ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
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SHARES
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ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
SHARES VALUE
COMMON STOCKS--95.4%
BANKING--12.9%
34,000 BankAmerica Corp. $
2,492,625
16,000 Citicorp 2,143,000
52,000 MBNA Corp. 2,106,000
25,000 NationsBank Corp. 1,546,875
10,000 Norwest Corp. 612,500,
Total 8,901,000
COMMERCIAL SERVICES--1.0%
34,000 Reynolds & Reynolds Co., Class A
660,875
CONSUMER DURABLES--1.9%
30,000 Brunswick Corp. 1,057,500
8,000 Mattel, Inc. 265,000
Total 1,322,500
CONSUMER NON-DURABLES--6.8%
25,000 PepsiCo, Inc. 1,014,063
66,000 Philip Morris Cos., Inc. 2,743,125
30,000 UST, Inc. 916,875
Total 4,674,063
ELECTRONIC TECHNOLOGY--15.0%
7,500 Compaq Computer Corp. 560,625
3,000 (a) Dell Computer Corp. 290,625
5,000 (a) EMC Corp. Mass 291,875
15,000 Hewlett-Packard Co. 1,043,438
30,000 Intel Corp. 2,769,375
15,000 Lucent Technologies, Inc. 1,220,625
40,000 (a) Sun Microsystems, Inc. 1,872,500
10,000 Tektronix, Inc. 674,375
20,000 United Technologies Corp. 1,620,000
Total $
10,343,438
ENERGY MINERALS--0.9%
15,000 Unocal Corp. 648,750
FINANCE--14.5%
46,000 Freddie Mac 1,621,500
22,000 Fannie Mae 1,034,000
80,000 Green Tree Financial Corp. 3,760,000
15,000 Household International, Inc. 1,697,813
27,000 Travelers Group, Inc. 1,842,750
Total 9,956,063
HEALTH SERVICES--1.3%
18,000 United Healthcare Corp. 900,000
HEALTH TECHNOLOGY--15.4%
25,000 Abbott Laboratories 1,598,438
25,000 (a) Amgen, Inc. 1,198,438
40,000 Medtronic, Inc. 1,880,000
14,000 Merck & Co., Inc. 1,399,125
25,000 Pfizer, Inc. 1,501,563
60,000 Schering Plough Corp. 3,090,000
Total 10,667,564
INDUSTRIAL SERVICES--2.6%
30,000 Halliburton Co. 1,560,000
5,000 (a) Rowan Companies, Inc. 178,125
Total 1,738,125
INSURANCE--1.3%
9,000 American International Group, Inc. 928,688
NON-ENERGY MINERALS--0.8%
13,000 Texas Industries, Inc. 551,688
PROCESS INDUSTRIES--1.3%
14,000 Avery Dennison Corp. $ 560,000
5,000 Du Pont (E.I.) de Nemours & Co. 307,813
Total 867,813
PRODUCER MANUFACTURING--10.8%
44,000 Allied-Signal, Inc. 1,870,000
12,000 General Electric Co. 816,750
34,000 Illinois Tool Works, Inc. 1,700,000
8,000 (a) Thermo Electron Corp. 320,000
15,000 (a) U.S. Filter Corp. 645,938
25,000 Xerox Corp. 2,104,688
Total 7,457,376
RETAIL TRADE--6.6%
7,000 Dayton-Hudson Corp. 419,563
12,500 Dollar General Corp. 425,781
20,000 Home Depot, Inc. 1,042,500
25,000 (a) Kroger Co., Inc. 754,688
12,000 (a) Safeway, Inc. 652,500
35,000 Wal-Mart Stores, Inc. 1,281,875
Total 4,576,907
TRANSPORTATION--0.7%
6,000 (a) UAL Corp. 507,750
UTILITIES--1.6%
25,000 (a) Airtouch Communications, Inc. 885,930
5,000 Williams Cos., Inc. (The) 234,063
Total 1,119,993
TOTAL COMMON STOCKS (IDENTIFIED COST 65,822,593
$40,309,549)
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MUTUAL FUNDS--4.5%
740,368 Aquila Funds Cash Asset Treasury Fund $
740,368
2,332,468 Financial Square Treasury Obligations Fund 2,332,468
TOTAL MUTUAL FUNDS (AT NET ASSET VALUE) 3,072,836
TOTAL INVESTMENTS (IDENTIFIED COST $
$43,382,385)(B) 68,895,429
(a) Non-income producing security.
(b) The cost for federal tax purposes amounts to $43,430,157. The net
appreciation of investments on a federal tax basis amounts to $25,465,272
which is comprised of $25,800,011 appreciation and $334,739 depreciation
at September 30, 1997.
Note: The categories of investments are shown as a percentage of net
assets ($68,965,117) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
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ARROW EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
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ASSETS:
Total investments in securities, at value
(identified cost $43,382,385, and tax cost $43,430,157) $ 68,895,429
Cash 41,023
Income receivable 92,292
Deferred expenses 229
Total assets 69,028,973
LIABILITIES:
Payable for shares redeemed $ 49,167
Accrued expenses 14,689
Total liabilities 63,856
Net Assets for 3,678,202 shares outstanding $ 68,965,117
NET ASSETS CONSIST OF:
Paid in capital $ 38,759,704
Net unrealized appreciation of investments 25,513,044
Accumulated net realized gain on investments 4,669,446
Undistributed net investment income 22,923
Total Net Assets $ 68,965,117
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER
SHARE:
Net Asset Value Per Share ($68,965,117 / 3,678,202 shares $18.75
outstanding)
Offering Price Per Share (100/96.50 of $18.75)* $19.43
Redemption Proceeds Per Share $18.75
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial
Statements)
fees 1,475
Auditing fees 13,006
Legal fees 3,471
Portfolio accounting fees 46,434
Distribution services fee 156,027
Share registration costs 16,223
Printing and postage 5,591
Insurance premiums 3,971
Miscellaneous 5,451
Total expenses 870,393
Waivers --
Waiver of distribution services fee (156,027 )
Net expenses 714,366
Net investment income 275,232
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 4,917,751
Net change in unrealized appreciation of investments 13,265,621
Net realized and unrealized gain on investments 18,183,372
Change in net assets resulting from operations $ 18,458,604
(See Notes which are an integral part of the Financial
Statements)
$ 275,232 423,781
Net realized gain (loss) on investments
($4,926,379 and $4,600,860 net gains, respectively, as
computed for federal tax purposes) 4,917,751 4,612,534
Net change in unrealized appreciation/depreciation of 13,265,621) (11,835
investments
Change in net assets resulting from operations 18,458,604 5,024,480
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (330,048 ) (381,222
Distributions from net realized gains (3,886,419) (218,057
Change in net assets resulting from distributions to
shareholders (4,216,467) (599,279
SHARE TRANSACTIONS--
Proceeds from sale of shares 15,587,127 12,339,545
Net asset value of shares issued to shareholders in payment of
distributions declared 407,045 47,007
Cost of shares redeemed (16,843,94) (4,946,669
Change in net assets resulting from share transactions (849,772 ) 7,439,883
Change in net assets 13,392,365 11,865,084
NET ASSETS:
Beginning of period 55,572,752 43,707,668
End of period (including undistributed net investment income
of $22,923 and $77,739, respectively) $ 68,965,117 55,572,752
(See Notes which are an integral part of the Financial Statements)
1997 11993(A)
NET ASSET VALUE,
BEGINNING OF 15.06 13.80 9.74 10.02 10.00 $ $ $ $ $
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment 0.08 0.12 0.10 0.07 0.04
income
Net realized
and
unrealized 4.75 1.32 4.05 (0.25) 0.02
gain (loss) on
investments
Total from
investment 4.83 1.44 4.15 (0.18) 0.06
operations
LESS
DISTRIBUTIONS
Distributions
from net (0.09) (0.11) (0.09) (0.07) (0.04)
investment
income
Distributions
from net
realized gain (1.05) (0.07) --- (0.03) ---
on
investments
Total (1.14) (0.18) (0.09) (0.10) (0.04)
distributions
NET ASSET VALUE,
END OF PERIOD 18.75 15.06 13.80 9.74 10.02 $ $ $ $ $
TOTAL RETURN (B) 33.85% 10.48% 42.90% (1.84%) 0.60%
RATIOS TO
AVERAGE NET
ASSETS
Expenses 1.14% 1.17% 1.28% 1.36% 1.32%*
Net investment 0.44% 0.86% 0.90% 0.74% 0.62%*
income
Expense waiver/
reimbursement 0.25% 0.28% 0.30% 0.28% 0.30%*
(c)
SUPPLEMENTAL DATA
Net assets,
end of period 68,965 55,573 43,708 30,282 31,159 $ $ $ $ $
(000 omitted)
Average
commission 0.0815 0.0756 - - - $ $
rate paid (d)
Portfolio 42% 45% 45% 127% 54%
turnover
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993. (b) Based on net asset value, which
does not reflect the sales charge or contingent deferred sales charge, if
applicable. (c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above. (d) Represents total commissions
paid on portfolio securities divided by total portfolio shares purchased or sold
on
which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
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ARROW EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION
Arrow Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act") as an open-end, management investment company. The
Trust consists of four portfolios. The financial statements included herein are
only those of Arrow Equity Portfolio (the "Fund"), a diversified portfolio. The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held. The Fund's investment objective is
capital appreciation by investing primarily in equity securities.
On October 27, 1996, Mark Twain Bancshares, Inc., the parent company of Mark
Twain Bank, entered into a definitive agreement whereby Mark Twain Bancshares
Inc. merged with Mercantile Bancorp Inc., a bank holding company headquartered
in St. Louis (the "Merger"). As a result, upon completion the Merger, all
existing subsidiaries of Mark Twain Bancshares Inc., including Mark Twain Bank,
were merged into Mercantile Bancorp Inc. and its subsidiaries. The Merger was
effective April 25, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS - Listed equity securities are valued at the last sale
price reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at the
time of purchase may be valued at amortized cost, which approximates fair
market value. Investments in other open-end regulated investment companies
are valued at net asset value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS - Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES - It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES - The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from the Fund's commencement date.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER - Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
YEAR ENDED YEAR ENDED
SEPTEMBER SEPTEMBER
30, 30, 1996
1997
Shares sold 993,820 867,438
Shares issued to
shareholders in 26,717 3,298
payment of distributions
declare
Shares redeemed (1,032,878) (346,978)
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Net change resulting (12,341) 523,758
from share transactions
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE - Mississippi Valley Advisors, Inc., the Fund's
investment advisor (the "Advisor"), receives for its services an annual
investment advisory fee equal to 0.75% of the Fund's average daily net
assets. The Advisor may voluntarily choose to waive any portion of its fee.
The Advisor can modify or terminate this voluntary waiver at any time at its
sole discretion.
Mississippi Valley Advisors, Inc. became the advisor on April 25, 1997.
Prior to April 25, 1997 Mark Twain Bank was the investment advisor.
The fees earned by each advisor for the year ended September 30, 1997
are as follows.
ADVISER NAME AMOUNT
Mark Twain Bank $
254,011
Mississippi Valley Advisors $
214,069
Total advisory fees $
468,080
ADMINISTRATIVE FEE - Federated Administrative Services ("FAS") provides the
Fund with certain administrative personnel and services. The fee paid to FAS
is based on the level of average aggregate net assets of the Fund for the
period.
DISTRIBUTION SERVICES FEE - The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of the Fund's shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets
of the Fund shares, annually, to FSC. The distributor may voluntarily choose
to waive any portion of its fee. The distributor can modify or terminate this
voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES - Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the
Fund. The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES - FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES - Mercantile Bank National Association is the Fund's
custodian. The fee is based on the level of the Fund's average daily net
assets for the period, plus out-of-pocket expenses.
Mercantile Bank National Association became the Fund's custodian on April 25,
1997. Prior to April 25, 1997 Mark Twain Bank was the Fund's custodian. The
fees earned by each custodian for the year ended September 30, 1997 are as
follows.
CUSTODIAN NAME AMOUNT
Mark Twain Bank $
13,541
Mercantile Bank National $
Association 10,451
Total custodian fees $
23,992
ORGANIZATIONAL EXPENSES - Organizational expenses of $17,560 were borne
initially by FAS. The Fund has agreed to reimburse FAS for the organizational
expenses during the five year period following effective date. For the period
ended September 30, 1997, the Fund paid $5,136 pursuant to this agreement.
GENERAL - Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
PURCHASES $ 27,272,804
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SALES $ 34,074,520
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6. SUBSEQUENT EVENT
The Trust entered an Agreement and Plan of Reorganization with The ARCH Fund,
Inc. pursuant to which all the assets and liabilities of the Arrow Equity
Portfolio were transferred to the ARCH Growth Equity Portfolio. The
reorganization, which qualified as a tax-free exchange for federal income tax
purposes, was completed on November 21, 1997, following approval by shareholders
of the Trust at a special shareholder meeting held on November 12, 1997. The
Fund's investment advisor, Mississippi Valley Advisors, Inc., has remained as
the advisor after the reorganization. The ARCH Growth Equity Portfolio has
retained the investment objectives and assumed the financial history of the
Arrow Equity Portfolio.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Trustees of the
ARROW FUNDS:
We have audited the accompanying statement of assets and liabilities of the
Arrow Equity Portfolio ("the Fund"), including the portfolio of investments, as
of September 30, 1997, and the related statement of operations, statement of
changes in net assets and the financial highlights for each of the periods
indicated herein. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included verification of securities owned as of September 30, 1997,
by confirmation with the custodian and brokers and other appropriate audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the 1997 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Arrow Equity Portfolio at September 30, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for each of the
periods indicated herein, in conformity with generally accepted accounting
principles.
Columbus, Ohio
January 23, 1998
