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THE VALIANT FUND
CLASS E SHARES
The Valiant Fund (the "Trust") is an open-end investment company comprised
of four separate investment portfolios (the "Portfolios"):
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<S> <C>
U.S. TREASURY MONEY MARKET PORTFOLIO GENERAL MONEY MARKET PORTFOLIO
U.S. TREASURY INCOME PORTFOLIO TAX-EXEMPT MONEY MARKET PORTFOLIO
</TABLE>
The investment objective of each Portfolio is to obtain as high a level of
current income as is consistent with the preservation of capital and liquidity.
The Tax-Exempt Money Market Portfolio seeks primarily income exempt from federal
income tax. The Trust offers banks and other institutional investors an
economical and convenient means of investing in professionally managed money
market funds.
The Trust offers five classes of shares. The five classes of shares are
identical, except as to the services offered to and the expenses borne by each
class. Before purchasing, you should determine which class is appropriate for
you. THIS PROSPECTUS RELATES ONLY TO CLASS E SHARES.
Each Portfolio is designed exclusively for investment of short-term monies
held in institutional accounts. Shares of the Portfolios may be purchased by
banks and other institutional investors that have entered into service
agreements with Integrity Investments, Inc. (the "Distributor"), 1-800-828-2176.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor ought to know before investing. Please read it carefully
and retain it for future reference. Certain additional information is contained
in a Statement of Additional Information ("SAI") dated December 15, 1998, as
supplemented March 31, 1999 and as revised from time to time, which has been
filed with the Securities and Exchange Commission, is incorporated herein by
reference and is available upon request and without charge by calling the
Distributor at the telephone number shown above.
INVESTMENTS IN THE PORTFOLIOS ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT A PORTFOLIO'S OBJECTIVES WILL BE
ACHIEVED OR THAT A PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND
INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS -- MARCH 31, 1999
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CONTENTS
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Expense Information......................................... 3
Investment Objectives and Policies.......................... 5
Who Should Invest........................................... 6
Purchases and Redemptions................................... 6
Management of the Portfolios................................ 8
Management Fees and Other Expenses.......................... 9
Year 2000 Issues............................................ 10
Valuation of Shares......................................... 11
Distributions and Taxes..................................... 11
Performance Information..................................... 12
Investment Restrictions..................................... 13
Certain Investment Strategies, Policies and Risk
Considerations............................................ 13
Appendix.................................................... 18
</TABLE>
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EXPENSE INFORMATION
<TABLE>
<CAPTION>
U.S. TREASURY U.S. TREASURY GENERAL TAX-EXEMPT
MONEY MARKET INCOME MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------ ------------
CLASS E CLASS E CLASS E CLASS E
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Sales Load Imposed on Purchases.... None None None None
Sales Load Imposed on Reinvested
Dividends.......................... None None None None
Deferred Sales Load................ None None None None
Redemption Fees.................... None None None None
Annual Fund Operating Expenses (as
a percentage of average net
assets)
Management Fees**.................. 0.20% 0.20% 0.20% 0.20%
12b-1 Fees*........................ 0.80% 0.80% 0.80% 0.80%
Other Expenses
(after expense
reimbursement)**................ 0.00% 0.00% 0.00% 0.00%
---- ---- ---- ----
Total Fund Operating Expenses
(after expense
reimbursement)**................ 1.00% 1.00% 1.00% 1.00%
==== ==== ==== ====
</TABLE>
- ---------------
* The Trust has adopted a Distribution and Shareholder Servicing Plan for the
Class E Shares (the "Plan"). Payments under the Plan are authorized at the
rate of up to 0.80% of the average daily net assets. See "Management Fees and
Other Expenses" for further information on the Plan.
** Management fees are paid by each Portfolio to Integrity Management &
Research, Inc. (the "Manager") for managing its investments and business
affairs. All operating expenses except the Management Fee are paid by the
Manager and are not charged directly to an investor's account. The Manager
has declared voluntary expense limitations for the Class E shares of each
Portfolio of 1.00% of average daily net assets of Class E shares. The Manager
will voluntarily reimburse any expenses above the expense limitations. The
expense limitations are voluntary but will remain in effect through December
1999. The expense limitations may be removed at any time thereafter with 90
days' prior notice to existing shareholders. Non-recurring or extraordinary
expenses are generally excluded in the determination of expense ratios of the
Portfolios for purposes of determining any required expense reimbursement.
Quotations of yield for any period when an expense limitation is in effect
will be greater than if the limitation had not been in effect. For more
information, see "Management Fees and Other Expenses," and "Purchases and
Redemptions."
The purpose of this table is to assist an investor in understanding the
various costs and expenses that the investor will bear directly or indirectly.
There are no sales charges or redemption fees. However, certain institutional
investors may charge their customers fees in addition to those described herein.
See "Purchases and Redemptions."
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EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period.
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1 YEAR 3 YEARS
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U.S. Treasury Money Market Portfolio................ $10 $32
U.S. Treasury Income Portfolio...................... $10 $32
General Money Market Portfolio...................... $10 $32
Tax-Exempt Money Market Portfolio................... $10 $32
</TABLE>
THE EXAMPLES ARE BASED ON ASSUMED PERFORMANCE LEVELS AND SHOULD NOT BE
CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
In addition to the Class E shares offered by this prospectus, the Trust
offers four other classes of shares. Each class of shares represents an interest
in the same assets of each Portfolio and is identical in all respects except
that each class is subject to lower annual distribution and service fees, which
will affect performance, and each class has separate or exclusive voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of the other class. An investor may obtain
prospectuses relating to the Class A and Class B shares, Class C and Class D
shares, respectively, by calling the Distributor at 1-800-828-2176.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is to obtain as high a level of
current income as is consistent with the preservation of capital and liquidity.
The Tax-Exempt Money Market Portfolio seeks primarily income exempt from federal
income tax. There is no assurance that a Portfolio will achieve its investment
objective. A Portfolio's investment objective is fundamental and may not be
changed at any time without shareholder approval. Unless otherwise indicated, a
Portfolio's investment policies are not fundamental and may be changed at any
time without shareholder approval. As a matter of non-fundamental policy, the
Portfolios will only purchase securities, in addition to U.S. Government
Obligations (as defined below), that are rated in the highest category by at
least one nationally recognized statistical rating organization ("NRSRO") or, if
unrated, are determined by the sub-adviser to be of equivalent quality. (See
"Management of the Portfolios" for information about the sub-adviser, and see
the Appendix for a description of NRSRO ratings.)
The U.S. Treasury Money Market Portfolio invests all of its assets in
securities issued or guaranteed by the United States Government or its agencies,
authorities or instrumentalities ("U.S. Government Obligations") which are
backed by the full faith and credit of the United States and repurchase
agreements collateralized by such U.S. Government Obligations. Under normal
market conditions, at least 65% of its total assets will be invested in direct
U.S. Treasury obligations and repurchase agreements collateralized by U.S.
Treasury obligations. Income earned from U.S. Government Obligations is
generally exempt from state and local income tax. Income earned from repurchase
agreement transactions generally is not exempt from state and local income tax.
(See "Distributions and Taxes.")
The U.S. Treasury Money Market Portfolio has been rated "AAAm" by Standard
& Poor's Corporation ("S&P") and "Aaa" by Moody's Investors Service, Inc.
("Moody's"). Such quality rating is based on, among other things, an analysis of
the Portfolio's investment strategies, operational policies and management. S&P
and Moody's also may undertake an ongoing analysis and assessment of these
criteria in order to update the Portfolio's rating.
The U.S. Treasury Income Portfolio invests all of its assets in U.S.
Government Obligations which are backed by the full faith and credit of the
United States, the interest income from which generally will not be subject to
state income tax. (See "Distributions and Taxes.") Under normal market
conditions, at least 65% of its total assets will be invested in U.S. Treasury
obligations such as U.S. Treasury bills, notes and bonds.
The General Money Market Portfolio invests in U.S. dollar-denominated
short-term debt securities including:
- Obligations of domestic and foreign banks or thrift organizations (such
as bankers' acceptances, time deposits and certificates of deposit);
- Corporate debt obligations, including commercial paper, notes and bonds
with remaining maturities of 397 days or less;
U.S. Government Obligations and repurchase agreements backed by U.S.
Government Obligations; and
Cash.
More than 25% of the value of the total assets of the Portfolio may be
invested in domestic banking industry obligations. The Portfolio may purchase
securities that are subject to restrictions on resale.
The Tax-Exempt Money Market Portfolio invests in high-quality, short-term,
fixed, variable or floating rate municipal securities and in high-quality,
long-term municipal securities whose features give them interest rates,
maturities and prices similar to short-term instruments ("Municipal
Securities"). Under normal market
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conditions, at least 80% of the Tax-Exempt Money Market Portfolio's assets will
be invested in Municipal Securities.
Municipal Securities are obligations issued by or on behalf of state and
local governments and public authorities (including states, territories and
possessions of the United States, the District of Columbia, cities, counties,
municipalities, municipal agencies and regional districts and their political
subdivisions, agencies, authorities and instrumentalities), the interest from
which, in the opinion of bond counsel for the issuers of the obligations at the
time of their issuance, is exempt from federal income tax.
The Portfolio's investments in Municipal Securities may include tax,
revenue and bond anticipation notes; tax-exempt commercial paper; and general
obligation or revenue bonds (including securities such as municipal lease
obligations and resource recovery bonds). The Portfolio may purchase obligations
that are subject to restrictions on resale. The Portfolio will not invest in
Municipal Securities whose interest is subject to the federal alternative
minimum tax ("AMT") for individuals (known as "private activity obligations").
Municipal Securities are issued to raise money for various public purposes,
including general purpose financing for state and local governments as well as
financing for specific projects or public facilities. Municipal Securities may
be backed by the full taxing power of a municipality or by the revenues from a
specific project or the credit of a private organization. Some Municipal
Securities are insured by private insurance companies, while others may be
supported by letters of credit furnished by domestic or foreign banks.
Distributions from the Tax-Exempt Money Market Portfolio will in general be
exempt from regular federal income taxes. As a temporary defensive measure, when
market conditions so warrant, the Tax-Exempt Money Market Portfolio may invest
its assets without limitation in any of the money market instruments which are
permissible investments for the General Money Market Portfolio. To the extent
that the Tax-Exempt Money Market Portfolio earns taxable income from any of its
investments, the income would be distributed as a taxable dividend.
WHO SHOULD INVEST
Each Portfolio is designed exclusively for investment of short-term monies
held by banks and other institutional investors.
The advantages offered by the Portfolios include large scale purchasing
power and diversification, which can help avoid the greater expense of executing
a large number of small transactions. Each Portfolio also makes it possible for
institutional investors to participate in a more diversified portfolio than the
size of their investments might otherwise permit. Also, investment in the
Portfolios can relieve institutions of many management and administrative
burdens usually associated with the direct purchase and sale of money market
instruments, including: selecting portfolio investments, obtaining favorable
terms at which to buy and sell, scheduling and monitoring maturities and
reinvestments, safe-keeping of securities, and portfolio recordkeeping.
It should be noted that the Portfolios are not FDIC insured.
PURCHASES AND REDEMPTIONS
PURCHASES
Shares of the Portfolios may be purchased by institutions that have entered
into service agreements with the Distributor and opened accounts with the Trust.
Call 1-800-828-2176 for information. Establishment of an account requires that
certain documents and applications be signed before the investment can be
processed. Fees
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in addition to those described herein may be charged by some institutions which
establish accounts on behalf of their customers.
The minimum initial investment in each Portfolio is $1,000,000.
Institutions may satisfy the minimum investment by aggregating their fiduciary
accounts. Subsequent investments may be in any amount. If an account balance
falls below $100,000 due to redemption, the Portfolio may close the account.
Investors will be notified if the minimum balance is not being maintained and
will be allowed 30 days to make additional investments before the account is
closed. Any involuntary redemptions will be effected at the price at 3:00 p.m.
(Eastern time) for the U.S. Treasury Money Market Portfolio and the General
Money Market Portfolio and at noon (Eastern time) for the U.S. Treasury Income
Portfolio and the Tax-Exempt Money Market Portfolio.
Purchase orders must be transmitted to the Portfolio's transfer agent,
BISYS Fund Services Ohio, Inc. (the "Transfer Agent"). Each Portfolio requires
advance notification of all wire purchases. Purchases may be made only by wire.
A purchase order for shares in the U.S. Treasury Money Market Portfolio or
General Money Market Portfolio received by the Transfer Agent by 3:00 p.m.
(Eastern time), or for shares in the U.S. Treasury Income Portfolio or the
Tax-Exempt Money Market Portfolio received by the Transfer Agent by noon
(Eastern time), on a day the New York Stock Exchange ("NYSE") and both the
Boston and New York Federal Reserve Banks are open ("Business Day") will be
executed at the net asset value per share next determined after receipt of the
order and will receive the dividend declared on the day of purchase, provided
that the Trust's custodian, The Bank of New York (the "Custodian"), receives the
wire by the close of the Federal Reserve wire system on that Business Day. See
"Valuation of Shares."
Each Portfolio reserves the right to reject any purchase order. Purchase
orders may be refused if, for example, they are of a size that could disrupt
management of a Portfolio. Purchases by exchange are not permitted.
REDEMPTIONS
Shareholders may redeem all or a portion of their shares on any Business
Day. Shares will be redeemed at the net asset value next calculated after the
Transfer Agent has received the redemption request. If an account is closed, any
accrued dividends will be paid within 10 days of the beginning of the following
month.
Shares may be redeemed, and the redemption proceeds wired, on the same day
if telephone redemption instructions are received by the Transfer Agent by 3:00
p.m. (Eastern time) on the day of redemption for the U.S. Treasury Money Market
Portfolio and for the General Money Market Portfolio, or by noon (Eastern time)
on the day of redemption for the U.S. Treasury Income Portfolio and for the
Tax-Exempt Money Market Portfolio. Shares redeemed and wired on the same day
will not receive the dividend declared on the day of redemption. A shareholder
whose redemption instructions are received by the Transfer Agent after 3:00 p.m.
(Eastern time) with respect to the U.S. Treasury Money Market Portfolio or
General Money Market Portfolio or after noon (Eastern time) with respect to the
U.S. Treasury Income Portfolio or the Tax-Exempt Money Market Portfolio will
receive the dividend declared on the day on which the redemption instructions
were received and will receive wired redemption proceeds on the next Business
Day. Shareholders may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to the Transfer Agent, BISYS Fund Services Ohio, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219.
If making immediate payment of redemption proceeds could adversely affect a
Portfolio, shareholders may be paid up to seven days after receipt of the
redemption request. Also, when the NYSE or either the Boston or New York Federal
Reserve Bank is closed (or when trading is restricted) for any reason other than
its respective
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customary weekend or holiday closing, or under any emergency circumstances as
determined by the Securities and Exchange Commission ("SEC") to merit such
action, redemption or payment may be suspended or postponed.
Shares also may be redeemed by mail by submitting an order addressed to:
The Valiant Fund, 871 Venetia Bay Boulevard, Suite 370, Venice, Florida 34292.
If transactions by telephone cannot be executed (e.g., during times of unusual
market activity), orders should be placed by mail. In case of suspension of the
right of redemption, a shareholder may either withdraw its request for
redemption or receive payment based on the net asset value next determined after
the termination of the suspension.
The Trust reserves the right to refuse a wire or telephone redemption if
the Manager or the Transfer Agent believes it is advisable to do so. Upon 60
days' prior notice to existing shareholders, procedures for redeeming shares by
wire or telephone may be modified or terminated at any time by the Trust or the
Transfer Agent.
ADDITIONAL INFORMATION
Shareholder Services
Shareholders should verify the accuracy of all transactions immediately
upon receipt of their confirmation statements. Neither the Trust nor the
Transfer Agent will be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. The privilege to initiate
transactions by telephone is made available to shareholders automatically. The
Trust will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, including: requiring some form of
personal identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions or tape recording of
telephone instructions. If it does not employ reasonable procedures to confirm
that telephone instructions are genuine, the Trust or the Transfer Agent may be
liable for any losses due to unauthorized or fraudulent instructions.
To allow the Portfolios to be managed effectively, shareholders are urged
to initiate all trades (investments and redemptions of shares) as early in the
day as possible and to notify the Trust by calling the Transfer Agent at least
one day in advance of trades in excess of $10,000,000. In making trade requests,
the name of the shareholder and the account number(s) must be supplied.
STATEMENTS AND REPORTS
Shareholders will receive a monthly statement and a confirmation after
every transaction that affects the share balance or the account registration. A
statement with tax information will be mailed by January 31st following each tax
year and also will be filed with the Internal Revenue Service. At least twice a
year, shareholders will receive the Portfolios' financial statements.
MANAGEMENT OF THE PORTFOLIOS
The overall responsibility for supervision of the affairs of the Trust
vests in the Board of Trustees of the Trust. The Manager is responsible for the
management of the Trust's day-to-day business affairs and has general
responsibility for the management of the investments of the Portfolios. The
Manager, at its expense, has contracted with David L. Babson & Co. Inc. (the
"Sub-Adviser") to manage the investments of the Portfolios subject to the
requirements of the Investment Company Act of 1940, as amended (the "1940 Act").
Richard F. Curcio, who is the Manager's President and Chairman of the Board
and President, Chairman of the Board and a Trustee of the Trust, indirectly owns
or controls the outstanding shares of common stock of the
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Manager. Mr. Curcio has 19 years of experience in mutual fund industry
marketing, sales and operations. Located at 871 Venetia Bay Boulevard, Suite
370, Venice, Florida 34292, the Manager was organized in Florida on September
24, 1992.
The Sub-Adviser, a Massachusetts corporation, is located at One Memorial
Drive, Cambridge, Massachusetts 02142. Founded in 1940, the Sub-Adviser provides
investment advice to individuals, state and local government agencies, pension
and profit sharing plans, trusts, estates, banks and other organizations, and
also serves as the investment adviser to The Babson Funds (a family of mutual
funds). The Sub-Adviser is a subsidiary of Massachusetts Mutual Life Insurance
Company.
The Sub-Adviser is authorized to make investment decisions and engage in
portfolio transactions on behalf of the Trust, subject to such general or
specific instructions as may be given by the Trustees and/or the Manager. The
payment of fees to the Sub-Adviser is the sole responsibility of the Manager.
MANAGEMENT FEES AND OTHER EXPENSES
Under its Management Agreement with the Trust, the Manager performs certain
administrative and management services for the Trust and pays the compensation,
if any, of officers and Trustees who are affiliated with the Manager or the
Sub-Adviser and pays all the Portfolio expenses with the following exceptions:
the fees and expenses of those Trustees who are not "interested persons" of the
Trust; interest on borrowings; taxes; expenses incurred pursuant to the Trust's
distribution and shareholder servicing plans; and such extraordinary
nonrecurring expenses as may arise, including litigation to which the Trust may
be a party.
For its services to the Portfolios, the Manager receives fees paid monthly
and computed at an annual rate of 0.20% of the average daily net asset value of
each of the Portfolios. The Manager is solely responsible for the payment of all
fees to the Sub-Adviser.
For its services to the Portfolios, the Sub-Adviser is paid by the Manager
a monthly fee computed at an annual rate based upon the aggregate average daily
net assets of the Trust, as follows: 0.10% of the first $500 million of net
assets and 0.05% of net assets over $500 million. The Sub-Adviser has
voluntarily agreed to reduce its fees from 0.05% to 0.04% of net assets over $2
billion.
Administrator. BISYS Fund Services Ohio, Inc. ("BISYS" or the
"Administrator"), 3435 Stelzer Road, Columbus, Ohio 43219, is the Administrator
of the Trust.
The Administrator assists in each Portfolio's administration and operation,
including providing office space and various services in connection with the
regulatory requirements applicable to each Portfolio. The Administrator may
utilize the resources of its affiliates in performing certain of these
responsibilities, at no additional cost to the Trust. The Administrator's fee is
paid by the Manager. Pursuant to a Fund Accounting Agreement, the Administrator
assists the Trust in calculating net asset values and provides certain other
accounting services for each Fund and is paid a fee by the Manager.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
Integrity Investments, Inc., 871 Venetia Bay Boulevard, Suite 370, Venice,
Florida 34292, is the Trust's Distributor. The Trust has adopted a Distribution
and Shareholder Servicing Plan for the Class E Shares (the "Plan") which
provides for payment of up to 0.80% of each Portfolio's average daily net
assets, the purpose of which is to promote distribution of the Portfolios'
shares and to enhance the provision of shareholder services. Payments under the
Plan are authorized at the rate of up to 0.80% of each Portfolio's average daily
net assets for the Class E shares.
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Under the Plan, each Portfolio, subject to Trustee authorization, may pay
the Distributor a monthly fee to compensate it for expenses it bears and
services it provides in the distribution of shares and the provision of
shareholder support services. The Plan also provides that certain Service
Providers (defined under the Plan as any broker, dealer, bank or other
institution) may receive compensation for providing continuing personal services
to Shareholders as well as administrative services with respect to shareholder
accounts. Such payments are used to compensate the Distributor and any Service
Providers for the services outlined above.
The Distributor shall determine the amounts to be paid to Service
Providers. Each Service Provider is required to disclose to its clients any
compensation payable to it by the Trust pursuant to the Plan and any other
compensation payable by its clients in connection with the investment of their
assets in Trust shares. The fees payable to the Distributor under the Plan for
advertising, marketing and distributing Class E shares and for payments to
Service Providers are payable without regard to actual expenses incurred by the
Distributor.
The Plan recognizes that the Manager, the Sub-Adviser and the Distributor
may use their fees from each Portfolio or other resources to pay expenses
associated with activities primarily intended to result in the sale of the
shares of the Portfolio. Under its Distribution Agreement with the Trust, the
Distributor bears certain distribution-related expenses of the Portfolios, such
as the cost and expense of printing and distributing copies of prospectuses
which are used in connection with the offering of shares to prospective
investors.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
The Bank of New York serves as the Trust's custodian and holds all
portfolio securities and cash assets of the Trust. The Custodian is authorized
to deposit securities in securities depositories or to use the services of
subcustodians. BISYS serves as the Trust's Transfer Agent and dividend
disbursing agent and maintains the Trust's shareholder records. BISYS' fees are
paid by the Manager.
YEAR 2000 ISSUES
Like other funds and business organizations around the world, the Trust
could be adversely affected if the computer systems used by the Manager and the
Trust's other service providers do not properly process and calculate
date-related information for the year 2000 and beyond. In addition, Year 2000
issues may adversely affect companies in which the Trust invests where, for
example, such companies incur substantial costs to address Year 2000 issues or
suffer losses caused by the failure to adequately or timely do so.
The Trust has been assured that the Manager and the Trust's other service
providers (i.e., Sub-Adviser, Administrator, Transfer Agent, Fund Accounting
Agent, Custodian and Distributor) have developed and are implementing clearly
defined and documented plans intended to minimize risks to services critical to
the Trust's operations associated with Year 2000 issues. Internal efforts
include a commitment to dedicate adequate staff and funding to identify and
remedy Year 2000 issues, and specific actions such as inventorying software
systems, determining inventory items that may not function properly after
December 31, 1999, reprogramming or replacing such systems, and retesting for
Year 2000 readiness. The Trust's Manager and service providers are likewise
seeking assurances from their respective vendors and suppliers that such
entities are addressing any Year 2000 issues, and each provider intends to
engage, where appropriate, in private and industry or "streetwide" interface
testing of systems for Year 2000 readiness.
In the event that any systems upon which the Trust is dependent are not
Year 2000 ready by December 31, 1999, administrative errors and account
maintenance failures would likely occur. While the ultimate costs or
consequences of incomplete or untimely resolution of Year 2000 issues by the
Manager or the Trust's service providers cannot be accurately assessed at this
time, the Trust currently has no reason to believe that the Year
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2000 plans of the Manager and the Trust's service providers will not be
completed by December 31, 1999, or that the anticipated costs associated with
full implementation of their plans will have a material adverse impact on either
their business operations or financial condition of those of the Trust. The
Trust and the Manager will continue to closely monitor developments relating to
this issue, including development by the Manager and the Trust's service
providers of contingency plans for providing back-up computer services in the
event of a systems failure or the inability of any provider to achieve Year 2000
readiness. Separately, the Manager will monitor potential investment risk
related to Year 2000 issues.
VALUATION OF SHARES
All income, expenses (other than expenses incurred by a class pursuant to
its distribution and shareholder servicing plan) and realized and unrealized
gains and losses are allocated to each class proportionately on a daily basis
for purposes of determining the net asset value of each class.
Net asset value per share is determined as of 3:00 p.m. (Eastern time) for
the U.S. Treasury Money Market Portfolio and the General Money Market Portfolio
and as of noon (Eastern time) for the U.S. Treasury Income Portfolio and the
Tax-Exempt Money Market Portfolio. Net asset value per share is determined on
each day the NYSE and the Boston and the New York Federal Reserve Banks are
open. Currently, the days on which the Trust is closed (other than weekends) are
New Year's Day, Martin Luther King, Jr. Day (observed), President's Day
(observed), Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Columbus Day (observed), Veteran's Day, Thanksgiving Day and Christmas Day. Net
asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
a Portfolio, less the Portfolio's liabilities, by the number of outstanding
shares of that Portfolio.
The securities owned by each Portfolio are valued based upon the amortized
cost method. Pursuant to this method, a security is valued by reference to a
Portfolio's acquisition cost as adjusted for amortization of premium or
accretion of discount. Although the Trust seeks to maintain the net asset value
per share of each Portfolio at $1.00, there can be no assurance that the net
asset value per share will not vary.
DISTRIBUTIONS AND TAXES
Dividends out of net investment income will be declared daily and paid
monthly. Dividends for the U.S. Treasury Money Market Portfolio and the General
Money Market Portfolio are declared at 3:00 p.m. (Eastern time) to shareholders
of record at that time, and dividends for the U.S. Treasury Income Portfolio and
the Tax-Exempt Money Market Portfolio are declared at noon (Eastern time) to
shareholders of record at that time. Distributions of net long-term capital
gains and disposition gain, if any, for the year are made annually. All income
dividends are paid in cash and will automatically be made by wire unless the
investor has elected to reinvest such dividends in additional shares.
Each Portfolio intends to continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As regulated investment companies, the Portfolios will not be
subject to federal income taxes on the net investment income and capital gains
that are distributed to shareholders or deemed to have been distributed to
shareholders.
Dividends derived from net investment income for the U.S. Treasury Money
Market Portfolio, U.S. Treasury Income Portfolio and General Money Market
Portfolio and from short-term capital gains, if any, are taxable to each such
Portfolio's shareholders, unless they are exempt from Federal income taxes, as
ordinary income. Distributions are taxable when they are paid, except that
distributions declared in October, November or December and paid in January of
the following year are taxable as if paid on December 31st.
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Distributions of tax-exempt income by the Tax-Exempt Money Market Portfolio
are not subject to regular federal income taxes. If the Tax-Exempt Money Market
Portfolio earns federally taxable income from any of its investments, it will be
distributed as a taxable dividend. The Portfolio does not intend to invest in
Municipal Securities whose interest is subject to the federal alternative
minimum tax ("AMT") for individuals (known as "private activity obligations").
Since all investment income is expected to be derived from earned interest,
it is anticipated that no part of any distribution will be eligible for the
dividends received deduction for corporations.
OTHER TAX INFORMATION
The information above is only a summary of some of the tax consequences
generally affecting each Portfolio and its shareholders, and no attempt has been
made to discuss individual tax consequences. In addition to federal tax,
distributions may be subject to state and local taxes. Shareholders should make
their own determination whether a Portfolio is suitable for investment given
their particular situation.
State law varies on whether mutual fund dividends that are derived in whole
or in part from interest on U.S. Government Obligations are exempt from state
income taxation. The Portfolios will provide shareholders annually with
information relating to the composition of their distributions to permit
shareholders to determine whether and to what extent the dividend income they
receive from the Portfolio may be exempt from their state's income tax.
Shareholders should consult their tax adviser as to whether any portion of the
dividends they receive from the Portfolio is exempt from state income taxes and
on any other specific questions concerning state or federal tax treatment.
Annual statements as to the current federal tax status of distributions, if
applicable, are mailed to shareholders by January 31st following each tax year.
When an investor signs its account application, it will be asked to certify
that its taxpayer identification number is correct and that it is not subject to
backup withholding for failing to report income to the Internal Revenue Service
("IRS"). If the investor does not comply with IRS regulations, the IRS can
require each Portfolio to withhold a percentage of distributions.
PERFORMANCE INFORMATION
From time to time each Portfolio may advertise its current yield and
effective yield for each class of shares in advertisements or in reports or
other communications with shareholders. A Portfolio's performance may be
compared to other investments or relevant indices.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. Each Portfolio's current yield for a class of
shares refers to the net income generated by an investment in that class over a
seven-day period expressed as an annual percentage rate. In addition to the
current yield, each Portfolio may quote yields in advertising based on any
historical seven-day period. The effective yield assumes that the income earned
from the investment is reinvested. The effective yield will be slightly higher
than the current yield because of the compounding effect on this assumed
reinvestment.
The Tax-Exempt Money Market Portfolio also may quote its tax equivalent
yield and tax equivalent effective yield, which shows the taxable yield or
taxable effective yield an investor would have to earn, before taxes, to equal
the Portfolio's tax-free yield or tax-free effective yield. When a tax
equivalent yield or tax equivalent effective yield is calculated, the yield is
increased using a stated income tax rate. See the SAI for more information
concerning performance calculations.
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INVESTMENT RESTRICTIONS
The following is a description of certain investment restrictions which are
fundamental and may not be changed with respect to a Portfolio without the
approval of a majority of the outstanding shares of the Portfolio. For a
description of certain other investment restrictions, reference should be made
to the SAI. The restrictions do not apply to U.S. Government Obligations.
1. No Portfolio will invest 25% or more of the value of its total
assets in a particular industry, except that up to 100% of the assets of
the General Money Market Portfolio may be invested in domestic banking
industry obligations.
2. As to 75% of the value of its total assets, a Portfolio will not
invest more than 5% of the value of its total assets in the securities of
any one issuer or acquire more than 10% of the voting securities of any
issuer; the remaining 25% of the assets may be invested in the securities
of one or more issuers without regard to such limitations.
3. Under normal market conditions, at least 80% of the value of the
Tax-Exempt Money Market Portfolio's total assets will be invested in
Municipal Securities.
These limitations apply as of the time of purchase. If through market
action the percentage limitations are exceeded, the Portfolios will not be
required to reduce the amount of their holdings in such investments.
The General Money Market Portfolio operates in accordance with a
non-fundamental operating policy which complies with Rule 2a-7 promulgated under
the 1940 Act and is more restrictive than investment restriction number 2 above.
Under Rule 2a-7 the Portfolio may not (with certain exceptions) invest more than
5% of its total assets in the securities of a single issuer. The General Money
Market Portfolio is also required by Rule 2a-7 to diversify its investments so
that, with minor exceptions, and except for U.S. government obligations, not
more than 5% of its total assets is invested in the securities of any one
issuer, not more than 5% of its total assets is invested in securities of
issuers rated by the NRSRO's at the time of investment in the second highest
rating category for short-term debt obligations or, if unrated, deemed by the
Sub-Adviser to be of comparable quality ("Second Tier Securities") and not more
than the greater of one percent of total assets or one million dollars is
invested in the securities of one issuer that are Second Tier Securities. See
"Investment Policies and Limitations" in the SAI.
CERTAIN INVESTMENT STRATEGIES, POLICIES AND RISK CONSIDERATIONS
QUALITY AND MATURITY
Each Portfolio may purchase only high quality obligations that the
Sub-Adviser believes present minimal credit risks. To be considered high
quality, a security must be a U.S. Government Obligation; or rated in accordance
with applicable rules in one of the two highest rating categories for short-term
obligations by at least two NRSROs (or by one, if only one rating service has
rated the security); or, if unrated, judged to be of equivalent quality by the
Sub-Adviser. As a matter of non-fundamental policy, the Portfolios will only
purchase securities, in addition to U.S. Government Obligations, that are rated
in the highest rating category by at least one NRSRO or, if unrated, are
determined to be of equivalent quality. (See the Appendix for a description of
NRSRO ratings).
Each Portfolio must limit its investments to obligations with remaining
maturities of 397 days or less and must maintain a dollar-weighted average
maturity of 90 days or less.
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Each Portfolio's ability to achieve its investment objective depends, at
least in part, on the quality and maturity of its investments. The Portfolios
invest in high quality obligations, but an investment in any of the Portfolios
involves risks. Although each Portfolio's policies are designed to maintain a
stable net asset value of $1.00 per share, all money market instruments can
change in value when interest rates or an issuer's creditworthiness changes, or
if an issuer or guarantor of a security fails to pay interest or principal when
due. If these changes in value were substantial, a Portfolio's net asset value
could deviate from $1.00.
Unless otherwise indicated, each Portfolio may invest in the securities and
engage in the transactions described below.
AFFILIATED BANK TRANSACTIONS
Pursuant to an exemptive order from the SEC, each Portfolio may engage in
certain transactions with banks that are, or may be considered to be,
"affiliated persons" of the Portfolio under the 1940 Act. Such transactions may
be entered into only pursuant to procedures established, and periodically
reviewed, by the Board of Trustees. These transactions may include repurchase
agreements with U.S. banks having short-term debt instruments rated high quality
by at least one NRSRO (or if unrated, determined by the Sub-Adviser to be of
comparable quality); purchases, as principal, of short-term obligations of such
banks and their bank holding companies and affiliates; transactions in Municipal
Securities; transactions in bankers' acceptances; and transactions in U.S.
Government Obligations with affiliated banks that are primary dealers in these
securities.
REPURCHASE AGREEMENTS (APPLICABLE TO U.S. TREASURY MONEY MARKET PORTFOLIO,
GENERAL MONEY MARKET PORTFOLIO AND TAX-EXEMPT MONEY MARKET PORTFOLIO ONLY)
Each Portfolio, except the U.S. Treasury Income Portfolio, may enter into
repurchase agreements that allow the Portfolio to purchase U.S. Government
Obligations, with an agreement that the seller will repurchase the obligation at
an agreed upon price and date. No more than 10% of a Portfolio's net assets
taken at current value will be invested in repurchase agreements extending for
more than seven days. If a seller defaults on the obligation to repurchase, the
Portfolios may incur a loss or other costs.
REVERSE REPURCHASE AGREEMENTS (APPLICABLE TO GENERAL MONEY MARKET PORTFOLIO AND
TAX-EXEMPT MONEY MARKET PORTFOLIO ONLY)
The General Money Market Portfolio and the Tax-Exempt Money Market
Portfolio may enter into reverse repurchase agreements, which are transactions
where a Portfolio temporarily transfers possession of a portfolio instrument to
another party, such as a bank or broker-dealer, in return for cash. At the same
time, the Portfolio agrees to repurchase the instrument at an agreed upon time
and price, which includes interest. The General Money Market Portfolio expects
that it will engage in reverse repurchase agreements when it is able to invest
the cash so acquired at a rate higher than the cost of the agreement, which
would increase income earned by such Portfolio, or for liquidity purposes.
Engaging in reverse repurchase agreements may involve an element of leverage,
and no Portfolio will purchase a security while borrowings (including reverse
repurchase agreements) representing more than 5% of its total assets are
outstanding. The Tax-Exempt Money Market Portfolio will engage in reverse
repurchase agreements for temporary or emergency purposes only and not for
leverage or investment.
FORWARD COMMITMENTS AND "WHEN-ISSUED" SECURITIES
Each Portfolio may also enter into forward commitment agreements and
purchase "when-issued" securities. Forward commitments are contracts to purchase
securities for a fixed price at a specified future date beyond
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customary settlement time with no interest accruing to the Portfolio until the
settlement date. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Municipal
Securities are often issued on a when-issued basis. The yield of such securities
is fixed at the time a commitment to purchase is made, with actual payment and
delivery of the security generally taking place 15 to 45 days later. Under some
circumstances, the purchase of when-issued securities may act to leverage the
Portfolio.
LENDING OF SECURITIES
For the purpose of realizing additional income, the Portfolios may lend
portfolio securities to broker-dealers or financial institutions up to not more
than 10% of their respective total assets taken at current value. While any such
loan is outstanding, each such Portfolio will continue to receive amounts equal
to the interest or dividends paid by the issuer on the securities, as well as
interest (less any rebates to be paid to the borrower) on the investment of the
collateral or fees from the borrower. Each Portfolio will have a right to call
each loan and obtain the securities. Lending portfolio securities involves
certain risks, including possible delays in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will be made in accordance with
guidelines established by the Board of Trustees.
LETTERS OF CREDIT
Issuers or financial intermediaries who provide demand features or standby
commitments often support their ability to buy obligations on demand by
obtaining letters of credit ("LOCs") or other guarantees from domestic or
foreign banks. LOCs also may be used as credit supports for Municipal
Securities. The Sub-Adviser may rely upon its evaluation of a bank's credit in
determining whether to purchase an instrument supported by an LOC. In evaluating
a foreign bank's credit, the Sub-Adviser will consider whether adequate public
information about the bank is available and whether the bank may be subject to
unfavorable political or economic developments, currency controls or other
governmental restrictions that might affect the bank's ability to honor its
credit commitment.
ZERO COUPON BONDS
Each Portfolio may purchase zero coupon bonds. Regular interest payments
are not made on zero coupon bonds; instead these bonds are sold at a deep
discount from their face value and are redeemed at face value when they mature.
Each Portfolio will purchase only those zero coupon bonds which have a remaining
maturity of one year or less. As a result, such bonds are expected to pay out a
return on a regular basis as they mature. Because zero coupon bonds do not pay
current income, their prices tend to be more volatile in response to interest
rate changes than bonds which pay interest regularly. In calculating its daily
dividend, a Portfolio takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.
A broker-dealer creates a derivative zero coupon bond by separating the
interest and principal components of a U.S. Treasury security and selling them
as two individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zero coupon bonds.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation and the Financing
Corporation can also be separated in this fashion.
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U.S. GOVERNMENT OBLIGATIONS
U.S. Government Obligations are debt obligations issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. Government. Not
all U.S. Government Obligations are backed by the full faith and credit of the
United States. Obligations may be supported only by the agency's right to borrow
money from the U.S. Treasury under certain circumstances or by the credit of the
agency. There is no guarantee that the U.S. Government will support these types
of obligations, and therefore they involve more risk than U.S. Government
Obligations backed by the full faith and credit of the United States.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Portfolio may purchase variable and floating rate demand instruments
and other securities that possess a floating or variable interest rate
adjustment formula. These instruments permit the Portfolios to demand payment of
the principal balance plus unpaid accrued interest upon a specified number of
days' notice to the issuer or its agent. The demand feature may be backed by a
bank letter of credit or guarantee issued with respect to such instrument.
The Portfolios' Sub-Adviser, on behalf of the Manager, intends to exercise
the demand only (1) to attain a more optimal portfolio structure, (2) upon a
default under the terms of the debt security, (3) as needed to provide liquidity
to the Portfolios, or (4) to maintain the respective quality standard of the
Portfolios' investment portfolio. The Portfolios' Sub-Adviser will determine
which variable or floating rate demand instruments to purchase in accordance
with procedures approved by the Trustees to minimize credit risks.
MUNICIPAL LEASE OBLIGATIONS (APPLICABLE TO TAX-EXEMPT MONEY MARKET PORTFOLIO
ONLY)
Municipal lease obligations are issued by a state and local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and the
interest payable on these obligations may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease payments,
a lease may terminate, with the possibility of default on the lease obligation
and significant loss to the Portfolio. Such risk of non-appropriation is unique
to municipal lease obligations. The SEC Staff has taken the position that
open-end investment companies may treat these obligations as liquid under
guidelines established by the Board of Trustees. Determination concerning the
liquidity and proper valuation of these obligations will include: the frequency
of trades and quotes for the obligation, the number of dealers willing to
purchase or sell the security and the number of potential buyers, the
willingness of dealers to make a market in the securities, the nature of the
marketplace trades and the likelihood that its marketability will be maintained
throughout the time the instrument is held by the Portfolio. The Board will be
responsible for determining the credit quality of any unrated lease obligations
held by the Portfolio, on an ongoing basis, including an assessment of the
likelihood that the lease will not be cancelled. The high quality municipal
lease obligations in which the Tax-Exempt Money Market Portfolio intends to
invest generally are not expected by the Board to present liquidity risks. Lease
obligations will be valued based on a standard spread that relates to general
obligation securities whose value is determined using a pricing service.
Certificates of participation in municipal lease obligations or installment
sales contracts entitle the holder to a proportionate interest in the
lease-purchase payments made. Certificates of participation typically are issued
by municipalities and by banks and other financial institutions.
MUNICIPAL SECURITIES (APPLICABLE TO TAX-EXEMPT MONEY MARKET PORTFOLIO ONLY)
Municipal Securities include general obligation securities, which are
backed by the full taxing power of a municipality, or revenue securities, which
are backed by the revenues of a specific tax, project or facility.
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Resource recovery bonds, a type of revenue obligation, are used to finance the
construction of waste burning facilities. Such bonds may be subject to special
risks because the project uses technology or an economic plan that is not yet
proven, or requires operating permits from environmental authorities. Industrial
development bonds are a type of revenue bond backed by the credit and security
of a private issuer and may involve greater risk. Tax and revenue anticipation
notes are issued by municipalities in expectation of future tax or other
revenues, and are payable from those specific taxes or revenues. Bond
anticipation notes normally provide interim financing in advance of an issue of
bonds or notes, the proceeds of which are used to repay the anticipation notes.
Although the Tax-Exempt Money Market Portfolio presently does not intend to
do so on a regular basis, it may invest more than 25% of its assets in Municipal
Securities which are related in such a way that an economic, business, or
political development or change affecting one security would likewise affect the
other Municipal Securities. To the extent that the Portfolio's assets are
concentrated in Municipal Securities that are so related, the Portfolio will be
subject to the peculiar risks presented by such Municipal Securities, such as
negative developments in a particular industry or state, to a greater extent
than it would be if the Portfolio's assets were not so concentrated.
RESTRICTED SECURITIES (APPLICABLE TO GENERAL MONEY MARKET PORTFOLIO AND
TAX-EXEMPT MONEY MARKET PORTFOLIO ONLY)
The General Money Market Portfolio and the Tax-Exempt Money Market
Portfolio may purchase securities which cannot be sold to the public without
registration under the Securities Act of 1933 (restricted securities). Unless
registered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registration. Provided that the
security has a demand feature of seven days or less, or a dealer or
institutional trading market exists which in the opinion of the Sub-Adviser,
subject to Board guidelines, affords liquidity, these restricted securities are
not treated as illiquid securities for purposes of each Portfolio's restriction
on not investing more than 10% of its net assets in illiquid securities.
SPECIAL CONSIDERATIONS OF FOREIGN INVESTMENTS (APPLICABLE TO GENERAL MONEY
MARKET PORTFOLIO ONLY)
The General Money Market Portfolio may invest in U.S. dollar-denominated
obligations of foreign branches of U.S. banks (Eurodollars), U.S. branches and
agencies of foreign banks (Yankee dollars), and foreign branches of foreign
banks. Euro and Yankee dollar investments involve risks that are different from
investments in securities of U.S. banks. These risks may include future
unfavorable political and economic developments, possible withholding taxes,
seizure of foreign deposits, currency controls, interest limitations or other
governmental restrictions which might affect payment of principal or interest.
Additionally, there may be less public information available about foreign banks
and their branches. Foreign branches of foreign banks are not regulated by U.S.
banking authorities, and generally are not bound by accounting, auditing and
financial reporting standards comparable to U.S. banks. Although the Sub-Adviser
carefully considers these factors when making investments, and subject to its
policy on concentration, the Portfolio does not limit the amount of its assets
which can be invested in any one type of instrument or in any foreign country.
The Portfolio will not invest 25% or more of its assets in Euro and Yankee
dollar investments and obligations of foreign branches of foreign banks.
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APPENDIX
NRSRO RATINGS
Description of Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P") commercial paper and bond ratings:
SHORT-TERM DEBT RATINGS
MOODY'S EMPLOYS THREE DESIGNATIONS, ALL JUDGED TO BE INVESTMENT GRADE, TO
INDICATE THE RELATIVE REPAYMENT CAPACITY OF RATED ISSUERS. THE HIGHEST
DESIGNATION IS AS FOLLOWS:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
S&P SHORT-TERM DEBT RATINGS ARE GRADED INTO FOUR CATEGORIES, RANGING FROM
"A" FOR THE HIGHEST QUALITY OBLIGATIONS TO "D" FOR THE LOWEST. THE HIGHEST
RATINGS IN THE "A" CATEGORY ARE DESCRIBED AS FOLLOWS:
"A" -- Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designations 1, 2 and 3 to indicate the relative degree of
safety.
"A-1' -- This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be noted with a plus (+) sign
designation.
MUNICIPAL OBLIGATIONS
Moody's ratings for state and municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in short-term borrowing risk are of lesser importance in the long
run. The highest MIG quality rating is defined as follows:
MIG-1 -- Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
A short-term rating may also be assigned to an issue having a demand
feature. Such ratings will be designated as VMIG to reflect such characteristics
as payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert to the
fact that the source of payment may be limited to the external liquidity with no
or limited legal recourse to the issuer in the event the demand is not met. A
VMIG-1 rating carries the same definition as MIG-1.
S&P'S HIGHEST QUALITY RATING FOR SHORT-TERM STATE AND MUNICIPAL NOTES IS
DEFINED AS FOLLOWS:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
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THE VALIANT FUND
U.S. Treasury Money Market Portfolio
U.S. Treasury Income Portfolio
General Money Market Portfolio
Tax-Exempt Money Market Portfolio
Class A, Class B, Class C, Class D and Class E Shares
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 15, 1998 AS SUPPLEMENTED MARCH 31, 1999
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the current Prospectuses for The Valiant Fund: U.S.
Treasury Money Market Portfolio, U.S. Treasury Income Portfolio, General Money
Market Portfolio and Tax-Exempt Money Market Portfolio (dated December 15,
1998). Please retain this SAI for future reference. To obtain additional copies
of this SAI or of the Prospectuses, please call Integrity Investments, Inc. (the
"Distributor") at 1-800-828-2176.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Investment Policies and Limitations.............................3
Portfolio Transactions.........................................13
Valuation of Portfolio Securities..............................14
Performance....................................................14
Additional Purchase and Redemption Information.................16
Dividends, Capital Gains Distributions and Taxes...............17
Trustees and Officers..........................................18
Investment Advisory Agreements.................................20
Administration Agreement and Other Contracts...................20
Description of the Trust.......................................22
</TABLE>
Investment Adviser
- ------------------
Integrity Management & Research, Inc. (the "Manager")
Sub-Adviser
- -----------
David L. Babson & Co. Inc. (the "Sub-Adviser")
Distributor
- -----------
Integrity Investments, Inc. (the "Distributor")
Administrator/ Transfer Agent
- -----------------------------
BISYS Fund Services Ohio, Inc. (the "Administrator" and the "Transfer Agent")
Custodian:
The Bank of New York (the "Custodian")
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INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectuses. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Portfolio's assets that may be
invested in any security or other assets, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Portfolio's acquisition of such
security or other asset. Any later increase or decrease resulting from a change
in values, net assets or other circumstances, will not be considered when
determining whether the investment complies with the Portfolio's investment
policies and limitations.
Fundamental policies and investment limitations may not be changed with respect
to any Portfolio without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940 (the "1940 Act"))
of that Portfolio. The investment policies and limitations described in this
Statement of Additional Information are not fundamental and may be changed
without shareholder approval, except for the investment limitations specifically
identified as fundamental below.
U.S. TREASURY MONEY MARKET PORTFOLIO
The following are the U.S. Treasury Money Market Portfolio's fundamental
limitations. The Portfolio may not:
(1) with respect to 75% of the Portfolio's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Portfolio's total assets would be invested in the securities of that
issuer; or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Portfolio may borrow money for temporary or
emergency purposes (not for leveraging or investment) provided that the amount
does not exceed 33% of the Portfolio's total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with this 33% limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the Securities
Act of 1933, as amended ("1933 Act") in the disposition of restricted
securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, more than 25% of the Portfolio's total assets would be invested
in the securities of companies whose principal business activities are in the
same industry;
(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(7) purchase or sell physical commodities (unless acquired as a result of
ownership of securities or other instruments) or commodity contracts, including
futures contracts;
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(8) lend any security or make any other loan if, as a result, more than 10% of
its total assets would be lent to other parties, but this limit does not apply
to purchases of debt securities or to repurchase agreements; or
(9) purchase the securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or in
accordance with the 1940 Act.
THE FOLLOWING LIMITATIONS OF THE U.S. TREASURY MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend during the coming year to purchase
the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the coming year to sell
securities short, unless it owns or has the right, without payment of additional
consideration, to obtain securities equivalent in kind and amount to the
securities sold short.
(iii) The Portfolio does not currently intend during the coming year to purchase
securities on margin, except that the Portfolio may obtain such short-term
credits as are necessary for the clearance of transactions.
(iv) The Portfolio may borrow money only from a bank. The Portfolio will not
purchase any security while borrowings representing more than 5% of its total
assets are outstanding.
(v) The Portfolio does not currently intend during the coming year to purchase
any security or enter into a repurchase agreement if, as a result, more than 10%
of its net assets would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven days and in securities
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
(vi) The Portfolio does not currently intend during the coming year to make
loans, but this limit does not apply to purchases of debt securities or to
repurchase agreements.
(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or leases.
(viii) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees of the
Trust and those officers and directors of the Manager or the Sub-Adviser who
individually own more than 1/2 of 1% of the securities of such issuer together
own more than 5% of such issuer's securities.
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<PAGE> 23
U.S. TREASURY INCOME PORTFOLIO
THE FOLLOWING ARE THE U.S. TREASURY INCOME PORTFOLIO'S FUNDAMENTAL LIMITATIONS.
THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Portfolio's total assets would be invested in the securities of that
issuer; or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Portfolio may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii) in
combination do not exceed 33% of the Portfolio's total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with this 33%
limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, more than 25% of the Portfolio's total assets would be invested
in the securities of companies whose principal business activities are in the
same industry;
(6) purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(7) purchase or sell physical commodities (unless acquired as a result of
ownership of securities or other instruments) or commodity contracts, including
futures contracts;
(8) lend any security or make any other loan if, as a result, more than 10% of
its total assets would be lent to other parties, but this limit does not apply
to purchases of debt securities or to repurchase agreements; or
(9) purchase the securities of other investment companies except in connection
with a merger, consolidation, reorganization or acquisition of assets or in
accordance with the 1940 Act.
THE FOLLOWING LIMITATIONS OF THE U.S. TREASURY INCOME PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend during the coming year to purchase
the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the coming year to sell
securities short, unless it owns or has the right, without payment of additional
consideration, to obtain securities equivalent in kind and amount to the
securities sold short.
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<PAGE> 24
(iii) The Portfolio does not currently intend during the coming year to purchase
securities on margin, except that the Portfolio may obtain such short-term
credits as are necessary for the clearance of transactions.
(iv) The Portfolio may borrow money only (a) from a bank or (b) by engaging in
reverse repurchase agreements with any party (reverse repurchase agreements are
treated as borrowings for purposes of fundamental investment limitation (3)).
The Portfolio will not purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
(v) The Portfolio does not currently intend during the coming year to purchase
any security or enter into a repurchase agreement if, as a result, more than 10%
of its net assets would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven days and in securities
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
(vi) The Portfolio does not currently intend during the coming year to make
loans, but this limit does not apply to purchases of debt securities or to
repurchase agreements.
(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or leases.
(viii) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees of the
Trust and those officers and directors of the Manager or the Sub-Adviser who
individually own more than 1/2 of 1% of the securities of such issuer together
own more than 5% of such issuer's securities.
Notwithstanding paragraph (3) and paragraphs (iv) through (vi) above, as a
matter of nonfundamental policy, the Portfolio will not engage in repurchase
agreement or reverse repurchase agreement transactions.
GENERAL MONEY MARKET PORTFOLIO
THE FOLLOWING ARE THE GENERAL MONEY MARKET PORTFOLIO'S FUNDAMENTAL LIMITATIONS.
THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Portfolio's total assets would be invested in the securities of that
issuer; or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
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<PAGE> 25
(3) borrow money, except that the Portfolio may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii) in
combination do not exceed 33% of the Portfolio's total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with this 33%
limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or by domestic issuers which are banks, bank holding companies or similar
banking institutions) if, as a result, more than 25% of the Portfolio's total
assets would be invested in the securities of companies whose principal business
activities are in the same industry;
(6) purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(7) purchase or sell physical commodities (unless acquired as a result of
ownership of securities or other instruments) or commodity contracts, including
futures contracts;
(8) lend any security or make any other loan if, as a result, more than 10% of
its total assets would be lent to other parties, but this limit does not apply
to purchases of debt securities or to repurchase agreements; or
(9) purchase the securities of other investment companies except in connection
with a merger, consolidation, reorganization or acquisition of assets or in
accordance with the 1940 Act.
As a result of Rule 2a-7 promulgated under the 1940 Act (the "Rule"), the entire
portfolio (except with respect to U.S. Government securities) of the General
Money Market Portfolio is subject to the 5% limitation contained in investment
limitation (1) above. However, in accordance with the Rule, the General Money
Market Portfolio will be able to invest more than 5% (but no more than 25%) of
its total assets in the securities of a single issuer for a period of up to
three business days after the purchase thereof, provided that the Portfolio may
not hold more than one such investment at any one time. The Portfolio operates
in accordance with a non-fundamental operating policy which complies with the
Rule. Investment limitation (1) above would give the Portfolio the ability to
invest, with respect to 25% of the Portfolio's assets, more than 5% of its
assets in any one issuer in the event that the Rule were to be amended in the
future.
THE FOLLOWING LIMITATIONS OF THE GENERAL MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend during the coming year to purchase
the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the coming year to sell
securities short, unless it owns or has the right, without payment of additional
consideration, to obtain securities equivalent in kind and amount to the
securities sold short.
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<PAGE> 26
(iii) The Portfolio does not currently intend during the coming year to purchase
securities on margin, except that the Portfolio may obtain such short-term
credits as are necessary for the clearance of transactions.
(iv) The Portfolio may borrow money only (a) from a bank or (b) by engaging in
reverse repurchase agreements with any party (reverse repurchase agreements are
treated as borrowings for purposes of fundamental investment limitation (3)).
The Portfolio will not purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
(v) The Portfolio does not currently intend during the coming year to purchase
any security or enter into a repurchase agreement if, as a result, more than 10%
of its net assets would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven days and in securities
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
(vi) The Portfolio does not currently intend during the coming year to make
loans, but this limit does not apply to purchases of debt securities or to
repurchase agreements.
(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or leases.
(viii) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees of the
Trust and those officers and directors of the Manager or the Sub-Adviser who
individually own more than 1/2 of 1% of the securities of such issuer together
own more than 5% of such issuer's securities.
TAX-EXEMPT MONEY MARKET PORTFOLIO
THE FOLLOWING ARE THE TAX-EXEMPT MONEY MARKET PORTFOLIO'S FUNDAMENTAL
LIMITATIONS. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Portfolio may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements; provided that (i) and (ii) in combination do not
exceed 33 % of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed this
amount will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with this 33 % limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or tax-exempt obligations issued or guaranteed by a U.S. territory or possession
or a state or local government, or a political subdivision of any of the
foregoing) if, as a result,
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<PAGE> 27
more than 25% of the Portfolio's total assets would be invested in securities of
companies whose principal business activities are in the same industry;
(6) buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(7) purchase or sell physical commodities (unless acquired as a result of
ownership of securities or other instruments) or commodity contracts, including
futures contracts;
(8) lend any security or make any other loan if, as a result, more than 10% of
its total assets would be lent to other parties, but this limit does not apply
to purchases of debt securities or to repurchase agreements; or
(9) purchase the securities of other investment companies except in connection
with a merger, consolidation, reorganization or acquisition of assets or in
accordance with the 1940 Act.
As a result of Rule 2a-7 promulgated under the 1940 Act (the "Rule"), the entire
portfolio (except with respect to U.S. Government securities) of the Tax-Exempt
Money Market Portfolio is subject to the 5% limitation contained in investment
limitation (1) above. However, in accordance with the Rule, the Tax-Exempt Money
Market Portfolio will be able to invest more than 5% (but no more than 25%) of
its total assets in the securities of a single issuer for a period of up to
three business days after the purchase thereof, provided that the Portfolio may
not hold more than one such investment at any one time. The Portfolio operates
in accordance with a non-fundamental operating policy which complies with the
Rule. Investment limitation (1) above would give the Portfolio the ability to
invest, with respect to 25% of the Portfolio's assets, more than 5% of its
assets in any one issuer in the event that the Rule were to be amended in the
future.
THE FOLLOWING LIMITATIONS OF THE TAX-EXEMPT MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend during the coming year to purchase
the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the coming year to sell
securities short, unless it owns or has the right, without payment of additional
consideration, to obtain securities equivalent in kind and amount to the
securities sold short.
(iii) The Portfolio does not currently intend during the coming year to purchase
securities on margin, except that the Portfolio may obtain such short-term
credits as are necessary for the clearance of transactions.
(iv) The Portfolio may borrow money only (a) from a bank or (b) by engaging in
reverse repurchase agreements with any party (reverse repurchase agreements are
treated as borrowings for purposes of fundamental investment limitation (3)).
The Portfolio will not purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
(v) The Portfolio does not currently intend during the coming year to purchase
any security or enter into a repurchase agreement if, as a result, more than 10%
of its net assets would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven days and in securities
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<PAGE> 28
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
(vi) The Portfolio does not currently intend during the coming year to make
loans, but this limit does not apply to purchases of debt securities or to
repurchase agreements.
(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or leases.
(viii) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees of the
Trust and those officers and directors of the Manager who individually own more
than 1/2 of 1% of the securities of such issuer together own more than 5% of
such issuer's securities.
INVESTMENT POLICIES OF THE PORTFOLIOS
DELAYED DELIVERY TRANSACTIONS. Each Portfolio may buy and sell securities on a
delayed delivery or when-issued basis. These transactions involve a commitment
by each Portfolio to purchase or sell specific securities at a predetermined
price and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (which may be more than seven days
in the future). Typically, no interest accrues to the purchaser until the
security is delivered.
When purchasing securities on a delayed delivery basis, each Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because each Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with the
Portfolios' other investments. If each Portfolio remains substantially fully
invested at a time when delayed delivery purchases are outstanding, the delayed
delivery purchases may result in a form of leverage. If the other party to a
delayed delivery transaction fails to deliver or pay for the securities, each
Portfolio could miss a favorable price or yield opportunity, or could suffer a
loss. When delayed delivery purchases are outstanding, each Portfolio will set
aside cash or appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. Each Portfolio may renegotiate delayed delivery
transactions after they are entered into, and may sell underlying securities
before they are delivered, which may result in capital gains or losses.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS are obligations that bear variable
or floating interest rates and carry rights that permit holders to demand
payment of the unpaid principal balance plus accrued interest from the issuers
or certain financial intermediaries. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for such
obligations that approximates their par value. A demand instrument with a
conditional demand feature must have received both a short-term and a long-term
high quality rating, or, if unrated, have been determined to be of comparable
quality, and a demand instrument with an unconditional demand feature may be
acquired solely in reliance upon a short-term high quality rating or, if
unrated, upon a finding of comparable short-term quality, pursuant to procedures
adopted by the Trustees.
A variable rate instrument that matures in 397 days or less may be deemed to
have a maturity equal to the period remaining until the next readjustment of the
interest rate. A variable rate instrument that matures in greater than 397 days
but that is subject to a demand feature that is 397 days or less may be deemed
to have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the
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period remaining until the principal amount can be recovered through demand. A
floating rate instrument that is subject to a demand feature may be deemed to
have a maturity equal to the period remaining until the principal amount may be
recovered through demand. Each Portfolio may purchase a demand instrument with a
remaining final maturity in excess of 397 days only if the demand feature can be
exercised on no more than 30 days' notice (a) at any time or (b) at specific
intervals not exceeding 397 days.
STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. The Tax-Exempt Money Market
Portfolio may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments present minimal risk of
default.
Ordinarily, the Tax-Exempt Money Market Portfolio will not transfer a standby
commitment to a third party, although it could sell the underlying Municipal
Security to a third party at any time. Standby commitments will not affect the
dollar-weighted average maturity of the Portfolio, or the valuation of the
securities underlying the commitments. The Portfolio may purchase standby
commitments separate from, or in conjunction with, the purchase of securities
subject to such commitments, in which case, the Portfolio would pay a higher
price for the securities acquired, thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers to pay for securities at the time the commitments are exercised. The
fact that standby commitments are not marketable by the Portfolio, and that the
maturities of the underlying securities may be different from those of the
commitments, also present potential risks.
MUNICIPAL LEASE OBLIGATIONS. The Tax-Exempt Money Market Portfolio may invest a
portion of its assets in municipal leases and participation interests therein. A
participation interest gives the Portfolio a specified, undivided interest in
the obligation in proportion to its purchased interest in the total amount of
the obligation. These obligations, which may take the form of a lease, an
installment purchase, or a conditional sales contract, are issued by state and
local governments and authorities to acquire land and a wide variety of
equipment and facilities. Generally, the Portfolio will not hold such
obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation. Such participation interests
may be purchased from a municipality or from a bank or other third party.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. Leases, installment purchase, or
conditional sale contracts (which normally provide for title to the leased asset
to pass to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting their constitutional
and statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer has
no obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. Non-appropriation clauses free the issuer from debt
issuance limitations.
In determining the liquidity of a municipal lease obligation, the Sub-Adviser
will differentiate between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond, a tax-exempt asset-backed security or any other investment
structure using a municipal lease-purchase agreement as its base. While the
former may present liquidity issues, the latter are based on a well-established
method of securing payment of a municipal lease obligation.
MUNICIPAL SECURITIES include general obligation securities, which are backed by
the full taxing power of a municipality, or revenue securities, which are backed
by revenues of a project or facility. Industrial
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development bonds are a type of revenue bond backed by the credit and security
of a private issuer and may involve greater risk. Bond anticipation notes
normally provide interim financing in advance of an issue of bonds or notes, the
proceeds of which are used to repay anticipation notes. Tax and revenue
anticipation notes are issued by municipalities in expectation of future tax or
other revenues, and are payable from those specific taxes or revenues.
Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs.
TAX-EXEMPT MONEY MARKET PORTFOLIO FEDERALLY TAXABLE OBLIGATIONS. The Tax-Exempt
Money Market Portfolio does not intend to invest in securities whose interest is
federally taxable; however, from time to time, the Portfolio may invest a
portion of its assets on a temporary defensive basis in fixed-income obligations
whose interest is subject to federal income tax.
Should the Portfolio invest in taxable obligations, it would purchase securities
which in the judgment of the Sub-Adviser are of high quality. These would
include obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, obligations of domestic banks and repurchase agreements. The
Portfolio will purchase taxable obligations only if they meet its quality
requirements as set forth in the Prospectuses.
Proposals are introduced before Congress from time to time to restrict or
eliminate the federal income tax exemption for interest on Municipal Securities.
If such proposals were enacted, the availability of Municipal Securities and the
value of the Portfolio's holdings would be affected and the Trustees would
reevaluate the Tax-Exempt Money Market Portfolio's investment objective and
policies.
The Tax-Exempt Money Market Portfolio anticipates being as fully invested as
practicable in Municipal Securities. However, as a result of maturities of
portfolio securities, or sales of the Portfolio's shares, or in order to meet
redemption requests, there may be occasions when the Portfolio may hold cash
that is not earning income.
REPURCHASE AGREEMENTS are transactions in which a Portfolio purchases a security
and simultaneously commits to resell that security at an agreed upon price and
date within a number of days (usually not more than seven) from the date of
purchase.
All Portfolios, except the U.S. Treasury Income Portfolio, may enter into a
repurchase agreement with respect to any security in which it is authorized to
invest even though the underlying security matures in more than one year. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price. This obligation is in effect secured by the underlying
security having a value at least equal to the amount of the agreed upon resale
price and marked to market daily. A Portfolio will limit repurchase agreements
to those with parties whose creditworthiness has been reviewed and found
satisfactory by the Sub-Adviser.
REVERSE REPURCHASE AGREEMENTS permit each Portfolio, other than the U.S.
Treasury Money Market Portfolio and the U.S. Treasury Income Portfolio, to earn
additional income by selling securities to banks and primary dealers while
agreeing to repurchase them at an agreed upon time and price. Reverse repurchase
agreements involve the sale of securities held by a Portfolio pursuant to an
agreement to repurchase the securities at an agreed-upon price, date and
interest payment. A Portfolio may enter into reverse repurchase agreements when
it is able to purchase other securities which will produce more income than the
cost of the agreement, or for liquidity purposes. When effecting reverse
repurchase transactions, securities which are a permitted investment for the
Portfolio (i.e., obligations of domestic and foreign banks
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<PAGE> 31
or thrift organizations, corporate debt obligations, including commercial paper,
notes and bonds with remaining maturities of one year or less and U.S.
Government Obligations with respect to the General Money Market Portfolio and
the Tax-Exempt Money Market Portfolio; and Municipal Securities with respect to
the Tax-Exempt Money Market Portfolio) and are of a dollar amount equal in value
to the securities subject to the agreement will be maintained in a segregated
account with the Portfolio's custodian. Reverse repurchase agreements are
considered to be borrowings and would therefore be subject to a Portfolio's
fundamental borrowing limitation (3). The Tax-Exempt Money Market Portfolio will
only engage in reverse repurchase agreements for temporary or emergency purposes
and not for leverage or investment.
In event of the bankruptcy of the other party to a reverse repurchase agreement
the Portfolio could experience delays in recovering securities. To the extent
that the value of securities may have decreased in the meantime, a Portfolio
could experience a loss. The creditworthiness of the other party to a reverse
repurchase transaction must be reviewed and found satisfactory by the
Sub-Adviser.
RESTRICTED SECURITIES. The General Money Market Portfolio and Tax-Exempt Money
Market Portfolio may purchase restricted securities that are not registered for
sale to the general public, but which provide the Portfolio with the right to
receive payment of principal and interest without penalty on demand (demand
feature) or can be resold to institutional investors. Institutional trading in
restricted securities is relatively new, and the liquidity of the Portfolio's
investments could be impaired if trading does not develop or declines. Provided
that the security has a demand feature or a dealer or institutional trading
market exists, these restricted securities are not treated as illiquid
securities.
PORTFOLIO TRANSACTIONS
The Sub-Adviser makes decisions to buy and sell securities for each Portfolio,
selects broker-dealers and negotiates commission rates. The selection of
broker-dealers is generally made based upon the price, quality of execution
services and/or research provided. Portfolio securities are normally purchased
directly from the issuer or from a market maker for the securities. Since
purchases and sales of portfolio securities by the Portfolios are usually
principal transactions, the Portfolios incur little or no brokerage commissions.
The purchase price paid to dealers serving as market makers may include a spread
between the bid and asked prices. The Portfolios may also purchase securities
from underwriters at prices which include a commission paid by the issuer to the
underwriter.
Each Portfolio requires that investments mature (or are deemed to mature) within
397 days or less. The amortized cost method of valuing portfolio securities
requires that each Portfolio maintain an average weighted portfolio maturity of
90 days or less. Both policies may result in relatively high portfolio turnover,
but since brokerage commissions are not normally paid on money market
instruments, the high rate of portfolio turnover is not expected to have a
material effect on the Portfolios' net income or expenses. Each Portfolio may
seek to profit from short-term trading, and may not always hold portfolio
securities to maturity.
The Sub-Adviser's primary consideration in effecting a security transaction is
to obtain the best net price and the most favorable execution of the order. To
the extent that the executions and prices offered by more than one dealer are
comparable, the Sub-Adviser may, at its discretion, effect transactions with
dealers that furnish statistical, research or other information or services
which are deemed by the Sub-Adviser to be beneficial to the Portfolios'
investment program. Certain research services furnished by dealers may be useful
to the Sub-Adviser's clients other than the Portfolios. Similarly, any research
services received by the Sub-Adviser through placement of portfolio transactions
of other clients may be of value to the Sub-Adviser
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in fulfilling its obligations to the Portfolios. The Sub-Adviser is of the
opinion that the material received is beneficial in supplementing its research
and analysis, and therefore, may benefit the Portfolios by improving the quality
of its investment advice. The advisory fee paid by the Portfolios is not reduced
because of the receipt of such services.
The Sub-Adviser and its affiliates may manage other investment accounts, some of
which may have objectives similar to that of the Portfolios. It is possible that
at times, identical securities will be acceptable for one or more of such
investment accounts. However, the position of each account in the securities of
the same issue may vary and the length of time that each account may choose to
hold its investment in the securities of the same issue may likewise vary. Also,
the timing and amount of purchase by each account may be determined by its cash
position. If the purchase or sale of securities consistent with the investment
policies of each Portfolio and one or more of these accounts is considered at or
about the same time, transactions in such securities will be allocated in good
faith among the Portfolios and such accounts in a manner deemed equitable by the
Sub-Adviser. The Sub-Adviser may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. The allocation and combination of simultaneous securities
purchases on behalf of each Portfolio would be made in the same way that such
purchases are allocated among or combined with those of other such investment
accounts. Simultaneous transactions could adversely affect the ability of each
Portfolio to obtain or dispose of the full amount of security which it seeks to
purchase or sell.
VALUATION OF PORTFOLIO SECURITIES
Each Portfolio values its investments on the basis of amortized cost, which
involves valuing an instrument at its cost and thereafter assuming a constant
accretion to maturity of any discount or amortization to maturity of any
premium. The amortized cost value of an instrument may be higher or lower than
the price a Portfolio would receive if it sold the instrument. During periods of
declining interest rates, each Portfolio's yields based on amortized cost may
tend to be higher than a yield based on market prices and estimates of market
prices. A new shareholder in a Portfolio would then be able to obtain a somewhat
higher yield than would result from investment in a fund using solely market
quotations to determine its net asset value per share while existing
shareholders would receive less investment income. In a period of rising
interest rates, the converse would apply. The valuation of a Portfolio's
instruments based upon amortized cost and the maintenance of its net asset value
per share at $1.00 is permitted in accordance with Rule 2a-7 under the 1940 Act.
Each Portfolio must adhere to certain conditions under Rule 2a-7 which are
summarized in the Prospectuses.
The Trustees have established procedures designed to stabilize each Portfolio's
net asset value per share calculated on the basis of amortized cost. The
Trustees review each Portfolio's holdings, at such intervals as they may deem
appropriate, to determine whether net asset value per share calculated by using
available market quotations would deviate from $1.00. The Trustees have agreed
to take such corrective action as they may deem necessary and appropriate, if
any such deviation would result in material dilution or otherwise would be
unfair to shareholders. This may include selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends, redeeming shares in kind, or establishing net
asset value per share by using available market quotations.
PERFORMANCE
From time to time, each Portfolio of the Trust advertises its yield and
effective yield for each class of shares in advertisements or in reports or
other communications with shareholders and others. Both yield figures are based
on historical earnings and are not intended to indicate future performance.
14
<PAGE> 33
The standardized annualized seven-day yield for each Portfolio for a class of
shares is computed by: (1) determining the net change exclusive of capital
changes, in the value of a hypothetical pre-existing account in a Portfolio
having a balance of one share of the relevant class at the beginning of a
seven-day period, for which the yield is to be quoted, (2) dividing the net
change in account value by the value of the account at the beginning of the base
period to obtain the base period return, and (3) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of the
account in each Portfolio includes the value of additional shares purchased with
dividends from the original share and dividends declared on both the original
share and any such additional shares, and all fees that are charged by a
Portfolio to all shareholder accounts in proportion to the length of the base
period, other than nonrecurring account and sales charges. For any account fees
that vary with the size of the account, the amount of fees charged would be
computed with respect to the Portfolio's mean (or median) account size. The
capital changes to be excluded from the calculation of the net change in account
value are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The yields for each Portfolio for the seven-day
period ended August 31, 1998 were:
<TABLE>
<CAPTION>
Portfolio Yield
--------- -----
<S> <C>
U.S. Treasury Money Market Portfolio - Class A 5.31%
U.S. Treasury Money Market Portfolio - Class B 5.06%
U.S. Treasury Money Market Portfolio- Class D 4.81%
General Money Market Portfolio - Class A 5.38%
General Money Market Portfolio - Class B 5.13%
Tax-Exempt Money Market Portfolio - Class A 3.18%
</TABLE>
The effective compound yield quotation for each Portfolio and class is computed
by adding 1 to the unannualized base period return (calculated as described
above), raising the sum to a power equal to 365 divided by 7, and subtracting 1
from the result. The effective yields for each Portfolio for the seven-day
period ended August 31, 1998 were:
<TABLE>
<CAPTION>
Portfolio Yield
--------- -----
<S> <C>
U.S. Treasury Money Market Portfolio - Class A 5.46%
U.S. Treasury Money Market Portfolio - Class B 5.19%
U.S. Treasury Money Market Portfolio- Class D 4.93%
General Money Market Portfolio - Class A 5.53%
General Money Market Portfolio - Class B 5.26%
Tax-Exempt Money Market Portfolio - Class A 3.23%
</TABLE>
In addition to the current yield, the Portfolios may quote yields in advertising
based on any historical seven day period.
Yield information may be useful in reviewing each Portfolio's performance and
for providing a basis for comparison with other investment alternatives. Each
Portfolio's yield will fluctuate, unlike investments which pay a fixed yield for
a stated period of time. Investors should give consideration to the quality and
maturity of portfolio securities of the respective investment companies when
comparing investments.
In addition, the Tax-Exempt Money Market Portfolio may calculate a "tax
equivalent yield" and "tax equivalent effective yield" for each class of shares.
The tax equivalent yield shows the taxable yield an investor would have to earn,
before taxes, to equal the class's tax-free yield. The tax equivalent yield for
the class is computed by dividing that portion of the class's yield which is
tax-exempt by one minus a stated
15
<PAGE> 34
income tax rate and adding the product to that portion, if any, of the class's
computed yield that is not tax-exempt. The tax equivalent yield for the
Tax-Exempt Money Market Portfolio Class A shares for the seven days ended August
31, 1998 was 5.21%. The tax equivalent effective yield for the class is computed
by dividing that portion of the class's effective yield which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the class's computed effective yield that is not tax-exempt. The tax
equivalent effective yield for the Tax-Exempt Money Market Portfolio Class A
shares for the seven days ended August 31, 1998 was 5.30%. Tax equivalent and
tax equivalent effective yields assume the payment of federal income taxes at a
rate of 39% or another applicable stated rate. Of course, no assurance can be
given that any of the classes of shares of the Tax-Exempt Money Market Portfolio
will achieve any specific tax-exempt yield. While the Portfolio invests
principally in obligations the interest from which is exempt from federal income
tax, other income received by the Portfolio may be taxable.
From time to time, in advertisements or in reports to shareholders, the yields
of the Portfolios, as a measure of their performance, may be quoted and compared
to those of other mutual funds with similar investment objectives and to other
relevant indexes or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
The Portfolios may compare their performance or the performance of securities in
which they may invest to: IBC/Donoghue's Money Fund Average TM/Total
Institutions Only Average; Government Only Institutions Only; and Tax-Free
Institutions Only, which are average yields of various types of money market
funds that include the effect of compounding distributions. The Portfolios'
yield data may be reported in national financial publications including, but not
limited to, "Money Magazine", "Forbes", "Barron's", "The Wall Street Journal"
and "The New York Times", or in publications of a local or regional nature.
Each Portfolio may also compare its performance to other mutual funds,
especially to those with similar investment objectives. These comparisons may be
based on data published by IBC/Donoghue's Money Fund Report(R) of Holliston, MA
01746, or by Lipper Analytical Services, Inc. (Lipper, sometimes referred to as
Lipper Analytical Services), an independent service located in Summit, New
Jersey that monitors the performance of mutual funds. Each Portfolio may compare
its performance to the yields or averages of other money market securities as
reported by the Federal Reserve Bulletin, by TeleRate, a financial information
network, or by Salomon Brothers Inc., a broker-dealer firm; and other
fixed-income investments such as Certificates of Deposit (CDs). The principal
value and interest rate of CDs and money market securities are fixed at the time
of purchase whereas each Portfolio's yield will fluctuate. Unlike some CDs and
certain other money market securities, money market mutual funds, and the
Portfolios in particular, are not insured by the FDIC. Investors should give
consideration to the quality and maturity of the portfolio securities of the
respective investment companies when comparing investment alternatives. The
Portfolios may reference the growth and variety of money market mutual funds and
the Manager's or Sub-Adviser's skill and participation in the industry.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing each
Portfolio's net asset value per share. Shareholders receiving securities or
other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale, as well as the associated inconveniences.
The Trust is open for business and its net asset value per share is calculated
every day that both the Boston and New York Federal Reserve Banks and the New
York Stock Exchange (NYSE) are open. On any day when either the Boston or New
York Federal Reserve Bank or the NYSE closes early, the right is reserved
16
<PAGE> 35
to advance the time on that day by which purchase and redemption orders must be
received. To the extent that the Portfolios' securities are traded in other
markets on days when the Boston and New York Federal Reserve Bank or the NYSE is
closed, the Portfolios' net asset value per share may be affected when investors
may not purchase or redeem shares.
17
<PAGE> 36
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS. Dividends from the Trust will not normally qualify for the
dividends-received deduction available to corporations, since the Portfolios'
income is primarily derived from interest income and short-term capital gains.
Depending upon state law, a portion of each Portfolio's dividends attributable
to interest income derived from U.S. Government Obligations may be exempt from
state and local taxation. The Portfolios will provide information on the portion
of each Portfolio's dividends, if any, that qualifies for this exemption.
Dividends derived from the Tax-Exempt Money Market Portfolio's tax-exempt income
are not subject to federal income tax, but must be reported to the IRS by
shareholders. Exempt-interest dividends are included in income for purposes of
computing the portion of social security and railroad retirement benefits that
may be subject to federal tax. If the Portfolio earns taxable income or capital
gains from its investments, these amounts will be designated as taxable
distributions. Dividends derived from taxable investment income and short-term
capital gains are taxable as ordinary income.
The Tax-Exempt Money Market Portfolio will send a tax statement showing the
amount of tax-exempt distributions for the previous calendar year by January
31st.
Each Portfolio's distributions are taxable when they are paid, except that
distributions declared in October, November or December to shareholders of
record in those months and paid in January of the following year are taxable as
if paid on December 31st.
CAPITAL GAINS DISTRIBUTIONS. The Portfolios may distribute capital gains once a
year or more often as necessary to maintain their net asset value per share at
$1.00 or to comply with distribution requirements under federal tax law. The
Portfolios do not anticipate earning long-term capital gains on securities held.
TAX STATUS OF THE TRUST. Each Portfolio intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), so that each Portfolio will not be liable for federal
income or excise taxes on net investment income, net long-term or capital gains
to the extent that these are distributed to shareholders in accordance with
applicable provisions of the Code.
18
<PAGE> 37
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each Trustee
that is an "interested person" (as defined by the 1940 Act) by virtue of his
affiliation with the Trust, or the Manager or the Distributor, is indicated by
an asterisk (*).
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH PRINCIPAL OCCUPATION DURING PAST FIVE
REGISTRANT YEARS
<S> <C> <C>
John S. Culbertson Trustee Retired. Trust Consultant with Fidelity
1995 Lake Marshall Drive Investments Institutional Services Co. from
Gibsonia, PA 15044 1990 to 1993.
68
Rufus C. Cushman, Jr. Trustee Retired. Money Manager with Fidelity
10 Corn Point Road Management & Research Corp. from 1968 through
Marblehead, MA 01945 1994.
65
Richard F. Curcio* President, Trustee, Founded Integrity Investments, Inc. (a
871 Venetia Bay Boulevard Chairman of the Board broker/dealer) and Integrity Management &
Suite 370 of Trustees Research, Inc.(an investment adviser) in 1992,
Venice, FL 34292 and is currently President and Director of
51 each. Senior Vice President/Regional Manager
for Fidelity Institutional Services Company
from 1987 to 1992. Associated with Fidelity
Distributors from 1979 to 1992.
H. Willis Day, Jr. Trustee Retired. Former Senior Vice President of
35 Beach Avenue Southeast Bank, FLA, N.A.
Kennebunk Beach, ME 04043
73
Roger F. Dumas Trustee Private investor since 1987.
151 Tremont Street
Boston, MA 02111
63
Kenneth J. Phelps* Trustee President, Principal and Director of Reliance
5545 Cross Gate Court, N.W. Trust Company, Atlanta, GA since 1992.
Atlanta, GA 30327 Chairman, Chief Executive Officer and
57 Director, C&S/Sovran Trust Company, Inc. from
1987 to 1992.
</TABLE>
19
<PAGE> 38
<TABLE>
<S> <C> <C>
Susan M. Schwartz Vice President, Operations Manager of Integrity Investments,
871 Venetia Bay Boulevard Secretary and Treasurer Inc. since 1993. Account Officer of Fidelity
Suite 370 Investments from 1985 to 1993.
Venice, FL 34292
35
Robert Melley Vice President, Senior Vice President of Integrity
871 Venetia Bay Boulevard Assistant Secretary and Investments, Inc. since April 1994. Senior
Suite 370 Assistant Treasurer Vice President of Fidelity Distributors, Inc.
Venice, FL 34292 from 1981 to 1994.
60
</TABLE>
The Trust pays each Trustee who is not affiliated with the Manager or the
Sub-Adviser (the "Independent Trustees") an annual fee of $1,000 plus $1,000 for
each meeting attended and reimburses travel and other expenses incurred in
attending such meetings. The Trust's officers and Trustees who are affiliated
with the Manager or the Sub-Adviser are paid by the Manager. During the fiscal
year ended August 31, 1998, the Trust paid an aggregate of $ 20,000 to the
Independent Trustees. The following table shows compensation by Trustee for the
fiscal year ended August 31, 1998.
<TABLE>
COMPENSATION TABLE
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
NAME OF PERSON, COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON
POSITION THE TRUST PART OF FUND EXPENSES RETIREMENT
<S> <C> <C> <C>
John S. Culbertson $5,000 None None
Trustee
Rufus C. Cushman $5,000 None None
Trustee
Richard F. Curcio None None None
President, Trustee,
Chairman of the
Board of Trustees
H. Willis Day, Jr. $5,000 None None
Trustee
Roger F. Dumas $5,000 None None
Trustee
Kenneth J. Phelps None None None
Trustee
</TABLE>
20
<PAGE> 39
As of October 28, 1998, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of any class of any Portfolio of
the Trust except that the Trustees and officers of the Trust, as a group, may be
deemed to have beneficially owned 100% of the Class B shares of the Tax-Exempt
Money Market Portfolio, the Class B shares of the U.S. Treasury Income
Portfolio, the Class C and D shares of the General Money Market Portfolio and
Class C of the U.S. Treasury Money Market Portfolio.
INVESTMENT ADVISORY AGREEMENTS
Each Portfolio employs the Manager to furnish investment advisory and other
services to the Portfolio. Under the Management Agreement with each Portfolio,
the Manager is authorized to appoint one or more sub-advisers at the Manager's
expense. David L. Babson & Co. Inc. acts as Sub-Adviser and, subject to the
supervision of the Trustees and of the Manager, directs the investments of each
Portfolio in accordance with its investment objective, policies and limitations.
The Manager pays all the Portfolio expenses with the following exceptions: the
fees and expenses of the Trustees who are not "interested persons" of the Trust;
interest on borrowings; taxes; expenses incurred by Class B, Class C and Class D
shares pursuant to the Distribution and Shareholder Servicing Plans, if any; and
such extraordinary non-recurring expenses as may arise, including litigation to
which the Trust may be party, and any obligation it may have to indemnify its
officers and Trustees with respect to such litigation.
For managing its investment and business affairs, each Portfolio pays to the
Manager the fees set forth in the Prospectuses. The Manager pays the Sub-Adviser
the fee set forth in the Prospectuses.
FOR FISCAL YEAR LISTED, THE PORTFOLIO PAID THE MANAGER:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Fiscal Year U.S. Treasury Money U.S. Treasury General Money Tax-Exempt Money
Ended Market Portfolio Income Portfolio Market Portfolio Market Portfolio
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/31/98 $ 936,822 $ 36,010 $ 897,707 $ 514,182
- -------------------------------------------------------------------------------------------------------
8/31/97 $ 823,706 $ 33,215 $ 975,895 $ 528,012
- -------------------------------------------------------------------------------------------------------
8/31/96 $ 385,690 $ 8,578 $ 958,106 $ 572,477
- -------------------------------------------------------------------------------------------------------
</TABLE>
FOR FISCAL YEAR LISTED, THE PORTFOLIO PAID THE SUB-ADVISER:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Fiscal Year U.S. Treasury Money U.S. Treasury General Money Tax-Exempt Money
Ended Market Portfolio Income Portfolio Market Portfolio Market Portfolio
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/31/98 $ 332,963 $ 12,605 $ 317,968 $ 182,645
- -------------------------------------------------------------------------------------------------------
8/31/97 $ 293,764 $ 11,785 $ 345,965 $ 188,730
- -------------------------------------------------------------------------------------------------------
8/31/96 $ 145,722 $ 6,319 $ 363,469 $ 217,873
- -------------------------------------------------------------------------------------------------------
</TABLE>
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR. BISYS Fund Services Ohio, Inc. ("BISYS") serves as Administrator
to the Trust pursuant to an administration agreement dated September 1, 1998
(the "Administration Agreement")
21
<PAGE> 40
between the Trust, BISYS and the Manager. The Administration Agreement continues
in effect until August 31, 2000, ("Initial Term"). Thereafter, unless otherwise
terminated as provided herein, this Agreement shall be renewed automatically for
successive one-year periods ("Rollover Periods"). This Agreement may be
terminated without penalty (i) by provision of a notice of nonrenewal in the
manner set forth in the Administration Agreement, (ii) by mutual agreement of
the parties or (iii) for "cause," as defined in the Administration Agreement,
upon the provision of 60 days advance written notice by the party alleging
cause. In addition, subject to the payment obligation set forth in the
Administration Agreement, this Agreement may be terminated during any Rollover
Period upon the provision of 90 days advance written notice of termination.
Written notice of nonrenewal must be provided within 60 days of the end of the
Initial Term or any Rollover Period, as the case may be. The Administration
Agreement contains provisions limiting the liability of BISYS and requiring its
indemnification by the Trust. Pursuant to the Administration Agreement, BISYS
provides the Trust with general office facilities and supervises the overall
administration of the Fund, including among other responsibilities, assisting in
the preparation and filing of all documents required for compliance by the Trust
with applicable laws and regulations and arranging for the maintenance of books
and records of the Trust. BISYS provides persons (including directors, officers
or other employees of BISYS or its affiliates) satisfactory to the Board of
Trustees to serve as officers of the Trust. BISYS is a wholly owned indirect
subsidiary of BISYS Group, Inc., which is headquartered in Little Falls, New
Jersey, and through its subsidiaries provides a comprehensive array of products
and services to financial institutions and corporate clients including: mutual
fund distribution and administration, retirement plan services, insurance
distribution and support services and image and data processing outsourcing.
Pursuant to the Administration Agreement, the Manager pays BISYS compensation at
the following annualized rates for each Portfolio:
.025% for portfolio assets of $1.2 billion and less
.0125% for portfolio assets greater than $1.2 billion
CUSTODIAN The Bank of New York, ("Custodian") 90 Washington Street, New York,
New York 10286, is the Custodian for each Portfolio under custodian agreements
with respect to each Portfolio.
FUND ACCOUNTING SERVICES. BISYS provides certain Fund accounting services
pursuant to a Fund Accounting Agreement dated September 1, 1998 (the "Fund
Accounting Agreement") between the Trust, BISYS and the Manager and shall
continue in effect with respect to a Portfolio, unless earlier terminated by
either party hereto as provided hereunder, until August 31, 2000. The Fund
Accounting Agreement's provisions for termination, limitation of liability and
indemnification are similar to those of the Trust's Administration Agreement.
Under the Fund Accounting Agreement, BISYS maintains all Fund books and records
required under Rule 31a-1 under the Investment Company Act, performs daily
accounting services and provides additional Fund reporting and record keeping
requirements.
Pursuant to the Fund Accounting Agreement, BISYS is entitled to receive a fee
from the Manager for each Portfolio (except U.S. Treasury Income Portfolio) in
accordance with the following schedule, subject to a monthly minimum fee of
$3000 for up to four (4) classes for each Portfolio:
.0225% of each Portfolio's average daily net assets up to $100 million;
22
<PAGE> 41
.0125% of each Portfolio's average daily net assets in excess of $100
million up to $200 million; and
.005% of each Portfolio's average daily net assets in excess of $200
million.
Pursuant to the Fund Accounting Agreement, BISYS is entitled to receive a fee
from the U.S. Treasury Income Portfolio for those months during which the
Portfolio is operational, in accordance with the following schedule, subject to
a monthly minimum fee of $200:
.0225% of the Portfolio's average daily net assets up to $100 million;
.0125% of the Portfolio's average daily net assets in excess of $100
million up to $200 million; and
.005% of the Portfolio's average daily net assets in excess of $200
million.
TRANSFER AGENT. BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, also serves as
transfer agent and dividend disbursing agent for the Fund pursuant to a separate
agreement, the Transfer Agency Agreement.
DISTRIBUTOR. Integrity Investments, Inc. (the "Distributor"), located at 871
Venetia Bay Boulevard, Suite 370, Venice, Florida 34292, sells shares of each
Portfolio as agent on behalf of the Trust at no additional cost to the Trust.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS. The Trustees of the Trust have
adopted a Distribution and Shareholder Servicing Plan for the Class A shares and
Class B shares, a Distribution and Shareholder Servicing Plan for the Class C
shares, Distribution and Shareholder Servicing Plans for the Class D and Class E
shares (collectively, the "Plans") of each Portfolio of the Trust pursuant to
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in substance that
a mutual fund may not engage directly or indirectly in financing any activity
that is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have adopted
the Plans to allow each Portfolio to incur certain expenses that might be
considered to constitute direct or indirect payment of distribution expenses.
Under the Plans, each Portfolio, subject to Trustee authorization, may pay the
Distributor a monthly fee to compensate it for expenses it bears and services it
provides in the distribution of shares and the provisions of shareholder support
services. The fees that may be paid by the respective classes of the Portfolios
under the Plans are set forth in the respective Prospectuses. For the fiscal
year ended August 31, 1998, the Class B shares of the U.S. Treasury Money Market
Portfolio and the General Money Market Portfolio paid distribution costs of
$748,044 and $40,292, respectively and Class D shares of the U.S. Treasury Money
Market Portfolio paid distribution costs of $671,044 pursuant to their
respective Plans. The Plans also recognize that the Manager, the Sub-Adviser and
the Distributor may each use its fees and other resources to pay expenses
associated with the promotion and administration of activities primarily
intended to result in the sale of shares. Distribution-related services include,
but are not limited to, the following: advertising the availability of services
and products; designing material to send to customers and developing methods of
making such materials accessible to customers; providing information about the
product needs of customers; providing facilities to solicit sales and to answer
questions from prospective and existing investors about the Portfolios;
receiving and answering correspondence from prospective investors, including
requests for sales literature, prospectuses and statements of additional
information; displaying and making sales literature and prospectuses available
on the service organization's premises; acting as liaison between shareholders
and the Portfolios, including obtaining information from the Portfolios and
providing
23
<PAGE> 42
performance and other information about the Portfolios; and providing additional
personal services and/or shareholder account maintenance services or additional
distribution-related services.
The Plans have been approved by the Trustees. As required by the Rule, the
Trustees considered all pertinent factors relating to the implementation of the
Plans prior to their approval, and have determined that there is a reasonable
likelihood that the Plans will benefit Class A, Class B, Class C, Class D and
Class E shares of each Portfolio and its shareholders. To the extent that the
Plans give the Manager and Distributor greater flexibility in connection with
the distribution of shares of the Portfolios, additional sales of the
Portfolios' shares may result.
The Glass-Steagall Act generally prohibits federally and state chartered or
supervised banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of this prohibition under the
Glass-Steagall Act has not been fully defined, in the opinion of the Trust and
the Manager, it should not prohibit banks from being paid for investment
advisory, shareholder servicing, administrative services and recordkeeping, nor
should it prevent the Manager or the Portfolios from compensating third parties
for performing such functions. If, because of changes in law or regulation, or
because of new interpretations of existing law, a bank or the Trust were
prevented from continuing these arrangements, it is expected that the Trustees
would make other arrangements for these services and that shareholders would not
suffer adverse financial consequences. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein,
and banks and other financial institutions may be required to register as
dealers pursuant to state law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. The U.S. Treasury Money Market Portfolio, U.S. Treasury
Income Portfolio, General Money Market Portfolio and Tax-Exempt Money Market
Portfolio are portfolios of The Valiant Fund.There are presently four Portfolios
of the Trust, each of which offers Class A, Class B, Class C, Class D and Class
E shares. The Trust was established as a Massachusetts business trust under the
laws of The Commonwealth of Massachusetts by an Agreement and Declaration of
Trust dated January 29, 1993 (the "Trust Declaration"). A copy of the Trust
Declaration is on file with the Secretary of The Commonwealth of Massachusetts.
The Trust, a diversified, open-end management investment company, is not
required to hold annual meetings of shareholders and does not intend to hold
shareholder meetings unless required by the 1940 Act. Holders of shares
representing 10% or more of the outstanding shares of the Trust may call a
meeting for the purpose of voting on the removal of one or more Trustees.
Special meetings may be called for the purpose of conducting specific items of
Trust business.
Shareholders receive one vote for each dollar (or a proportionate fractional
vote for each fraction of a dollar) of net asset value per share owned. The
shares of each Portfolio are classified into five classes. Each Portfolio votes
separately with respect to issues affecting only that Portfolio. Holders of a
particular class of shares have the exclusive right to vote on matters submitted
to shareholders pertaining only to that class. Pursuant to the Trust
Declaration, the Trustees have the authority to create additional Portfolios and
to issue additional classes of shares for each Portfolio of the Trust, subject
to receipt of any required regulatory approval. Shareholders may direct any
questions they may have about the Trust to the Distributor at 1-800-828-2176.
The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are especially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
each Portfolio are segregated on the books of account, and are to be charged
with the liabilities with respect to such Portfolio
24
<PAGE> 43
and with a share of the general expenses of the Trust. Expenses with respect to
the Trust are to be allocated in proportion to the asset value of the respective
Portfolios except where allocations of direct expense or class specific expense
can otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which expenses are
allocable to a given Portfolio or class thereof, or which are general or
allocable to all of the Portfolios. In the event of the dissolution or
liquidation of the Trust, shareholders of each class of each Portfolio are
entitled to receive the underlying assets of such class of such Portfolio
available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
of such trust may, under certain circumstances, be held personally liable for
the obligations of the Trust. The Declaration of Trust provides that the Trust
shall not have any claim against shareholders except for the payment of the
purchase price of shares and requires that each agreement, obligation or
instrument entered into or executed by the Trust or the Trustees shall include a
provision limiting the obligations created thereby to the Trust and its assets.
The Declaration of Trust provides for indemnification out of each Portfolio's
property of any shareholders held personally liable for the obligations of the
Portfolio. The Declaration of Trust also provides that each Portfolio shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Portfolio and satisfy any judgment thereon. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio itself would be
unable to meet its obligations. The Trustees believe that, in view of the above,
the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
VOTING RIGHTS. Each Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion or exchange rights; the
voting and dividend rights, and the right of redemption are described in the
Prospectuses. Shares are fully paid and nonassessable, except as set forth under
the heading "Shareholder and Trustee Liability" above. Holders of shares
representing 10% or more of the votes represented by all outstanding shares of
the Trust or a Portfolio may, as set forth in the By-Laws, call meetings of the
Trust or a Portfolio or Class for any purpose related to the Trust or a
Portfolio, as the case may be, including, in the case of a meeting of the entire
Trust, the purpose of voting on removal of one or more Trustees. The Trust or
any Portfolio may be terminated upon the sale of its assets to another open-end
management investment company, if approved by vote of the holders of shares
representing a majority of the votes represented by all outstanding shares of
the Trust or the Portfolio. If not so terminated, the Trust and the Portfolios
will continue indefinitely.
PRINCIPAL HOLDERS OF SECURITIES. As of January 4, 1999, to the knowledge of the
Trust's Management, the following persons owned of record or beneficially 5% or
more of the outstanding shares of any class of a Portfolio.
General Money Market Portfolio Class A: David L. Babson & Co., One Memorial
Drive, Cambridge, MA 02142, 5.84%; Evergreen Select Income Plus Fund, State
Street Bank & Trust, 108 Myrtle Street, AH3, North-Quincy, MA 02171, 10.06%;
First Union National Bank, 1525 West Wt. Harris Blvd., Charlotte, NC 28288,
73.11%.*
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General Money Market Portfolio Class B: Relico c/o Reliance Trust Company, PO
Box 48449, Atlanta, GA 30362, 100%.*
U.S. Treasury Money Market Portfolio Class A: Turtle & Co., ACM, PO Box 9427,
Boston, MA 02209, 5.98%; Relico c/o Reliance Trust Company, PO Box 48449,
Atlanta, GA 30362, 57.03%; State Street Bank & Trust, 108 Myrtle Street, AH3,
North-Quincy, MA 02171, 18.97%; Citizens Trust Co., 870 Westminster Street,
Providence, RI 02903, 17.95%.*
U.S. Treasury Money Market Portfolio Class B: Sun Bank National Association,
Suntrust Bank, Atlanta, PO Box 105504, Atlanta, GA 30348, 99.51%.*
U.S. Treasury Income Portfolio Class A: First Union National Bank, 1525 West Wt.
Harris Boulevard, Charlotte, NC 28288, 99.98%.*
U.S. Treasury Money Market Portfolio-Class D: First Union National Bank, 1525
West Wt. Harris Boulevard, Charlotte, NC 28288, 86.68%; Relico c/o Reliance
Trust Company, P.O. Box 48449, Atlanta, GA 30362, 12.71%.*
Tax-Exempt Money Market Portfolio-Class A: First Union National Bank, 1525 West
Wt. Harris Boulevard, Charlotte, NC 28288, 96.17%.*
Integrity Investments, Inc., 871 Venetia Bay Boulevard, Venice, FL 34292, owned
100% of : the Class C and Class D shares of the General Money Market Portfolio,
the Class B shares of the Tax-Exempt Money Market Portfolio, the Class C shares
of the U.S. Treasury Money Market Portfolio and the Class A and B shares of the
U.S. Treasury Income Portfolio.
*Any person or organization owning 25% or more of the outstanding shares of a
Portfolio may be presumed to "control" (as that term is defined in the 1940 Act)
such Portfolio. The Trust has adopted a code of ethics which contains a policy
on personal securities transactions by "access persons." That policy complies,
in all material respects, with the recommendations of the Investment Company
Institute.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 100 East Broad Street,
Suite 2100, Columbus, Ohio 43215, serves as the Trust's independent accountants
providing services including (1) audit of annual financial statements, (2)
assistance and consultation in connection with SEC filings, and (3) review of
the annual federal income tax returns filed on behalf of the Portfolios.
FINANCIAL STATEMENTS. The Trust's audited financial statements for the fiscal
year ended August 31, 1998, including the notes thereto and the report of
PricewaterhouseCoopers LLP thereon are incorporated herein by reference from the
Trust's 1998 Annual Report to Shareholders. A copy of the 1998 Annual Report to
Shareholders accompanies the delivery of this SAI.
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