond Portfolio has three
classes of shares outstanding (Trust Shares, Investor A Shares and Investor B
Shares). Holders of shares of an Arrow Portfolio will receive Investor A Shares
(which are similar to shares of the Arrow Portfolios) of the corresponding Arch
Portfolio as set forth in the table on page ___ under "Information Relating to
the Proposed Reorganization -- Description of the Reorganization Agreement."
-2-
<PAGE>
The Arrow Portfolios will make liquidating distributions of the Arch
Portfolios' shares to the Shareholders of the Arrow Portfolios, so that a holder
of shares in an Arrow Portfolio will receive Investor A Shares of the
corresponding Arch Portfolio with the same aggregate net asset value as the
Shareholder had in the Arrow Portfolio immediately before the transaction.
Following the Reorganization, Shareholders of the Arrow Portfolios will be
shareholders of the corresponding Arch Portfolios, and Arrow will be
deregistered as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act") and its existence will be terminated under state
law.
At [record date], 1997, Mercantile Bank National Association ("Mercantile
Bank"), an affiliate of MVA, owned of record with the power to vote
approximately _____% of the outstanding shares of the Arrow Portfolios on behalf
of customers maintaining fiduciary, employee benefit, retirement plan or other
qualified accounts at Mercantile Bank. Arch and Arrow have been advised by
Mercantile Bank that it intends to exchange the Investor A Shares of the Arch
Portfolios that it receives in these capacities for Trust Shares of the same
Arch Portfolios. Mercantile Bank intends to effect this exchange, which it has
been advised by Drinker Biddle & Reath LLP will not cause shareholders to
recognize taxable gains or losses, promptly after the Reorganization because it
believes that Trust Shares are more appropriate than Investor A Shares for these
customers.
The Existing Arch Portfolios currently are conducting investment
operations as described in this Combined Proxy Statement/Prospectus. The New
Arch Portfolio has recently been organized for the purpose of continuing the
investment operations of the Arrow Equity Portfolio.
This Combined Proxy Statement/Prospectus sets forth the information that a
Shareholder of an Arrow Portfolio should know before voting on the
Reorganization Agreement (and related transactions), and should be retained for
future reference. The Prospectus relating to Investor A Shares of the Existing
Arch Portfolios dated March 31, 1997 (as supplemented May 28, 1997), which
describes the operations of those Portfolios, accompanies this Combined Proxy
Statement/Prospectus. Additional information is set forth in the Statements of
Additional Information relating to those Portfolios and this Combined Proxy
Statement/Prospectus, which are dated March 31, 1997 (as revised May 28, 1997)
and August 30, 1997, respectively, and in the Prospectus dated November 30, 1996
(as supplemented April 25, 1997) and Combined Statement of Additional
Information dated November 30, 1996, relating to the Arrow Portfolios. Each of
these documents is on file with the Securities and Exchange Commission (the
"SEC"), and is available without charge upon oral or written request by writing
or calling either Arrow or Arch at the respective addresses or telephone numbers
indicated above. The information contained in the Prospectus dated November 30,
1996 (as supplemented April 25, 1997) and Combined Statement of Additional
-3-
<PAGE>
Information dated November 30, 1996, relating to the Arrow Portfolios is
incorporated herein by reference.
This Combined Proxy Statement/Prospectus constitutes the Proxy Statement
of Arrow for the Meeting of its Shareholders, and Arch's Prospectus for the
Investor A Shares of the Existing Arch Portfolios that have been registered with
the SEC and are to be issued in connection with the Reorganization. Because the
operations of the Arrow Equity Portfolio will be carried on by the New Arch
Portfolio, this Combined Proxy Statement/Prospectus does not constitute a
prospectus for the Investor A Shares of the New Arch Portfolio that will be
issued in the Continuing Portfolio Transaction.
This Combined Proxy Statement/Prospectus is expected to first be sent to
Shareholders on or about September __, 1997.
THE SECURITIES OF THE ARCH PORTFOLIOS 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 COMBINED PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ARROW OR ARCH.
SHARES OF THE ARCH PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, MERCANTILE BANK NATIONAL ASSOCIATION OR ANY OF ITS AFFILIATES.
SHARES OF THE ARCH PORTFOLIOS ARE NOT FEDERALLY INSURED BY, GUARANTEED BY,
OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENT RETURN AND PRINCIPAL VALUE WILL VARY AS A RESULT
OF MARKET CONDITIONS OR OTHER FACTORS SO THAT SHARES OF THE ARCH PORTFOLIOS,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AN INVESTMENT
IN THE ARCH PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
-4-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...............................................................
Proposed Reorganization.........................................
Reasons for Reorganization......................................
Federal Income Tax Consequences.................................
Overview of the Arrow Portfolios and
Arch Portfolios...............................................
Voting Information..............................................
Risk Factors....................................................
Information Relating to the Proposed Reorganization...................
Description of the Reorganization Agreement.....................
Capitalization..................................................
Federal Income Tax Consequences.................................
Comparison of Investment Policies and Risk Factors....................
Arrow Fixed Income Portfolio and Arch Government &
Corporate Bond Portfolio......................................
Arrow Municipal Income Portfolio and Arch
National Municipal Bond Portfolio.............................
Investment Policies and Risks -- General........................
Investment Limitations..........................................
Purchase and Redemption Information, Exchange
Privileges, Distribution and Pricing..........................
Other Information...............................................
Information Relating to Voting Matters................................
General Information.............................................
Shareholder and Board Approvals.................................
Appraisal Rights................................................
Quorum..........................................................
Annual Meetings.................................................
Additional Information about Arch.....................................
Additional Information about Arrow....................................
Litigation............................................................
Financial Statements..................................................
Other Business........................................................
Shareholder Inquiries.................................................
Appendix I - Agreement and Plan of Reorganization..................... I-1
Appendix II - Management's Discussion of Fund Performance ............ II-1
Appendix III - Shareholder Transactions and Services................. III-1
</TABLE>
<PAGE>
SUMMARY
The following is a summary of certain information relating to the proposed
Reorganization, the parties thereto and the related transactions, and is
qualified by reference to the more complete information contained elsewhere in
this Combined Proxy Statement/Prospectus, the Prospectuses and Statements of
Additional Information of Arrow and Arch, and the Reorganization Agreement
attached to this Combined Proxy Statement/Prospectus as Appendix I. Arrow's
Combined Annual Report to Shareholders and the most recent Combined Semi-Annual
Report to Shareholders may be obtained free of charge by calling 1-800-866-6040
(Texas residents call 1-800-618-8573) or by writing to Arrow c/o Federated
Investors, Federated Investors Tower, 19th Floor, 1001 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3779. Arch's Annual Report to Shareholders and
the most recent Semi-Annual Report to Shareholders may be obtained free of
charge by calling 1-800-452-ARCH (2724) or by writing to Arch at 3435 Stelzer
Road, Columbus, Ohio 43219-3085.
PROPOSED REORGANIZATION. Based upon their evaluation of the relevant information
presented to them, and in light of their fiduciary duties under federal and
state law, Arrow's and Arch's Boards of Trustees and Directors, respectively,
including their members who are not "interested persons" within the meaning of
the 1940 Act, have determined that the proposed Reorganization is in the best
interests of Arrow's and Arch's Shareholders, respectively, and that the
interests of existing Shareholders of Arrow and Arch, respectively, will not be
diluted as a result of such Reorganization.
The Cover Page and pages ___-___ hereof summarize the proposed
Reorganization.
REASONS FOR THE REORGANIZATION. The primary reason for the Reorganization is the
Holding Company Merger of Mark Twain Bancshares, Inc. and Mercantile
Bancorporation Inc. Consummation of the Holding Company Merger on April 25, 1997
resulted in the automatic termination of the existing investment advisory
agreement between the Arrow Portfolios and Mark Twain Bank, a wholly-owned
subsidiary of Mark Twain Bancshares, Inc. In anticipation of the Holding Company
Merger and to provide continuity in investment advisory services to the Arrow
Portfolios, shareholders of the Arrow Portfolios approved a new investment
advisory agreement with MVA, a wholly-owned subsidiary of Mercantile Bank and an
indirect wholly-owned subsidiary of Mercantile Bancorporation Inc., effective
April 25, 1997.
MVA has recommended that each of the Arrow Portfolios be reorganized as
described in this Combined Proxy Statement/Prospectus in an effort to promote
more efficient operations, eliminate duplicative costs and enhance the
distribution of shares by eliminating market overlap. In light of this
recommendation, after consideration of the reasons
<PAGE>
therefor and the proposed operations of the combined portfolios after the
Reorganization, and in consideration of the fact that the Reorganization will be
tax-free and will not dilute the interests of Arrow Shareholders, the Board of
Trustees of Arrow has authorized the Agreement and Plan of Reorganization and
recommended approval of the Reorganization by Shareholders.
FEDERAL INCOME TAX CONSEQUENCES. Shareholders of the Arrow Portfolios will
recognize no gain or loss for federal income tax purposes on their receipt of
Investor A Shares of the Arch Portfolios. Shareholders of the Arch Portfolios
will have no federal tax consequences from the Reorganization. The Arch
Portfolios will incur no federal tax consequences from their issuance of
Investor A Shares in the Reorganization. See "Information Relating to the
Proposed Reorganization -- Federal Income Tax Consequences."
OVERVIEW OF THE ARROW PORTFOLIOS AND ARCH PORTFOLIOS. There are no material
differences between the investment objectives and policies of the Continuing
Portfolio and the New Arch Portfolio. The investment objectives and policies of
the Reorganizing Portfolios are similar to those of the corresponding Existing
Arch Portfolios.
ARROW FIXED INCOME PORTFOLIO AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
The Arrow Fixed Income Portfolio's investment objective is current income.
The Arch Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital.
Each Portfolio pursues its objective by investing in a diversified portfolio of
U.S. Government and investment grade corporate debt securities.
ARROW MUNICIPAL INCOME PORTFOLIO AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
The Arrow Municipal Income Portfolio's investment objective is current
income which is exempt from federal regular income tax. The Arch National
Municipal Bond Portfolio's investment objective is to seek as high a level of
current income exempt from regular federal income tax as is consistent with
conservation of capital. Each Portfolio pursues its objective by investing at
least 80% of its total assets in a diversified portfolio of municipal
securities.
See "Comparison of Investment Policies and Risk Factors" below and the
Arrow Prospectus for the Arrow Portfolios and the Arch Prospectus for Investor A
Shares of the Existing Arch Portfolios, which are incorporated herein by
reference, for a description of the similarities and differences between the
investment objectives and policies of the Reorganizing Portfolios and the
Existing Arch Portfolios.
-2-
<PAGE>
CERTAIN ARRANGEMENTS WITH SERVICE PROVIDERS - ARROW PORTFOLIOS. MVA serves as
investment adviser for Arrow and is entitled to receive advisory fees from the
Arrow Portfolios, computed and paid daily, at the following annual rates,
expressed as a percentage of average daily net assets:
<TABLE>
<CAPTION>
============================================================================================
ACTUAL ADVISORY
FEE FOR YEAR
ENDED SEPTEMBER 30, 1996
ARROW PORTFOLIOS ADVISORY FEE (AFTER FEE WAIVERS)*
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income Portfolio .60% .59%
Municipal Income Portfolio .70% .11%
Equity Portfolio .75% .72%
============================================================================================
</TABLE>
* Paid to Mark Twain Bank pursuant to the investment advisory
agreement then in effect.
Pursuant to the Arrow investment advisory agreement, MVA provides
investment research and supervision to the Arrow Portfolios and conducts a
continuous program of investment evaluation and of appropriate sale or other
disposition of each Arrow Portfolio's assets. MVA also directs the investments
of the Arrow Portfolios in accordance with the Portfolios' investment
objectives, policies and limitations, and creates and maintains all necessary
books and records.
Administrative services are provided to the Arrow Portfolios by Federated
Administrative Services ("Federated"), a subsidiary of Federated Investors. For
its services, Federated receives a fee, calculated and paid daily, at the annual
rate of .15% of the average aggregate daily net assets of all investment
portfolios of Arrow up to $250 million of such aggregate assets, .125% of the
next $250 million of such aggregate assets, .10% of the next $250 million of
such aggregate assets, and .075% of such aggregate assets in excess of $750
million. The minimum annual administration fee for each investment portfolio of
Arrow is $50,000. For the fiscal year ended September 30, 1996, Federated
received administration fees at the effective annual rates of .17%, .29% and
.15% of the average daily net assets of the Fixed Income, Municipal Income and
Equity Portfolios, respectively.
Federated Services Company, a subsidiary of Federated Investors, serves as
Arrow's transfer agent, dividend disbursing agent and portfolio recordkeeper.
Mercantile Bank provides custodial services to each Arrow Portfolio.
Federated Securities Corp. ("FSC"), a subsidiary of
Federated Investors, is the principal distributor for Arrow.
-3-
<PAGE>
Under the distribution agreement, FSC acts as the agent of Arrow in connection
with the offering of shares of each Arrow Portfolio.
Arrow has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act (the "Arrow 12b-1 Plan"). Under the Arrow 12b-1 Plan, the shares of
each Arrow Portfolio bear the expense of distribution fees payable to FSC at an
annual rate of up to .25% of the average daily net asset value of such
Portfolio's outstanding shares to finance activities which are principally
intended to result in the sale of shares subject to the Arrow 12b-1 Plan. FSC
may enter into agreements with financial institutions which provide distribution
and/or administrative services as agents for their customers who beneficially
own shares. Administrative services provided by such financial institutions may
include, without limitation: 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;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The Arrow 12b-1 Plan is a "compensation" type plan as opposed to a
"reimbursement" type plan. Accordingly, payments by the Arrow Portfolios under
the Arrow 12b-1 Plan are based on the expressed fee rather than on specific
amounts expended by FSC for distribution purposes. FSC may earn a profit from
payments made by Arrow Portfolios under the Arrow 12b-1 Plan.
For the fiscal year ended September 30, 1996, FSC was entitled to receive
fees from the Arrow Portfolios pursuant to the Arrow 12b-1 Plan in the aggregate
amount of $238,312, all of which was voluntarily waived. Such fees represent
.25% of the average daily net assets of the Arrow Portfolios during such period.
CERTAIN ARRANGEMENTS WITH SERVICE PROVIDERS - ARCH PORTFOLIOS. MVA serves as
investment adviser for Arch and is entitled to receive advisory fees from the
Arch Portfolios, computed daily and paid monthly, at the following annual rates,
expressed as a percentage of average daily net assets:
-4-
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
ACTUAL ADVISORY
FEE FOR YEAR/PERIOD*
ENDED NOVEMBER 30, 1996
ARCH PORTFOLIO ADVISORY FEE (AFTER WAIVERS)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Government & Corporate
Bond Portfolio .45% .45%
National Municipal Bond
Portfolio .55% .00%
Growth Equity Portfolio .75% .00%**
============================================================================================
</TABLE>
* For the period November 18, 1996 (commencement of operations) through
November 30, 1996 with respect to the Arch National Municipal Bond
Portfolio.
** The Arch Growth Equity Portfolio has not yet commenced operations.
As investment adviser, MVA manages the investments of each Arch Portfolio,
makes decisions with respect to and places orders for all purchases and sales of
each Portfolio's securities, and maintains certain records relating to such
purchases and sales.
See "Management of the Fund--Investment Adviser and Sub-Adviser" in Arch's
Prospectus for Investor A Shares of the Existing Arch Portfolios, which
accompanies this Combined Proxy Statement/Prospectus and which is incorporated
herein by reference, for additional information on MVA.
Administrative services are provided to the Arch Portfolios by BISYS Fund
Services Ohio, Inc. ("BISYS Ohio"), a subsidiary of The BISYS Group, Inc. For
its services, BISYS Ohio is entitled to receive a fee from each Arch Portfolio,
computed daily and payable monthly, at the annual rate of 0.20% of each
Portfolio's average daily net assets. For the fiscal year ended November 30,
1996, BISYS Ohio received administration fees (net of fee waivers) at the
effective annual rate of 0.10% of the average daily net assets of the Arch
Government & Corporate Bond Portfolio and 0.05% of the average daily net assets
of the Arch National Municipal Bond Portfolio. See "Management of the Fund --
Administrator" in Arch's Prospectus for Investor A Shares of the Existing Arch
Portfolios which accompanies this Combined Proxy/Prospectus and which is
incorporated herein by reference, for additional information on Arch's
administrator.
BISYS Ohio also serves as Arch's transfer and dividend disbursing agent.
See "Management of the Fund -- Custodian, SubCustodian and Transfer Agent" in
Arch's Prospectus for Investor A
-5-
<PAGE>
Shares of the Existing Arch Portfolios, which accompanies this Combined
Proxy/Prospectus and which is incorporated herein by reference, for additional
information on Arch's transfer and dividend disbursing agent.
Custodial services are provided to Arch by Mercantile Bank. See
"Custodian, Sub-Custodian and Transfer Agent" in Arch's Prospectus for Investor
A Shares of the Existing Arch Portfolios, which accompanies this Combined Proxy
Statement/Prospectus which is incorporated herein by reference, for additional
information about Arch's custodian.
BISYS Fund Services ("BISYS"), an affiliate of BISYS Ohio, serves as
distributor of the shares of Arch's investment portfolios.
Arch has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Arch 12b-1 Plan") with respect to Investor A Shares of
its investment portfolios. Under the Arch 12b-1 Plan, Investor A Shares of each
of the Arch Portfolios bear the expense of (i) distribution fees paid to BISYS
at an annual rate of up to .10% of the average daily net assets of such
Portfolio's outstanding Investor A Shares in consideration for distribution
services and the assumption of related expenses primarily intended to result in
the sale of Investor A Shares, and (ii) shareholder servicing fees paid to
securities brokers, dealers and other such organizations ("Service
Organizations") for administrative support services provided to their customers
who are the beneficial owners of Investor A Shares at the annual rate of up to
.20% of the average daily net asset value of such Portfolio's Investor A Shares
beneficially owned by such customers. The Arch 12b-1 Plan authorizes Arch to
enter into servicing agreements with Service Organizations that require the
Service Organizations receiving such compensation to perform certain services
with respect to the beneficial owners of Investor A Shares of an Arch Portfolio,
such as establishing and maintaining accounts and records for their customers
who invest in such Shares, assisting customers in processing purchase, exchange
and redemption requests, and responding to customer inquiries regarding their
investments.
The Arch 12b-1 Plan is a "compensation" type plan as opposed to a
"reimbursement" type plan. Accordingly, payments by the Arch Portfolios under
the Arch 12b-1 Plan are based on the expressed fee rather than on specific
amounts expended by BISYS for distribution purposes. BISYS may earn a profit
from payments made by the Arch Portfolios under the Arch 12b-1 Plan.
For the fiscal year ended November 30, 1996, the Existing Arch Portfolios
paid fees to BISYS and other broker-dealers pursuant to the Arch 12b-1 Plan in
the aggregate amount of $15,982, which represents .30% of the average net assets
of the Existing Arch Portfolios' Investor A Shares during that period subject
to the Arch 12b-1 Plan.
-6-
<PAGE>
Arch has adopted an Administrative Services Plan (the "Arch Services
Plan") with respect to Trust Shares of its investment portfolios. Under the Arch
Services Plan, Trust Shares of each of the Arch Portfolios bear the expense of
shareholder servicing fees paid to Service Organizations for administrative
services provided to their customers who are the beneficial owners of Trust
Shares at the annual rate of up to .30% of the average daily net asset value of
such Portfolio's Trust Shares beneficially owned by such customers. Like the
Arch 12b-1 Plan, the Arch Services Plan authorizes Arch to enter into servicing
agreements with Service Organizations that require the Service Organizations
receiving such compensation to perform certain services with respect to the
beneficial owners of Trust Shares of an Arch Portfolio. These services are the
same services which Service Organizations are required to provide under the Arch
12b-1 Plan described above.
For the fiscal year ended November 30, 1996, the Existing Arch Portfolios
paid fees to Service Organizations pursuant to the Arch Services Plan in the
aggregate amount of $157 which represents .30% of the average daily net assets
of the Existing Arch Portfolios' Trust Shares during that period subject to the
Plan.
COMPARATIVE FEE TABLES. Set forth in the tables below is information regarding
(i) the fees and expenses paid by shares of each Arrow Portfolio as of its most
recent fiscal year, restated to reflect the fees and expenses that each Arrow
Portfolio expects to incur during the current fiscal year, (ii) the fees and
expenses paid by each Existing Arch Portfolio as of its most recent fiscal year,
restated in the case of the Arch National Municipal Bond Portfolio to reflect
the fees and expenses which that Portfolio expects to incur during the current
fiscal year, or, in the case of the New Arch Portfolio, the fees and expenses
which that Portfolio expects to incur during the current fiscal year, and (iii)
estimated fees and expenses on a pro forma basis giving effect to the proposed
Reorganization.
-7-
<PAGE>
COMPARATIVE FEE TABLES
<TABLE>
<CAPTION>
===================================================================================================================================
Arch
Arrow Government &
Fixed Income Corporate Bond Pro Forma Combined
Portfolio Portfolio Portfolio
------------ ---------------------------------- ------------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(4) None 4.50%(4) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(after fee waivers) .60% .45% .45% .45% .45%
12b-1 Fees (after fee waivers) .00%(2) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) .65% .20%(5)(6) .20%(5)(6) .20%(5)(6) .20%(5)(6)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.25%(3) .95%(6) .65%(6) .95%(6) .65%(6)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) The Arrow Fixed Income Portfolio can pay up to 0.25% of its average daily
net assets as a 12b-1 fee. For the foreseeable future, FSC plans to waive
all 12b-1 fees.
(3) The Annual Operating Expenses for the Arrow Fixed Income Portfolio in the
table above are based on expenses expected to be incurred during the
fiscal year ending September 30, 1997. The Total Operating Expenses for
the Portfolio were 1.27% for the fiscal year ended September 30, 1996. The
Total Operating Expenses for the Portfolio during the fiscal year ended
September 30, 1997 are expected to be 1.50% absent the voluntary waivers
detailed in note (2).
(4) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(5) Without fee waivers, administration fees for the Arch Government &
Corporate Bond Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.30% and .30% for Investor A Shares and Trust Shares, respectively, of the
Arch Government & Corporate Bond Portfolio, and Total Operating Expenses
would be 1.05% and 1.05% for Investor A Shares and Trust Shares,
respectively, of the Arch Government & Corporate Bond Portfolio.
-8-
<PAGE>
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Fixed Income Portfolio(1) $47 $73 $101 $181
Arch Government & Corporate
Bond Portfolio
Investor A Shares(1) $54 $74 $95 $156
Trust Shares $ 7 $21 $36 $ 81
Pro Forma Combined Portfolio
Investor A Shares(1) $54 $74 $95 $156
Trust Shares $ 7 $21 $36 $ 81
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-9-
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Arrow Arch
Municipal Income National Municipal Pro Forma Combined
Portfolio Portfolio Portfolio
----------------- ---------------------------------- ----------------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(5) None 4.50%(5) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
----
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(after fee waivers) .11%(2) .00%(6) .00%(6) .00%(6) .00%(6)
12b-1 Fees (after fee waivers) .00%(3) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) 1.21% .12%(7)(8) .12%(7)(8) .12%(7)(8) .12%(7)(8)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.32%(4) .42%(8) .12%(8) .42%(8) .12%(8)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) Without fee waivers, the Advisory Fee for the Arrow Municipal Income
Portfolio would be .70%.
(3) The Arrow Municipal Income Portfolio can pay up to 0.25% of its average
daily net assets as a 12b-1 fee. For the foreseeable future, FSC plans to
waive all 12b-1 fees.
(4) The Annual Operating Expenses for the Arrow Municipal Income Portfolio in
the table above are based on expenses expected to be incurred during the
fiscal year ending September 30, 1997. The Total Operating Expenses for
the Portfolio were 1.20% for the fiscal year ended September 30, 1996. The
Total Operating Expenses of the Portfolio during the fiscal year ended
September 30, 1997 are expected to be 2.16% absent the voluntary waivers
detailed in notes (2) and (3).
(5) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(6) Without fee waivers, Advisory Fees for the Arch National Municipal Bond
Portfolio would be .55%.
(7) Without fee waivers, administration fees for the Arch National Municipal
Bond Portfolio would be .20%.
(8) Without fee waivers and/or expense reimbursements, Other Expenses would be
.22% and .57% for Investor A Shares and Trust Shares, respectively, of the
Arch National Municipal Bond Portfolio and Total Operating Expenses would
be 1.07% and 1.07% for Investor A Shares and Trust Shares, respectively,
of the Arch National Municipal Bond Portfolio.
-10-
<PAGE>
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Municipal Income $48 $75 $105 $188
Portfolio(1)
Arch National Municipal
Bond Portfolio
Investor A Shares(1) $49 $58 N/A N/A
Trust Shares $ 1 $ 4 N/A N/A
Pro Forma Combined Portfolio
Investor A Shares(1) $49 $58 N/A N/A
Trust Shares $ 1 $ 4 N/A N/A
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-11-
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Arrow Arch
Equity Growth Equity Pro Forma Combined
Portfolio Portfolio Portfolio
--------- ---------------------------------- ----------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(4) None 4.50%(4) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees .75% .75% .75% .75% .75%
12b-1 Fees (after fee waivers) .00%(2) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) .39% .23%(5)(6) .23%(5)(6) .23%(5)(6) .23%(5)(6)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.14%(3) 1.28%(6) .98%(6) 1.28%(6) .98%(6)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) The Arrow Equity Portfolio can pay up to 0.25% of its average daily net
assets as a 12b-1 fee. For the foreseeable future, FSC plans to waive all
12b-1 fees.
(3) The Annual Operating Expenses for the Arrow Equity Portfolio in the table
above are based on expenses expected to be incurred during the fiscal year
ending September 30, 1997. The Total Operating Expenses for the Portfolio
were 1.17% for the fiscal year ended September 30, 1996. The Total
Operating Expenses of the Portfolio during the fiscal year ended September
30, 1997 are expected to be 1.39% absent the voluntary waivers detailed in
note (2).
(4) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(5) Without fee waivers, administration fees for the Arch Growth Equity
Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.35% and .65% for Investor A Shares and Trust Shares, respectively, of the
Arch Growth Equity Portfolio and Total Operating Expenses would be 1.40%
and 1.40% for Investor A Shares and Trust Shares, respectively, of the
Arch Growth Equity Portfolio.
-12-
<PAGE>
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Equity Portfolio(1) $46 $70 $96 $169
Arch Growth Equity Portfolio
Investor A Shares(1) $57 $84 N/A N/A
Trust Shares $10 $45 N/A N/A
Pro Forma Combined Portfolio
Investor A Shares(1) $57 $84 N/A N/A
Trust Shares $10 $31 N/A N/A
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-13-
<PAGE>
EXPENSE RATIOS -- ARROW PORTFOLIOS. The following table sets forth (i) the
ratios of operating expenses to average net assets of the Arrow Portfolios for
the fiscal year ended September 30, 1996 (a) after fee waivers and expense
reimbursements, and (b) absent fee waivers and expense reimbursements, and (ii)
the annualized ratios of operating expenses to average net assets of the Arrow
Portfolios for the six-month period ended March 31, 1997 (a) after fee waivers
and expense reimbursements and (b) absent fee waivers and expense
reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
------------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARROW PORTFOLIOS
- ----------------
<S> <C> <C>
Fixed Income Portfolio 1.27% 1.53%
Municipal Income Portfolio 1.20% 2.04%
Equity Portfolio 1.17% 1.45%
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED MARCH 31, 1997
-------------------------------------
ANNUALIZED ANNUALIZED
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARROW PORTFOLIOS
- ----------------
<S> <C> <C>
Fixed Income Portfolio 1.32% 1.57%
Municipal Income Portfolio 1.37% 2.21%
Equity Portfolio 1.14% 1.39%
</TABLE>
-14-
<PAGE>
EXPENSE RATIOS -- ARCH PORTFOLIOS. The following tables set forth (i) the ratios
of operating expenses to average net assets of the Arch Portfolios for the
fiscal year ended November 30, 1996 (a) after fee waivers and expense
reimbursements, and (b) absent fee waivers and expense reimbursements, and (ii)
the annualized ratios of operating expenses to average net assets of the Arch
Portfolios for the six-month period ended May 31, 1997 (a) after fee waivers and
expense reimbursements and (b) absent fee waivers and expense reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, 1996
-----------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARCH PORTFOLIOS
- ---------------
<S> <C> <C>
Government & Corporate
Bond Portfolio
Investor A Shares .95% 1.05%
Trust Shares .65% .75%
National Municipal Bond
Portfolio
Investor A Shares .42%* 1.12%*
Trust Shares .12%* .82%*
Growth Equity Portfolio
Investor A Shares ** **
Trust Shares ** **
</TABLE>
* Annualized
** Had not commenced operations at November 30, 1996.
-15-
<PAGE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED MAY 31, 1997
-----------------------------------
ANNUALIZED ANNUALIZED
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARCH PORTFOLIOS
- ---------------
<S> <C> <C>
Government & Corporate
Bond Portfolio
Investor A Shares .95% 1.05%
Trust Shares .65% 1.05%
National Municipal Bond
Portfolio
Investor A Shares .42% 1.07%
Trust Shares .12% 1.07%
Growth Equity Portfolio
Investor A Shares N/A N/A
Trust Shares N/A N/A
</TABLE>
* Had not commenced operations at May 31, 1997.
VOTING INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Arrow's Board of Trustees in
connection with a Special Meeting of Shareholders to be held at Federated
Investors Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania, on
Wednesday, November 12, 1997 at 2:00 p.m. Eastern Time (such meeting and any
adjournments thereof hereinafter referred to as the "Meeting"). Only
Shareholders of record at the close of business on __________, 1997 will be
entitled to notice of and to vote at the Meeting. Each share or fraction thereof
is entitled to one vote or fraction thereof and all shares will vote separately
by Portfolio. Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon, or if no specification is made, the
persons named as proxies will vote in favor of each proposal set forth in the
Notice of Meeting. Proxies may be revoked at any time before they are exercised
by submitting to Arrow a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and voting in person. For additional
information, including a description of the Shareholder vote required for
approval of the Reorganization Agreement and related transactions contemplated
thereby, see "Information Relating to Voting Matters."
RISK FACTORS. The following discussion highlights the principal risk factors
associated with an investment in the Reorganizing Portfolios and the Existing
Arch Portfolios and is qualified in
-16-
<PAGE>
its entirety by the more extensive discussion of risk factors in "Comparison of
Investment Policies and Risk Factors."
Because of the similarities of the investment objectives and policies of
the Reorganizing Portfolios and the corresponding Existing Arch Portfolios,
management believes that an investment in an Existing Arch Portfolio involves
risks that are similar to those of the corresponding Reorganizing Portfolio.
These investment risks include those typically associated with investing in a
diversified portfolio of government or investment grade corporate bonds in the
case of the Arrow Fixed Income Portfolio and in a diversified portfolio of
municipal securities in the case of the Arrow Municipal Income Portfolio.
There are differences, however, between the Reorganizing Portfolios and
the Existing Arch Portfolios, as described below under "Comparison of Investment
Policies and Risk Factors." These differences can result in different risks. For
example, the Arrow Fixed Income Portfolio will only invest in investment grade
debt securities, i.e. securities rated in one of the four highest rating
categories assigned by one or more rating agencies or, if unrated, determined by
MVA to be of comparable quality. The Arch Government & Corporate Bond Portfolio
also will only invest in investment grade debt securities, provided, however,
that at least 65% of its assets will be invested in debt securities rated within
the three highest rating categories assigned by one or more rating agencies or,
if unrated, determined by MVA to be of comparable quality. Similarly, the Arrow
Municipal Income Portfolio will only invest in investment grade municipal
securities. The Arch National Municipal Bond Portfolio also will only invest in
investment grade municipal securities, provided, however, that at least 65% of
its assets will be invested in municipal securities rated in one of the three
highest rating categories assigned by one or more rating agencies or, if
unrated, determined by MVA to be of comparable quality. Debt securities,
including municipal securities, rated in the lowest investment grade rating
category do not have outstanding investment characteristics and may have
speculative characteristics as well.
The Arrow Fixed Income Portfolio may invest up to 10% of its assets in
investment grade debt securities of foreign issuers. The Arch Government &
Corporate Bond Portfolio may invest up to 10% of its total assets in
dollar-denominated debt obligations of foreign issuers, either directly or
indirectly through American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs"). Investments in the securities of foreign issuers, whether
made directly or indirectly, carry certain risks not ordinarily associated with
investments in the securities of domestic issuers.
The ARCH Government & Corporate Bond Portfolio and the Arrow Fixed Income
Portfolio may each purchase put and call options listed on a national securities
exchange and issued by the
-17-
<PAGE>
Options Clearing Corporation and write covered call options (and covered put
options in the case of the Arrow Fixed Income Portfolio) listed on a national
securities exchange and issued by the Options Clearing Corporation. Unlike the
Arch Government & Corporate Bond Portfolio, the Arrow Fixed Income Portfolio may
also purchase and write unlisted over-the-counter options which are not subject
to the protections afforded by the Options Clearing Corporation. The Arrow
Municipal Income Portfolio may purchase and write listed and unlisted options as
described above, whereas the Arch National Municipal Bond Portfolio may not
enter into options transactions.
The Arch Government & Corporate Bond Portfolio and the Arrow Fixed Income
Portfolio may each purchase mortgage-related asset-backed securities. Unlike the
Arrow Fixed Income Portfolio, the Arch Government & Corporate Bond Portfolio may
purchase non-mortgage-related asset-backed securities, which involve certain
risks that are not presented by mortgage-related asset-backed securities arising
primarily from the nature of the underlying collateral (i.e. credit card
receivables and automobile loan receivables as opposed to real estate
mortgages).
Unlike the Arch National Municipal Bond Portfolio, the Arrow Municipal
Income Portfolio may enter into repurchase agreements and reverse repurchase
agreements. Default by a counterparty to a repurchase agreement could expose a
Portfolio to loss because of adverse market action or possible delay in
disposing of the underlying collateral. Reverse repurchase agreements are
subject to the risk that the market value of the securities sold by a Portfolio
will decline below the repurchase price which the Portfolio is obligated to pay.
The per share price of the Reorganizing Portfolios and the Existing
Portfolios will fluctuate with changes in the value of the investments held by
each Portfolio. Generally, the market value of debt securities will vary
inversely to changes in prevailing interest rates. There is no assurance that
any Portfolio will achieve its investment objective.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
Arrow has entered into an agreement whereby its investment portfolios
(other than the Arrow Government Money Market Portfolio) are to be acquired by
investment portfolios of Arch. Significant provisions of the Reorganization
Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Reorganization Agreement, a copy of which is
attached as Appendix I to this Combined Proxy Statement/Prospectus.
DESCRIPTION OF THE REORGANIZATION AGREEMENT. There are four separate Arrow
investment portfolios. Prior to the consummation of the transactions
contemplated by the Reorganization Agreement,
-18-
<PAGE>
it is anticipated that shareholders of the Arrow Government Money Market
Portfolio will redeem their shares in that portfolio. The initial transaction in
the Reorganization is that the assets of the two Arrow Reorganizing Portfolios
will be acquired by two similar investment portfolios currently offered by Arch.
Afterwards, the Arrow Continuing Portfolio will be acquired by the new Arch
portfolio which has been organized to continue its operations.
The Reorganization Agreement provides, first, that substantially all of
the assets and liabilities of the Reorganizing Portfolios will be transferred to
the Existing Arch Portfolios identified in the table below. Not less than seven
calendar days thereafter, substantially all of the assets and liabilities of the
Continuing Portfolio will be transferred to the New Arch Portfolio identified in
the table below. The holders of shares of an Arrow Portfolio will receive
Investor A Shares of the corresponding Arch Portfolio identified in the table.
The number of Investor A Shares to be issued by each Arch Portfolio will have an
aggregate net asset value equal to the aggregate net asset value of the shares
of the corresponding Arrow Portfolio as of the regular close of the New York
Stock Exchange, currently 4:00 p.m. Eastern Time, on the same business day on
which each transaction will be consummated. The number of Investor A Shares
received by an Arrow shareholder may be different from the number of Arrow
shares previously held, but the value of such shares in the aggregate will equal
the aggregate value held previously by such shareholders. Arrow shareholders
will not pay a sales charge in connection with their receipt of Investor A
Shares of the Arch Portfolios.
<TABLE>
<CAPTION>
REORGANIZING PORTFOLIOS EXISTING ARCH PORTFOLIOS
- ----------------------- ------------------------
<S> <C>
Fixed Income Portfolio Government & Corporate Bond
Portfolio
Municipal Income Portfolio National Municipal Bond Portfolio
<CAPTION>
CONTINUING PORTFOLIO NEW ARCH PORTFOLIO
- -------------------- ------------------
<S> <C>
Equity Portfolio Growth Equity Portfolio
</TABLE>
The Reorganization Agreement provides that Arrow will declare a dividend
or dividends prior to the Reorganizing Portfolios Transaction which, together
with all previous dividends, will have the effect of distributing to the
Shareholders of each of the Reorganizing Portfolios all undistributed ordinary
income earned and net capital gains realized up to and including the effective
time of the Reorganizing Portfolios Transaction.
Following the transfers of assets and liabilities from the Arrow
Portfolios to the Arch Portfolios, and the issuances of
-19-
<PAGE>
Investor A Shares by the Arch Portfolios to the Arrow Portfolios, each of the
Arrow Portfolios will distribute the Investor A Shares of the Arch Portfolios
pro rata to the holders of shares of the Arrow Portfolios as described above in
liquidation of the Arrow Portfolios. Each holder of shares of an Arrow Portfolio
will receive an amount of Investor A Shares of the corresponding Arch Portfolio
of equal value, plus the right to receive any declared and unpaid dividends or
distributions. Following the Reorganization, Shareholders of the Arrow
Portfolios will be shareholders of the corresponding Arch Portfolios, and Arrow
will be deregistered as an investment company under the 1940 Act and its
existence terminated under state law.
At [record date], 1997, Mercantile Bank owned of record with the power to
vote approximately _____% of the outstanding shares of the Arrow Portfolios on
behalf of customers maintaining fiduciary, employee benefit, retirement plan or
other qualified accounts at Mercantile Bank. Arch and Arrow have been advised by
Mercantile Bank that it intends to exchange the Investor A Shares of the Arch
Portfolios that it receives in these capacities for Trust Shares of the same
Arch Portfolios. Mercantile Bank intends to effect this exchange, which it has
been advised by Drinker Biddle & Reath LLP will not cause shareholders to
realize taxable gains or losses, promptly after the Reorganization because it
believes that Trust Shares are more appropriate than Investor A Shares for these
customers.
The stock transfer books of Arrow will be permanently closed after the
Reorganization. If any Arrow Portfolio shares held by a former Arrow Portfolio
shareholder are represented by share certificates, the certificate must be
surrendered to Arch's transfer agent for cancellation before the Arch Portfolio
shares issued to the shareholder in the Reorganization may be redeemed. Arch
will not issue share certificates with respect to the Arch Portfolio shares
issued in connection with the Reorganization.
The Reorganization is subject to a number of conditions, including
approval of the Reorganization Agreement and the transactions contemplated
thereby as described in this Combined Proxy Statement/Prospectus by the
Shareholders of the Arrow Portfolios; the receipt of certain legal opinions
described in the Reorganization Agreement; the receipt of certain certificates
from the parties concerning the continuing accuracy of the representations and
warranties in the Reorganization Agreement and other matters; and the parties'
performance in all material respects of their agreements and undertakings in the
Reorganization Agreement. Assuming satisfaction of the conditions in the
Reorganization Agreement, the Reorganizing Portfolios Transaction is expected to
occur on or after November 14, 1997 and the Continuing Portfolio Transaction is
expected to occur on or after November 21, 1997.
______________ will be responsible for the payment of expenses incurred in
connection with the Reorganization.
-20-
<PAGE>
It is estimated that such expenses will be approximately $___.
The Reorganization may be terminated at any time prior to its consummation
by Arch or Arrow if the conditions specified in the Reorganization Agreement are
not satisfied or by the mutual consent of Arch and Arrow. The Reorganization
Agreement provides further that at any time prior to or (to the fullest extent
permitted by law) after approval of the Reorganization Agreement by the
Shareholders of Arrow (a) the parties thereto may, by written agreement approved
by their respective Boards of Trustees or Directors or authorized officers and
with or without the approval of their shareholders, amend any of the provisions
of the Reorganization Agreement; and (b) either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations with or without the approval of such party's shareholders.
Section 15(f) of the 1940 Act provides that when a change in the control
of an investment adviser occurs, the investment adviser or any of its affiliated
persons may receive any amount or benefit in connection therewith under certain
conditions. One condition is that for three years thereafter, at least 75% of
the board of directors of the surviving investment company are not "interested
persons" of the company's investment adviser or of the investment adviser of the
terminating investment company. Another condition is that no "unfair burden" is
imposed on the investment company as a result of the transaction relating to the
change of control, or any express or implied terms, conditions or understandings
applicable thereto. The term "unfair burden" as defined in the 1940 Act includes
any arrangement during the two-year period after the transaction whereby the
investment adviser (or predecessor or successor adviser), or any "interested
person" of any such adviser, receives or is entitled to receive any
compensation, directly or indirectly, from the investment company or its
security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than fees for bona fide principal underwriting services). Arch intends to
comply with the conditions set forth in Section 15(f).
In its consideration and approval of the Reorganization at a meeting on
August 18, 1997, the Board of Trustees of Arrow considered the effect of the
Holding Company Merger of Mark Twain Bancshares, Inc. and Mercantile
Bancorporation Inc. on Arrow; the recommendation of MVA with respect to the
proposed consolidation of Arrow and Arch; the tax-free nature of the
Reorganization; and the fact that the interests of Shareholders would not be
diluted as a result of the Reorganization.
-21-
<PAGE>
After consideration of all of the foregoing factors, together with certain
other factors and information considered to be relevant, Arrow's Board of
Trustees unanimously approved the Reorganization Agreement and directed that it
be submitted to Shareholders for approval. ARROW'S BOARD OF TRUSTEES RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE REORGANIZATION AGREEMENT.
The Board of Trustees of Arrow has not determined what action it will take
in the event the Shareholders of any Arrow Portfolio fail to approve the
Reorganization Agreement or for any reason the Reorganization is not
consummated. In either such event, the Trustees may choose to consider
alternative dispositions of the Arrow Portfolios' assets, including the sale of
assets to, or merger with, another investment company, or the possible
liquidation of any of the Arrow Portfolios.
At a meeting held on June 17, 1997, the Arch Board of Directors considered
the proposed Reorganization. Based upon their evaluation of the relevant
information provided to them, and in light of their fiduciary duties under
federal and state law, the Board of Directors unanimously determined that the
proposed Reorganization was in the best interests of the Arch Portfolios and
their respective shareholders and that the interests of existing shareholders of
the Arch Portfolios would not be diluted as a result of effecting the
transaction.
CAPITALIZATION. Because the Reorganizing Portfolios will be combined in
the Reorganization with the Existing Arch Portfolios, the total capitalization
of each of the Existing Arch Portfolios after the Reorganization is expected to
be greater than the current capitalization of the corresponding Reorganizing
Portfolios. The following table sets forth (i) the capitalization of each of the
Reorganizing Portfolios as of May 31, 1997; (ii) the capitalization of each of
the Existing Arch Portfolios as of May 31, 1997; and (iii) the pro forma
capitalization of each of the Existing Arch Portfolios as adjusted to give
effect to the Reorganization. If consummated, the capitalization of each
Portfolio is likely to be different at the time of the Reorganizing Portfolios
Transaction as a result of daily share purchase and redemption activity in the
Portfolios.
-22-
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
ARCH
ARROW GOVERNMENT &
FIXED INCOME CORPORATE BOND PRO FORMA
PORTFOLIO PORTFOLIO COMBINED PORTFOLIO
===================================================================================================
<S> <C> <C> <C>
Total Net Assets
Shares/Investor A Shares $28,125,845 $4,606,807 $32,732,652
Trust Shares N/A $141,220,745 $141,220,745
Shares Outstanding
Shares/Investor A Shares 2,898,396 458,760 3,260,224
Trust Shares N/A 14,062,830 14,062,830
Net Asset Value Per Share
Shares/Investor A Shares $9.59 $10.04 $10.04
Trust Shares N/A $10.04 $10.04
===================================================================================================
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
ARROW ARCH
MUNICIPAL INCOME NATIONAL MUNICIPAL PRO FORMA
PORTFOLIO BOND PORTFOLIO COMBINED PORTFOLIO
====================================================================================================
<S> <C> <C> <C>
Total Net Assets
Shares/Investor A Shares $13,450,961 $542,574 $13,993,535
Trust Shares N/A $325,883,666 $325,883,666
Shares Outstanding
Shares/Investor A Shares 1,304,417 54,515 1,406,385
Trust Shares N/A 32,725,131 32,725,131
Net Asset Value Per Share
Shares/Investor A Shares $10.31 $9.95 $9.95
Trust Shares N/A $9.96 $9.96
====================================================================================================
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES. Consummation of the Reorganization is subject
to the condition that Arrow and Arch receive an opinion from Drinker Biddle &
Reath LLP, based on certain factual assumptions and in reliance on certain
factual representations by the management of Arrow and Arch, to the effect that
for federal income tax purposes: (i) the transfer of all of the assets and
liabilities of each of the Arrow Portfolios to the corresponding Arch Portfolio
in exchange for Investor A Shares of the corresponding Arch Portfolio and the
liquidating distribution to Shareholders of the Arrow Portfolio of the Investor
A Shares of the Arch Portfolio so received, as described in the Reorganization
Agreement, will constitute a reorganization within the meaning of Section
368(a)(1)(C), Section 368(a)(1)(D) or Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, and both the Arrow Portfolio and the Arch
Portfolio will be considered "a party to the reorganization" within the meaning
of Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Arrow Portfolios as a result of such transactions; (iii) no gain or loss will be
recognized by the Arch Portfolios as a result of such transactions; (iv) no gain
or loss will be recognized by the Shareholders of any Arrow Portfolio on the
distribution to them of Investor A Shares of the corresponding Arch Portfolio in
exchange for their shares of the Arrow Portfolio; (v) the aggregate basis of the
Investor A Shares of an Arch Portfolio received by a Shareholder of an Arrow
Portfolio will be the same as the aggregate basis of the Shareholder's Arrow
Portfolio shares immediately prior to the Reorganization; (vi) the basis of each
Arch Portfolio in the assets of the corresponding Arrow Portfolio received
pursuant to the Reorganization will be the same as the basis of the assets in
the hands of the Arrow Portfolio immediately before the Reorganization; (vii) a
Shareholder's holding period for Investor A Shares of an Arch Portfolio will be
determined by including the period for which the Shareholder held the Arrow
Portfolio shares exchanged therefor, provided that the Shareholder held such
Arrow Portfolio shares as a capital asset; and (viii) each Arch Portfolio's
holding period with respect to the assets received in the Reorganization will
include the period for which such assets were held by the corresponding Arrow
Portfolio.
-24-
<PAGE>
Arch and Arrow have not sought a tax ruling from the Internal Revenue
Service ("IRS"), but are acting in reliance upon the opinion of counsel
discussed in the previous paragraph. That opinion is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. Shareholders should
consult their own advisers concerning the potential tax consequences to them,
including state and local income taxes.
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS
The investment objectives and policies of the Reorganizing Portfolios are,
in many respects, similar to those of the corresponding Existing Arch
Portfolios. There are, however, certain differences. The following discussion
summarizes some of the more significant similarities and differences in the
investment policies and risk factors of the Reorganizing Portfolios and their
corresponding Existing Arch Portfolios and is qualified in its entirety by the
discussion elsewhere herein, and in the Prospectuses and Statements of
Additional Information of the Reorganizing Portfolios and the Existing Arch
Portfolios incorporated herein by reference.
INVESTMENT POLICIES AND RISK -- GENERAL
The investment objective of each of the Reorganizing Portfolios and of
each of the Existing Arch Portfolios is fundamental, meaning that it may not be
changed without the vote of the holders of a majority of the Portfolio's
outstanding shares (as defined in the 1940 Act). Unless otherwise indicated, the
investment policies of the Reorganizing Portfolios and Existing Arch Portfolios
are not fundamental and may be changed by the respective Boards of Trustees or
Directors.
ARROW FIXED INCOME PORTFOLIO AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
The investment policies of the Portfolios are similar, but not identical.
Both Portfolios invest at least 65% of their respective assets (under normal
conditions, in the case of the Arrow Fixed Income Portfolio) in U.S. Government
and investment grade corporate debt securities. Both Portfolios will only invest
in investment grade securities, i.e. securities rated at the time of purchase in
the four highest rating categories assigned by a rating agency or, if unrated,
determined by MVA to be of comparable quality, although the Arch Government &
Corporate Bond Portfolio must (i) invest a minimum of 65% of its assets in
securities rated in the three highest rating categories assigned by a rating
agency or, if unrated, determined by MVA to be of comparable quality, and (ii)
maintain a dollar-weighted average portfolio quality of at least "A" or higher.
Debt securities with the lowest investment grade rating do not have outstanding
investment characteristics and may have speculative characteristics as well.
-25-
<PAGE>
The debt securities in which each Portfolio may invest include fixed and
variable rate bonds, debentures, notes, and securities convertible into or
exchangeable for common stock (the Arrow Portfolio may also invest in securities
convertible into or exchangeable for preferred stock). The Arrow Fixed Income
Portfolio may also invest in preferred stock and units, which are debt
securities with stock or warrants to buy stock attached.
The Arrow Fixed Income Portfolio may invest up to 10% of its assets in the
debt securities of foreign issuers. Such securities include the securities of
foreign governments, foreign governmental agencies or supranational
organizations or investment grade debt securities of foreign corporations. The
Arch Government & Corporate Bond Portfolio may invest up to 10% of its total
assets in dollar-denominated debt obligations of foreign issuers, either
directly or indirectly through ADRs and EDRs. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of foreign issuers. Such
risks include future political and economic developments and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
The Arrow Fixed Income Portfolio may invest in mortgage-related
asset-backed securities, including collateralized mortgage obligations ("CMOs"),
rated in one of the three highest rating categories assigned by one or more
rating agencies or determined to be of comparable quality by MVA. The Arch
Government & Corporate Bond Portfolio may invest in investment grade
mortgage-related asset-backed securities, including CMOs, as well as
non-mortgage-related asset-backed securities, although investments in
non-mortgage-related asset-backed securities will not exceed 25% of the
Portfolio's total assets at the time of purchase. The average life of
asset-backed securities varies with the underlying instruments or assets and
market conditions, which in the case of mortgages have maximum maturities of
forty years. The average life of a mortgage-backed instrument, in particular, is
likely to be substantially less than the original maturity of the mortgages
underlying the securities as the result of unscheduled principal payments and
mortgage prepayments. The relationship between mortgage prepayment and interest
rates may give some high-yielding mortgage-backed securities less potential for
growth in value than conventional bonds with comparable maturities. In addition,
in periods of falling interest rates, the rate of mortgage prepayments tends to
increase. During such periods, the reinvestment of prepayment proceeds by a
Portfolio will generally be at lower rates than the rates that were carried by
the obligations that have been prepaid. When interest rates rise, the value of
an asset-backed security generally will decline; however, when interest rates
decline, the value of an
-26-
<PAGE>
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict. The collateral
supporting non-mortgage-related asset-backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Non-mortgage-related asset-backed securities involve certain risks that are not
presented by mortgage-backed securities arising primarily from the nature of the
underlying assets (i.e., credit card and automobile loan receivables as opposed
to real estate mortgages). For example, credit card receivables are generally
unsecured and the repossession of automobiles and other personal property upon
the default of the debtor may be difficult or impracticable in some cases. The
Arch Government & Corporate Bond Portfolio may also invest in first mortgage
loans, income participation loans and participations in certificates of pools of
mortgages.
Each Portfolio may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation, provided,
however, that the Arch Government & Corporate Bond Portfolio will not invest
more than 10% of its net assets in such options. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Each Portfolio may
also write covered call options (and covered put options in the case of the
Arrow Fixed Income Portfolio) listed on a national securities exchange and
issued by the Options Clearing Corporation, limited in amount with respect to
the Arch Government & Corporate Bond Portfolio to not more than 20% of the value
of the Portfolio's net assets. The Arrow Fixed Income Portfolio may also
purchase and write unlisted over-the-counter options which are not subject to
the protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members which fail to perform
them in connection with the purchase or sale of options.
Each Portfolio may purchase and sell futures contracts and options on
futures contracts as a hedge against anticipated changes in interest rates or
market conditions. Neither Portfolio will purchase or sell futures contracts or
related options for hedging purposes if, immediately after purchase, the
aggregate initial margin deposits and premiums paid by a Portfolio on its open
futures and options positions exceeds 5% of the Portfolio's total assets. When
futures and related options are used as a hedging device, there is a risk that
the prices of the securities subject to the futures contract may not correlate
with the prices of a Portfolio's investment securities. This may cause the
futures contract and any related options to react differently than the
Portfolio's investment securities to market changes.
-27-
<PAGE>
The Arch Government & Corporate Bond Portfolio may hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such time and
in such proportions as, in the opinion of MVA, prevailing market or economic
conditions warrant. Such short-term obligations may include commercial paper,
bankers acceptances, certificates of deposit, demand and time deposits of
domestic and foreign banks and savings and loan associations, and obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Arrow Fixed Income Portfolio may invest in commercial
paper rated in the top two rating categories assigned by one or more rating
agencies; time and savings deposits (including certificates of deposit) in
certain domestic banks and certificates of deposit and other time deposits
issued by the foreign branches of such domestic banks; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Each Portfolio may purchase "stripped" securities limited, with respect to
the Arch Government & Corporate Bond Portfolio, to stripped U.S. Treasury and
agency obligations. Stripped securities are issued at a discount to their face
value and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
Each Portfolio may purchase "when-issued" securities, and the Arch
Government & Corporate Bond Portfolio may also purchase and sell securities on a
forward commitment or delayed settlement basis. Both Portfolios may enter into
repurchase and reverse repurchase agreement transactions, lend their portfolio
securities and invest in the securities of other investment companies. Neither
Portfolio will invest more than 15% of the value of its net assets in illiquid
securities.
ARROW MUNICIPAL INCOME PORTFOLIO AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
The Portfolios have similar, but not identical, investment policies. As a
matter of fundamental policy, each Portfolio invests at least 80% of its total
assets in municipal securities, primarily bonds (at least 65% under normal
market conditions) with respect to the Arch National Municipal Bond Portfolio.
Each Portfolio purchases only investment grade municipal securities, i.e.
securities rated in the top four rating categories assigned by one or more
rating agencies or, if unrated, determined by MVA to be of comparable quality,
provided, however, that (i) the Arch National Municipal Bond Portfolio will
invest, under normal conditions, at least 65% of its assets in municipal
securities that are rated at the time of purchase in one of the three highest
rating categories assigned by one or more rating agencies or, if unrated,
determined by MVA to be of comparable quality, and (ii) the Arrow Municipal
Income Portfolio may invest in
-28-
<PAGE>
short-term municipal securities rated in the highest rating category by one or
more rating agencies.
The Arch National Municipal Bond Portfolio may invest 25% or more of its
net assets in (i) municipal securities whose issuers are in the same state, (ii)
municipal securities the interest on which is paid solely from revenues of
similar projects, and (ii) private activity bonds. The Arrow Municipal Income
Portfolio may invest more than 25% of the value of its assets in industrial
development bonds. Both Portfolios may invest in participation interests (the
Arch Portfolio may also invest in other tax-exempt derivative instruments) and
variable and floating rate municipal securities.
During temporary defensive periods, the Arch National Municipal Bond
Portfolio (i) may invest in taxable obligations, such as obligations of the U.S.
Government, its agencies and instrumentalities, including "stripped securities",
and debt securities (including commercial paper) of issuers having, at the time
of purchase, a quality rating within the two highest rating categories assigned
by one or more rating agencies, and (ii) may hold without limit uninvested cash
reserves which do not earn income pending investment.
Unlike the Arch National Municipal Bond Portfolio, the Arrow Municipal
Income Portfolio may purchase listed and unlisted put and call options and write
listed and unlisted covered call options and covered put options. See
"Comparison of Investment Policies and Risk Factors -- Arrow Fixed Income
Portfolio and Arch Government & Corporate Bond Portfolio" above.
The Arrow Municipal Income Portfolio may enter into repurchase agreements
and reverse repurchase agreements, whereas the Arch National Municipal Bond
Portfolio may not. Each Portfolio may purchase "when-issued" securities and the
Arch National Municipal Bond Portfolio may also purchase and sell securities on
a forward commitment or delayed settlement basis and enter into stand-by
commitments. Each Portfolio may lend its portfolio securities and invest in the
securities of other investment companies. While both Portfolios may invest up to
15% of their respective net assets in illiquid securities, the Arrow Municipal
Income Portfolio may only invest up to 10% of its net assets in restricted
municipal securities.
INVESTMENT LIMITATIONS
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
change their fundamental investment limitations without the affirmative vote of
the holders of a majority of the outstanding shares (as defined in the 1940 Act)
of the particular Reorganizing Portfolio or Existing Arch Portfolio. The
investment limitations of the Reorganizing Portfolios and the corresponding
Existing Arch Portfolios are similar, but not identical.
-29-
<PAGE>
Each of the Reorganizing Portfolios and each of the Existing Arch
Portfolios is a "diversified" investment portfolio and, therefore, has a
fundamental policy limiting investments in securities of any one issuer (other
than cash, cash items or securities issued by the U.S. Government, its agencies
and instrumentalities and, with respect to the Reorganizing Portfolios,
repurchase agreements collateralized by such securities) to 5% of the value of a
Portfolio's total assets, except that up to 25% of the value of a Portfolio's
total assets may be invested without regard to this 5% limitation. In addition,
none of the Reorganizing Portfolios or the Existing Arch Portfolios may acquire
more than 10% of the outstanding voting securities of any one issuer, except
that the Existing Arch Portfolios may invest up to 25% of their respective total
assets without regard to such 10% limitation.
The Reorganizing Portfolios may not issue senior securities, except that
each Portfolio may borrow money directly or through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, for temporary purposes. The Existing Arch Portfolios may
not borrow money or issue senior securities, except that each Portfolio may
borrow from banks and the Arch Government & Corporate Bond Portfolio may enter
into reverse repurchase agreements for temporary purposes in amounts not in
excess of 10% of the Portfolio's total assets at the time of such borrowing.
Neither a Reorganizing Portfolio nor an Existing Arch Portfolio will purchase
securities while its borrowings, including reverse repurchase agreements, exceed
5% of the total assets of such Portfolio.
The Reorganizing Portfolios and the Existing Arch Portfolios may mortgage,
pledge or hypothecate their assets only to secure permitted indebtedness, and
then may only pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15%, in the case of the Reorganizing Portfolios,
or 10% in the case of the Existing Arch Portfolios, of the value of the
Portfolio's total assets.
The investment limitations described in the foregoing paragraphs regarding
diversification and borrowing are fundamental with respect to both the
Reorganizing Portfolios and Existing Arch Portfolios. The limitation with
respect to pledging portfolio assets is fundamental as to the Existing Arch
Portfolios, but not fundamental as to the Reorganizing Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
make loans, except that: (i) the Reorganizing Portfolios may lend portfolio
securities up to one-third of the value of their respective total assets; and
(ii) the Reorganizing Portfolios may purchase or hold certain debt instruments
and may enter into repurchase agreements; and (iii) each Existing Arch Portfolio
may purchase or hold debt instruments, lend portfolio
-30-
<PAGE>
securities, and, except for the Arch National Municipal Bond Portfolio, enter
into repurchase agreements. The foregoing limitations on securities lending are
fundamental limitations for both the Reorganizing Portfolios and the Existing
Arch Portfolios.
The Reorganizing Portfolios and the Existing Arch Portfolios may not
invest 25% or more of the value of their respective total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) with respect to the Reorganizing Funds,
(i) there is no limitation concerning cash, certain money market instruments, or
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities and repurchase agreements collateralized by such securities
and (ii) no more than 25% of the Arrow Municipal Income Portfolio's total assets
may be invested in a governmental subdivision of any one state, territory or
possession of the United States; (b) with respect to the Arch Government &
Corporate Bond Portfolio, (i) there is no limitation with respect to (i)
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) wholly-owned finance companies will be considered to be
in the industry of their parents if their activities are primarily related to
financing the activities of their parents; and (iii) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry); and
(c) with respect to the Arch National Municipal Bond Portfolio, there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state, territory or possession of the U.S. Government, the
District of Columbia, or any of their authorities, agencies, instrumentalities
or political subdivisions. The foregoing investment limitations with respect to
industry concentration of investments are fundamental investment limitations as
to both the Reorganizing Portfolios and the Existing Arch Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
purchase or sell real estate, except that the Portfolios may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interests in real estate. The foregoing limitations on investments in
real estate are fundamental as to both the Reorganizing Portfolios and the
Existing Arch Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
act as an underwriter of securities within the meaning of the Securities Act of
1933, except to the extent that the purchase of obligations directly from the
issuer thereof, or the disposition of securities, in accordance with a
Portfolio's investment objective, policies and limitations may be deemed to be
underwriting. The foregoing limitation on underwriting is fundamental as to both
the Reorganizing Portfolios and Existing Arch Portfolios.
-31-
<PAGE>
The Existing Arch Portfolios may not purchase securities of companies for
the purpose of exercising control. The foregoing limitation is fundamental as to
such Portfolios. The Reorganizing Portfolios are not subject to a similar
limitation.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
purchase securities on margin, make short sales of securities or maintain a
short position, except that (i) each Portfolio may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
portfolio securities, (ii) this limitation shall not apply to the Arch
Government & Corporate Bond Portfolio's transactions in options and futures
contracts and related options, and (iii) with respect to the Arrow Fixed Income
Portfolio, the deposit or payment of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin. The foregoing limitation is
fundamental as to both the Reorganizing Portfolios and the Existing Arch
Portfolios.
The Reorganizing Portfolios may not purchase or sell commodities,
commodity contracts, or commodities futures contracts. The Existing Arch
Portfolios may not purchase or sell commodities contracts, or invest in oil, gas
or mineral exploration or development programs.
PURCHASE AND REDEMPTION INFORMATION, EXCHANGE PRIVILEGES, DISTRIBUTION AND
PRICING. The purchase, redemption, exchange privileges and distribution policies
of the Arrow Portfolios and the Arch Portfolios are discussed below in Appendix
III to this Combined Proxy Statement/Prospectus.
OTHER INFORMATION. Arrow and Arch are registered as open-end, series, management
investment companies under the 1940 Act. Currently, Arrow offers four investment
portfolios and Arch offers seventeen investment portfolios.
Arrow is organized as a Massachusetts business trust and is subject to the
provisions of its Declaration of Trust and By-Laws. Arch is organized as a
Maryland corporation and is subject to the provisions of its Articles of
Incorporation and By-Laws. Although the rights of shareholders of a Maryland
corporation vary in certain respects from the rights of shareholders of a
Massachusetts business trust, the attributes of a share of common stock in Arch
are comparable to those of a share of beneficial interest in Arrow. Shares of
both Arrow and Arch: (i) are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held; (ii) will vote in
the aggregate and not by class except as otherwise expressly required by law or
when class voting is permitted by the respective Boards of Trustees or
Directors; and (iii) are entitled to participate equally in the dividends and
distributions that are declared with respect to a particular class and in the
net distributable assets of such class on
-32-
<PAGE>
liquidation. Shares of the Arch Portfolios have a par value of $.001, while the
shares of the Arrow Portfolios have no par value. In addition, shares of the
Arrow Portfolios and Arch Portfolios have no preemptive rights and only such
conversion and exchange rights as the respective Boards of Trustees or Directors
may grant in their discretion. When issued for payment as described in their
respective Prospectuses, Arrow Portfolio shares and Arch Portfolio shares are
validly issued, fully paid and non-assessable by such entities except as
required under Massachusetts law with respect to Arrow, and Maryland law with
respect to Arch. Arch is not required under Maryland General Corporation Law to
hold annual shareholder meetings and intends to do so only if required by the
1940 Act. Shareholders have the right to remove Directors. To the extent
required by law, Arch will assist in shareholder communications in such matters.
The foregoing is only a summary. Shareholders may obtain copies of the
Declaration of Trust and By-Laws of Arrow and the Articles of Incorporation and
By-laws of Arch upon written request at the addresses shown on the cover page of
this Combined Proxy Statement/Prospectus.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Arrow's Board of Trustees in
connection with the Meeting. It is expected that the solicitation of proxies
will be primarily by mail. Officers and service contractors of Arrow may also
solicit proxies by telephone, telegraph, facsimile or personal interview. Any
shareholder giving a proxy may revoke it at any time before it is exercised by
submitting to Arrow a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on __________, 1997
will be entitled to vote at the Meeting. On that date there were outstanding and
entitled to be voted ___________ shares of the Arrow Fixed Income Portfolio,
__________ shares of the Arrow Municipal Income Portfolio, __________ shares of
the Arrow Equity Portfolio. Each share or fraction thereof is entitled to one
vote or fraction thereof, and all shares will vote separately by Fund.
At [record date], 1997, Mercantile Bank owned of record with the power to
vote approximately _____% of the outstanding shares of the Arrow Portfolios on
behalf of its customers. Arrow and Arch have been advised by Mercantile Bank
that it intends to vote the shares of each Arrow Portfolio over which it has
voting power "FOR" the Reorganization.
If the accompanying proxy is executed and returned in time for the
Meeting, the shares covered thereby will be voted in
-33-
<PAGE>
accordance with the proxy on all matters that may properly come before the
Meeting or any adjournment thereof. For information on adjournment of the
meeting, see "Quorum" below.
SHAREHOLDER AND BOARD APPROVALS. The Reorganization Agreement (and the
transactions contemplated thereby) is being submitted for approval at the
Meeting by the holders of a majority of the outstanding shares of the Arrow
Fixed Income Portfolio, the Arrow Municipal Income Portfolio and the Arrow
Equity Portfolio in accordance with the provisions of Arrow's Declaration of
Trust and the requirements of the 1940 Act. The term "majority of the
outstanding shares" of an Arrow Portfolio as used herein means the lesser of (a)
67% of the shares of the particular Arrow Portfolio present at the Meeting if
the holders of more than 50% of the outstanding shares of the Arrow Portfolio
are present in person or by proxy, or (b) more than 50% of the outstanding
shares of such Arrow Portfolio.
In tallying shareholder votes, abstentions and broker non-votes (i.e.,
proxies sent in by brokers and other nominees that cannot be voted on a proposal
because instructions have not been received from the beneficial owners) will be
counted for purposes of determining whether or not a quorum is present for
purposes of convening the meeting. On the Reorganization proposal, abstentions
and broker non-votes will be considered to be a vote against the Reorganization
proposal.
The approval of the Reorganization by the shareholders of the
corresponding Arch Portfolios is not being solicited because their approval or
consent is not necessary for the Reorganization to be consummated.
At [record date], 1997, the name, address and share ownership of the
persons who owned of record 5% or more of the outstanding shares of the
Reorganizing Portfolios and the percentage of Investor A Shares of the
corresponding Existing Arch Portfolios that would be owned by those persons upon
the consummation of the Reorganizing Portfolios Transaction based on their
holdings on that date are as follows:
<TABLE>
<CAPTION>
=======================================================================================
PERCENTAGE OF PERCENTAGE OF
REORGANIZING INVESTOR A SHARES
PORTFOLIO'S OF EXISTING ARCH
REORGANIZING SHARES OWNED ON PORTFOLIO OWNED
PORTFOLIO NAME AND ADDRESS RECORD DATE ON CONSUMMATION
=======================================================================================
<S> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
At [record date], 1997, the name, address and share ownership of the
persons who owned of record 5% or more of the outstanding shares of the
Continuing Portfolio are listed below. Prior to the Continuing Portfolio
Transaction, the New Arch Portfolio will have only nominal assets. The persons
who owned of record 5% or more of the outstanding shares of the Continuing
-34-
<PAGE>
Portfolio will not materially change upon consummation of the Continuing
Portfolio Transaction.
<TABLE>
<CAPTION>
=======================================================================================
PERCENTAGE OF PERCENTAGE OF
CONTINUING INVESTOR A SHARES
PORTFOLIO'S OF NEW ARCH
CONTINUING SHARES OWNED ON PORTFOLIO OWNED
PORTFOLIO NAME AND ADDRESS RECORD DATE ON CONSUMMATION
=======================================================================================
<S> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
At [record date], 1997, the trustees and officers of Arrow, as a group,
owned less than 1% of the outstanding shares of each of the Arrow Portfolios. At
[record date], 1997, the directors and officers of Arch owned less than 1% of
the outstanding shares of each of the Arch Portfolios.
At [record date], 1997, the name, address, and share ownership of the
persons who owned of record 5% or more of the Trust Shares or Investor A Shares
of the Existing Arch Portfolios and the percentage of Trust Shares or Investor A
Shares of the Existing Arch Portfolios that would be owned by those persons upon
the consummation of the Reorganizing Portfolios Transaction based on their
holdings on that date are as follows:
<TABLE>
<CAPTION>
==================================================================================================
PERCENTAGE OF
EXISTING ARCH
EXISTING CLASS OF PERCENTAGE OF PORTFOLIO'S PERCENTAGE OF
ARCH SHARES CLASS OWNED ON SHARES OWNED ON CLASS OWNED ON
PORTFOLIO NAME AND ADDRESS OWNED RECORD DATE RECORD DATE CONSUMMATION
==================================================================================================
<S> <C> <C> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
APPRAISAL RIGHTS. Shareholders are not entitled to any rights of share appraisal
under Arrow's Declaration of Trust or under the laws of the Commonwealth of
Massachusetts in connection with the Reorganization. Shareholders have, however,
the right to redeem from Arrow their Arrow Portfolio shares at net asset value
until the effective time of the Reorganization with respect to each Arrow
Portfolio, and thereafter shareholders may redeem the Investor A Shares of the
Arch Portfolios acquired by them in the Reorganization at net asset value.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement and the transactions contemplated thereby are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. Any such adjournment will
require the affirmative vote of a majority of those shares affected by the
adjournment that are represented at
-35-
<PAGE>
the Meeting in person or by proxy. If a quorum is present, the persons named as
proxies will vote those proxies which they are entitled to vote FOR the
Reorganization Agreement, in favor of such adjournments, and will vote those
proxies required to be voted AGAINST such proposal against any adjournment. A
shareholder vote may be taken with respect to one or more Arrow Portfolios prior
to any such adjournment if sufficient votes have been received for approval with
respect to any such Arrow Portfolio. A quorum is constituted with respect to an
Arrow Portfolio by the presence in person or by proxy of the holders of more
than 50% of the outstanding shares of the Portfolio entitled to vote at the
Meeting. Arrow proxies properly executed and marked with a negative vote or an
abstention will be considered to be present at the Meeting for the purposes of
determining the existence of a quorum for the transaction of business.
ANNUAL MEETINGS. Arch does not presently intend to hold annual meetings of
shareholders for the election of directors and other business unless and until
such time as less than a majority of the directors holding office have been
elected by the shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Shareholders have
the right to call a meeting of shareholders to consider the removal of one or
more directors or for other matters and such meetings will be called when
requested in writing by the holders of record of 25% or more of Arch's
outstanding shares of common stock. To the extent required by law, Arch will
assist in shareholder communications on such matters.
ADDITIONAL INFORMATION ABOUT ARCH
Information about the Existing Arch Portfolios is included in the
Prospectus for Investor A Shares accompanying this Combined Proxy
Statement/Prospectus, which is incorporated by reference herein. Additional
information about these Portfolios is included in the Statement of Additional
Information relating to this Combined Proxy Statement/Prospectus and in these
Portfolios' Statement of Additional Information dated March 31, 1997 (as revised
May 28, 1997) which has been filed with the SEC. A copy of either Statement of
Additional Information may be obtained without charge by writing to Arch at 3435
Stelzer Road, Columbus, Ohio 43219, or by calling Arch at 1-800-452-ARCH (2724).
Arch is subject to the informational requirements of the Securities Exchange Act
of 1934 and the 1940 Act, as applicable, and, in accordance with such
requirements, files proxy materials, reports and other information with the SEC.
These materials can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Arch's offices listed above and at the SEC's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained
-36-
<PAGE>
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549, at
prescribed rates.
The current directors and officers of Arch (other than Lyle L. Meyer who
has indicated that he intends to resign from the Board of Directors on or about
September 16, 1997) will continue as directors and officers following the
Reorganization. Additionally, subject to the approval of Arch's shareholders,
Arch expects to add two additional directors to the Board of Directors either
prior to or shortly after the Reorganization. As of the date of this Combined
Proxy Statement/Prospectus, no nominees to serve as such additional directors
have been recommended by the Board of Directors for submission to shareholders.
The name and address of the current directors and officers, as well as
information concerning his or her principal occupations during the past five
years are set forth below.
<TABLE>
<CAPTION>
=======================================================================================================
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATIONS
WITH ARCH DURING PAST 5 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerry V. Woodham* 53 Chairman of Board; Treasurer, St. Louis
St. Louis President and University, August 1996 to
University Director present; Treasurer, Washington
3500 Lindell University, 1981 to 1995.
Fitzgerald Hall
St. Louis, MO 63131
- -------------------------------------------------------------------------------------------------------
Robert M. Cox, Jr. 51 Director Senior Vice President and
Emerson Electric Co. Advisory Director, Emerson
8000 W. Florissant Ave. Electric Co.
P.O. Box 4100
St. Louis, MO 63136-8506
- -------------------------------------------------------------------------------------------------------
Joseph J. Hunt 54 Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and
3544 Watson Road Ornamental Iron Workers
St. Louis, MO 63139 (International Labor Union),
January 1994 to present;
General Organizer, International
Association of Bridge,
Structural and Ornamental
Iron Workers, September 1983
to December 1993.
- -------------------------------------------------------------------------------------------------------
James C. Jacobsen 61 Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping
Chesterfield, MO 63017 softgoods); Vice Chairman,
Kellwood Company.
- -------------------------------------------------------------------------------------------------------
Lyle L. Meyer 60 Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation
Corporation (manufacturer of paperboard
8182 Maryland Avenue and packaging materials);
St. Louis, MO 63105 President, Smurfit Pension &
Insurance Services Company.
- -------------------------------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Ronald D. Winney* 54 Director and Treasurer, Ralston Purina
Ralston Purina Company Treasurer Company.
Checkerboard Square
St. Louis, MO 63164
- -------------------------------------------------------------------------------------------------------
W. Bruce McConnel, III 54 Secretary Partner of the law firm of
Suite 1100 Drinker Biddle & Reath LLP,
1345 Chestnut Street Philadelphia, Pennsylvania.
Philadelphia, PA 19107
- -------------------------------------------------------------------------------------------------------
Walter B. Grimm* 51 Vice President and Employee of BISYS Fund
3435 Stelzer Road Assistant Treasurer Services.
Columbus, OH 43219
- -------------------------------------------------------------------------------------------------------
David Bunstine* 32 Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services.
Columbus, OH 43219
=======================================================================================================
</TABLE>
- ------------------------
* Messrs. Woodham, Winney, McConnel, Grimm and Bunstine are "interested persons"
of the Fund as defined in the 1940 Act.
ADDITIONAL INFORMATION ABOUT ARROW
Information about the Arrow Portfolios is incorporated herein by reference
to its Prospectuses dated November 30, 1996 (as supplemented April 25, 1997) and
Statement of Additional Information dated November 30, 1996, copies of which may
be obtained without charge by writing or calling Arrow at the address and
telephone number shown on the cover page of this Combined Proxy
Statement/Prospectus. Reports and other information filed by Arrow can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates.
The name and address of each trustee and officer of Arrow as well as
information concerning his or her principal occupations during the past five
years are as follows:
-38-
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================
Date of Position(s) held Principal Occupations During Past
Name and Address Birth with Arrow 5 Years**
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John F. Donahue@* 7/28/24 Chairman and Chairman and Trustee, Federated
Federated Investors Tower Trustee Investors, Federated Advisers,
Pittsburgh, PA Federated Management, Federated
Research; Chairman and Director,
Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.;
Chief Executive Officer and
Director or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Thomas G. Bigley 2/3/34 Trustee Chairman of the Board, Children's
One Oxford Centre Hospital of Pittsburgh; formerly,
28th Floor Senior Partner, Ernst & Young LLP;
Pittsburgh, PA Director MED 3000 Group, Inc.;
Member of Executive Committee,
University of Pittsburgh; Director
or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. 6/23/37 Trustee President, Investment Properties
Wood/IPC Commercial Corporation; Senior Vice
Department President, John R. Wood and
John R. Wood & Associates, Inc., Realtors;
Associates, Realtors Partner or Trustee in private real
3255 Tamiami Trail North estate ventures in Southwest
Naples, FL Florida; formerly, President,
Naples Property Management, Inc.
and Northgate Village Development
Corporation; Director or Trustee
of the Funds.
- -------------------------------------------------------------------------------------------------------
William J. Copeland 7/4/18 Trustee Director and Member of the
One PNC Plaza Executive Committee, Michael
23rd Floor Baker, Inc; formerly, Vice
Pittsburgh, PA Chairman and Director, PNC Bank,
N.A. and PNC Bank Corp.; Director,
Ryan Homes, Inc.; Director or
Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
James E. Dowd 5/18/22 Trustee Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.;
Concord, MA Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.* 10/11/32 Trustee Professor of Medicine, University
3471 Fifth Avenue of Pittsburgh; Medical Director,
Suite 1111 University of Pittsburgh Medical
Pittsburgh, PA Center - Downtown; Member, Board
of Directors, University of
Pittsburgh Medical Center;
formerly, Hematologist,
Oncologist, and Internist,
Presbyterian and Montefiore
Hospitals; Director or Trustee of
the Funds.
- -------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@ 6/18/24 Trustee Attorney of Counsel, Miller,
Miller, Ament, Henry & Ament, Henny & Kochuba; Director,
Kochuba Eat'N Park Restaurants, Inc.;
205 Ross Street formerly, Counsel, Horizon
Pittsburgh, PA Financial, F.A., Western Region;
Director or Trustee of the Funds.
</TABLE>
-39-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Edward C. Gonzales* 10/22/30 President, Vice Chairman, Treasurer and
Federated Investors Tower Treasurer and Trustee, Federated Investors; Vice
Pittsburgh, PA Trustee President, Federated Advisers,
Federated Management, Federated
Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd; Executive Vice
President and Director, Federated
Securities Corp.; Trustee,
Federated Shareholder Services
Company; Trustee or Director of
some of the Funds; President,
Executive Vice President and
Treasurer of some of the Funds.
- -------------------------------------------------------------------------------------------------------
Peter E. Madden 3/16/42 Trustee Consultant; Former State
One Royal Palm Way Representative, Commonwealth of
100 Royal Palm Way Massachusetts; formerly,
Palm Beach, FL President, State Street Bank and
Trust Company and State Street
Boston Corporation;
Director or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Gregor F. Meyer 10/6/26 Trustee Attorney, Retired Member of
203 Kensington Court Miller, Ament, Henny & Kochuba;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants,
Inc.; Director or Trustee of the
Funds.
- -------------------------------------------------------------------------------------------------------
John E. Murray, Jr., J.D., 12/20/32 Trustee President, Law Professor, Duquesne
S.J.D. University; Consulting Partner,
President Mollica and Murray; Director or
Duquesne University Trustee of the Funds.
Pittsburgh, PA
- -------------------------------------------------------------------------------------------------------
Wesley W. Posvar 9/14/25 Trustee Professor, International Politics;
1202 Cathedral of Learning Management Consultant; Trustee,
University of Pittsburgh Carnegie Endowment for
Pittsburgh, PA International Peace, RAND
Corporation, Online Computer
Library Center, Inc., National
Defense University, and U.S. Space
Foundation; President Emeritus,
University of Pittsburgh; Founding
Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency
Management Advisory Board; and Czech
Management Center, Prague; Director or
Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Marjorie P. Smuts 6/21/35 Trustee Public Relations/ Marketing/
4905 Bayard Street Conference Planning; Director or
Pittsburgh, PA Trustee of the Funds.
</TABLE>
-40-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
J. Christopher Donahue 4/11/49 Executive President and Trustee, Federated
Federated Investors Tower Vice President Investors, Federated Advisers,
Pittsburgh, PA Federated Management and Federated
Research; President and Director,
Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.; Trustee, Federated
Shareholder Services Company and
Federated Shareholder Services;
Director, Federated Services
Company; President or Executive
Vice President of the Funds;
Director or Trustee of some of the
Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and
Trustee of the Company.
- -------------------------------------------------------------------------------------------------------
John W. McGonigle 10/26/38 Executive Executive Vice President,
Federated Investors Tower Vice President Secretary and Trustee, Federated
Pittsburgh, PA and Investors; Trustee, Federated
Secretary Advisers, Federated Management,
and Federated Research; Director,
Federated Research Corp. and
Federated Global Research Corp.;
Trustee, Federated Shareholder
Services Company; Director,
Federated Services Company;
President and Trustee, Federated
Shareholder Services; Director,
Federated Securities Corp.;
Executive Vice President and
Secretary of the Funds; Treasurer
of some of the Funds.
- -------------------------------------------------------------------------------------------------------
Richard B. Fisher 5/17/23 Vice President Executive Vice President and
Federated Investors Tower Trustee, Federated Investors;
Pittsburgh, PA Chairman and Director, Federated
Securities Corp.; President or
Vice President of some of the
Funds; Director or Trustee of
some of the Funds.
- -------------------------------------------------------------------------------------------------------
Charles L. Davis, Jr. 3/23/60 Vice President Vice President and Assistant
Federated Investors Tower and Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
=======================================================================================================
</TABLE>
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
** As used in the above, "the Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series:
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA
Trust; Federated Government Income Securities, Inc.; Federated Government
Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust;
-41-
<PAGE>
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federal Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated
Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government
Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; WesMark Funds and World Investment Series, Inc.
LITIGATION
Neither Arrow nor Arch is involved in any litigation that would have any
material adverse financial effect upon either the Arrow Portfolios or the Arch
Portfolios.
FINANCIAL HIGHLIGHTS
ARROW FINANCIAL HIGHLIGHTS. The tables set forth below present financial
information for shares of the Arrow Portfolios for the six-month period ended
March 31, 1997. This information is derived from the Arrow Portfolios' unaudited
financial statements for the six-month period ended March 31, 1997. The data
should be read in conjunction with the unaudited financial statements and
related notes which are contained in the Arrow Portfolios' Semi-Annual Report to
Shareholders dated March 31, 1997 and incorporated by reference into the
Statement of Additional Information related to this Combined Proxy
Statement/Prospectus. The financial highlights for the Arrow Portfolios for
prior periods are contained in Arrow's Prospectus dated November 30, 1996 (as
supplemented April 25, 1997) for the Arrow Portfolios and the financial
statements for prior periods are contained in the Arrow Portfolios' Annual
Report to Shareholders dated September 30, 1996 and are incorporated by
reference into Arrow's Combined Statement of Additional Information with respect
to the Arrow Portfolios dated November 30, 1996, which Prospectus and Combined
Statement of Additional Information are incorporated herein by reference.
-42-
<PAGE>
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Fixed Income Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ............... $ 9.70
Income from investment operations
Net investment income ............................ 0.33
Net realized and unrealized
gain/loss on investments ....................... (0.11)
----------
Total from investment operations ................. 0.22
Less Distributions
Distributions from net investment
income ......................................... (0.33)
Distributions from net realized
gains on investments ........................... --
----------
Total distributions .............................. (0.33)
----------
Net asset value, end of period ..................... $ 9.59
----------
Total return(a) .................................... 2.21%
Ratios to average net assets
Expenses ......................................... 1.32%*
Net investment income ............................ 5.74%*
Expense waiver/reimbursement(b) .................. 0.25%*
Supplemental Data
Net assets, end of period (000 omitted) .......... $ 28,229
Portfolio turnover ............................... 25%
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
-43-
<PAGE>
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Municipal Income Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ................... $ 10.26
Income from investment operations
Net investment income ................................ 0.22
Net realized and unrealized
gain/loss on investments ........................... (0.04)
----------
Total from investment operations ..................... 0.18
Less Distributions
Distributions from net investment
income ............................................. (0.22)
Distributions from net realized
gains on investments ............................... --
----------
Total distributions .................................. (0.22)
----------
Net asset value, end of period ......................... $ 10.22
----------
Total return(a) ........................................ 1.76%
Ratios to average net assets
Expenses ............................................. 1.37%*
Net investment income ................................ 4.29%*
Expense waiver/reimbursement(b) ...................... 0.84%*
Supplemental Data
Net assets, end of period (000 omitted) .............. $ 13,795
Portfolio turnover ................................... 7%
=================================================================================
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
-44-
<PAGE>
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Equity Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ................. $ 15.06
Income from investment operations
Net investment income .............................. 0.06
Net realized and unrealized
gain/loss on investments ......................... 1.14
------------
Total from investment operations ................... 1.20
Less Distributions
Distributions from net investment
income ........................................... (0.05)
Distributions from net realized
gains on investments ............................. (1.05)
------------
Total distributions ................................ 1.10
------------
Net asset value, end of period ....................... $ 15.16
------------
Total return(a) ...................................... 7.98%
Ratios to average net assets
Expenses ........................................... 1.14%*
Net investment income .............................. 0.50%*
Expense waiver/reimbursement(b) .................... 0.25%*
Supplemental Data
Net assets, end of period (000 omitted) ............ $ 58,555
Average commission rate paid(c) .................... $ 0.0905
Portfolio turnover ................................. 7%
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
-45-
<PAGE>
ARCH FINANCIAL HIGHLIGHTS. The tables set forth below present financial
information for the six-month period ended May 31, 1997 for Investor A Shares
and Trust Shares of the Existing Arch Portfolios. This information is derived
from the Existing Arch Portfolios' unaudited financial statements for the
six-month period ended May 31, 1997. The data should be read in conjunction with
the unaudited financial statements and related notes which are contained in
Arch's Semi-Annual Report to Shareholders dated May 31, 1997 and incorporated by
reference into the Statement of Additional Information related to this Combined
Proxy Statement/Prospectus. The financial highlights for the Investor A Shares
and Trust Shares of the Existing Arch Portfolios for prior periods are contained
in Arch's Prospectuses for Investor A Shares and Trust Shares dated March 31,
1997 (as supplemented May 28, 1997), and the financial statements for the
Existing Arch Portfolios for prior periods are contained in Arch's Annual Report
to Shareholders dated November 30, 1996 and are incorporated by reference into
Arch's Statement of Additional Information dated March 31, 1997 (as revised May
28, 1997), which Prospectuses and Statement of Additional Information are
incorporated herein by reference.
-46-
<PAGE>
Selected data for a share(a) of common stock
outstanding throughout the period indicated
Arch Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
====================================================================================
Six Months
Ended
May 31, 1997
(Unaudited)
------------------------------
Investor A Trust
Shares Shares
- ------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, Beginning of Period ..... $ 10.34 $ 10.34
----------- -----------
Income Activities
Net investment income .................. 0.28 0 .30
Net realized and unrealized gains
(losses) from investments ............ (0.30) (0.30)
----------- -----------
Total from Investment Activities ..... (0.02) --
----------- -----------
Distributions
Net investment income .................. (0.28) (0.30)
----------- -----------
Total Distributions .................. (0.28) (0.30)
----------- -----------
Net asset value, End of Period ........... $ 10.04 $ 10.04
=========== ===========
Total Returns ............................ (0.14%)(b)(c) 0.01%(c)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 4,607 $ 141,221
Ratio of expenses to average net
assets (including waivers) ........... $ 0.95%(d) 0.65%(d)
Ratio of net investment income to
average net assets (including waivers) 5.64%(d) 5.93%(d)
Ratio of expenses to average net
assets (before waivers)* ............. 1.05%(d) 0.75%(d)
Ratio of net investment income to
average net assets (before waivers)* . 5.54%(d) 5.83%(d)
Portfolio turnover ..................... 77% 77%
========================================================================================
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
shares as "Investor Shares". In addition, on February 1, 1991, the
Portfolio issued a second series of shares which were designated as "Trust
Shares". On September 27, 1994, the Portfolio redesignated the Investor
Shares as "Investor A" Shares.
(b) Excludes sales charge.
(c) Not Annualized.
(d) Annualized.
-47-
<PAGE>
Selected data for a share(a) of common stock
outstanding throughout the period indicated
Arch National Municipal Bond Portfolio
<TABLE>
<CAPTION>
========================================================================================
Six Months
Ended
May 31, 1997
(Unaudited)
---------------------------------
Investor A Trust
Shares Shares
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, Beginning of Period ..... $ 10.05 $ 10.05
----------- -----------
Income Activities
Net investment income .................. 0.27 .28
Net realized and unrealized gains
(losses) from investments ............ (0.10) (0.09)
----------- -----------
Total from Investment Activities ..... 0.17 0.19
----------- -----------
Distributions
Net investment income .................. (0.27) (0.28)
----------- -----------
Total Distributions .................. (0.27) (0.28)
----------- -----------
Net asset value, End of Period ........... $ 9.95 $ 9.96
=========== ===========
Total Returns ............................ 1.69%(a)(b) 1.91%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 543 $ 325,884
Ratio of expenses to average net
assets (including waivers) ........... 0.33%(c) 0.13%(c)
Ratio of net investment income to
average net assets (including waivers) 5.34%(c) 5.61%(c)
Ratio of expenses to average net
assets (before waivers)* ............. .82%(c) 0.73%(c)
Ratio of net investment income to
average net assets (before waivers)* . 4.85%(c) 5.01%(c)
Portfolio turnover ..................... 51% 51%
========================================================================================
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) Excludes sales charge.
(b) Not Annualized.
(c) Annualized.
-48-
<PAGE>
FINANCIAL STATEMENTS
The financial highlights for the Arrow Portfolios for the fiscal year
ended September 30, 1996 included in Arrow's Prospectus with respect to the
Arrow Portfolios dated November 30, 1996 (as supplemented April 25, 1997) and
the financial statements for the Arrow Portfolios for the fiscal year ended
September 30, 1996 contained in Arrow's Annual Report to Shareholders dated
September 30, 1996 for the Arrow Portfolios and incorporated by reference into
the Combined Statement of Additional Information for the Arrow Portfolios dated
November 30, 1996, which Prospectus and Combined Statement of Additional
Information are incorporated by reference into this Combined Proxy/Prospectus,
have been incorporated herein in reliance on the reports of KPMG Peat Marwick
LLP, independent auditors, given on the authority of that firm as experts in
accounting and auditing.
The financial highlights for the Investor A Shares and Trust Shares of the
Existing Arch Portfolios for the fiscal year ended November 30, 1996 included in
Arch's Prospectuses for Investor A Shares and Trust Shares of the Existing Arch
Portfolios dated March 31, 1997 (as supplemented May 28, 1997) and the financial
statements for the Existing Arch Portfolios contained in Arch's Annual Report to
Shareholders dated November 30, 1996 and incorporated by reference into Arch's
Statement of Additional Information dated March 31, 1997 (as revised May 28,
1997), which Prospectuses and Supplement of Additional Information are
incorporated by reference into this Combined Proxy Statement/ Prospectus, have
been incorporated herein in reliance on the reports of KPMG Peat Marwick LLP,
independent auditors, given on the authority of that firm as experts in
accounting and auditing.
OTHER BUSINESS
Arrow's Board knows of no other business to be brought before the Meeting.
However, if any other matters come before the Meeting, it is the intention that
proxies which do not contain specific restrictions to the contrary will be voted
on such matters in accordance with the judgment of the persons named in the
enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to Arrow in writing at the address
on the cover page of this Combined Proxy Statement/Prospectus or by telephoning
1-800-866-6040.
* * *
-49-
<PAGE>
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
-50-
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
THE ARCH FUND(R), INC.
AND
ARROW FUNDS
_____________________, 1997
I-1
<PAGE>
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C> <C>
I. Transfer of Assets of Arrow Funds............................. I-7
II. Liquidating Distributions and Termination of
Arrow......................................................... I-10
III. Effective Times of the Reorganization......................... I-12
IV. Certain Representations, Warranties and
Agreements of Arrow........................................... I-12
V. Certain Representations, Warranties and
Agreements of Arch............................................ I-20
VI. Shareholder Action on Behalf of the Acquired
Portfolios.................................................... I-25
VII. N-14 Registration Statement and Proxy
Solicitation Materials........................................ I-26
VIII. Delivery of Assets and Shares. . . . ......................... I-27
IX. Arch Conditions............................................... I-27
X. Arrow Conditions.............................................. I-35
XI. Tax Documents................................................. I-40
XII. Finder's Fees................................................. I-40
XIII. Announcements................................................. I-40
XIV. Further Assurances............................................ I-41
XV. Termination of Representations and
Warranties.................................................... I-41
XVI. Termination of Agreement...................................... I-41
XVII. Amendment and Waiver.......................................... I-43
XVIII. Governing Law................................................. I-43
XIX. Successors and Assigns........................................ I-43
XX. Beneficiaries................................................. I-44
XXI. Arrow Liability............................................... I-44
XXII. Arch Liability................................................ I-45
XXIII. Notices....................................................... I-45
XXIV. Expenses...................................................... I-46
XXV. Entire Agreement.............................................. I-47
XXVI. Counterparts.................................................. I-47
</TABLE>
I-2
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of
__________, 1997 between THE ARCH FUND(R), INC., a Maryland corporation
("Arch"), and ARROW FUNDS, a Massachusetts business trust ("Arrow").
WHEREAS, Arrow currently consists of four investment portfolios,
i.e. the Arrow Government Money Market Portfolio, the Arrow Fixed Income
Portfolio, the Arrow Municipal Income Portfolio and the Arrow Equity Portfolio;
WHEREAS, the parties intend that substantially all of the assets and
known liabilities of the Arrow Fixed Income Portfolio, the Arrow Municipal
Income Portfolio and the Arrow Equity Portfolio as of the Effective Time of the
Reorganization (as defined in Article III) with respect to each such Portfolio
be transferred to, and be acquired and assumed by, certain Arch portfolios in
exchange for Investor A Shares of the Arch portfolios which shall thereafter be
distributed by Arrow to the holders of the shares of its portfolios, all as
described in this Agreement (the "Reorganization");
WHEREAS, the parties intend that one of the Arch portfolios, the
ARCH Growth Equity Portfolio, will have nominal assets and liabilities before
the Reorganization and will
<PAGE>
continue the investment operations of the Arrow Equity Portfolio (the
"Continuing Portfolio") after the Reorganization;
WHEREAS, the parties intend that substantially all of the assets and
known liabilities of the Arrow Fixed Income Portfolio and the Arrow Municipal
Income Portfolio (the "Reorganizing Portfolios" and, together with the
Continuing Portfolio, the "Acquired Portfolios") shall be acquired and assumed
by the Arch Government & Corporate Bond Portfolio and the Arch National
Municipal Bond Portfolio, respectively;
WHEREAS, the parties intend that the Reorganization with respect to
the Reorganizing Portfolios will occur on a date that is prior to the
Reorganization with respect to the Continuing Portfolio;
WHEREAS, the parties have been advised that the shareholders of the
Arrow Government Money Market Portfolio will redeem their shares in that
portfolio prior to the Effective Time of the Reorganization with respect to the
Reorganizing Portfolios;
WHEREAS, the parties intend that the transfers of assets,
assumptions of liabilities, and distributions of Investor A Shares be treated as
tax-free reorganizations under Section
I-4
<PAGE>
368(a)(1)(C), (D) or (F) of the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the parties intend that in connection with the
Reorganization each of the Acquired Portfolios shall be terminated and Arrow
shall be deregistered as an investment company and dissolved under state law as
described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions hereof,
and intending to be legally bound hereby, Arch and Arrow agree as follows:
I. TRANSFER OF ASSETS OF ARROW FUNDS.
1.01 At the Effective Time of the Reorganization (as defined in Article
III) with respect to each of the Acquired Portfolios, all property of every
description, and all interests, rights, privileges and powers of such Acquired
Portfolio other than cash in an amount necessary to pay any unpaid dividends and
distributions as provided in Article IV, Section 4.01(h) (such assets, the
"Acquired Portfolio Assets"), shall be transferred and conveyed by such Acquired
Portfolio to Arch on behalf of one of its portfolios as set forth in Article I,
Section 1.02 (each, an "Acquiring Portfolio"), and shall be accepted by Arch on
behalf of such Acquiring Portfolio, and Arch, on behalf of such Acquiring
Portfolio, shall assume all known liabilities, whether
I-5
<PAGE>
accrued, absolute, contingent or otherwise, of such Acquired Portfolio reflected
in the calculation of such Acquired Portfolio's net asset value (the "Acquired
Portfolio Liabilities"), so that at and after the Effective Time of the
Reorganization with respect to such Acquired Portfolio: (i) all assets of such
Acquired Portfolio shall become and be the assets of its Acquiring Portfolio;
and (ii) all known liabilities of such Acquired Portfolio reflected as such in
the calculation of such Acquired Portfolio's net asset value shall attach to its
Acquiring Portfolio as aforesaid and may thenceforth be enforced against such
Acquiring Portfolio to the extent as if the same had been incurred by it.
Without limiting the generality of the foregoing, the Acquired Portfolio Assets
shall include all property and assets of any nature whatsoever, including,
without limitation, all cash, cash equivalents, securities, claims and
receivables (including dividend and interest receivables) owned by an Acquired
Portfolio, and any deferred or prepaid expenses shown as an asset on an Acquired
Portfolio's books, at the Effective Time of the Reorganization of such Acquired
Portfolio, and all good will, all other intangible property and all books and
records belonging to an Acquired Portfolio. Recourse by any person for the
Acquired Portfolio Liabilities assumed by an Acquiring Portfolio shall, at and
after the Effective Time of the Reorganization of such Acquired Portfolio, be
limited to such Acquiring Portfolio.
I-6
<PAGE>
1.02 The assets of each Acquired Portfolio shall be acquired by the
Acquiring Portfolio identified below opposite its name:
<TABLE>
<CAPTION>
Arrow Portfolios Arch Portfolios
- ---------------- ---------------
<S> <C>
Fixed Income Portfolio Government & Corporate Bond
Portfolio (Class D Common Stock)
Municipal Income Portfolio National Municipal Bond Portfolio
(Class N Common Stock)
Equity Portfolio Growth Equity Portfolio
(Class S Common Stock)
</TABLE>
1.03 In exchange for the transfer of the Acquired Portfolio Assets and the
assumption of the Acquired Portfolio Liabilities, Arch shall simultaneously
issue at the applicable Effective Time of the Reorganization to each Acquired
Portfolio a number of full and fractional (to the third decimal place) Investor
A Shares of the Acquiring Portfolio specified in Article I, Section 1.02, all
determined and adjusted as provided in this Agreement. The number of Investor A
Shares of each Acquiring Portfolio so issued will have an aggregate net asset
value equal to the net value of the Acquired Portfolio Assets that are
represented by the shares of the Acquired Portfolio, the holders of which shall
receive Investor A Shares of the Acquiring Portfolio, as specified in Article I,
Section 1.02, all determined and adjusted as provided in this Agreement.
1.04 The net asset value of the Investor A Shares of the Acquiring
Portfolios and the net asset value of the shares of the Acquired Portfolios
shall be determined as of the applicable
I-7
<PAGE>
Effective Time of the Reorganization with respect to each Acquired Portfolio.
1.05 The net asset value of the Investor A Shares of each Acquiring
Portfolio shall be computed in the manner set forth in such Acquiring
Portfolio's then current prospectuses under the Securities Act of 1933, as
amended (the "1933 Act"). In determining the value of the securities transferred
by the Acquired Portfolios to the Acquiring Portfolios, each security shall be
priced in accordance with the policies and procedures of Arch described in its
then current prospectuses and statements of additional information and adopted
by Arch's Board of Directors. For such purposes, price quotations and the
security characteristics relating to establishing such quotations shall be
determined by Arch, such determination being subject to the approval of Arrow,
and shall be subject to adjustment by the amount, if any, agreed to by the
parties hereto.
II. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF ARROW. Immediately after
the Effective Time of the Reorganization with respect to each Acquired
Portfolio, such Acquired Portfolio shall distribute in complete liquidation pro
rata to the record holders of its shares at the applicable Effective Time of the
Reorganization the Investor A Shares of the Acquiring Portfolio identified in
Article I, Section 1.02, to be received by the record holders of the shares of
such Acquired Portfolio. In addition, each shareholder of record of an Acquired
Portfolio
I-8
<PAGE>
shall have the right to receive any unpaid dividends or other distributions
which were declared before the applicable Effective Time of the Reorganization
with respect to the shares of such Acquired Portfolio that are held by the
shareholder at the applicable Effective Time of the Reorganization. In
accordance with instructions it receives from Arrow, Arch shall record on its
books the ownership of Investor A Shares of each Acquiring Portfolio by the
record holders of the shares of the Acquired Portfolio identified in Article I,
Section 1.02. No redemption or repurchase of any Acquiring Portfolio shares
credited to Arrow shareholders of record with respect to the Acquired Portfolio
shares represented by share certificates shall be permitted until such
certificates have been surrendered to Arch's transfer agent for cancellation.
All of the issued and outstanding shares of each Acquired Portfolio shall be
cancelled on the books of Arrow at the Effective Time of the Reorganization of
such Acquired Portfolio and shall thereafter represent only the right to receive
the Investor A Shares of the Acquiring Portfolio identified in Article I,
Section 1.02, following which the Acquired Portfolio's transfer books shall be
closed permanently. As soon as practicable after the Effective Time of the
Reorganization with respect to the Continuing Fund, Arrow shall make all filings
and take all other steps as shall be necessary and proper to effect its complete
dissolution, and shall file an application pursuant to Section 8(f) of the
Investment Company Act of 1940, as amended (the "1940 Act") for an order
declaring
I-9
<PAGE>
that it has ceased to be an investment company. After the Effective Time of the
Reorganization with respect to the Continuing Fund, Arrow shall not conduct any
business except in connection with its liquidation, dissolution, and
deregistration.
III. EFFECTIVE TIMES OF THE REORGANIZATION. The Effective Time of the
Reorganization with respect to the Reorganizing Portfolios shall be 4:00 p.m.,
Eastern Time, on November 14, 1997, or on such other date as may be agreed to in
writing by the duly authorized officers of both parties hereto. The Effective
Time of the Reorganization with respect to the Continuing Portfolio shall be
4:00 p.m., Eastern Time, on November 21, 1997, or on such other date as may be
agreed to in writing by the duly authorized officers of both parties hereto.
IV. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ARROW.
4.01 Arrow, on behalf of itself and each Acquired Portfolio, represents
and warrants to, and agrees with, Arch as follows:
4.01 (a) Arrow is a Massachusetts business trust duly created
pursuant to its Declaration of Trust for the purpose of acting
as a management investment company under the 1940 Act and is
validly existing
I-10
<PAGE>
under the laws of, and duly authorized to transact business
in, the Commonwealth of Massachusetts. It is registered with
the Securities and Exchange Commission (the "SEC") as an
open-end, management investment company under the 1940 Act and
such registration is in full force and effect.
4.01 (b) Arrow has power to own all of its properties and assets and,
subject to the approvals of shareholders referred to herein,
to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local
authorizations to carry on its business as now being conducted
and to consummate the transactions contemplated by this
Agreement.
4.01 (c) This Agreement has been duly authorized, executed and
delivered by Arrow, and represents Arrow's valid and binding
contract, enforceable in accordance with its terms, subject as
to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general
applicability relating to or affecting creditors' rights and
to general principles of equity. The execution and delivery of
this Agreement does not and will not, and the
I-11
<PAGE>
consummation of the transactions contemplated by this
Agreement will not, violate Arrow's Declaration of Trust or
By-Laws or any agreement or arrangement to which it is a party
or by which it is bound.
4.01 (d) Each Acquired Portfolio has elected to qualify and has
qualified as a regulated investment company under Part I of
Subchapter M of the Code, as of and since its first taxable
year; has been a regulated investment company under such Part
of the Code at all times since the end of its first taxable
year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company until the Effective
Time of the Reorganization with respect to such Acquired
Portfolio.
4.01 (e) All federal, state, local and foreign income, profits,
franchise, sales, withholding, customs, transfer and other
taxes, including interest, additions to tax and penalties
(collectively, "Taxes") relating to the Acquired Portfolio
Assets due or properly shown to be due on any return filed by
or on behalf of any Acquired Portfolio with respect to taxable
periods ending on or prior
I-12
<PAGE>
to, and the portion of any interim period up to, the date
hereof have been fully and timely paid or provided for; and
there are no levies, liens, or other encumbrances relating to
Taxes existing, threatened or pending with respect to the
Acquired Portfolio Assets. At the Effective Time of the
Reorganization with respect to each Acquired Portfolio, all
returns and reports of Arrow and such Acquired Portfolio
respecting Taxes required by law to have been filed by such
time shall have been filed.
4.01 (f) The financial statements of each Acquired Portfolio for its
fiscal year ended September 30, 1996, examined by KPMG Peat
Marwick LLP, copies of which have been previously furnished to
Arch, present fairly the financial position of each Acquired
Portfolio as of such date and the results of its operations
for the year then ended, in conformity with generally accepted
accounting principles.
4.01 (g) The unaudited financial statements of each Acquired
Portfolio for the six-month period ended March 31, 1997,
copies of which have been previously furnished to Arch,
present fairly the
I-13
<PAGE>
financial position of each Acquired Portfolio as of such date
and the results of its operations for the six-month period
then ended, in conformity with generally accepted accounting
principles.
4.01 (h) Prior to the Effective Time of the Reorganization
applicable to the Reorganizing Portfolios, each of
the Reorganizing Portfolios shall have declared a
dividend, with a record date and ex-dividend date
prior thereto, which, together with all previous
dividends, shall have the effect of distributing
to its shareholders all of its net investment
company income, if any, for the taxable year ended
on September 30, 1997 and for the period from said
date to and including the Effective Time of the
Reorganization applicable to the Reorganizing
Portfolios (computed without regard to any
deduction for dividends paid), and all of its net
capital gain, if any, realized in such taxable
year and period.
4.01 (i) At the Effective Time of the Reorganization with respect
to each Acquired Portfolio, there shall be no known
liabilities of such Acquired Portfolio, whether accrued,
absolute, contingent or
I-14
<PAGE>
otherwise, not reflected in the net asset value per share of
its outstanding shares.
4.01 (j) There are no legal, administrative or other proceedings
pending or, to Arrow's knowledge, threatened against Arrow or
an Acquired Portfolio which could result in liability on the
part of Arrow or an Acquired Portfolio.
4.01 (k) Subject to the approvals of shareholders referred to herein,
at the Effective Time of the Reorganization with respect to
each Acquired Portfolio, Arrow shall have full right, power
and authority to sell, assign, transfer and deliver the
Acquired Portfolio Assets of such Acquired Portfolio and, upon
delivery and payment for the Acquired Portfolio Assets as
contemplated herein, an Acquiring Portfolio shall acquire good
and marketable title thereto, free and clear of all liens and
encumbrances, and subject to no restrictions on the ownership
or transfer thereof (except as imposed by federal or state
securities laws).
4.01 (l) No consent, approval, authorization or order of any court or
governmental authority is required
I-15
<PAGE>
for the consummation by Arrow of the transactions contemplated
by this Agreement, except such as may be required under the
1933 Act, the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the 1940 Act, the rules and regulations under
those Acts, and state securities laws.
4.01 (m) Insofar as the following relate to Arrow, the registration
statement filed by Arch on Form N-14 relating to the shares of
certain Acquiring Portfolios that will be registered with the
SEC pursuant to this Agreement, which, without limitation,
shall include a proxy statement of Arrow and the prospectus of
Arch with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the
"N-14 Registration Statement"), on the effective date of the
N-14 Registration Statement, at the time of any shareholders'
meetings referred to herein and at each Effective Time of the
Reorganization: (i) shall comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act,
the rules and regulations thereunder, and state securities
laws, and (ii) shall not contain any untrue
I-16
<PAGE>
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading.
4.01 (n) All of the issued and outstanding shares of each Acquired
Portfolio have been duly and validly issued, are fully paid
and non-assessable, and were offered for sale and sold in
conformity with all applicable federal and state securities
laws, and no shareholder of an Acquired Portfolio has any
preemptive right of subscription or purchase in respect of
such shares.
4.01 (o) Arrow shall not sell or otherwise dispose of any shares of
an Acquiring Portfolio to be received in the transactions
contemplated herein, except in distribution to its
shareholders as contemplated herein.
4.01 (p) Arrow has valued, and will continue to value, its
portfolio securities and other assets in accordance with
applicable legal requirements.
I-17
<PAGE>
V. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ARCH.
5.01 Arch, on behalf of itself and each Acquiring Portfolio, represents
and warrants to, and agrees with, Arrow as follows:
5.01 (a) Arch is a corporation duly organized and validly
existing under the laws of the State of Maryland. It
is registered with the SEC as an open-end, management
investment company under the 1940 Act and such
registration is in full force and effect.
5.01 (b) Arch has power to own all of its properties and
assets and to carry out and consummate the
transactions contemplated herein, and has all
necessary federal, state and local authorizations
to carry on its business as now being conducted
and to consummate the transactions contemplated by
this Agreement.
5.01 (c) This Agreement has been duly authorized, executed
and delivered by Arch, and represents Arch's valid
and binding contract, enforceable in accordance with
its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization,
I-18
<PAGE>
arrangement, moratorium, and other similar laws of
general applicability relating to or affecting
creditors' rights and to general principles of
equity. The execution and delivery of this Agreement
does not and will not, and the consummation of the
transactions contemplated by this Agreement will not,
violate Arch's Article of Incorporation or By-Laws or
any agreement or arrangement to which it is a party
or by which it is bound.
5.01 (d) Each Acquiring Portfolio has elected or will elect
to qualify as a regulated investment company under
Part I of Subchapter M of the Code, and each of
the first two Acquiring Portfolios listed in
Article I, Section 1.02, has so qualified as of
and at all times since the end of its first
taxable year and intends to continue to so
qualify.
5.01 (e) The financial statements of each of the first two
Acquiring Portfolios listed in Article I, Section
1.02, for its fiscal year or period ended November
30, 1996, examined by KPMG Peat Marwick LLP, copies
of which have been previously furnished to Arrow,
present fairly the financial
I-19
<PAGE>
position of each such Acquiring Portfolio as of such
date and the results of its operations for the year
or period then ended, in conformity with generally
accepted accounting principles.
5.01 (f) The unaudited financial statements of each of the
first two Acquiring Portfolios listed in
Article I, Section 1.02, for the six-month period
ended May 31, 1997, copies of which have been
previously furnished to Arrow, present fairly the
financial position of each such Acquiring
Portfolio as of such date and the results of its
operations for the six-month period then ended, in
conformity with generally accepted accounting
principles.
5.01 (g) At the Effective Time of the Reorganization with
respect to each Acquiring Portfolio, there shall
be no known liabilities applicable to the Investor
A Shares of such Acquiring Portfolio, whether
accrued, absolute, contingent or otherwise, not
reflected in the net asset value per share of such
Acquiring Portfolio's Investor A Shares.
5.01 (h) There are no legal, administrative or other
proceedings pending or, to Arch's knowledge,
I-20
<PAGE>
threatened against Arch or an Acquiring Portfolio
which could result in liability on the part of Arch
or an Acquiring Portfolio.
5.01 (i) No consent, approval, authorization or order of
any court or governmental authority is required
for the consummation by Arch of the transactions
contemplated by this Agreement, except such as may
be required under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations under those
Acts, and state securities laws.
5.01 (j) Insofar as the following relate to Arch, the N-14
Registration Statement on its effective date, at
the time of any shareholders' meetings referred to
herein and at each Effective Time of the
Reorganization: (i) shall comply in all material
respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws,
and (ii) shall not contain any untrue statement of
a material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading.
I-21
<PAGE>
5.01 (k) The Investor A Shares of each Acquiring Portfolio
to be issued and delivered to an Acquired
Portfolio for the account of record holders of
shares of such Acquired Portfolio pursuant to the
terms hereof, shall have been duly authorized as
of the Effective Time of the Reorganization
applicable to such Acquiring Portfolio and, when
so issued and delivered, shall be duly and validly
issued, fully paid and non-assessable, and no
shareholder of Arch shall have any preemptive
right of subscription or purchase in respect
thereto.
5.01 (l) Arch has valued, and will continue to value, its
portfolio securities and other assets in
accordance with applicable legal requirements.
5.01 (m) The Board of Directors of Arch complies with the
requirements of Section 15(f)(1)(A) of the 1940
Act as of the date hereof. If its Board of
Directors ceases to comply with such requirements
at any time within three years after the Effective
Time of the Reorganization with respect to the
Continuing Portfolio, Arch will take such action
as is necessary to restore such compliance as soon
as is reasonably practicable.
I-22
<PAGE>
VI. SHAREHOLDER ACTION ON BEHALF OF THE ACQUIRED PORTFOLIOS.
6.01 As soon as practicable after the effective date of the N-14
Registration Statement, but in any event prior to the Effective Time of the
Reorganization applicable to the Reorganizing Portfolios and as a condition to
the Reorganization, Arrow shall hold a meeting of the shareholders of the
Acquired Portfolios for the purpose of considering and voting upon:
6.01 (a) Approval of this Agreement and the transactions
contemplated hereby, including, without
limitation:
(i) The transfer of the Acquired Portfolio Assets
belonging to each Acquired Portfolio to an
Acquiring Portfolio, and the assumption by such
Acquiring Portfolio of the Acquired Portfolio
Liabilities of such Acquired Portfolio, in
exchange for Investor A Shares of such
Acquiring Portfolio, as set forth in Article I,
Section 1.02.
(ii) The liquidation of each Acquired Portfolio
through the distribution to its record
I-23
<PAGE>
holders of Investor A Shares of an Acquiring
Portfolio as described in this Agreement.
6.01 (b) Such other matters as may be determined by the
parties hereto.
6.02 Approval of this Agreement and the transactions contemplated
herein by the shareholders of the Acquired Portfolios shall constitute the
waiver of the application of any fundamental policy of such Acquired Portfolios
that might be deemed to prevent them from taking the actions necessary to
effectuate the Reorganization as described, and such policies, if any, shall be
deemed to have been amended accordingly.
VII. N-14 REGISTRATION STATEMENT AND PROXY SOLICITATION MATERIALS. Arch
shall file the N-14 Registration Statement under the 1933 Act, and Arrow shall
file the combined prospectus/proxy statement contained therein under the 1934
Act and 1940 Act proxy rules, with the SEC as promptly as practicable. Each of
Arch and Arrow has cooperated and shall continue to cooperate with the other,
and has furnished and shall continue to furnish the other with the information
relating to itself that is required by the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under each of those Acts and state securities laws, to
be included in the N-14 Registration Statement.
I-24
<PAGE>
VIII. DELIVERY OF ASSETS AND SHARES. Delivery of the Acquired Portfolio
Assets and the Investor A Shares of each Acquiring Portfolio to be issued
pursuant to Article I shall occur at the Effective Time of the Reorganization
applicable to such Acquired Portfolio, or on such other date, and at such place
and time, as may be determined by the President or any Vice President of each
party hereto. To the extent any Acquired Portfolio Assets are, for any reason,
not transferred at the applicable Effective Time of the Reorganization, Arrow
shall cause such Acquired Portfolio Assets to be transferred in accordance with
this Agreement at the earliest practicable date thereafter.
IX. ARCH CONDITIONS.
9.01 The obligations of Arch hereunder with respect to each Acquiring
Portfolio shall be subject to the following conditions precedent:
9.01 (a) This Agreement and the transactions contemplated
by this Agreement shall have been approved by the
shareholders of each Acquired Portfolio, in the
manner required by law.
9.01 (b) Arrow shall have duly executed and delivered to
Arch such bills of sale, assignments, certificates
I-25
<PAGE>
and other instruments of transfer ("Transfer
Documents") as may be necessary or desirable to
transfer all right, title and interest of Arrow and
such Acquired Portfolio in and to the Acquired
Portfolio Assets of such Acquired Portfolio. The
Acquired Portfolio Assets shall be accompanied by all
necessary state stock transfer stamps or cash for the
appropriate purchase price therefor.
9.01 (c) All representations and warranties of Arrow made
in this Agreement shall be true and correct in all
material respects as if made at and as of each
Effective Time of the Reorganization. As of the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, there shall have been no
material adverse change in the financial condition
of such Acquired Portfolio since September 30,
1996, other than those changes incurred in the
ordinary course of business as an investment
company. No action, suit or other proceeding
shall be threatened or pending before any court or
governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the
transactions contemplated herein.
I-26
<PAGE>
9.01 (d) Arch shall have received an opinion of Dickstein,
Shapiro, Morin & Oshinsky LLP, addressed to Arch
in form reasonably satisfactory to Arch and dated
the Effective Time of the Reorganization
applicable to each Acquired Portfolio, substan-
tially to the effect that: (i) Arrow is a
Massachusetts business trust duly organized and
validly existing under the laws of the
Commonwealth of Massachusetts; (ii) the shares of
each Acquired Portfolio outstanding at the
applicable Effective Time of the Reorganization
are duly authorized, validly issued, fully paid
and non-assessable by such Acquired Portfolio, and
to such counsel's knowledge no shareholder of such
Acquired Portfolio has any option, warrant or pre-
emptive right to subscription or purchase in
respect thereof; (iii) this Agreement and the
Transfer Documents have been duly authorized,
executed and delivered by Arrow and represent its
legal, valid and binding contracts or instruments,
enforceable against Arrow in accordance with their
terms, subject to the effect of bankruptcy,
insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors'
rights generally and court decisions with respect
thereto, and such counsel shall not be required to
I-27
<PAGE>
express an opinion with respect to the application of
equitable principles in any proceeding, whether at
law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for
particular matters to an Acquired Portfolio and its
assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the
transactions contemplated by this Agreement will not,
violate the Declaration of Trust or By-Laws of Arrow
or any material agreement known to such counsel to
which Arrow is a party or by which Arrow is bound;
and (v) to such counsel's knowledge, no consent,
approval, authorization or order of any court or
governmental authority is required for the
consummation by Arrow of the transactions
contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations under those Acts,
and such as may be required under state securities
laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion,
provided such other counsel is reasonably acceptable
to Arch.
I-28
<PAGE>
9.01 (e) Arch shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arch and Arrow in
form reasonably satisfactory to them and dated the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, substantially to the
effect that for federal income tax purposes
(i) the transfer by each Acquired Portfolio of all
of its Acquired Portfolio Assets and Acquired
Portfolio Liabilities to the corresponding
Acquiring Portfolio, in exchange for Investor A
Shares of such Acquiring Portfolio, and the
distribution of said Investor A Shares to the
shareholders of such Acquired Portfolio, as
provided in this Agreement, will each constitute a
reorganization within the meaning of Section
368(a)(1)(C), (D) or (F) of the Code and with
respect to each reorganization, the Acquired
Portfolio and the Acquiring Portfolio will each be
considered "a party to a reorganization" within
the meaning of Section 368(b) of the Code; (ii) in
accordance with Sections 361(a), 361(c)(1) and
357(a) of the Code, no gain or loss will be
recognized by any Acquired Portfolio as a result
of such transactions; (iii) in accordance with
Section 1032(a) of the Code, no gain or loss will
be recognized by an Acquiring Portfolio as a
I-29
<PAGE>
result of such transactions; (iv) in accordance with
Section 354(a)(1) of the Code, no gain or loss will
be recognized by the shareholders of any Acquired
Portfolio on the distribution to them by such
Acquired Portfolio of Investor A Shares of an
Acquiring Portfolio in exchange for their shares of
such Acquired Portfolio; (v) in accordance with
Section 358(a)(1) of the Code, the aggregate basis of
Investor A Shares of an Acquiring Portfolio received
by each holder of shares of an Acquired Portfolio
will be the same as the aggregate basis of the
shareholder's Acquired Portfolio shares immediately
prior to the transactions; (vi) in accordance with
Section 362(b) of the Code, the basis of the Acquired
Portfolio Assets to each Acquiring Portfolio will be
the same as the basis of such Acquired Portfolio
Assets in the hands of an Acquired Portfolio
immediately prior to the exchange; (vii) in
accordance with Section 1223 of the Code, a
shareholder's holding period for Investor A Shares of
an Acquiring Portfolio will be determined by
including the period for which the shareholder held
the shares of an Acquired Portfolio exchanged
therefor, provided that the shareholder held such
shares of an Acquired Portfolio as a capital asset;
(viii) in accordance
I-30
<PAGE>
with Section 1223 of the Code, the holding period of
an Acquiring Portfolio with respect to the Acquired
Portfolio Assets will include the period for which
such Acquired Portfolio Assets were held by an
Acquired Portfolio; and (ix) in accordance with
Section 381(a) of the Code, each Acquiring Portfolio
will succeed to the tax attributes of the
corresponding Acquired Portfolio described in Section
381(c) of the Code.
9.01 (f) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act
nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act.
9.01 (g) The N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order
suspending such effectiveness shall have been
instituted or, to the knowledge of Arch,
contemplated by the SEC and the parties shall have
received all permits and other authorizations
necessary under state securities laws to
consummate the transactions contemplated by this
Agreement.
I-31
<PAGE>
9.01 (h) Arrow shall have delivered or caused to be
delivered to Arch each account, book, record or
other document of Arrow applicable to such
Acquired Portfolio which is required to be
maintained by Section 31(a) of the 1940 Act and
Rule 31a-1 to 31a-3 thereunder (regardless of what
person possesses the same), and a copy of all
agreements and instruments to which Arrow is a
party or signatory. Arrow has instructed its
service contractors to provide Arch upon request
with access to and copies of all documents
belonging to Arrow. Arrow shall have delivered to
Arch a list of the tax costs of the securities of
each Acquired Portfolio by lot and the holding
periods of such securities, as of the Effective
Time of the Reorganization applicable to each
Acquired Portfolio.
9.01 (i) The President or any Vice President of Arrow shall
have certified that Arrow has performed and
complied in all material respects with each of its
agreements and covenants required by this
Agreement to be performed or complied with by it
prior to or at each Effective Time of the
Reorganization.
I-32
<PAGE>
9.01 (j) The merger between Mercantile Bancorporation, Inc.
and Mark Twain Bancshares Inc., as described in
the Agreement and Plan of Merger dated as of
October 27, 1996, shall have been consummated.
9.01 (k) The Acquired Portfolio Assets to be transferred to
an Acquiring Portfolio under this Agreement shall
include no assets which such Acquiring Portfolio
may not properly acquire pursuant to its
investment objective, policies or limitations, or
may not otherwise lawfully acquire.
9.01 (l) With respect to the Reorganization of the
Continuing Portfolio, the Reorganization of both of
the Reorganizing Portfolios shall have been
consummated.
X. ARROW CONDITIONS.
10.01 The obligations of Arrow hereunder with respect to each Acquired
Portfolio shall be subject to the following conditions precedent:
10.01 (a) This Agreement and the transactions contemplated
by this Agreement shall have been approved by the
I-33
<PAGE>
shareholders of each Acquired Portfolio in the
manner required by law.
10.01 (b) All representations and warranties of Arch made in
this Agreement shall be true and correct in all
material respects as if made at and as of each
Effective Time of the Reorganization. As of the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, there shall have been no
material adverse change in the financial condition
of its Acquiring Portfolio since November 30,
1996, other than those changes incurred in the
ordinary course of business as an investment
company. No action, suit or other proceeding
shall be threatened or pending before any court or
governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the
transactions contemplated herein.
10.01 (c) Arrow shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arrow in form
reasonably satisfactory to it and dated the Effective
Time of the Reorganization applicable to each
Acquired Portfolio, substantially to the effect that:
(i) Arch is a corporation duly
I-34
<PAGE>
organized and validly existing under the laws of the
State of Maryland; (ii) the Investor A Shares of each
Acquiring Portfolio to be delivered at such time to
an Acquired Portfolio as provided for by this
Agreement are duly authorized and upon delivery will
be validly issued, fully paid and non-assessable by
such Acquiring Portfolio, and to such counsel's
knowledge no shareholder of an Acquiring Portfolio
has any option, warrant or pre-emptive right to
subscription or purchase in respect thereof; (iii)
this Agreement has been duly authorized, executed and
delivered by Arch and represents its legal, valid and
binding contract, enforceable against Arch in
accordance with its terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with
respect thereto, and such counsel shall not be
required to express an opinion with respect to the
application of equitable principles in any
proceeding, whether at law or in equity, or with
respect to the provisions of this Agreement intended
to limit liability for particular matters to an
Acquiring Portfolio and its assets; (iv) the
execution and delivery of this Agreement did not,
I-35
<PAGE>
and the consummation of the transactions contemplated
by this Agreement will not, violate the Articles of
Incorporation or By-Laws of Arch, or any material
agreement known to such counsel to which Arch is a
party or by which Arch is bound; and (v) to such
counsel's knowledge no consent, approval,
authorization or order of any court or governmental
authority is required for the consummation by Arch of
the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act,
the 1934 Act, the 1940 Act, the rules and regulations
under those Acts and such as may be required under
state securities laws. Such opinion may rely on the
opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is
reasonably acceptable to Arrow.
10.01 (d) Arrow shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arch and Arrow in
form reasonably satisfactory to them and dated the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, with respect to the matters
specified in Article IX, Section 9.01(e).
I-36
<PAGE>
10.01 (e) The N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order
suspending such effectiveness shall have been
instituted, or, to the knowledge of Arch,
contemplated by the SEC and the parties shall have
received all permits and other authorizations
necessary under state securities laws to
consummate the transactions contemplated by this
Agreement.
10.01 (f) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act
nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act.
10.01 (g) The President or any Vice President of Arch shall
have certified that Arch has performed and
complied in all material respects with each of its
agreements and covenants required by this
Agreement to be performed or complied with by it
prior to or at each Effective Time of the
Reorganization.
I-37
<PAGE>
10.01 (h) The merger between Mercantile Bancorporation, Inc.
and Mark Twain Bancshares Inc., described in the
Agreement and Plan of Reorganization dated as of
October 27, 1996, shall have been consummated.
10.02 (i) With respect to the Reorganization of the
Continuing Portfolio, the Reorganization of both
of the Reorganizing Portfolios shall have been
consummated.
XI. TAX DOCUMENTS. Arrow shall deliver to Arch at each Effective Time
of the Reorganization confirmations or other adequate evidence as to the
adjusted tax basis of the Acquired Portfolio Assets delivered to an Acquiring
Portfolio in accordance with the terms of this Agreement.
XII. FINDER'S FEES. Each party represents and warrants to each of the
other parties hereto that there is no person who is entitled to any finder's or
other similar fee or commission arising out of the transactions contemplated by
this Agreement.
XIII. ANNOUNCEMENTS. Any announcements or similar publicity with
respect to this Agreement or the transactions contemplated herein shall be at
such time and in such manner as the parties shall agree; provided, that nothing
herein shall prevent either party upon notice to the other party from making
I-38
<PAGE>
such public announcements as such party's counsel may consider advisable in
order to satisfy the party's legal and contractual obligations.
XIV. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments, and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
XV. TERMINATION OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Arrow and Arch set forth in this Agreement shall terminate
upon the consummation of the Reorganization.
XVI. TERMINATION OF AGREEMENT.
16.01 This Agreement may be terminated as to one or more investment
portfolios by a party at any time at or prior to (i) the Effective Time of the
Reorganization of the Reorganizing Portfolios, or (ii) with respect to the
Continuing Portfolio and the corresponding Acquired Portfolio, at any time at or
prior to the Effective Time of the Reorganization of the Continuing
I-39
<PAGE>
Portfolio, by its Board of Trustees, in the case of Arrow, or its Board of
Directors, in the case of Arch, as provided below:
(a) By Arch if the conditions set forth in Article IX
are not satisfied as specified in said Article;
(b) By Arrow if the conditions set forth in Article X
are not satisfied as specified in said Article; or
(c) By the mutual consent of the parties.
16.02 If a party terminates this Agreement as to one or more investment
portfolios because one or more of the conditions precedent have not been
fulfilled, or if this Agreement is terminated by mutual consent, this Agreement
will become null and void without any liability of either party or any of their
investment portfolios to the other; provided, however, that if such termination
is by Arch pursuant to Section 16.01(a) as a result of a breach by Arrow of any
of its representations, warranties or covenants in this Agreement, or such
termination is by Arrow pursuant to Section 16.01(b) as a result of a breach by
Arch of any of its representations, warranties or covenants in this Agreement,
nothing herein shall affect the non-breaching party's right to damages on
account of such other party's breach.
I-40
<PAGE>
XVII. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
Arrow, (a) the parties hereto may, by written agreement authorized by the Board
of Directors of Arch and the Board of Trustees of Arrow or their authorized
officers and with or without the approval of their shareholders, amend any of
the provisions of this Agreement, and (b) either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations (such waiver to be in writing and authorized by the President or any
Vice President of the waiving party with or without the approval of such party's
shareholders).
XVIII. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Maryland, without giving effect to the conflicts of law principles
otherwise applicable therein.
XIX. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
I-41
<PAGE>
XX. BENEFICIARIES. Nothing contained in this Agreement shall be deemed
to create rights in or eliminate liabilities of persons not parties hereto,
other than the successors and permitted assigns of the parties.
XXI. ARROW LIABILITY.
21.01 The names "Arrow Funds" and "Board of Trustees of Arrow Funds"
refer, respectively, to the trust created and the trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated July 1, 1992, which is hereby referred to and a copy of which is on
file at the office of the State Secretary of the Commonwealth of Massachusetts
and at the principal office of Arrow. The obligations of Arrow entered into in
the name or on behalf thereof by any of the trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the trustees, shareholders or representatives of Arrow personally, but bind
only the trust property, and all persons dealing with any series of shares of
Arrow must look solely to the trust property belonging to such series for the
enforcement of any claims against Arrow.
21.02 Both parties specifically acknowledge and agree that any
liability of Arrow under this Agreement with respect to an Acquired Portfolio,
or in connection with the transactions
I-42
<PAGE>
contemplated herein with respect to an Acquired Portfolio, shall be discharged
only out of the assets of that Acquired Portfolio and that no other portfolio of
Arrow shall be liable with respect thereto.
XXII. ARCH LIABILITY. Both parties specifically acknowledge and agree
that any liability of Arch under this Agreement with respect to an Acquiring
Portfolio, or in connection with the transactions contemplated herein with
respect to an Acquiring Portfolio, shall be discharged only out of the assets of
that Acquiring Portfolio and that no other portfolio of Arch shall be liable
with respect thereto.
XXIII. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to a nationally recognized
overnight courier service, in each case properly addressed to the party entitled
to receive such notice at the address or telecopier number stated below or to
such other address or telecopier number as may hereafter be furnished in writing
by notice similarly given by one party to the other party hereto:
I-43
<PAGE>
If to Arch:
Jerry V. Woodham, Chairman of the Board
The ARCH Fund, Inc.
Saint Louis University
Fitzgerald Hall
3500 Lindell Blvd.
St. Louis, MO 63131
Telecopier Number: (314) 977-2298
With a copy to:
Henry S. Hilles, Jr., Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2878
If to Arrow:
Arrow Funds
c/o Gail Cagney, Esq.
Federated Investors
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Telecopier Number: (412) 288-8141
With a copy to:
Matthew G. Maloney, Esq.
Dickstein, Shapiro, Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, DC 20037
Telecopier Number: (202) 887-0689
XXIV. EXPENSES. _________ shall be responsible for the payment of all
expenses incurred in connection with this Agreement and the transactions
contemplated hereby.
I-44
<PAGE>
XXV. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes any and all prior agreements, arrangements and understandings
relating to matters provided for herein.
XXVI. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers designated below as of the date
first written above.
THE ARCH FUND, INC.
ATTEST:
___________________________ By: _______________________
ARROW FUNDS
ATTEST:
____________________________ By: ________________________
I-45
<PAGE>
APPENDIX III
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services that
are available in connection with: (1) Investor A Shares and Trust Shares of the
Arch Portfolios, and (2) shares of the Arrow Portfolios.
A. GENERAL
1. SALES CHARGES AND EXEMPTIONS
Arch Portfolios -- Investor A Shares and Trust Shares
(a) Investor A Shares of each Arch Portfolio are sold with a
maximum 4.50% front-end sales charge.
(b) The Arch Portfolios offer sales charge exemptions to the
following classes of shareholders: (1) directors and officers of Arch and the
immediate family members of such individuals; (2) directors, current and retired
employees and participants in employee benefit/retirement plans (future and
current annuitants) of Mercantile Bancorporation Inc. or any of its affiliates
or BISYS or its affiliates and the immediate family members of such individuals;
(3) brokers, dealers, and agents who have a sales agreement with BISYS, and
their employees (and the immediate family members of such individuals); (4)
customers who purchase pursuant to a wrap fee program offered by any
broker-dealer or other financial institution or financial planning organization;
(5) individuals who purchase Investor A Shares with the proceeds of Trust Shares
or Institutional Shares redeemed in connection with a rollover of benefits paid
by a qualified retirement or employee benefit plan or distribution on behalf of
any other qualified account administered by Mercantile Bank or its affiliated or
correspondent banks, within 60 days of receipt of such payment; (6) investors
who purchase Investor A Shares through a payroll deduction program; (7)
employees of any sub-adviser to Arch; (8) former holders of Southwestern Bell
Visa cards that had been issued by Mercantile Bank of Illinois, N.A. and who
participated in the Automatic Investment Program (credit cards may not be used
for the purchase of Shares); (9) investors exchanging Trust Shares of a
Portfolio received from the distribution of assets held in a qualified trust,
agency or custodian account with the trust department of Mercantile Bank or any
of its affiliated or correspondent banks; or (10) other investment companies
distributed by BISYS or its affiliates.
The sales charge will not apply to purchases of Investor A
Shares made through the reinvestment of dividends and distributions on Investor
A Shares. The sales charge also will
III-1
<PAGE>
not apply to exchanges between Arch's portfolios to the extent that a
shareholder has a credit for previously paid sales charges on purchases of
Investor A Shares of Arch's portfolios.
(c) The Arch Portfolios also offer rights of accumulation,
quantity discounts, letter of intent programs and a reinvestment privilege that
can reduce or eliminate the sales charge payable on Investor A Share purchases.
(d) Trust Shares of the Arch Portfolios are sold without any
sales charge.
Arrow Portfolios
(a) Shares of the Arrow Portfolios are sold with a maximum
3.50% front-end sales charge.
(b) The Arrow Portfolios offer sales charge exemptions to the
following classes of shareholders: (1) current and retired employees of
Mercantile Bancorporation Inc. (formerly Mark Twain Bancshares, Inc.) and its
subsidiaries; (2) Arrow's Trustees and their spouses and children under 21; (3)
participants in all qualified retirement plans administered by Mercantile Bank
(formerly Mark Twain Bank); (4) investors who purchase shares through the
Mercantile Bank (formerly Mark Twain Bank) trust department; and (5) investors
purchasing pursuant to a Mercantile Investment Services, Inc. (formerly Mark
Twain Brokerage Services, Inc.) wrap fee program.
The sales charge will not apply to purchases of shares made
through the reinvestment of dividends and distributions. The sales charge also
will not apply to exchanges between Arrow's portfolios to the extent that a
shareholder has previously paid a sales charge on purchasing shares of any of
Arrow's portfolios.
(c) The Arrow Portfolios also offer rights of accumulation,
quantity discounts, concurrent purchase programs, letter of intent programs and
a reinvestment privilege that can reduce or eliminate the sales charge payable
on share purchases.
III-2
<PAGE>
B. PURCHASE POLICIES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Minimum Initial Investor A Shares - $1,000 for $1,000 for initial
Investments initial purchases of ($5,000 for purchases ($500 for
initial purchases in connection with initial purchases by
the Automatic Exchange Program, $50 employees of Mercantile
for initial purchases in connection Bancorporation, Inc.
with Automatic Investment Program, (formerly Mark Twain
no minimums for initial purchases Bancshares, Inc.) and
via a sweep program at a financial its subsidiaries and
institution, through a payroll their spouses and
deduction program or through a wrap children under 21 and
fee program). $250 for initial
purchases in connection
Trust Shares - None with an IRA).
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Subsequent Investor A Shares - $100 ($50 for $100 minimum for any
Investments subsequent purchases through an investor.
Automatic Investment Program, $25 for
subsequent purchases through a payroll
deduction program, no minimums for subsequent
purchases through a sweep or wrap fee
program).
Trust Shares - None
- -----------------------------------------------------------------------------------------------------------------------------------
Automatic Investor A Shares - Shares may be Shares may be purchased
Investment Plan purchased monthly through automatic on a regular basis once
deductions of at least $50 from a an account has been
shareholder's checking account. opened through automatic
deductions from a
Trust Shares - None shareholder's checking
account in the minimum
amount of $100.
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase Methods Investor A Shares - Shares are sold Shares are sold to
through broker/dealers or other customers of Mercantile
organizations acting on behalf of Bancorporation Inc.
their customers by telephone or by (formerly Mark Twain
mail. Bancshares, Inc.)
through an appropriate
Trust Shares - Shares are sold to subsidiary.
financial institutions acting on
their own behalf or on behalf of
certain qualified accounts.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment methods Investor A Shares - By check, bank By check or federal
draft, money order or federal funds. funds.
Trust Shares - By federal funds.
===================================================================================================================================
</TABLE>
An Arrow shareholder who, at the effective time of the Reorganization
with respect to a particular Arrow Portfolio, meets the Arrow, but not the Arch,
minimum investment requirement, will not be required to redeem the Arch Investor
A Shares received in connection with the Reorganization, unless the
III-3
<PAGE>
balance in the shareholder's account drops below the Arrow
minimum as a result of redemptions.
The Arch Portfolios and Arrow Portfolios each reserve the right to
reject any purchase order.
C. REDEMPTION POLICIES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Redemption Methods Investor A Shares - By mail or Through Mercantile
telephone through the same Bancorporation Inc.
broker/dealer organization that (formerly Mark Twain
placed the purchase order. Bancshares, Inc.) by
mail or telephone.
Trust Shares - By mail or telephone
through the same financial institution
that placed the purchase order.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment Methods Investor A Shares - By check or By check or wire.
wire to the broker/dealer Payment is normally made
organization that placed the within 7 days, but Arrow
purchase order. Payment is attempts to honor
normally made within three business requests received by
days, but Arch may take up to 7 mail within one business
days to honor redemption requests. day and requests
received by telephone
Trust Shares - By wire. Payment is within 5 business days.
normally made the next business
day.
- -----------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Investor A Shares - Yes ($10,000 Yes ($10,000 minimum
Plan minimum balance/$50 minimum per balance/$100 minimum per
transaction). transaction).
Trust Shares - None
===================================================================================================================================
</TABLE>
A shareholder of record may be required to redeem Investor A Shares or
Trust Shares in any Arch Portfolio upon 60 days' written notice if the balance
in the shareholder's account in that Portfolio drops below $500 as the result of
a redemption request. The Arrow Portfolios, upon thirty days' written notice,
may redeem shares in any account if the account balance falls below $1,000. The
Arch Portfolios and the Arrow Portfolios may also redeem shares involuntarily
when appropriate in light of their responsibilities under the 1940 Act, and may
make payment for redemptions in securities in lieu of cash.
III-4
<PAGE>
D. SHARE EXCHANGES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
===================================================================================================================================
<S> <C> <C>
By Mail Investor A Shares - Yes Yes.
Trust Shares - Yes
- -----------------------------------------------------------------------------------------------------------------------------------
By Telephone Investor A Shares - Yes Yes.
Trust Shares - Yes
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Investor A Shares - At least equal At least equal to minimum
to minimum required for the required for the Portfolio
Portfolio for which shares are for which shares are
exchanged. exchanged.
Trust Shares - None
===================================================================================================================================
</TABLE>
Investor A Shares of the Arch Portfolio may be exchanged for Investor A
Shares of another portfolio offered by Arch or for Trust Shares or Institutional
Shares in the same Portfolio if the shareholder has a qualified trust, agency or
custodian account with the trust department of Mercantile Bank or any of its
affiliated or correspondent banks and the Trust Shares or Institutional Shares
are to be held in that account. Trust Shares of an Arch Portfolio may be
exchanged for Trust Shares of another portfolio offered by Arch or for Investor
A Shares of the same portfolio in connection with the distribution of assets
held in a qualified trust, agency or custodian account with the trust department
of Mercantile Bank or any of its affiliated or correspondent banks.
Shareholders who exchange into any portfolio of Arch or Arrow that
imposes a sales charge may be subject to such sales charge if applicable and not
previously paid. Exchanges are only available in states where exchanges can
lawfully be made from one portfolio to another, and must satisfy the
requirements relating to the minimum initial investment in a portfolio. Arch and
Arrow reserve the right to reject any telephone exchange request and to modify
or terminate the exchange privilege (1) in the case of Arch, upon sixty days'
written notice to shareholders, or (ii) in the case of Arrow, with respect to
any shareholder who makes more than six exchanges in a year or more than three
exchanges in a calendar quarter, upon prior notification.
Arch also offers an Automatic Exchange Program enabling Investor A
shareholders to automatically exchange Investor A Shares of one portfolio for
Investor A Shares of another portfolio.
III-5
<PAGE>
E. RESPONSIBILITY FOR TELEPHONE INSTRUCTIONS
The Arch Portfolios and Arrow Portfolios and their respective service
contractors may be liable for losses due to unauthorized or fraudulent telephone
instructions if they do not follow reasonable procedures to verify the
authenticity of such instructions.
II. DIVIDENDS AND DISTRIBUTIONS
All Arch Portfolios and Arrow Portfolios distribute their net capital
gains to shareholders at least annually. The following table shows the
Portfolios' policies concerning the declaration and payment of dividends from
net investment income.
DIVIDENDS DECLARED DAILY/PAID MONTHLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
Government & Corporate Fixed Income Portfolio
Bond Portfolio
National Municipal Bond Portfolio Municipal Income Portfolio
DIVIDENDS DECLARED MONTHLY/PAID MONTHLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
Growth Equity Portfolio None
DIVIDENDS DECLARED AND PAID QUARTERLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
None Equity Portfolio
III-6
