FIRST OMAHA FUNDS
A FAMILY OF NO-LOAD MUTUAL FUNDS
>FIRST OMAHA INCOME FUND(R)
>FIRST OMAHA NEBRASKA TAX-EXEMPT FUND(R)
>FIRST OMAHA COLORADO TAX-EXEMPT FUND(R)
PROSPECTUS
DECEMBER 15, 2000
First Omaha Funds, Inc. (the "Company") is a family of ten no-load mutual funds.
In this prospectus we describe the First Omaha Income Fund, Nebraska Tax-Exempt
Fund and Colorado Tax-Exempt Fund. Sometimes we refer to the latter two Funds
together as the "Tax-Exempt Funds."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, the First National Bank of Omaha, FNC Trust Group, n.a., First
National Colorado, Inc., their parent, First National of Nebraska, Inc., or any
of their affiliates. Shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. An investment in a Fund involves certain investment risks, including the
possible loss of principal.
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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Table of Contents
THE FUNDS
PRINCIPAL INVESTMENT STRATEGIES AND RISKS, EXPENSES AND PERFORMANCE
First Omaha Income Fund.......................................................4
First Omaha Nebraska Tax-Exempt Fund..........................................7
First Omaha Colorado Tax-Exempt Fund ........................................10
YOUR INVESTMENT
BUYING AND SELLING SHARES, ACCOUNT POLICIES AND MANAGEMENT
Buying Shares................................................................14
Selling (Redeeming) Shares...................................................15
Exchanging Shares............................................................15
Transaction Policies.........................................................16
Dividends and Taxes..........................................................17
Management of the Company....................................................18
Financial Highlights.........................................................20
FOR MORE INFORMATION Back cover
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FIRST OMAHA INCOME FUND(R)
OBJECTIVE
This Fund seeks to maximize current income consistent with the preservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
PRINCIPAL INVESTMENTS
Under normal market conditions, the Fund intends to invest primarily all, but
must invest at least 65%, of its assets in fixed income securities, consisting
of:
> bonds, notes and debentures from a wide range of U.S. corporate issuers;
> mortgage-related securities;
> state, municipal or industrial revenue bonds;
> obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
> fixed income securities that can be converted into or exchanged for common
stock; or
> repurchase agreements.
The Fund seeks to maintain a dollar-weighted average portfolio maturity of three
years or more under normal market conditions. To calculate maturity, the adviser
uses each instrument's ultimate maturity date, or the probable date of a call,
refunding or redemption provision, or other maturity-shortening device. For
securities expected to be repaid before their maturity date (such as
mortgage-backed securities), the adviser uses the effective maturity, which is
shorter than the stated maturity.
The Fund also seeks to maintain an average portfolio duration comparable to the
Lehman Bros. Aggregate Bond Index average duration. Duration is an indicator of
the expected volatility of a bond position in response to changes in interest
rates. In calculating duration, the Fund measures the average time required to
receive all cash flows associated with those debt securities--representing
payments of principal and interest--by considering the timing, frequency and
amount of payment expected from each portfolio debt security. The lower the
duration, the less likelihood the investment will be volatile. For example, on
November 30, 2000 the duration of the Lehman Bros. Aggregate Bond Index was
4.72. By comparison, on the same date the duration of a 30-year U.S. Treasury
Bond bearing interest at 5.61% was 14.0.
The fixed income securities in which the Fund invests will be "investment
grade," which means they will be:
> rated at purchase within the four highest ratings of a nationally
recognized rating organization, such as Moody's Investors Service, Inc. and
Standard & Poor's Corporation; or
> if unrated, considered at purchase by the Fund's investment adviser to be
of comparable quality.
MORTGAGE-RELATED SECURITIES. Under normal market conditions, the Fund will
invest no more than 50%of its value in mortgage-related securities, which are
backed by obligations such as:
> conventional 30-year fixed rate mortgages;
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> 15-year mortgages; or
> adjustable-rate mortgages.
Mortgage-related securities are pass-through securities--an interest in a poo1
or poo1s of mortgage obligations. The cash flow from the mortgage obligations is
"passed through" to the securities' holders as periodic payments of interest,
principal and prepayments (net of service fees).
Other mortgage securities the Fund may purchase include collateralized mortgage
obligations (CMOs) and real estate mortgage investment conduits (REMICs), some
of which are issued privately. CMOs may be collateralized by whole mortgage
loans or, more typically, by portfolios of pass-through securities guaranteed by
the Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation or the Federal National Mortgage Association.
PRINCIPAL RISKS
The value of the Fund's shares depends on the value of the securities it owns.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of your investment may fluctuate significantly, which means
you could lose money.
GENERAL MARKET RISKS. Factors affecting the securities markets include domestic
and foreign economic growth and decline, interest rate levels and political
events. There is a risk the adviser won't accurately predict the direction of
these and other factors and, as a result, the adviser's investment decisions may
not accomplish what they were intended to achieve. You should consider your own
investment goals, time horizon, and risk tolerance before investing in the Fund.
INTEREST RATE RISK. Changes in interest rates affect the value of the Fund's
debt securities, including securities issued or guaranteed by the U.S.
government or other government agencies. When interest rates rise, the value of
the Fund's securities and its shares will decline. A change in interest rates
will also affect the amount of income the Fund generates.
CREDIT RISK. The value of the Fund's fixed income securities is affected by the
issuer's continued ability to make interest and principal payments. The Fund
could lose money if the issuers cannot meet their financial obligation or go
bankrupt.
Securities rated in the lowest of the investment grade categories (e.g., Baa or
BBB) are considered more speculative than higher rated securities. Their issuers
may not be as financially strong as those of higher rated bonds and may be more
vulnerable to periods of economic uncertainty or downturn.
If the seller of a repurchase agreement defaults, the Fund may be exposed to
possible loss because of adverse market conditions or a delay in selling the
underlying securities to another person.
REINVESTMENT RISK. When interest rates decline, cash flows from maturing
securities may have to be reinvested at a lower rate.
PREPAYMENT RISK. Mortgage- and asset-backed securities involve prepayment risk,
which is the risk that the underlying mortgages or other debts may be refinanced
or paid off before they mature during a period of declining interest rates. That
will tend to lower the Fund's return and could result in losses to the Fund if
it acquired some securities at a premium. Due to prepayments and the need to
reinvest principal payments at current rates, mortgage-related securities may be
less effective than bonds at maintaining yields when interest rates decline.
Mortgage-related securities may be more volatile than other fixed income
securities.
EXTENSION RISK. Conversely, during periods of rising interest rates, the rate of
prepayments of mortgage-and asset-backed securities may be slower than
estimated, causing the Fund to miss the opportunity to reinvest assets at higher
rates.
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PERFORMANCE HISTORY OF PREDECESSOR FUND
The bar chart and table below show the Fund's predecessor's annual returns and
its long-term performance and provide some indication of the risks of an
investment in the Fund. The bar chart shows you how the Fund's predecessor's
performance has varied from year-to-year. The table compares the Fund's
predecessor's performance over time to that of the Lehman Bros. Aggregate Bond
Index(R). Both the bar chart and table assume reinvestment of dividends and
distributions. As with all mutual funds, past performance is no guarantee of
future results.
YEAR-BY-YEAR TOTAL RETURN AS OF 12/31 EACH YEAR (%)
6.92% 14.43% 6.37% 9.25% -4.28% 17.84% 1.48% 8.99% 8.71% -4.75%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
The Fund's predecessor's total return for the nine-month period ended September
30, 2000 was 11.34%.
BEST QUARTER WORST QUARTER
------------ -------------
June 30, 1995 March 31, 1994
6.12% -3.22%
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/99
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Income Fund (Predecessor) -4.75% 6.15% 6.20%
Lehman Bros.
Aggregate
Bond Index (1) -0.83% 7.73% 7.70%
(1)The Lehman Bros. Aggregate Bond Index represents securities that are U.S.
domestic, taxable, and dollar denominated. The index covers the U.S. investment
grade fixed rate bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed securities. These
major sectors are subdivided into more specific indices that are calculated and
reported on a regular basis. It is not possible to make a direct investment in
an index.
The above performance information of this Fund represents the performance of the
Fund's predecessor common trust fund. The common trust fund had investment
objectives, policies and restrictions that were equivalent in all material
respects to those of the Fund, and was managed by First National Bank of Omaha,
which manages the Fund. The bar chart and table above include information
regarding the common trust fund's operations for periods before the Fund's
registration statement became effective, as adjusted to reflect the higher
expenses (before any waivers or reimbursements) incurred by the Funds. The
common trust fund was not registered under the Investment Company Act of 1940
and therefore was not subject to certain investment restrictions that are
imposed by that Act. If the common trust fund had been registered, its
performance might have been adversely affected.
EXPENSES
This table describes the fees and expenses you may pay in connection with
investing in the Fund. The Fund has no shareholder transaction fees. Annual fund
operating expenses are deducted from Fund assets, so their effect is reflected
in the Fund's share price.
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FEE TABLE
INCOME FUND
ANNUAL FUND OPERATING EXPENSES
(% OF AVERAGE NET ASSETS)
Management Fees(1) .60%
Distribution (12b-l) Fees(2) .01%
Other Expenses(1)(3) .55%
Total Fund Operating Expenses(1) 1.16%
(1)The table above reflects all fees the Fund's service providers are
entitled to receive annually pursuant to their contracts with the Fund or
others. However, certain service providers will voluntarily waive a portion
of their respective fees. Taking these waivers into account, the actual
annual Management Fees and Other Expenses to be incurred are expected to be
.40% and .42%, respectively. The actual Total Fund Operating Expenses
incurred by the Fund are expected to be .82%. These waivers by the service
providers are voluntary and therefore may be eliminated at any time.
(2)The Company has adopted a Rule 12b-l Plan, pursuant to which the Fund is
authorized to pay distribution expenses. The Plan limits the amount of
distribution expenses that may be paid by the Fund to an annual rate of no
more than 0.25% of the average daily net asset value of the Fund. As of the
date of this Prospectus, it is estimated that 12b-l expenses will be 0.0%
of average daily net assets of the Fund. As these fees are paid out of the
Fund's assets on an on-going basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of
sales charges.
(3)"Other Expenses" include estimates of miscellaneous fund expenses such
as administration, legal, accounting, custody, shareholder servicing and
transfer agent fees.
The example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds and shows what you could
pay in expenses over time, based on Total Fund Operating Expenses described in
the Fee Table. It uses the same hypothetical conditions other funds use in their
prospectuses: $10,000 initial investment, 5% total return each year and the
Fund's operating expenses remain the same. The figure shown would be the same
whether you sold your shares at the end of a period or kept them. Because actual
return and expenses will be different, this example is for comparison only.
EXPENSE EXAMPLE
1 YEAR 3 YEARS
------ --------
$118 $368
FIRST OMAHA NEBRASKA TAX-EXEMPT FUND(R)
OBJECTIVE
This Fund seeks as high a level of current income exempt from both federal and
Nebraska income tax as is consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
PRINCIPAL INVESTMENTS
Under normal market conditions, the Fund invests primarily, but not less than
65% of its assets, in municipal securities that generate income exempt from
Nebraska state income tax. The Fund, as a matter of fundamental policy, invests
at least 80% of its assets in securities that generate income exempt from
federal income tax. The Fund invests primarily in securities which are
"investment grade," which means they will be:
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<PAGE>
> rated at purchase within the four highest ratings of a nationally
recognized rating organization, such as Moody's Investors Service, Inc. and
Standard & Poor's Corporation; or
> if unrated, considered at purchase by the Fund's investment adviser to be
of comparable quality.
Under normal market conditions, the Fund's assets will be invested in a
portfolio of Nebraska municipal securities which the adviser believes will
produce a higher level of current income than a portfolio of municipal
securities with the highest rating, but that do not present a significant credit
risk. The expected average dollar weighted maturity of the Fund's portfolio is
between 5 and 15 years.
The Fund's investment adviser uses a value-oriented strategy and looks for
higher yielding and undervalued municipal securities that offer the potential
for above-average return. To assess a municipal security's value, the adviser
considers the security's yield, price, credit quality, and future prospects.
Municipal securities include debt obligations (such as bonds, notes, commercial
paper and lease obligations) issued by the respective state and its political
subdivisions, municipalities, agencies and authorities. States, local
governments and municipalities issue municipal securities to raise money for
various public purposes such as building public facilities, refinancing
outstanding obligations and financing general operating expenses. These
securities include general obligation bonds, which are backed by the full faith
and credit of the issuer and may be repaid from any revenue source, and revenue
bonds, which may be repaid only from the revenue of a specific facility or
source.
The Fund may purchase municipal securities that represent lease obligations.
These carry special risks because the issuer of the securities may not be
obligated to appropriate money annually to make payments under the lease. In
order to reduce this risk, the Fund will not invest more than 10% in lease
obligations.
The Fund may also invest in municipal bonds of U.S. territories and possessions
(such as Puerto Rico, the U.S. Virgin Islands, and Guam) which are exempt from
regular federal income taxes. The Fund may not invest more than 10% of its total
assets in these territorial municipalities.
PRINCIPAL RISKS
The value of the Fund's shares depends on the value of the securities it owns.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of your investment may fluctuate significantly, which means
you could lose money.
GENERAL MARKET RISKS. Factors affecting the securities markets include domestic
and foreign economic growth and decline, interest rate levels and political
events. There is a risk the adviser won't accurately predict the direction of
these and other factors and, as a result, the adviser's investment decisions may
not accomplish what they were intended to achieve. You should consider your own
investment goals, time horizon, and risk tolerance before investing in the Fund.
INTEREST RATE RISK. Changes in interest rates affect the value of the Fund's
municipal securities. When interest rates rise, the value of the Fund's
securities and its shares will decline. A change in interest rates will also
affect the amount of income the Fund generates.
CREDIT RISK. The value of the Fund's municipal securities is affected by the
issuer's continued ability to make interest and principal payments. The Fund
could lose money if the municipal issuers cannot meet their financial
obligations.
Securities rated in the lowest of the investment grade categories (e.g., Baa or
BBB) are considered more speculative than higher rated securities. Their issuers
may not be as financially strong as those of higher rated municipal securities
and may be more vulnerable to periods of economic uncertainty or downturn.
8
<PAGE>
NON-DIVERSIFICATION RISK. Because the Fund is non-diversified and invests
primarily in Nebraska municipal securities, the Fund is particularly susceptible
to any economic, political, or regulatory developments affecting a particular
issuer or issuers of Nebraska municipal securities in which the Fund invests.
For example, neither the State of Nebraska nor its agencies may issue general
obligation bonds secured by the full faith and credit of the State. Nebraska's
economy is heavily agricultural and changes in the agricultural sector can
affect taxes and other municipal revenues.
REINVESTMENT RISK. When interest rates decline, cash flows from maturing
securities may have to be reinvested at a lower rate.
PREPAYMENT RISK. Certain municipal securities involve prepayment risk, which is
the risk that the underlying debts may be refinanced or paid off before they
mature during a period of declining interest rates. That will tend to lower the
Fund's return and could result in losses to the Fund if it acquired some
securities at a premium.
PERFORMANCE HISTORY OF PREDECESSOR FUND. The bar chart and table below show the
Fund's predecessor's annual returns and its long-term performance. The bar chart
shows you how the Fund's predecessor's performance has varied from year-to-year.
The table gives some indication of the risks of an investment in the Fund by
comparing the Fund's predecessor's performance over time to that of the Lehman
Bros. Municipal Bond Index(C). Both the bar chart and table assume reinvestment
of dividends and distributions. As with all mutual funds, past performance is no
guarantee of future results.
YEAR-BY-YEAR TOTAL RETURN AS OF 12/31 EACH YEAR (%)
----% ----% ----% ----% ----% ----% ----% ----% ----% ----% ----%
5.19% 9.24% 5.59% 8.66% -4.18% 12.00% 2.72% 5.90% 5.03% -1.56%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
The Fund's predecessor's total return for the nine-month period ended September
30, 2000 was 4.40%.
BEST QUARTER WORST QUARTER
------------ -------------
March 31, 1995 March 31, 1994
4.92% -4.57%
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/99
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Nebraska Tax-Exempt
Fund (Predecessor) -1.56% 4.69% 4.67%
Lehman Bros. Municipal
Bond Index(1) -2.07% 6.91% 6.90%
(1)The Lehman Bros. Municipal Bond Index is an index that includes a broad range
of investment grade municipal bonds. The returns for this index do not reflect
any fees or expenses. It is not possible to make a direct investment in an
index.
The above performance information of this Fund represents the performance of the
Fund's predecessor common trust fund. The common trust fund had investment
objectives, policies and restrictions that were equivalent in all material
respects to those of the Fund, and was managed by First National Bank of Omaha,
which manages the Fund. The bar chart and table above include information
regarding the common trust fund's operations for periods before the Fund's
registration statement become effective, as adjusted to reflect the higher
expenses (before any waivers or reimbursements) incurred by the Funds. The
common trust fund was not registered under the Investment Company Act of 1940
and therefore was not
9
<PAGE>
subject to certain investment restrictions that are imposed by that Act. If the
common trust fund had been registered, its performance might have been adversely
affected.
EXPENSES
This table describes the fees and expenses you may pay in connection with
investing in the Fund. The Fund has no shareholder transaction fees. Annual fund
operating expenses are deducted from Fund assets, so their effect is reflected
in the Fund's share price.
FEE TABLE
NEBRASKA TAX-EXEMPT FUND
ANNUAL FUND OPERATING EXPENSES
(% OF AVERAGE NET ASSETS)
Management Fees(1) .70%
Distribution (12b-1) Fees(2) .01%
Other Expenses(1)(3) .54%
Total Fund Operating Expenses 1.25%
(1)The table above reflects all fees the Fund's service providers are
entitled to receive annually pursuant to their contracts with the Fund or
others. However, certain service providers will voluntarily waive a portion
of their respective fees. Taking these waivers into account, the actual
annual Management Fees and Other Expenses to be incurred are expected to be
.50% and .41%, respectively. The actual Total Fund Operation Expenses
incurred by the Fund are expected to be .91%. These waivers by the service
providers are voluntary and therefore may be eliminated at any time.
(2)The Company has adopted a Rule 12b-1 Plan, pursuant to which the Fund is
authorized to pay distribution expenses. The Plan limits the amount of
distribution expenses that may be paid by the Fund to an annual rate of no
more than 0.25% of the average daily net asset value of the Fund. As of the
date of this Prospectus, it is estimated that 12b-1 expenses will be 0.0%
of average daily net assets of the Fund. As these fees are paid out of the
Fund's assets on an on-going basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of
sales charges.
(3)"Other Expenses" include estimates of miscellaneous fund expenses such
as administration, legal, accounting, custody, shareholder servicing and
transfer agent fees.
The example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds and shows what you could
pay in expenses over time, based on Total Fund Operating Expenses described in
the Fee Table. It uses the same hypothetical conditions other funds use in their
prospectuses: $10,000 initial investment, 5% total return each year and the
Fund's operating expenses remain the same. The figure shown would be the same
whether you sold your shares at the end of a period or kept them. Because actual
return and expenses will be different, this example is for comparison only.
EXPENSE EXAMPLE
1 YEAR 3 YEARS
$127 $397
FIRST OMAHA COLORADO TAX-EXEMPT FUND(R)
OBJECTIVE
This Fund seeks as high a level of current income exempt from both federal and
Colorado income tax as is consistent with preservation of capital.
10
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PRINCIPAL INVESTMENT STRATEGIES AND RISKS
PRINCIPAL INVESTMENTS
Under normal market conditions, the Fund invests primarily, but not less than
65% of its assets, in municipal securities that generate income exempt from
Colorado state income tax. The Fund, as a matter of fundamental policy, invests
at least 80% of its assets in securities that generate income exempt from
federal income tax. The Fund invests primarily in securities which are
"investment grade," which means they will be:
> rated at purchase within the four highest ratings of a nationally
recognized rating organization, such as Moody's Investors Service, Inc. and
Standard & Poor's Corporation; or
> if unrated, considered at purchase by the Fund's investment adviser to be
of comparable quality.
Under normal market conditions, the Fund's assets will be invested in a
portfolio of Colorado municipal securities which the adviser believes will
produce a higher level of current income than a portfolio of municipal
securities with the highest rating, but that do not present a significant credit
risk. The expected average dollar weighted maturity of the Fund's portfolio is
between 5 and 15 years.
The Fund's investment adviser uses a value-oriented strategy and looks for
higher yielding and undervalued municipal securities that offer the potential
for above-average return. To assess a municipal security's value, the adviser
considers the security's yield, price, credit quality, and future prospects.
Municipal securities include debt obligations (such as bonds, notes, commercial
paper and lease obligations) issued by the respective state and its political
subdivisions, municipalities, agencies and authorities. States, local
governments and municipalities issue municipal securities to raise money for
various public purposes such as building public facilities, refinancing
outstanding obligations and financing general operating expenses. These
securities include general obligation bonds, which are backed by the full faith
and credit of the issuer and may be repaid from any revenue source, and revenue
bonds, which may be repaid only from the revenue of a specific facility or
source.
The Fund may purchase municipal securities that represent lease obligations.
These carry special risks because the issuer of the securities may not be
obligated to appropriate money annually to make payments under the lease. In
order to reduce this risk, the Fund will not invest more than 10% in lease
obligations.
The Fund may also invest in municipal bonds of U.S. territories and possessions
(such as Puerto Rico, the U.S. Virgin Islands, and Guam) which are exempt from
regular federal income taxes. The Fund may not invest more than 10% of its total
assets in these territorial municipalities.
The Fund may also invest in financial futures and related options for hedging
purposes.
PRINCIPAL RISKS
The value of the Fund's shares depends on the value of the securities it owns.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of your investment may fluctuate significantly, which means
you could lose money.
GENERAL MARKET RISKS. Factors affecting the securities markets include domestic
and foreign economic growth and decline, interest rate levels and political
events. There is a risk the adviser won't accurately predict the direction of
these and other factors and, as a result, the adviser's investment decisions may
not accomplish what they were intended to achieve. You should consider your own
investment goals, time horizon, and risk tolerance before investing in the Fund.
11
<PAGE>
INTEREST RATE RISK. Changes in interest rates affect the value of the Fund's
municipal securities. When interest rates rise, the value of the Fund's
securities and its shares will decline. A change in interest rates will also
affect the amount of income the Fund generates.
CREDIT RISK. The value of the Fund's municipal securities is affected by the
issuer's continued ability to make interest and principal payments. The Fund
could lose money if the municipal issuers cannot meet their financial
obligations.
Securities rated in the lowest of the investment grade categories (e.g., Baa or
BBB) are considered more speculative than higher rated securities. Their issuers
may not be as financially strong as those of higher rated municipal securities
and may be more vulnerable to periods of economic uncertainty or downturn.
NON-DIVERSIFICATION RISK. Because the Fund is non-diversified and invests
primarily in Colorado municipal securities, the Fund is particularly susceptible
to any economic, political, or regulatory developments affecting a particular
issuer or issuers of Colorado municipal securities in which the Fund invests.
For example, neither the State of Colorado nor its agencies may issue general
obligation bonds secured by the full faith and credit of the State. In 1992
Colorado passed a constitutional amendment restricting the ability of state and
local governments to incur indebtedness and raise taxes.
REINVESTMENT RISK. When interest rates decline, cash flows from maturing
securities may have to be reinvested at a lower rate.
PREPAYMENT RISK. Certain municipal securities involve prepayment risk, which is
the risk that the underlying debts may be refinanced or paid off before they
mature during a period of declining interest rates. That will tend to lower the
Fund's return and could result in losses to the Fund if it acquired some
securities at a premium.
12
<PAGE>
FEE TABLE
COLORADO TAX-EXEMPT FUND
ANNUAL FUND OPERATING EXPENSES
(% OF AVERAGE NET ASSETS)
Management Fees(1) .70%
Distribution (12b-1) Fees(2) .01%
Other Expenses(1)(3) .69%
Total Fund Operating Expenses 1.40%
Fee Waiver/Reimbursement .50%
Net Expenses .90%
(1)The table above reflects all fees the Fund's service providers are
entitled to receive annually pursuant to their contracts with the Fund or
others. However, the Fund's Adviser has contractually agreed to waive or
reimburse expenses in excess of .90% for a period of one year from the date
of this Prospectus. Thus, the actual annual Management Fees and Other
Expenses to be incurred are expected to be .29% and .61%, respectively. The
actual Total Fund Operation Expenses incurred by the Fund are expected to
be .90%.
(2)The Company has adopted a Rule 12b-1 Plan, pursuant to which the Fund is
authorized to pay distribution expenses. The Plan limits the amount of
distribution expenses that may be paid by the Fund to an annual rate of no
more than 0.25% of the average daily net asset value of the Fund. As of the
date of this Prospectus, it is estimated that 12b-1 expenses will be 0.0%
of average daily net assets of the Fund. As these fees are paid out of the
Fund's assets on an on-going basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of
sales charges.
(3) "Other Expenses" include estimates of miscellaneous fund expenses such
as administration, legal, accounting, custody, shareholder servicing and
transfer agent fees.
The example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds and shows what you could
pay in expenses over time, based on Total Fund Operating Expenses described in
the Fee Table. It uses the same hypothetical conditions other funds use in their
prospectuses: $10,000 initial investment, 5% total return each year and the
Fund's operating expenses remain the same. The figure shown would be the same
whether you sold your shares at the end of a period or kept them. Because actual
return and expenses will be different, this example is for comparison only.
13
<PAGE>
EXPENSE EXAMPLE
1 YEAR 3 YEARS
------ -------
$92 $443
BUYING, SELLING AND EXCHANGING SHARES
BUYING SHARES
You can buy First Omaha shares by mail or wire, or through the First National
Bank of Omaha and its affiliates, your broker/ dealer, or other institutions.
For a Purchase Application, call l-800-662-4203. The Funds reserve the right to
refuse purchases and redemptions that may adversely affect the Funds.
OPENING AN ACCOUNT BY MAIL
Make out a check or money order for the amount you want to invest, payable to
the Fund you want. See page ___ for minimum amounts.
Mail the check or money order and a completed Purchase Application to:
First Omaha Funds, Inc.
P.O. Box 219022
Kansas City, MO 64121-9022
For overnight delivery, send to:
DST Systems, Inc.
330 West 9th Street
Poindexter One
Kansas City, MO 64105
ADDING TO YOUR ACCOUNT BY MAIL
Make out a check or money order for the amount you want to invest, payable to
the Fund you want. See page ___ for minimum amounts.
Mail the check or money order and a note with your account number to:
First Omaha Funds, Inc.
P.O. Box 219022
Kansas City, MO 64121-9022
ADDING TO YOUR ACCOUNT BY WIRE
Call l-800-662-4203 for the account number to which funds should be wired. Your
bank may charge a wire transfer fee.
THROUGH FIRST NATIONAL BANK OF OMAHA, ITS CORRESPONDENTS OR AFFILIATES
You may be able to buy shares through some bank accounts, including those that
sweep cash into Money Market Fund shares. These accounts have their own
requirements and may charge fees associated with your investment, which will
reduce your net return. For details, see your bank representative.
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<PAGE>
THROUGH OTHER INSTITUTIONS
To find out if you can buy shares through your bank, broker/dealer, or other
institution, call l-800-662-4203. Check with your institution on account
requirements, procedures, and any fees, which will reduce your net return.
AUTO INVEST PLAN
You can make regular monthly or quarterly purchases by ACH transfer from your
bank account. The minimum investment to open your account is $100; the minimum
for additional investments is $50. To start, complete the Auto Invest Plan
Section of the Purchase Application.
SELLING (REDEEMING) SHARES
If you purchase your shares from the Funds, you can redeem them as described
below. If you purchase shares through a bank or other institution, you need to
meet that institution's account requirements.
BY MAIL
> Send a written request to:
First Omaha Funds, Inc.
P.O. Box 219022
Kansas City, MO 64121-9022
> The Funds will mail a check payable to the Shareholder(s) of record to the
address of record, or wire the funds at no charge to a previously
designated bank account. Check with your bank to determine if it charges a
wire transfer fee. See "Signature Guarantees," on page ___.
BY PHONE
> Your account has telephone redemption privileges unless you checked the box
declining this feature when you opened your account.
> Call l-800-662-4203 to request the redemption.
> The Funds will mail a check payable to the Shareholder(s) of record to the
address of record, or transfer the funds via ACH to a previously designated
bank account. There is no charge for ACH transfers. See "Telephone
Transactions," on page ___.
AUTO WITHDRAWAL PLAN
You can redeem shares automatically every month or quarter and have a check for
the specified amount mailed to you. The minimum withdrawal is $100. To start,
call l-800-662-4203. To change your plan, send the Funds a signature-guaranteed
written request. See "Signature Guarantees," on page ___. You could have
negative tax results if you purchase shares while you're making withdrawals. Be
sure to check with your tax adviser on the effects of this plan, especially if
you're also purchasing shares.
EXCHANGING SHARES
You can exchange shares of one First Omaha Fund for shares of another. An
exchange is considered a sale of shares; you may have a capital gain or loss for
federal income tax purposes.
> Read the Prospectus of the Fund whose shares you want to buy in the
exchange.
> Mail the Funds your request or call l-800-662-4203.
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<PAGE>
> The amount to be exchanged must meet minimum investment requirements,
described below.
The Funds may change or eliminate the exchange privilege with 60 days' notice to
Shareholders, though there are no plans to do so. You may exchange only into
Fund shares legally available in your state.
TRANSACTION POLICIES
SHARE PRICE
The price per share for each Fund, equal to net asset value (NAV), is calculated
each business day at the close of trading on the New York Stock Exchange
(typically 4 p.m. Eastern Time). A business day is a day on which the NYSE is
open for trading. A Fund is not required to calculate NAV if none of its shares
were bought or sold that day.
If the Funds receive your buy or sell order before the daily valuation time, you
will pay or receive that day's NAV for each share. Otherwise you will pay or
receive the next business day's NAV for each share.
To calculate the NAV, First Omaha Funds adds up the value of all a Fund's
securities and other assets, subtracts any liabilities, and divides by the
number of shares of that Fund outstanding. You can determine the value of your
account on any particular day by multiplying the number of shares you own by
that day's NAV.
The Funds' securities are valued at market value. If market prices aren't
available, the Funds' Board of Directors will choose another valuation method.
For details, see "Net Asset Value" in the Statement of Additional Information
("SAI").
MINIMUM INVESTMENT
The minimum initial investment for each Fund is $500. For additional
investments, it's $50. Under the Auto Invest Plan, the required initial
investment drops to $100. The Funds may also waive minimum requirements for
Individual Retirement Accounts and payroll deduction plans.
If an exchange or redemption causes the value of your account (other than an
Auto Invest Plan or payroll deduction account) to fall below $500, the Funds may
ask you to add to your account. If the balance remains below the minimum after
60 days, the Funds may close out your account and mail you the proceeds.
CONFIRMATION
You'll receive an account statement after each transaction. However, any Auto
Invest Plan, Auto Withdrawal Plan, automatic dividend reinvestment and capital
gain distribution transactions are reported on your quarterly statement. If you
want to confirm these transactions before the end of the quarter, call
l-800-662-4203.
The Funds do not issue share certificates.
REDEMPTION PAYMENTS
If you redeem shares, you'll receive payment within seven days of the Transfer
Agent receiving your request. Shares are sold at the next NAV calculated after
your request is received in good order. Unless it would hurt a Fund or its
Shareholders, the Funds try to honor requests for next-day payment if your order
is received on a business day before 4 p.m. Eastern Time, or second-day payment
if your order is received after that time.
Before selling recently purchased shares, please note that if the Transfer Agent
has not yet collected payment for the shares you are selling, it may delay
sending the proceeds for up to 15 calendar days. This is intended to protect the
Funds and their Shareholders from loss.
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The Funds intend to pay cash for all shares redeemed, but under unusual
conditions may make payment wholly or partly in portfolio securities whose
market value equals the redemption price. You will incur brokerage costs when
converting them to cash.
The Funds may also suspend redemptions and payments if the New York Stock
Exchange closes or in other emergencies. See "Additional Purchase and Redemption
Information" in the SAI.
SIGNATURE GUARANTEES
Signature guarantees are designed to prevent unauthorized transactions. The
guarantor pledges that the signature presented is genuine and, unlike a notary
public, is financially responsible if it's not.
You can obtain signature guarantees from banks, brokers/dealers, credit unions,
securities exchanges and some other institutions. A notary public is not
acceptable. The Funds require a signature guarantee to change the address to
which a redemption check is to be mailed or to make the check payable to someone
other than the Shareholder(s) of record. The Transfer Agent reserves the right
to reject any signature guarantee.
TELEPHONE TRANSACTIONS
For purchases made by telephone, the Funds and their agents will use reasonable
procedures to confirm telephone instructions are genuine. These procedures may
include, among others, requiring some form of identification before acting on
telephone instructions; providing written confirmation of all such transactions;
and tape recording all telephone instructions. If reasonable procedures are
followed, the Funds and their agents will not be liable for any loss, cost, or
expense due to an investor's telephone instructions or an unauthorized telephone
redemption.
If, because of peak activity or adverse conditions, you can't place a telephone
transaction, consider mailing your request as described in "Buying Shares" and
"Selling Shares" on page ___. The Funds reserve the right to refuse a telephone
transaction.
DIVIDENDS AND TAXES
The Funds generally pass net investment income and realized capital gains, if
any, on to Shareholders in the form of dividends and capital gains.
DIVIDENDS
The Funds automatically reinvest your dividends in more shares of the Fund
unless you choose to receive them in cash. To receive dividends in cash, or to
change that election, notify the Funds in writing.
If you redeem all your shares in a Fund, you'll receive accrued dividends, if
applicable, in cash within seven business days.
Distributable net realized capital gains are distributed at least annually.
TAXES
Here's an overview of important information about taxes for shareholders of the
Income Fund.
> Dividends and distributions you receive, whether in cash or additional
shares, are generally taxable.
> Distributions from a Fund's long-term capital gains over net short-term
capital losses are taxable as long-term capital gains in the year you
receive them, no matter how long you've held the shares.
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<PAGE>
> Some dividends paid in January may be taxable as if you had received them
the previous December.
> Dividends attributable to interest on U.S. Treasury obligations may be
subject to state and local taxes, even though the interest would be
tax-exempt if you received it directly.
> If the distribution of income or gain realized on the sale of securities
causes a share's NAV to fall below what you paid for it, the distribution
is a "return of invested principal" but is still taxable as described
above.
> If you buy shares shortly before the record date of a Fund's dividend or
capital gains distribution, the payment of those dividends or capital gains
will reduce your NAV per share. All or a part of such distributions are
taxable.
> Corporations may be eligible for a dividends-received deduction on certain
dividends.
Here's an overview of important information about taxes for shareholders of the
Tax-Exempt Funds.
> Regular monthly dividends payable from net tax-exempt interest will
generally be exempt from regular federal income tax.
> All or a portion of these dividends may be subject to state and local
taxes.
> These dividends may also be subject to the federal alternative minimum tax
(AMOUNT).
> Net investment income from securities that are not municipal securities,
and short-term capital gains, are taxable as ordinary income.
> Distributions from a Fund's long-term capital gains over net short-term
capital losses are taxable as long-term capital gains in the year you
receive them, no matter how long you've held the shares.
> Some dividends paid in January, if taxable, may be taxable as if you had
received them the previous December.
> Dividends attributable to interest on U.S. Treasury obligations may be
subject to state and local taxes, even though the interest would be
tax-exempt if you received it directly.
> If the distribution of income or gain realized on the sale of securities
causes a share's NAV to fall below what you paid for it, the distribution
is a "return of invested principal" but is still taxable as described
above.
> If you buy shares shortly before the record date of a Fund's dividend or
capital gains distribution, the payment of those dividends or capital gains
will reduce your NAV per share. All or a part of such distributions are
taxable.
At least annually, the Funds will advise you of the source and tax status of all
the distributions you've received.
This Prospectus gives only general tax information. Before you invest, consult
your tax adviser on federal, state and local tax considerations for your
specific situation.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISERS
First National Bank of Omaha ("First National"), One First National Center, 1620
Dodge Street, Omaha, Nebraska 68102 is the investment adviser of the Income Fund
and the Nebraska Tax-Exempt Fund.
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First National is a subsidiary of First National of Nebraska, Inc., a Nebraska
corporation with total assets of about $8.6 billion as of December 31, 1999.
First National offers clients in the Midwest a full range of financial services
and has more than 65 years of experience in trust and investment management. As
of December 31, 1999, First National's trust division had about $8.5 billion in
assets under administration, with about $2.9 billion under management. First
National also manages the First Omaha U.S. Government Money Market Fund(sm),
Short/Intermediate Fixed Income Fund(R), Fixed Income Fund(R), Balanced Fund(R),
Equity Fund(R) and Small Cap Value Fund(R).
The Colorado Tax-Exempt Fund is advised by FNC Trust Group, n.a., ("FNC"),
established in May 1997 as a wholly-owned subsidiary of First National Colorado,
Inc., which is a wholly-owned subsidiary of First National of Nebraska, Inc.
FNC was created to offer a full range of trust and asset management services,
both directly and as an agent for banks with trust powers. Currently FNC is an
agent for clients of Union Colony Bank, Greeley, Colorado, and serves customers
directly from its offices in Boulder and Loveland, Colorado.
The predecessor to FNC was Union Colony Bank's trust division, whose staff moved
to FNC when it was formed. FNC also manages First Omaha Growth Fund(R).
As of December 31, 1999, FNC had $34 million in assets under administration,
directly or as an agent, including more than $33 million under investment
management.
RESPONSIBILITIES
Supervised by the Board of Directors and following each Fund's investment
objectives and restrictions, the Adviser:
> manages a Fund's investments;
> makes buy/sell decisions and places the orders; and
> keeps records of purchases and sales.
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<PAGE>
PORTFOLIO MANAGERS
The Income Fund and Nebraska Tax-Exempt Fund are managed by a team comprised of
Michael D. Hansen, CFA, John G. Woolway, CFA and Greg Ritchey, CFA. Mr. Hansen
joined First National Bank of Omaha in June of 1997 after seven years with the
Nebraska Investment Council where he served as the Fixed Income Portfolio
Manager. He is a member of the Association for Investment Management and
Research and the Omaha-Lincoln Society of Financial Analysts and is a Chartered
Financial Analyst. He received his B.S. Degree from the University of Nebraska
at Lincoln in 1988 and is a Chartered Financial Analyst. Mr. Woolway received
his B.S. Degree from the University of Iowa in 1985 and his M.B.A. from DePaul
University in 1991. He is a member of the Omaha-Lincoln Society of Financial
Analysts. He is also a member of the Association for Investment Management and
Research. Prior to joining First National Bank of Omaha in December of 1993, he
was a Portfolio Manager at FirsTier Bank. He also held the position of Fixed
Income Analyst at Chicago Title and Trust Company in Chicago, Illinois. Mr.
Ritchey received his B.S. Degree and his M.B.A. from the University of Kansas.
He worked for Fountain Capital Management in Kansas City before joining the
First National Bank of Omaha in 1995. He is a member of the Association for
Investment Management and Research, the Omaha-Lincoln Society of Financial
Analysts and is a Chartered Financial Analyst.
The Colorado Tax-Exempt Fund is managed by Karen Kjeldgaard. Ms. Kjeldgaard
is a graduate of Nebraska Wesleyan University with a degree in Business
Administration. She also attended the graduate school at the University of San
Diego. Before joining the FNC investment staff in 1994 she had twelve years of
experience as a Senior Financial Analyst at General Dynamics Corporation and
Martin Marietta Corp.
FEES
For services and related expenses, First National receives a fee, computed daily
and paid monthly, equal to a percent of each Fund's average daily net assets at
these annual rates:
> Income Fund: .60%
> Nebraska Tax-Exempt Fund: .70%
Similarly, FNC's fee for advising the Colorado Tax-Exempt Fund is .70% of
average daily net assets, or a lesser fee agreed to in writing.
First National and FNC (collectively, the "Advisers") may choose to waive all or
some of their advisory fees, which will cause a Fund's yield and total return to
be higher than it would be without the waiver. The Advisers may end such waivers
anytime and may not seek reimbursement. In addition, FNC has contractually
agreed to waive or reimburse fees and expenses of the Colorado Tax-Exempt Fund
in excess of .90% for a period of one year from the date of this Prospectus.
OTHER SERVICE PROVIDERS
The Funds' Board of Directors has appointed various parties to advise and
administer the Funds.
ADMINISTRATOR AND DISTRIBUTOR
SEI Investments Mutual Funds Services, One Freedom Valley Drive, Oaks,
Pennsylvania 19456, is Administrator for each Fund, providing clerical,
compliance, regulatory, accounting and other services. SEI Distribution Co., an
affiliate of the administrator, is Distributor for the Funds.
CUSTODIAN AND TRANSFER AGENT
First National in its capacity as Custodian provides for the safekeeping of the
Funds' assets. First National also serves as the Funds' Transfer Agent. DST
Systems, Inc., 210 W. 10th Street, Kansas City, MO 64105 is Sub-Transfer Agent,
whose functions include disbursing dividends and other distributions.
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<PAGE>
All service providers receive fees. They may choose to waive some or all of
their fees, which will cause the Funds' returns to be higher than they would
have been without the waiver.
DISTRIBUTION AND SERVICE PLAN
The Company has adopted a plan under federal securities Rule 12b-l that allows
the Funds to pay fees for the sale and distribution of their respective shares.
The fees will not exceed an annual rate of 0.25% of a Fund's average daily net
assets. Because these fees are paid regularly out of the Fund's assets, over
time they will increase the cost of your investment and may cost you more than
paying other types of sales charges.
The Company has also adopted an Administrative Service Plan under which each
Fund may pay compensation to banks and other financial institutions that provide
various administrative services for Shareholders. The fees will not exceed an
annual rate of 0.25% of a Fund's average daily net assets. Such institutions may
include the Advisers, their correspondent and affiliated banks, and the
Administrator and its affiliates.
The Funds' agreement with First National sets that institution's administrative
service fee at the annual rate of 0.10% of the average aggregate net asset value
of shares of each Fund held during the period by customers for whom First
National provided services under the Servicing Agreement.
First National may choose to waive some or all of this fee, which will cause a
Fund's total return and yield to be higher than without the waiver.
FINANCIAL HIGHLIGHTS
Because the Funds are recently formed, Financial Highlights are not included.
[Back Cover]
For more information on the Funds, ask for a free copy of the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI has been filed with the
Securities and Exchange Commission and is incorporated by reference, which means
it is legally considered part of this Prospectus. It contains more details on
all aspects of the Funds.
ANNUAL/SEMI-ANNUAL REPORTS. These reports describe the Funds' performance, list
portfolio holdings and include financial statements. The Annual Report contains
a discussion of the market conditions and investment strategies that
significantly affected each Fund's performance during its last fiscal year.
TO OBTAIN INFORMATION:
BY PHONE
Call l-800-662-4203
BY MAIL
Write to: First Omaha Funds
P.O. Box 219022
Kansas City, MO 64141--9022
ON THE INTERNET
View or download Fund documents at:
WWW. FIRSTOMAHAFUNDS .COM
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You can review and copy information about First Omaha Funds (including the SAI)
at the SEC's Public Reference Room in Washington, D.C. You can call
1-202-942-8090 for information on the operations of the Public Reference Room.
Reports and other information about First Omaha Funds are also available at the
SEC's Internet site at http://www.sec.gov and copies of this information may be
obtained, upon payment of a duplicating fee, by writing to the address below or
by electronic request to [email protected].
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
SEC File Number 811-8846
[FIRST OMAHA FAMILY OF FUNDS LOGO]
P.O. Box 219022
Kansas City, MO 64141-9022
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First Omaha U.S. Government Money Market Fund
FIRST OMAHA NEBRASKA TAX-EXEMPT FUND
FIRST OMAHA COLORADO TAX-EXEMPT FUND
First Omaha Short/Intermediate Fixed Income Fund
First Omaha Fixed Income Fund
FIRST OMAHA INCOME FUND
First Omaha Balanced Fund
First Omaha Equity Fund
First Omaha Growth Fund
First Omaha Small Cap Value Fund
Each an Investment Portfolio of
FIRST OMAHA FUNDS, INC.
Statement of Additional Information
DECEMBER 15, 2000
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the RESPECTIVE PROSPECTUSES (the "Prospectus") of First
Omaha U.S. Government Money Market Fund (the "Money Market Fund"), FIRST OMAHA
NEBRASKA TAX-EXEMPT FUND (THE "NEBRASKA FUND"), FIRST OMAHA COLORADO TAX-EXEMPT
FUND (THE "COLORADO FUND," AND, TOGETHER WITH THE NEBRASKA FUND, THE "TAX-EXEMPT
FUNDS"), First Omaha Short/Intermediate Fixed Income Fund (the
"Short/Intermediate Fund"), First Omaha Fixed Income Fund (the "Fixed Income
Fund"), FIRST OMAHA INCOME FUND (THE "INCOME FUND"), First Omaha Balanced Fund
(the "Balanced Fund"), First Omaha Equity Fund (the "Equity Fund"), First Omaha
Growth Fund (the "Growth Fund"), and First Omaha Small Cap Value Fund (the
"Small Cap Value Fund"), (collectively referred to as the "Funds" and singly, a
"Fund"). THE PROSPECTUS OF THE INCOME FUND AND THE TAX-EXEMPT FUNDS IS DATED
DECEMBER 15, 2000. THE PROSPECTUS OF THE OTHER FUNDS IS DATED JULY 28, 2000, AS
AMENDED BY A SUPPLEMENT DATED AUGUST 28, 2000. The Funds are each separate
investment portfolios of First Omaha Funds, Inc. (the "Company"). This Statement
of Additional Information is incorporated in its entirety into the Prospectus.
No investment in shares of a Fund should be made without first reading such
Fund's Prospectus. Copies of the Prospectus may be obtained by writing the
Company, P.O. Box 219022, Kansas City, Missouri, 64141-6022, or by telephoning
toll free (800) 662-4203. Capitalized terms used but not defined herein have the
same meanings as in the Prospectus.
<PAGE>
TABLE OF CONTENTS
PAGE
THE COMPANY B-1
INVESTMENT OBJECTIVES, POLICIES, AND RISKS B-1
Additional Information on Portfolio Instruments B-1
Investment Restrictions B-15
Portfolio Turnover B-20
NET ASSET VALUE B-21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION B-23
MANAGEMENT OF THE COMPANY B-24
Directors and Officers B-24
Investment Advisers B-26
Portfolio Transactions B-28
Banking Regulations B-30
Administrator B-30
Expenses B-32
Distributor B-32
Administrative Services Plan B-34
Custodian B-35
Transfer Agency Services B-36
Auditors B-36
Legal Counsel B-36
Codes of Ethics B-36
ADDITIONAL INFORMATION B-37
Organization and Capital Structure B-37
Shareholder Meetings B-38
Ownership of Shares B-38
Vote of a Majority of the Outstanding Shares B-38
Additional Tax Information B-39
Yield of the Money Market Fund B-40
Yield of the TAX-EXEMPT FUNDS,
THE Fixed Income Fund,
the Short/Intermediate Fund
AND THE INCOME FUND B-41
Calculation of Total Return B-41
Distribution Rates B-42
Performance Comparisons B-42
Miscellaneous B-43
Financial Statements B-43
FINANCIAL STATEMENTS
APPENDIX A1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE COMPANY
First Omaha Funds, Inc. (the "Company") is an open-end management
investment company which currently offers TEN investment portfolios IDENTIFIED
ON THE PRECEDING PAGE.
INVESTMENT OBJECTIVES, POLICIES, AND RISKS
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following policies supplement the investment objective, policies and
risks of each Fund as set forth in the Prospectus for such Fund.
BANK OBLIGATIONS. Each FUND EXCEPT THE MONEY MARKET FUND may invest in
bank obligations such as bankers' acceptances, certificates of deposit, and
demand 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
demand 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 Short/Intermediate Fund, Fixed Income Fund, INCOME FUND, Balanced
Fund, Equity Fund, Growth Fund and Small Cap Value Fund 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 issued by corporations. Except as noted below with respect to variable
B-1
<PAGE>
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
EACH FUND EXCEPT THE MONEY MARKET Fund may invest in domestic and
foreign commercial paper which must be rated by an NRSRO in one of the top three
categories. In general, investment in lower-rated instruments is more risky than
investment in instruments in higher rated categories. The Short/Intermediate
Fund, Fixed Income Fund, INCOME FUND, Balanced Fund, Equity Fund, Growth Fund
and Small Cap Value Fund may also invest in Canadian commercial paper, which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes, in which the Short/Intermediate Fund, Fixed Income Fund, INCOME FUND,
Balanced Fund, Equity Fund, Growth Fund and Small Cap Value Fund 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 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. The Advisers 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 average weighted 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. No Fund will invest more than 5% of its assets in such
securities.
FOREIGN INVESTMENTS. The Short/Intermediate Fund, Fixed Income Fund,
INCOME FUND, Balanced Fund, Equity Fund, Growth Fund and Small Cap Value Fund
may each invest up to 10% of its assets in foreign securities either directly or
through the purchase of sponsored and unsponsored American Depository Receipts
("ADRs"). Unsponsored ADRs may be less liquid than sponsored ADRs, and there may
be less information available regarding the underlying foreign issuer for
unsponsored ADRs. Investments in securities issued by foreign branches of U.S.
banks, foreign banks, or other foreign issuers, including ADRs, investment
companies that invest in foreign securities and securities purchased on foreign
securities exchanges, may subject the Funds to investment risks that differ in
some respects from those related to investment in obligations of U.S. domestic
issuers or in U.S. securities markets. Such risks include trade balances and
imbalances, and related economic policies, future adverse political, economic,
and social developments, possible imposition of withholding taxes on interest
and dividend income, possible seizure, nationalization, or expropriation of
foreign investments or deposits, currency blockage, less stringent disclosure
requirements, the possible establishment of exchange controls or taxation at the
source, or the adoption of other foreign governmental restrictions. In addition,
foreign branches of U.S. banks, foreign banks and foreign issuers may be subject
to less stringent reserve requirements and to different accounting, auditing,
reporting, and record keeping standards than those applicable to domestic
branches of U.S. banks and U.S. domestic issuers, and securities markets in
B-2
<PAGE>
foreign countries may be structured differently from and may not be as liquid as
the U.S. markets. Where purchases of foreign securities are made in foreign
currencies, a Fund may incur currency conversion costs and may be affected
favorably or unfavorably by changes in the value of foreign currencies against
the U.S. dollar. Investments in emerging markets involve even greater risks such
as immature economic structures and different legal systems.
FIXED INCOME SECURITIES. The Equity Fund and Growth Fund may each invest
in fixed income securities. Any fixed income securities in which either of these
Funds invest will be "investment grade," which means that they will be rated at
purchase within the four highest ratings of a nationally recognized rating
organization, such as Moody's Investors Service, Inc. and Standard & Poor's
Corporation; or if unrated, considered by the Fund's investment adviser to be of
comparable quality.
U.S. GOVERNMENT OBLIGATIONS. Each of the Funds may invest in obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including bills, notes and bonds issued by the U.S. Treasury.
The Money Market Fund may also invest in "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.
Obligations of certain agencies and instrumentalities of the U.S.
government are supported by the full faith and credit of the U.S. government,
such as those of the Government National Mortgage Association and the Export
Import Bank of the United States; others, such as those of the Federal National
Mortgage Association, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Student Loan Marketing Association
and the Federal Home Loan Banks, are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; and still others, such
as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage
Corporation, are supported only by the credit 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 Money Market Fund, Short/Intermediate Fund, Fixed
Income Fund and Balanced Fund will invest in the obligations of such agencies or
instrumentalities only when First National believes that the credit risk with
respect thereto is minimal.
BONDS. The Short/Intermediate Fund, Fixed INCOME FUND, Income Fund and
Balanced Fund may each invest in the following short-term obligations: U.S.
dollar-denominated international bonds traded primarily in the United States or
abroad; Canadian bonds; and bonds issued by institutions such as the World Bank,
the European Community, or two or more sovereign governments.
These Funds each also expect to invest in bonds, notes and debentures of
a wide range of U.S. corporate issuers. Such obligations, in the case of
debentures, will represent unsecured promises to pay, and in the case of notes
and bonds, may be secured by mortgages on real property or security interests in
personal property and will in most cases differ in their interest rates,
maturities and times of issuance.
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MUNICIPAL SECURITIES. EACH OF THE TAX-EXEMPT FUNDS SEEKS TO INVEST IN A
PORTFOLIO OF INVESTMENT GRADE MUNICIPAL SECURITIES WHICH GENERATE INTEREST
INCOME THAT IS EXEMPT FROM BOTH FEDERAL INCOME TAX AND INCOME TAX OF THE STATE
AFTER WHICH THE FUND WAS NAMED (E.G., NEBRASKA INCOME TAX FOR THE NEBRASKA
FUND).
MUNICIPAL SECURITIES ARE DEBT OBLIGATIONS ISSUED BY THE STATE, ITS POLITICAL
SUBDIVISIONS, MUNICIPALITIES, AGENCIES AND AUTHORITIES ISSUED TO OBTAIN FUNDS
FOR VARIOUS PUBLIC PURPOSES, INCLUDING THE CONSTRUCTION OR IMPROVEMENT OF A WIDE
RANGE OF PUBLIC FACILITIES SUCH AS AIRPORTS, BRIDGES, HIGHWAYS, HOSPITALS,
HOUSING, JAILS, MASS TRANSPORTATION, NURSING HOMES, PARKS, PUBLIC BUILDINGS,
RECREATIONAL FACILITIES, SCHOOL FACILITIES, STREETS AND WATER AND SEWER WORKS.
OTHER PUBLIC PURPOSES FOR WHICH MUNICIPAL SECURITIES MAY BE ISSUED INCLUDE THE
REFUNDING OF OUTSTANDING OBLIGATIONS, THE ANTICIPATION OF TAXES OR STATE AIDS,
THE PAYMENT OF JUDGMENTS, THE FUNDING OF STUDENT LOANS, COMMUNITY REDEVELOPMENT,
THE PURCHASE OF STREET MAINTENANCE AND FIREFIGHTING EQUIPMENT, OR ANY AUTHORIZED
CORPORATE PURPOSE OF THE ISSUER EXCEPT FOR THE PAYMENT OF CURRENT EXPENSES. IN
ADDITION, CERTAIN TYPES OF INDUSTRIAL DEVELOPMENT AND OTHER REVENUE BONDS MAY BE
ISSUED BY OR ON BEHALF OF PUBLIC CORPORATIONS TO FINANCE PRIVATELY OPERATED
HOUSING FACILITIES, AIR OR WATER POLLUTION CONTROL FACILITIES AND CERTAIN LOCAL
FACILITIES FOR WATER SUPPLY, GAS, ELECTRICITY OR SEWAGE OR SOLID WASTE DISPOSAL.
OTHER TYPES OF INDUSTRIAL DEVELOPMENT BONDS, THE PROCEEDS OF WHICH ARE USED FOR
THE CONSTRUCTION, EQUIPPING, REPAIR OR IMPROVEMENT OF PRIVATELY OPERATED
INDUSTRIAL, COMMERCIAL OR OFFICE FACILITIES, CONSTITUTE MUNICIPAL SECURITIES,
ALTHOUGH CURRENT FEDERAL INCOME TAX LAWS PLACE SUBSTANTIAL LIMITATIONS ON THE
SIZE OF SUCH ISSUES.
THE MUNICIPAL SECURITIES IN WHICH A TAX-EXEMPT FUND INVESTS CONSIST OF ITS
RESPECTIVE STATE'S TAX-EXEMPT BONDS, NOTES, COMMERCIAL PAPER AND PARTICIPATION
INTERESTS IN MUNICIPAL LEASES. TAX-EXEMPT NOTES AND COMMERCIAL PAPER ARE
GENERALLY USED TO PROVIDE FOR SHORT-TERM CAPITAL NEEDS AND ORDINARILY HAVE A
MATURITY OF UP TO ONE YEAR. THESE INCLUDE NOTES ISSUED IN ANTICIPATION OF TAX
REVENUE, REVENUE FROM OTHER GOVERNMENT SOURCES OR REVENUE FROM BOND OFFERINGS
AND SHORT-TERM, UNSECURED COMMERCIAL PAPER, WHICH IS OFTEN USED TO FINANCE
SEASONAL WORKING CAPITAL NEEDS OR TO PROVIDE INTERIM CONSTRUCTION FINANCING.
TAX-EXEMPT LEASES ARE OBLIGATIONS OF STATE AND LOCAL GOVERNMENT UNITS INCURRED
TO LEASE OR PURCHASE EQUIPMENT OR OTHER PROPERTY UTILIZED BY SUCH GOVERNMENTS.
EACH FUND WILL NOT ORIGINATE LEASES AS A LESSOR, BUT WILL INSTEAD PURCHASE A
PARTICIPATION INTEREST IN THE REGULAR PAYMENT STREAM OF THE UNDERLYING LEASE
FROM A BANK, EQUIPMENT LESSOR OR OTHER THIRD PARTY. GENERAL OBLIGATION BONDS ARE
SECURED BY THE ISSUER'S PLEDGE OF ITS FAITH, CREDIT AND TAXING POWER FOR THE
PAYMENT OF PRINCIPAL AND INTEREST. REVENUE BONDS ARE PAYABLE FROM THE REVENUE
DERIVED FROM A PARTICULAR FACILITY OR CLASS OF FACILITIES OR, IN SOME CASES,
FROM THE PROCEEDS OF A SPECIAL EXCISE TAX OR OTHER SPECIFIC REVENUE SOURCE, BUT
NOT FROM THE GENERAL TAXING POWER. TAX-EXEMPT INDUSTRIAL DEVELOPMENT BONDS ARE
IN MOST CASES REVENUE BONDS AND GENERALLY DO NOT CARRY THE PLEDGE OF THE CREDIT
OF THE ISSUING MUNICIPALITY. THE REVENUES FROM WHICH SUCH BONDS ARE PAID
GENERALLY CONSTITUTE AN OBLIGATION OF THE CORPORATE ENTITY ON WHOSE BEHALF THE
BONDS ARE ISSUED.
ALTHOUGH THE PARTICIPATIONS IN MUNICIPAL LEASES WHICH A TAX-EXEMPT FUND MAY
PURCHASE (HEREINAFTER CALLED "LEASE OBLIGATIONS") DO NOT CONSTITUTE GENERAL
OBLIGATIONS OF THE MUNICIPALITY FOR WHICH THE MUNICIPALITY'S TAXING POWER IS
PLEDGED, A LEASE OBLIGATION IS ORDINARILY BACKED BY THE MUNICIPALITY'S COVENANT
TO BUDGET FOR, APPROPRIATE AND MAKE THE PAYMENTS DUE UNDER THE LEASE OBLIGATION.
HOWEVER, CERTAIN LEASE OBLIGATIONS CONTAIN "NON-APPROPRIATION" CLAUSES WHICH
PROVIDE THAT THE MUNICIPALITY HAS NO OBLIGATION TO MAKE LEASE PAYMENTS IN FUTURE
YEARS UNLESS MONEY IS APPROPRIATED FOR SUCH PURPOSE ON A YEARLY BASIS. IN
ADDITION TO THE "NON-APPROPRIATION" RISK, THESE SECURITIES REPRESENT A
RELATIVELY NEW TYPE OF FINANCING THAT HAS NOT YET DEVELOPED THE DEPTH OF
MARKETABILITY ASSOCIATED WITH MORE CONVENTIONAL BONDS AND THEREFORE MAY BE LESS
LIQUID THAN OTHER MUNICIPAL SECURITIES. ALTHOUGH "NON-APPROPRIATION" LEASE
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OBLIGATIONS ARE SECURED BY THE LEASED PROPERTY, DISPOSITION OF THE PROPERTY IN
THE EVENT OF FORECLOSURE MIGHT PROVE DIFFICULT. A FUND WILL ONLY PURCHASE LEASE
OBLIGATIONS WHICH ARE RATED IN THE TOP CATEGORY BY EITHER STANDARD & POOR'S
CORPORATION ("S&P") OR MOODY'S INVESTOR SERVICE, INC. ("MOODY'S"). EACH FUND
WILL NOT INVEST MORE THAN 10% OF ITS NET INVESTMENT ASSETS IN LEASE OBLIGATIONS
(INCLUDING, BUT NOT LIMITED TO THOSE LEASE OBLIGATIONS WHICH CONTAIN
"NONAPPROPRIATION CLAUSES"), OR ANY OTHER ILLIQUID SECURITIES.
EACH TAX-EXEMPT FUND WILL ONLY PURCHASE LEASE OBLIGATIONS WHICH ARE COVERED BY
AN EXISTING OPINION OF LEGAL COUNSEL EXPERIENCED IN MUNICIPAL LEASE TRANSACTIONS
THAT, AS OF THE DATE OF ISSUE OR PURCHASE OF EACH PARTICIPATION INTEREST IN A
MUNICIPAL LEASE, THE INTEREST PAYABLE ON SUCH OBLIGATION IS EXEMPT FROM BOTH
FEDERAL INCOME TAX AND THE RELEVANT STATE'S INCOME TAX AND THAT THE UNDERLYING
LEASE WAS THE VALID AND BINDING OBLIGATION OF THE GOVERNMENTAL ISSUER.
EACH TAX-EXEMPT FUND ALSO MAY PURCHASE FLOATING AND VARIABLE RATE DEMAND NOTES
FROM MUNICIPAL AND NON-GOVERNMENTAL ISSUERS. THESE NOTES NORMALLY HAVE A STATED
MATURITY IN EXCESS OF ONE YEAR, BUT PERMIT THE HOLDER TO DEMAND PAYMENT OF
PRINCIPAL PLUS ACCRUED INTEREST UPON A SPECIFIED NUMBER OF DAYS NOTICE.
FREQUENTLY, SUCH OBLIGATIONS ARE SECURED BY LETTERS OF CREDIT OR OTHER CREDIT
SUPPORT ARRANGEMENTS PROVIDED BY BANKS. USE OF LETTERS OF CREDIT OR OTHER CREDIT
SUPPORT ARRANGEMENTS WILL GENERALLY NOT ADVERSELY AFFECT THE TAX-EXEMPT STATUS
OF THESE OBLIGATIONS. THE ADVISER WILL RELY UPON THE OPINION OF THE ISSUER'S
BOND COUNSEL TO DETERMINE WHETHER SUCH NOTES ARE EXEMPT FROM FEDERAL AND THE
RELEVANT STATE'S INCOME TAXATION. THE ISSUER OF FLOATING AND VARIABLE RATE
DEMAND NOTES NOMINALLY HAS A CORRESPONDING RIGHT, AFTER A GIVEN PERIOD, TO
PREPAY IN ITS DISCRETION THE OUTSTANDING PRINCIPAL AMOUNT OF THE NOTE PLUS
ACCRUED INTEREST UPON A SPECIFIED NUMBER OF DAYS NOTICE TO THE NOTE HOLDERS. THE
INTEREST RATE ON A FLOATING RATE DEMAND NOTE IS BASED ON A KNOWN LENDING RATE,
SUCH AS A BANK'S PRIME RATE, AND IS ADJUSTED AUTOMATICALLY EACH TIME SUCH RATE
IS ADJUSTED. THE INTEREST RATE ON A VARIABLE RATE DEMAND NOTE IS ADJUSTED AT
SPECIFIED INTERVALS, BASED UPON A KNOWN LENDING RATE. THE ADVISER WILL MONITOR
THE CREDITWORTHINESS OF THE ISSUERS OF FLOATING AND VARIABLE RATE DEMAND NOTES.
EACH FUND WILL NOT INVEST IN DERIVATIVE FINANCIAL INSTRUMENTS OTHER THAN IN
CONNECTION WITH ITS HEDGING ACTIVITIES.
AS NOTED, THE TAX-EXEMPT FUNDS INVEST A SUBSTANTIAL PORTION OF THEIR ASSETS IN
INVESTMENT GRADE MUNICIPAL SECURITIES. LOWER QUALITY SECURITIES INVOLVE A
GREATER RISK OF DEFAULT, INCLUDING NONPAYMENT OF PRINCIPAL AND INTEREST, THAN
INVESTMENT GRADE SECURITIES; HOWEVER, THE RISK OF DEFAULT IS PRESENT IN
INVESTMENT GRADE SECURITIES. MUNICIPAL SECURITIES RATED IN THE LOWEST CATEGORY
OF INVESTMENT GRADE DEBT MAY HAVE SPECULATIVE CHARACTERISTICS. INVESTMENT IN
MEDIUM-QUALITY DEBT SECURITIES (RATED BBB OR A BY S&P OR BAA OR A BY MOODY'S)
INVOLVES GREATER INVESTMENT RISK, INCLUDING THE POSSIBILITY OF ISSUER DEFAULT OR
BANKRUPTCY, THAN INVESTMENT IN HIGHER-QUALITY DEBT SECURITIES. MEDIUM-QUALITY
MUNICIPAL SECURITIES ARE CONSIDERED TO POSSESS ADEQUATE, BUT NOT OUTSTANDING,
CAPACITIES TO SERVICE THEIR OBLIGATIONS. AN ECONOMIC DOWNTURN COULD SEVERELY
DISRUPT THIS MARKET AND ADVERSELY AFFECT THE VALUE OF OUTSTANDING BONDS AND THE
ABILITY OF THE ISSUERS TO REPAY PRINCIPAL AND INTEREST. DURING A PERIOD OF
ADVERSE ECONOMIC CHANGES, INCLUDING A PERIOD OF RISING INTEREST RATES, ISSUERS
OF SUCH BONDS ARE MORE LIKELY TO EXPERIENCE DIFFICULTY IN SERVICING THEIR
PRINCIPAL AND INTEREST PAYMENT OBLIGATIONS THAN IS THE CASE WITH HIGHER GRADE
BONDS. THE PRINCIPAL TRADING MARKET FOR THE MUNICIPAL SECURITIES WILL GENERALLY
BE IN THE OVER-THE-COUNTER MARKET. AS A RESULT, THE EXISTENCE OF A LIQUID
TRADING MARKET FOR THE MUNICIPAL SECURITIES MAY DEPEND ON WHETHER DEALERS WILL
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MAKE A MARKET IN SUCH SECURITIES. THERE CAN BE NO ASSURANCE THAT A MARKET WILL
BE MADE FOR ANY OF THE MUNICIPAL SECURITIES, THAT ANY MARKET FOR THE MUNICIPAL
SECURITIES WILL BE MAINTAINED OR OF THE LIQUIDITY OF THE MUNICIPAL SECURITIES IN
ANY MARKETS MADE. MEDIUM-QUALITY DEBT SECURITIES TEND TO BE LESS MARKETABLE THAN
HIGHER-QUALITY DEBT SECURITIES BECAUSE THE MARKET IS LESS LIQUID. THE MARKET FOR
UNRATED DEBT SECURITIES IS EVEN NARROWER. DURING PERIODS OF THIN TRADING IN
THESE MARKETS, THE SPREAD BETWEEN BID AND ASKED PRICES IS LIKELY TO INCREASE
SIGNIFICANTLY, AND A TAX-EXEMPT FUND MAY HAVE GREATER DIFFICULTY SELLING THE
MEDIUM-QUALITY DEBT SECURITIES IN ITS PORTFOLIO.
IN ADDITION, CERTAIN OF THE MUNICIPAL SECURITIES IN WHICH A TAX-EXEMPT FUND
INVESTS MAY BE SUBJECT TO EXTRAORDINARY OPTIONAL AND/OR MANDATORY REDEMPTIONS AT
PAR IF CERTAIN EVENTS SHOULD OCCUR. TO THE EXTENT SECURITIES WERE PURCHASED AT A
PRICE IN EXCESS OF THE PAR VALUE THEREOF AND ARE SUBSEQUENTLY REDEEMED AT PAR AS
A RESULT OF AN EXTRAORDINARY REDEMPTION, A TAX-EXEMPT FUND WOULD SUFFER A LOSS
OF PRINCIPAL.
IN ADDITION TO THE FOREGOING, THE YIELDS ON MUNICIPAL SECURITIES ARE DEPENDENT
ON A VARIETY OF FACTORS, INCLUDING GENERAL MONEY MARKET CONDITIONS, THE
FINANCIAL CONDITION OF THE ISSUER, GENERAL CONDITIONS OF THE STATE'S TAX-EXEMPT
OBLIGATION MARKET, THE SIZE OF A PARTICULAR OFFERING, THE MATURITY OF THE
OBLIGATION AND THE RATING OF THE ISSUE OR ISSUER. THE RATINGS OF MOODY'S AND S&P
REPRESENT THEIR OPINIONS AS TO THE QUALITY OF THE MUNICIPAL SECURITIES WHICH
THEY UNDERTAKE TO RATE. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE
GENERAL, AND NOT ABSOLUTE, STANDARDS OF QUALITY. CONSEQUENTLY, MUNICIPAL
SECURITIES OF 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 THEIR PURCHASE BY A
TAX-EXEMPT FUND, PARTICULAR MUNICIPAL SECURITIES OR OTHER INVESTMENTS MAY CEASE
TO BE RATED OR THEIR RATINGS MAY BE REDUCED BELOW THE MINIMUM RATING REQUIRED
FOR PURCHASE BY A TAX-EXEMPT FUND.
FACTORS THAT PERTAIN TO NEBRASKA. BECAUSE THE NEBRASKA FUND WILL INVEST
SUBSTANTIALLY ALL OF ITS ASSETS IN NEBRASKA MUNICIPAL SECURITIES, THE FUND IS
SUSCEPTIBLE TO POLITICAL AND ECONOMIC FACTORS AFFECTING THE ISSUERS OF NEBRASKA
MUNICIPAL SECURITIES. BECAUSE OF LIMITATIONS CONTAINED IN THE STATE
CONSTITUTION, THE STATE OF NEBRASKA ISSUES NO GENERAL OBLIGATION BONDS SECURED
BY THE FULL FAITH AND CREDIT OF THE STATE. SEVERAL AGENCIES AND
INSTRUMENTALITIES OF STATE GOVERNMENT ARE AUTHORIZED TO ISSUE BONDS SECURED BY
REVENUE FROM SPECIFIC PROJECTS AND ACTIVITIES.
ALONG WITH POSITIVE POPULATION GROWTH, NEBRASKA HAS ENJOYED REGULAR ECONOMIC
GROWTH DURING THE PAST FEW YEARS. HISTORICALLY, THE STATE'S ECONOMY IS LESS
CYCLICAL THAN THE NATIONAL ECONOMY; THAT IS, IT TYPICALLY DOES NOT GROW AS
QUICKLY AS THE NATIONAL ECONOMY DURING PERIODS OF EXPANSION BUT IT ALSO DOES NOT
CONTRACT AS MUCH DURING PERIODS OF RECESSION. NEBRASKA'S ECONOMY EXPANDED DURING
1998 AND 1999 WITH STEADY GROWTH IN LABOR FORCE, EMPLOYMENT, RETAIL SALES,
INCOME AND TOURISM. OVERALL, THE STATE'S ECONOMY IS EXPECTED TO REMAIN STRONG
THROUGH 2001 ALTHOUGH BUSINESSES HAVE INDICATED WEAKNESSES TIED TO THE
AGRICULTURE SECTOR. THIS COULD INCREASE MIGRATION FROM RURAL AREAS TO THE CITIES
OF NEBRASKA.
FACTORS THAT PERTAIN TO COLORADO. BECAUSE OF LIMITATIONS CONTAINED IN THE STATE
CONSTITUTION, THE STATE OF COLORADO ISSUES NO GENERAL OBLIGATION BONDS SECURED
BY THE FULL FAITH AND CREDIT OF THE STATE. SEVERAL AGENCIES AND
INSTRUMENTALITIES OF STATE GOVERNMENT ARE AUTHORIZED TO ISSUE SHORT-TERM REVENUE
ANTICIPATION NOTES.
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THERE ARE APPROXIMATELY 2,000 UNITS OF LOCAL GOVERNMENT IN COLORADO, INCLUDING
COUNTIES, STATUTORY CITIES AND TOWNS, HOME-RULE CITIES AND COUNTIES, SCHOOL
DISTRICTS AND A VARIETY OF WATER, IRRIGATION, AND OTHER SPECIAL DISTRICTS AND
SPECIAL IMPROVEMENT DISTRICTS, ALL WITH VARIOUS CONSTITUTIONAL AND STATUTORY
AUTHORITY TO LEVY TAXES AND INCUR INDEBTEDNESS. THE MAJOR SOURCE OF REVENUE FOR
FUNDING SUCH INDEBTEDNESS IS THE AD VALOREM PROPERTY TAX, WHICH PRESENTLY IS
LEVIED AND COLLECTED SOLELY AT THE LOCAL LEVEL, ALTHOUGH THE STATE IS ALSO
AUTHORIZED TO LEVY SUCH TAXES. THERE IS A STATUTORY RESTRICTION ON THE AMOUNT OF
ANNUAL INCREASES IN TAXES THAT CAN BE LEVIED BY THE VARIOUS TAXING JURISDICTIONS
IN COLORADO WITHOUT ELECTORAL APPROVAL.
IN 1992, AN AMENDMENT TO THE CONSTITUTION OF THE STATE OF COLORADO WAS APPROVED
AND WENT INTO EFFECT. IN GENERAL, THE EFFECT OF THE AMENDMENT WAS TO LIMIT THE
ABILITY OF THE STATE AND LOCAL GOVERNMENTS TO INCREASE REVENUES AND
EXPENDITURES, ISSUE DEBT AND ENTER INTO OTHER FINANCIAL OBLIGATIONS AND RAISE
TAXES.
COLORADO'S ECONOMY IS DIVERSIFIED AND THE STATE HAS BECOME THE SERVICES CENTER
FOR THE ROCKY MOUNTAIN REGION. THE STATE'S ECONOMY INCLUDES AGRICULTURE,
MANUFACTURING (ESPECIALLY HIGH TECHNOLOGY AND COMMUNICATIONS), CONSTRUCTION,
TOURISM (SKI RESORTS AND NATIONAL PARKS) AND MINING (PRIMARILY OIL PRODUCTION).
COLORADO HAS RECOVERED FROM ECONOMIC DIFFICULTIES EXPERIENCED DURING THE PAST
SEVERAL YEARS, WHICH CAUSED STATE GOVERNMENT REVENUE SHORTFALLS AT THAT TIME.
EMPLOYMENT IN COLORADO IS DIVERSIFIED AMONG COMMUNICATIONS, SERVICES, TRADE,
GOVERNMENT AND MANUFACTURING. EMPLOYMENT GROWTH IN COLORADO HAS EXCEEDED THAT OF
THE UNITED STATES AS A WHOLE SINCE 1989.
THERE CAN BE NO ASSURANCE THAT FUTURE ECONOMIC DIFFICULTIES AND THEIR IMPACT ON
STATE AND LOCAL GOVERNMENT FINANCES WILL NOT ADVERSELY AFFECT THE MARKET VALUE
OF THE COLORADO OBLIGATIONS HELD BY THE FUND OR THE ABILITY OF THE RESPECTIVE
OBLIGORS TO PAY DEBT SERVICE ON CERTAIN OF SUCH OBLIGATIONS.
PREFERRED STOCK. The Short/Intermediate Fund, Fixed INCOME FUND AND
Income Fund may each invest up to 15% of their assets, respectively, in
preferred stocks. Some of the preferred stocks in which the Funds invest trade
in the over-the-counter market. These "unlisted preferred stocks" generally
trade at a lower volume, which may limit their liquidity.
WHEN ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase
securities on a "when-issued" or delayed-delivery basis. These transactions are
arrangements in which a Fund purchases securities with payment and delivery
scheduled for a future time. When-issued securities are securities purchased for
delivery beyond the normal settlement date at a stated price and yield and
thereby involve a risk that the yield obtained in the transaction will be less
than that available in the market when delivery takes place. A Fund will
generally not pay for such securities or start earning interest on them until
they are received on the settlement date. When a Fund agrees to purchase
securities on a "when issued" basis, the Custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities to satisfy
the purchase commitment, and in such a case, such 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 a Fund's
commitment. Each Fund's commitments to purchase when-issued securities will not
exceed 25% of the value of its total assets absent unusual market conditions. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
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it sets aside cash. In addition, because a Fund will set aside cash or liquid
portfolio securities to satisfy its purchase commitments in the manner described
above, a Fund's liquidity and the ability of the Adviser to manage it might be
affected in the event its commitments to purchase "when issued" securities ever
exceeded 25% of the value of its assets.
When a Fund engages in "when issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in a
Fund incurring a loss or missing the opportunity to obtain a price or yield
considered to be advantageous. Each of the Funds will engage in "when issued"
delivery transactions only for the purpose of acquiring portfolio securities
consistent with and in furtherance of the Fund's investment objectives and
policies and not for investment leverage, although such transactions represent a
form of leveraging.
MORTGAGE RELATED SECURITIES. The TAX-EXEMPT FUNDS, Short/Intermediate
Fund, Fixed INCOME FUND, Income Fund and Balanced Fund may, consistent with
their respective investment objective and policies, invest in mortgage related
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
Mortgage related securities, for purposes of such Funds' Prospectus and
this Statement of Additional Information, represent pools of mortgage loans
assembled for sale to investors by various governmental agencies such as the
Government National Mortgage Association and government related organizations
such as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, as well as by non-governmental 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. Conversely, when interest rates are rising, the
rate of prepayment tends to decrease, thereby lengthening the average life of
the security and 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 Short/Intermediate Fund, Fixed Income Fund and the
Balanced Fund. 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.
The TAX-EXEMPT FUNDS, Short/Intermediate Fund, Fixed INCOME FUND, Income
Fund and Balanced Fund may also invest in mortgage related securities which are
collateralized mortgage obligations structured on pools of mortgage pass-through
certificates or mortgage loans. Mortgage related securities will be purchased
only if rated in the four highest bond rating categories assigned by one or more
appropriate NRSROs, or, if unrated, which the Advisers deems to present
attractive opportunities and are of comparable quality.
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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 Government National Mortgage Association ("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 U.S. government. 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 Federal National Mortgage Association
("FNMA") include FNMA Guaranteed Mortgage Pass Through Certificates (also known
as "Fannie Maes") which are solely the obligations of the FNMA and are not
backed by or entitled to the full faith and credit of the U.S. government. The
FNMA is a government sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by FNMA. Mortgage related securities issued by the Federal Home
Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "PCS"). The FHLMC is a corporate
instrumentality of the U.S. government, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the U.S. government or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the U.S. government or of any Federal Home
Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which
is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
As stated in the Prospectus, also included among the mortgage-related
securities that such Funds may purchase are collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs") Certain CMOs
and REMICs are issued by private issuers. Such securities may be eligible for
purchase by the Short/Intermediate Fund, Fixed Income Fund and Balanced Fund if:
(1) the issuer has obtained an exemptive order from the Commission regarding
purchases by investment companies of equity interests of other investment
companies, or (2) such purchase is within the limitations imposed by Section 12
of the Investment Company Act of 1940, as amended (the "1940 Act").
Certain debt securities such as, but not limited to, mortgage-backed
securities, CMOs, asset-backed securities and securitized loan receivables, as
well as securities subject to prepayment of principal prior to the stated
maturity date, are expected to be repaid prior to their stated maturity dates.
As a result, the effective maturity of these securities is expected to be
shorter than the stated maturity. For purposes of compliance with stated
maturity policies and calculation of a Fund's weighted average maturity, the
effective maturity of such securities will be used. Depending upon the
prevailing market conditions, First National may purchase debt securities at a
discount from face value, which produces a yield greater than the coupon rate.
Conversely, if debt securities are purchased at a premium over face value, the
yield will be lower than the coupon rate. In making investment decisions, First
National will consider many factors other than current yield, including the
preservation of capital, maturity and yield to maturity.
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OTHER ASSET-BACKED SECURITIES. The Short/Intermediate Fund, Fixed INCOME
FUND, Income Fund and Balanced Fund may also invest in interests in pools of
receivables, such as motor vehicle installment purchase obligations (known as
Certificates of Automobile Receivables or CARs) and credit card receivables
(known as Certificates of Amortizing Revolving Debts or CARDs). Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Such securities are not issued or guaranteed by the U.S. government or
its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts and for a
certain time period by a letter of credit issued by a financial institution
(such as a bank or insurance company) unaffiliated with the issuers of such
securities. Non-mortgage-backed securities will be purchased by the
Short/Intermediate Fund, Fixed Income Fund or Balanced Fund only when rated in
one of the four highest rating categories for such securities by one or more
appropriate NRSROs at the time of purchase. In addition, such securities
generally will have remaining estimated lives at the time of purchase of seven
years or less.
The development of these asset-backed securities is at an early state
compared to mortgage-backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for mortgage-backed
securities issued by certain private organizations and nonmortgage-backed
securities is not as well developed. The Advisers will limit purchases of
asset-backed securities to securities that are deemed to be readily marketable
by the Advisers at the time of purchase.
Asset-backed securities held by the Short/Intermediate Fund, Fixed
INCOME FUND, Income Fund or Balanced Fund arise through the grouping by
governmental, government-related and private organizations of loans, receivables
and other assets originated by various lenders. Interests in pools of these
assets differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal paid at maturity or
specified call dates. Instead, asset-backed securities provide periodic payments
which generally consist of both interest and principal payments.
The estimated life of an asset-backed security may vary with the
prepayment experience with respect to the underlying debt instruments. The rate
of such prepayments, and hence the life of an asset-backed security, will be a
function of current market interest rates and other economic and demographic
factors. Since prepayment experience can vary, asset-backed securities may be a
less effective vehicle for locking in high long-term yields. None of these Funds
will invest more than 5% of its assets in such other asset-backed securities.
MEDIUM-GRADE DEBT SECURITIES. As stated in the Prospectus, EACH FUND
EXCEPT THE MONEY MARKET Fund may each invest in securities within the four
highest rating groups assigned by one or more appropriate NRSROs, including
securities rated in the fourth highest rating group or, if unrated, judged by
the Advisers to be of comparable quality ("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.
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Medium-Grade Securities are considered by Moody's and Standard & Poor's
to have some speculative characteristics, and are generally subject to greater
credit risk because issuers are more vulnerable to changes in economic
conditions, higher interest rates or adverse issuer-specific developments which
are more likely to lead to a weaker capacity to make principal and interest
payments than comparable higher-rated debt securities. In addition, the price of
Medium-Grade Securities is generally subject to greater market risk and
therefore reacts 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
a Fund to sell such securities at their fair 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. Some Medium-Grade Securities 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 A FUND 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, the Advisers conduct their own independent credit
analysis of Medium-Grade Securities.
Should subsequent events cause the rating of a debt security purchased
by one of the Funds to fall below the fourth highest rating category, as the
case may be, the Advisers will consider such an event in determining whether
that Fund should continue to hold that security. The Advisers expect that they
would not retain more than 5% of the assets of any Fund in such downgraded
securities. In no event, however, would that Fund be required to liquidate any
such portfolio security where the Fund should suffer a loss on the sale of such
security.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each FUND MAY INVEST IN
SECURITIES ISSUED BY OTHER INVESTMENT COMPANIES. EACH FUND EXCEPT THE MONEY
MARKET FUND MAY ALSO INVEST IN SHARES of the Money Market Fund. EACH Fund
currently intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of its
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; and (c) not more
than 3% of the outstanding voting stock of any one investment company will be
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owned by any of these Funds. As a shareholder of another investment company, a
Fund would bear, along with other shareholders, its pro rata portion of that
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that such Fund bears directly in connection
with its own operations. Investment companies in which a Fund may invest, other
than the Money Market Fund, may also impose a sales or distribution charge in
connection with the purchase or redemption of their shares and other types of
commissions or charges. Such charges will be payable by that Fund and,
therefore, will be borne directly by shareholders. In order to reduce the
imposition of additional fees as a result of investing in shares of the Money
Market Fund, the Advisers, the Administrator and their affiliates will reduce
their fees charged to a Fund by an amount equal to the fees charged by such
service providers based on a percentage of that Fund's assets attributable to
such Fund's investment in the Money Market Fund.
INCOME PARTICIPATION LOANS. The Short/Intermediate Fund, Fixed INCOME
FUND, Income Fund and Balanced Fund may make or acquire PARTICIPATIONS in
privately negotiated loans to borrowers. Frequently, such loans have variable
interest rates and may be backed by a bank letter of credit; in other cases they
may be unsecured. Such transactions may provide an opportunity to achieve higher
yields than those that may be available from other securities offered and sold
to the general public.
Privately arranged loans, however, will generally not be rated by a
credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made by
the Short/Intermediate Fund, Fixed INCOME FUND, Income Fund and Balanced Fund
may have a demand provision permitting such Fund to require repayment within
seven days. Participation in such loans, however, may not have such a demand
provision and may not be otherwise marketable. To the extent these securities
are not readily marketable, they will be subject to the Fund's 5% limitation on
investments in illiquid securities. Recovery of an investment in any such loan
that is illiquid and payable on demand will depend on the ability of the
borrower to meet an obligation for full repayment of principal and payment of
accrued interest within the demand period, normally seven days or less (unless
such Fund determines that a particular loan issue, unlike most such loans, has a
readily available market). As it deems appropriate, the Company's Board of
Directors will establish procedures to monitor the credit standing of each such
borrower, including its ability to honor contractual payment obligations.
The Short/Intermediate Fund, Fixed INCOME FUND, Income Fund and Balanced
Fund will purchase income participation loans only if such instruments are, in
the opinion of the ADVISER, of comparable quality to securities rated within the
four highest rating groups assigned by one or more appropriate NRSROs. None of
these Funds will invest more than 5% of its assets in such securities.
OTHER LOANS. In order to generate additional income, each Fund
(excluding the Money Market Fund) may, from time to time, lend it portfolio
securities to broker-dealers, banks or institutional borrowers of securities. A
Fund must receive 100% collateral in the form of cash or U.S. government
securities. This collateral will be valued daily by the Advisers. Should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to that Fund. During the time portfolio securities are on
loan, the borrower pays that Fund any dividends or interest received on such
securities. Loans are subject to termination by such Fund or the borrower at any
time. While a Fund does not have the right to vote securities on loan, each Fund
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. In the event the borrower would
default in its obligations, such Fund bears the risk of delay in recovery of the
portfolio securities and the loss of rights in the collateral. A Fund will enter
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into loan agreements only with broker-dealers, banks or other institutions that
the Advisers have determined are creditworthy under guidelines established by
the Company's Board of Directors.
REPURCHASE AGREEMENTS. Securities held by each of the Funds may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Fund would acquire securities from member banks of the Federal Deposit Insurance
Corporation and/or registered broker-dealers which the Advisers deem
credit-worthy under guidelines approved by the Company's Board of Directors,
subject to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price would generally equal the price
paid by a Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying portfolio
securities. Securities subject to repurchase agreements will be of the same type
and quality as those in which such Fund may invest directly. The seller under a
repurchase agreement will be required to maintain continually the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest) plus the transaction costs, including loss of
interest, that such Fund reasonably could expect to incur if the seller
defaults. This requirement will be continually monitored by the Advisers If the
seller were to default on its repurchase obligation or become insolvent, a Fund
holding such obligation would 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, or to the extent that the disposition of such
securities by such Fund were delayed pending court action. Additionally, there
is no controlling legal precedent confirming that a Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, although the Board of Directors of the Company
believes that, under the regular procedures normally in effect for custody of a
Fund's securities subject to repurchase agreements and under federal laws, a
court of competent jurisdiction would rule in favor of the Company if presented
with the question. Securities subject to repurchase agreements will be held by
that Fund's custodian or another qualified custodian or in the Federal
Reserve/Treasury book entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As discussed in the Prospectus, each of
the Funds may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with that Fund's investment restrictions.
Pursuant to such agreements, a Fund would sell portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase the
securities at a mutually agreed-upon date and price. Each Fund intends to enter
into reverse repurchase agreements only to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. At the time a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. government securities or other liquid,
high grade debt securities consistent with such Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will subsequently continually monitor the account to ensure that such equivalent
value is maintained at all times. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is obligated to repurchase the securities and that the
buyer may default on its obligation to sell such securities back to a Fund
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
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Except as otherwise disclosed to the Shareholders of a Fund, the Company
will not execute portfolio transactions through, acquire portfolio securities
issued by, make savings deposits in, or enter into repurchase or reverse
repurchase agreements with the Advisers, the Administrator, or their affiliates,
and will not give preference to the Advisers' correspondents with respect to
such transactions, securities, savings deposits, repurchase agreements and
reverse repurchase agreements.
ILLIQUID SECURITIES. Each Fund may invest up to 5% of its net assets in
illiquid securities (i.e., securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which the
Fund has valued the securities). The Board of Directors has the ultimate
authority to determine which securities are liquid or illiquid for purposes of
this limitation. Certain securities ("restricted securities") exempt from
registration or issued in transactions exempt from registration under the
Securities Act of 1933, as amended ("Securities Act") (securities that may be
resold pursuant to Rule 144A or Regulation S under the Securities Act), may be
considered liquid. The Board has delegated to the Advisers the day-to-day
determination of the liquidity of a security, although it has retained oversight
and ultimate responsibility for such determinations. Although no definite
quality criteria are used, the Board of Directors has directed the Advisers to
look to such factors as (a) the nature of the market for a security (including
the institutional private or international resale market), (b) the terms of
these securities or other instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase obligations and demand
instruments), (c) the availability of market quotations (e.g., for securities
quoted in PORTAL system), and (d) other permissible relevant factors. Certain
securities, such as repurchase obligations maturing in more than seven days, are
currently considered illiquid.
Restricted securities may be sold only in privately negotiated or other
exempt transactions, qualified non-U.S. transactions, such as under Regulation
S, or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable time may elapse between the decision to sell and the sale date. If,
during such period, adverse market conditions were to develop, that Fund might
obtain a less favorable price than prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined in good faith by the Board
of Directors. If through the appreciation of illiquid securities or the
depreciation of liquid securities, a Fund should be in a position where more
than 5% of the value of its net assets is invested in illiquid assets, including
restricted securities which are not readily marketable, that Fund will take such
steps as it deems advisable, if any, to reduce the percentage of such securities
to 5% or less of the value of its net assets.
TEMPORARY DEFENSIVE POSITIONS. During temporary defensive periods as
determined by First National, the Equity Fund, Growth Fund and Small Cap Value
Fund may each hold up to 100% of its total assets in high-quality short-term
obligations including domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by bank instruments. However, to
the extent that a Fund is so invested in debt obligations, such Fund may not
achieve its investment objective.
OVER-THE-COUNTER MARKET. The Balanced Fund, Equity Fund, Growth Fund and
Small Cap Value Fund may each invest in common stocks, some of which will be
traded in the over-the-counter market. In contrast to the securities exchanges,
the over-the counter market is not a centralized facility which limits trading
activity to securities of companies which initially satisfy certain defined
standards. Any security can be traded in the over-the-counter market as long as
an individual or firm is willing to make a market in the security. Because there
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are no minimum requirements for a company's assets or earnings or the number of
its stockholders in order for its stock to be traded over-the-counter, there is
great diversity in the size and profitability of companies whose stocks trade in
this market, ranging from relatively small little-known companies to
well-established corporations. When the Fund disposes of such a stock it may
have to offer the shares at a discount from recent prices or sell the shares in
small lots over an extended period of time.
SMALL-AND-MEDIUM-CAPITALIZATION COMPANIES. The Growth FUND AND SMALL CAP
VALUE Fund may invest in securities issued by companies with relatively smaller
or medium capitalization. Some securities issued by companies with relatively
smaller market capitalizations in general present greater risks than securities
issued by companies with larger market capitalization and may be subject to
large, abrupt or erratic fluctuations in price due, in part, to such factors as
the issuer's dependence upon key personnel, the lack of internal resources, the
inability to obtain funds from external sources, and dependence on a new product
or service for which there is no firmly established market. Therefore, the net
asset value of the A Fund could be influenced by such price fluctuations in the
securities of small-capitalization companies held by the Fund. An emphasis on
appreciation and medium-capitalization companies may result in even greater risk
than is inherent in other equity investment alternatives. The FUNDS will likely
have somewhat greater volatility than the stock market generally, as measured by
the S&P 500 Index.
UNDER NORMAL MARKET CONDITIONS, THE SMALL CAP VALUE FUND WILL INVEST AT LEAST
65% OF ITS TOTAL ASSETS IN COMMON STOCKS AND SECURITIES CONVERTIBLE INTO COMMON
STOCKS (SUCH AS CONVERTIBLE BONDS, CONVERTIBLE PREFERRED STOCKS, WARRANTS,
OPTIONS AND RIGHTS) ISSUED BY COMPANIES HAVING SMALL MARKET CAPITALIZATION.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
Each Fund's investment objective is a fundamental policy and may not be
changed without a vote of the holders of a majority of such Fund's outstanding
Shares. In addition, the following investment restrictions may be changed with
respect to a particular Fund only by a vote of the majority of the outstanding
Shares of that Fund (as defined under "ADDITIONAL INFORMATION Vote of a Majority
of the Outstanding Shares").
Each FUND EXCEPT THE TAX-EXEMPT FUNDS WILL NOT 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: (a) more than 5% of the value of such Fund's total assets would be
invested in such issuer; or (b) such Fund would hold more than 10% of the
outstanding voting securities of such issuer, except that up to 25% 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.
EACH OF THE FUNDS WILL NOT:
1. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in
securities of one or more issuers conducting their principal business activities
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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 or
instrumentalities, 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;
and (c) 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. Borrow money or issue senior securities, except that each Fund may
borrow from banks or enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of such Fund's total assets at
the time of its borrowing. A Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) exceed 5% of its total
assets.
3. Make loans, except that each Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, and may enter into repurchase agreements.
In addition, the Money Market Fund may not:
1. Purchase securities on margin, sell securities short, participate on
a joint or joint and several basis in any securities trading account, or
underwrite the securities of other issuers, except to the extent that such Fund
may be deemed to be an underwriter under certain securities laws, in the
disposition of "restricted securities" acquired in accordance with that Fund's
investment objectives and policies;
2. Purchase or sell commodities, commodity contracts (including futures
contracts), oil, gas or mineral exploration or development programs, or real
estate (although investments by such Fund in marketable securities of companies
engaged in such activities are not hereby precluded);
3. Write or purchase put or call options;
4. Invest in any issuer for purposes of exercising control or
management; and
5. Purchase or retain securities of any issuer if the officers or
Directors of the Company or the officers or directors of its investment adviser
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.
In addition, none of the TAX-EXEMPT FUNDS, Short/Intermediate Fund,
Fixed Income Fund, INCOME FUND, Balanced Fund, Equity Fund and Small Cap Value
Fund may:
1. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities;
2. Engage in any short sales;
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3. 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";
4. Purchase or sell commodities or commodities contracts, unless and
until disclosed in the current Prospectus of the Funds; and
5. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities are not prohibited by this
restriction).
In addition, the Growth Fund may not:
1. Act as an underwriter or distributor of securities other than shares
of the Fund except to the extent that the Fund's participation as part of a
group in bidding or by bidding alone, for the purchase of permissible
investments directly from an issuer or selling shareholders for the Fund's own
portfolio may be deemed an underwriting, and except to the extent that the Fund
may be deemed an underwriter under the Securities Act, by virtue of disposing of
portfolio securities;
2. Purchase or sell commodities or commodities contracts unless acquired
as a result of ownership of securities or other instruments (but this shall not
prevent the Fund from engaging in transactions involving foreign currencies,
futures contracts, options on futures contracts or options, or from investing in
securities or other instruments backed by physical commodities); and
3. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities are not prohibited by this
restriction).
NON-FUNDAMENTAL RESTRICTIONS
The following additional investment restrictions may be changed by the
Board of Directors without the vote of a majority of the outstanding Shares of a
Fund:
Each Fund may not:
1. Purchase or otherwise acquire any securities if, as a result, more
than 5% of that Fund's net assets would be invested in securities that are
illiquid.
2. Purchase securities of other investment companies except (a) to the
extent permitted by the Investment Company Act of 1940 and the rules,
regulations and orders thereunder, or (b) in connection with a merger,
consolidation, acquisition or reorganization.
In addition, the Money Market Fund AND THE TAX-EXEMPT FUNDS may not buy common
stocks or voting securities.
Irrespective of fundamental investment restriction number 1 above, and
pursuant to Rule 2a-7 under the 1940 Act, the Money Market 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 TAX-EXEMPT FUNDS, Short/Intermediate Fund, Fixed Income Fund, INCOME
FUND, Balanced Fund, Equity Fund and Small Cap Value Fund may not:
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1. Purchase participations or direct interests in oil, gas or other
mineral exploration or development programs (although investments by such Funds
in marketable securities of companies engaged in such activities are not
prohibited in this restriction);
2. Purchase or retain the securities of an issuer if, to the knowledge
of such Fund's management, the officers or Directors of the Company, and the
officers or directors of First National, who each owns beneficially more than
.5% of the outstanding securities of such issuer, together own beneficially more
than 5% of such securities.
The Growth Fund may not:
1. Purchase securities on margin (except to obtain such short-term
credits as are necessary for the clearance of purchases and sales of securities)
or participate in a joint trading account; provided, however, the Fund may (i)
purchase or sell futures contracts, (ii) make initial and variation margin
payments in connection with purchases or sales of futures contracts or options
on futures contracts, (iii) write or invest in put or call options on securities
and indexes, and (iv) engage in foreign currency transactions. (The "bunching"
of orders for the sale or purchase of marketable portfolio securities with other
accounts under the management of FNC to save brokerage costs on average prices
among them is not deemed to result in a securities trading account.);
2. Acquire illiquid securities if, as a result of such investments, more
than five percent (5%) of the Fund's net assets (taken at market value at the
time of each investment) would be invested in illiquid securities. "Illiquid
securities" means securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the securities; and
3. Engage in any short sales.
If any percentage restriction described above (and in the Prospectus) is
satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in 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 investment in illiquid securities to exceed
such Fund's limit on its investments in such securities, 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, a Fund would not be
required to liquidate any portfolio securities where such Fund would suffer a
loss on the sale of such securities.
SPECIAL NON-FUNDAMENTAL DIVERSIFICATION AND CONCENTRATION POLICIES OF THE
TAX-EXEMPT FUNDS
EACH TAX-EXEMPT FUND IS A NON-DIVERSIFIED FUND UNDER THE INVESTMENT COMPANY ACT
OF 1940. THIS MEANS THAT MORE THAN 5% OF A FUND'S ASSETS MAY BE INVESTED IN THE
OBLIGATIONS OF ANY ISSUER. THE TAX-EXEMPT FUNDS, HOWEVER, INTEND TO COMPLY WITH
SUBCHAPTER M OF THE INTERNAL REVENUE CODE (THE "CODE") THAT LIMITS THE AGGREGATE
VALUE OF ALL HOLDINGS (EXCEPT U.S. GOVERNMENT AND CASH ITEMS, AS DEFINED IN THE
CODE) THAT EXCEED 5% OF THE FUND'S TOTAL ASSETS TO AN AGGREGATE AMOUNT OF 50% OF
SUCH ASSETS. ALSO, HOLDINGS OF A SINGLE ISSUER (WITH THE SAME EXCEPTIONS) MAY
NOT EXCEED 25% OF A FUND'S TOTAL ASSETS, NOR MAY A FUND INVEST MORE THAN 25% OF
ITS ASSETS IN SECURITIES BACKED BY ASSETS OR REVENUES OF THE SAME OR RELATED
PROJECTS. THESE LIMITS ARE MEASURED AT THE END OF EACH QUARTER. UNDER THE
SUBCHAPTER M LIMITS, UP TO 50% OF A FUND'S TOTAL ASSETS MAY BE INVESTED IN AS
FEW AS TWO SINGLE ISSUERS. IN THE EVENT OF DECLINE OF CREDITWORTHINESS OR
DEFAULT UPON THE OBLIGATIONS OF ONE OR MORE SUCH ISSUERS
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EXCEEDING 5%, AN INVESTMENT IN A FUND WILL ENTAIL GREATER RISK THAN IN A
PORTFOLIO HAVING A POLICY OF "DIVERSIFICATION" BECAUSE A HIGH PERCENTAGE OF THE
FUND'S ASSETS MAY BE INVESTED IN MUNICIPAL OBLIGATIONS OF ONE OR TWO ISSUERS.
FURTHERMORE, A HIGH PERCENTAGE OF INVESTMENTS AMONG FEW ISSUERS MAY RESULT IN A
GREATER DEGREE OF FLUCTUATION IN THE MARKET VALUE OF THE ASSETS OF A FUND AND
CONSEQUENTLY A GREATER DEGREE OF FLUCTUATION OF THE FUND'S NET ASSET VALUE,
BECAUSE THE FUND WILL BE MORE SUSCEPTIBLE TO ECONOMIC, POLITICAL, OR REGULATORY
DEVELOPMENTS AFFECTING THESE SECURITIES THAN WOULD HE THE CASE WITH A PORTFOLIO
COMPOSED OF VARIED OBLIGATIONS OF MORE ISSUERS.
IN ADDITION, BECAUSE OF THE RELATIVELY SMALL NUMBER OF ISSUERS OF MUNICIPAL
SECURITIES IN NEBRASKA AND COLORADO, EACH FUND IS MORE LIKELY TO INVEST A HIGHER
PERCENTAGE OF ITS ASSETS IN THE SECURITIES OF A SINGLE ISSUER THAN AN INVESTMENT
COMPANY WHICH INVESTS IN A BROAD RANGE OF TAX-EXEMPT SECURITIES. THIS PRACTICE
INVOLVES AN INCREASED RISK OF LOSS TO THE FUND IF THE ISSUER IS UNABLE TO MAKE
INTEREST OR PRINCIPAL PAYMENTS OR IF THE MARKET VALUE OF SUCH SECURITIES
DECLINES.
A FUND WILL NOT INVEST MORE THAT 25% OF ITS TOTAL ASSETS IN ANY INDUSTRY.
MUNICIPAL SECURITIES BACKED ONLY BY THE ASSETS AND REVENUES OF NON-GOVERNMENTAL
USERS WILL FOR THIS PURPOSE BE DEEMED TO BE ISSUED BY SUCH NON-GOVERNMENTAL
USERS, IN WHICH CASE THE 25% LIMITATION WOULD APPLY TO SUCH OBLIGATIONS.
ACCORDINGLY, NO MORE THAN 25% OF A FUND'S ASSETS WILL BE INVESTED IN OBLIGATIONS
DEEMED TO BE ISSUED BY NON-GOVERNMENTAL USERS IN ANY ONE INDUSTRY.
OVER 25% OF THE MUNICIPAL SECURITIES IN A FUND'S PORTFOLIO MAY HE HEALTH CARE
REVENUE BONDS. RATINGS OF BONDS ISSUED FOR HEALTH CARE FACILITIES ARE OFTEN
BASED ON FEASIBILITY STUDIES THAT CONTAIN PROJECTIONS OF OCCUPANCY LEVELS,
REVENUES AND EXPENSES. A FACILITY'S GROSS RECEIPTS AND NET INCOME AVAILABLE FOR
DEBT SERVICE MAY BE AFFECTED BY FUTURE EVENTS AND CONDITIONS INCLUDING, AMONG
OTHER THINGS, DEMAND FOR SERVICES, THE ABILITY OF THE FACILITY TO PROVIDE THE
SERVICES REQUIRED, PHYSICIANS' CONFIDENCE IN THE FACILITY, MANAGEMENT
CAPABILITIES, COMPETITION WITH OTHER HOSPITALS, EFFORTS BY INSURERS AND
GOVERNMENT AGENCIES TO LIMIT RATES, LEGISLATION ESTABLISHING STATE RATE-SETTING
AGENCIES EXPENSES, GOVERNMENT REGULATION, THE COST AND POSSIBLE UNAVAILABILITY
OF MALPRACTICE INSURANCE AND THE TERMINATION OR RESTRICTION OF GOVERNMENTAL
FINANCIAL ASSISTANCE, INCLUDING THAT ASSOCIATED WITH MEDICARE, MEDICAID AND
OTHER SIMILAR THIRD PARTY PAYOR PROGRAMS. MEDICARE REIMBURSEMENTS ARE CURRENTLY
CALCULATED ON A PROSPECTIVE BASIS UTILIZING A SINGLE NATIONWIDE SCHEDULE OF
RATES. PRIOR TO THIS NATIONWIDE APPROACH, MEDICARE REIMBURSEMENTS WERE BASED ON
THE ACTUAL COSTS INCURRED BY THE HEALTH FACILITY. THE CURRENT LEGISLATION MAY
ADVERSELY AFFECT REIMBURSEMENTS TO HOSPITALS AND OTHER FACILITIES FOR SERVICES
PROVIDED UNDER THE MEDICARE PROGRAM.
OVER 25% OF THE MUNICIPAL SECURITIES IN A FUND'S PORTFOLIO MAY DERIVE THEIR
PAYMENT FROM MORTGAGE LOANS. CERTAIN OF THESE MUNICIPAL SECURITIES IN A FUND MAY
BE SINGLE FAMILY MORTGAGE REVENUE BONDS ISSUED FOR THE PURPOSE OF ACQUIRING FROM
ORIGINATING FINANCIAL INSTITUTIONS NOTES SECURED BY MORTGAGES ON RESIDENCES
LOCATED WITHIN THE ISSUER'S BOUNDARIES AND OWNED BY PERSONS OF LOW OR MODERATE
INCOME. MORTGAGE LOANS ARE GENERALLY PARTIALLY OR COMPLETELY PREPAID PRIOR TO
THEIR FINAL MATURITIES, AS A RESULT OF EVENTS SUCH AS THE SALE OF THE MORTGAGED
PREMISES, DEFAULT CONDEMNATION OR CASUALTY LOSS. BECAUSE THESE BONDS ARE SUBJECT
TO EXTRAORDINARY MANDATORY REDEMPTION, IN WHOLE OR IN PART, FROM SUCH
PREPAYMENTS ON MORTGAGE LOANS, A SUBSTANTIAL PORTION OF SUCH BONDS WILL PROBABLY
HE REDEEMED PRIOR TO THEIR SCHEDULED MATURITIES OR EVEN PRIOR TO THEIR ORDINARY
B-19
<PAGE>
CALL DATES. THE REDEMPTION PRICE OF SUCH ISSUES MAY BE MORE OR LESS THAN THE
OFFERING PRICE OF SUCH BONDS. EXTRAORDINARY MANDATORY REDEMPTION WITHOUT PREMIUM
COULD ALSO RESULT FROM THE FAILURE OF THE ORIGINATING FINANCIAL INSTITUTIONS TO
MAKE MORTGAGE LOANS IN SUFFICIENT AMOUNTS WITHIN A SPECIFIED TIME PERIOD OR, IN
SOME CASES, FROM THE SALE BY THE BOND ISSUER OF THE MORTGAGE LOANS. FAILURE OF
THE ORIGINATING FINANCIAL INSTITUTIONS TO MAKE MORTGAGE LOANS WOULD BE DUE
PRINCIPALLY TO THE INTEREST RATES ON MORTGAGE LOANS FUNDED FROM OTHER SOURCES
BECOMING COMPETITIVE WITH THE INTEREST RATES ON THE MORTGAGE LOANS FUNDED WITH
THE PROCEEDS OF THE SINGLE FAMILY MORTGAGE REVENUES AVAILABLE FOR THE PAYMENT OF
THE PRINCIPAL OF OR INTEREST ON SUCH MORTGAGE REVENUE BONDS. SINGLE FAMILY
MORTGAGE REVENUE BONDS ISSUED AFTER DECEMBER 31, 1980, WERE ISSUED UNDER SECTION
103A OF THE INTERNAL REVENUE CODE, WHICH SECTION CONTAINS CERTAIN ONGOING
REQUIREMENTS RELATING TO THE USE OF THE PROCEEDS OF SUCH BONDS IN ORDER FOR THE
INTEREST ON SUCH BONDS TO RETAIN ITS TAX-EXEMPT STATUS. IN EACH CASE THE ISSUER
OF THE BONDS HAS COVENANTED TO COMPLY WITH APPLICABLE REQUIREMENTS AND BOND
COUNSEL TO SUCH ISSUER HAS ISSUED AN OPINION THAT THE INTEREST ON THE BONDS IS
EXEMPT FROM FEDERAL INCOME TAX UNDER EXISTING LAWS AND REGULATIONS. THERE CAN BE
NO ASSURANCE THAT SUCH ONGOING REQUIREMENTS WILL BE MET. THE FAILURE TO MEET
THESE REQUIREMENTS COULD CAUSE THE INTEREST ON THE BONDS TO BECOME TAXABLE,
POSSIBLY RETROACTIVELY FROM THE DATE OF ISSUANCE.
CERTAIN OF THE MUNICIPAL SECURITIES IN A FUND'S PORTFOLIO MAY BE OBLIGATIONS OF
ISSUERS WHOSE REVENUES ARE PRIMARILY DERIVED FROM MORTGAGE LOANS TO HOUSING
PROJECTS FOR LOW TO MODERATE INCOME FAMILIES. THE ABILITY OF SUCH ISSUERS TO
MAKE DEBT SERVICE PAYMENTS WILL BE AFFECTED BY EVENTS AND CONDITIONS AFFECTING
FINANCED PROJECTS INCLUDING, AMONG OTHER THINGS, THE ACHIEVEMENT AND MAINTENANCE
OF SUFFICIENT OCCUPANCY LEVELS AND ADEQUATE RENTAL INCOME, INCREASES IN TAXES,
EMPLOYMENT AND INCOME CONDITIONS PREVAILING IN LOCAL LABOR MARKETS, UTILITY
COSTS AND OTHER OPERATING EXPENSES, THE MANAGERIAL ABILITY OF PROJECT MANAGERS,
CHANGES IN LAWS AND GOVERNMENTAL REGULATIONS, THE APPROPRIATION OF SUBSIDIES AND
SOCIAL AND ECONOMIC TRENDS AFFECTING THE LOCALITIES IN WHICH THE PROJECTS ARE
LOCATED. THE OCCUPANCY OF HOUSING PROJECTS MAY BE ADVERSELY AFFECTED BY HIGH
RENT LEVELS AND INCOME LIMITATIONS IMPOSED UNDER FEDERAL AND STATE PROGRAMS.
LIKE SINGLE FAMILY MORTGAGE REVENUE BENDS, MULTI-FAMILY MORTGAGE REVENUE BONDS
ARE SUBJECT TO REDEMPTION AND CALL FEATURES, INCLUDING EXTRAORDINARY MANDATORY
REDEMPTION FEATURES, UPON PREPAYMENT, SALE OR NON-ORIGINATION OF MORTGAGE LOANS
AS WELL AS UPON THE OCCURRENCE OF OTHER EVENTS.
OVER 25% OF THE MUNICIPAL SECURITIES IN A FUND'S PORTFOLIO MAY BE OBLIGATIONS OF
ISSUERS WHOSE REVENUES ARE PRIMARILY DERIVED FROM THE SALE OF ELECTRIC ENERGY.
UTILITIES ARE GENERALLY SUBJECT TO EXTENSIVE REGULATION BY STATE UTILITY
COMMISSIONS WHICH, AMONG OTHER THINGS, ESTABLISH THE RATES WHICH MAY BE CHARGED
AND THE APPROPRIATE RATE OF RETURN ON AN APPROVED ASSETS BASED. THE PROBLEMS
FACED BY SUCH ISSUERS INCLUDE THE DIFFICULTY IN OBTAINING APPROVAL FOR TIMELY
AND ADEQUATE RATE INCREASES FROM THE GOVERNING PUBLIC UTILITY COMMISSION, THE
DIFFICULTY IN FINANCING LARGE CONSTRUCTION PROGRAMS, THE LIMITATIONS ON
OPERATIONS AND INCREASED COSTS AND DELAYS ATTRIBUTABLE TO ENVIRONMENTAL
CONSIDERATIONS, INCREASED COMPETITION, RECENT REDUCTIONS IN ESTIMATES OF FUTURE
DEMAND FOR ELECTRICITY IN CERTAIN AREAS OF THE COUNTRY, THE DIFFICULTY OF THE
CAPITAL MARKET IN ABSORBING UTILITY DEBT, THE DIFFICULTY IN OBTAINING FUEL AT
REASONABLE PRICES AND THE EFFECT OF ENERGY CONSERVATION. ALL OF SUCH ISSUERS
HAVE BEEN EXPERIENCING CERTAIN OF THESE PROBLEMS IN VARYING DEGREES. IN
ADDITION, FEDERAL, STATE AND MUNICIPAL GOVERNMENTAL AUTHORITIES MAY FROM TIME TO
TIME REVIEW EXISTING AND IMPOSE ADDITIONAL REGULATIONS GOVERNING THE LICENSING,
CONSTRUCTION AND OPERATION OF NUCLEAR POWER PLANTS, WHICH MAY ADVERSELY AFFECT
THE ABILITY OF THE ISSUERS OF SUCH BONDS TO MAKE PAYMENTS OF PRINCIPAL AND/OR
INTEREST OF SUCH BONDS.
B-20
<PAGE>
OVER 25% OF THE MUNICIPAL SECURITIES IN A FUND'S PORTFOLIO MAY BE UNIVERSITY AND
COLLEGE REVENUE OBLIGATIONS. UNIVERSITY AND COLLEGE REVENUE OBLIGATIONS ARE
OBLIGATIONS OF ISSUERS WHOSE REVENUES ARE DERIVED MAINLY FROM TUITION, DORMITORY
REVENUES, GRANTS AND ENDOWMENTS. GENERAL PROBLEMS FACED BY SUCH ISSUERS INCLUDE
DECLINES IN THE NUMBER OF "COLLEGE" AGE INDIVIDUALS, POSSIBLE INABILITY TO RAISE
TUITIONS AND FEES, THE UNCERTAINTY OF CONTINUED RECEIPT OF FEDERAL GRANTS AND
STATE FUNDING, AND GOVERNMENT LEGISLATION OR REGULATIONS WHICH MAY ADVERSELY
AFFECT THE REVENUES OR COSTS OF SUCH ISSUERS.
PORTFOLIO TURNOVER
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 portfolio securities. The
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition were one year or less.
Because the Money Market Fund intends to invest entirely in securities
with remaining maturities of less than one year and because the Commission
requires such securities to be excluded from the calculation of portfolio
turnover rate, the portfolio turnover with respect to the Money Market Fund is
expected to be zero percent for regulatory purposes. The portfolio turnover rate
may vary greatly from year to year as well as within a particular year, and may
also be affected by cash requirements for redemptions of Shares. Portfolio
turnover will not be a limiting factor in making investment decisions.
B-21
<PAGE>
NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund is
determined and the Shares of each Fund are priced each Business Day at the close
of trading on the New York Stock Exchange ("NYSE") (typically 4 p.m. Eastern
time), except for Money Market Fund shares, which are priced at 2 p.m. A
"Business Day" is a day on which the NYSE is open for trading. A Fund is not
required to calculate NAV if none of its shares were bought or sold that day.
The NYSE will not open in observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Shares are purchased at their net asset value per share. Each Fund,
except the Money Market Fund, calculates its net asset value (NAV) as follows:
NAV = (VALUE OF FUND ASSETS)-(FUND LIABILITIES)
-----------------------------------------
Number of Outstanding Shares
VALUATION OF THE MONEY MARKET FUND. A security listed or traded on a
recognized stock exchange or quoted on NASDAQ is valued at its last sale price
prior to the time when assets are valued on the principal exchange on which the
security is traded or on NASDAQ. If no sale is reported at that time the most
current bid price will be used. All other securities for which over-the-counter
market quotations are readily available are valued at the most current bid
price. Where quotations are not readily available, the Funds' investments are
valued at fair value as determined by management and approved in good faith by
the Directors. Debt securities which will mature in more than 60 days are valued
at prices furnished by a pricing service approved by the Directors subject to
review and determination of the appropriate price by the Company, whenever a
furnished price is significantly different from the previous day's furnished
price. Securities which will mature in 60 days or less are valued at amortized
cost, which approximates market value.
Generally, trading in foreign securities, as well as U.S. Government
securities and certain cash equivalents and repurchase agreements, is
substantially completed each day at various times prior to the close of the
NYSE. The values of such securities used in computing the net asset value of the
shares of the Funds are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of the NYSE.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between the times at which they are determined and at the close
of the NYSE, which will not be reflected in the computation of net asset value.
If during such periods, events occur which materially affect the value of such
securities, the securities will be valued at their fair market value as
determined by management and approved in good faith by the Directors.
For purposes of determining the net asset value per share of each Fund,
all assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars furnished by a pricing
service approved by the Directors.
A Fund's net asset value per share will be calculated separately from
the per share net asset value of the other funds of the Company. "Assets
belonging to" a fund consist of the consideration received upon the issuance of
shares of the particular fund together with all net investment income, earnings,
profits, realized gains/losses and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
B-22
<PAGE>
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular series. Each Fund will be
charged with the direct liabilities of that Fund and with a share of the general
liabilities of the Company's Funds.
The Money Market Fund has elected to use the amortized cost method of
valuation pursuant to Rule 2a-7 under the 1940 Act, which the Directors of the
Company believe fairly reflects the market-based net asset value per share 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 the Money Market Fund would receive if
it sold the instrument. The value of securities in the Money Market Fund can be
expected to vary inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Fund will maintain a
dollar-weighted average portfolio maturity appropriate to the Money Market
Fund's objective of maintaining a stable net asset value per share, provided
that the Money Market Fund will not purchase any security with a remaining
maturity of more than 397 days (13 months) (securities subject to repurchase
agreements may bear longer maturities) nor maintain a dollar-weighted average
portfolio maturity which exceeds 90 days. The Company's Board of Directors has
also undertaken to establish procedures reasonably designed, taking into account
current market conditions and the investment objective of the Money Market Fund,
to stabilize the net asset value per share of the Money Market Fund for purposes
of sales and redemptions at $1.00; although the Fund seeks to maintain a net
asset value per share at $1.00, there can be no assurance that net asset value
will not vary. These procedures include review by the Directors, at such
intervals as they deem appropriate, to determine the extent, if any, to which
the net asset value per share of the Money Market 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
Directors promptly consider what action, if any, should be initiated. If the
Directors believe that the extent of any deviation from the Money Market 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 average
portfolio maturity, withholding or reducing dividends, reducing the number of
the Money Market 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.
----------------------------
Each security traded on a U.S. national securities exchange or quoted on the
NASDAQ National Market System ordinarily will be valued on the basis of its last
sale price on the date of valuation or, if there are no sales that day, at the
closing bid quotation. Securities traded on exchanges located outside of the
U.S. will be valued on the basis of the price as of the most recent close of
business on the exchange preceding the time of valuation. Debt securities (other
than short-term instruments are valued at prices furnished by a pricing service.
Securities and other assets for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures established by and under the general supervision of the
Directors of the Company. Short-term securities are valued at either amortized
cost or original cost plus accrued interest, which approximates current value.
B-23
<PAGE>
ADDITIONAL PURCHASE, REDEMPTION, AND EXCHANGE INFORMATION
PURCHASES. Shares of the Funds are sold on a continuous basis by the
Distributor, and the Shares may be purchased either directly from the Funds or
through Banks or certain other institutions. Investors purchasing Shares of the
Funds may include officers, directors, or employees of the Advisers or their
correspondent or affiliated banks.
Customers of First National and FNC or their correspondent or affiliated
banks (collectively, the "Banks") may purchase shares in connection with the
requirements of their qualified accounts maintained at the Banks. In the case of
the Money Market Fund, these procedures may include instructions under which a
customer's account is "swept" automatically no less frequently than weekly and
amounts in excess of a minimum amount agreed upon by the Bank and the customer
are invested in shares of the Money Market Fund.
Shares of the Funds purchased through the Banks acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of customers will
normally be held of record by the Banks. With respect to shares of the Funds so
sold, it is the responsibility of the particular Bank to transmit purchase or
redemption orders to the Company and to deliver federal funds for purchase on a
timely basis. Beneficial ownership of shares will be recorded by the Banks and
reflected in the account statements provided by the Banks to customers. A Bank
will exercise voting authority for those shares for which it is granted
authority by the customer.
The Banks and other institutions may impose particular customer account
requirements in connection with investments in the Funds, such as minimum
account size or minimum account thresholds above which excess cash balances may
be invested in Fund shares. In addition, depending on the terms of the
particular account used to purchase shares of the Funds, the Banks or other
institutions may impose charges against the account. These charges could include
asset allocation fees, account maintenance fees, sweep fees, compensatory
balance requirements, transaction charges or other charges based upon account
transactions, assets or income. The charges will reduce the net return on an
investment in a Fund. Investors should contact their institutions with respect
to these fees and the particular institution's procedures for purchasing or
redeeming shares. This Prospectus should be read in conjunction with any such
information received from the Banks or the institutions.
EXCHANGES. If shares are purchased through a Bank or other institution,
the shares may be exchanged only in accordance with the instructions and
procedures pertaining to that account.
REDEMPTIONS. If a customer has agreed with a Bank to maintain a minimum
balance in his or her account with the Bank, and the balance in that account
falls below that minimum, the customer may be obligated to redeem, or the Bank
may redeem on behalf of the customer, all or part of the customer's shares of a
Fund to the extent necessary to maintain the required minimum balance. The
minimum balance required by any such Bank or other institution may be higher
than the minimum required by the Company.
The Transfer Agent reserves the right to reject any signature guarantee
if: (1) it has reason to believe that the signature is not genuine; (2) it has
reason to believe that the transaction would otherwise be improper; or (3) the
guarantor institution is a broker or dealer that is neither a member of a
clearing corporation nor maintains net capital of at least $100,000.
The Company may suspend the right of redemption or postpone the date of
payment for Shares of a Fund during any period when (a) trading on the New York
B-24
<PAGE>
Stock Exchange is restricted by applicable rules and regulations of the
Commission, (b) the New York Stock Exchange is closed for other than customary
weekend and holiday closings, (c) the Commission has by order permitted such
suspension, or (d) an emergency exists as a result of which (i) disposal by the
Company of securities owned by it is not reasonably practical, or (ii) it is not
reasonably practical for the Company to determine the fair value of its net
assets.
The Company may redeem Shares of the Money Market Fund involuntarily if
redemption appears appropriate in light of the Company's responsibilities under
the 1940 Act. See "NET ASSET VALUE Valuation of the Money Market Fund" in this
Statement of Additional Information.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
Overall responsibility for management of the Company rests with its
Board of Directors, which is elected by the Shareholders of the Company. The
Company will be managed by the Directors in accordance with the laws of Nebraska
governing corporations. The Directors elect the officers of the Company to
supervise actively its DAY-TO-DAY operations.
The names of the Directors and officers of the Company, their addresses,
and principal occupations during the past five years are as follows:
Position(s) Held Principal Occupation(s)
Name, Address, and Age With the Company During Past 5 Years
---------------------- ---------------- -------------------
David P. Greer* President and Trust Officer, First National
3623 South 107th Avenue Director Bank of Omaha (1987-1994);
Omaha, NE 68124 presently retired
Age: 70
James F. Volk Treasurer Director of Investment Accounting
530 E. Swedesford Road Operations, SEI Investments Mutual
Wayne, PA 19087 Fund Services (1996-present);
Age 38 Assistant Chief Accountant of the
Securities and Exchange
Commission's Division of Investment
Management (1993-1996)
Timothy D. Barto Vice President Vice President and Assistant
One Freedom Valley Drive and Secretary Secretary of the Administrator and
Oaks, PA 19456 Distributor since November 1999;
Age:32 Associate at Dechert Price & Rhoads
(1997-1999); Associate at Richter,
Miller & Finn (1994-1997)
Joseph Caggiano Director Vice Chairman (1967-1993), Chief
302 South 36th Street Financial Officer (1967-1991) and
Omaha, NE 68131 Vice-Chairman Emeritus
Age: 74 (1993-present) of Bozell Jacobs
Harry A. Koch, Jr.* Director President and Treasurer, The Harry
P.O. Box 6215 A. Koch Co., insurance agents and
Omaha, NE 68106 brokers (1958-present)
Age: 70
Robert A. Reed Director President and Chief Executive
2600 Dodge Street Officer, Physicians Mutual
Omaha, NE 68131 Insurance Company and Physicians
Age: 60 Life Insurance Company
(1974-present)
Director President and Shareholder,
Gary Witt Lutz & Company, P.C., Certified
11837 Miracle Hills Drive Public Accountants (1987-present)
Suite 100
Omaha, NE 68154
Age: 48
-----------------
* Denotes "interested directors" as defined in the 1940 Act.
B-26
<PAGE>
The following table sets forth certain information concerning
compensation paid by the Company to its Directors and officers in the fiscal
year ending March 31, 2000.
Pension or
Retirement
Aggregate Benefits Accrued Estimated Total
Compensation as Annual Compensation
Name and to be Paid Part of Company Retirement From Company
Position by Company Expenses Benefits
-------- ---------- -------- -------- ------------
David P. Greer $7,500 -0- -0- $7,500
President and Director
James F. Volk -0- -0- -0- -0-
Treasurer
Timothy D. Barto -0- -0- -0- -0-
Vice President and
Secretary
Joseph Caggiano $6,000 -0- -0- $6,000
Director
Harry A. Koch, Jr. $6,000 -0- -0- $6,000
Director
Robert A. Reed $6,000 -0- -0- $6,000
Director
Gary Witt $7,500 -0- -0- $7,500
Director
As of SEPTEMBER 30, 2000, the Company's officers and Directors, as a
group, owned less than 1% of each Fund's outstanding Shares. As of SEPTEMBER 30,
2000, the Funds were not aware of any entities that owned a controlling interest
(ownership of greater than 25%) or beneficially owned or owned of record 5% of
more of the outstanding shares of any Fund.
The officers of the Company receive no compensation directly from the Company
for performing the duties of their offices. The officers of the Company may,
from time to time, serve as officers of other investment companies. SEI
INVESTMENTS MUTUAL FUNDS SERVICES receives fees from each of the Funds for
acting as administrator and the Administrator or its affiliates may receive fees
from each of the Funds pursuant to the Distribution and Service Plan and the
Administrative Services Plan described below. Messrs. Barto and Volk are
employees of, and are compensated by, the Administrator.
INVESTMENT ADVISERS
Investment advisory services are provided to the Money Market Fund,
NEBRASKA TAX-EXEMPT FUND, Short/Intermediate Fund, Fixed Income Fund, INCOME
FUND, Balanced Fund, Equity Fund and Small Cap Value Fund by First National Bank
of Omaha, Omaha, Nebraska ("First National"), pursuant to the Investment
Advisory Agreement dated as of December 20, 1994 as amended as of December 5,
1995 and June 4, 1996 (the "Investment Advisory Agreement"). First National is a
wholly owned subsidiary of First National of Nebraska, Inc., a Nebraska
corporation.
B-27
<PAGE>
Investment advisory services are provided to the COLORADO TAX-EXEMPT
FUND AND Growth Fund by FNC Trust Group, n.a. ("FNC") pursuant to the Investment
Advisory Agreement dated as of February 3, 1998 (the "Growth Fund Advisory
Agreement"). FNC is a wholly owned subsidiary of First National Colorado, Inc.
which is a wholly owned subsidiary of First National of Nebraska, Inc., a
Nebraska corporation.
Under the Advisory Agreements, the Advisers have agreed to provide
investment advisory services as described in the Prospectus of the Funds. For
the services provided and expenses assumed pursuant to the Advisory Agreements,
THE Money Market Fund, NEBRASKA TAX-EXEMPT FUND, Colorado Tax-Exempt Fund,
Short/Intermediate Fund, Fixed Income Fund, INCOME FUND, Balanced Fund, Equity
Fund and Small Cap Value Fund, AND GROWTH FUND pay the Advisers a fee equal to
the lesser of (a) a fee computed daily and paid monthly, at an annual rate of
twenty-five one-hundredths of one percent (.25%), seventy one-hundredths of one
percent (.70%), seventy one-hundredths of one percent (.70%), fifty
one-hundredths of one percent (.50%), sixty one-hundredths of one percent
(.60%),%, sixty one-hundredths of one percent (.60%), seventy-five
one-hundredths of one percent (.75%), seventy-five one-hundredths of one percent
(.75%), seventy-five one-hundredths of one percent (.75%), eighty-five
one-hundredths of one percent (.85%), respectively, of the average daily net
assets of that Fund, or (b) such other fee as may be agreed upon from time to
time in writing by the Company and the Advisers. The Advisers may periodically
voluntarily reduce all or a portion of their advisory fees with respect to any
Fund, which reduction would increase the net income of that Fund available for
distribution as dividends.
Set forth below are the advisory fees, net of fee waivers, First
National earned for the three previous fiscal periods ended March 31.
Fiscal Year Ended March 31, 1998:
Fund Advisory Fees Fee Waivers
(net of fee waivers)
Money Market $275,046 $0
Short/Intermediate $89,772 $9,975
Fixed Income $422,736 $38,430
Balanced $68,635 $78,438
Equity $2,151,925 $0
Small Cap Value $33,894 $62,141
Fiscal Year Ended March 31, 1999:
Fund Advisory Fees Fee Waivers
(net of fee waivers)
Money Market $268,858 $0
Short/Intermediate $94,050 $10,450
Fixed Income $450,197 $40,927
Equity $140,350 $51,037
Balanced $2,111,587 $0
Small Cap Value $76,625 $53,638
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<PAGE>
Fiscal Year Ended March 31, 2000:
Fund Advisory Fees Fee Waivers
(net of fee waivers)
Money Market $281,295 $204,180
Short/Intermediate $87,890 $9,766
Fixed Income $366,311 $33,301
Balanced $105,551 $38,382
Equity $1,252,545 $0
Small Cap Value $54,023 $37,817
Set forth below are the advisory fees, net of fee waivers, FNC earned for the
two previous fiscal periods ended March 31.
Fiscal Year Ended March 31, 1999:
Fund Advisory Fees Fee Waivers
(net of fee waivers)
Growth $61,210 $30,604
Fiscal Year Ended March 31, 2000:
Fund Advisory Fees Fee Waivers
(net of fee waivers)
Growth $85,189 $42,595
Unless otherwise terminated, the Advisory Agreements remain in effect
from year to year for successive annual periods ending on June 30 if, as to each
Fund, such continuance is approved at least annually by the Company's Board of
Directors or by vote of a majority of the outstanding Shares of that Fund (as
defined under "ADDITIONAL INFORMATION" in the Statement of Additional
Information), and a majority of the Directors who are not parties to the
Advisory Agreements or interested persons (as defined in the 1940 Act) of any
party to the Advisory Agreements by votes cast in person at a meeting called for
such purpose. The Advisory Agreements are terminable as to a Fund at any time on
60 days written notice without penalty by the Directors, by vote of a majority
of the outstanding Shares of that Fund, or by the Advisers. The Advisory
Agreements also terminate automatically in the event of any assignment, as
defined in the 1940 Act.
The Advisory Agreements provide that the Advisers shall not be liable
for any error of judgement or mistake of law or for any loss suffered by a Fund
in connection with the performance of the Advisory Agreements, 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 the Advisers in the performance of
their duties, or from reckless disregard by the Advisers of their duties and
obligations thereunder.
First National also serves as the Funds' custodian as more fully
discussed under "Custodian" below.
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PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreements, the Advisers determine, subject to
the general supervision of the Board of Directors of the Company and in
accordance with each Fund's investment objective and restrictions, which
securities are to be purchased and sold by a Fund, and which brokers are to be
eligible to execute such Fund's portfolio transactions. Purchases and sales of
fixed income debt securities acquired for the Money Market Fund,
Short/Intermediate Fund, Fixed Income Fund, Balanced Fund usually are principal
transactions in which portfolio securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters of other portfolio securities for the Funds 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 Company, 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 the Advisers in their best judgment and in
a manner deemed fair and reasonable to Shareholders. The primary consideration
is prompt execution of orders in an effective manner at the most favorable
price. Subject to this consideration, brokers and dealers who provide
supplemental investment research to the Advisers may receive orders for
transactions on behalf of the Funds. Information so received is in addition to
and not in lieu of services required to be performed by the Advisers and does
not reduce the advisory fees payable to the Advisers by the Funds. Such
information may be useful to the Advisers in serving a Fund and other clients
and, conversely, supplemental information obtained by the placement of business
of other clients may be useful to the Advisers in carrying out their obligations
to each of the Funds. The Advisers may authorize a Fund to pay a commission in
excess of the commission another broker-dealer would have charged if the
Advisers determine in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such
broker-dealer, viewed either in terms of that particular transaction or the
Advisers' overall responsibilities to the accounts they manage.
While the Advisers generally seek competitive commissions, the Company
may not necessarily pay the lowest commission available on each brokerage
transaction, for reasons discussed above. For the three previous fiscal years
ending on March 31, the Funds paid the following brokerage commissions on their
respective total transactions:
Fiscal Period Ended March 31, 1998
Fund Brokerage Commissions Total Transactions
Balanced $11,362 $15,999,858
Equity $90,644 $168,119,274
Small Cap Value $18,033 $13,224,031
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<PAGE>
Fiscal Period Ended March 31, 1999
Fund Brokerage Commissions Total Transactions
Balanced $15,578 $19,848,197
Equity $245,701 $202,491,981
Growth $43,980 $32,671,469
Small Cap Value $22,005 $10,475,475
Fiscal Period Ended March 31, 2000
Fund Brokerage Commissions Total Transactions
Balanced $18,569 $28,300,615
Equity $327,538 $194,132,653
Growth $41,244 $28,068,161
Small Cap Value $20,148 $14,139,889
During the fiscal year ended March 31, 2000, the Funds did not
direct brokerage transactions to brokers because of research services provided.
Except as otherwise disclosed to the Shareholders of the Funds and as
permitted by applicable laws, rules and regulations, the Company will not, on
behalf of any of the Funds, execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Advisers, the Distributor,
or their affiliates, and will not give preference to the Advisers'
correspondents with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those for
the other Funds of the Company, any other investment company or account managed
by the Advisers. Any such other fund, investment company or account may also
invest in the same securities as the Company. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
another 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 the Advisers believe to be equitable to the Fund and such other 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, the Advisers may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for the other investment companies or accounts in order to obtain best
execution. As provided by the Advisory Agreements, in making investment
recommendations for each of the Funds, the Advisers will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Company is a customer of the Advisers, their parent or subsidiaries or
affiliates and, in dealing with its customers, the Advisers, their parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Funds.
BANKING REGULATIONS
Prior to November, 1999, various judicial and administrative
interpretations had interpreted Federal law, including the Federal
Glass-Steagall Act, as limiting the mutual fund activities of certain banks and
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bank holding companies. The Gramm-Leach-Bliley Financial Modernization Act was
passed in November, 1999 and effectively repeals the Glass-Steagall Act.
The Advisers believe that they possessed, prior to the repeal of the
Glass-Steagall Act, and continue to possess, the legal authority to perform the
services for each of the Funds contemplated by the Prospectus, this Statement of
Additional Information, the Advisory Agreements, the Custodian Agreement and the
Servicing Agreement without violation of applicable statutes and regulations.
The Advisers have been advised by their counsel that counsel believes that such
laws should not prevent the Advisers from providing the services required of
them under the Advisory Agreements, the Custodian Agreement, and the Servicing
Agreement. Future changes in either Federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict the Advisers from continuing to perform
such services for the Company. Depending upon the nature of any changes in the
services which could be provided by the Advisers, the Board of Directors of the
Company would review the Company's relationship with the Advisers and consider
taking all action necessary in the circumstances.
ADMINISTRATOR
SEI INVESTMENTS MUTUAL FUND SERVICES serves as administrator (the
"Administrator") to each of the Funds pursuant to the Administration Agreement
dated OCTOBER 1, 2000 (the "Administration Agreement"). The Administrator and
its affiliates provide administration, distribution and fund accounting services
to other investment companies.
Under the Administration Agreement, the Administrator has agreed to
provide office space, facilities, PREPARE AND FILE TIMELY NOTICES required
pursuant to Rule 24f-2 under the Act and semi-annual reports on Form N-SAR;
COORDINATE AND SUPERVISE THE PREPARATION AND FILING OF TAX RETURNS; PREPARE
MATERIALS NECESSARY TO REGISTER the securities of the Funds pursuant to state
securities laws; determine the income and expense accruals of the Funds;
calculate daily net asset values and income factors of the Funds; maintain THE
general ledger; prepare financial statements; COORDINATE WITH FUND COUNSEL THE
PREPARATION OF REGISTRATION STATEMENTS and any amendments thereto, and proxy
materials; prepare and monitor MAINTAIN each Fund's expense accruals and CONTROL
DISBURSEMENTS; assist in the acquisition of First Omaha Funds' fidelity bond
required by the Act; MONITOR ON A SECONDARY BASIS each Fund's compliance with
the policies and limitations relating to portfolio investments as set forth in
the Prospectus, Statement of Additional Information and Articles of
Incorporation and monitor each Fund's status as a regulated investment company
under Subchapter M of the Internal Revenue Code, as amended; and generally
assist in each Fund's administrative operations.
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The Administrator receives a fee from THE COMPANY (PRORATED TO THE
RESPECTIVE FUNDS BASED UPON THEIR NET ASSETS) for its services as administrator
and expenses assumed pursuant to the Administration Agreement, equal to the
lesser of a fee calculated daily and paid periodically, at the annual rate of
twenty one-hundredths of one percent (.20%) of that COMPANY'S average daily net
assets, subject to a minimum fee of $638,500. THE COMPANY IS SUBJECT to a
minimum fee of $50,000 for NEW FUND, AND A MINIMUM FEE OF $15,000 PER CLASS FOR
EACH NEW CLASS OF SHARES ADDED TO A FUND.
Unless otherwise terminated as provided therein, the Administration
Agreement remains HAS AN INITIAL TERM OF THREE YEARS AND THEREAFTER WILL REMAIN
in effect from year to year for successive annual periods ending on SEPTEMBER
30.
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
any of the Funds 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.
A PREDECESSOR ADMINISTRATOR PROVIDED SERVICES TO THE FUNDS UNTIL
SEPTEMBER 30, 2000. For the fiscal period ended March 31, 1998, the PREDECESSOR
ADMINISTRATOR earned $183,788, $33,264, $127,827, $35,000, $477,003 and $30,000,
net of fee waivers of $36,249, $6,635, $25,895, $15,000, $96,844 and $20,000 for
the Money Market Fund, Short/Intermediate Fund, Fixed Income Fund, Balanced
Fund, Equity Fund and Small Cap Value Fund, respectively. For the fiscal period
ended March 31, 1999, the PREDECESSOR ADMINISTRATOR earned $172,610, $33,545,
$131,378, $40,958, $451,890, $33,333 and $37,663 net of fee waivers of $42,477,
$8,255, $32,330, $10,079, $111,200, $16,667 and $12,337 for the Money Market
Fund, Short/Intermediate Fund, Fixed Income Fund, Balanced Fund, Equity Fund,
Growth Fund and Small Cap Value Fund, respectively. For the fiscal period ended
March 31, 2000, the PREDECESSOR ADMINISTRATOR earned $274,579, $31,039,
$105,846, $30,499, $265,412, $33,517 and $35,566, net of fee waivers of
$113,801, $8,023, $27,358, $7,883, $68,600, $16,757 and $14,708 for the Money
Market Fund, Short/Intermediate Fund, Fixed Income Fund, Balanced Fund, Equity
Fund, Growth Fund and Small Cap Value Fund, respectively.
EXPENSES
The Advisory Agreements provide that if total expenses borne by any of
the Funds in any fiscal year exceed expense limitations imposed by applicable
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<PAGE>
state securities regulations, the Advisers will reimburse that Fund by the
amount of such excess in proportion to its respective fees. As of the date of
this Statement of Additional Information, the Funds are not aware of any state
imposed expense limitation applicable to the Funds. Fees imposed upon customer
accounts by the Advisers or their affiliated or correspondent banks for cash
management services are not included within Fund expenses for purposes of any
such expense limitation.
The Advisers and the Administrator each bear all expenses in connection
with the performance of their services as investment advisers and administrator,
respectively, other than the cost of securities (including brokerage
commissions, and issue and transfer taxes, if any) purchased for a Fund. Each
Fund will bear the following expenses relating to its operations: organizational
expenses; taxes; interest; any brokerage fees and commissions; fees and expenses
of the Directors of the Company; Commission fees; state securities qualification
fees; costs of preparing and printing Prospectuses for regulatory purposes and
for distribution to its current Shareholders; outside auditing and legal
expenses; advisory and administration fees; fees and out-of-pocket expenses of
the Administrator, Custodian and Transfer Agent; costs for independent pricing
service; certain insurance premiums; costs of maintenance of the Company's
existence; costs of Shareholders' and Directors' reports and meetings;
distribution expenses incurred pursuant to the Distribution and Service Plan
described below; and any extraordinary expenses incurred in a Fund's operation.
DISTRIBUTOR
SEI INVESTMENTS Distribution serves as agent for each of the Funds
in the distribution of its Shares pursuant to a Distribution Agreement dated
OCTOBER 1, 2000. Unless otherwise terminated, the Distribution Agreement remains
HAS AN INITIAL TERM OF TWO YEARS AND THEREAFTER WILL REMAIN in effect from year
to year for successive annual periods ending on SEPTEMBER 30 if approved at
least annually (a) by the Company's Board of Directors or by the vote of a
majority of the outstanding shares of the Company, and (b) by the vote of a
majority of the Directors of the Company 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.
The Distributor solicits orders for the sale of Shares, advertises and
pays the costs of advertising, office space and the personnel involved in such
activities. The Distributor receives no UNDERWRITING COMMISSIONS under the
Distribution Agreement with the Company, but may receive compensation under the
Distribution and Service Plan described below.
As described in the Prospectus, the Company has adopted a Distribution
and Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act under
which each Fund is authorized to make payments to banks, including the Advisers,
other institutions and broker-dealers, (with all of the foregoing organizations
being referred to as "Participating Organizations") for providing distribution
or shareholder service assistance. Payments to such Participating Organizations
may be made pursuant to agreements entered into upon the recommendation of the
Distributor. The Plan authorizes each Fund to make payments in an amount not in
excess, on an annual basis, of 0.25% of the average daily net assets of that
Fund.
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<PAGE>
Payments may be made by the Funds under the Plan for the purpose of
financing any activity primarily intended to result in the sales of shares of
the Funds as determined by the Board of Directors. Such activities typically
include advertising; compensation for sales and sales marketing activities of
financial services agents and others, such as dealers or distributors;
shareholder account servicing; production and dissemination of prospectuses and
sales and marketing materials; and capital or other expenses of associated
equipment, rent, salaries, bonuses, interest and other overhead. To the extent
any activity is one which the Funds may finance without a Plan, the Funds may
also make payments to finance such activity outside of the Plan and not subject
to its limitations. Payments under the Plan are not tied exclusively to actual
distribution and service expenses, and the payments may exceed distribution and
service expenses actually incurred.
For the fiscal period ended March 31, 2000, no 12b-1 payments were made under
the Plan.
As required by Rule 12b-1, the Plan was approved by the sole shareholder
of each of the Funds and by the Board of Directors, including a majority of the
Directors who are not interested persons of any of the Funds and who have no
direct or indirect financial interest in the operation of the Plan (the
"Independent Directors"). The Plan may be terminated as to a Fund by vote of a
majority of the Independent Directors, or by vote of majority of the outstanding
Shares of that Fund. Any change in the Plan that would materially increase the
distribution cost to a Fund requires Shareholder approval. The Directors 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 Directors including a
majority of the Independent Directors, cast in person at a meeting called for
that purpose. For so long as the Plan is in effect, selection and nomination of
those Directors who are not interested persons of the Company shall be committed
to the discretion of such disinterested persons. All agreements with any person
relating to the implementation of the 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 Directors or by a vote of the majority of the outstanding Shares
of any of the Funds. The Plan will continue in effect for successive one-year
periods, provided that each such continuance is specifically approved (a) by the
vote of a majority of the Independent Directors, and (b) by a vote of a majority
of the entire Board of Directors cast in person at a meeting called for that
purpose. The Board of Directors has a duty to request and evaluate such
information as may be reasonably necessary for them to make an informed
determination of whether the Plan should be implemented or continued. In
addition, the Directors in approving the Plan must determine that there is a
reasonable likelihood that the Plan will benefit each Fund and its Shareholders.
The Board of Directors of the Company believes that the Plan is in the
best interests of each Fund since it encourages Fund growth. As a Fund grows in
size, certain expenses, and therefore total expenses, per Share, may be reduced
and overall performance per Share may be improved.
ADMINISTRATIVE SERVICES PLAN
As described in the Prospectus, the Company has also adopted an
Administrative Services Plan (the "Services Plan") under which each Fund is
authorized to pay certain financial institutions, including First National, its
correspondent and affiliated banks, and the Distributor (a "Service
Organization"), to provide certain ministerial, record keeping, and
administrative support services to their customers who own of record or
beneficially Shares in a Fund, such as processing dividend and distribution
payments from the Funds on behalf of customers, providing periodic statements to
customers showing their positions in the shares of the Funds, providing
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<PAGE>
sub-accounting with respect to shares beneficially owned by such customers and
providing customers with a service that invests the assets of their accounts in
shares of the Funds pursuant to specific or pre-authorized instructions Payments
to such service organizations are made pursuant to Servicing Agreements between
the Company and the Service Organization. The Services Plan authorizes each Fund
to make payments to Service Organizations in an amount, on an annual basis, of
up to 0.25% of the average daily net assets of that Fund. The Services Plan has
been approved by the Board of Directors of the Company, including a majority of
the Directors who are not interested persons of the Company (as defined in the
1940 Act) and who have no direct or indirect financial interest in the operation
of the Services Plan or in any Servicing Agreements thereunder (the
"Disinterested Directors"). The Services Plan may be terminated as to a Fund by
a vote of a majority of the Disinterested Directors. The Directors review
quarterly a written report of the amounts expended pursuant to the Services Plan
and the purposes for which such expenditures were made. The Services Plan may be
amended by a vote of the Directors, provided that any material amendments also
require the vote of a majority of the Disinterested Directors. For so long as
the Services Plan is in effect, selection and nomination of those Disinterested
Directors shall be committed to the discretion of the Company's Disinterested
Directors. All Servicing Agreements may be terminated at any time without the
payment of any penalty by a vote of a majority of the Disinterested Directors.
The Services Plan will continue in effect for successive one-year periods,
provided that each such continuance is specifically approved by a majority of
the Board of Directors, including a majority of the Disinterested Directors.
As authorized by the Services Plan, the Company has entered into a
Servicing Agreement with the First National pursuant to which First National has
agreed to provide certain administrative support services in connection with
Shares of the Funds owned of record or beneficially by its customers. Such
administrative support services may include, but are not limited to, (a)
processing dividend and distribution payments from a Fund on behalf of
customers; (b) providing periodic statements to its customers showing their
positions in the Shares; (c) arranging for bank wires; (d) responding to routine
customer inquiries relating to services performed by First National; (e)
providing subaccounting with respect to the Shares beneficially owned by First
National's customers or the information necessary for subaccounting; (f) if
required by law, forwarding shareholder communications from a Fund (such as
proxies, shareholder reports, annual and semiannual financial statements and
dividend, distribution and tax notices) to its customers; (g) aggregating and
processing purchase, exchange, and redemption requests from customers and
placing net purchase, exchange, and redemption orders for customers; and (h)
providing customers with a service that invests the assets of their account in
the Shares pursuant to specific or preauthorized instructions. In consideration
of such services, the Company, on behalf of each Fund, except the Money Market
Fund and the Growth Fund, may pay First National a monthly fee, computed at the
annual rate of .10% of the average aggregate net asset value of Shares of that
Fund held during the period by customers for whom First National has provided
services under the Servicing Agreement. For the fiscal period ended March 31,
1998, First National earned fees of $9,126, $36,899, $8,360, $130,664 and
$5,302, net of fee waivers of $9,125, $36,900, $8,361, $130,685 and $5,302 for
the Short/Intermediate Fund, Fixed Income Fund, Equity Fund, Balanced Fund and
Small Cap Value Fund, respectively. For the fiscal period ended March 31, 1999,
First National earned fees of $9,325, $37,997, $10,276, $125,882 and $7,074, net
of fee waivers of $9,332, $38,004, $10,294, $125,905 and $7,077 for the
Short/Intermediate Fund, Fixed Income Fund, Balanced Fund, Equity Fund and Small
Cap Value Fund, respectively. For the fiscal period ended March 31, 2000, First
National earned fees of $8,849, $30,064, $7,759, $71,658 and $5,059, net of fee
waivers of $8,837, $30,051, $7,732, $71,677 and $5,053 for the
Short/Intermediate Fund, Fixed Income Fund, Balanced Fund, Equity Fund and Small
Cap Value Fund, respectively.
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In addition, the Company, on behalf of a Fund, may enter into, from time
to time, other Servicing Agreements with other service organizations pursuant to
which such Service Organizations will provide similar services as those
discussed above.
CUSTODIAN
First National Bank of Omaha (the "Custodian"), One First National
Center, Omaha, Nebraska 68102, in addition to serving as an investment adviser
and Transfer Agent to the Funds, also serves as custodian to each of the Funds
pursuant to the Custodian Agreement dated December 20, 1994 and amended as of
December 5, 1995, June 4, 1996 and February 3, 1998 (the "Custodian Agreement").
The Custodian's responsibilities include safeguarding and controlling each
Fund's cash and securities, handling the receipt and delivery of securities, and
collecting interest on each Fund's investments. In consideration of such
services, each Fund pays the Custodian a fee, computed daily and paid monthly,
at the annual rate of .03% of such Fund's average daily net assets.
For the fiscal period ended March 31, 1998, the Custodian earned custody
fees of $33,005 for the Money Market Fund and earned and waived $5,986, $23,063,
$5,874, $86,097 and $3,383, for the Short/Intermediate Fund, Fixed Income Fund,
Balanced Fund, Equity Fund and Small Cap Value Fund, respectively. For the
fiscal period ended March 31, 1999, the Custodian earned Custody fees of $32,263
for the Money Market Fund and earned and waived $6,270, $24,556, $7,655,
$84,463, $3,673 and $4,598 for the Short/Intermediate Fund, Fixed Income Fund,
Balanced Fund, Equity Fund, Growth Fund and Small Cap Value Fund, respectively.
For the fiscal period ended March 31, 2000, the Custodian earned custody fees of
$58,257 for the Money Market Fund and earned and waived $5,859, $19,981, $5,757,
$50,102, $5,111 and $3,241 for the Short/Intermediate Fund, Fixed Income Fund,
Balanced Fund, Equity Fund, Growth Fund and Small Cap Value Fund, respectively.
In the opinion of the staff of the Commission, since the custodian is
serving as both an investment adviser and custodian of the Funds, the Funds and
the Custodian are subject to the requirements of Rule 17f-2 under the 1940 Act,
and therefore the Funds and the Custodian will comply with the requirements of
such rule.
TRANSFER AGENCY SERVICES
First National Bank of Omaha (the "Transfer Agent") serves as Transfer
Agent and dividend disbursing agent for the Company pursuant to the Transfer
Agency Agreement dated December 20, 1994 and amended as of December 5, 1995,
June 4, 1996 and February 3, 1998. Pursuant to such Agreement, the Transfer
Agent, among other things, performs the following services in connection with
each Fund's shareholders of record: maintenance of shareholder records for each
of the Company's shareholders of record; processing shareholder purchase and
redemption orders; processing transfers and exchanges of shares of the Company
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
based on the number of shareholders of record. Pursuant to authority in the
Transfer Agency Agreement, the Transfer Agent has appointed as sub-transfer
agent DST Systems, Inc., 210 West 10th Street, Kansas City, Missouri 64105. DST
Systems, Inc. performs the principal services as transfer agent for the Funds
under such Agreement and receives a fee from the Transfer Agent for such
services.
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In the fiscal period ended March 31, 1998, Transfer Agent fees of
$24,948, $24,957, $24,970, $24,341, $32,300 and $24,354 were incurred by the
Money Market Fund, Short/Intermediate Fund, Fixed Income Fund, Balanced Fund,
Equity Fund and Small Cap Value Fund, respectively. In the fiscal period ended
March 31, 1999, Transfer Agent fees of $27,391, $26,479, $27,193, $26,512,
$36,175, $17,237 and $26,434 were incurred by the Money Market Fund,
Short/Intermediate Fund, Fixed Income Fund, Balanced Fund, Equity Fund, Growth
Fund and Small Cap Value Fund, respectively. In the fiscal period ended March
31, 2000, Transfer Agent fees of $26,908, $25,317, $25,959, $25,369, $29,807,
$24,688 and $25,243 were incurred by the Money Market Fund, Short/Intermediate
Fund, Fixed Income Fund, Balanced Fund, Equity Fund, Growth Fund and Small Cap
Value Fund, respectively.
AUDITORS
The financial statements of each Fund as of March 31, 2000 appearing in
this Statement of Additional Information have been audited by KPMG LLP, Two
Central Park Plaza, Suite 1501, Omaha, Nebraska 68102, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such report
and on the authority of such firm as experts in auditing and accounting.
LEGAL COUNSEL
Cline, Williams, Wright, Johnson & Oldfather, L.L.P., 1900 U.S. Bank
Building, 233 South 13th Street, Lincoln, Nebraska 68508, is counsel to the
Company.
CODES OF ETHICS
Rule 17j-1 under the Investment Company Act is designed to prevent abuses
that could occur as a result of conflicts of interest arising out of personal
trading by persons involved with or with access to information about a fund's
investment activities. The Company and FNC Trust Group have each adopted Codes
of Ethics regarding personal investing by their personnel pursuant to Rule 17j-1
under the Investment Company Act. The Company's Code of Ethics requires First
National Bank of Omaha personnel who are "access persons" of any Fund within the
meaning of Rule 17j-1 to comply with the Company's Code of Ethics adopted
pursuant to Rule 17j-1. The Company's Code therefore applies to First National
Bank of Omaha and FNC Trust Group, n.a. personnel who are access persons under
Rule 17-1. Each Code of Ethics permits personnel to invest in securities,
including securities that may be purchased or held by a Fund.
SEI INVESTMENTS Distribution CO. has also adopted a Code of Ethics
regarding personal investing by its personnel. The Code permits personnel to
invest in securities, including securities that may be purchased or held by a
Fund.
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ADDITIONAL INFORMATION
The Company was organized as a Nebraska corporation on October 12, 1994.
The Company and its Money Market Fund, Short/Intermediate Fund, Fixed Income
Fund and Equity Fund, were organized to acquire the assets and continue the
business of the corresponding substantially identical investment portfolios of
The Sessions Group, an Ohio business trust. On April 10, 1995 the Company
acquired approximately $326 million of assets from The Sessions Group in return
for an equivalent dollar amount of shares of the Company. The Small Cap Value
Fund was added and became effective on March 29, 1996. The Balanced Fund became
effective on July 29, 1996. The Growth Fund became effective on April 1, 1998.
THE TAX-EXEMPT FUNDS AND THE INCOME FUND BECAME EFFECTIVE ON DECEMBER 15, 2000.
Each Share of a Fund represents an equal proportionate interest in that Fund
with other shares of the same Fund, and is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund as
are declared at the discretion of the Directors.
ORGANIZATION AND CAPITAL STRUCTURE
The Company is authorized to issue a total of 1,000,000,000 Shares of
common stock in series with a par value of $.00001 per share. SEVEN Hundred
FIFTY million of these Shares have been authorized by the Board of Directors to
be issued in series designated for the existing seven Funds. The Board of
Directors may authorize additional Shares in series, or may divide the Shares of
any existing or new series into two or more subseries or classes, all without
shareholder approval.
All Shares, when issued, will be fully paid and non-assessable and will
be redeemable and freely transferable. All Shares have equal voting rights. They
can be issued as full or fractional Shares. A fractional Share has pro rata the
same kind of rights and privileges as a full Share. The Shares possess no
preemptive or conversion rights.
Each Share of a Fund has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the Shares.
On some issues, such as the election of directors, all Shares of the Fund vote
together as one series. Cumulative voting is authorized. This means that in a
vote for the election of directors, Shareholders may multiply the number of
Shares they own by the number of directorships being filled and then allocate
such votes to one or more directors. On issues affecting only a particular Fund,
the Shares of the affected Fund vote as a separate series. An example of such an
issue would be a fundamental investment restriction pertaining to only one Fund.
The Articles of Incorporation of the Company permit the Company, by
resolution of its Board of Directors, to create new series of common shares
relating to new investment portfolios or to subdivide existing series of shares
into subseries or classes. Classes could be utilized to create differing expense
and fee structures for investors in the same Fund. Differences could exist, for
example, in the sales load, Rule 12b-1 fees or service plan fees applicable to
different classes of shares offered by a particular Fund. Such an arrangement
could enable the Company to tailor its marketing efforts to a broader segment of
the investing public with a goal of attracting additional investments in the
Funds.
While the Board of Directors of the Company has not created any such
subseries or classes, it could do so in the future without shareholder approval.
However, any such creation of classes would require compliance with regulations
the Commission has adopted under the 1940 Act.
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<PAGE>
SHAREHOLDER MEETINGS
It is possible that the Company will not hold annual or periodically
scheduled regular meetings of Shareholders. Annual meetings of Shareholders will
not be held unless called by the Shareholders pursuant to the Nebraska Business
Corporation Act or unless required by the Investment Company Act of 1940 and the
rules and regulations promulgated thereunder. Special meetings of the
Shareholders may be held, however, at any time and for any purpose, if called by
(a) the Chairman of the Board, the President and two or more directors, (b) by
one or more Shareholders holding ten percent or more of the Shares entitled to
vote on matters presented to the meeting, or (c) if the annual meeting is not
held within any thirteen month period, the local district court, upon
application of any Shareholder, may summarily order that such meeting be held.
In addition, the 1940 Act requires a Shareholder vote for all amendments to
fundamental investment policies, investment advisory contracts and amendments
thereto.
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 Company 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 would be effectively acted upon with respect to a Fund only if approved
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 Directors may be
effectively acted upon by Shareholders of the Company voting without regard to
series.
OWNERSHIP OF SHARES
As of SEPTEMBER 30, 2000, the Advisers and their affiliates held of
record substantially all of the outstanding Shares of the Funds as agent,
custodian, trustee or investment adviser on behalf of their customers. At such
date, First National Bank of Omaha, One First National Center, Omaha, Nebraska
68102-1596, and its affiliates held as beneficial owner five percent or more of
the outstanding Shares of the Funds because they possessed sole or shared voting
or investment power with respect to such Shares.
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
As used in the Prospectus and this Statement of Additional Information,
a "vote of a majority of the outstanding Shares" of a Fund means the affirmative
vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more
of the votes of Shareholders of such Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
that Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding Shares of that Fund.
B-40
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ADDITIONAL TAX INFORMATION
Each of the Funds of the Company is treated as a separate entity for
federal income tax purposes and each intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for so long as such qualification is in the best interest
of such Fund's Shareholders. Qualification as a regulated investment company
under the Code requires, among other things, that the regulated investment
company distribute to its Shareholders at least 90% of its investment company
taxable income. Each Fund contemplates declaring as dividends 100% of that
Fund's investment company taxable income (before deduction of dividends paid).
Because all of the Money Market Fund's net investment income is expected to be
derived from earned interest and short-term capital gains, it is anticipated
that no part of any distribution will be eligible for the dividends-received
deduction for corporations. The Money Market Fund does not expect to realize any
long-term capital gains and, therefore, does not foresee paying any "capital
gains dividends" as described in the Code. In order to avoid the imposition of
an excise tax, each Fund is required to distribute annually, prior to calendar
year end, 98% of taxable ordinary income on a calendar year basis, 98% of
capital gain net income realized in the 12 months preceding October 31, and the
balance of undistributed taxable ordinary income and capital gain net income
from the prior calendar year. If distributions during the calendar year are less
than the required amounts, that Fund would be subject to a nondeductible 4%
excise tax on the deficiency.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year that Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to federal tax at regular corporate rates (without any deduction for
distributions to its Shareholders). In such event, dividend distributions would
be taxable to Shareholders to the extent of earnings and profits, and would be
eligible for the dividends received deduction for corporations.
Foreign taxes may be imposed on a Fund by foreign countries with respect
to its income from foreign securities. Since less than 50% in value of a Fund's
total assets at the end of its fiscal year are expected to be invested in stocks
or securities of foreign corporations, such Fund will not be entitled under the
Code to pass through to its Shareholders their pro rata share of the foreign
taxes paid by the Fund. These taxes will be taken as a deduction by such Fund.
Each Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any Shareholder who has
provided either an incorrect tax identification number or no number at all, or
who is subject to withholding by the Internal Revenue Service for failure
properly to include on their return payments of interest or dividends.
In addition, to the extent Shareholders receive distributions of income
attributable to investments in repurchase agreements by a Fund, such
distribution may also be subject to state or local taxes.
B-41
<PAGE>
SPECIAL TAX CONSIDERATIONS FOR TAX-EXEMPT FUNDS
UNDER THE CODE, INTEREST ON LOANS INCURRED BY SHAREHOLDERS TO ENABLE THEM TO
PURCHASE OR CARRY SHARES OF ONE OF THE TAX-EXEMPT FUNDS MAY NOT BE DEDUCTED FOR
REGULAR FEDERAL TAX PURPOSES. IN ADDITION, UNDER RULES USED BY THE INTERNAL
REVENUE SERVICE FOR DETERMINING WHEN BORROWED FUNDS ARE DEEMED USED FOR THE
PURPOSE OF PURCHASING OR CARRYING PARTICULAR ASSETS, THE PURCHASE OF SHARES OF
ONE OF THE TAX-EXEMPT FUNDS MAY BE CONSIDERED TO HAVE BEEN MADE WITH BORROWED
FUNDS EVEN THROUGH THE BORROWED FUNDS ARE NOT DIRECTLY TRACEABLE TO THE PURCHASE
OF SHARES.
FOR PERSONS WHO ARE RECEIVING SOCIAL SECURITY OR RAILROAD RETIREMENT BENEFITS, A
PORTION OF THESE BENEFITS MAY BECOME TAXABLE, IF THEY RECEIVE EXEMPT-INTEREST
DIVIDENDS FROM A FUND.
A PERSON WHO IS A "SUBSTANTIAL USER" OF FACILITIES FINANCED BY INDUSTRIAL
DEVELOPMENT OR PRIVATE ACTIVITY BONDS SHOULD CONSULT THEIR OWN TAX ADVISER
BEFORE PURCHASING SHARES OF ONE OF THE TAX-EXEMPT FUNDS.
INTEREST FROM MUNICIPAL SECURITIES IS TAX-EXEMPT FOR PURPOSES OF COMPUTING THE
SHAREHOLDER'S REGULAR TAX. HOWEVER, INTEREST FROM SO-CALLED PRIVATE ACTIVITY
BONDS ISSUED AFTER AUGUST 7, 1986, CONSTITUTES A TAX PREFERENCE ITEM FOR BOTH
INDIVIDUALS AND CORPORATIONS AND THUS WILL ENTER INTO A COMPUTATION OF THE
ALTERNATIVE MINIMUM TAX ("AMT"). WHETHER OR NOT THAT COMPUTATION WILL RESULT IN
A TAX WILL DEPEND ON THE ENTIRE CONTENT OF YOUR RETURN. THE FUND WILL NOT INVEST
MORE THAN 20% OF ITS ASSETS IN THE TYPES OF MUNICIPAL SECURITIES THAT PAY
INTEREST SUBJECT TO AMT. AN ADJUSTMENT REQUIRED BY THE CODE WILL TEND TO MAKE IT
MORE LIKELY THAT CORPORATE SHAREHOLDERS WILL BE SUBJECT TO AMT. THEY SHOULD
CONSULT THEIR TAX ADVISERS.
Information set forth in the Prospectus and this Statement of Additional
Information which relates to federal taxation is only a summary of some of the
important federal tax considerations generally affecting purchasers of Shares of
a Fund. No attempt has been made to present a detailed explanation of the
federal income tax treatment of a Fund or its Shareholders and this discussion
is not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of Shares of a Fund are urged to consult their tax advisers with
specific reference to their own tax situation. In addition, the tax discussion
in the Prospectus and this Statement of Additional Information is based on tax
laws and regulations which are in effect on the date of the Prospectus and this
Statement of Additional Information; such laws and regulations may be changed by
legislative or administrative action.
YIELD OF THE MONEY MARKET FUND
For the seven-day period ended November 30, 2000, the yield and effective
yield, respectively, of the Money Market Fund were 6.32% and 6.15%. For the
30-day period ended November 30, 2000, the yield for such Fund was 6.14%. In the
absence of fee waivers, the yields for the period ended November 30, 2000 would
have been 5.97%, 6.13% and 5.97%, respectively. The yield figures are based on
historical earnings and are not intended to indicate future performance. The
standardized seven-day yield for the Money Market Fund is computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in the Money Market 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
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<PAGE>
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 (365/7). The net
change in the account value of the Money Market 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 non-recurring account or sales charges, that are charged to all
Shareholder accounts in proportion to the length of the base period and assuming
the Money Market Fund's average account size. The capital changes to be excluded
from the calculation of the net change in account value are realized gains and
losses from the sale of securities and unrealized appreciation and depreciation.
The 30day yield and effective yield are calculated as described above except
that the base period is 30 days rather than seven days.
The effective yield for the Money Market Fund 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 seven and subtracting
1 from the result.
YIELD OF THE TAX-EXEMPT FUNDS, THE FIXED INCOME FUND, THE SHORT/INTERMEDIATE
FUND AND THE INCOME FUND
As summarized in the Prospectus under the heading "The Funds," yield of
each of the FUNDS LISTED ABOVE will be computed by annualizing net investment
income per share for a recent 30-day period and dividing that amount by such
Share's net asset value per share (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 portion of
the stated dividend rate of dividend paying portfolio securities. The yield of
each of SUCH FUNDS will vary from time to time depending upon market conditions,
the composition of such Fund's portfolio and operating expenses of the Company
allocated to such 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 Fund.
For the 30-day period ended November 30, 2000, the yields for
Short/Intermediate Fund and the Fixed Income Fund were 5.81% and 5.99%,
respectively. In the absence of fee waivers, the yields for the
Short/Intermediate Fund and the Fixed Income Fund would have been 5.14% AND
5.82%, RESPECTIVELY. THE TAX-EXEMPT FUNDS AND THE INCOME FUND HAD NOT COMMENCED
OPERATIONS ON November 30, 2000.
The yield figures are based on historical earnings and are not intended
to indicate future performance.
CALCULATION OF TOTAL RETURN
As summarized in the Prospectus under the headings "The Funds," 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 are reinvested in such Fund immediately rather than paid to the
investor in cash. Average annual total return will be calculated by: (a) adding
to the total number of Shares purchased by a hypothetical $10,000 investment in
that Fund all additional Shares which would have been purchased if all dividends
B-43
<PAGE>
and distributions paid during the period had been immediately reinvested; (b)
calculating the value of the hypothetical initial investment of $10,000 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; (c) assuming redemption at the end of the period; and (d) dividing this
account value for the hypothetical investor by the initial $10,000 investment.
Aggregate total return is a measure of change in value of an investment in a
Fund over the relevant period and is similar to average annual total return
except that the result is not annualized.
The Funds may, when citing performance in marketing and sales
literature, include the performance of investment vehicles which were
predecessors to the Funds.
DISTRIBUTION RATES
The TAX-EXEMPT FUNDS, Short/Intermediate Fund, Fixed Income Fund, INCOME
FUND, Balanced Fund, Equity Fund, Growth Fund and Small Cap Value Fund may from
time to time advertise current distribution rates which are calculated by
dividing the distributions per share made by a Fund over a 12-month period by
the maximum offering price per share. The calculation of income in the
distribution rate includes both income and capital gain dividends and does not
reflect unrealized gains or losses, although each Fund may also present a
distribution rate excluding the effect of capital gains. The distribution rate
differs from the yield, because it includes capital items which are often
non-recurring in nature, whereas yield does not include such items. Distribution
rate information will be accompanied by the standardized yield and total return
data.
PERFORMANCE COMPARISONS
Investors may judge the performance of each of the Funds by comparing
them to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation and to
data prepared by Lipper Analytical Services, Inc., a widely recognized
independent service which monitors the performance of mutual funds. Comparisons
may also be made to indices or data published in Donoghue's MONEY MARKET REPORT,
a nationally recognized money market fund reporting service, Money Magazine,
Forbes, Barron's, The Wall Street Journal, Morningstar, Inc., Ibbotson
Associates, CDA/Wiesenberger, The New York Times, Business Week, U.S.A. Today
and local periodicals. In addition to performance information, general
information about each of the Funds that appears in a publication such as those
mentioned above may be included in advertisements, sales literature and reports
to Shareholders.
From time to time, each of the Funds may include general comparative
information, such as statistical data regarding inflation, securities indices or
the features or performance of alternative investments, in advertisements, sales
literature and reports to Shareholders. A Fund 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 performance of
any of the Funds.
Current yields or total return will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
total return may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and total
B-44
<PAGE>
return are functions of a Fund's quality, composition and maturity, as well as
expenses allocated to such Fund. Fees imposed upon Customer accounts by the
Advisers or their affiliated or correspondent banks for cash management services
will reduce a Fund's effective yield and total return to Customers.
MISCELLANEOUS
The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statement filed with the
Commission. Copies of such information may be obtained from the commission upon
payment of the prescribed fee.
The Prospectus and this Statement of Additional Information 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 Prospectus and this Statement of Additional Information.
FINANCIAL STATEMENTS
The following audited financial statements are CONTAINED IN THE FUNDS'
ANNUAL REPORT, WHICH IS INCORPORATED HEREIN BY REFERENCE, AND CONSIDERED LEGALLY
PART OF, THIS STATEMENT OF ADDITIONAL INFORMATION.
Money Market Fund, Short/Intermediate Fund, Fixed Income Fund, Balanced
Fund, Equity Fund, Growth Fund and Small Cap Value Fund
1. Schedules of Portfolio Investments as of March 31, 2000
2. Statements of Assets and Liabilities as of March 31, 2000
3. Statements of Operations for the period ended March 31, 2000
4. Statements of Changes in Net Assets for the periods ended
March 31, 2000 and 1999
5. Financial Highlights
6. Notes to Financial Statements
7. Independent Auditors' Report
A COPY OF THE ANNUAL REPORT IS DELIVERED ALONG WITH THIS STATEMENT OF
ADDITIONAL INFORMATION.
B-45
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS. Commercial paper ratings of Standard & Poor's
Corporation ("S&P") are current assessments of the likelihood of timely payment
of debt considered short-term in the relevant market. Commercial paper rated A1
by S&P indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted Al+. Commercial paper rated A2 by S&P indicates that capacity for timely
payment on issues is satisfactory. However, the relative degree of safety is not
as high as for issues designated A1. Commercial paper rated A3 by S&P indicates
adequate capacity for timely payment. Such paper is, however, more vulnerable to
the adverse effects of changes in circumstances than obligations carrying the
higher designations. Commercial paper rated B by S&P is regarded as having only
speculative capacity for timely payment. Commercial paper rated C by S&P is
regarded as short-term obligations with a doubtful capacity for payment.
Commercial paper rated D by S&P is 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.
Moody's Investors Service, Inc.'s ("Moody's") commercial paper rating
are opinions of the ability of issuers to repay punctually senior debt
obligations which have an original maturity not exceeding one year. The rating
Prime1 is the highest commercial paper rating assigned by Moody's. Issuers rated
Prime1 (or supporting institutions) are considered to have a superior capacity
for repayment of senior short-term debt obligations. Prime1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics of Prime1 rated issuers, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variations. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Issuers rated Prime3 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. The effects of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall
within any of the Prime rating categories.
Commercial paper rated Fl+ by Fitch Investors Service ("Fitch")
is regarded as having the strongest degree of assurance for timely payments.
Commercial paper rated F1 by Fitch is regarded as having an assurance of timely
payment only slightly less than the strongest rating, i.e., Fl+. Commercial
paper rated F2 by Fitch is regarded as having a satisfactory degree of assurance
of timely payment, but the margin of safety is not as great as for issues
assigned Fl+ or F1 ratings. Commercial paper rated F3 by Fitch is regarded as
having characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause these
securities to be rated below investment grade. Commercial paper rated FS by
Fitch is regarded as having characteristics suggesting a minimal degree of
assurance for timely payment and is vulnerable to near term adverse changes in
financial and economic conditions. Commercial paper rated D by Fitch is in
actual or imminent payment default.
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The description of the three highest short-term debt ratings by Duff &
Phelps, Inc. ("Duff") (Duff incorporates gradations of "1+" (one plus) and "1"
(one minus) to assist investors in recognizing quality differences within the
highest rating category) are as follows. Duff 1+ is regarded as having the
highest certainty of timely payment. Short-term liquidity, including internal
operating factors and/or access to alternative sources of funds, is outstanding,
and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1
is regarded as having a very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection factors. Risk factors
are minor. Duff 1- is regarded as having a high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are minor. Duff 2 is regarded as having a good certainty
of timely payment. Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing requirements, access
to capital markets is good. Risk factors are small. Duff 3 is regarded as having
a satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected. Duff 4 is considered as having
speculative investment characteristics. Liquidity is not sufficient to insure
against disruption in debt service. Operating factors and market access may be
subject to a high degree of variation. Duff 5 indicates that the issuer has
failed to meet scheduled principal and/or interest payments.
Commercial paper rated A1 by IBCA Limited and its affiliate, IBCA Inc.
(collectively "IBCA") is regarded by IBCA as obligations supported by the
highest capacity for timely repayment. Where issues possess a particularly
strong credit feature, a rating of Al+ is assigned. Obligations rated A2 are
supported by a good capacity for timely repayment. Obligations rated A3 are
supported by a satisfactory capacity for timely repayment. Obligations rated B
are those for which there is an uncertainty as to the capacity to ensure timely
repayment. Obligations rated C are those for which there is a high risk of
default or which are currently in default.
The following summarizes the description of the three highest short-term
ratings of Thomson BankWatch, Inc. ("Thomson"). TBW1 is the highest category and
indicates a very high likelihood that principal and interest will be paid on a
timely basis. TBW2 is the second highest category indicating that while the
degree of safety regarding timely repayment of principal and interest is strong,
the relative degree of safety is not as high as for issues rated "TBW1." TBW3 is
the lowest investment grade category and indicates that while more susceptible
to adverse developments (both internal and external) than obligations with
higher ratings, capacity to service principal and interest in a timely fashion
is considered adequate. TBW4 is the lowest rating category and is regarded as
noninvestment grade and therefore speculative.
The plus (+) sign is used after a rating symbol to designate the
relative position of an issuer within the rating category.
CORPORATE DEBT RATINGS. A S&P corporate debt rating is a current
assessment of the credit-worthiness of an obligor with respect to a specific
obligation. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated A has a strong capacity to
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pay interest and repay principal although it is somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is 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.
The following summarizes the four highest ratings used by Moody's for
corporate debt. Bonds that are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
that are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Bonds that are
rated A by Moody's possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future. Bonds that
are rated Baa by Moody's are considered as 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.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds
rated Aa through Baa. The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
The following summarizes the four highest long-term debt ratings by
Duff. Debt rated AAA has the highest credit quality. The risk factors are
negligible being only slightly more than for risk-free U.S. Treasury debt. Debt
rated AA has a high credit quality and protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
Debt rated A has protection factors that are average but adequate. However, risk
factors are more variable and greater in periods of economic stress. Debt rated
BBB has below average protection factors but is still considered sufficient for
prudent investment. However, there is considerable variability in risk during
economic cycles.
To provide more detailed indications of credit quality, the ratings from
AA to BBB may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
The following summarizes the four highest long-term debt ratings by
Fitch (except for AAA ratings, plus or minus signs are used with a rating symbol
to indicate the relative position of the credit within the rating category).
Bonds rated AAA are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
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repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated "F-1+". Bonds rated as A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings for these bonds will fall
below investment grade is higher than for bonds with higher ratings.
The following summarizes IBCA's four highest long-term debt ratings.
Obligations rated AAA are those for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Obligations
rated AA are those for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly. Obligations rated A are those for which
there is a low expectation of investment risk. Capacity for timely repayment of
principal and interest is strong, although adverse changes in business, economic
or financial conditions may lead to increased investment risk. Obligations rated
BBB are those for which there is currently a low expectation of investment risk.
Capacity for timely repayment of principal and interest is adequate, although
adverse changes in business, economic, or financial conditions are more likely
to lead to increased investment risk than for obligations in other categories.
The following summarizes Thomson's description of its four highest
long-term debt ratings (Thomson may include a plus (+) or minus () designation
to indicate where within the respective category the issue is placed). AAA is
the highest category and indicates that the ability to repay principal and
interest on a timely basis is very high. AA is the second highest category and
indicates a superior ability to repay principal and interest on a timely basis
with limited incremental risk versus issues rated in the highest category. A is
the third highest category and indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB is the lowest investment grade category and indicates an acceptable capacity
to repay principal and interest. Issues rated BBB are, however, more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
MUNICIPAL OBLIGATIONS RATINGS
The following summarizes the three highest ratings used by Moody's for
state and municipal short-term obligations. Obligations bearing MIG1 or VMIG1
designations are of the best quality, enjoying strong protection by established
cash flows, superior liquidity support or demonstrated broadbased access to the
market for refinancing. Obligations rated MIG2 or VMIG2 denote high quality with
ample margins of protection although not so large as in the preceding rating
group. Obligations bearing MIG3 or VMIG3 denote favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
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S&P SP1, SP2, and SP3 municipal note ratings (the three highest ratings
assigned) are described as follows:
"SP1": Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
"SP2": Satisfactory capacity to pay principal and interest.
"SP3": Speculative capacity to pay principal and interest.
The following summarizes the four highest ratings used by Moody's for
state and municipal bonds:
"Aaa": Bonds judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
"Aa": Bonds judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
"A": Bonds which possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered
adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
"Baa": Bonds which are considered as 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. Such
bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
The following summarizes the four highest ratings used by S&P for state
and municipal bonds:
"AAA": Debt which has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
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"AA": Debt which has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in small degree.
"A": Debt which has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
"BBB": Debt which has 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.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
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.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally 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.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. government.
U.S. Government Agency and Instrumentality Obligations
Obligations of the U.S. government include Treasury bills, certificates
of indebtedness, notes and bonds, and issues of agencies and instrumentalities
of the U.S. government, such as the Government National Mortgage Association,
the Tennessee Valley Authority, the Farmers Home Administration, the Federal
Home Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
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of the Government National Mortgage Association, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Student Loan Marketing Association,
are supported by the discretionary authority of the U.S. government to purchase
the agency's obligations; still others, such as those of the Federal Farm Credit
Banks, are supported only by the credit of the instrumentality. No assurance can
be given that the U. S. government would provide financial support to U.S.
government-sponsored instrumentalities if it is not obligated to do so by law.
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