Qualivest Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-743-8637
STATEMENT OF ADDITIONAL INFORMATION
November 15, 1995
as supplemented May 1, 1996
and May 15, 1996
This Statement of Additional Information ("SAI") describes the seventeen
diversified investment portfolios (the "Funds") of Qualivest Funds (the
"Trust"), all of which are advised by Qualivest Capital Management, Inc.
("Qualivest"). The Funds are:
. Qualivest U.S. Treasury Money Market . Qualivest Micro Cap Value Fund
Fund . Qualivest Income Equity Value
. Qualivest Money Market Fund Fund
. Qualivest Tax-Free Money Market Fund . Qualivest International
. Qualivest Intermediate Bond Fund Opportunities Fund
. Qualivest Diversified Bond Fund . Qualivest Optimized Stock Fund
. Qualivest Tax-Free National Bond Fund . Qualivest Allocated Conservative Fund
. Qualivest Large Companies Value Fund . Qualivest Allocated Balanced Fund
. Qualivest Large Companies Growth Fund . Qualivest Allocated Growth Fund
. Qualivest Small Companies Value Fund . Qualivest Allocated Aggressive Fund
The Trust offers an indefinite number of transferable units ("Shares") of
each Fund, and each Fund offers multiple classes of Shares. Shares of the
Qualivest Tax-Free National Bond Fund, the Qualivest Large Companies Growth
Fund, the Qualivest Micro Cap Value Fund, and the Qualivest Income Equity
Value Fund are not currently offered for sale. This SAI describes all classes
of Shares offered by the Trust.
This SAI is not a Prospectus and is authorized for distribution only when
preceded or accompanied by the Prospectuses (the "Prospectuses") of the Funds,
each of which is dated or supplemented the date hereof. This SAI contains more
detailed information than that set forth in the Prospectuses and should be read
in conjunction with the Prospectuses. This SAI is incorporated by reference in
its entirety into the Prospectuses. Copies of each of the Prospectuses may be
obtained by writing the Trust at 3435 Stelzer Road, Columbus, Ohio 43219, or by
telephoning toll free 1-800-743-8637.
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TABLE OF CONTENTS
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Page
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information on the Parent Funds' Investment Policies . . .
Additional Information on Portfolio Instruments of the Equity, Income
and Money Funds . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . .
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of the Trust's Money Funds . . . . . . . . . . . . . . . . .
Valuation of the Other Funds . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . .
Matters Affecting Redemption . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . .
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . .
Remuneration of Trustees . . . . . . . . . . . . . . . . . . . . . . .
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . .
Glass-Steagall Act . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custodians, Transfer Agent and Fund Accounting Services . . . . . . .
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . . . . . . . . . . . . . . . . .
Vote of a Majority of the Outstanding Shares . . . . . . . . . . . . .
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder and Trustee Liability . . . . . . . . . . . . . . . . . .
Additional Tax Information . . . . . . . . . . . . . . . . . . . . . .
Yields of the Money Funds . . . . . . . . . . . . . . . . . . . . . .
Yields of the Parent Funds, the Equity Funds and the Income Funds . .
Calculation of Total Return . . . . . . . . . . . . . . . . . . . . .
Distribution Rates . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Comparisons . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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The Qualivest Funds (the "Trust") is an open-end management investment
company which offers seventeen separate diversified investment portfolios
(collectively, the "Funds" and singly, a "Fund"), each with a different
investment objective. The Funds enable the Trust to meet a wide range of
investment needs. This SAI contains information about each of the following
Funds: the Qualivest Allocated Conservative Fund (the "Conservative Fund"),
the Qualivest Allocated Balanced Fund (the "Balanced Fund"), the Qualivest
Allocated Growth Fund (the "Growth Fund") and the Qualivest Allocated
Aggressive Fund (the "Aggressive Fund") (collectively, the "Parent Funds");
the Qualivest Large Companies Value Fund (the "Large Companies Value Fund"),
the Qualivest Large Companies Growth Fund (the "Large Companies Growth Fund"),
the Qualivest Small Companies Value Fund (the "Small Companies Fund"), the
Qualivest Micro Cap Value Fund (the "Micro Cap Fund"), the Qualivest Income
Equity Value Fund (the "Income Equity Fund"), the Qualivest International
Opportunities Fund (the "International Fund") and the Qualivest Optimized Stock
Fund (the "Optimized Fund") (collectively, the "Equity Funds"); the Qualivest
Intermediate Bond Fund (the "Intermediate Bond Fund"), the Qualivest Diversified
Bond Fund (the "Bond Fund") and the Qualivest Tax-Free National Bond Fund (the
"Tax-Free Bond Fund") (collectively, the "Income Funds"); and the Qualivest U.S.
Treasury Money Market Fund (the "U.S. Treasury Fund"), the Qualivest Money
Market Fund (the "Money Market Fund") and the Qualivest Tax-Free Money Market
Fund (the "Tax-Free Money Market Fund") (collectively, the "Money Funds)."
Much of the information contained in this SAI expands upon subjects
discussed in the Prospectuses of the Funds. Capitalized terms not defined
herein are defined in such Prospectuses. No investment in Shares of a Fund
should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES
Additional Information on the Parent Funds' Investment Policies
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Each Parent Fund seeks its investment objective by investing in a
diversified portfolio of one or more of the following Funds: the Large
Companies Value Fund, the Small Companies Fund, the International Fund, the
Optimized Fund, the Intermediate Bond Fund, the Bond Fund, the U.S. Treasury
Fund and the Money Market Fund (the "Underlying Funds"). Accordingly, the
investment performance of each Parent Fund is directly related to the
performance of the Underlying Funds, which may engage in the investment
techniques described below. In addition to Shares of the Underlying Funds, for
temporary cash management purposes, each Parent Fund may invest in short-term
obligations (with maturities of 12 months or less) consisting of commercial
paper (including variable amount master demand notes), bankers' acceptances,
certificates of deposit, repurchase agreements, reverse repurchase agreements
and dollar roll agreements, obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, asset-backed and
mortgage-related securities, and demand and time deposits of domestic and
foreign banks and savings and loan associations. The Parent Funds also may hold
depositary or custodial receipts representing beneficial interests in any of the
foregoing securities. These investments are described below under "Additional
Information on Portfolio Instruments of the Equity, Income and Money Funds."
Additional Information on Portfolio Instruments of the Equity, Income and Money
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Funds
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The following policies supplement the investment objectives and policies of
each of the Equity, Income and Money Funds of the Trust as set forth in the
respective Prospectuses for these Funds.
General. The Equity, Income and Money Funds will not acquire portfolio
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securities issued by, make savings deposits in, or enter into repurchase,
reverse repurchase, or dollar roll agreements with affiliates of the Funds,
except that the Optimized Fund may invest in such securities if they are
included in the S&P 500 Index.
Bank Obligations. All Funds may invest in bank obligations consisting of
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bankers' acceptances, certificates of deposit, and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Bankers' acceptances
invested in by the Funds will be those guaranteed by domestic and foreign banks
having, at the time of investment, capital, surplus, and undivided profits in
excess of $100,000,000 (as of the date of their most recently published
financial statements).
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. Certificates of deposit and time
deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of investment the depository institution has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements), or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
The Funds may also invest in Eurodollar Certificates of Deposit, which are
U.S. dollar denominated certificates of deposit issued by offices of foreign and
domestic banks located outside the United States; Yankee Certificates of
Deposit, which are certificates of deposit issued by a U.S. branch of a foreign
bank denominated in U.S. dollars and held in the United States; Eurodollar Time
Deposits ("ETDs"), which are U.S. dollar denominated deposits in a foreign
branch of a U.S. bank or a foreign bank; and Canadian Time Deposits, which are
basically the same as ETDs, except they are issued by Canadian offices of major
Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes
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issued by corporations. Except as noted below with respect to variable amount
master demand notes, issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
Variable Amount Master Demand Notes. Variable amount master demand notes,
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in which the Funds may invest, are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between a Fund and the issuer, they
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are not normally traded. Although there is no secondary market in the notes, a
Fund may demand payment of principal and accrued interest at any time. While
the notes are not typically rated by credit rating agencies, issuers of variable
amount master demand notes (which are normally manufacturing, retail, financial,
and other business concerns) must satisfy the same criteria as set forth above
for commercial paper. Qualivest will consider the earning power, cash flow, and
other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. In
determining dollar weighted average portfolio maturity, a variable amount master
demand note will be deemed to have a maturity equal to the longer of the period
of time remaining until the next interest rate adjustment or the period of time
remaining until the principal amount can be recovered from the issuer through
demand.
Foreign Investments. Investment in foreign securities is subject to
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special investment risks that differ in some respects from those related to
investments in securities of U.S. domestic issuers.
Because foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. Volume and
liquidity in most foreign markets are less than in the U.S., and securities of
many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Equity, Income and Money Funds endeavor to achieve the most favorable net
results on portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers, dealers and listed
companies than in the U.S., thus increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets, there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Fund is uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause such Fund to miss attractive investment
opportunities. Losses to a Fund due to subsequent declines in the value of
portfolio securities, or losses arising out of the Fund's inability to fulfill a
contract to sell such securities, could result in potential liability to the
Fund. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Fund's investments
in those countries. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
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In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and quality. Under
certain market conditions these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult for a Fund to obtain or to enforce a
judgment against the issuers of such securities.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of a Fund's securities
denominated in that currency. Such changes will also affect a Fund's income and
distributions to Shareholders. In addition, although a Fund will receive income
on foreign securities in such currencies, such Fund will be required to compute
and distribute its income in U.S. dollars. Therefore, if the exchange rate for
any such currency declines materially after such Fund's income has been accrued
and translated into U.S. dollars, the Fund could be required to liquidate
portfolio securities to make required distributions. Similarly, if an exchange
rate declines between the time a Fund incurs expenses in U.S. dollars and the
time such expenses are paid, the amount of such currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater.
In general, there is a large, liquid market in the United States for many
American Depositary Receipts ("ADRs"). The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. Certain of the ADRs in which the Equity Funds, except for the
Optimized Fund, may invest, typically those denominated as unsponsored, require
the holders thereof to bear most of the costs of such facilities, while issuers
of sponsored facilities normally pay more of the costs thereof. The depositary
of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through the voting rights to facility holders with respect to the
deposited securities, whereas the depositary of a sponsored facility typically
distributes shareholder communications and passes through the voting rights.
Variable and Floating Rate Notes. The Money Funds and the Tax-Free Bond
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Fund may acquire variable and floating rate notes, subject to each such Fund's
investment objective, policies and restrictions. A variable rate note is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate note is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by a Fund will be determined by Qualivest, under guidelines
established by the Trust's Board of Trustees, to be of comparable quality at the
time of purchase to rated instruments eligible for purchase under the Fund's
investment policies. In making such determinations, the investment adviser will
consider the earning power, cash flow and other liquidity ratios of the
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issuers of such notes (such issuers include financial, merchandising, bank
holding and other companies) and will continuously monitor their financial
condition. Although there may be no active secondary market with respect to a
particular variable or floating rate note purchased by a Fund, it may resell the
note at any time to a third party. The absence of an active secondary market,
however, could make it difficult for the Fund to dispose of a variable or
floating rate note in the event the issuer of the note defaulted on its payment
obligations and the Fund could, as a result or for other reasons, suffer a loss
to the extent of the default. To the extent that the Fund is not entitled to
receive the principal amount of a note within seven days, such note will be
treated as an illiquid security for purposes of calculation of the limitation on
the Fund's investment in illiquid securities as set forth in that Fund's
investment restrictions. Variable or floating rate notes may be secured by bank
letters of credit.
Variable or floating rate notes invested in by the Money Funds may have
maturities of more than 397 days, as follows:
1. An instrument that is issued or guaranteed by the U.S. Government or
any agency thereof which has a variable rate of interest readjusted no less
frequently than every 397 days will be deemed by a Money Fund to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
2. A variable rate note, the principal amount of which is scheduled on
the face of the instrument to be paid in 397 days or less, will be deemed by a
Money Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature will be
deemed by a Money Fund to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will be
deemed by a Money Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund is
entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding 397 days.
Money Market Funds. Each of the Equity and Income Funds may invest up to
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5% of the value of its total assets in the securities of any one money market
fund (including shares of the U.S. Treasury Fund, the Money Market Fund and the
Tax-Free Money Market Fund), provided that no more than 10% of such Fund's total
assets may be invested in the securities of money market funds in the aggregate.
Each of the Money Funds may invest up to 25% of its total assets in the
securities of money market funds.
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In order to avoid the imposition of additional fees as a result of
investments by the Equity and Income Funds in Shares of the Money Funds of the
Trust, Qualivest, BISYS Fund Services ("BISYS" or "Distributor" or
"Administrator"), and their affiliates will not retain any portion of their
usual service fees from the Funds that are attributable to investments by these
Funds in Shares of those Money Funds. The Equity and Income Funds will incur no
sales charges, contingent deferred sales charges, 12b-1 fees, or other
underwriting or distribution fees in connection with their investments in the
Money Funds of the Trust. These Funds will vote their Shares of each of the
Money Funds of the Trust in proportion to the vote by all other Shareholders of
such Money Fund. Moreover, no single Fund of the Trust may own more than 3% of
the outstanding Shares of any single Money Fund of the Trust.
Municipal Securities. As stated in the Prospectuses of the Tax-Free Money
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Market and Tax-Free Bond Funds (collectively, the "Exempt Funds" and singly, an
"Exempt Fund"), the assets of the Exempt Funds will be primarily invested in
bonds and notes issued by or on behalf of states (including the District of
Columbia), territories, and possessions of the United States and their
respective authorities, agencies, instrumentalities, and political subdivisions,
the interest on which is both exempt from federal income tax and not treated as
a preference item for purposes of the federal alternative minimum tax
("Municipal Securities"). With respect to the Tax-Free Money Market Fund,
Municipal Securities are expected to have remaining maturities of 397 days or
less. Under normal market conditions, at least 80% of the net assets of each
such Exempt Fund will be invested in Municipal Securities.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by
or on behalf of public authorities to finance various privately-operated
facilities are included within the term Municipal Securities if the interest
paid thereon is exempt from both federal income tax and not treated as a
preference item for purposes of the federal alternative minimum tax.
Among other types of Municipal Securities, the Exempt Funds may purchase
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Project Notes, Tax-Exempt Commercial Paper,
Construction Loan Notes and other forms of short-term tax-exempt loans. Such
instruments are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements or other revenues. In addition,
the Exempt Funds may invest in other types of tax-exempt instruments, such as
municipal bonds, private activity bonds, and pollution control bonds.
Project Notes are issued by a state or local housing agency and are sold by
the Department of Housing and Urban Development. While the issuing agency has
the primary obligation with respect to its Project Notes, they are also secured
by the full faith and credit of the United States through agreements with the
issuing authority which provide that, if required, the federal
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government will lend the issuer an amount equal to the principal of and interest
on the Project Notes.
As described in the Prospectuses of the Exempt Funds, the two principal
classifications of Municipal Securities consist of "general obligation" and
"revenue" issues. The Exempt Funds may also acquire "moral obligation" issues,
which are normally issued by special purpose authorities. There are, of course,
variations in the quality of Municipal Securities, both within a particular
classification and between classifications, and the yields on Municipal
Securities depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of a nationally recognized
statistical rating organization ("NRSRO") represent its opinion as to the
quality of Municipal Securities. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and Municipal Securities
with the same maturity, interest rate and rating may have different yields,
while Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to purchase, an issue of Municipal
Securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase. Qualivest will consider such an event in
determining whether an Exempt Fund should continue to hold the obligation.
An issuer's obligations under Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of Municipal Securities may be materially
adversely affected by litigation or other conditions.
Municipal Lease Obligations. The Tax-Free Bond Fund may invest up to 5% of
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its total assets in municipal lease obligations, including certificates of
participation, which finance a variety of public projects. Because of the way
these instruments are structured, they carry a greater risk than other types of
Municipal Securities. The Tax-Free Bond Fund may invest in municipal lease
obligations only when they are rated by an NRSRO or are deemed by Qualivest,
pursuant to guidelines adopted by the Board of Trustees, to be of a quality
compatible with the Fund's quality standards. Prior to purchasing a municipal
lease obligation and on a regular basis thereafter, Qualivest will evaluate the
credit quality and liquidity of the security. In making its evaluation,
Qualivest will consider various credit factors, such as the necessity of the
project, the municipality's credit quality, future borrowing plans, sources of
revenue pledged for lease repayment, general economic conditions in the region
where the security is issued, and liquidity factors, such as dealer activity.
U.S. Government Obligations. Each of the Funds may invest in obligations
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issued or guaranteed by the U.S. Government or its agencies and
instrumentalities, including bills, notes
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and bonds issued by the U.S. Treasury, as well as "stripped" U.S. Treasury
obligations such as Treasury Receipts issued by the U.S. Treasury representing
either future interest or principal payments. Stripped securities are issued at
a discount to their "face value," and may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The stripped Treasury obligations in which
the Funds may invest do not include Certificates of Accrual on Treasury
Securities ("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S.
Government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others are supported only by the
creditworthiness of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law. The Funds
will invest in the obligations of such agencies or instrumentalities only when
Qualivest believes that the credit risk with respect thereto is minimal.
Taxable Obligations. As stated in the Prospectuses of each of the Exempt
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Funds, under normal market conditions, each Exempt Fund may invest up to 20% of
its net assets in Taxable Obligations. Taxable Obligations may include (1)
obligations of the U.S. Treasury; (2) obligations of agencies and instrumen-
talities of the U.S. Government; (3) money market instruments, such as
certificates of deposit issued by domestic banks, corporate commercial paper,
and bankers' acceptances; and (4) taxable instruments subject to repurchase
agreements (agreements under which the seller agrees at the time of sale to
repurchase the securities it is selling at an agreed time and price).
Certificates of deposit will be those of domestic branches of U.S. banks which
are members of the Federal Reserve System or the Federal Deposit Insurance
Corporation and which have total assets at the time of purchase in excess of
$100,000,000, or of savings and loan associations which are members of the
Federal Deposit Insurance Corporation and which have total assets at the time of
purchase in excess of $100,000,000. Bankers' acceptances will be guaranteed by
U.S. commercial banks having total assets at the time of purchase in excess of
$100,000,000.
Options Trading. The Equity Funds and the Income Funds may purchase put
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and call options. A call option gives the purchaser the right to buy, and a
writer has the obligation to sell, the underlying security or foreign currency
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price or exchange rate of the security or foreign
currency, as the case may be. The premium paid to the writer is consideration
for undertaking the obligations under the option contract. A put option gives
the purchaser the right to sell the underlying security or foreign currency at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price or exchange rate of the security or
foreign currency, as the case may be. Put and call options purchased by the
foregoing Funds will be valued at the last sale price, or in the absence of such
a price, at the mean between bid and asked price.
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When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included in the liability
section of its statement of assets and liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked-to-market to reflect
the current value of the option written. The current value of the traded option
is the last sale price or, in the absence of a sale, the average of the closing
bid and asked prices. If an option expires on the stipulated expiration date,
or if a Fund enters into a closing purchase transaction, it will realize a gain
(or a loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund may deliver the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received and the Fund will
realize a gain or loss.
The Equity Funds, the Intermediate Bond Fund, and the Bond Fund also may
purchase or sell index options. Index options (or options on securities
indices) are similar in many respects to options on securities except that an
index option gives the holder the right to receive, upon exercise, cash instead
of securities, if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
Puts. Each Exempt Fund may acquire "puts" with respect to Municipal
----
Securities held in its portfolio. A put is a right to sell a specified security
(or securities) within a specified period of time at a specified exercise price.
The Exempt Funds may sell, transfer, or assign a put only in conjunction with
the sale, transfer, or assignment of the underlying security or securities.
The amount payable to an Exempt Fund upon its exercise of a put is normally
(i) the Exempt Fund's acquisition cost of the Municipal Securities (excluding
any accrued interest which the Exempt Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Exempt Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period.
Puts may be acquired by such Funds to facilitate the liquidity of their
respective portfolio assets. Puts may also be used to facilitate the
reinvestment of an Exempt Fund's assets at a rate of return more favorable than
that of the underlying security. Puts may, under certain circumstances, also be
used to shorten the maturity of underlying variable rate or floating rate
securities for purposes of calculating the remaining maturity of those
securities and the dollar weighted average portfolio maturity of the Tax-Free
Money Market Fund's assets pursuant to Rule 2a-7 under the Investment Company
Act of 1940, as amended ("1940 Act"). See "INVESTMENT POLICIES -- Additional
Information on Portfolio Instruments -- Variable and Floating Rate Notes" and
"NET ASSET VALUE" in this SAI.
The Exempt Funds expect that each such Fund will generally acquire puts
only where the puts are available without the payment of any direct or indirect
consideration. However, if
9
<PAGE>
necessary or advisable, the Exempt Funds may pay for puts either separately in
cash or by paying a higher price for portfolio securities which are acquired
subject to the puts (thus reducing the yield to maturity otherwise available for
the same securities).
The Exempt Funds intend to enter into puts only with banks and broker-
dealers which, in Qualivest's opinion, present minimal credit risks.
When-Issued and Delayed-Delivery Securities. Each Equity, Income and Money
-------------------------------------------
Fund may purchase securities on a "when-issued" or "delayed-delivery" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
----
yield). When a Fund agrees to purchase securities on a "when-issued" or
"delayed-delivery" basis, its custodian will set aside cash or high grade liquid
debt securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside securities to satisfy the purchase
commitment, and in such a case, the Fund may be required subsequently to place
additional assets in the separate account in order to assure that the value of
the account remains equal to the amount of the Fund's commitment. It may be
expected that the Fund's net assets will fluctuate to a greater degree when it
sets aside securities to cover such purchase commitments than when it sets aside
cash. In addition, because the Fund will set aside cash or high grade liquid
debt securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of Qualivest to manage it might be affected
in the event its commitments to purchase "when-issued" or "delayed-delivery"
securities ever exceeded 25% of the value of its assets. Under normal market
conditions, however, a Fund's commitments to purchase "when-issued" or "delayed-
delivery" securities will not exceed 25% of the value of its assets.
If the Fund sells a "when-issued" or "delayed-delivery" security before a
delivery, any gain would not be tax-exempt. When the Fund engages in "when-
issued" or "delayed-delivery" transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Fund
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous.
Mortgage-Related Securities. Each Fund except the Optimized Fund and the
---------------------------
International Fund may, consistent with its investment objective and policies,
invest in mortgage-related securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities. In addition, these Funds may
invest in mortgage-related securities issued by nongovernmental entities;
provided, however, that to the extent a Fund purchases mortgage-related
securities from such issuers which may, solely for purposes of the 1940 Act, be
deemed to be investment companies, its investment in such securities will be
subject to the limitations on its investment in investment company securities.
Mortgage-related securities, for purposes of the Funds' Prospectuses and
this SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the Government National Mortgage
Association ("GNMA") and government-related organizations such as the Federal
National Mortgage Association ("FNMA") and the
10
<PAGE>
Federal Home Loan Mortgage Corporation ("FHLMC"), as well as by nongovernmental
issuers such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies. Although certain mortgage-
related securities are guaranteed by a third party or otherwise similarly
secured, the market value of the security, which may fluctuate, is not so
secured. If a Fund purchases a mortgage-related security at a premium, that
portion may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the securities are prone to
prepayment, thereby shortening the average life of the security and shortening
the period of time over which income at the higher rate is received. When
interest rates are rising, though, the rate of prepayment tends to decrease,
thereby lengthening the period of time over which income at the lower rate is
received. For these and other reasons, a mortgage-related security's average
maturity may be shortened or lengthened as a result of interest rate
fluctuations and, therefore, it is not possible to predict accurately the
security's return to the Funds. In addition, regular payments received in
respect of mortgage-related securities include both interest and principal. No
assurance can be given as to the return the Funds will receive when these
amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued by
the GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of FNMA and are not backed by or
entitled to the full faith and credit of the United States. FNMA is a
government-sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to the timely payment of the principal and
interest by FNMA. Mortgage-related securities issued by the FHLMC include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed by the United States or by any Federal Home Loan Bank
and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to the timely payment
of interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate
collection or the timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal,
FHLMC may remit the amount due on account of its guarantee of ultimate payment
of principal
11
<PAGE>
at any time after default on an underlying mortgage, but in no event later than
one year after it becomes payable.
Medium-Grade Debt Securities. As stated in the Prospectuses for the Large
----------------------------
Companies Value Fund, Large Companies Growth Fund, Small Companies Fund, Micro
Cap Fund, Income Equity Fund and each Income Fund, each of these Funds may
invest in debt securities which are within the fourth highest rating group
assigned by an NRSRO (e.g., including securities rated BBB by Standard & Poor's
----
Corporation ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's")) or,
if not rated, or are of comparable quality as determined by Qualivest.
("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject
to credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest. Medium-Grade
Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where
the number of potential purchasers and sellers, if any, is limited, the ability
of those Funds to sell such securities at their fair market value either to meet
redemption requests or to respond to changes in the financial markets may be
limited.
Particular types of Medium-Grade Securities may present special concerns.
The prices of payment-in-kind or zero-coupon securities may react more strongly
to changes in interest rates than the prices of other Medium-Grade Securities.
Some Medium-Grade Securities in which such Funds may invest may be subject to
redemption or call provisions that may limit increases in market value that
might otherwise result from lower interest rates while increasing the risk that
those Funds may be required to reinvest redemption or call proceeds during a
period of relatively low interest rates.
The credit ratings issued by NRSROs are subject to various limitations.
For example, while such ratings evaluate credit risk, they ordinarily do not
evaluate the market risk of Medium-Grade Securities. In certain circumstances,
the ratings may not reflect in a timely fashion adverse developments affecting
an issuer. For these reasons, Qualivest conducts its own independent credit
analysis of Medium-Grade Securities.
12
<PAGE>
Restricted Securities. "Section 4(2) securities," as described in the
---------------------
Prospectuses, are securities that are issued in reliance on the "private
placement" exemption from registration which is afforded by Section 4(2) of the
Securities Act of 1933 (the "1933 Act"). The Funds will not purchase Section
4(2) securities which have not been determined to be liquid in excess of 15%
(10% in the case of the Money Funds) of the net assets of each Fund. The Board
of Trustees has delegated to Qualivest the day-to-day authority to determine
whether a particular issue of Section 4(2) securities that are eligible for
resale under Rule 144A under the 1933 Act should be treated as liquid. Rule
144A provides a safe-harbor exemption from the registration requirements of the
1933 Act for resales to "qualified institutional buyers" as defined in Rule
144A. With the exception of registered broker-dealers, a qualified
institutional buyer must generally own and invest on a discretionary basis at
least $100 million in securities.
Qualivest may deem Section 4(2) securities liquid if it believes that,
based on the trading markets for such security, such security can be disposed of
within seven days in the ordinary course of business at approximately the amount
at which an Equity, Income or Money Fund has valued the security. In making
such determination, Qualivest generally considers any and all factors that it
deems relevant, which may include (i) the credit quality of the issuer; (ii) the
frequency of trades and quotes for the security; (iii) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers; (iv) dealer undertakings to make a market in the security; and (v)
the nature of the security and the nature of market-place trades.
Treatment of Section 4(2) securities as liquid could have the effect of
decreasing the level of a Fund's liquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
Guaranteed Investment Contracts. When investing in guaranteed investment
-------------------------------
contracts ("GICs"), the Intermediate Bond Fund, the Bond Fund, and each of the
Money Funds make cash contributions to a deposit fund of an insurance company's
general account. The insurance company then credits to the deposit fund on a
monthly basis guaranteed interest. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company
may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. The Intermediate Bond Fund and the Bond Fund may invest in GICs of
insurance companies without regard to the ratings, if any, assigned to such
insurance companies' outstanding debt securities. The Money Funds may invest in
GICs issued by insurance companies whose outstanding debt securities are rated
in the first two rating categories by an NRSRO or, if not rated, that Qualivest
deems to be of comparable quality. Because a Fund may not receive the principal
amount of a GIC from the insurance company on seven days' notice or less, the
GIC is considered an illiquid investment, and, together with other instruments
held by the Fund which are deemed to be illiquid, will not exceed a Fund's
restriction on investment in illiquid securities. In determining average
portfolio maturity, GICs will be deemed to have a maturity equal to the period
of time remaining until the next readjustment of the guaranteed interest rate.
13
<PAGE>
Repurchase Agreements. Securities held by all of the Funds except the U.S.
---------------------
Treasury Fund may be subject to repurchase agreements. Under the terms of a
repurchase agreement, a Fund acquires securities from member banks of the
Federal Reserve System and broker-dealers that Qualivest deems creditworthy
under guidelines approved by the Board of Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price. If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation could suffer a loss to the extent
that the proceeds from a sale of the underlying portfolio securities were less
than the repurchase price under the agreement. Securities subject to repurchase
agreements will be held by the Fund's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system.
Futures Contracts. As discussed in the Prospectuses of the Equity Funds
-----------------
and the Income Funds, each of these Funds may enter into futures contracts.
This investment technique is designed primarily to hedge against anticipated
future changes in market conditions or foreign exchange rates which otherwise
might adversely affect the value of securities which a Fund holds or intends to
purchase. For example, when interest rates are expected to rise or market
values of portfolio securities are expected to fall, a Fund can seek through the
sale of futures contracts to offset a decline in the value of its portfolio
securities. When interest rates are expected to fall or market values are
expected to rise, a Fund, through the purchase of such contracts, can attempt to
secure better rates or prices for the Fund than might later be available in the
market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period.
Futures transactions involve brokerage costs and require a Fund to
segregate liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt obligations, to cover its obligation under such
contracts. A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Equity or Income Fund had not entered into any
futures transactions. In addition, the value of a Fund's futures positions may
not prove to be perfectly or even highly correlated with the value of its
portfolio securities and foreign currencies, limiting its ability to hedge
effectively against interest rates, foreign exchange rates and/or market risk
and giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
Forward Foreign Currency Exchange Contracts. The Large Companies Value,
-------------------------------------------
Large Companies Growth, Small Companies, Micro Cap, Income Equity and
International Funds may engage in foreign currency exchange transactions. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
("Term") from the date of the contract agreed upon by the parties, at a price
14
<PAGE>
set at the time of the contract. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
No such Fund intends to enter into such forward contracts if it would have
more than 10% of the value of its total assets committed to such contracts on a
regular or continuous basis. A Fund also will not enter into such forward
contracts or maintain a net exposure in such contracts where such Fund would be
obligated to deliver an amount of foreign currency in excess of the value of
such Fund's securities or other assets denominated in that currency. Qualivest
believes that it is important to have the flexibility to enter into such forward
contracts when it determines that to do so is in the best interests of a Fund.
Each such Fund's custodian bank segregates cash or liquid high grade debt
securities in an amount not less than the value of the Fund's total assets
committed to forward foreign currency exchange contracts entered into for the
purchase of a foreign security. If the value of the securities segregated
declines, additional cash or securities are added so that the segregated amount
is not less than the amount of such Fund's commitments with respect to such
contracts. These Funds generally do not enter into a forward contract with a
Term longer than one year.
Foreign Currency Options. A foreign currency option provides the Large
------------------------
Companies Value, Large Companies Growth, Small Companies, Micro Cap, Income
Equity or International Fund, as the option buyer, with the right to buy or sell
a stated amount of foreign currency at the exercise price at a specified date or
during the option period. A call option gives its owner the right, but not the
obligation, to buy the currency, while a put option gives its owner the right,
but not the obligation, to sell the currency. The option seller (writer) is
obligated to fulfill the terms of the option sold if it is exercised. However,
either seller or buyer may close its position during the option period in the
secondary market for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely,
a put rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect a Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if a Fund has
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in the value
of the currency but instead the currency had depreciated in value between the
date of purchase and the settlement date, such Fund would not have to exercise
its call but could acquire in the spot market the amount of foreign currency
needed for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
-------------------------------------
transactions, the Large Companies Value, Large Companies Growth, Small
Companies, Micro Cap, Income Equity and International Funds may use foreign
currency futures contracts and options on such futures contracts. Through the
purchase or sale of such contracts, a Fund may be able to achieve many
15
<PAGE>
of the same objectives as through forward foreign currency exchange contracts
more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency
futures contracts and options on foreign currency futures contracts are
standardized as to amount and delivery period and may be traded on boards of
trade and commodities exchanges or directly with a dealer which makes a market
in such contracts and options. It is anticipated that such contracts may
provide greater liquidity and lower cost than forward foreign currency exchange
contracts.
Regulatory Restrictions. As required by the Securities and Exchange
-----------------------
Commission, when purchasing or selling a futures contract or writing a put or
call option or entering into a forward foreign currency exchange purchase, a
Fund will maintain in a segregated account cash or liquid high grade debt
securities equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being classified as a "commodity pool
operator," a Fund will not enter into a futures contract or purchase an option
thereon if immediately thereafter the initial margin deposits for futures
contracts held by such Fund plus premiums paid by it for open options on futures
would exceed 5% of such Fund's total assets. A Fund will not engage in
transactions in financial futures contracts or options thereon for speculation,
but only to attempt to hedge against changes in market conditions affecting the
values of securities which such Fund holds or intends to purchase. When futures
contracts or options thereon are purchased to protect against a price increase
on securities intended to be purchased later, it is anticipated that at least
25% of such intended purchases will be completed. When other futures contracts
or options thereon are purchased, the underlying value of such contracts will at
all times not exceed the sum of: (1) accrued profit on such contracts held by
the broker; (2) cash or high quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days.
Investment Restrictions
- -----------------------
Each Fund's investment objective is fundamental and may not be changed
without a vote of the holders of a majority of the Fund's outstanding Shares.
In addition, the following investment restrictions may be changed with respect
to a particular Fund only by a vote of a majority of the outstanding Shares of
that Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value
of the Fund's total assets at the time of purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that: (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government or its agencies
16
<PAGE>
or instrumentalities, domestic bank certificates of deposit or bankers'
acceptances issued by United States branches of domestic banks (for the Money
Funds), and repurchase agreements secured by obligations of the U.S. Government
or its agencies or instrumentalities; (b) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; (c) a Parent
Fund may invest more than 25% of its total assets in investment companies, or
portfolios thereof, that are Underlying Funds of the Parent Fund; and (d)
utilities will be divided according to their services. For example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry;
2. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer, or the Fund would hold more than 10% of
the outstanding voting securities of the issuer, except that 25% or less of the
value of a Fund's total assets may be invested without regard to such
limitations. There is no limit to the percentage of assets that may be invested
in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. In addition, there is no
limit to the percentage of assets that a Parent Fund may invest in any
investment company;
3. Borrow money or issue senior securities, except that a Fund may borrow
from banks or brokers, in amounts up to 10% of the value of its total assets at
the time of such borrowing. A Fund will not purchase securities while its
borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt instruments
and lend portfolio securities in accordance with its investment objective and
policies, make time deposits with financial institutions and enter into
repurchase agreements;
5. Underwrite the securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities;"
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
7. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein, or in Underlying Funds investing in such
securities, are not prohibited by this restriction).
For purposes only of investment limitation number 1 above, such limitation
shall not apply to Municipal Securities, and industrial development bonds or
private activity bonds that are backed only by the assets and revenues of a
nongovernmental user shall not be deemed to be Municipal Securities. For
purposes of investment limitation number 2 above, a security is considered to be
17
<PAGE>
issued by the governmental entity (or entities) whose assets and revenues back
the security and, with respect to a private activity bond that is backed only by
the assets and revenues of a nongovernmental user, a security is considered to
be issued by such nongovernmental user.
Irrespective of investment restriction number 2 above and pursuant to Rule
2a-7 under the 1940 Act, the Money Market Fund and the U.S. Treasury Fund will,
with respect to 100% of its total assets, limit its investment in the securities
of any one issuer in the manner provided by such Rule.
The following additional investment restrictions are not fundamental
policies and therefore may be changed without the vote of a majority of the
outstanding Shares of a Fund. None of the Funds may:
1. Engage in any short sales (except for short sales "against the box" by
the Large Companies Value, Large Companies Growth, Small Companies, Micro Cap,
Income Equity, International and Optimized Funds);
2. Invest more than 10% of the Fund's total assets in the securities of
issuers which, together with any predecessors, have a record of less than three
years of continuous operation, except that this limitation shall not apply to a
Parent Fund's investment in other investment companies, or portfolios thereof,
that are Underlying Funds of the Parent Fund;
3. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, (b) to
the extent permitted by the 1940 Act or pursuant to any exemptions therefrom,
and (c) as consistent with the investment policies of a Parent Fund;
4. Purchase or retain securities of any issuer if the officers or
Trustees of the Trust and the officers or directors of its investment adviser
and of its administrator, who each owns beneficially more than one-half of 1% of
the outstanding securities of such issuer, together own beneficially more than
5% of such securities, except that this limitation shall not apply if the issuer
of the securities is an Underlying Fund of a Parent Fund;
5. Mortgage or hypothecate the Fund's assets in excess of one-third of
the Fund's total assets;
6. Purchase participations or direct interests in oil, gas or other
mineral exploration or development programs (although investments by the Fund in
marketable securities of companies engaged in such activities, or in securities
of Underlying Funds investing in such companies, are not prohibited by this
restriction);
7. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities and, for the Large
Companies Value, Large
18
<PAGE>
Companies Growth, Small Companies, Micro Cap, Income Equity, International,
Intermediate Bond, Bond and Tax-Free Bond Funds, except as may be necessary to
make margin payments in connection with foreign currency futures and other
derivative securities transactions; and
8. Purchase or otherwise acquire any securities if, as a result, more
than 15% (10% of the case of the Trust's Money Funds) of the Fund's net assets
would be invested in securities that are illiquid.
In addition, the Tax-Free Money Market Fund may not:
1. Acquire a put, if, immediately after such acquisition, over 5% of the
total amortized cost value of the Fund's assets would be subject to puts from
the same institution (except that (i) up to 25% of the value of the Fund's total
assets may be subject to puts without regard to such 5% limitation and (ii) the
5% limitation is inapplicable to puts that, by their terms, would be readily
exercisable in the event of a default in payment of principal or interest on the
underlying securities). For the purpose of this investment restriction and
investment restriction number 2 below, a put will be considered to be from the
party to whom the Fund will look for payment of the exercise price; and
2. Acquire a put that, by its terms, would be readily exercisable in the
event of a default in payment of principal and interest on the underlying
security or securities if, immediately after that acquisition, the amortized
cost value of the security or securities underlying that put, when aggregated
with the amortized cost value of any other securities issued or guaranteed by
the issuer of the put, would exceed 10% of the total amortized cost value of the
Fund's assets.
The Tax-Free Bond Fund may not:
1. Acquire a put, if, immediately after such acquisition, over 5% of the
total value of the Fund's assets would be subject to puts from the same
institution (except that (i) up to 25% of the value of the Fund's total assets
may be subject to puts without regard to such 5% limitation and (ii) the 5%
limitation is inapplicable to puts that, by their terms, would be readily
exercisable in the event of a default in payment of principal or interest on the
underlying securities). For the purpose of this investment restriction and
investment restriction number 2 below, a put will be considered to be from the
party to whom the Fund will look for payment of the exercise price; and
2. Acquire a put that, by its terms, would be readily exercisable in the
event of a default in payment of principal and interest on the underlying
security or securities if, immediately after that acquisition, the value of the
security or securities underlying that put, when aggregated with the value of
any other securities issued or guaranteed by the issuer of the put, would exceed
10% of the total value of the Fund's assets.
A Parent Fund may not:
19
<PAGE>
1. Redeem Shares of any Underlying Fund representing more than 3% of such
Underlying Fund's total assets during any one-month period, except as necessary
to meet redemption requests of the Parent Fund's Shareholders.
If any percentage restriction described above is satisfied at the time of
purchase, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
However, should a change in net asset value or other external events cause a
Fund's investments in illiquid securities to exceed the limitation set forth in
such Fund's Prospectus, that Fund will act to cause the aggregate amount of
illiquid securities to come within such limit as soon as reasonably practicable.
In such an event, however, that Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
In accordance with the terms of an order issued by the Securities and
Exchange Commission, each Parent Fund may (i) own more than 3% of the total
outstanding Shares of an Underlying Fund, (ii) invest more than 5% of its
assets in any one Underlying Fund, and (iii) invest more than 10% of its
assets in the Underlying Funds as a group. Due to the investment policies of
the Parent Funds, each Parent Fund will concentrate more than 25% of its total
assets in the investment company industry. However, as described above, no
Underlying Fund in which the Parent Funds invest will concentrate more than
25% of its total assets in any one industry.
Portfolio Turnover
- ------------------
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares and by requirements which enable the Funds to receive certain favorable
tax treatments. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions, and may result in
additional tax consequences to a Fund's Shareholders.
The portfolio turnover rate of each Parent Fund is expected to be low, as
such Fund will purchase or sell Shares of the Underlying Funds to (i)
accommodate purchases and sales of the Parent Fund's Shares, (ii) change the
percentage of its assets invested in each Underlying Fund in which it invests in
response to market conditions, and (iii) maintain or modify the allocation of
the Parent Fund's assets between Underlying Funds within the percentage limits
described in the Parent Fund's Prospectus. The portfolio turnover rate for each
of the Large Companies Growth and the Micro Cap Funds is not expected to exceed
100%. It is anticipated that the annual portfolio turnover rate for an
Underlying Fund normally will not exceed the amount stated in such Fund's
Prospectus, although the portfolio turnover rate for each of the Bond,
International, and Optimized Funds is expected to increase as each of these
Funds expands its
20
<PAGE>
investment activities following its recent commencement of operations.
The portfolio turnover rate for each of the Funds is calculated by dividing
the lesser of a Fund's purchases or sales of portfolio securities for the year
by the monthly average value of the securities. The Securities and Exchange
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less.
NET ASSET VALUE
As indicated in the Prospectuses, the net asset value of each Fund is
determined and the Shares of each Fund are priced as of the Valuation Time(s) on
each Business Day of the Trust. A "Business Day" is a day on which the New York
Stock Exchange ("NYSE") is open for trading, the Federal Reserve Bank of San
Francisco is open, and any other day except days on which there are insufficient
changes in the value of a Fund's portfolio securities to materially affect the
Fund's net asset value or days on which no Shares are tendered for redemption
and no order to purchase any Shares is received. Currently, the NYSE or the
Federal Reserve Bank of San Francisco is closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving and
Christmas.
Valuation of the Trust's Money Funds
- ------------------------------------
The Money Funds have elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument
at its cost initially and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price one of these Funds would receive if it sold the instrument. The
value of securities in these Funds can be expected to vary inversely with
changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Funds will maintain a dollar-weighted
average maturity appropriate for each Fund's objective of maintaining a stable
net asset value per Share, provided that no Money Fund will purchase any
security with a remaining maturity of more than 397 days (thirteen months)
(securities subject to repurchase agreements may bear longer maturities) nor
maintain a dollar-weighted average maturity which exceeds 90 days. The Board of
Trustees has also undertaken to establish procedures reasonably designed, taking
into account current market conditions and the investment objective of each of
these Funds, to stabilize the net asset value per Share of each Money Fund for
purposes of sales and redemptions at $1.00. These procedures include review by
the Trustees, at such intervals as they deem appropriate, to determine the
extent, if any, to which the net asset value per Share of each Fund calculated
by using available market quotations deviates from $1.00 per Share. In the
event such deviation exceeds one-half of one percent, Rule 2a-7 requires that
the Board of Trustees promptly consider what action, if any, should be
initiated. If the Trustees believe that the extent of any deviation from a
Money
21
<PAGE>
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take such steps as
they consider appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar weighted
average maturity, withholding or reducing dividends, reducing the number of a
Money Fund's outstanding Shares without monetary consideration, or utilizing a
net asset value per Share determined by using available market quotations.
Valuation of the Other Funds
- ----------------------------
Portfolio securities, the principal market for which is a securities
exchange, will be valued at the closing sales price on that exchange on the day
of computation, or, if there have been no sales during such day, at the latest
bid quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. Foreign securities are valued based on quotations from the
primary market in which they are traded and are translated from the local
currency into U.S. dollars using current exchange rates. If no such bid price
is available, then securities will be valued in good faith at their respective
fair market values using methods determined by or under the supervision of the
Board of Trustees. Portfolio securities with a remaining maturity of 60 days or
less will be valued either at amortized cost or original cost plus accrued
interest, which approximates current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair market value
as determined in good faith under the general supervision of the Board of
Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each of the classes of Shares of the Funds is sold on a continuous basis by
the Distributor, and the Distributor has agreed to use appropriate efforts to
solicit all purchase orders. In addition to purchasing Shares directly from the
Distributor, Shares may be purchased through a broker-dealer who has established
a dealer agreement with the Distributor and certain other industry professionals
(collectively, "Entities") acting on behalf of customers for investment of funds
that are held by in a fiduciary, agency, custodial or similar capacity. Shares
of a Fund also may be purchased by other Funds of the Trust or by other
investment portfolios established by the Trust.
As stated in the relevant Prospectuses, the public offering price of Class
A Shares of the Money Funds is their net asset value per Share, which they will
seek to maintain at $1.00. The public offering price of Class A Shares of each
of the other Funds is their net asset value per Share next computed after the
sale plus a sales charge which varies based upon the quantity purchased. The
public offering price of such Class A Shares of the Trust is calculated by
dividing net asset value by the difference (expressed as a decimal) between 100%
and the sales charge percentage of offering price applicable to the purchase.
The offering price is rounded to two
22
<PAGE>
decimal places each time a computation is made. The sales charge scale set
forth in a Fund's Prospectus applies to purchases of Class A Shares of such a
Fund by an investor.
The public offering price of Class C Shares of each Parent, Equity and
Income Fund is their net asset value per Share, although Class C Shares redeemed
within one year of their purchase may be subject to a contingent deferred sales
charge of 1.00%. Purchasers of Class C Shares will have more of their initial
purchase price invested. Any positive investment return on this additional
invested amount would partially or wholly offset the expected higher annual
expenses borne by Class C Shares. Because the Trust's future returns cannot be
predicted, there can be no assurance that this will be the case. Investors in
Class C Shares would, however, own Shares that are subject to higher annual
expenses and, for Shares owned for less than one year, such Shares would be
subject to a contingent deferred sales charge of 1.00% upon redemption.
The public offering price of Class Q Shares of each Money Fund is their net
asset value per Share, which each Money Fund seeks to maintain at $1.00.
Class Y Shares may also be purchased through procedures established by the
Distributor in connection with the requirements of qualified accounts maintained
by or on behalf of certain persons ("Customers") by United States National Bank
of Oregon ("U.S. Bank"), one of its affiliates, or other financial institutions.
With respect to Class Y Shares so sold, it is the responsibility of the holder
of record to transmit purchase or redemption orders to the Distributor and to
deliver funds for the purchase thereof on a timely basis. Beneficial ownership
of such Class Y Shares of the Funds will be recorded and reflected in the
account statements provided to Customers. U.S. Bank or its affiliates may
exercise voting authority for those Class Y Shares for which it has been granted
authority by the Customer. Confirmation of purchases and redemptions of Class Y
Shares of the Funds by U.S. Bank or its affiliates on behalf of a Customer may
be obtained from U.S. Bank or the affiliate.
Depending upon the terms of a particular Customer account, Customers may be
charged account fees for services provided in connection with investment in a
Fund. Customers are urged to request information concerning these services and
charges.
Matters Affecting Redemption
- ----------------------------
The Trust may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Securities and Exchange Commission,
(b) the NYSE is closed for other than customary weekend and holiday closings,
(c) the Securities and Exchange Commission has by order permitted such
suspension, or (d) an emergency exists as a result of which (i) disposal by the
Trust of securities owned by it is not reasonably practical or (ii) it is not
reasonably practical for the Trust to determine the fair market value of its net
assets.
23
<PAGE>
The Money Funds may redeem Shares involuntarily if redemption appears
appropriate in light of the Trust's responsibilities under the 1940 Act. See
"NET ASSET VALUE - Valuation of the Money Funds" in this SAI.
MANAGEMENT OF THE TRUST
Trustees and Officers
- ---------------------
Overall responsibility for management of the Trust rests with its Trustees,
who are elected by the Shareholders of the Trust. The Trustees elect the
officers of the Trust to supervise actively its day-to-day operations. George
R. Landreth, Stephen G. Mintos, Mark A. Dillon, J. David Huber, Mary Anne
Houlahan, Walter B. Grimm, Irimga McKay, Gregory T. Maddox and Robert L. Tuch
are the officers of the Trust. Mr. Landreth also serves as Trustee.
The names of the Trustees, their addresses and principal occupations during
the past five years are set forth below:
Principal Occupation
Name and Address During Past 5 Years
---------------- -------------------
George R. Landreth* Director of Client Services;
3435 Stelzer Road BISYS Fund Services (12/92-
Columbus, OH 43219-3035 present); Vice President, PNC
Age: 53 Financial (7/91-12/92); Senior
Vice President, The Central
Trust Company (10/84-7/91).
David F. Jones Principal, The Harvey-Jones
P.O. Box 23969 Company (real estate
Federal Way, WA 98023 management)(7/93-present);
Age: 55 Chief Executive Officer,
Pacific Nuclear Systems, Inc.
(nuclear engineering)(5/83-
9/92).
Raymond H. Lung* Retired (1/91-present).
16199 N.W. Canterwood Way
Portland, OR 97229
Age: 68
John W. Judy President, American
P. O. Box 4166 International Forest Products,
Portland, OR 97208 Inc. (7/89-present).
Age: 57
24
<PAGE>
David B. Frohnmayer President, University of
Johnson Hall Oregon (7/94-present); Dean,
University of Oregon University of Oregon Law
Eugene, OR 97403 Center (1/92-7/94); Attorney
Age: 55 General, State of Oregon
(1/81-12/91).
- ------------------
* Mr. Landreth and Mr. Lung are "interested persons" of the Trust as that
term is defined in the 1940 Act.
Remuneration of Trustees
- ------------------------
The Trust pays each Trustee an annual fee of $15,000, plus $1,000 for each
meeting of the Board of Trustees attended and reasonable out-of-pocket expenses.
For the fiscal year ended July 31, 1995, the Trust paid the following
compensation to all current Trustees of the Trust:
<TABLE><CAPTION>
Pension or Retirement Estimated Annual
Aggregate Benefits Accrued as Benefits Upon Total
Compensation Fund Expenses Retirement Compensation
------------ -------------------- ---------------- ------------
<S> <C> <C> <C> <C>
George R. Landreth $ 0 $ 0 $ 0 $ 0
David F. Jones $18,000 $ 0 $ 0 $18,000
John W. Judy $18,000 $ 0 $ 0 $18,000
Raymond H. Lung $18,000 $ 0 $ 0 $18,000
David B. Frohnmayer $14,250 $ 0 $ 0 $14,250
</TABLE>
The officers of the Trust, their addresses, and principal occupations
during the past five years are as follows:
<TABLE><CAPTION>
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- --------------------
<S> <C> <C>
George R. Landreth President, Chief Director of Client Services,
3435 Stelzer Road Executive Officer, BISYS Fund Services
Columbus, OH 43219-3035 and Trustee (12/92-present); Vice
</TABLE>
25
<PAGE>
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- --------------------
Age: 53 President, PNC Financial
(7/91-12/92); Senior Vice
President, The Central
Trust Co. (10/84-7/91).
Stephen G. Mintos Vice President Executive Vice President,
3435 Stelzer Road BISYS Fund Services
Columbus, OH 43219-3035 (1/87-present).
Age: 41
Mark A. Dillon Vice President Employee of BISYS Fund
3435 Stelzer Road Services (12/86-present).
Columbus, OH 43219-3035
Age: 33
J. David Huber Vice President Employee of BISYS Fund
3435 Stelzer Road Services (6/87-present).
Columbus, OH 43219-3035
Age: 49
Mary Anne Houlahan Vice President Senior Vice President and
515 South Figueroa Street Director of Distribution
Suite 335 Services, BISYS Fund
Los Angeles, CA 90071 Services (1/93-present);
Age: 41 Senior Vice President-
Marketing, Great Western
Investment Management
(6/85-12/92).
Walter B. Grimm Vice President Employee of BISYS Fund
3435 Stelzer Road Services (6/92-present);
Columbus, OH 43219-3035 President, Leigh
Age: 50 Investments (investment
firm) (7/87-6/92).
Irimga McKay Vice President First Vice President,
Columbia Square, Suite 500 BISYS Fund Services
1230 Columbia Street (11/88 to present).
San Diego, CA 92101
Age: 35
26
<PAGE>
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- --------------------
Gregory T. Maddox Treasurer, Principal Employee of BISYS Fund
Columbia Squire, Suite 500 Financial and Account- Services (4/91-present).
1230 Columbia Street ing Officer, and Secretary
San Diego, CA 92101
Age: 27
Robert L. Tuch Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services (6/91-present);
Columbus, OH 43219-3035 Vice President and
Age: 44 Associate General
Counsel, National
Securities and Research
Corp. (7/90-6/91).
The officers of the Trust receive no compensation directly from the Trust
for performing the duties of their offices. BISYS receives fees from the Trust
for acting as Administrator and for providing certain fund accounting services,
may retain all or a portion of any sales charge on the Shares and may receive
fees under the Distribution and Shareholder Service Plans described below.
BISYS Fund Services Ohio, Inc. receives fees from the Trust for acting as
transfer agent.
Investment Adviser
- ------------------
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives, policies and restrictions,
investment advisory services are provided to the Funds by Qualivest Capital
Management, Inc., 111 S.W. Fifth Avenue, Portland, Oregon 97204, pursuant to an
Investment Advisory Agreement dated July 29, 1994 and supplemented effective May
1, 1995 and April 10, 1996.
Qualivest is a wholly owned subsidiary of U.S. Bank, which in turn is a
wholly owned subsidiary of U.S. Bancorp, a publicly held bank holding company.
John H. Coulter, a Short-Term Investments Manager at Qualivest, has primary
responsibility for management of the Money Market and U.S. Treasury Funds. Mr.
Coulter has twenty-nine years of investment management experience and has been
employed by Qualivest since 1965. He has received a Bachelor of Science degree
in Business Administration from Oregon State University.
Under the Investment Advisory Agreement, Qualivest has agreed to provide,
either directly or through one or more subadvisers, investment advisory services
for each of the Funds as described in their respective Prospectuses. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, each of the Funds
27
<PAGE>
pays Qualivest a fee, computed daily and paid monthly, at an annual rate as
disclosed in each Prospectus calculated as a percentage of the average daily net
assets of that Fund. Each Parent Fund, as a Shareholder in an Underlying Fund,
also indirectly bears its proportionate share of any investment advisory fees
paid by the Underlying Fund. For the fiscal period ended July 31, 1995, the
Equity, Income and Money Funds paid Qualivest the following in advisory
fees: Large Companies Value Fund - $185,314, Small Companies
Fund - $499,916, International Fund - $17,933, Optimized Fund - $104,513,
Intermediate Bond Fund - $244,351, Bond Fund - $72,657, U.S. Treasury
Fund - $0, Money Market Fund - $262,916 and Tax-Free Money Market Fund - $0.
Unless sooner terminated, the Investment Advisory Agreement continues in
effect as to a particular Fund until July 29, 1996, and thereafter for
successive one-year periods ending July 29 of each year if such continuance is
approved at least annually by the Board of Trustees or by vote of a majority of
the outstanding Shares of such Fund and a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement by votes cast
in person at a meeting called for such purpose. The Investment Advisory
Agreement is terminable as to a particular Fund at any time on 60 days' written
notice without penalty by the Trustees, by vote of a majority of the outstanding
Shares of that Fund, or by Qualivest. Such Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Qualivest shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of its duties, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of Qualivest or any sub-investment
advisers in the performance of their duties, or from reckless disregard of their
duties and obligations thereunder.
From time to time, advertisements, supplemental sales literature, and
information furnished to present or prospective Shareholders of the Funds may
include descriptions of Qualivest including, but not limited to, (i)
descriptions of Qualivest's operations; (ii) descriptions of certain personnel
and their functions; and (iii) statistics and rankings related to Qualivest's
operations.
Portfolio Transactions
- ----------------------
With respect to all Funds of the Trust, Qualivest determines, subject to
the general supervision of the Board of Trustees and in accordance with each
Fund's investment objective, policies and restrictions, which securities are to
be purchased and sold by a Fund, and which brokers are to be eligible to execute
an Equity, Income or Money Fund's portfolio transactions.
Purchases and sales of portfolio securities which are debt securities
usually are principal transactions in which portfolio securities are normally
purchased directly from the issuer or from
28
<PAGE>
an underwriter or market maker for the securities. Purchases from underwriters
of portfolio securities generally include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
may include the spread between the bid and asked price. Transactions on stock
exchanges involve the payment of negotiated brokerage commissions. Transactions
in the over-the-counter market are generally principal transactions with
dealers. With respect to the over-the-counter market, the Trust, where
possible, will deal directly with dealers who make a market in the securities
involved except in those circumstances where better price and execution are
available elsewhere.
Allocation of transactions, including their frequency, to various brokers
and dealers is determined by Qualivest in its best judgment and in a manner
deemed fair and reasonable to Shareholders. In selecting a broker, Qualivest
evaluates a wide range of criteria, including the broker's commission rate and
execution capability, the broker's positioning and distribution capabilities,
back office efficiency, ability to handle difficult trades, financial stability,
reputation, prior performance, sale of Fund Shares, and research. The primary
consideration is the broker's ability to provide prompt execution of orders in
an effective manner at the most favorable price for the security. Subject to
this consideration, brokers and dealers who provide supplemental investment
research to Qualivest may receive orders for transactions on behalf of the
Trust. Research may include brokers' analyses of specific securities,
performance and technical statistics, and information databases. It may also
include maintenance research, which is the information that keeps Qualivest
informed concerning overall economic, market, political and legal trends. Under
some circumstances, Qualivest's evaluation of research and other broker
selection criteria may result in one or a few brokers executing a substantial
percentage of an Equity, Income or Money Fund's trades. This might occur, for
example, where a broker can provide best execution at a cost that is reasonable
in relation to its services and the broker offers unique or superior research
facilities, special knowledge or expertise in a Fund's relevant markets, or
access to proprietary information about companies, like those included in the
EAFE Index, that are a majority of a Fund's investments.
Research information so received is in addition to and not in lieu of
services required to be performed by Qualivest and does not reduce the fees
payable to Qualivest by the Trust. Such information may be useful to Qualivest
in serving both the Trust and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
in carrying out its obligations to the Trust. While Qualivest generally seeks
competitive commissions, the Trust may not necessarily pay the lowest commission
available on each brokerage transaction for reasons discussed above.
Some of Qualivest's other clients have investment objectives similar to
those of the Funds. Qualivest may recommend or purchase and sell the same
securities on behalf of both the Funds and its other clients. When a purchase
or sale of the same security is made at substantially the same time on behalf of
an Equity, Income or Money Fund and another Fund, portfolio, investment company
or account, the transaction will be averaged as to price and available
investments will be allocated as to amount in a manner which Qualivest believes
to be equitable to the Fund(s) and
29
<PAGE>
such other portfolio, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained by a Fund. To the extent permitted by law,
Qualivest may aggregate the securities to be sold or purchased for an Equity,
Income or Money Fund with those to be sold or purchased for the other Funds or
for other portfolio, investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory Agreement, in making
investment recommendations for the Trust, Qualivest will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Trust is a customer of Qualivest, its parent or its subsidiaries or
affiliates and, in dealing with its customers, Qualivest, its parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
For the fiscal period ended July 31, 1995, the Equity Funds paid the
following in brokerage commissions: Large Companies Value Fund - $139,373,
Small Companies Fund - $251,933, International Fund - $182,317 and Optimized
Fund - $74,929. Of this amount, none was paid to any brokers that are
affiliated with the Trust. In addition, for the fiscal period ended July 31,
1995, the following Funds paid the indicated amounts to brokers from which
Qualivest received research services: Large Companies Value Fund - $43,422.72,
and Small Companies Fund - $122,469.00.
Glass-Steagall Act
- ------------------
In 1971, the United States Supreme Court held that the federal statute
commonly referred to as the "Glass-Steagall Act" prohibits a national bank from
operating a mutual fund for the collective investment of managing agency
accounts. Subsequently, the Board of Governors of the Federal Reserve System
(the "Board") issued a regulation and interpretation to the effect that the
Glass-Steagall Act and such decision: (a) forbid a bank holding company
registered under the Federal Bank Holding Company Act of 1956 (the "Holding
Company Act") or any non-bank affiliate thereof from sponsoring, organizing, or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, but (b) do not prohibit such a holding company or
affiliate from acting as investment adviser, transfer agent, and custodian to
such an investment company. In 1981, the United States Supreme Court determined
that the Board did not exceed its authority under the Holding Company Act when
it adopted its regulation and interpretation authorizing bank holding companies
and their nonbank affiliates to act as investment advisers to registered
closed-end investment companies. The Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their non--
bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
Qualivest believes that it possesses the legal authority to perform the
services for the Funds contemplated by the Prospectuses, this SAI and the
Investment Advisory Agreement without violation of applicable statutes and
regulations. Counsel has pointed out, however, that there is
30
<PAGE>
presently no controlling authority regarding the performance of the combination
of investment advisory and shareholder servicing activities by national banks
and their subsidiaries. Moreover, such counsel has advised that changes in
federal banking laws and regulations related to the permissible activities of
national banks, subsidiaries of national banks, and national banks and their
subsidiaries that are affiliates of a bank holding company, as well as further
judicial or administrative decisions on interpretations of present and future
statutes and regulations, could prevent Qualivest from continuing to serve as
investment adviser to the Funds or could restrict the services which Qualivest
is permitted to perform for the Funds. In addition, such changes, decisions or
interpretations could prevent Qualivest's national bank affiliates from
performing shareholder servicing activities or from receiving compensation
therefor or could restrict the types of services such entities are permitted to
provide and the amount of compensation they are permitted to receive for such
services. Depending upon the nature of any changes in the services which could
be provided by Qualivest, the Board of Trustees would review the Trust's
relationship with Qualivest and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative action prohibit or
restrict the proposed activities of Qualivest and/or U.S. Bank's affiliated
banks in connection with Customer purchases of Shares of the Trust, those banks
might be required to alter materially or discontinue the services offered by
them to Customers. It is not anticipated, however, that any change in the
Trust's method of operations would affect its daily net asset value per Share or
result in financial losses to any Customer.
Administrator
- -------------
BISYS serves as general manager and administrator to the Trust pursuant to
a Management and Administration Agreement dated July 29, 1994 and supplemented
effective May 1, 1995 and April 10, 1996 (the "Administration Agreement").
The Administrator assists in supervising all operations of each Fund (other than
those performed by Qualivest under the Investment Advisory Agreement, by U.S.
Bank and The Bank of New York under the Custody Agreements and by BISYS Fund
Services Ohio, Inc. under the Transfer Agency Agreement). The Administrator is
a broker-dealer registered with the Securities and Exchange Commission, and is a
member of the National Association of Securities Dealers, Inc. The
Administrator provides financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities for the Trust; furnish statistical and research data,
clerical and certain bookkeeping services and stationery and office supplies;
prepare the periodic reports to the Securities and Exchange Commission on Form
N-SAR or any replacement forms therefor; compile data for, prepare for execution
by the Funds and file certain federal and state tax returns and required tax
filings; prepare compliance filings pursuant to state securities laws with the
advice of the Trust's counsel; keep and maintain the financial accounts and
records of the Funds, including calculation of daily expense accruals; in the
case of the Parent Funds, bear the costs of organizing these Funds and of
preparing and printing prospectuses and delivering prospectuses to current
Shareholders; in the case of the Money Funds, determine the actual variance
from $1.00 of a Money Fund's net asset value per Share; and generally assist
in all aspects of the
31
<PAGE>
Trust's operations other than those performed by Qualivest under the Investment
Advisory Agreement, by U.S. Bank and The Bank of New York under the Custody
Agreements and by BISYS Fund Services Ohio, Inc. under the Transfer Agency
Agreement. Under the Administration Agreement, the Administrator may delegate
all or any part of its responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically. This fee is equal to 0.13% of each
Equity, Income and Money Fund's average daily net assets, and 0.07% of each
Parent Fund's average daily net assets, or such other fee as may from time to
time be agreed upon by the Trust and the Administrator. The Administrator may
voluntarily reduce all or a portion of its fee with respect to any Fund in order
to increase the net income of one or more of the Funds available for
distribution as dividends.
Unless sooner terminated as provided therein, the Administration Agreement
will continue in effect until July 29, 1996. The Administration Agreement
thereafter shall be renewed automatically for successive two-year terms, unless
written notice not to renew is given by the non-renewing party to the other
party at least 60 days prior to the expiration of the then-current term. The
Administration Agreement is terminable with respect to a particular Fund only
upon mutual agreement of the parties to the Administration Agreement and for
cause (as defined in the Administration Agreement) by the party alleging cause,
on no less than 60 days' written notice by the Board of Trustees or by the
Administrator.
The Administration Agreement provides that the Administrator shall not be
liable for any error of judgment or mistake of law or any loss suffered by the
Trust in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
Expenses
- --------
If total expenses borne by any of the Funds in any fiscal year exceed
expense limitations imposed by applicable state securities regulations,
Qualivest and the Administrator will reimburse that Fund by the amount of such
excess in proportion to their respective fees. As of the date of this SAI, the
most restrictive expense limitation applicable to the Funds limits each Fund's
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2 1/2% of
the first $30 million of a Fund's average net assets, 2% of the next $70 million
of a Fund's average net assets, and 1 1/2% of a Fund's remaining average net
assets. Any expense reimbursements will be estimated daily and reconciled and
paid on a monthly basis. Fees imposed upon customer accounts by U.S. Bank or
its affiliated banks for cash management services are not included within Trust
expenses for purposes of any such expense limitation.
32
<PAGE>
Distributor
- -----------
BISYS serves as distributor to the Trust pursuant to a Distribution
Agreement dated July 29, 1995 (the "Distribution Agreement"). Unless otherwise
terminated, the Distribution Agreement will remain in effect until July 29,
1996, and thereafter continues for successive one-year periods ending July 29 of
each year if approved at least annually (i) by the Board of Trustees or by the
vote of a majority of the outstanding Shares of the Trust, and (ii) by the vote
of a majority of the Trustees who are not parties to the Distribution Agreement
or interested persons (as defined in the 1940 Act) of any party to the
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement may be terminated in the
event of any assignment, as defined in the 1940 Act.
As described in the respective Funds' Prospectuses, the Trust has adopted
Distribution and Shareholder Service Plans with respect to Class A Shares of all
Funds (the "Class A Plans"), Distribution and Shareholder Service Plans with
respect to Class C Shares of the Parent Funds, the Equity Funds and the Income
Funds (the "Class C Plans") and Distribution and Shareholder Service Plans with
respect to Class Q Shares of the Money Funds (the "Class Q Plans") (the Class A
Plans, Class C Plans and Class Q Plans together are hereinafter referred to as
the "Plans") pursuant to Rule 12b-1 under the 1940 Act under which the Funds are
authorized to pay BISYS for payments it makes to banks, including U.S. Bank,
other institutions and broker-dealers, and for expenses BISYS and any of its
affiliates or subsidiaries incur (with all of the foregoing organizations being
referred to as "Participating Organizations") for providing administration,
distribution or shareholder service assistance. Payments to such Participating
Organizations may be made pursuant to agreements entered into with BISYS or with
the Trust. The Class A Plans authorize a Fund to make payments to BISYS in an
amount not in excess, on an annual basis, of 0.25% (0.40% for the Money Funds)
of the average daily net asset value of the Class A Shares of that Fund. As
required by Rule 12b-1, the Class A Plans were approved by the holders of the
Class A Shares and by the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Funds and who have no direct or
indirect financial interest in the operation of those Plans (the "Independent
Trustees"). The Class C Plans authorize a Fund to make payments to BISYS in an
amount not in excess, on an annual basis, of 1.00% of the average daily net
asset value of the Class C Shares of that Fund. Over time, the expense of the
annual Rule 12b-1 fee on the Class C Shares may equal or exceed the initial
sales charge and annual Rule 12b-1 fee applicable to Class A Shares. For
example, if net asset value remains constant, the aggregate Rule 12b-1 fees with
respect to Class C Shares of the Parent Funds and the Equity Funds would equal
or exceed the initial sales charge and aggregate Rule 12b-1 fees of Class A
Shares approximately six years after purchase, and Rule 12b-1 fees with respect
to Class C Shares of the Income Funds would equal or exceed the initial sales
charge and aggregate Rule 12b-1 fees of Class A Shares approximately four and
two-third years after purchase. This example assumes that the initial purchase
of
33
<PAGE>
Class A Shares would be subject to the maximum initial sales charge. As
required by Rule 12b-1, the Class C Plans have been approved by the Board of
Trustees, including a majority of the Independent Trustees, and the Class C
Shareholders of each Fund. The Class Q Plans authorize a Money Fund to make
payments to BISYS in an amount not in excess, on an annual basis, of 0.25% of
the average daily net asset value of the Class Q Shares of each Money Fund. As
required by Rule 12b-1, the Class Q Plans have been approved by the Board of
Trustees, including a majority of the Independent Trustees, and the Class Q
Shareholders of each Money Fund.
The Shareholder and distribution services provided by Participating
Organizations may include promoting the purchase of Shares of a Fund by their
customers; processing purchase, exchange, and redemption requests from customers
and placing orders with the Distributor or the Transfer Agent; processing
dividend and distribution payments from a Fund on behalf of customers; providing
information periodically to customers, including information showing their
positions in Shares; providing sub-accounting with respect to Shares
beneficially owned by customers or the information necessary for sub-accounting;
responding to inquiries from customers concerning their investment in Shares;
arranging for bank wires; and providing other similar services as may be
reasonably requested. A portion of this distribution fee, up to 0.25% of the
average daily net assets of each class of Shares, may be paid to the Distributor
and Participating Organizations as a "service fee," as defined in the rules of
the National Association of Securities Dealers, Inc. for personal service and
maintenance of Shareholder accounts.
The Trust understands that Participating Organizations may charge fees to
their customers who are the owners of Class A Shares for additional services
provided in connection with their customer accounts. These fees would be in
addition to any amounts which may be received by a Participating Organization
under its Rule 12b-1 Agreement with BISYS. Customers of Participating
Organizations should read the Prospectus and SAI in light of the terms governing
their accounts with their Participating Organizations.
Conflict of interest restrictions may apply to the receipt by
Participating Organizations of compensation from the Trust in connection with
the investment of fiduciary assets in Shares. Institutions, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board, or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the Securities and Exchange Commission,
the Department of Labor, or state securities commissions, are urged to consult
their legal advisers before investing such assets in Shares of the Funds.
The Plans require the officers of the Trust to provide the Board of
Trustees at least quarterly with a written report of the amounts expended
pursuant to the Plans and the purposes for which such expenditures were made.
The Board reviews these reports in connection with its decisions with respect to
the Plans. The Plans continue in effect as long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
the Independent Trustees.
34
<PAGE>
The Plans may be terminated as to a Fund by vote of a majority of the
Independent Trustees, or by vote of majority of the outstanding Shares of the
particular class of the Fund. Any change in a Plan that would materially
increase the distribution cost to the Fund requires Shareholder approval. The
Trustees review quarterly a written report of such costs and the purposes for
which such costs have been incurred. The Plan may be amended by vote of the
Trustees, including a majority of the Independent Trustees, cast in person at a
meeting called for that purpose. For so long as the Plans are in effect,
selection and nomination of those Trustees who are not interested persons of the
Trust shall be committed to the discretion of such Independent Trustees. All
agreements with any person relating to the implementation of a Plan may be
terminated at any time on 60 days' written notice without payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of the
majority of the outstanding Shares of the particular class of the Fund. The
Plans will continue in effect for successive one-year periods, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Independent Trustees, and (ii) by a vote of a majority of the entire Board
of Trustees cast in person at a meeting called for that purpose. The Board of
Trustees has a duty to request and evaluate such information as may be
reasonably necessary for them to make an informed determination of whether the
Plans should be implemented or continued. In addition the Trustees in approving
the Plans must determine that there is a reasonable likelihood that the Plans
will benefit the Funds and their Shareholders.
The Board of Trustees believes that the Plans are in the best interests of
the Funds since they encourage Fund growth. As the Funds grow in size, certain
expenses, and therefore total expenses per Share, may be reduced and overall
performance per Share may be improved.
As authorized by each Plan, BISYS has entered into agreements with U.S.
Bancorp Securities, Inc. ("USBS") pursuant to which USBS has agreed to provide
certain administrative and Shareholder support services in connection with
Shares purchased and held by USBS for the accounts of its customers and Shares
purchased and held by customers of USBS directly, including, but not limited to,
advertising and marketing the Shares, answering routine questions concerning the
Funds and distributing prospectuses to persons other than Shareholders of the
Funds, and providing such office space, equipment, telephone and personnel as is
necessary and appropriate to accomplish such matters. In consideration of such
services BISYS has agreed to pay USBS a monthly fee, computed at the annual rate
of up to 0.25% (up to 0.40% for the Money Funds) of the average aggregate net
asset value of Class A Shares, up to 0.75% of the average aggregate net asset
value of Class C Shares, and up to 0.25% of the average aggregate net asset
value of Class Q Shares held during the period in customer accounts for which
USBS has provided services under an agreement. In addition, BISYS has agreed to
pay USBS a monthly fee, computed at the annual rate of up to 0.25% of the
average aggregate net asset value of Class C Shares held during the period in
accounts for which USBS has arranged for the provision of Shareholder services.
BISYS will be compensated by each Fund in an amount equal to its payments to
USBS under each agreement with respect to the Shares of each class of that Fund.
35
<PAGE>
For the fiscal period ended July 31, 1995, the Funds paid BISYS the
following fees pursuant to the Class A Plan: Large Companies Value Fund - $877,
Small Companies Fund - $1,111, International Fund - $2, Optimized Fund - $8,
Intermediate Bond Fund - $426, Bond Fund - $0, U.S. Treasury Fund - $145,467,
Money Market Fund - $586,906 and Tax-Free Money Market Fund - $80,020. For the
fiscal period ended July 31, 1995, the Funds paid BISYS the following fees
pursuant to the Class C Plan: Large Companies Value Fund - $1,110, Small
Companies Fund - $1,120, International Fund - $0, Optimized Fund - $36,
Intermediate Bond Fund - $697 and Bond Fund - $0. For the fiscal period ended
July 31, 1995, the Funds paid BISYS the following fees pursuant to the Class Q
Plan: U.S. Treasury Fund - $5,559, Money Market Fund - $12,130 and Tax-Free
Money Market Fund - $1,240. All expenditures were for compensation of BISYS for
its expenses incurred and its services provided as underwriter of the Shares of
the Funds. In addition, for the fiscal period ended July 31, 1995, BISYS
received $73,923 in aggregate commissions from the sale of Class A Shares, of
which BISYS retained $7,841 after dealer reallowances.
Custodians, Transfer Agent and Fund Accounting Services
- -------------------------------------------------------
United States National Bank of Oregon, 321 S.W. 6th, Portland, Oregon
97204, serves as custodian to the Trust with respect to all Funds other than the
International Fund pursuant to a Custody Agreement dated as of July 29, 1994 and
supplemented effective May 1, 1995 and April 10, 1996. The Bank of New York,
One Wall Street, New York, New York 10286 serves as custodian to the Trust with
respect to the International Fund pursuant to a Custody Agreement dated as of
October 12, 1995. U.S. Bank and The Bank of New York perform custodial services
including safeguarding and controlling the Funds' cash and securities, handling
the receipt and delivery of securities, and collecting interest and dividends on
such Funds' investments.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-
3035, serves as transfer agent and dividend disbursing agent (the "Transfer
Agent") for all Funds of the Trust pursuant to a Transfer Agency Agreement dated
as of July 29, 1994 and supplemented effective May 1, 1995 and April 10, 1996.
Pursuant to such Transfer Agency Agreement, the Transfer Agent, among other
things, performs the following services: maintenance of Shareholder records for
each of the Trust's Shareholders of record; processing Shareholder purchase and
redemption orders; processing transfers and exchanges of Shares of the Trust on
the Shareholder files and records; processing dividend payments and
reinvestments; and assistance in the mailing of Shareholder reports and proxy
solicitation materials. For such services, the Transfer Agent receives a fee
equal to the lesser of 0.02% of each Fund's average daily net assets or a fee
based on the number of Shareholders of record.
In addition, BISYS Fund Services Ohio, Inc. provides certain fund
accounting services to the Trust pursuant to a Fund Accounting Agreement dated
July 29, 1994 and supplemented effective May 1, 1995 and April 10, 1996. BISYS
Fund Services Ohio, Inc. receives a fee for such services, computed daily and
paid periodically at an annual rate of 0.04% of the average daily net assets of
each Exempt Fund, 0.03% of the average daily net assets of each Equity Fund and
each of the other Income and Money Funds, and 0.01% of the average daily net
assets of each of the Parent Funds. Under such Agreement, BISYS Fund Services
Ohio, Inc. maintains the accounting
36
<PAGE>
books and records for the Funds, including journals containing an itemized daily
record of all purchases and sales of portfolio securities, all receipts and
disbursements of cash and all other debits and credits, general and auxiliary
ledgers reflecting all asset, liability, reserve, capital, income and expense
accounts, including interest accrued and interest received, and other required
separate ledger accounts; maintains a monthly trial balance of all ledger
accounts; performs certain accounting services for the Funds, including
calculation of the daily net asset value per Share, calculation of the dividend
and capital gain distributions, if any, and of yield, reconciliation of cash
movements with U.S. Bank and The Bank of New York, affirmation to U.S. Bank and
The Bank of New York of portfolio trades and cash settlements, verification and
reconciliation with U.S. Bank and The Bank of New York of daily trade activity;
provides certain reports; obtains dealer quotations, prices from a pricing
service or matrix prices on all portfolio securities in order to mark the
portfolio to the market; and prepares an interim balance sheet, statement of
income and expense, and statement of changes in net assets for the Funds.
Auditors
- --------
The firm of Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, Ohio
45402, serves as independent auditors for the Trust. Its services comprise
auditing the Trust's financial statements and advising the Trust as to certain
accounting and tax matters.
Legal Counsel
- -------------
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005 is
counsel to the Trust and has passed upon the legality of the Shares offered
hereby.
ADDITIONAL INFORMATION
Description of Shares
- ---------------------
The Trust is a Massachusetts business trust. The Trust was organized on
May 19, 1994, and the Trust's Declaration of Trust was filed with the Secretary
of State of the Commonwealth of Massachusetts on May 19, 1994 and amended
effective May 1, 1995 and April 10, 1996. The Declaration of Trust authorizes
the Board of Trustees to issue an unlimited number of Shares, which are units of
beneficial interest, without par value. The Trust currently has seventeen
series of Shares which represent interests in each series of the Trust. The
Shares of each of the Funds of the Trust, other than the Money Funds, are
offered in three separate classes: Class A Shares, Class C Shares and Class Y
Shares. Shares of the Money Funds are also offered in three separate classes:
Class A Shares, Class Q Shares and Class Y Shares. The Trust's Declaration of
Trust authorizes the Board of Trustees to divide or redivide any unissued Shares
of the Trust into one or more additional series by setting or changing in any
one or more respects their respective preferences, conversion or other rights,
voting power, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption.
37
<PAGE>
The amount of dividends payable with respect to Class Q and Class Y Shares
will exceed dividends on Class A and Class C Shares as a result of the Plan fees
applicable to Class A and Class C Shares and because Class A and Class C Shares
may bear additional retail transfer agency expenses. The amount of dividends
payable with respect to Class Y Shares will also exceed dividends on Class Q
Shares as a result of the Plan fees applicable to Class Q Shares.
Each Fund intends to seek a ruling from the Internal Revenue Service
("IRS") to the effect that differing distributions among the classes of its
Shares will not result in the Fund's dividends and other distributions being
regarded as "preferential dividends" under the Internal Revenue Code of 1986, as
amended (the "Code"). Generally, a preferential dividend is a dividend which a
Fund cannot treat as having been distributed for purposes of determining (i)
whether the Fund qualifies as a regulated investment company ("RIC") for federal
tax purposes and (ii) the Fund's tax calculations. In order to qualify as a
RIC, each Fund must satisfy certain requirements, including an income
distribution requirement. If a Fund so qualifies, it generally will not be
subject to federal tax on income timely distributed to Shareholders, and
distributions from the Fund may qualify as capital gain dividends or exempt-
interest dividends, generally depending on the type of income generated by the
Fund. While similar rulings have been issued previously by the IRS, complete
assurance cannot, of course, be given that the Funds will actually receive such
rulings. Although an adverse determination by the IRS is not currently
expected, the Funds may be required to reassess their multiple class share
structure (and reserve the right to do so) were the IRS not to rule favorably
since that could impact on the Funds' ability to qualify as RICs. In addition,
were the IRS not to rule favorably, each Fund might make additional
distributions (which could carry interest and interest-related charges to the
Fund) if doing so would assist the Funds in complying with their general
practice of distributing sufficient income to reduce or eliminate U.S. federal
taxes.
Shares have no subscription or preemptive rights and only such conversion
or exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectuses and this SAI, the Trust's
Shares will be fully paid and non-assessable. In the event of a liquidation or
dissolution of the Trust, Shareholders of a Fund are entitled to receive the
assets available for distribution belonging to that Fund, and a proportionate
distribution, based upon the relative asset values of the respective series, of
any general assets not belonging to any particular series which are available
for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding Shares of
each Fund affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding Shares of a Fund will be required in
connection with a matter, a Fund will be deemed to be affected by a matter
unless it is clear that the interests of each Fund in the matter are identical,
or that the matter does not affect any interest of the Fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy submitted to Shareholders would be effectively acted upon with respect to
a Fund only if approved
38
<PAGE>
by a majority of the outstanding Shares of such Fund. However, Rule 18f-2 also
provides that the ratification of independent public accountants, the approval
of principal underwriting contracts, and the election of Trustees may be
effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
- --------------------------------------------
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Principal Shareholders
- ----------------------
As of April 5, 1996, the Trustees and officers of the Trust as a group
owned beneficially, directly or indirectly, less than one percent of the
outstanding Shares of the Trust and each of its Funds.
The following tables indicate each additional person known by the Funds to
own beneficially 5% or more of the Shares of the Funds as of April 5, 1996:
LARGE COMPANIES FUND
--------------------
CLASS C
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- ------------------ ---------
Peggy and Henry Baker 3,545.92 7.86%
P.O. Box 809
Mulino, OR 97042
Edward Kane 2,805.94 6.22%
65 Park Meadow LP N.E.
Keizer, OR 97303
IRA of Doris Miles 3,066.56 6.80%
151 North Bonair Road
Zillah, WA 98953
Trust Metallurgical 17,999.46 39.92%
Corp. ESOP
c/o Key Trust Company
P.O. Box 94871
Cleveland, OH 44101
Sam Volpentest Living 5,075.73 11.26%
Trust
365 Quailwood Place
Richland, WA 99352
Peggy's Classic Cars 3,545.92 7.86%
3905 S.E. 82nd Ave.
Portland, OR 97266
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- ------------------ ---------
Sandwell, Inc. Retirement 551,741.55 6.32%
Equity
Address Not Released
Forest City Trading 574,150.44 6.58%
Group/Equity
Address Not Released
Miller Nash Equity Fund 440,837.92 5.05%
Address Not Released
39
<PAGE>
SMALL COMPANIES FUND
--------------------
CLASS A
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
McCall Companies 38,120.90 7.35%
Salaried Employees
Retirement Plan
808 S.W. 15th Avenue
Portland, OR 97205
American Industries, Inc. 36,363.64 7.01%
1750 N.W. Front Avenue
Suite 106
Portland, OR 97209
CLASS C
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
Gregory Affiliates 3,877.57 5.17%
21975 S.W. Hillsboro Hwy.
Newberg, OH 97132
Peters Office Supply Co. 7,518.80 10.02%
Profit Sharing Plan
338 N.W. 9th
Portland, OR 97209
Richard and Peggie Foy 4,009.01 5.34%
4018 Dry Creek Road
Medford, OR 97504
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
Aggressive Equity Portfolio 1,578,629.88 7.78%
Blended 1
P.O. Box 2758
Portland, OR 97208
Moderate Balanced Portfolio 1,269,736.43 6.26%
Blended 4
P.O. Box 2758
Portland, OR 97208
USBC EIP Aggr. Equity 2,924,585.55 14.42%
Fund E
P.O. Box 2758
Portland, OR 97208
USBC Retirement Equity 4,347,653.75 21.44%
Fund
P.O. Box 2758
Portland, OR 97208
OPTIMIZED FUND
--------------
CLASS A
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
IRA of Pamela Kay Crary 3,147.01 7.37%
1060 Humorist Road
Pasco, WA 99301
40
<PAGE>
CLASS C
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
Elmer and Norma Benson 547.49 8.68%
3641 Dayton Road
Pasco, WA 99301
Lois Davidson 444.62 7.05%
213 Park Avenue
Yakima, WA 98902
Niki Albright 558.48 8.86%
5521 32nd Avenue, N.W.
Seattle, WA 98107
IRA of Anne Bobinac 1,028.31 16.31%
1411 E. Channel View Lane
Freeland, WA 98249
IRA of Robert Bacon, Jr. 453.69 7.19%
1725 West Henry
Pasco, WA 99301
Jacquelyn and John Henderson 415.63 6.59%
P.O. Box 72
Greenbank, WA 98258
Dario C. Padilla 455.30 7.22%
420 East 3rd
Kennewick, WA 99386
SAR SEP IRA of 557.43 8.84%
Richard Sturtevant
2431 Birch Road
Pasco, WA 99301
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
USBC Retirement Equity 13,235,540.52 76.08%
Fund
P.O. Box 2758
41
<PAGE>
Portland, OR 97208
Westone Bancorp Ret. Equity 2,665,472.95 15.32%
c/o U.S. Bank of Oregon
111 S.W. Fifth Avenue
Portland, OR 97208
INTERNATIONAL FUND
------------------
CLASS A
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
David and Ruth Cohn 9,675.23 5.03%
P.O. Box 380
Mercer Island, WA 98204
Hall Family Living Trust 9,675.23 5.03%
6451 N.W. Windermer
Seattle, WA 98105
Dahlgren Logging, Inc. 9,675.23 5.03%
1666 Bogahiel Way
Forks, WA 98331
CLASS C
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
David and Julie Hathaway 561.80 52.17%
540 N. Newport
Mesa, WA 99340
Richard and Arlene Morgan 287.08 26.66%
Rt. 2, Box 103
Rosalia, WA 99170
Amrit Rupaal 193.27 17.95%
2918 Sylvan #107
Bellingham, WA 98226
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
TELCO 1,326,089.91 11.32%
c/o U.S. Bank of Oregon
555 S.W. Oak
Portland, OR 97204
Unit & Co. 10,161,564.55 86.75%
c/o U.S. Bank of Oregon
555 S.W. Oak
Portland, OR 97204
INTERMEDIATE BOND FUND
----------------------
CLASS A
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
IRA of Robert Shugert 4,395.18 6.74%
1706 W. Fairview Drive
Spokane, WA 99218
IRA of Michael Schmidt 3,877.74 5.95%
16824 S.W. Inverurie Rd.
Lake Oswego, OR 97035
IRA of Augusta Shipsey 6,701.26 10.28%
8472 Chippewa Court
West Linn, OR 97068
Criteser Family Rev. 9,056.45 13.90%
Living Trust
101 McCarver
Oregon City, OR 97405
IRA of Pamela Kay Crary 4,076.84 6.26%
1080 Humorist Road
Pasco, WA 99801
CLASS C
- -------
42
<PAGE>
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
Pacific Interstate Const., Inc. 560.38 5.22%
P.O. Box 67
Hillsboro, OR 97123
Allan Goforth 840.93 7.83%
P.O. Box 125
Williams, CA 95987
IRA of Stephen Springer 1,763.25 16.41%
10265 Gould Avenue
Tillamook, OR 97141
IRA of James Fjelland 1,453.11 13.53%
2579 Pinehurst Drive
McMinville, OR 97128
IRA of Donald Small 4,193.15 39.03%
565 S. Frisco Drive
Elko, NV 89801
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
USBC EIP Fixed Income 1,269,736.43 8.33%
Fund A
P.O. Box 2758
Portland, OR 97208
Conservative Balanced 1,935,645.73 12.71%
Blended 3
P.O. Box 2758
Portland, OR 97208
Moderate Balanced Portfolio 3,453,692.20 22.68%
Blended 4
P.O. Box 2758
Portland, OR 97208
BOND FUND
---------
CLASS A
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
43
<PAGE>
- ---------------- -------------------- ----------
Harry Yager 4,639.81 28.03%
802 South Liberty
Burns, OR 97720
IRA of Robert Shugert 4,395.66 26.56%
1706 West Fairview Drive
Spokane, WA 99218
Burt McDowell 1,848.63 11.17%
Trust Emergicorp Ltd.
Defined Benefit Pension Plan
20560 S.W. Edy Road
Sherwood, OR 97140
Violet Phinney 1,168.04 7.06%
2518 West Grace
Spokane, WA 99205
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
USBC Retirement F.I. Fund 11,253,783.95 74.55%
P.O. Box 2758
Portland, OR 97208
MONEY MARKET FUND
-----------------
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
USBC EIP Money Market 24,484,323.00 28.92%
Fund D
P.O. Box 2758
Portland, OR 97208
44
<PAGE>
USBC EIP W/O Fund D Shadow 10,760,559.00 12.71%
P.O. Box 2758
Portland, OR 97208
TAX-FREE MONEY MARKET FUND
--------------------------
CLASS Q
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
David and Shawn Taylor 168,283.83 5.61%
5801 Third Avenue South
Seattle, WA 98108
David Taylor, Jr. 830,432.80 27.67%
5801 Third Avenue South
Seattle, WA 98108
CLASS Y
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
Niles and Victoria Hanson 463,821.00 93.92%
c/o U.S. Bank of Oregon
111 S.W. Fifth Avenue
Portland, OR 97208
U.S. TREASURY FUND
------------------
CLASS Q
- -------
AMOUNT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP (SHARES) CLASS (%)
- ---------------- -------------------- ----------
Rogue Valley Medical 5,483,325.97 18.38%
Center
2650 S. Siskiyou Blvd.
Suite 200
Medford, OR 97504
Providence Newberg 1,670,093.54 5.60%
Hospital
501 Villa Road
Newberg, OR 97132
45
<PAGE>
Oregon Life & Health 2,477,008.42 8.30%
Insurance Guaranty Association
P.O. Box 4520
Salem, OR 97302
Shareholder and Trustee Liability
- ---------------------------------
Under Massachusetts law, holders of units of interest in a business trust
may, under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the Trust's property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall 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 Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent
of the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable
46
<PAGE>
to any person for any action or failure to act except for his or her own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Trust shall look solely to the assets of the
Trust for payment.
Additional Tax Information
- --------------------------
The following discussion sets forth additional information summarizing
certain U.S. federal tax considerations incident to an investment in a Fund.
Taxation of the Funds. Each Fund intends to qualify and elect to be
---------------------
treated as a RIC under Subchapter M of the Code. If so qualified, a Fund
generally will not be subject to federal income tax to the extent it distributes
its investment company taxable income (which includes interest on taxable
investments and the excess of net short-term capital gains over net long-term
capital losses) and net capital gains (the excess of net long-term capital gains
over net short-term capital losses) to Shareholders in a timely manner. To
qualify as a RIC, a Fund generally must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or curren-
cies; (b) derive in each taxable year less than 30% of its gross income from the
sale or other disposition of certain assets held less than three months, namely:
(i) stock or securities; (ii) options, futures, or forward contracts (other than
those on foreign currencies); or (iii) foreign currencies (or options, futures,
or forward contracts on foreign currencies) that are not directly related to the
Fund's principal business of investing in stock or securities (or options and
futures with respect to stock or securities) (the "30% Limitation"); and (c)
diversify its holdings so that, at the end of each fiscal quarter, (i) at least
50% of the market value of the Fund's assets is represented by cash, U.S.
Government securities, the securities of other RICs and other securities, with
such other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other RICs).
Additionally, a Fund must, for each taxable year, distribute to Shareholders at
least 90% of its investment company taxable income and at least 90% of its net
tax-exempt interest income.
The Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no regulations have been issued.
Amounts, other than tax-exempt interest, not distributed by a Fund on a
timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise
47
<PAGE>
tax at the Fund level. To avoid the tax, each Fund must distribute during each
calendar year an amount equal to the sum of: (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses or tax-exempt
interest) for the calendar year; (2) at least 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses) for a one-year
period generally ending on October 31 of the calendar year; and (3) all taxable
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make distributions in accordance with the calendar year distribution
requirements. A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by a Fund in October, November or
December of the year with a record date in such a month and paid by the Fund
during January of the following year. Such distributions will be treated as
received by Shareholders in the calendar year the distributions are declared,
rather than the calendar year in which the distributions are actually received.
Options, Futures and Foreign Currency Forward Contracts. Some of the
-------------------------------------------------------
options, futures and foreign currency forward contracts in which a Fund may
invest may be "section 1256 contracts." Gains (or losses) on these contracts
generally are considered to be 60% long-term and 40% short-term capital gains or
losses; however, foreign currency gains or losses arising from certain section
1256 contracts are ordinary in character. Also, section 1256 contracts held by
a Fund at the end of each taxable year (and on certain other dates prescribed in
the Code) are "marked-to-market" with the result that unrealized gains or losses
are treated as though they were realized.
The transactions in options, futures and forward contracts undertaken by a
Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains or losses realized by a Fund. In
addition, losses realized by a Fund on positions that are part of a straddle may
be deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the consequences of such transactions to a Fund are not
entirely clear. The straddle rules may increase the amount of short-term
capital gain realized by a Fund, which is taxed as ordinary income when
distributed to Shareholders.
The Funds may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
Shareholders as ordinary income or long-term capital gain
48
<PAGE>
may be increased or decreased substantially as compared to a Fund that did not
engage in such transactions.
The 30% Limitation and the diversification requirements applicable to each
Fund's assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures and forward contracts.
Currency Fluctuations -- "Section 988" Gains or Losses. Gains or losses
------------------------------------------------------
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues income or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of some
investments, including debt securities denominated in a foreign currency and
certain forward contracts, gains or losses attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of a Fund's investment company taxable income
available to be distributed to its Shareholders as ordinary income. If section
988 losses exceed other investment company taxable income during a taxable year,
a Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to Shareholders, rather than as an ordinary dividend, reducing
each Shareholder's basis in his or her Fund Shares.
Investments in Passive Foreign Investment Companies. A Fund may invest in
---------------------------------------------------
shares of foreign corporations which may be classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half of its assets constitute investment-
type assets, or 75% or more of its gross income is investment-type income. If a
Fund receives a so-called "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to a tax on a portion of the excess distribution,
whether or not the corresponding income is distributed by the Fund to
Shareholders. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the Fund
held the PFIC shares. The Fund itself will be subject to tax on the portion, if
any, of an excess distribution that is so allocated to prior Fund taxable years
and an interest factor will be added to the tax, as if the tax had been payable
in such prior taxable years. Certain distributions from a PFIC, as well as gain
from the sale of PFIC shares, are treated as excess distributions. Excess
distributions are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions,
49
<PAGE>
would not apply. In addition, another election may be available that would
involve marking-to-market a Fund's PFIC shares at the end of each taxable year
(and on certain other dates prescribed in the Code), with the result that
unrealized gains are treated as though they were realized. If this election
were made, tax at the Fund level under the PFIC rules would generally be
eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. A Fund's intention to qualify annually as a RIC may limit its
elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC shares.
Foreign Taxes. Income received by a Fund from sources within a foreign
-------------
country may be subject to withholding and other income or similar taxes imposed
by that country. If more than 50% of the value of a Fund's total assets at the
close of its taxable year consists of securities of foreign corporations, the
Fund will be eligible and may elect to "pass-through" to the Fund's Shareholders
the amount of foreign income and similar taxes paid by the Fund. Pursuant to
this election, a Shareholder will be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
--- ----
foreign income and similar taxes paid by a Fund, and will be entitled either to
claim a deduction (as an itemized deduction) for his pro rata share of such
--- ----
foreign taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. federal income taxes, subject to limitations. Foreign
taxes may not be deducted by a Shareholder that is an individual in computing
the alternative minimum tax. Each Shareholder will be notified within 60 days
after the close of a Fund's taxable year whether the foreign taxes paid by the
Fund will "pass-through" for that year and, if so, such notification will
designate (a) the Shareholder's portion of the foreign taxes paid to each such
country, and (b) the portion of the dividend which represents income derived
from sources within each such country.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the Shareholder's U.S. tax attributable to his total foreign
source taxable income. For this purpose, if a Fund makes the election described
in the preceding paragraph, the source of a Fund's income flows through to its
Shareholders. With respect to a Fund, gains from the sale of securities
generally will be treated as derived from U.S. sources and section 988 gains
generally will be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax credit), including
foreign source passive income received from a Fund. In addition, the foreign
tax credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals. If a Fund is not eligible to make the election
described above, the foreign income and similar taxes it pays generally will
reduce investment company taxable income and distributions by a Fund will be
treated as United States source income.
50
<PAGE>
The foregoing is only a general description of the foreign tax credit under
current law. Because application of the credit depends on the particular
circumstances of each Shareholder, Shareholders are advised to consult their own
tax advisers.
Debt Securities Acquired at a Discount. Some of the debt securities (with
--------------------------------------
a fixed maturity date of more than one year from the date of issuance) that may
be acquired by a Fund may be treated as debt securities that are issued
originally at a discount. Generally, the amount of the original issue discount
("OID") is treated as interest income and is included in income over the term of
the debt security, even though payment of that amount is not received until a
later time, usually when the debt security matures. A portion of the OID
includable in income with respect to certain high-yield corporate debt
securities may be treated as a dividend for purposes of the corporate dividends-
received deduction. OID on an obligation, the interest from which is exempt
from federal income tax, is not taxable.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, gain recognized on
the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. In addition, the deduction of any interest expenses attributable to
debt securities having market discount may be deferred. Market discount
generally accrues in equal daily installments. A Fund may make one or more of
the elections applicable to debt securities having market discount, which could
affect the character and timing of the recognition of income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance), the interest from which is taxable, that may be acquired
by a Fund may be treated as having acquisition discount, or OID in the case of
certain types of debt securities. Generally, a Fund will be required to include
the acquisition discount, or OID, in income over the term of the debt security,
even though payment of that amount is not received until a later time, usually
when the debt security matures. A Fund may make one or more of the elections
applicable to debt securities having acquisition discount, or OID, which could
affect the character and timing of recognition of income.
Each Fund generally will be required to distribute dividends to
Shareholders representing discount on debt securities that is currently
includable in income, even though cash representing such income may not have
been received by the Fund. Cash to pay such dividends may be obtained from
sales proceeds of securities held by the Fund or by borrowing.
Disposition of Shares. Upon a redemption, sale or exchange of Shares of a
---------------------
Fund, a Shareholder will realize a taxable gain or loss depending upon the basis
of the Shares. However, dispositions of Shares of the Money Funds will not give
rise to a gain or loss if the relevant Fund maintains a net asset value per
Share of one dollar. A gain or loss will be treated as capital gain or loss if
the Shares are capital assets in the Shareholder's hands and generally will be
long-term
51
<PAGE>
or short-term, depending upon the Shareholder's holding period for the Shares.
Any loss realized on a redemption, sale or exchange will be disallowed to the
extent the Shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after the Shares are disposed of. In such a case, the basis of the Shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a Shareholder on the sale of a Fund's Shares held by the Shareholder for six
months or less will be treated for tax purposes as a long-term capital loss to
the extent of any distributions of capital gain dividends received or treated as
having been received by the Shareholder with respect to such Shares.
Furthermore, a loss realized by a Shareholder of the Tax-Free Bond Fund on the
redemption, sale or exchange of Shares of the Fund with respect to which exempt-
interest dividends have been paid will, to the extent of such exempt-interest
dividends, be disallowed if such Shares have been held by the Shareholder for
six months or less at the time of their disposition.
In some cases, Shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Shares. This prohibition generally applies where (1)
the shareholder incurs a sales charge in acquiring the stock of a RIC, (2) the
stock is disposed of before the 91st day after the date on which it was
acquired, and (3) the shareholder subsequently acquires shares of the same or
another RIC and the otherwise applicable sales charge is reduced or eliminated
under a "reinvestment right" received upon the initial purchase of shares of
stock. In that case, the gain or loss recognized will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred a sales charge
initially. Sales charges affected by this rule are treated as if they were
incurred with respect to the stock acquired under the reinvestment right. This
provision may be applied to successive acquisitions of stock.
Backup Withholding. The Funds will be required to report to the IRS all
------------------
distributions of investment company taxable income and net capital gains, and
the gross proceeds from the redemption of Shares, except in the case of certain
exempt Shareholders. All distributions of investment company taxable income and
net capital gains, and proceeds from the redemption of Fund Shares, will be
subject to withholding of federal income tax at the rate of 31% ("backup
withholding") in the case of nonexempt Shareholders if (1) the Shareholder fails
to furnish the Fund with and to certify the Shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
Shareholder or the Fund that the Shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the Shareholder fails to certify
that he or she is not subject to backup withholding. It is not expected that
the gross proceeds from redemptions of Shares of the Money Funds will be
reportable to the IRS or subject to backup withholding if the Money Funds
maintain a net asset value per Share of one dollar.
The Exempt Funds. Each Exempt Fund intends to manage its portfolio so that
----------------
it will be eligible to pay "exempt-interest dividends" to Shareholders. A RIC
will so qualify if, at the close
52
<PAGE>
of each quarter of its taxable year, at least 50% of the value of its total
assets consists of state, municipal, and certain other securities, the interest
on which is exempt from the regular federal income tax. To the extent that
dividends distributed to Shareholders by an Exempt Fund are derived from such
interest income and are designated as "exempt-interest dividends" by the
distributing Fund, they will be excludable from a Shareholder's gross income for
regular federal income tax purposes. In computing the alternative minimum tax
liability of a corporation, the entire amount of exempt-interest dividends will
be part of an adjustment in computing alternative minimum taxable income and
will have to be taken into account for purposes of the environmental tax under
Code section 59A. Shareholders are required to report the receipt of tax-exempt
interest and exempt-interest dividends on their federal income tax returns. An
Exempt Fund would not be suitable investments for tax-exempt institutions and
may not be suitable for retirement plans qualified under the Code, including
individual retirement accounts, since such plans and accounts are generally tax-
exempt and, therefore, would not gain any additional benefit from receiving
exempt-interest dividends, and such dividends would be ultimately taxable to the
beneficiaries when distributed to them. An Exempt Fund will inform Shareholders
annually as to the portion of the distributions from the Fund which constitute
"exempt-interest dividends."
Other Taxation. Distributions and redemptions may also be subject to
--------------
additional state, local and foreign taxes depending on each Shareholder's parti-
cular situation. Non-U.S. Shareholders may be subject to U.S. tax rules that
differ significantly from those summarized herein. This discussion does not
purport to deal with all of the tax consequences applicable to the Funds or
Shareholders (for example, a Fund may be subject to state and local taxation).
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
Yields of the Money Funds
- -------------------------
Each of the standardized seven-day yields for each Money Fund is computed
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in that Fund having a balance of one Share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from Shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/base period). The
net change in the account value of each Money Fund includes the value of
additional Shares purchased with dividends from the original Share, dividends
declared on both the original Share and any such additional Shares, and all
fees, other than nonrecurring account or sales charges, that are charged to all
Shareholder accounts in proportion to the length of the base period and assuming
that Fund's average account size. The capital changes to be excluded from the
calculation of the net change in account value are net realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. Yield
for the seven-day period ended July 31, 1995 was as follows:
Yield for the Seven-Day
Fund Period Ended July 31, 1995
- ---- --------------------------
U.S. Treasury Fund
Class A Shares 5.00%
Class Q Shares 5.20%
Class Y Shares 5.41%
Money Fund
Class A Shares 5.01%
Class Q Shares 5.41%
Class Y Shares 5.41%
Tax-Free Money Market Fund
Class A Shares 2.78%
Class Q Shares 2.93%
Class Y Shares 3.19%
53
<PAGE>
Each of the effective yields for the Money Funds is computed by compounding
the base period return, as calculated above by adding 1 to the base period
return, raising the sum to a power equal to 365 divided by base period and
subtracting 1 from the result. Effective yield for the seven-day period ended
July 31, 1995 was as follows:
Effective Yield for the Seven-Day
Fund Period Ended July 31, 1995
- ---- ---------------------------------
U.S. Treasury Fund
Class A Shares 5.13%
Class Q Shares 5.34%
Class Y Shares 5.56%
Money Fund
Class A Shares 5.14%
Class Q Shares 5.56%
Class Y Shares 5.56%
Tax-Free Money Market Fund
Class A Shares 2.82%
Class Q Shares 2.97%
Class Y Shares 3.24%
Each of the 30-day yields and effective yields are calculated as described
above except than the base period is 30 days rather than seven days. Yield for
the 30-day period ended July 31, 1995 was as follows:
Yield for the 30-Day
Fund Period Ended July 31, 1995
- ---- --------------------------
U.S. Treasury Fund
Class A Shares 5.02%
Class Q Shares 5.22%
Class Y Shares 5.43%
Money Fund
Class A Shares 5.03%
Class Q Shares 5.43%
Class Y Shares 5.43%
Tax-Free Money Market Fund
Class A Shares 2.66%
Class Q Shares 2.81%
Class Y Shares 3.07%
Effective yield for the 30-day period ended July 31, 1995 was as follows:
Effective Yield for the 30-Day
Fund Period Ended July 31, 1995
- ---- ------------------------------
U.S. Treasury Fund
Class A Shares 5.14%
Class Q Shares 5.35%
Class Y Shares 5.56%
Money Fund
Class A Shares 5.14%
Class Q Shares 5.56%
Class Y Shares 5.56%
Tax-Free Money Market Fund
Class A Shares 2.70%
Class Q Shares 2.85%
Class Y Shares 3.12%
The Tax-Free Money Market Fund's tax-equivalent yields are computed by
dividing that portion of the Tax-Free Money Market Fund's yield which is tax-
exempt by one minus the stated income tax rate and adding the result to that
portion, if any, of the Tax-Free Money Market Fund's yield that is not tax-
exempt. The Tax-Free Money Market Fund's tax-equivalent effective yields are
computed by dividing that portion of the effective yield which is tax-exempt by
one minus the stated income tax rate and adding to that result the portion, if
any, of the Tax-Free Money Market Fund's effective yield that is not tax-exempt.
Yields of the Parent Funds, the Equity Funds and the Income Funds.
- -----------------------------------------------------------------
Yields of each of the Parent Funds, the Equity Funds and the Income Funds
are computed by analyzing net investment income per Share for a recent 30-day
period and dividing that amount by a Share's maximum offering price (reduced by
any undeclared earned income expected to be paid shortly as a dividend) on the
last trading day of that period. Net investment income will reflect
amortization of any market value premium or discount of fixed income securities
(except for obligations backed by mortgages or other assets) and may include
recognition of a pro rata
54
<PAGE>
portion of the stated dividend rate of dividend paying portfolio securities.
The yield of each of the Equity Funds and the Income Funds will vary from time
to time depending upon market conditions, the composition of a Fund's portfolio
and operating expenses of the Trust allocated to each Fund. These factors and
possible differences in the methods used in calculating yield should be
considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's Shares and to the
relative risks associated with the investment objective and policies of each of
the Funds. Yield for the 30-day period ended July 31, 1995 was as follows:
Yield for the 30-Day
Period Ended July 31, 1995
--------------------------
With Without
Fund Sales Charge Sales Charge
- ---- ------------ ------------
Large Companies Value Fund
Class A Shares 1.56% 1.63%
Class C Shares 0.82% N/A
Class Y Shares 1.78% N/A
Small Companies Fund
Class A Shares 0.15% 0.15%
Class C Shares -0.56% N/A
Class Y Shares 0.36% N/A
Optimized Fund
Class A Shares 1.55% 1.63%
Class C Shares 0.90% N/A
Class Y Shares 1.93% N/A
Intermediate Bond Fund
Class A Shares 4.96% 5.14%
Class C Shares 4.38% N/A
Class Y Shares 5.39% N/A
Bond Fund
Class A Shares 1.13% 1.17%
Class C Shares 2.34% N/A
Class Y Shares 5.68% N/A
In addition, for the Tax-Free Bond Fund, tax-equivalent yields are computed
by dividing that portion of the Fund's yield (as computed above) which is tax-
exempt by one minus a stated income tax rate and adding that result to that
portion, if any, of the yield of that Fund which is not tax exempt.
At any time in the future, yields may be higher or lower than past yields
and there can be no assurance that any historical results will continue.
Investors in the Parent Funds, the Equity Funds and the Income Funds are
specifically advised that Share prices, expressed as the net asset values per
Share, will vary just as yields will vary.
Calculation of Total Return
- ---------------------------
Average annual total return is a measure of the change in value of an
investment in a Fund over the period covered, which assumes any dividends or
capital gains distributions which are reinvested in the Fund immediately rather
than paid to the investor in cash. Average annual total return will be
calculated by: (1) adding to the total number of Shares purchased by a
hypothetical $1,000 investment in the Fund and (less the maximum sales charge,
if any) all additional Shares which would have been purchased if all dividends
and distributions paid or distributed during the period had been immediately
reinvested; (2) calculating the value of the hypothetical initial investment of
$1,000 as of the end of the period by multiplying the total number of Shares
owned at the end of the period by the net asset value per Share on the last
trading day of the period; (3) assuming redemption at the end of the period; and
(4) dividing this account value for the
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hypothetical investor by the initial $1,000 investment and analyzing the result
for periods of less than one year. Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Total return for the
period ended July 31, 1995 was as follows:
Average Annual Total Return
for Period Ended July 31, 1995
------------------------------
With Without
Fund Sales Charge Sales Charge
- ---- ------------ ------------
Large Companies Value Fund
Class A Shares 19.01% 24.61% (1)
Class C Shares 21.78% 22.78% (1)
Class Y Shares N/A 25.04% (1)
Optimized Fund
Class A Shares 4.72% 9.64% (2)
Class C Shares 8.41% 9.41% (2)
Class Y Shares N/A 9.74% (2)
International Fund
Class A Shares -0.19% 4.50% (3)
Class C Shares 3.60% 4.60% (3)
Class Y Shares N/A 4.80% (3)
Bond Fund
Class A Shares -0.51% 3.07% (2)
Class C Shares 2.35% 3.35% (2)
Class Y Shares N/A 4.58% (2)
U.S. Treasury Fund
Class A Shares N/A 2.79% (4)
Class Q Shares N/A 2.90% (4)
Class Y Shares N/A 3.02% (4)
Money Fund
Class A Shares N/A 4.97% (1)
Class Q Shares N/A 3.13% (5)
Class Y Shares N/A 5.40% (1)
Tax-Free Money Market Fund
Class A Shares N/A 1.66% (6)
Class Q Shares N/A 1.73% (6)
Class Y Shares N/A 1.88% (6)
_______________________________________________
(1) From August 1, 1994 (commencement of operations).
(2) From May 2, 1995 (commencement of operations).
(3) From July 3, 1995 (commencement of operations).
(4) From January 11, 1995 (commencement of operations).
(5) From January 10, 1995 (commencement of operations).
(6) From January 9, 1995 (commencement of operations).
In addition, for the period ended March 31, 1996, total return for the
Small Companies Fund and Intermediate Bond Fund was as follows:
<TABLE><CAPTION>
Average Annual Total Return for Period Ended March 31, 1996
-----------------------------------------------------------
One Year Five Years Since Inception 1
-------- ---------- -----------------
With Without With Without With Without
Fund Sales Charge Sales Charge Sales Charge Sales Charge Sales Charge Sales Charge
---- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Small Companies Fund
Class A Shares 31.28% 37.50% 21.40% 22.53% 20.20% 20.89%
Class C Shares N/A 38.13% N/A 21.51% N/A 19.93%
Class Y Shares N/A 37.63% N/A 22.79% N/A 21.16%
Intermediate Bond Fund
Class A Shares 4.36% 8.18% 6.14% 6.92% 6.86% 7.32%
Class C Shares N/A 7.30% N/A 6.03% N/A 6.46%
Class Y Shares N/A 8.36% N/A 7.39% N/A 7.70%
(1) From January 1, 1988 (commencement of operations). The quoted
performances of these Funds includes the performance of certain collective
trust fund accounts (the "Commingled Accounts") advised by Qualivest for periods
prior to the Funds' August 1, 1994 commencement of operations as investment
portfolios of the Trust, which is an investment company registered under the
1940 Act. The Funds' quoted performance has been adjusted for the period prior
to August 1, 1994 to reflect each Fund's expenses. The Commingled Accounts were
not registered with the Securities and Exchange Commission, and therefore were
not subject to the investment restrictions imposed by law on the Trust and the
Funds. If the Commingled Accounts had been registered under the 1940 Act, the
performance of the Commingled Accounts may have been adversely affected.
</TABLE>
Each Fund may also present its average annual total return, aggregate total
return and yield, as the case may be, excluding the effect of a sales charge, if
any.
Distribution Rates
- ------------------
Each of the Parent Funds, the Equity Funds and the Income Funds may from
time to time advertise current distribution rates. Distribution rates are
computed by dividing the distribution per Share of a class made by a Fund over a
twelve-month period by the maximum offering price per Share of that class. The
calculation of income in the distribution rate includes both income and capital
gain dividends and does not reflect unrealized gains or losses, although a Fund
may also present a distribution rate excluding the effect of capital gains. The
distribution rate differs
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from the yield, because it includes capital items which are often non-recurring
in nature, whereas yield does not include such items. Distribution rates may
also be presented excluding the effect of a sales charge, if any.
Performance Comparisons
- -----------------------
Investors may judge the performance of the Funds by comparing their
performance to the performance of other mutual funds or mutual fund portfolios
directly or through various mutual fund or market indices such as the EAFE Index
and those prepared by Dow Jones & Co., Inc., Standard & Poor's Corporation,
Shearson Lehman Brothers, Inc. and The Russell 2000 Index, and to data prepared
by Lipper Analytical Services, Inc., a widely recognized independent service
which monitors the performance of mutual funds, Morningstar, Inc. and the
Consumer Price Index. Comparisons may also be made to indices or data published
in various general and financial press sources, including Donoghue's MONEY FUND
REPORT of Holliston, Massachusetts 01746, a nationally recognized money market
fund reporting service, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's Index, The Bond
Buyer, The New York Times, Business Week, Pensions and Investments, and U.S.A.
Today. In addition to performance information, general information about these
Funds that appears in a publication such as those mentioned above may be
included in advertisements and in reports to Shareholders.
From time to time, the Funds may include the following types of information
in advertisements, supplemental sales literature and reports to Shareholders:
(1) discussions of general economic or financial principles (such as the effects
of compounding, the benefits of dollar-cost averaging, and asset allocations
appropriate for various financial goals); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the Funds; (5) descriptions of investment strategies for one or more of the
Funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, insured bank products, annuities,
qualified retirement plans and individual stocks and bonds), which may or may
not include the Funds; (7) comparisons of investment products (including the
Funds) with relevant market or industry indices or other appropriate benchmarks;
(8) discussions of fund rankings or ratings by recognized rating organizations;
and (9) testimonials describing the experience of persons that have invested in
one or more of the Funds. The Funds may also include calculations, such as
hypothetical compounding examples, which describe hypothetical investment
results in such communications. Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any of
the Funds.
Current yields or performance will fluctuate from time to time and are not
necessarily representative of future results. Accordingly, a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are functions of a Fund's quality, composition, and maturity, as
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<PAGE>
well as expenses allocated to the Fund. Fees imposed upon customer accounts for
cash management services will reduce a Fund's effective yield to customers.
Miscellaneous
- -------------
Individual Trustees are elected by the Shareholders and, subject to removal
by the vote of two-thirds of the Board of Trustees, serve for a term lasting
until the next meeting of Shareholders at which Trustees are elected. Such
meetings are not required to be held at any specific intervals. Individual
Trustees may be removed by vote of the Shareholders voting not less than a
majority of the Shares then outstanding, cast in person or by proxy at any
meeting called for that purpose, or by a written declaration signed by
Shareholders voting not less than two-thirds of the Shares then outstanding.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision
by the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectuses and this SAI omit certain of the information contained in
the Registration Statement filed with the Securities and Exchange Commission.
Copies of such information may be obtained from the Securities and Exchange
Commission upon payment of the prescribed fee.
The Prospectuses and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
Financial Statements
- --------------------
The Trust's audited financial statements for the Funds, including the
related notes thereto, dated as of July 31, 1995, and the Trust's unaudited
financial statements for the Funds, including the related notes thereto,
dated as of January 31, 1996, are incorporated by reference in the SAI from
the Annual Report of the Trust dated as of July 31, 1995 and the Semi-Annual
Report of the Trust dated as of January 31, 1996, respectively. A copy of the
Report(s) delivered with this SAI should be retained for future reference.
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<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa -judged to be the best quality and they carry the smallest degree
of investment risk; Aa -judged to be of high quality by all standards - together
with the Aaa group, they comprise what are generally known as high grade bonds;
A - possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; Baa - considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured -
----
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
Description of S&P's corporate and municipal bond ratings:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA - highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA - has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A - has
a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB - regarded as
having an adequate capacity to pay interest and repay principal; whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D - interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
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<PAGE>
Description of Moody's ratings of short-term municipal obligations:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade, or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these
groups are as follows: MIG 1/VMIG 1 - denotes best quality, there is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing; MIG 2/VMIG 2 -
denotes high quality, margins of protection are ample although not as large as
in the preceding group; MIG 3/VMIG 3 -denotes high quality, all security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly
regarded as required of an investment security is present, but there is specific
risk; SQ - denotes speculative quality, instruments in this category lack
margins of protection.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 -issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior short-
term promissory obligations; Prime - 3 - issuers (or supporting institutions)
have an acceptable ability for repayment of senior short-term promissory
obligations; Not Prime - issuers do not fall within any of the Prime categories.
Description of S&P's rating for municipal notes and short-term municipal demand
obligations:
Rating categories are as follows: SP-1 - has a very strong or strong
capacity to pay principal and interest - those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2 -
has a satisfactory capacity to pay principal and interest; SP-3 - issues
carrying this designation have a speculative capacity to pay principal and
interest.
Description of S&P's ratings for short-term corporate demand obligations and
commercial paper:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 - the degree of safety regarding timely payment is strong - those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 - capacity for timely payment is
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<PAGE>
satisfactory - however, the relative degree of safety is not as high as for
issues designated "A-1"; A-3 - has adequate capacity for timely payment -
however, is more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations; B - regarded as having only
speculative capacity for timely payment; C - a doubtful capacity for payment;
D - in payment default - the "D" rating category is used when interest payments
or principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period.
iii
