S SHARES
LIQUID ASSETS FUND AND MUNICIPAL ASSETS FUND
2203 Grand Avenue, Des Moines, Iowa 50312-5338
________________________________________________________________________________
FOR CURRENT YIELD, PURCHASE AND REDEMPTION INFORMATION CALL ........800-798-1819
....................................................................515-244-5426
________________________________________________________________________________
PROSPECTUS JANUARY 16, 1998
________________________________________________________________________________
Liquid Assets Fund and Municipal Assets Fund, each of these a "Fund",
(collectively, the "Funds") are money market mutual funds designed to enable
investors to meet short-term goals. Investors choose whichever Fund best suits
their needs and may, without charge, exchange Funds as their investment outlook
or goals change.
Liquid Assets Fund offers four classes of shares and Municipal Assets Fund
offers three classes of shares. This Prospectus describes the "S Shares" of each
Fund. S Shares are offered to customers of banks. S Shares are normally offered
through financial institutions providing automatic "sweep" investment programs
to their own customers. The Funds also offer "T Shares" and "I Shares" which
accrue daily dividends in the same manner as S Shares except that each class
bears separate distribution and/or shareholder servicing fees. "S2 Shares" are
also offered by Liquid Assets Fund. (see "Organization and Shares of the
Funds").
LIQUID ASSETS FUND, ("Liquid Assets") seeks maximum current income consistent
with safety of principal and maintenance of liquidity. MUNICIPAL ASSETS FUND,
("Municipal Assets") seeks maximum current income exempt from federal income
tax, consistent with safety of principal and maintenance of liquidity. S Shares
are offered and redeemed at $1.00 per share under rules which allow the Funds to
use the amortized cost method of valuing the Funds' assets.
AN INVESTMENT IN SHARES OF THE FUNDS IS NOT INSURED OR GUARANTEED BY THE UNITED
STATES GOVERNMENT, BY ANY STATE, OR BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A
BANK, OR GUARANTEED BY A BANK. INVESTMENTS IN THE FUNDS INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE FUNDS SEEK TO MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00, BUT UNDER
EXTRAORDINARY CIRCUMSTANCES THE VALUE OF SHARES MAY VARY FROM $1.00 AND
CONSEQUENTLY, THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth basic information about each Fund that investors
should know before investing and should be retained for future reference.
Statements of Additional Information (as of the date of this Prospectus) which
contain more detailed information about each Fund have been filed with the
Securities and Exchange Commission and are hereby incorporated by reference. The
Statements of Additional Information are available free upon request from the
Funds at the address and telephone number indicated above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS SUMMARY
TYPE OF COMPANY
Each Fund is a diversified series of an open-end, management investment company.
INVESTMENT OBJECTIVE
For Liquid Assets, maximum current income consistent with safety of principal
and maintenance of liquidity.
For Municipal Assets, maximum current income exempt from federal income tax,
consistent with safety of principal and maintenance of liquidity.
INVESTMENT POLICY
Under normal market conditions, Liquid Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term debt obligations
including, primarily, redeemable Certificates backed by federally insured
student loans and Farmers Home Administration guaranteed loans, commercial
paper, bank obligations, short-term corporate obligations and obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations having a
dollar-weighted average maturity of 90 days or less. The Fund seeks to maintain
a net asset value of $1.00 per share.
Under normal market conditions, Municipal Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term municipal
securities which mature or have a demand feature exercisable in one year or less
from the date of acquisition having a dollar-weighted average maturity of 90
days or less. The Fund seeks to maintain a net asset value of $1.00 per share.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Funds is subject to certain risks, as set forth in detail
under "INVESTMENT OBJECTIVES, POLICIES AND Restrictions." As with all mutual
funds, there can be no assurance that the Funds will achieve their investment
objectives.
OFFERING PRICE
The public offering price of each Fund is equal to its net asset value of $1.00
per Share.
SHARES OFFERED
S Shares of common stock ("Shares") of Liquid Assets and Municipal Assets, each
a separate investment portfolio of the IMG Mutual Funds, Inc., a Maryland
Corporation. See "OPENING AN ACCOUNT", "PURCHASING SHARES" and "REDEEMING
SHARES" for detailed information about how to buy and sell shares.
MINIMUM PURCHASE
The minimum initial investment is $250 with $25 minimum subsequent investments
(subject to certain exceptions).
DIVIDENDS
Dividends are declared daily and paid monthly and will be automatically
reinvested unless the shareholder elects otherwise.
2
<PAGE>
INVESTMENT ADVISOR
Investors Management Group (the "Advisor").
ADMINISTRATOR
Investors Management Group (the "Administrator").
DISTRIBUTOR
BISYS Fund Services Inc., Columbus, Ohio (the "Distributor")
3
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
LIQUID MUNICIPAL
ASSETS ASSETS
Maximum Sales Charge Imposed on Purchases None None
Maximum Sales Charge on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fee * None None
Exchange Fee None None
* A $15.00 fee may be charged to an individual shareholder account for
redemption by wire.
LIQUID MUNICIPAL
ASSETS ASSETS
ESTIMATED ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees.................................... 0.35% 0.35%
12b-1 Distribution Fees After Limitation 1......... 0.40% 0.15%
Other Expenses After Limitation 1
Shareholder Servicing Fees.................... 0.25% 0.25%
Administrative Fees........................... 0.06% 0.06%
Other Expenses................................ 0.11% 0.15%
Total Other Expenses.......................... 0.42% 0.46%
Total Fund Operating Expenses After Limitation 1... 1.17% 0.96%
The purpose of the above table is to assist a potential purchaser of a Fund's
Shares in understanding the various costs and expenses that an investor in S
Shares of a Fund will bear directly or indirectly. The table reflects the
current fees and an estimate of other expenses. Rule 12b-1 Distribution Fees are
fees related to distribution and marketing expenses incurred under plans adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940. From time to
time, the Fund's Advisor and/or Distributor may voluntarily waive the Management
Fees, the 12b-1 Distribution Fees and/or Shareholder Servicing Fees and/or
absorb certain expenses for a Fund or class of Shares of a Fund. Long-term
shareholders may pay more than the economic equivalent of the maximum front-end
sales charge permitted by the National Association of Securities Dealers. Wire
transfers may be used to transfer federal funds directly to/from the Funds'
custodian bank.
1 Under the Funds' 12b-1 Plan, the Funds are permitted to pay fees up to 0.50%
and 0.25% of average annual net assets, but have voluntarily agreed to limit
such fees to 0.40% and 0.15% until further notice. The Funds are subject to a
Management and Administration Agreement with IMG pursuant to which the Funds are
authorized to pay a periodic fee calculated at an annual rate of 0.21% of the
average daily net assets of such Funds. Currently, however, the fee has been
voluntarily limited to an annual rate of 0.06%. Absent the limitation of these
fees, "Total Operating Expenses" as a percentage of average daily net assets
would have been 1.42% for Liquid Assets and 1.21% for Municipal Assets.
EXAMPLE
You would pay the following expenses on a $1,000 investment in each Fund
assuming, (1) a (hypothetical) five percent annual return and (2) redemption at
the end of each time period.
1 Year 3 Years 5 Years 10 Years
Liquid Assets $12 $37 $64 $142
Municipal Assets $10 $31 $53 $118
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN.
4
<PAGE>
ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN. The
above Example is based on the expense information included in the previous
Expense Summary. The Expense Summary and Examples do not reflect any charges
that may be imposed by financial institutions on their customers. Please refer
to "MANAGEMENT AND FEES" for a more complete discussion of the Shareholder
transaction expenses and annual operating expenses for the Fund.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
LIQUID ASSETS
The investment objective of Liquid Assets is maximum current income consistent
with safety of principal and maintenance of liquidity. The Fund invests in the
following money market instruments maturing in 397 days or less from time of
investment, (with certain exceptions):
(1) Obligations issued or guaranteed by the U.S. government or any agency or
instrumentality thereof. Such securities will include those supported by
the full faith and credit of the United States Treasury or the right of
the agency or instrumentality to borrow from the Treasury, as well as
those supported only by the credit of the issuing agency or
instrumentality.
(2) Repurchase agreements involving securities in the immediately foregoing
categories. A repurchase agreement involves the sale of such securities
to the Fund with the concurrent agreement of the seller to repurchase
them at a specified time and price to yield an agreed upon rate of
interest. Repurchase agreements may involve certain risks which are
described in greater detail in the Statement of Additional Information.
(3) Redeemable interest-bearing trust certificates ("Student Loan
Certificates") issued by the Iowa Student Loan Trust and/or other Student
Loan Trusts established by the Fund, ("Student Loan Trusts"), created for
the sole purpose of purchasing from banks (which qualify as "eligible
lenders") federally insured student loans originated by banks. The
Student Loan Certificates will have original maturities of no more than
397 days but will be redeemable by the Fund at their face amount upon not
more than five days' written notice to the issuing Student Loan Trust.
Further details concerning the Student Loan Trusts and the Fund's
investments in Student Loan Certificates are found in the Statement of
Additional Information.
(4) Redeemable interest-bearing ownership certificates ("FmHA Certificates")
issued by one or more guaranteed loan trusts ("FmHA Trusts"), each
created for the purpose of acquiring participation interests in the
guaranteed portion of Farmer's Home Administration ("FmHA") guaranteed
loans. The FmHA Certificates will have original maturities of no more
than 397 days but will be redeemable by the Fund at their face amount
upon not more than five days' written notice to the issuing FmHA Trust.
Further details concerning the FmHA Trusts and the Fund's investment in
FmHA Certificates and FmHA guaranteed loans are found in the Statement of
Additional Information.
(5) Commercial paper which at the time of investment (a) is rated (or the
issuer of which has been rated) highest quality by two nationally
recognized statistical rating organizations ("NRSRO") if rated by two or
more NRSROs; (b) is rated (or the issuer of which has been rated) highest
quality if rated by only one NRSRO; or (c) is determined to be of
equivalent quality by the Fund's Board of Directors if unrated.
(6) U.S. dollar-denominated bank obligations (certificates of deposit and
bankers' acceptances) issued by domestic offices of U.S. banks which, at
the date of investment, have capital, surplus, and undivided profits (as
of the date of their most recently published financial statements) in
excess of $10,000,000; and obligations of other banks or savings and
loans if such obligations are insured by the Federal Deposit Insurance
Corporation, provided that not more than 10 percent of the total assets
of the Fund will be invested in such insured obligations.
(7) Short-term (maturing in one year or less) corporate obligations which at
5
<PAGE>
the time of investment (a) are rated in the highest rating category by
two NRSROs, if rated by two or more NRSROs; (b) are rated in the highest
rating category if rated by only one NRSRO; or (c) are determined to be
of equivalent quality by the Fund's Board of Directors if unrated.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not have invested more than five percent of its total
assets in securities issued by a single issuer. For additional requirements of
Rule 2a-7, see "Opening an Account -- Share Price". Assets of the Fund will
consist of securities with maturities of 397 days or less at date of purchase
or, if maturing beyond 397 days, will be backed by Liquidity and Servicing
Agreements or Guaranteed Funding Agreements and will have variable interest
rates adjustable at least semiannually. In determining whether particular
variable rate investments backed by Liquidity and Servicing Agreements or
Guaranteed Funding Agreements may be made, the period remaining until maturity
will be deemed to be the longer of the demand notice period required before the
Fund is entitled to receive payment of the principal amount or the period
remaining until the next interest adjustment. The dollar-weighted average
maturity of Fund investments will be 90 days or less, determined in the same
manner. While the underlying security in a repurchase agreement may have a
maturity of more than 397 days, the repurchase agreement itself will terminate
in less than 397 days, and typically within a few days. The Fund intends to
invest at least 25 percent of its total assets in Student Loan Certificates,
and/or FmHA Certificates, except when such investments are either not available
in sufficient quantity or do not carry yields competitive with alternative
investments.
It is the policy of the Fund that any illiquid securities (including repurchase
agreements of more than seven days duration) may not constitute, at the time of
purchase or at any time, more than ten percent of the value of the total net
assets of the Fund.
As a fundamental policy, the Fund will not concentrate its investments in any
one industry and pursuant to Section 18(f) of the 1940 Act, the Fund may not
issue senior securities. As a general policy, it is the Fund's intention to hold
investments until they mature. However, in an effort to increase portfolio
yields the Fund may periodically trade securities to take advantage of perceived
disparities between markets for various short-term money market instruments. It
is also possible that redemptions of Fund shares could necessitate the sale of
portfolio investments prior to maturity and at times when such sale would be
undesirable because of unfavorable market conditions.
While investments by the Fund will be confined to high quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible Participating Banks or borrowers will default on the provisions of
their agreements with the Fund or that banks will default on repurchase
agreements with the Student Loan Trusts or the FmHA Trusts, which could cause
the net asset value per share to decrease.
In light of these various contingencies, there can be no assurances the Fund
will achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described above; (2) invest more than 80 percent of its total assets
in Student Loan Certificates and/or FmHA Certificates; (3) purchase or sell real
estate (other than short-term loans secured by real estate or interests therein
or loans to companies which invest in or engage in other activities related to
real estate), commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (4) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
repayment and guarantee arrangements on loan participations purchased from
Participating Banks), calls, straddles, spreads or combinations thereof; (5)
make loans to other persons, provided the Fund may invest up to 80 percent of
its total assets in Student Loan Certificates or FmHA Certificates, as described
in (2) above, and may make the investments and enter into repurchase agreements
6
<PAGE>
as described above; (6) invest in securities with legal or contractual
restrictions on resale (except for repurchase agreements, Student Loan
Certificates, and FmHA Certificates) or for which no ready market exists; (7)
enter into repurchase agreements if, as a result thereof, more than five percent
of the Fund's total assets (taken at market value at the time of such
investment) would be subject to repurchase agreements maturing in more than
seven days.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (a) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (b)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
MUNICIPAL ASSETS
The investment objective of Municipal Assets is maximum current income exempt
from federal income tax, consistent with safety of
principal and maintenance of liquidity. The Fund invests in the following types
of money market instruments maturing in 397 days or less from time of investment
(with certain exceptions), as defined herein:
(1) Tax-exempt debt obligations issued by state and municipal governmental
units and public authorities within the United States and participation
interests therein. With few exceptions such obligations will be nonrated
and of limited marketability. However, they will be backed by demand
repurchase commitments of the issuers thereof and irrevocable bank
letters of credit or guarantees (collectively referred to herein as
"Liquidity Agreements"). The Liquidity Agreements will permit the holder
of the securities to demand payment of the unpaid principal balance plus
accrued interest upon a specified number of days' notice either from the
issuer or by drawing on an irrevocable bank letter of credit or
guarantee. In addition, all obligations with maturities longer than 397
days from date of purchase will, by their terms, bear rates of interest
that are adjusted upward or downward no less frequently than semiannually
by means of a formula intended to reflect market changes in interest
rates. Certain types of industrial development bonds issued by public
bodies to finance the construction of industrial and commercial
facilities and equipment are also purchased. The Statement of Additional
Information contains further details concerning the Fund's policies and
procedures with respect to investments in such tax-exempt obligations and
participation interests.
(2) High quality tax-exempt debt obligations issued by state and municipal
governments and by public authorities, including issues sold as interim
financing in anticipation of tax collections, revenue receipts or bond
sales, and tax-exempt Project Notes secured by the full faith and credit
of the United States. Such obligations will be purchased only if backed
by the full faith and credit of the United States or rated Aaa, Aa,
MIG-1, MIG-2 or Prime-1 by Moody's Investors Service, Inc., or AAA, AA,
or A-1 by Standard & Poor's Corporation. Nonrated securities may also be
purchased if determined by the Fund's board of directors to be of
comparable quality to the rated securities in which the Fund may invest.
(3) Taxable obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government may be acquired from time to time on a temporary
basis for defensive purposes.
(4) Repurchase agreements involving securities in the immediate foregoing
category. A repurchase agreement involves the sale of such securities to
the Fund with the concurrent agreement of the seller to repurchase them
at a specified time and price, to yield an agreed upon rate of interest.
Repurchase agreements may involve certain risks which are described in
greater detail in the Statement of Additional Information.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
7
<PAGE>
2a-7, the Fund shall not invest more than five percent of its total assets in
securities issued by a single issuer. For additional requirements of Rule 2a-7,
see "Opening an Account -- Share Price". Assets of the Fund will consist of
securities with maturities of 397 days or less at date of purchase or, if
maturing beyond 397 days, securities which are backed by Liquidity Agreements
and which have variable interest rates adjustable at least semi-annually and
upon the adjustment of the interest rate the value of the securities will be
approximately equal to par. In determining whether particular variable rate
investments backed by Liquidity Agreements may be made, the period remaining
until maturity will be deemed to be the longer of the demand notice period
required before the Fund is entitled to receive payment of the principal amount
or the period remaining until the next interest adjustment. The dollar-weighted
average maturity of Fund investments will be 90 days or less, determined in the
same manner.
Under normal market conditions, the Fund as a matter of fundamental policy, will
invest at least 80 percent of its total net assets in tax-exempt securities, the
interest on which is exempt from federal income tax, except to the extent that
some or all of which may be subject to the alternative minimum tax. This
fundamental policy may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
It is the policy of the Fund that any illiquid securities may not constitute, at
the time of purchase or at anytime, more than ten percent of the value of the
total net assets of the Fund. The Fund will not concentrate its investments in
any one industry and pursuant to Section 18(f) of the 1940 Act may not issue
senior securities.
As a general policy, it is the Fund's intention to hold investments until they
mature or until immediately prior to the expiration of an applicable Liquidity
Agreement. However, in an effort to increase portfolio yields, the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of portfolio
investments prior to maturity and at times when such sale would be undesirable
because of unfavorable market conditions.
New issues of tax-exempt debt obligations are usually offered on a when-issued
basis with the securities to be delivered and paid for approximately 45 days
following the initial purchase commitment. The Fund may occasionally enter into
such commitments, subject to certain limitations and procedures discussed in the
Statement of Additional Information.
While investments by the Fund will be confined to high-quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances, described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible an issuer or bank will default on the provisions of their Liquidity
Agreements, which could cause the net asset value per share to decrease. In
light of these various contingencies, there can be no assurances the Fund will
achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described under "Investment Policy"; (2) invest more than 80 percent
of its total assets in tax-exempt fixed and variable rate debt obligations (or
participation interests therein) issued by state and local governmental units
within the United States which are backed by Liquidity Agreements; (3) invest
more than five percent of its total assets (determined as of the date of
purchase) in tax-exempt obligations or participation interests therein subject
to Liquidity Agreements issued by any one bank; (4) purchase or sell real
estate, commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (5) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
Liquidity Agreements covering certain tax-exempt obligations purchased by the
Fund), calls, straddles, spreads or combinations thereof; (6) make loans to
other persons, provided the Fund may make investments and enter into repurchase
agreements as described above; (7) invest in securities with legal or
contractual restrictions on resale (except for tax-exempt debt obligations
subject to Liquidity Agreements) or for which no ready market exists; (8) enter
into a Liquidity Agreement with any bank unless such bank is a United States
bank which has a record, together with predecessors, of at least five years of
8
<PAGE>
continuous operations; (9) enter into repurchase agreements if, as a result
thereof, more than five percent of the Fund's total assets (taken at market
value at the time of such investment) would be subject to repurchase agreements
maturing in more than seven days; and (10) enter into Liquidity Agreements with
any bank if five percent or more of the securities of such bank are owned by the
Advisor or by directors and officers of the Fund or the Advisor, or if any
director or officer of the Fund or the Advisor owns more than 1/2 percent of the
voting securities of such bank.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (1) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (2)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
PERFORMANCE
Performance of each Fund may be quoted in advertising in terms of current yield
and effective yield. CURRENT YIELD refers to the income generated by an
investment in either Fund over a seven-day period. This income is then
"annualized". That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The Fund may also present a 30-day
yield which is calculated similarly but instead refers to a 30-day period rather
than a seven-day period. EFFECTIVE YIELD is calculated similarly but, when
annualized, that income earned from the investment is assumed to be reinvested
weekly. Effective yield will be slightly higher than current yield because of
the compounding effect of this assumed reinvestment.
Performance of the Funds may also be compared to other mutual funds with similar
investment objectives, relevant indices or rankings prepared by independent
services or other financial publications, or yields on deposits at financial
institutions. Unlike the Funds, deposit accounts at financial institutions are
generally insured by the Federal Deposit Insurance Corporation and do not
fluctuate to the extent of the Funds.
Additionally, Municipal Assets may quote a taxable-equivalent yield based on a
stated income tax rate. Please see each Fund's Statement of Additional
Information for further discussion of the manner in which yields are calculated
and the comparative performance data which may be used.
Of course, the Funds' yields are not fixed nor is principal guaranteed. Yields
are functions of the type and quality of instruments held in the portfolio,
operating expenses, and market conditions. Consequently, current yields will
fluctuate and are not necessarily representative of the future results.
DISTRIBUTIONS AND TAXES
Dividends from the net income of each Fund are declared daily on each business
day and paid monthly to holders of record immediately before 3:00 p.m. Central
Time. Dividends are automatically reinvested in S Shares unless cash payment has
been selected on the Account Application. If a shareholder has elected to
receive dividends and/or distributions in cash and the checks are returned and
marked as "undeliverable" or remain uncashed for six months, your cash election
will be changed automatically and future dividends will be reinvested in S
Shares of the Fund. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in S Shares of
the Fund at the per share net asset value determined as of the date of
cancellation. If a shareholder redeems the entire amount in his account during
the month, dividends credited to the account from the beginning of the month
through the date of redemption are paid with the redemption proceeds.
Dividends on each class of shares are determined in the same manner and are paid
in the same amounts irrespective of class, except that each class bears separate
distribution and/or shareholder servicing fees (see "Organization and Shares of
the Funds").
Dividends declared in October, November, or December of any year, payable to
9
<PAGE>
shareholders of record on a specified date in such months, will be deemed to
have been received by the shareholders and paid by the Funds on December 31 of
such year, in the event that such dividends are actually paid during January of
the following year.
Each Fund intends to qualify as a regulated investment company by distributing
substantially all of its taxable net income, including any realized capital
gains, and thus will not incur any Federal income taxes. Shareholders will
receive taxable dividend income, tax-exempt dividend income and/or capital
gains, as the case may be, from distributions whether paid in cash or received
in the form of additional shares.
Dividends derived from interest on federally tax-exempt debt obligations owned
by Municipal Assets are intended to constitute "exempt-interest dividends" which
are generally not Federally taxable to shareholders, although some could be
includable for purposes of the alternative minimum tax. Dividends derived from
other interest and the realization of capital gains are taxable to shareholders
whether or not reinvested.
Municipal Assets expenses will be allocated between tax-exempt and taxable
income in the same proportion as the Fund's tax-exempt income bears to the total
of such exempt income and its gross income (excluding from gross income the
excess of capital gains over capital losses).
Promptly after the end of each calendar year, each shareholder will receive a
statement of the Federal income tax status of all dividends and distributions
paid during the year. This discussion is only a summary and relates solely to
Federal tax matters. Further discussion of the Federal Income Tax consequences
of an investment in the Fund is provided in the Statement of Additional
Information. Dividends may also be subject to local taxation. Shareholders are
encouraged to consult with their personal tax advisors.
ORGANIZATION AND SHARES OF THE FUNDS
IMG Mutual Funds, Inc. is a Maryland corporation organized on November 16, 1994.
The Funds were created on October 30, 1997, to acquire the assets and continue
the business of the corresponding substantially identical investment portfolios
of the Liquid Assets Funds, Inc., and the Municipal Assets Funds, Inc., two
separately registered open-end, diversified management investment companies
organized as Iowa corporations. References herein to the "immediate predecessor"
of the Funds refer to the respective companies which correspond to such Fund.
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.
The Articles of Incorporation of the Company permit the Company, by resolution
of its Board of Directors, to create new series of common stock 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.
S Shares of the Funds are described in this Prospectus. T Shares, I Shares and
S2 Shares are offered in separate Prospectuses which may be obtained by calling
the Fund at 1-800-798-1819 or writing to the address on the cover of this
Prospectus. Please read the Prospectus carefully before investing or sending
money. All shares are offered to individual and institutional investors acting
on their own behalf or on behalf of their customers and bear their pro rata
portion of all operating expenses paid by the Funds, except that S Shares, T
Shares and S2 Shares bear separate distribution and/or shareholder servicing
fees. I Shares bear no distribution or shareholder servicing fees.
Each class of shares offers different privileges. S Shares and S2 Shares are
normally offered through financial institutions providing automatic "sweep"
investment programs to their customers, and offer a check writing privilege. T
Shares are normally offered through trust organizations or others providing
10
<PAGE>
shareholder services such as establishing and maintaining accounts and records
for their customers who invest in T Shares, assisting customers in processing
purchase, exchange and redemption requests, and responding to customers'
inquiries concerning their investments. I Shares are available directly from the
Distributor only and offer only the Exchange and Telephone Transfer services.
Each class of shares is exchangeable only for shares of the same class.
Financial institutions selling or servicing S Shares, T Shares and S2 Shares may
receive different compensation with respect to one class over another.
Shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held. Shares of each Fund will vote
together and not by class unless otherwise required by law or permitted by each
Fund's Board of Directors. All shareholders of each Fund will vote together as a
single class on matters relating to the Fund's investment advisory agreement,
investment objective and fundamental policies. Only holders of S Shares and S2
Shares will vote on matters relating to the Distribution Plan for S Shares and
S2 Shares. Only holders of S Shares, S2 Shares and T Shares will vote on matters
pertaining to the Administrative Services Plan.
Shares of the Funds have non-cumulative voting rights and, accordingly, the
holders of more than 50 percent of each Fund's outstanding shares (irrespective
of class) may elect all of the Directors. Shares have no preemptive rights and
only such conversion and exchange rights as each Fund's Board may grant in its
discretion. When issued for payments as described in this Prospectus, shares
will be fully paid and nonassessable. All shares are held in uncertificated form
and will be evidenced by the appropriate notation on the books of the transfer
agent.
SHAREHOLDER REPORTS AND MEETINGS
Each shareholder will receive monthly Fund information, an unaudited semiannual
report, and an annual report containing audited financial statements. If you
have questions about your account, call 1-800-798-1819. You may also write the
Fund at the address on the cover of this Prospectus. You may order statements
for the current and preceding year at no charge. However, there will be a $10.00
fee per statement for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Funds
have adopted the appropriate provisions in their Bylaws and may, in their
discretion, not hold annual meetings of shareholders for the election of
Directors unless otherwise required by the 1940 Act. The Funds have also adopted
provisions in their Bylaws for the removal of Directors by the shareholders.
Shareholders may receive assistance in communicating with other shareholders as
provided in Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Shareholders of the Funds may remove a Director by the affirmative vote of a
majority of the Funds' outstanding voting shares. In addition, the Directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Director or for any other purpose when requested
in writing to do so by the shareholders or record of not less than 10 percent of
the Funds' outstanding voting securities.
All consideration received by the Funds for shares of one of the Funds and all
assets in which such consideration is invested, belong to that Fund (subject
only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one Fund
are treated separately from those of the other Funds.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Funds, will 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 such matter. Rule 18f-2 further provides that a Fund shall 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 the interest of such
11
<PAGE>
Fund. However, the Rule exempts the selection of independent auditors and the
election of Directors from the separate voting requirements of the Rule.
MANAGEMENT AND FEES
Overall responsibility for management of the Company rests with the Board of
Directors, who are elected by the Shareholders of the Company's Funds. The
Company will be managed by the Directors in accordance with laws of Maryland
governing corporations. The Directors, in turn, elect the officers of the
Company to supervise the day-to-day operations. The Directors receive fees and
are reimbursed for their expenses in connection with each meeting of the Board
of Directors they attend. The officers of the Company receive no compensation
directly from the Company for performing the duties of their offices.
Investors Management Group, ("IMG") manages the investments and business affairs
of the Funds. IMG is a federally registered Investment Advisor organized in 1982
and located at 2203 Grand Avenue, Des Moines, Iowa 50312-5338. IMG has been
providing continuous investment management to pension and profit-sharing plans,
insurance companies, public agencies, banks, endowments and charitable
institutions, other mutual funds, individuals and others for over 15 years. As
of November 30, 1997, IMG had approximately $1.6 billion in equity, fixed income
and money market assets under management.
The Funds are managed by Jeffrey D. Lorenzen, CFA, Managing Director, Kathryn D.
Beyer, CFA, Managing Director, and Elizabeth S. Pierson, CFA, Senior Fixed
Income Manager. Mr. Lorenzen is a fixed income strategist and is a member of
IMG's Investment Policy Committee. Prior to joining IMG in 1992, his experience
includes serving as a securities analyst and corporate fixed income analyst for
The Statesman Group from 1989 to 1992. Mr. Lorenzen received his Masters of
Business Administration degree from Drake University, Des Moines, Iowa, and his
Bachelor of Business Administration degree from the University of Iowa, Iowa
City, Iowa. Ms. Beyer is a fixed income strategist and is a member of IMG's
Investment Policy Committee. Prior to joining IMG in 1993, her experience
includes serving as a securities analyst and director of mortgage-backed
securities for Central Life Assurance Company from 1988 to 1993. Ms. Beyer
received her Master of Business Administration degree from Drake University, Des
Moines, Iowa, and her Bachelor of Science degree in agricultural engineering
from Iowa State University, Ames, Iowa. Ms. Pierson is a fixed income strategist
and is a member of IMG's Investment Policy Committee. She began her investment
career in 1984 with AMCORE Capital Management, Inc., which was merged with IMG
in December 1997. Ms. Pierson received her Bachelor of Science degree from the
University of Illinois, Champaign-Urbana.
Under an Investment Advisory Agreement between the Funds and IMG, a fee is paid
to IMG for investment advisory services. Each Fund is responsible for paying
operating expenses not assumed by IMG. The investment management fee for each
Fund is calculated daily and paid monthly. The maximum management fee for each
Fund is 0.35 percent of each Fund's average daily net assets.
From time to time, IMG may voluntarily waive all or a portion of the management
fee and/or absorb certain expenses of a Fund or class of shares without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for a
Fund or class of shares and increasing the overall yield to investors in that
Fund or class of shares at the time any such amounts are waived and/or absorbed.
IMG may not seek reimbursement of such waived fees at a later date. The waiver
of such fee will cause the yield of a Fund to be higher than it would otherwise
be in the absence of such a waiver.
IMG also provides management and administration, fund accounting, transfer
agency, and shareholder recordkeeping services to the Funds. Under a Management
and Administration Agreement, IMG will supervise all aspects of the operations
of the Funds, except those performed under the Investment Advisory Agreement, by
the Custodian, under the Transfer Agency Agreement and under the Fund Accounting
Agreement. For these services the Funds each pay IMG a fee calculated daily and
paid monthly at an annual rate of up to 0.25% of the average daily net assets of
each Fund. Presently, the fee is calculated at 0.06% annually. Under a Fund
Accounting Agreement, IMG provides bookkeeping and accounting services to the
Funds, including calculating daily net asset value and yield quotations. For
these services, the Funds each pay IMG a fee calculated daily and paid monthly
at an annual rate of 0.03% of the average daily net assets of each Fund. Under a
12
<PAGE>
Transfer Agency Agreement, IMG provides customary and usual services of a
transfer agent to the Funds. For these services, IMG is paid various fees
depending on the class of shares of the Funds. The fees are charged to each
class of shares separately and are not computed on a periodic percentage of net
assets, but at a flat annual fee depending on the number of accounts. The fees
received and the services provided under these contracts are in addition to
those received and paid to IMG under the Advisory Agreement.
At its expense, IMG provides office space and all necessary office facilities,
equipment, and personnel for servicing the investments of the Funds. Except for
the expenses expressly assumed by IMG pursuant to its investment advisory
agreement, each Fund is responsible for all its other expenses, including,
without limitation, governmental fees, interest charges, taxes if applicable,
membership dues in the Investment Company Institute allocable to the Fund,
broker commissions, and other expenses connected with the execution, recording
and settlement of Fund security transactions, expenses of repurchasing and
redeeming shares and expenses of servicing shareholder accounts; expenses for
preparing, printing and distributing periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions;
insurance premiums, fees and expenses of the Fund's custodian, including
safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Funds;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Funds; compensation and
expenses of Directors who are not "interested persons" of the Advisor; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses to existing shareholders are borne by the
Funds except that the Funds' Distribution Agreement requires that the
Distributor pay for prospectuses that are to be used for sales purposes with
persons other than current shareholders.
From time to time, IMG may voluntarily waive all or a portion of the investment
management fee and/or other fees and/or absorb certain expenses of a Fund
without further notification of the commencement or termination of such waiver
or absorption. Any such waiver will have the effect of lowering the overall
expense ratio for that Fund and increasing the Fund's overall yield to investors
at the time any such amounts are waived and/or absorbed.
Except as voluntarily absorbed by IMG, all expenses incurred in the operation of
the Funds will be borne by the Funds. Expenses attributable to a particular Fund
are charged against the assets of that Fund; other expenses of the Funds are
allocated among the Funds on a reasonable basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Fund.
Each Fund pays certain distribution fees related to marketing, selling and
distribution of Shares including, but not limited to, preparation and
distribution of promotional materials, compensation to sales personnel employed
by the Distributor and for payment to institutions, including financial
institutions ("Participating Organizations") who render assistance in
distributing or promoting the sale of each Fund's S Shares under plans ("12b-1
Plans") adopted pursuant to Rule 12b-1 under the Act. The maximum fees payable
under the 12b-1 Plans are an annual rate of 0.50 percent for Liquid Assets and
0.25 percent for Municipal Assets, computed monthly on the basis of the average
net asset value of the S Shares issued by each Fund. Presently the fees payable
under the 12b-1 Plans have been limited to 0.40% and 0.15%, respectively, until
further notice. The Directors of each Fund review quarterly a written report of
the costs incurred associated with the 12b-1 Plans. The Directors believe that
the 12b-1 Plans are in compliance with Rule 12b-1 and are in the best interests
of the Funds.
Each Fund pays certain shareholder servicing fees to financial institutions
("Participating Organizations"), who render assistance in servicing their
customers who are direct or beneficial owners of each Fund's Shares under the
Administrative Services Plan and Servicing Agreements (the "Servicing
Agreements") adopted by the Funds' Board of Directors. The maximum fees payable
under the Servicing Agreements are an annual rate of 0.25%, computed monthly on
the basis of the average daily net asset value of each Fund. The Directors of
each Fund review quarterly a written report of the costs incurred association
with the Administrative Services Plan. The Directors believe that the
Administrative Services Plan is in the best interest of the Funds.
13
<PAGE>
The Glass-Steagall Act and other applicable laws prohibit banks from engaging in
the business of underwriting, selling, or distributing securities. Insofar as
Participating Organizations (including banks) are compensated under the Plans,
their only function will be to perform administrative and shareholder services
for their clients who wish to invest in the Funds. If a Participating
Organization at a future date is prohibited from acting in this capacity, the
shareholder may lose the services provided by the Participating Organization;
however, it is not expected that the shareholders would incur any adverse
financial consequences. It is intended that none of the services provided by
such Participating Organizations other than through registered brokers will
involve the solicitation or sale of shares of the Funds.
AMCORE Investment Group, N.A., Rockford, Illinois, acts as custodian for the
Funds' cash and investments.
OPENING AN ACCOUNT
The Funds require a completed and signed application (which is attached) at the
time you open each new account. Additional paperwork may be required from
corporations, associations and certain fiduciaries. IF YOU HAVE QUESTIONS CALL
THE FUNDS AT 1-800-798-1819 FROM 8:00 A.M. TO 4:30 P.M. CENTRAL TIME.
SHARE PRICE
The shares of each Fund are sold without a sales charge. The price of one share
is its "net asset value" or NAV (generally $1.00). NAV is computed by adding the
value of each Fund's investments, plus cash and other assets, deducting
liabilities and then dividing the result by the number of shares outstanding.
The NAV of each Funds' shares is determined twice each business day, at 11:00
a.m. Central Time and at the close of the New York Stock Exchange (normally 3:00
p.m. Central Time). The Funds are open for business each day the Federal Reserve
is open.
Your purchase will be processed at the next NAV calculated after your investment
has been converted to federal funds. If you invest by check, the Funds must
generally allow one or more days for conversion into federal funds before
accepting your purchase.
Rule 2a-7 under the Investment Company Act of 1940 permits the Funds to compute
net asset value per share using the amortized cost method of valuing portfolio
securities. As a condition for using the amortized cost method of valuation, the
Board of Directors established procedures to stabilize each Fund's net asset
value at $1.00 per Share. These procedures are described in more detail in each
Fund's Statement of Additional Information.
Under the amortized cost method of valuation, a security is initially valued at
cost on the date of purchase and, thereafter, any discount or premium is
amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security. U.S. government
obligations, Student Loan Certificates and FmHA Certificates, which are subject
to mandatory repurchase at their original purchase price, investments in taxable
and tax-exempt debt obligations rated by a recognized bond rating agency and
regularly traded in the secondary market, and nonrated fixed and variable rate
tax-exempt obligations and participation interests therein, not regularly traded
in the secondary market but subject to Liquidity Agreements will be valued at
amortized cost. Other assets are valued at a fair value determined in good faith
by the board of directors of each Fund.
PURCHASING SHARES
Shares of each Fund may be purchased directly from BISYS Fund Services, Inc., as
the distributor. Shares may also be purchased by customers of qualified banks,
savings and loan associations, broker/dealers, investment advisory firms, and
other organizations ("Participating Organizations") that have entered into
servicing agreements with the Distributor. The Participating Organization is
responsible for transmitting purchase orders directly to the Fund's Distributor.
A Participating Organization may elect to hold record ownership of shares for
14
<PAGE>
its customers and to show beneficial ownership of shares on the account
statements it provides to them. In the alternative, a Participating Organization
may elect to establish its customers' accounts of record with IMG as transfer
agent for the Funds. Generally, shares purchased through Participating
Organizations will be held by the Participating Organization as shareholder of
record.
Shares of each Fund are offered without any purchase or redemption charge
imposed by the Fund. The minimum initial investment that may be made in each
Fund is $250. Subsequent investments in each Fund must be made in amounts of not
less than $25, except where purchases are made through financial institutions
providing an automatic "sweep" investment program, in which case there is no
minimum. Participating organizations may aggregate their customers' purchases to
satisfy the required minimums.
Purchases may be effected on business days when the Advisor, Distributor and
Custodian are open for business. The Funds reserve the right to reject any
purchase order, including purchases made with foreign and third party drafts or
checks.
A purchase order for S Shares received in good order by the Funds by 11:00 a.m.
Central Time on a business day is effected at the net asset value per share
calculated as of 11:00 a.m. Central Time, and investors will receive the
dividend declared that day, IF THE CUSTODIAN HAS RECEIVED THE PURCHASE PRICE IN
FEDERAL FUNDS OR OTHER IMMEDIATELY AVAILABLE FUNDS BY 3:00 P.M. CENTRAL TIME
THAT DAY. A purchase order for S Shares received after 11:00 a.m. Central Time
and prior to 3:00 p.m. Central Time on a business day for which such funds have
been received by 3:00 p.m. Central Time will be effected as of 3:00 p.m. Central
Time, and will begin to accrue dividends on the following business day. If
federal funds are not available by 3:00 p.m. Central Time, the order will be
canceled. Payment for orders which are not accepted or are canceled will be
returned after prompt inquiry to the transmitting organization.
While the Funds themselves do not presently levy sales, redemption or account
service charges, Participating Organizations may elect to do so and the Funds
may elect to do so in the future. Investors should inquire regarding the nature
and costs of services provided by Participating Organizations and determine if
such services are desired, because the costs thereof will reduce the Funds'
yields to the investor below that obtainable by investing in the Funds directly.
Customers wishing to purchase shares through their Participating Organization
should contact such entity directly for appropriate instructions. (For a list of
the Participating Organizations in your area, CALL THE FUNDS AT 1-800-798-1819
OR 515-244-5426.) Direct investors may purchase shares in accordance with the
procedures described below, "Purchase Procedures".
Certificates representing Fund shares purchased will not be issued. However, all
purchases are confirmed in writing to the investor and credited to their account
in the shareholder records maintained by the Transfer Agent. Investors will have
the same rights to their shares as if certificates had been issued.
PURCHASE PROCEDURES
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
BY MAIL $250 (minimum) $25 (minimum)
Please make your check Please make your check
payable to the Fund selected payable to the Fund
and mail to the address selected, with your
indicated on the application. account number on the
check and mail to the
address printed on your
account statement.
BY WIRE Please call for an account See instructions below.
number before initial invest-
ment at 1-800-798-1819 or
515-244-5426.
15
<PAGE>
Federal Funds should be wired to: Federal Reserve Bank of Chicago for AMCORE
Investment Group, N.A., Rockford, Illinois, together with the name of the
Fund, your account number and names.
Please note that when accounts are opened by wire you must send a completed
application at your earliest convenience. Your application must be received
by the Fund before any instructions for redemption will be accepted.
BY ELECTRONIC Not available for initial Shareholders who have
FUNDS TRANSFER purchase. an account with an
(ACH) institution which is a
member of the Automated
Clearing House, may
elect to purchase Fund
shares via electronic
funds transfer. Select
this service on your
application or call
the Fund.
SHAREHOLDER SERVICES
Some shareholder services may not be available if shares are purchased through
Participating Organizations. Call the Funds at 1-800-798-1819 for more
information.
EXCHANGE PRIVILEGE. You may exchange S Shares of either Fund for S Shares in the
other Fund described in this Prospectus. An exchange involves a redemption of
the shares of the Fund being liquidated and a purchase of the shares of the Fund
in which the redemption proceeds are to be invested. The exchange privilege is
offered as a convenience to shareholders and is not intended to be a means of
speculating on short-term movements in securities prices by transactions
involving frequent purchases and sales of shares. Each Fund reserves the right
at any time and without prior notice, to suspend, limit, modify or terminate
exchange privileges or their use by individual shareholders in order to prevent
transactions considered to be disadvantageous to existing shareholders.
TELEPHONE TRANSFERS. This service allows you to authorize transfers of money to
purchase or sell shares. Using Telephone Transfer you can move money between
your bank account and your account in the Funds with one phone call. Moneys may
be transferred either by wire or electronic funds transfer with an institution
which is a member of the Automated Clearing House ("ACH").
Wire transfers may be used to transfer federal funds directly to/from the Funds'
custodian bank. A $15.00 fee may be charged to your account for redemptions by
wire.
Allow two (2) days after the call for electronic funds transfer via ACH to move
moneys between your bank account and your account with either Fund.
For moneys recently invested, allow normal clearing time before redemption
proceeds are sent to your bank. In order to change the financial institution
account designated to receive redemption proceeds, it will be necessary to send
a written request to the Fund with a signature guarantee from a national or
state bank, a trust company or a federal savings and loan association, or a
member firm of the New York, American, Boston, Midwest or Pacific Stock
Exchange.
You can also arrange systematic periodic investments (minimum $50) into your
Fund account. Simply select the regular investment schedule you would like when
completing your account application. Your bank account will automatically be
debited to purchase shares of the Fund you select. You will receive confirmation
of each transaction.
Your bank must be a member of ACH and you must have a checking or NOW/Money
Market Deposit account to use electronic funds transfer or systematic investing.
Please allow 20 days after receipt of your application to activate the Telephone
Transfer capability.
STATEMENTS AND REPORTS. You will receive a statement of your account listing
16
<PAGE>
every transaction that affects your share balance no less than once per month.
At least twice a year you will receive the financial statements of the Fund in
which you have invested with a summary of that Fund's portfolio composition and
performance. Each Fund's Annual Report is reported on by the Funds' independent
auditors, KPMG Peat Marwick LLP.
REDEEMING SHARES
Shareholders may request redemption of their shares at any time. Shares will be
redeemed at their net asset value as next determined after a redemption request
in good order is received by the Fund's Distributor. Redemption orders received
in good order by the Distributor before 11:00 a.m. Central Time on a business
day will be redeemed as of 11:00 a.m. Central Time and will earn dividends
through the previous day; proceeds normally will be sent electronically the same
day (or mailed by check the next business day) to the organization that placed
the redemption order in good form. Redemption orders received after 11:00 a.m.
Central Time or on a non-business day will be redeemed as of 3:00 p.m. Central
Time or at the next determined net asset value and earn dividends through the
date the redemption request was received; proceeds will be sent electronically
on the next business day (or mailed by check on the second business day
thereafter). While the Funds use their best efforts to maintain their net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount originally invested.
If you purchase shares through a Participating Organization, you may redeem
shares in accordance with that Organization's rules regarding redemption
requests. Direct shareholders may redeem shares in accordance with the
procedures described under "How to Redeem Shares".
The Funds intend to pay redemption proceeds within two business days and in no
event will payment be made later than seven days after receipt of a redemption
request in good order. Payments to investors who request to redeem shares within
a few days after a purchase paid for by check may be delayed until the Funds can
verify the check has been collected.
The Funds reserve the right to suspend redemptions or to postpone the payment
therefore when: (a) trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, or the Exchange is closed
for other than customary weekend and holiday closings; (b) the Securities and
Exchange Commission has permitted such suspension; or (c) an emergency as
determined by the Securities and Exchange Commission exists, making sale of
portfolio securities or valuations of the Funds' net assets not reasonably
practicable.
A shareholder may not reduce the value of their account to less than $100 by
writing checks. The check writing privilege is not available when purchases are
made through a financial institution providing an automatic "sweep" investment
program. The Funds and the Custodian reserve the right to terminate the check
writing service or to institute charges for the service.
If an investor's account drops below $250 due to redemptions, the Funds reserve
the right to redeem any remaining shares if after 30 days' notice additional
investments to bring the account value to $250 are not made.
HOW TO REDEEM SHARES
BY MAIL-- Send a "letter of instruction": a
TO: 2203 GRAND AVENUE letter specifying the name of the
DES MOINES, IA 50312-5338 Fund, the number of shares to be
sold, your name, your account number,
and the additional requirements
listed below that apply to your
particular account.
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole Letter of instruction signed by all
Proprietorship, Custodial (Uniform persons required to sign for the
Gifts or Transfers To Minors Act), account, exactly as it is registered,
General Partners accompanied by signature guarantee(s).
17
<PAGE>
Corporation, Association Letter of instruction and a corporate
resolution signed by person(s)
authorized to act on the account,
accompanied by signature guarantee(s).
Trust A letter of instruction signed by
the Trustee(s) (as Trustee), with a
signature guarantee. (If the Trustee's
name is not registered on your
account, also provide a copy of the
trust document, certified within the
last 60 days.)
If you do not fall into any of these registration categories (e.g.,
Executors, Administrators, Conservators or Guardians) please call for further
instructions.
A signature guarantee is designed to protect you and the Fund against
fraudulent transactions by unauthorized persons. A signature guarantee is
required for all persons registered on an account. A signature guarantee may
be obtained from an eligible guarantor institution, as defined by the
Securities and Exchange Commission. These institutions include banks, savings
and loan associations, credit unions, brokerage firms, and others. The words,
"SIGNATURE GUARANTEED" must be stamped or typed near each person's signature
and appear with the printed name, title, and signature of an officer and the
name of the guarantor institution. PLEASE NOTE THAT A NOTARY PUBLIC STAMP OR
SEAL IS NOT A SIGNATURE GUARANTEE.
FOR ALL OPTIONS BELOW, PLEASE CALL 1-800-798-1819
BY CHECK-- You must have applied for the check
(minimum $250 writing feature on your account
maximum $100,000) spplication. You may redeem pro-
vided that the signatures you
designated are on the check. (There
is no charge for this service and
you may write an unlimited number
of checks.)
BY EXCHANGE-- You must meet the minimum investment
requirement of the other fund. You
can only exchange between accounts
with identical names, addresses, and
taxpayer identification numbers.
BY ELECTRONIC FUNDS You must have applied for the
TRANSFER (ACH) OR WIRE-- Telephone Transfer feature on your
application. Allow two days via ACH.
Call before 10:00 a.m. for same day
wire. $15.00 fee for bank wires.
18
<PAGE>
TABLE OF CONTENTS
Prospectus Summary..........................................................2
Expense Summary of S Shares.................................................4
Investment Objectives, Policies and Restrictions............................5
Liquid Assets...............................................................5
Municipal Assets............................................................7
Performance................................................................10
Distributions and Taxes....................................................11
Organization and Shares of the Funds.......................................12
Shareholder Reports and Meetings...........................................13
Management and Fees........................................................14
Opening an Account.........................................................17
Share Price................................................................17
Purchasing Shares..........................................................18
Shareholder Services.......................................................19
Redeeming Shares...........................................................20
NO SALESMAN, OR OTHER PERSON, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS OR BY BISYS FUND SERVICES, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY BISYS FUND SERVICES, INC., IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
19
<PAGE>
S2 SHARES S SHARES
LIQUID ASSETS FUND MUNICIPAL ASSETS FUND
2203 Grand Avenue, Des Moines, Iowa 50312-5338
________________________________________________________________________________
FOR CURRENT YIELD, PURCHASE AND REDEMPTION INFORMATION CALL.........800-798-1819
....................................................................515-244-5426
________________________________________________________________________________
PROSPECTUS JANUARY 16, 1998
________________________________________________________________________________
Liquid Assets Fund and Municipal Assets Fund, each of these a "Fund",
(collectively, the "Funds") are money market mutual funds designed to enable
investors to meet short-term goals. Investors choose whichever Fund best suits
their needs and may, without charge, exchange Funds as their investment outlook
or goals change.
Liquid Assets Fund offers four classes of shares and Municipal Assets Fund
offers three classes of shares. This Prospectus describes the "S2 Shares" of
Liquid Assets Fund and "S Shares" of Municipal Assets Fund, (collectively, the
"Shares"). S Shares and S2 are normally offered through financial institutions
providing automatic "sweep" investment programs to their own customers. The
Funds also offer "T Shares" and "I Shares" which accrue daily dividends in the
same manner as S Shares and S2 Shares except that each class bears separate
distribution and/or shareholder servicing fees (see "Organization and Shares of
the Funds").
LIQUID ASSETS FUND, ("Liquid Assets") seeks maximum current income consistent
with safety of principal and maintenance of liquidity. MUNICIPAL ASSETS FUND,
("Municipal Assets") seeks maximum current income exempt from federal income
tax, consistent with safety of principal and maintenance of liquidity. Shares
are offered and redeemed at $1.00 per share under rules which allow the Funds to
use the amortized cost method of valuing the Funds' assets.
AN INVESTMENT IN SHARES OF THE FUNDS IS NOT INSURED OR GUARANTEED BY THE UNITED
STATES GOVERNMENT, BY ANY STATE, OR BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A
BANK, OR GUARANTEED BY A BANK. INVESTMENTS IN THE FUNDS INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE FUNDS SEEK TO MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00, BUT UNDER
EXTRAORDINARY CIRCUMSTANCES THE VALUE OF SHARES MAY VARY FROM $1.00 AND
CONSEQUENTLY, THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth basic information about each Fund that investors
should know before investing and should be retained for future reference.
Statements of Additional Information (as of the date of this Prospectus) which
contain more detailed information about each Fund have been filed with the
Securities and Exchange Commission and are hereby incorporated by reference. The
Statements of Additional Information are available free upon request from the
Funds at the address and telephone number indicated above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS SUMMARY
TYPE OF COMPANY
Each Fund is a diversified series of an open-end, management investment company.
INVESTMENT OBJECTIVE
For Liquid Assets, maximum current income consistent with safety of principal
and maintenance of liquidity.
For Municipal Assets, maximum current income exempt from federal income tax,
consistent with safety of principal and maintenance of liquidity.
INVESTMENT POLICY
Under normal market conditions, Liquid Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term debt obligations
including, primarily, redeemable Certificates backed by federally insured
student loans and Farmers Home Administration guaranteed loans, commercial
paper, bank obligations, short-term corporate obligations and obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations having a
dollar-weighted average maturity of 90 days or less. The Fund seeks to maintain
a net asset value of $1.00 per share.
Under normal market conditions, Municipal Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term municipal
securities which mature or have a demand feature exercisable in one year or less
from the date of acquisition having a dollar-weighted average maturity of 90
days or less. The Fund seeks to maintain a net asset value of $1.00 per share.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Funds is subject to certain risks, as set forth in detail
under "INVESTMENT OBJECTIVES, POLICIES AND Restrictions." As with all mutual
funds, there can be no assurance that the Funds will achieve their investment
objectives.
OFFERING PRICE
The public offering price of each Fund is equal to its net asset value of $1.00
per Share.
SHARES OFFERED
S-2 Shares of common stock of Liquid Assets and S Shares of common stock
Municipal Assets ("Shares"), each a separate investment portfolio of the IMG
Mutual Funds, Inc., a Maryland Corporation. See "OPENING AN ACCOUNT",
"PURCHASING SHARES" and "REDEEMING SHARES" for detailed information about how to
buy and sell shares.
MINIMUM PURCHASE
The minimum initial investment is $250 with $25 minimum subsequent investments
(subject to certain exceptions).
2
<PAGE>
DIVIDENDS
Dividends are declared daily and paid monthly and will be automatically
reinvested unless the shareholder elects otherwise.
INVESTMENT ADVISOR
Investors Management Group, Ltd. (the "Advisor").
ADMINISTRATOR
Investors Management Group, Ltd. (the "Administrator").
DISTRIBUTOR
BISYS Fund Services Inc., Columbus, Ohio (the "Distributor")
3
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
LIQUID MUNICIPAL
ASSETS ASSETS
Maximum Sales Charge Imposed on Purchases None None
Maximum Sales Charge on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fee * None None
Exchange Fee None None
* A $15.00 fee may be charged to an individual shareholder account for
redemption by wire.
LIQUID MUNICIPAL
ASSETS ASSETS
ESTIMATED ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees..................................... 0.35% 0.35%
12b-1 Distribution Fees After Limitations 1......... 0.15% 0.15%
Other Expenses After Limitations 1
Shareholder Servicing Fees..................... 0.25% 0.25%
Administrative Fees............................ 0.06% 0.06%
Other Expenses................................. 0.11% 0.15%
Total Other Expenses........................... 0.42% 0.46%
Total Fund Operating Expenses After Limitations 1... 0.92% 0.96%
The purpose of the above table is to assist a potential purchaser of a Fund's
Shares in understanding the various costs and expenses that an investor in S2
shares of Liquid Assets and S Shares of Municipal Assets will bear directly or
indirectly. The table reflects current fees and estimates other expenses. Rule
12b-1 Distribution Fees are fees related to distribution and marketing expenses
incurred under plans adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. From time to time, the Fund's Advisor and/or Distributor may
voluntarily waive the Management Fees, the 12b-1 Distribution Fees and/or
Shareholder Servicing Fees and/or absorb certain expenses for a Fund or class of
Shares of a Fund. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers. Wire transfers may be used to transfer
federal funds directly to/from the Funds' custodian bank.
1 Under the Funds' 12b-1 Plan, the Funds are permitted to pay fees up to 0.25%
of average annual net assets, but have voluntarily agreed to limit such fees to
0.15% until further notice. The Funds are subject to a Management and
Administration Agreement with IMG pursuant to which the Funds are authorized to
pay a periodic fee calculated at an annual rate of 0.21% of the average daily
net assets of such Funds. Currently, however, the fee has been voluntarily
limited to an annual rate of 0.06%. Absent the limitation of these fees, "Total
Operating Expenses" as a percentage of average daily net assets would have been
1.17% for Liquid Assets and 1.21% for Municipal Assets.
EXAMPLE
You would pay the following expenses on a $1,000 investment in each Fund
assuming, (1) a (hypothetical) five percent annual return and (2) redemption at
the end of each time period.
1 Year 3 Years 5 Years 10 Years
Liquid Assets $ 9 $29 $51 $113
Municipal Assets $10 $31 $53 $118
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. The above Example is based on the expense information
included in the previous Expense Summary. The Expense Summary and Examples do
not reflect any charges that may be imposed by financial institutions on their
4
<PAGE>
customers. Please refer to "MANAGEMENT AND FEES" for a more complete discussion
of the Shareholder transaction expenses and annual operating expenses for the
Fund.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
LIQUID ASSETS
The investment objective of Liquid Assets is maximum current income consistent
with safety of principal and maintenance of liquidity. The Fund invests in the
following money market instruments maturing in 397 days or less from time of
investment, (with certain exceptions):
(1) Obligations issued or guaranteed by the U.S. government or any agency or
instrumentality thereof. Such securities will include those supported by
the full faith and credit of the United States Treasury or the right of
the agency or instrumentality to borrow from the Treasury, as well as
those supported only by the credit of the issuing agency or
instrumentality.
(2) Repurchase agreements involving securities in the immediately foregoing
categories. A repurchase agreement involves the sale of such securities
to the Fund with the concurrent agreement of the seller to repurchase
them at a specified time and price to yield an agreed upon rate of
interest. Repurchase agreements may involve certain risks which are
described in greater detail in the Statement of Additional Information.
(3) Redeemable interest-bearing trust certificates ("Student Loan
Certificates") issued by the Iowa Student Loan Trust and/or other Student
Loan Trusts established by the Fund, ("Student Loan Trusts"), created for
the sole purpose of purchasing from banks (which qualify as "eligible
lenders") federally insured student loans originated by banks. The
Student Loan Certificates will have original maturities of no more than
397 days but will be redeemable by the Fund at their face amount upon not
more than five days' written notice to the issuing Student Loan Trust.
Further details concerning the Student Loan Trusts and the Fund's
investments in Student Loan Certificates are found in the Statement of
Additional Information.
(4) Redeemable interest-bearing ownership certificates ("FmHA Certificates")
issued by one or more guaranteed loan trusts ("FmHA Trusts"), each
created for the purpose of acquiring participation interests in the
guaranteed portion of Farmer's Home Administration ("FmHA") guaranteed
loans. The FmHA Certificates will have original maturities of no more
than 397 days but will be redeemable by the Fund at their face amount
upon not more than five days' written notice to the issuing FmHA Trust.
Further details concerning the FmHA Trusts and the Fund's investment in
FmHA Certificates and FmHA guaranteed loans are found in the Statement of
Additional Information.
(5) Commercial paper which at the time of investment (a) is rated (or the
issuer of which has been rated) highest quality by two nationally
recognized statistical rating organizations ("NRSRO") if rated by two or
more NRSROs; (b) is rated (or the issuer of which has been rated) highest
quality if rated by only one NRSRO; or (c) is determined to be of
equivalent quality by the Fund's Board of Directors if unrated.
(6) U.S. dollar-denominated bank obligations (certificates of deposit and
bankers' acceptances) issued by domestic offices of U.S. banks which, at
the date of investment, have capital, surplus, and undivided profits (as
of the date of their most recently published financial statements) in
excess of $10,000,000; and obligations of other banks or savings and
loans if such obligations are insured by the Federal Deposit Insurance
Corporation, provided that not more than 10 percent of the total assets
of the Fund will be invested in such insured obligations.
(7) Short-term (maturing in one year or less) corporate obligations which at
the time of investment (a) are rated in the highest rating category by
two NRSROs, if rated by two or more NRSROs; (b) are rated in the highest
rating category if rated by only one NRSRO; or (c) are determined to be
5
<PAGE>
of equivalent quality by the Fund's Board of Directors if unrated.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not have invested more than five percent of its total
assets in securities issued by a single issuer. For additional requirements of
Rule 2a-7, see "Opening an Account -- Share Price". Assets of the Fund will
consist of securities with maturities of 397 days or less at date of purchase
or, if maturing beyond 397 days, will be backed by Liquidity and Servicing
Agreements or Guaranteed Funding Agreements and will have variable interest
rates adjustable at least semiannually. In determining whether particular
variable rate investments backed by Liquidity and Servicing Agreements or
Guaranteed Funding Agreements may be made, the period remaining until maturity
will be deemed to be the longer of the demand notice period required before the
Fund is entitled to receive payment of the principal amount or the period
remaining until the next interest adjustment. The dollar-weighted average
maturity of Fund investments will be 90 days or less, determined in the same
manner. While the underlying security in a repurchase agreement may have a
maturity of more than 397 days, the repurchase agreement itself will terminate
in less than 397 days, and typically within a few days. The Fund intends to
invest at least 25 percent of its total assets in Student Loan Certificates,
and/or FmHA Certificates, except when such investments are either not available
in sufficient quantity or do not carry yields competitive with alternative
investments.
It is the policy of the Fund that any illiquid securities (including repurchase
agreements of more than seven days duration) may not constitute, at the time of
purchase or at any time, more than ten percent of the value of the total net
assets of the Fund.
As a fundamental policy, the Fund will not concentrate its investments in any
one industry and pursuant to Section 18(f) of the 1940 Act, the Fund may not
issue senior securities. As a general policy, it is the Fund's intention to hold
investments until they mature. However, in an effort to increase portfolio
yields the Fund may periodically trade securities to take advantage of perceived
disparities between markets for various short-term money market instruments. It
is also possible that redemptions of Fund shares could necessitate the sale of
portfolio investments prior to maturity and at times when such sale would be
undesirable because of unfavorable market conditions.
While investments by the Fund will be confined to high quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible Participating Banks or borrowers will default on the provisions of
their agreements with the Fund or that banks will default on repurchase
agreements with the Student Loan Trusts or the FmHA Trusts, which could cause
the net asset value per share to decrease.
In light of these various contingencies, there can be no assurances the Fund
will achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described above; (2) invest more than 80 percent of its total assets
in Student Loan Certificates and/or FmHA Certificates; (3) purchase or sell real
estate (other than short-term loans secured by real estate or interests therein
or loans to companies which invest in or engage in other activities related to
real estate), commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (4) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
repayment and guarantee arrangements on loan participations purchased from
Participating Banks), calls, straddles, spreads or combinations thereof; (5)
make loans to other persons, provided the Fund may invest up to 80 percent of
its total assets in Student Loan Certificates or FmHA Certificates, as described
in (2) above, and may make the investments and enter into repurchase agreements
as described above; (6) invest in securities with legal or contractual
restrictions on resale (except for repurchase agreements, Student Loan
Certificates, and FmHA Certificates) or for which no ready market exists; (7)
6
<PAGE>
enter into repurchase agreements if, as a result thereof, more than five percent
of the Fund's total assets (taken at market value at the time of such
investment) would be subject to repurchase agreements maturing in more than
seven days.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (a) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (b)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
MUNICIPAL ASSETS
The investment objective of Municipal Assets is maximum current income exempt
from federal income tax, consistent with safety of principal and maintenance of
liquidity. The Fund invests in the following types of money market instruments
maturing in 397 days or less from time of investment (with certain exceptions),
as defined herein:
(1) Tax-exempt debt obligations issued by state and municipal governmental
units and public authorities within the United States and participation
interests therein. With few exceptions such obligations will be nonrated
and of limited marketability. However, they will be backed by demand
repurchase commitments of the issuers thereof and irrevocable bank
letters of credit or guarantees (collectively referred to herein as
"Liquidity Agreements"). The Liquidity Agreements will permit the holder
of the securities to demand payment of the unpaid principal balance plus
accrued interest upon a specified number of days' notice either from the
issuer or by drawing on an irrevocable bank letter of credit or
guarantee. In addition, all obligations with maturities longer than 397
days from date of purchase will, by their terms, bear rates of interest
that are adjusted upward or downward no less frequently than semiannually
by means of a formula intended to reflect market changes in interest
rates. Certain types of industrial development bonds issued by public
bodies to finance the construction of industrial and commercial
facilities and equipment are also purchased. The Statement of Additional
Information contains further details concerning the Fund's policies and
procedures with respect to investments in such tax-exempt obligations and
participation interests.
(2) High quality tax-exempt debt obligations issued by state and municipal
governments and by public authorities, including issues sold as interim
financing in anticipation of tax collections, revenue receipts or bond
sales, and tax-exempt Project Notes secured by the full faith and credit
of the United States. Such obligations will be purchased only if backed
by the full faith and credit of the United States or rated Aaa, Aa,
MIG-1, MIG-2 or Prime-1 by Moody's Investors Service, Inc., or AAA, AA,
or A-1 by Standard & Poor's Corporation. Nonrated securities may also be
purchased if determined by the Fund's board of directors to be of
comparable quality to the rated securities in which the Fund may invest.
(3) Taxable obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government may be acquired from time to time on a temporary
basis for defensive purposes.
(4) Repurchase agreements involving securities in the immediate foregoing
category. A repurchase agreement involves the sale of such securities to
the Fund with the concurrent agreement of the seller to repurchase them
at a specified time and price, to yield an agreed upon rate of interest.
Repurchase agreements may involve certain risks which are described in
greater detail in the Statement of Additional Information.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not invest more than five percent of its total assets in
securities issued by a single issuer. For additional requirements of Rule 2a-7,
see "Opening an Account -- Share Price". Assets of the Fund will consist of
7
<PAGE>
securities with maturities of 397 days or less at date of purchase or, if
maturing beyond 397 days, securities which are backed by Liquidity Agreements
and which have variable interest rates adjustable at least semi-annually and
upon the adjustment of the interest rate the value of the securities will be
approximately equal to par. In determining whether particular variable rate
investments backed by Liquidity Agreements may be made, the period remaining
until maturity will be deemed to be the longer of the demand notice period
required before the Fund is entitled to receive payment of the principal amount
or the period remaining until the next interest adjustment. The dollar-weighted
average maturity of Fund investments will be 90 days or less, determined in the
same manner.
Under normal market conditions, the Fund as a matter of fundamental policy, will
invest at least 80 percent of its total net assets in tax-exempt securities, the
interest on which is exempt from federal income tax, except to the extent that
some or all of which may be subject to the alternative minimum tax. This
fundamental policy may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
It is the policy of the Fund that any illiquid securities may not constitute, at
the time of purchase or at anytime, more than ten percent of the value of the
total net assets of the Fund. The Fund will not concentrate its investments in
any one industry and pursuant to Section 18(f) of the 1940 Act may not issue
senior securities.
As a general policy, it is the Fund's intention to hold investments until they
mature or until immediately prior to the expiration of an applicable Liquidity
Agreement. However, in an effort to increase portfolio yields, the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of portfolio
investments prior to maturity and at times when such sale would be undesirable
because of unfavorable market conditions.
New issues of tax-exempt debt obligations are usually offered on a when-issued
basis with the securities to be delivered and paid for approximately 45 days
following the initial purchase commitment. The Fund may occasionally enter into
such commitments, subject to certain limitations and procedures discussed in the
Statement of Additional Information.
While investments by the Fund will be confined to high-quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances, described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible an issuer or bank will default on the provisions of their Liquidity
Agreements, which could cause the net asset value per share to decrease. In
light of these various contingencies, there can be no assurances the Fund will
achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described under "Investment Policy"; (2) invest more than 80 percent
of its total assets in tax-exempt fixed and variable rate debt obligations (or
participation interests therein) issued by state and local governmental units
within the United States which are backed by Liquidity Agreements; (3) invest
more than five percent of its total assets (determined as of the date of
purchase) in tax-exempt obligations or participation interests therein subject
to Liquidity Agreements issued by any one bank; (4) purchase or sell real
estate, commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (5) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
Liquidity Agreements covering certain tax-exempt obligations purchased by the
Fund), calls, straddles, spreads or combinations thereof; (6) make loans to
other persons, provided the Fund may make investments and enter into repurchase
agreements as described above; (7) invest in securities with legal or
contractual restrictions on resale (except for tax-exempt debt obligations
subject to Liquidity Agreements) or for which no ready market exists; (8) enter
into a Liquidity Agreement with any bank unless such bank is a United States
bank which has a record, together with predecessors, of at least five years of
continuous operations; (9) enter into repurchase agreements if, as a result
thereof, more than five percent of the Fund's total assets (taken at market
value at the time of such investment) would be subject to repurchase agreements
8
<PAGE>
maturing in more than seven days; and (10) enter into Liquidity Agreements with
any bank if five percent or more of the securities of such bank are owned by the
Advisor or by directors and officers of the Fund or the Advisor, or if any
director or officer of the Fund or the Advisor owns more than 1/2 percent of the
voting securities of such bank.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (1) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (2)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
PERFORMANCE
Performance of each Fund may be quoted in advertising in terms of current yield
and effective yield. CURRENT YIELD refers to the income generated by an
investment in either Fund over a seven-day period. This income is then
"annualized". That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The Fund may also present a 30-day
yield which is calculated similarly but instead refers to a 30-day period rather
than a seven-day period. EFFECTIVE YIELD is calculated similarly but, when
annualized, that income earned from the investment is assumed to be reinvested
weekly. Effective yield will be slightly higher than current yield because of
the compounding effect of this assumed reinvestment.
Performance of the Funds may also be compared to other mutual funds with similar
investment objectives, relevant indices or rankings prepared by independent
services or other financial publications, or yields on deposits at financial
institutions. Unlike the Funds, deposit accounts at financial institutions are
generally insured by the Federal Deposit Insurance Corporation and do not
fluctuate to the extent of the Funds.
Additionally, Municipal Assets may quote a taxable-equivalent yield based on a
stated income tax rate. Please see each Fund's Statement of Additional
Information for further discussion of the manner in which yields are calculated
and the comparative performance data which may be used.
Of course, the Funds' yields are not fixed nor is principal guaranteed. Yields
are functions of the type and quality of instruments held in the portfolio,
operating expenses, and market conditions. Consequently, current yields will
fluctuate and are not necessarily representative of the future results.
DISTRIBUTIONS AND TAXES
Dividends from the net income of each Fund are declared daily on each business
day and paid monthly to holders of record immediately before 3:00 p.m. Central
Time. Dividends are automatically reinvested in S Shares unless cash payment has
been selected on the Account Application. If a shareholder has elected to
receive dividends and/or distributions in cash and the checks are returned and
marked as "undeliverable" or remain uncashed for six months, your cash election
will be changed automatically and future dividends will be reinvested in Shares
of the Fund. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in Shares of the
Fund at the per share net asset value determined as of the date of cancellation.
If a shareholder redeems the entire amount in his account during the month,
dividends credited to the account from the beginning of the month through the
date of redemption are paid with the redemption proceeds.
Dividends on each class of shares are determined in the same manner and are paid
in the same amounts irrespective of class, except that each class bears separate
distribution and/or shareholder servicing fees (see "Organization and Shares of
the Funds").
Dividends declared in October, November, or December of any year, payable to
shareholders of record on a specified date in such months, will be deemed to
have been received by the shareholders and paid by the Funds on December 31 of
such year, in the event that such dividends are actually paid during January of
9
<PAGE>
the following year.
Each Fund intends to qualify as a regulated investment company by distributing
substantially all of its taxable net income, including any realized capital
gains, and thus will not incur any Federal income taxes. Shareholders will
receive taxable dividend income, tax-exempt dividend income and/or capital
gains, as the case may be, from distributions whether paid in cash or received
in the form of additional shares.
Dividends derived from interest on federally tax-exempt debt obligations owned
by Municipal Assets are intended to constitute "exempt-interest dividends" which
are generally not Federally taxable to shareholders, although some could be
includable for purposes of the alternative minimum tax. Dividends derived from
other interest and the realization of capital gains are taxable to shareholders
whether or not reinvested.
Municipal Assets expenses will be allocated between tax-exempt and taxable
income in the same proportion as the Fund's tax-exempt income bears to the total
of such exempt income and its gross income (excluding from gross income the
excess of capital gains over capital losses).
Promptly after the end of each calendar year, each shareholder will receive a
statement of the Federal income tax status of all dividends and distributions
paid during the year. This discussion is only a summary and relates solely to
Federal tax matters. Further discussion of the Federal Income Tax consequences
of an investment in the Fund is provided in the Statement of Additional
Information. Dividends may also be subject to local taxation. Shareholders are
encouraged to consult with their personal tax advisors.
ORGANIZATION AND SHARES OF THE FUNDS
IMG Mutual Funds, Inc. is a Maryland corporation organized on November 16, 1994.
The Funds were created on October 30, 1997, to acquire the assets and continue
the business of the corresponding substantially identical investment portfolios
of the Liquid Assets Funds, Inc., and the Municipal Assets Funds, Inc., two
separately registered open-end, diversified management investment companies
organized as Iowa corporations. References herein to the "immediate predecessor"
of the Funds refer to the respective companies which correspond to such Fund.
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.
The Articles of Incorporation of the Company permit the Company, by resolution
of its Board of Directors, to create new series of common stock 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.
S2 Shares of Liquid Assets and S Shares of Municipal Assets are described in
this Prospectus. T Shares and I Shares are offered in separate Prospectuses
which may be obtained by calling the Fund at 1-800-798-1819 or writing to the
address on the cover of this Prospectus. Please read the Prospectus carefully
before investing or sending money. All shares are offered to individual and
institutional investors acting on their own behalf or on behalf of their
customers and bear their pro rata portion of all operating expenses paid by the
Funds, except that Shares, S2 Shares and T Shares bear separate distribution
and/or shareholder servicing fees. I Shares bear no distribution or shareholder
servicing fees.
Each class of shares offers different privileges. Shares are normally offered
through financial institutions providing automatic "sweep" investment programs
to their customers, and offer a check writing privilege. T Shares are normally
offered through trust organizations or others providing shareholder services
such as establishing and maintaining accounts and records for their customers
who invest in T Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customers' inquiries concerning their
10
<PAGE>
investments. I Shares are available directly from the Distributor only and offer
only the Exchange and Telephone Transfer services. Each class of shares is
exchangeable only for shares of the same class. Financial institutions selling
or servicing Shares and T Shares may receive different compensation with respect
to one class over another.
Shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held. Shares of each Fund will vote
together and not by class unless otherwise required by law or permitted by each
Fund's Board of Directors. All shareholders of each Fund will vote together as a
single class on matters relating to the Fund's investment advisory agreement,
investment objective and fundamental policies. Only holders of Shares will vote
on matters relating to the Distribution Plan for Shares. Only holders of T
Shares will vote on matters pertaining to the Administrative Services Plan for T
Shares.
Shares of the Funds have non-cumulative voting rights and, accordingly, the
holders of more than 50 percent of each Fund's outstanding shares (irrespective
of class) may elect all of the Directors. Shares have no preemptive rights and
only such conversion and exchange rights as each Fund's Board may grant in its
discretion. When issued for payments as described in this Prospectus, shares
will be fully paid and nonassessable. All shares are held in uncertificated form
and will be evidenced by the appropriate notation on the books of the transfer
agent.
SHAREHOLDER REPORTS AND MEETINGS
Each shareholder will receive monthly Fund information, an unaudited semiannual
report, and an annual report containing audited financial statements. If you
have questions about your account, call 1-800-798-1819. You may also write the
Fund at the address on the cover of this Prospectus. You may order statements
for the current and preceding year at no charge. However, there will be a $10.00
fee per statement for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Funds
have adopted the appropriate provisions in their Bylaws and may, in their
discretion, not hold annual meetings of shareholders for the election of
Directors unless otherwise required by the 1940 Act. The Funds have also adopted
provisions in their Bylaws for the removal of Directors by the shareholders.
Shareholders may receive assistance in communicating with other shareholders as
provided in Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Shareholders of the Funds may remove a Director by the affirmative vote of a
majority of the Funds' outstanding voting shares. In addition, the Directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Director or for any other purpose when requested
in writing to do so by the shareholders or record of not less than 10 percent of
the Funds' outstanding voting securities.
All consideration received by the Funds for shares of one of the Funds and all
assets in which such consideration is invested, belong to that Fund (subject
only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one Fund
are treated separately from those of the other Funds.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Funds, will 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 such matter. Rule 18f-2 further provides that a Fund shall 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 the interest of such
Fund. However, the Rule exempts the selection of independent auditors and the
election of Directors from the separate voting requirements of the Rule.
11
<PAGE>
MANAGEMENT AND FEES
Overall responsibility for management of the Company rests with the Board of
Directors, who are elected by the Shareholders of the Company's Funds. The
Company will be managed by the Directors in accordance with laws of Maryland
governing corporations. The Directors, in turn, elect the officers of the
Company to supervise the day-to-day operations. The Directors receive fees and
are reimbursed for their expenses in connection with each meeting of the Board
of Directors they attend. The officers of the Company receive no compensation
directly from the Company for performing the duties of their offices.
Investors Management Group, ("IMG") manages the investments and business affairs
of the Funds. IMG is a federally registered Investment Advisor organized in 1982
and located at 2203 Grand Avenue, Des Moines, Iowa 50312-5338. IMG has been
providing continuous investment management to pension and profit-sharing plans,
insurance companies, public agencies, banks, endowments and charitable
institutions, other mutual funds, individuals and others for over 15 years. As
of November 30, 1997, IMG had approximately $1.6 billion in equity, fixed income
and money market assets under management.
The Funds will be managed by Jeffrey D. Lorenzen, CFA, Managing Director,
Kathryn D. Beyer, CFA, Managing Director, and Elizabeth S. Pierson, CFA, Senior
Fixed Income Manager. Mr. Lorenzen is a fixed income strategist and is a member
of IMG's Investment Policy Committee. Prior to joining IMG in 1992, his
experience includes serving as a securities analyst and corporate fixed income
analyst for The Statesman Group from 1989 to 1992. Mr. Lorenzen received his
Masters of Business Administration degree from Drake University, Des Moines,
Iowa, and his Bachelor of Business Administration degree from the University of
Iowa, Iowa City, Iowa. Ms. Beyer is a fixed income strategist and is a member of
IMG's Investment Policy Committee. Prior to joining IMG in 1993, her experience
includes serving as a securities analyst and director of mortgage-backed
securities for Central Life Assurance Company from 1988 to 1993. Ms. Beyer
received her Master of Business Administration degree from Drake University, Des
Moines, Iowa, and her Bachelor of Science degree in agricultural engineering
from Iowa State University, Ames, Iowa. Ms. Pierson is a fixed income strategist
and is a member of IMG's Investment Policy Committee. She began her investment
career in 1984 with AMCORE Capital Management, Inc. Ms. Pierson received her
Bachelor of Science degree from the University of Illinois, Champaign-Urbana.
Under an Investment Advisory Agreement between the Funds and IMG, a fee is paid
to IMG for investment advisory services. Each Fund is responsible for paying
operating expenses not assumed by IMG. The investment management fee for each
Fund is calculated daily and paid monthly. The maximum management fee for each
Fund is 0.35 percent of each Fund's average daily net assets.
From time to time, IMG may voluntarily waive all or a portion of the management
fee and/or absorb certain expenses of a Fund or class of shares without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for a
Fund or class of shares and increasing the overall yield to investors in that
Fund or class of shares at the time any such amounts are waived and/or absorbed.
IMG may not seek reimbursement of such waived fees at a later date. The waiver
of such fee will cause the yield of a Fund to be higher than it would otherwise
be in the absence of such a waiver.
IMG also provides management and administration, fund accounting, transfer
agency, and shareholder recordkeeping services to the Funds. Under a Management
and Administration Agreement, IMG will supervise all aspects of the operations
of the Funds, except those performed under the Investment Advisory Agreement, by
the Custodian, under the Transfer Agency Agreement and under the Fund Accounting
Agreement. For these services the Funds each pay IMG a fee calculated daily and
paid monthly at an annual rate of up to 0.25% of the average daily net assets of
each Fund. Presently, the fee is calculated at 0.06% annually. Under a Fund
Accounting Agreement, IMG provides bookkeeping and accounting services to the
Funds, including calculating daily net asset value and yield quotations. For
these services, the Funds each pay IMG a fee calculated daily and paid monthly
at an annual rate of 0.03% of the average daily net assets of each Fund. Under a
Transfer Agency Agreement, IMG provides customary and usual services of a
transfer agent to the Funds. For these services, IMG is paid various fees
depending on the class of shares of the Funds. The fees are charged to each
class of shares separately and are not computed on a periodic percentage of net
12
<PAGE>
assets, but at a flat annual fee depending on the number of accounts. The fees
received and the services provided under these contracts are in addition to
those received and paid to IMG under the Advisory Agreement.
At its expense, IMG provides office space and all necessary office facilities,
equipment, and personnel for servicing the investments of the Funds. Except for
the expenses expressly assumed by IMG pursuant to its investment advisory
agreement, each Fund is responsible for all its other expenses, including,
without limitation, governmental fees, interest charges, taxes if applicable,
membership dues in the Investment Company Institute allocable to the Fund,
broker commissions, and other expenses connected with the execution, recording
and settlement of Fund security transactions, expenses of repurchasing and
redeeming shares and expenses of servicing shareholder accounts; expenses for
preparing, printing and distributing periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions;
insurance premiums, fees and expenses of the Fund's custodian, including
safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Funds;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Funds; compensation and
expenses of Directors who are not "interested persons" of the Advisor; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses to existing shareholders are borne by the
Funds except that the Funds' Distribution Agreement requires that the
Distributor pay for prospectuses that are to be used for sales purposes with
persons other than current shareholders.
From time to time, IMG may voluntarily waive all or a portion of the investment
management fee and/or other fees and/or absorb certain expenses of a Fund
without further notification of the commencement or termination of such waiver
or absorption. Any such waiver will have the effect of lowering the overall
expense ratio for that Fund and increasing the Fund's overall yield to investors
at the time any such amounts are waived and/or absorbed.
Except as voluntarily absorbed by IMG, all expenses incurred in the operation of
the Funds will be borne by the Funds. Expenses attributable to a particular Fund
are charged against the assets of that Fund; other expenses of the Funds are
allocated among the Funds on a reasonable basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Fund.
Each Fund pays certain distribution fees related to marketing, selling and
distribution of S Shares including, but not limited to, preparation and
distribution of promotional materials, compensation to sales personnel employed
by the Distributor and for payment to institutions, including financial
institutions ("Participating Organizations") who render assistance in
distributing or promoting the sale of each Fund's S Shares under plans ("12b-1
Plans") adopted pursuant to Rule 12b-1 under the Act. The maximum fees payable
under the 12b-1 Plans are an annual rate of 0.25 percent for S2 Shares of Liquid
Assets and 0.25 percent for S Shares of Municipal Assets, computed monthly on
the basis of the average net asset value of the respective Shares issued by each
Fund. Presently the fees payable under the 12b-1 Plans have been limited to
0.15% for both classes of shares until further notice. The Directors of each
Fund review quarterly a written report of the costs incurred associated with the
12b-1 Plans. The Directors believe that the 12b-1 Plans are in compliance with
Rule 12b-1 and are in the best interests of the Funds.
Each Fund pays certain shareholder servicing fees to financial institutions
("Participating Organizations"), who render assistance in servicing their
customers who are direct or beneficial owners of each Fund's Shares under the
Administrative Services Plan and Servicing Agreements (the "Servicing
Agreements") adopted by the Funds' Board of Directors. The maximum fees payable
under the Servicing Agreements are an annual rate of 0.25%, computed monthly on
the basis of the average daily net asset value of each Fund. The Directors of
each Fund review quarterly a written report of the costs incurred association
with the Administrative Services Plan. The Directors believe that the
Administrative Services Plan is in the best interest of the Funds.
The Glass-Steagall Act and other applicable laws prohibit banks from engaging in
the business of underwriting, selling, or distributing securities. Insofar as
Participating Organizations (including banks) are compensated under the Plans,
their only function will be to perform administrative and shareholder services
13
<PAGE>
for their clients who wish to invest in the Funds. If a Participating
Organization at a future date is prohibited from acting in this capacity, the
shareholder may lose the services provided by the Participating Organization;
however, it is not expected that the shareholders would incur any adverse
financial consequences. It is intended that none of the services provided by
such Participating Organizations other than through registered brokers will
involve the solicitation or sale of shares of the Funds.
AMCORE Investment Group, N.A., Rockford, Illinois, acts as custodian for the
Funds' cash and investments.
OPENING AN ACCOUNT
The Funds require a completed and signed application (which is attached) at the
time you open each new account. Additional paperwork may be required from
corporations, associations and certain fiduciaries. IF YOU HAVE QUESTIONS CALL
THE FUNDS AT 1-800-798-1819 FROM 8:00 A.M. TO 4:30 P.M. CENTRAL TIME.
SHARE PRICE
The shares of each Fund are sold without a sales charge. The price of one share
is its "net asset value" or NAV (generally $1.00). NAV is computed by adding the
value of each Fund's investments, plus cash and other assets, deducting
liabilities and then dividing the result by the number of shares outstanding.
The NAV of each Funds' shares is determined twice each business day, at 11:00
a.m. Central Time and at the close of the New York Stock Exchange (normally 3:00
p.m. Central Time). The Funds are open for business each day the Federal Reserve
is open.
Your purchase will be processed at the next NAV calculated after your investment
has been converted to federal funds. If you invest by check, the Funds must
generally allow one or more days for conversion into federal funds before
accepting your purchase.
Rule 2a-7 under the Investment Company Act of 1940 permits the Funds to compute
net asset value per share using the amortized cost method of valuing portfolio
securities. As a condition for using the amortized cost method of valuation, the
Board of Directors established procedures to stabilize each Fund's net asset
value at $1.00 per Share. These procedures are described in more detail in each
Fund's Statement of Additional Information.
Under the amortized cost method of valuation, a security is initially valued at
cost on the date of purchase and, thereafter, any discount or premium is
amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security. U.S. government
obligations, Student Loan Certificates and FmHA Certificates, which are subject
to mandatory repurchase at their original purchase price, investments in taxable
and tax-exempt debt obligations rated by a recognized bond rating agency and
regularly traded in the secondary market, and nonrated fixed and variable rate
tax-exempt obligations and participation interests therein, not regularly traded
in the secondary market but subject to Liquidity Agreements will be valued at
amortized cost. Other assets are valued at a fair value determined in good faith
by the board of directors of each Fund.
PURCHASING SHARES
Shares of each Fund may be purchased directly from BISYS Fund Services, Inc., as
the distributor. Shares may also be purchased by customers of qualified banks,
savings and loan associations, broker/dealers, investment advisory firms, and
other organizations ("Participating Organizations") that have entered into
servicing agreements with the Distributor. The Participating Organization is
responsible for transmitting purchase orders directly to the Fund's Distributor.
A Participating Organization may elect to hold record ownership of shares for
its customers and to show beneficial ownership of shares on the account
statements it provides to them. In the alternative, a Participating Organization
may elect to establish its customers' accounts of record with IMG as transfer
agent for the Funds. Generally, shares purchased through Participating
Organizations will be held by the Participating Organization as shareholder of
record.
14
<PAGE>
Shares of each Fund are offered without any purchase or redemption charge
imposed by the Fund. The minimum initial investment that may be made in each
Fund is $250. Subsequent investments in each Fund must be made in amounts of not
less than $25, except where purchases are made through financial institutions
providing an automatic "sweep" investment program, in which case there is no
minimum. Participating organizations may aggregate their customers' purchases to
satisfy the required minimums.
Purchases may be effected on business days when the Advisor, Distributor and
Custodian are open for business. The Funds reserve the right to reject any
purchase order, including purchases made with foreign and third party drafts or
checks.
A purchase order for Shares received in good order by the Funds by 11:00 a.m.
Central Time on a business day is effected at the net asset value per share
calculated as of 11:00 a.m. Central Time, and investors will receive the
dividend declared that day, IF THE CUSTODIAN HAS RECEIVED THE PURCHASE PRICE IN
FEDERAL FUNDS OR OTHER IMMEDIATELY AVAILABLE FUNDS BY 3:00 P.M. CENTRAL TIME
THAT DAY. A purchase order for Shares received after 11:00 a.m. Central Time and
prior to 3:00 p.m. Central Time on a business day for which such funds have been
received by 3:00 p.m. Central Time will be effected as of 3:00 p.m. Central
Time, and will begin to accrue dividends on the following business day. If
federal funds are not available by 3:00 p.m. Central Time, the order will be
canceled. Payment for orders which are not accepted or are canceled will be
returned after prompt inquiry to the transmitting organization.
While the Funds themselves do not presently levy sales, redemption or account
service charges, Participating Organizations may elect to do so and the Funds
may elect to do so in the future. Investors should inquire regarding the nature
and costs of services provided by Participating Organizations and determine if
such services are desired, because the costs thereof will reduce the Funds'
yields to the investor below that obtainable by investing in the Funds directly.
Customers wishing to purchase shares through their Participating Organization
should contact such entity directly for appropriate instructions. (For a list of
the Participating Organizations in your area, CALL THE FUNDS AT 1-800-798-1819
OR 515-244-5426.) Direct investors may purchase shares in accordance with the
procedures described below, "Purchase Procedures".
Certificates representing Fund shares purchased will not be issued. However, all
purchases are confirmed in writing to the investor and credited to their account
in the shareholder records maintained by the Transfer Agent. Investors will have
the same rights to their shares as if certificates had been issued.
PURCHASE PROCEDURES
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
BY MAIL $250 (minimum) $25 (minimum)
Please make your check Please make your check
payable to the Fund selected payable to the Fund
and mail to the address selected, with your
indicated on the application. account number on the
check and mail to the
address printed on your
account statement.
BY WIRE Please call for an account See instructions below.
number before initial invest-
ment at 1-800-798-1819 or
515-244-5426.
Federal Funds should be wired to: Federal Reserve Bank of Chicago for AMCORE
Investment Group, N.A., Rockford, Illinois, together with the name of the
Fund, your account number and names.
Please note that when accounts are opened by wire you must send a completed
application at your earliest convenience. Your application must be received
by the Fund before any instructions for redemption will be accepted.
15
<PAGE>
BY ELECTRONIC Not available for initial Shareholders who have
FUNDS TRANSFER purchase. an account with an
(ACH) institution which is a
member of the Automated
Clearing House, may
elect to purchase Fund
shares via electronic
funds transfer. Select
this service on your
application or call
the Fund.
SHAREHOLDER SERVICES
Some shareholder services may not be available if shares are purchased through
Participating Organizations. Call the Funds at 1-800-798-1819 for more
information.
EXCHANGE PRIVILEGE. You may exchange Shares of either Fund for Shares in the
other Fund described in this Prospectus. An exchange involves a redemption of
the shares of the Fund being liquidated and a purchase of the shares of the Fund
in which the redemption proceeds are to be invested. The exchange privilege is
offered as a convenience to shareholders and is not intended to be a means of
speculating on short-term movements in securities prices by transactions
involving frequent purchases and sales of shares. Each Fund reserves the right
at any time and without prior notice, to suspend, limit, modify or terminate
exchange privileges or their use by individual shareholders in order to prevent
transactions considered to be disadvantageous to existing shareholders.
TELEPHONE TRANSFERS. This service allows you to authorize transfers of money to
purchase or sell shares. Using Telephone Transfer you can move money between
your bank account and your account in the Funds with one phone call. Moneys may
be transferred either by wire or electronic funds transfer with an institution
which is a member of the Automated Clearing House ("ACH").
Wire transfers may be used to transfer federal funds directly to/from the Funds'
custodian bank. A $15.00 fee may be charged to your account for redemptions by
wire.
Allow two (2) days after the call for electronic funds transfer via ACH to move
moneys between your bank account and your account with either Fund.
For moneys recently invested, allow normal clearing time before redemption
proceeds are sent to your bank. In order to change the financial institution
account designated to receive redemption proceeds, it will be necessary to send
a written request to the Fund with a signature guarantee from a national or
state bank, a trust company or a federal savings and loan association, or a
member firm of the New York, American, Boston, Midwest or Pacific Stock
Exchange.
You can also arrange systematic periodic investments (minimum $50) into your
Fund account. Simply select the regular investment schedule you would like when
completing your account application. Your bank account will automatically be
debited to purchase shares of the Fund you select. You will receive confirmation
of each transaction.
Your bank must be a member of ACH and you must have a checking or NOW/Money
Market Deposit account to use electronic funds transfer or systematic investing.
Please allow 20 days after receipt of your application to activate the Telephone
Transfer capability.
STATEMENTS AND REPORTS. You will receive a statement of your account listing
every transaction that affects your share balance no less than once per month.
At least twice a year you will receive the financial statements of the Fund in
which you have invested with a summary of that Fund's portfolio composition and
performance. Each Fund's Annual Report is reported on by the Funds' independent
auditors, KPMG Peat Marwick LLP.
16
<PAGE>
REDEEMING SHARES
Shareholders may request redemption of their shares at any time. Shares will be
redeemed at their net asset value as next determined after a redemption request
in good order is received by the Fund's Distributor. Redemption orders received
in good order by the Distributor before 11:00 a.m. Central Time on a business
day will be redeemed as of 11:00 a.m. Central Time and will earn dividends
through the previous day; proceeds normally will be sent electronically the same
day (or mailed by check the next business day) to the organization that placed
the redemption order in good form. Redemption orders received after 11:00 a.m.
Central Time or on a non-business day will be redeemed as of 3:00 p.m. Central
Time or at the next determined net asset value and earn dividends through the
date the redemption request was received; proceeds will be sent electronically
on the next business day (or mailed by check on the second business day
thereafter). While the Funds use their best efforts to maintain their net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount originally invested.
If you purchase shares through a Participating Organization, you may redeem
shares in accordance with that Organization's rules regarding redemption
requests. Direct shareholders may redeem shares in accordance with the
procedures described under "How to Redeem Shares".
The Funds intend to pay redemption proceeds within two business days and in no
event will payment be made later than seven days after receipt of a redemption
request in good order. Payments to investors who request to redeem shares within
a few days after a purchase paid for by check may be delayed until the Funds can
verify the check has been collected.
The Funds reserve the right to suspend redemptions or to postpone the payment
therefore when: (a) trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, or the Exchange is closed
for other than customary weekend and holiday closings; (b) the Securities and
Exchange Commission has permitted such suspension; or (c) an emergency as
determined by the Securities and Exchange Commission exists, making sale of
portfolio securities or valuations of the Funds' net assets not reasonably
practicable.
A shareholder may not reduce the value of their account to less than $100 by
writing checks. The check writing privilege is not available when purchases are
made through a financial institution providing an automatic "sweep" investment
program. The Funds and the Custodian reserve the right to terminate the check
writing service or to institute charges for the service.
If an investor's account drops below $250 due to redemptions, the Funds reserve
the right to redeem any remaining shares if after 30 days' notice additional
investments to bring the account value to $250 are not made.
HOW TO REDEEM SHARES
BY MAIL-- Send a "letter of instruction": a
TO: 2203 GRAND AVENUE letter specifying the name of the
DES MOINES, IA 50312-5338 Fund, the number of shares to be
sold, your name, your account number,
and the additional requirements
listed below that apply to your
particular account.
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole Letter of instruction signed by all
Proprietorship, Custodial (Uniform persons required to sign for the
Gifts or Transfers To Minors Act), account, exactly as it is registered,
General Partners accompanied by signature guarantee(s).
Corporation, Association Letter of instruction and a corporate
resolution signed by person(s)
authorized to act on the account,
accompanied by signature guarantee(s).
Trust A letter of instruction signed by
the Trustee(s) (as Trustee), with a
signature guarantee. (If the Trustee's
17
<PAGE>
name is not registered on your
account, also provide a copy of the
trust document, certified within the
last 60 days.)
If you do not fall into any of these registration categories (e.g.,
Executors, Administrators, Conservators or Guardians) please call for further
instructions.
A signature guarantee is designed to protect you and the Fund against
fraudulent transactions by unauthorized persons. A signature guarantee is
required for all persons registered on an account. A signature guarantee may
be obtained from an eligible guarantor institution, as defined by the
Securities and Exchange Commission. These institutions include banks, savings
and loan associations, credit unions, brokerage firms, and others. The words,
"SIGNATURE GUARANTEED" must be stamped or typed near each person's signature
and appear with the printed name, title, and signature of an officer and the
name of the guarantor institution. PLEASE NOTE THAT A NOTARY PUBLIC STAMP OR
SEAL IS NOT A SIGNATURE GUARANTEE.
FOR ALL OPTIONS BELOW, PLEASE CALL 1-800-798-1819
BY CHECK-- You must have applied for the check
(minimum $250 writing feature on your account
maximum $100,000) spplication. You may redeem pro-
vided that the signatures you
designated are on the check. (There
is no charge for this service and
you may write an unlimited number
of checks.)
BY EXCHANGE-- You must meet the minimum investment
requirement of the other fund. You
can only exchange between accounts
with identical names, addresses, and
taxpayer identification numbers.
BY ELECTRONIC FUNDS You must have applied for the
TRANSFER (ACH) OR WIRE-- Telephone Transfer feature on your
application. Allow two days via ACH.
Call before 10:00 a.m. for same day
wire. $15.00 fee for bank wires.
18
<PAGE>
TABLE OF CONTENTS
Prospectus Summary..........................................................2
Expense Summary of Shares...................................................2
Investment Objectives, Policies and Restrictions............................7
Liquid Assets...............................................................7
Municipal Assets............................................................9
Performance................................................................12
Distributions and Taxes....................................................13
Organization and Shares of the Funds.......................................14
Shareholder Reports and Meetings...........................................13
Management and Fees........................................................15
Opening an Account.........................................................16
Share Price................................................................16
Purchasing Shares..........................................................16
Shareholder Services.......................................................19
Redeeming Shares...........................................................21
NO SALESMAN, OR OTHER PERSON, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS OR BY BISYS FUND SERVICES, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY BISYS FUND SERVICES, INC., IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
19
<PAGE>
T SHARES
LIQUID ASSETS FUND AND MUNICIPAL ASSETS FUND
2203 Grand Avenue, Des Moines, Iowa 50312-5338
________________________________________________________________________________
FOR CURRENT YIELD, PURCHASE AND REDEMPTION INFORMATION CALL.........800-798-1819
....................................................................515-244-5426
________________________________________________________________________________
PROSPECTUS JANUARY 16, 1998
________________________________________________________________________________
Liquid Assets Fund and Municipal Assets Fund, each of these a "Fund",
(collectively, the "Funds") are money market mutual funds designed to enable
investors to meet short-term goals. Investors choose whichever Fund best suits
their needs and may, without charge, exchange Funds as their investment outlook
or goals change.
Liquid Assets Fund offers four classes of shares and Municipal Assets Fund
offers three classes of shares. This Prospectus describes the "T Shares" of each
Fund. T Shares are offered to customers of banks. T Shares are normally offered
through trust organizations or others providing shareholder services such as
establishing and maintaining accounts and records for their customers who invest
in T Shares, assisting customers in processing purchase, exchange and redemption
requests, and responding to customers' inquiries regarding their accounts. The
Funds also offer "S Shares" and "I Shares" which accrue daily dividends in the
same manner as T Shares except that each class bears separate distribution
and/or shareholder administrative servicing fees. "S2 Shares" are also offered
by Liquid Assets Fund. (see "Organization and Shares of the Funds").
LIQUID ASSETS FUND, ("Liquid Assets") seeks maximum current income consistent
with safety of principal and maintenance of liquidity. MUNICIPAL ASSETS FUND,
("Municipal Assets") seeks maximum current income exempt from federal income
tax, consistent with safety of principal and maintenance of liquidity. Trust
Shares are offered and redeemed at $1.00 per share under rules which allow the
Funds to use the amortized cost method of valuing the Funds' assets.
AN INVESTMENT IN SHARES OF THE FUNDS IS NOT INSURED OR GUARANTEED BY THE UNITED
STATES GOVERNMENT, BY ANY STATE, OR BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF ANY
BANK, OR GUARANTEED BY A BANK. INVESTMENTS IN THE FUNDS INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE FUNDS SEEK TO MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00, BUT UNDER
EXTRAORDINARY CIRCUMSTANCES THE VALUE OF SHARES MAY VARY FROM $1.00 AND
CONSEQUENTLY, THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth basic information about each Fund that investors
should know before investing and should be retained for future reference.
Statements of Additional Information (as of the date of this Prospectus) which
contain more detailed information about each Fund have been filed with the
Securities and Exchange Commission and are hereby incorporated by reference. The
Statements of Additional Information are available free upon request from the
Funds at the address and telephone number indicated above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS SUMMARY
TYPE OF COMPANY
Each Fund is a diversified series of an open-end, management investment company.
INVESTMENT OBJECTIVE
For Liquid Assets, maximum current income consistent with safety of principal
and maintenance of liquidity.
For Municipal Assets, maximum current income exempt from federal income tax,
consistent with safety of principal and maintenance of liquidity.
INVESTMENT POLICY
Under normal market conditions, Liquid Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term debt obligations
including, primarily, redeemable Certificates backed by federally insured
student loans and Farmers Home Administration guaranteed loans, commercial
paper, bank obligations, short-term corporate obligations and obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations having a
dollar-weighted average maturity of 90 days or less. The Fund seeks to maintain
a net asset value of $1.00 per share.
Under normal market conditions, Municipal Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term municipal
securities which mature or have a demand feature exercisable in one year or less
from the date of acquisition having a dollar-weighted average maturity of 90
days or less. The Fund seeks to maintain a net asset value of $1.00 per share.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Funds is subject to certain risks, as set forth in detail
under "INVESTMENT OBJECTIVES, POLICIES AND Restrictions." As with all mutual
funds, there can be no assurance that the Funds will achieve their investment
objectives.
OFFERING PRICE
The public offering price of each Fund is equal to its net asset value of $1.00
per Share.
SHARES OFFERED
T Shares of common stock ("Shares") of Liquid Assets and Municipal Assets, each
a separate investment portfolio of the IMG Mutual Funds, Inc., a Maryland
Corporation. See "OPENING AN ACCOUNT", "PURCHASING SHARES" and "REDEEMING
SHARES" for detailed information about how to buy and sell shares.
MINIMUM PURCHASE
The minimum initial investment is $250 with $25 minimum subsequent investments
(subject to certain exceptions).
DIVIDENDS
Dividends are declared daily and paid monthly and will be automatically
reinvested unless the shareholder elects otherwise.
2
<PAGE>
INVESTMENT ADVISOR
Investors Management Group, Ltd. (the "Advisor").
ADMINISTRATOR
Investors Management Group, Ltd. (the "Administrator").
DISTRIBUTOR
BISYS Fund Services Inc., Columbus, Ohio (the "Distributor")
3
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
LIQUID MUNICIPAL
ASSETS ASSETS
Maximum Sales Charge Imposed on Purchases None None
Maximum Sales Charge on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fee * None None
Exchange Fee None None
* A $15.00 fee may be charged to an individual shareholder account for
redemption by wire.
LIQUID MUNICIPAL
ASSETS ASSETS
ESTIMATED ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees...................................... 0.35% 0.35%
12b-1 Distribution Fees.............................. 0.00% 0.00%
Other Expenses
Shareholder Servicing Fees After Limitations 1..... 0.15% 0.15%
Administrative Fees 2.............................. 0.06% 0.06%
Other Expenses..................................... 0.11% 0.15%
Total Other Expenses............................... 0.32% 0.36%
Total Fund Operating Expenses After Limitations 2.... 0.67% 0.71%
The purpose of the above table is to assist a potential purchaser of a Fund's
Shares in understanding the various costs and expenses that an investor in T
Shares of a Fund will bear directly or indirectly. The table reflects the
current fees and an estimate of other expenses. From time to time, the Fund's
Advisor may voluntarily waive the Management Fees and/or absorb certain expenses
for a Fund or class of Shares of a Fund. Long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers. Wire transfers may be used to
transfer federal funds directly to/from the Funds' custodian bank.
1 The Funds have entered into Shareholder Servicing Agreements under the
Administrative Services Plan pursuant to which the Funds are authorized to pay
financial institutions, such as banks, a periodic fee calculated at an annual
rate of 0.25% of the average daily net assets of such Funds. Currently, however,
the Funds have limited these fees to an annual rate of 0.15% of the average
daily net assets of each Fund.
2 The Funds are subject to a Management and Administration Agreement with IMG
pursuant to which the Funds are authorized to pay a periodic fee calculated at
an annual rate of 0.21% of the average daily net assets of such Funds.
Currently, however, the fee has been voluntarily limited to an annual rate of
0.06%. Absent the limitation of these fees, "Total Operating Expenses" as a
percentage of average daily net assets would have been 0.92% for Liquid Assets
and 0.96% for Municipal Assets.
EXAMPLE
You would pay the following expenses on a $1,000 investment in each Fund
assuming, (1) a (hypothetical) five percent annual return and (2) redemption at
the end of each time period.
1 Year 3 Years 5 Years 10 Years
Liquid Assets $ 7 $21 $37 $83
Municipal Assets $ 7 $23 $40 $88
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. The above Example is based on the expense information
included in the previous Expense Summary The Expense Summary and Examples do not
reflect any charges that may be imposed by financial institutions on their
customers. Please refer to "MANAGEMENT AND FEES" for a more complete discussion
of the Shareholder transaction expenses and annual operating expenses for the
Fund.
4
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
LIQUID ASSETS
The investment objective of Liquid Assets is maximum current income consistent
with safety of principal and maintenance of liquidity. The Fund invests in the
following money market instruments maturing in 397 days or less from time of
investment, (with certain exceptions):
(1) Obligations issued or guaranteed by the U.S. government or any agency or
instrumentality thereof. Such securities will include those supported by
the full faith and credit of the United States Treasury or the right of
the agency or instrumentality to borrow from the Treasury, as well as
those supported only by the credit of the issuing agency or
instrumentality.
(2) Repurchase agreements involving securities in the immediately foregoing
categories. A repurchase agreement involves the sale of such securities
to the Fund with the concurrent agreement of the seller to repurchase
them at a specified time and price to yield an agreed upon rate of
interest. Repurchase agreements may involve certain risks which are
described in greater detail in the Statement of Additional Information.
(3) Redeemable interest-bearing trust certificates ("Student Loan
Certificates") issued by the Iowa Student Loan Trust and/or other Student
Loan Trusts established by the Fund, ("Student Loan Trusts"), created for
the sole purpose of purchasing from banks (which qualify as "eligible
lenders") federally insured student loans originated by banks. The
Student Loan Certificates will have original maturities of no more than
397 days but will be redeemable by the Fund at their face amount upon not
more than five days' written notice to the issuing Student Loan Trust.
Further details concerning the Student Loan Trusts and the Fund's
investments in Student Loan Certificates are found in the Statement of
Additional Information.
(4) Redeemable interest-bearing ownership certificates ("FmHA Certificates")
issued by one or more guaranteed loan trusts ("FmHA Trusts"), each
created for the purpose of acquiring participation interests in the
guaranteed portion of Farmer's Home Administration ("FmHA") guaranteed
loans. The FmHA Certificates will have original maturities of no more
than 397 days but will be redeemable by the Fund at their face amount
upon not more than five days' written notice to the issuing FmHA Trust.
Further details concerning the FmHA Trusts and the Fund's investment in
FmHA Certificates and FmHA guaranteed loans are found in the Statement of
Additional Information.
(5) Commercial paper which at the time of investment (a) is rated (or the
issuer of which has been rated) highest quality by two nationally
recognized statistical rating organizations ("NRSRO") if rated by two or
more NRSROs; (b) is rated (or the issuer of which has been rated) highest
quality if rated by only one NRSRO; or (c) is determined to be of
equivalent quality by the Fund's Board of Directors if unrated.
(6) U.S. dollar-denominated bank obligations (certificates of deposit and
bankers' acceptances) issued by domestic offices of U.S. banks which, at
the date of investment, have capital, surplus, and undivided profits (as
of the date of their most recently published financial statements) in
excess of $10,000,000; and obligations of other banks or savings and
loans if such obligations are insured by the Federal Deposit Insurance
Corporation, provided that not more than 10 percent of the total assets
of the Fund will be invested in such insured obligations.
(7) Short-term (maturing in one year or less) corporate obligations which at
the time of investment (a) are rated in the highest rating category by
two NRSROs, if rated by two or more NRSROs; (b) are rated in the highest
rating category if rated by only one NRSRO; or (c) are determined to be
of equivalent quality by the Fund's Board of Directors if unrated.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
5
<PAGE>
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not have invested more than five percent of its total
assets in securities issued by a single issuer. For additional requirements of
Rule 2a-7, see "Opening an Account -- Share Price". Assets of the Fund will
consist of securities with maturities of 397 days or less at date of purchase
or, if maturing beyond 397 days, will be backed by Liquidity and Servicing
Agreements or Guaranteed Funding Agreements and will have variable interest
rates adjustable at least semiannually. In determining whether particular
variable rate investments backed by Liquidity and Servicing Agreements or
Guaranteed Funding Agreements may be made, the period remaining until maturity
will be deemed to be the longer of the demand notice period required before the
Fund is entitled to receive payment of the principal amount or the period
remaining until the next interest adjustment. The dollar-weighted average
maturity of Fund investments will be 90 days or less, determined in the same
manner. While the underlying security in a repurchase agreement may have a
maturity of more than 397 days, the repurchase agreement itself will terminate
in less than 397 days, and typically within a few days. The Fund intends to
invest at least 25 percent of its total assets in Student Loan Certificates,
and/or FmHA Certificates, except when such investments are either not available
in sufficient quantity or do not carry yields competitive with alternative
investments.
It is the policy of the Fund that any illiquid securities (including repurchase
agreements of more than seven days duration) may not constitute, at the time of
purchase or at any time, more than ten percent of the value of the total net
assets of the Fund.
As a fundamental policy, the Fund will not concentrate its investments in any
one industry and pursuant to Section 18(f) of the 1940 Act, the Fund may not
issue senior securities. As a general policy, it is the Fund's intention to hold
investments until they mature. However, in an effort to increase portfolio
yields the Fund may periodically trade securities to take advantage of perceived
disparities between markets for various short-term money market instruments. It
is also possible that redemptions of Fund shares could necessitate the sale of
portfolio investments prior to maturity and at times when such sale would be
undesirable because of unfavorable market conditions.
While investments by the Fund will be confined to high quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible Participating Banks or borrowers will default on the provisions of
their agreements with the Fund or that banks will default on repurchase
agreements with the Student Loan Trusts or the FmHA Trusts, which could cause
the net asset value per share to decrease.
In light of these various contingencies, there can be no assurances the Fund
will achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described above; (2) invest more than 80 percent of its total assets
in Student Loan Certificates and/or FmHA Certificates; (3) purchase or sell real
estate (other than short-term loans secured by real estate or interests therein
or loans to companies which invest in or engage in other activities related to
real estate), commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (4) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
repayment and guarantee arrangements on loan participations purchased from
Participating Banks), calls, straddles, spreads or combinations thereof; (5)
make loans to other persons, provided the Fund may invest up to 80 percent of
its total assets in Student Loan Certificates or FmHA Certificates, as described
in (2) above, and may make the investments and enter into repurchase agreements
as described above; (6) invest in securities with legal or contractual
restrictions on resale (except for repurchase agreements, Student Loan
Certificates, and FmHA Certificates) or for which no ready market exists; (7)
enter into repurchase agreements if, as a result thereof, more than five percent
of the Fund's total assets (taken at market value at the time of such
investment) would be subject to repurchase agreements maturing in more than
seven days.
The foregoing investment restrictions are considered fundamental policies which
6
<PAGE>
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (a) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (b)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
MUNICIPAL ASSETS
The investment objective of Municipal Assets is maximum current income exempt
from federal income tax, consistent with safety of principal and maintenance of
liquidity. The Fund invests in the following types of money market instruments
maturing in 397 days or less from time of investment (with certain exceptions),
as defined herein:
(1) Tax-exempt debt obligations issued by state and municipal governmental
units and public authorities within the United States and participation
interests therein. With few exceptions such obligations will be nonrated
and of limited marketability. However, they will be backed by demand
repurchase commitments of the issuers thereof and irrevocable bank
letters of credit or guarantees (collectively referred to herein as
"Liquidity Agreements"). The Liquidity Agreements will permit the holder
of the securities to demand payment of the unpaid principal balance plus
accrued interest upon a specified number of days' notice either from the
issuer or by drawing on an irrevocable bank letter of credit or
guarantee. In addition, all obligations with maturities longer than 397
days from date of purchase will, by their terms, bear rates of interest
that are adjusted upward or downward no less frequently than semiannually
by means of a formula intended to reflect market changes in interest
rates. Certain types of industrial development bonds issued by public
bodies to finance the construction of industrial and commercial
facilities and equipment are also purchased. The Statement of Additional
Information contains further details concerning the Fund's policies and
procedures with respect to investments in such tax-exempt obligations and
participation interests.
(2) High quality tax-exempt debt obligations issued by state and municipal
governments and by public authorities, including issues sold as interim
financing in anticipation of tax collections, revenue receipts or bond
sales, and tax-exempt Project Notes secured by the full faith and credit
of the United States. Such obligations will be purchased only if backed
by the full faith and credit of the United States or rated Aaa, Aa,
MIG-1, MIG-2 or Prime-1 by Moody's Investors Service, Inc., or AAA, AA,
or A-1 by Standard & Poor's Corporation. Nonrated securities may also be
purchased if determined by the Fund's board of directors to be of
comparable quality to the rated securities in which the Fund may invest.
(3) Taxable obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government may be acquired from time to time on a temporary
basis for defensive purposes.
(4) Repurchase agreements involving securities in the immediate foregoing
category. A repurchase agreement involves the sale of such securities to
the Fund with the concurrent agreement of the seller to repurchase them
at a specified time and price, to yield an agreed upon rate of interest.
Repurchase agreements may involve certain risks which are described in
greater detail in the Statement of Additional Information.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not invest more than five percent of its total assets in
securities issued by a single issuer. For additional requirements of Rule 2a-7,
see "Opening an Account -- Share Price". Assets of the Fund will consist of
securities with maturities of 397 days or less at date of purchase or, if
maturing beyond 397 days, securities which are backed by Liquidity Agreements
and which have variable interest rates adjustable at least semi-annually and
upon the adjustment of the interest rate the value of the securities will be
approximately equal to par. In determining whether particular variable rate
investments backed by Liquidity Agreements may be made, the period remaining
until maturity will be deemed to be the longer of the demand notice period
required before the Fund is entitled to receive payment of the principal amount
7
<PAGE>
or the period remaining until the next interest adjustment. The dollar-weighted
average maturity of Fund investments will be 90 days or less, determined in the
same manner.
Under normal market conditions, the Fund as a matter of fundamental policy, will
invest at least 80 percent of its total net assets in tax-exempt securities, the
interest on which is exempt from federal income tax, except to the extent that
some or all of which may be subject to the alternative minimum tax. This
fundamental policy may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
It is the policy of the Fund that any illiquid securities may not constitute, at
the time of purchase or at anytime, more than ten percent of the value of the
total net assets of the Fund. The Fund will not concentrate its investments in
any one industry and pursuant to Section 18(f) of the 1940 Act may not issue
senior securities.
As a general policy, it is the Fund's intention to hold investments until they
mature or until immediately prior to the expiration of an applicable Liquidity
Agreement. However, in an effort to increase portfolio yields, the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of portfolio
investments prior to maturity and at times when such sale would be undesirable
because of unfavorable market conditions.
New issues of tax-exempt debt obligations are usually offered on a when-issued
basis with the securities to be delivered and paid for approximately 45 days
following the initial purchase commitment. The Fund may occasionally enter into
such commitments, subject to certain limitations and procedures discussed in the
Statement of Additional Information.
While investments by the Fund will be confined to high-quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances, described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible an issuer or bank will default on the provisions of their Liquidity
Agreements, which could cause the net asset value per share to decrease. In
light of these various contingencies, there can be no assurances the Fund will
achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described under "Investment Policy"; (2) invest more than 80 percent
of its total assets in tax-exempt fixed and variable rate debt obligations (or
participation interests therein) issued by state and local governmental units
within the United States which are backed by Liquidity Agreements; (3) invest
more than five percent of its total assets (determined as of the date of
purchase) in tax-exempt obligations or participation interests therein subject
to Liquidity Agreements issued by any one bank; (4) purchase or sell real
estate, commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (5) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
Liquidity Agreements covering certain tax-exempt obligations purchased by the
Fund), calls, straddles, spreads or combinations thereof; (6) make loans to
other persons, provided the Fund may make investments and enter into repurchase
agreements as described above; (7) invest in securities with legal or
contractual restrictions on resale (except for tax-exempt debt obligations
subject to Liquidity Agreements) or for which no ready market exists; (8) enter
into a Liquidity Agreement with any bank unless such bank is a United States
bank which has a record, together with predecessors, of at least five years of
continuous operations; (9) enter into repurchase agreements if, as a result
thereof, more than five percent of the Fund's total assets (taken at market
value at the time of such investment) would be subject to repurchase agreements
maturing in more than seven days; and (10) enter into Liquidity Agreements with
any bank if five percent or more of the securities of such bank are owned by the
Advisor or by directors and officers of the Fund or the Advisor, or if any
director or officer of the Fund or the Advisor owns more than 1/2 percent of the
voting securities of such bank.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (1) 67 percent or more of the securities voting
8
<PAGE>
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (2)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
PERFORMANCE
Performance of each Fund may be quoted in advertising in terms of current yield
and effective yield. CURRENT YIELD refers to the income generated by an
investment in either Fund over a seven-day period. This income is then
"annualized". That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The Fund may also present a 30-day
yield which is calculated similarly but instead refers to a 30-day period rather
than a seven-day period. EFFECTIVE YIELD is calculated similarly but, when
annualized, that income earned from the investment is assumed to be reinvested
weekly. Effective yield will be slightly higher than current yield because of
the compounding effect of this assumed reinvestment.
Performance of the Funds may also be compared to other mutual funds with similar
investment objectives, relevant indices or rankings prepared by independent
services or other financial publications, or yields on deposits at financial
institutions. Unlike the Funds, deposit accounts at financial institutions are
generally insured by the Federal Deposit Insurance Corporation and do not
fluctuate to the extent of the Funds.
Additionally, Municipal Assets may quote a taxable-equivalent yield based on a
stated income tax rate. Please see each Fund's Statement of Additional
Information for further discussion of the manner in which yields are calculated
and the comparative performance data which may be used.
Of course, the Funds' yields are not fixed nor is principal guaranteed. Yields
are functions of the type and quality of instruments held in the portfolio,
operating expenses, and market conditions. Consequently, current yields will
fluctuate and are not necessarily representative of the future results
DISTRIBUTIONS AND TAXES
Dividends from the net income of each Fund are declared daily on each business
day and paid monthly to holders of record immediately before 3:00 p.m. Central
Time. Dividends are automatically reinvested in T Shares unless cash payment has
been selected on the Account Application. If a shareholder has elected to
receive dividends and/or distributions in cash and the checks are returned and
marked as "undeliverable" or remain uncashed for six months, your cash election
will be changed automatically and future dividends will be reinvested in T
Shares of the Fund. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in T Shares of
the Fund at the per share net asset value determined as of the date of
cancellation. If a shareholder redeems the entire amount in his account during
the month, dividends credited to the account from the beginning of the month
through the date of redemption are paid with the redemption proceeds.
Dividends on each class of shares are determined in the same manner and are paid
in the same amounts irrespective of class, except that each class bears separate
distribution and/or shareholder servicing fees (see "Organization and Shares of
the Funds").
Dividends declared in October, November, or December of any year, payable to
shareholders of record on a specified date in such months, will be deemed to
have been received by the shareholders and paid by the Funds on December 31 of
such year, in the event that such dividends are actually paid during January of
the following year.
Each Fund intends to qualify as a regulated investment company by distributing
substantially all of its taxable net income, including any realized capital
gains, and thus will not incur any Federal income taxes. Shareholders will
receive taxable dividend income, tax-exempt dividend income and/or capital
gains, as the case may be, from distributions whether paid in cash or received
in the form of additional shares.
Dividends derived from interest on federally tax-exempt debt obligations owned
9
<PAGE>
by Municipal Assets are intended to constitute "exempt-interest dividends" which
are generally not Federally taxable to shareholders, although some could be
includable for purposes of the alternative minimum tax. Dividends derived from
other interest and the realization of capital gains are taxable to shareholders
whether or not reinvested.
Municipal Assets expenses will be allocated between tax-exempt and taxable
income in the same proportion as the Fund's tax-exempt income bears to the total
of such exempt income and its gross income (excluding from gross income the
excess of capital gains over capital losses).
Promptly after the end of each calendar year, each shareholder will receive a
statement of the Federal income tax status of all dividends and distributions
paid during the year. This discussion is only a summary and relates solely to
Federal tax matters. Further discussion of the Federal Income Tax consequences
of an investment in the Fund is provided in the Statement of Additional
Information. Dividends may also be subject to local taxation. Shareholders are
encouraged to consult with their personal tax advisors.
ORGANIZATION AND SHARES OF THE FUNDS
IMG Mutual Funds, Inc. is a Maryland corporation organized on November 16, 1994.
The Funds were created on October 30, 1997, to acquire the assets and continue
the business of the corresponding substantially identical investment portfolios
of the Liquid Assets Funds, Inc., and the Municipal Assets Funds, Inc., two
separately registered open-end, diversified management investment companies
organized as Iowa corporations. References herein to the "immediate predecessor"
of the Funds refer to the respective companies which correspond to such Fund.
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.
The Articles of Incorporation of the Company permit the Company, by resolution
of its Board of Directors, to create new series of common stock 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.
T Shares of the Funds are described in this Prospectus. S Shares, I Shares and
S2 Shares are offered in separate Prospectuses which may be obtained by calling
the Fund at 1-800-798-1819 or writing to the address on the cover of this
Prospectus. Please read the Prospectus carefully before investing or sending
money. All shares are offered to individual and institutional investors acting
on their own behalf or on behalf of their customers and bear their pro rata
portion of all operating expenses paid by the Funds, except that S Shares, T
Shares and S2 Shares bear separate distribution and/or shareholder servicing
fees. I Shares bear no distribution or shareholder servicing fees.
Each class of shares offers different privileges. S Shares and S2 Shares are
normally offered through financial institutions providing automatic "sweep"
investment programs to their customers, and offer a check writing privilege. T
Shares are normally offered through trust organizations or others providing
shareholder services such as establishing and maintaining accounts and records
for their customers who invest in T Shares, assisting customers in processing
purchase, exchange and redemption requests, and responding to customers'
inquiries concerning their investments. I Shares are available directly from the
Distributor only and offer only the Exchange and Telephone Transfer services.
Each class of shares is exchangeable only for shares of the same class.
Financial institutions selling or servicing S Shares, T Shares and S2 Shares may
receive different compensation with respect to one class over another.
Shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held. Shares of each Fund will vote
together and not by class unless otherwise required by law or permitted by each
Fund's Board of Directors. All shareholders of each Fund will vote together as a
single class on matters relating to the Fund's investment advisory agreement,
10
<PAGE>
investment objective and fundamental policies. Only holders of S Shares, S2
Shares and T Shares will vote on matters pertaining to the Administrative
Services Plan.
Shares of the Funds have non-cumulative voting rights and, accordingly, the
holders of more than 50 percent of each Fund's outstanding shares (irrespective
of class) may elect all of the Directors. Shares have no preemptive rights and
only such conversion and exchange rights as each Fund's Board may grant in its
discretion. When issued for payments as described in this Prospectus, shares
will be fully paid and nonassessable. All shares are held in uncertified form
and will be evidenced by the appropriate notation on the books of the transfer
agent.
SHAREHOLDER REPORTS AND MEETINGS
Each shareholder will receive monthly Fund information, an unaudited semiannual
report, and an annual report containing audited financial statements. If you
have questions about your account, call 1-800-798-1819. You may also write the
Fund at the address on the cover of this Prospectus. You may order statements
for the current and preceding year at no charge. However, there will be a $10.00
fee per statement for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Funds
have adopted the appropriate provisions in their Bylaws and may, in their
discretion, not hold annual meetings of shareholders for the election of
Directors unless otherwise required by the 1940 Act. The Funds have also adopted
provisions in their Bylaws for the removal of Directors by the shareholders.
Shareholders may receive assistance in communicating with other shareholders as
provided in Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Shareholders of the Funds may remove a Director by the affirmative vote of a
majority of the Funds' outstanding voting shares. In addition, the Directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Director or for any other purpose when requested
in writing to do so by the shareholders or record of not less than 10 percent of
the Funds' outstanding voting securities.
All consideration received by the Funds for shares of one of the Funds and all
assets in which such consideration is invested, belong to that Fund (subject
only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one Fund
are treated separately from those of the other Funds.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Funds, will 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 such matter. Rule 18f-2 further provides that a Fund shall 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 the interest of such
Fund. However, the Rule exempts the selection of independent auditors and the
election of Directors from the separate voting requirements of the Rule.
MANAGEMENT AND FEES
Overall responsibility for management of the Company rests with the Board of
Directors, who are elected by the Shareholders of the Company's Funds. The
Company will be managed by the Directors in accordance with laws of Maryland
governing corporations. The Directors, in turn, elect the officers of the
Company to supervise the day-to-day operations. The Directors receive fees and
are reimbursed for their expenses in connection with each meeting of the Board
of Directors they attend. The officers of the Company receive no compensation
directly from the Company for performing the duties of their offices.
Investors Management Group, ("IMG") manages the investments and business affairs
11
<PAGE>
of the Funds. IMG,., is a federally registered Investment Advisor organized in
1982 and located at 2203 Grand Avenue, Des Moines, Iowa 50312-5338. IMG has been
providing continuous investment management to pension and profit-sharing plans,
insurance companies, public agencies, banks, endowments and charitable
institutions, other mutual funds, individuals and others for over 15 years. As
of November 30, 1997, IMG had approximately $1.6 billion in equity, fixed income
and money market assets under management.
The Funds will be managed by Jeffrey D. Lorenzen, CFA, Managing Director,
Kathryn D. Beyer, CFA, Managing Director, and Elizabeth S. Pierson, CFA, Senior
Fixed Income Manager. Mr. Lorenzen is a fixed income strategist and is a member
of IMG's Investment Policy Committee. Prior to joining IMG in 1992, his
experience includes serving as a securities analyst and corporate fixed income
analyst for The Statesman Group from 1989 to 1992. Mr. Lorenzen received his
Masters of Business Administration degree from Drake University, Des Moines,
Iowa, and his Bachelor of Business Administration degree from the University of
Iowa, Iowa City, Iowa. Ms. Beyer is a fixed income strategist and is a member of
IMG's Investment Policy Committee. Prior to joining IMG in 1993, her experience
includes serving as a securities analyst and director of mortgage-backed
securities for Central Life Assurance Company from 1988 to 1993. Ms. Beyer
received her Master of Business Administration degree from Drake University, Des
Moines, Iowa, and her Bachelor of Science degree in agricultural engineering
from Iowa State University, Ames, Iowa. Ms. Pierson is a fixed income strategist
and is a member of IMG's Investment Policy Committee. She began her investment
career in 1984 with AMCORE Capital Management, Inc. Ms. Pierson received her
Bachelor of Science degree from the University of Illinois, Champaign-Urbana.
Under an Investment Advisory Agreement between the Funds and IMG, a fee is paid
to IMG for investment advisory services. Each Fund is responsible for paying
operating expenses not assumed by IMG. The investment management fee for each
Fund is calculated daily and paid monthly. The maximum management fee for each
Fund is 0.35 percent of each Fund's average daily net assets.
From time to time, IMG may voluntarily waive all or a portion of the management
fee and/or absorb certain expenses of a Fund or class of shares without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for a
Fund or class of shares and increasing the overall yield to investors in that
Fund or class of shares at the time any such amounts are waived and/or absorbed.
IMG may not seek reimbursement of such waived fees at a later date. The waiver
of such fee will cause the yield of a Fund to be higher than it would otherwise
be in the absence of such a waiver.
IMG also provides management and administration, fund accounting, transfer
agency, and shareholder recordkeeping services to the Funds. Under a Management
and Administration Agreement, IMG will supervise all aspects of the operations
of the Funds, except those performed under the Investment Advisory Agreement, by
the Custodian, under the Transfer Agency Agreement and under the Fund Accounting
Agreement. For these services the Funds each pay IMG a fee calculated daily and
paid monthly at an annual rate of up to 0.25% of the average daily net assets of
each Fund. Presently, the fee is calculated at 0.06% annually. Under a Fund
Accounting Agreement, IMG provides bookkeeping and accounting services to the
Funds, including calculating daily net asset value and yield quotations. For
these services, the Funds each pay IMG a fee calculated daily and paid monthly
at an annual rate of 0.03% of the average daily net assets of each Fund. Under a
Transfer Agency Agreement, IMG provides customary and usual services of a
transfer agent to the Funds. For these services, IMG is paid various fees
depending on the class of shares of the Funds. The fees are charged to each
class of shares separately and are not computed on a periodic percentage of net
assets, but at a flat annual fee depending on the number of accounts. The fees
received and the services provided under these contracts are in addition to
those received and paid to IMG under the Advisory Agreement.
At its expense, IMG provides office space and all necessary office facilities,
equipment, and personnel for servicing the investments of the Funds. Except for
the expenses expressly assumed by IMG pursuant to its investment advisory
agreement, each Fund is responsible for all its other expenses, including,
without limitation, governmental fees, interest charges, taxes if applicable,
membership dues in the Investment Company Institute allocable to the Fund,
broker commissions, and other expenses connected with the execution, recording
and settlement of Fund security transactions, expenses of repurchasing and
redeeming shares and expenses of servicing shareholder accounts; expenses for
preparing, printing and distributing periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions;
12
<PAGE>
insurance premiums, fees and expenses of the Fund's custodian, including
safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Funds;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Funds; compensation and
expenses of Directors who are not "interested persons" of the Advisor; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses to existing shareholders are borne by the
Funds except that the Funds' Distribution Agreement requires that the
Distributor pay for prospectuses that are to be used for sales purposes with
persons other than current shareholders.
From time to time, IMG may voluntarily waive all or a portion of the investment
management fee and/or other fees and/or absorb certain expenses of a Fund
without further notification of the commencement or termination of such waiver
or absorption. Any such waiver will have the effect of lowering the overall
expense ratio for that Fund and increasing the Fund's overall yield to investors
at the time any such amounts are waived and/or absorbed.
Except as voluntarily absorbed by IMG, all expenses incurred in the operation of
the Funds will be borne by the Funds. Expenses attributable to a particular Fund
are charged against the assets of that Fund; other expenses of the Funds are
allocated among the Funds on a reasonable basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Fund.
Each Fund pays certain shareholder servicing fees to financial institutions
("Participating Organizations"), who render assistance in servicing their
customers who are direct or beneficial owners of each Fund's Shares under the
Administrative Services Plan and Servicing Agreements (the "Servicing
Agreements") adopted by the Funds' Board of Directors. The maximum fees payable
under the Servicing Agreements are an annual rate of 0.25%, computed monthly on
the basis of the average daily net asset value of each Fund. At present, the
Board of Directors has limited the fee to 0.15% until further notice. The
Directors of each Fund review quarterly a written report of the costs incurred
association with the Administrative Services Plan. The Directors believe that
the Administrative Services Plan is in the best interest of the Funds.
The Glass-Steagall Act and other applicable laws prohibit banks from engaging in
the business of underwriting, selling, or distributing securities. Insofar as
Participating Organizations (including banks) are compensated under the Plans,
their only function will be to perform administrative and shareholder services
for their clients who wish to invest in the Funds. If a Participating
Organization at a future date is prohibited from acting in this capacity, the
shareholder may lose the services provided by the Participating Organization;
however, it is not expected that the shareholders would incur any adverse
financial consequences. It is intended that none of the services provided by
such Participating Organizations other than through registered brokers will
involve the solicitation or sale of shares of the Funds.
AMCORE Investment Group, N.A., Rockford, Illinois, acts as custodian for the
Funds' cash and investments.
OPENING AN ACCOUNT
The Funds require a completed and signed application (which is attached) at the
time you open each new account. Additional paperwork may be required from
corporations, associations and certain fiduciaries. IF YOU HAVE QUESTIONS CALL
THE FUNDS AT 1-800-798-1819 FROM 8:00 A.M. TO 4:30 P.M. CENTRAL TIME.
SHARE PRICE
The shares of each Fund are sold without a sales charge. The price of one share
is its "net asset value" or NAV (generally $1.00). NAV is computed by adding the
value of each Fund's investments, plus cash and other assets, deducting
liabilities and then dividing the result by the number of shares outstanding.
The NAV of each Funds' shares is determined twice each business day, at 11:00
a.m. Central Time and at the close of the New York Stock Exchange (normally 3:00
p.m. Central Time). The Funds are open for business each day the Federal Reserve
is open.
13
<PAGE>
Your purchase will be processed at the next NAV calculated after your investment
has been converted to federal funds. If you invest by check, the Funds must
generally allow one or more days for conversion into federal funds before
accepting your purchase.
Rule 2a-7 under the Investment Company Act of 1940 permits the Funds to compute
net asset value per share using the amortized cost method of valuing portfolio
securities. As a condition for using the amortized cost method of valuation, the
Board of Directors established procedures to stabilize each Fund's net asset
value at $1.00 per Share. These procedures are described in more detail in each
Fund's Statement of Additional Information.
Under the amortized cost method of valuation, a security is initially valued at
cost on the date of purchase and, thereafter, any discount or premium is
amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security. U.S. government
obligations, Student Loan Certificates and FmHA Certificates, which are subject
to mandatory repurchase at their original purchase price, investments in taxable
and tax-exempt debt obligations rated by a recognized bond rating agency and
regularly traded in the secondary market, and nonrated fixed and variable rate
tax-exempt obligations and participation interests therein, not regularly traded
in the secondary market but subject to Liquidity Agreements will be valued at
amortized cost. Other assets are valued at a fair value determined in good faith
by the board of directors of each Fund.
PURCHASING SHARES
Shares of each Fund may be purchased directly from BISYS, Fund Services, Inc.,
as the distributor. Shares may also be purchased by customers of qualified
banks, savings and loan associations, broker/dealers, investment advisory firms,
and other organizations ("Participating Organizations") that have entered into
servicing agreements with the Distributor. The Participating Organization is
responsible for transmitting purchase orders directly to the Fund's Distributor.
A Participating Organization may elect to hold record ownership of shares for
its customers and to show beneficial ownership of shares on the account
statements it provides to them. In the alternative, a Participating Organization
may elect to establish its customers' accounts of record with IMG as transfer
agent for the Funds. Generally, shares purchased through Participating
Organizations will be held by the Participating Organization as shareholder of
record.
Shares of each Fund are offered without any purchase or redemption charge
imposed by the Fund. The minimum initial investment that may be made in each
Fund is $250. Subsequent investments in each Fund must be made in amounts of not
less than $25, except where purchases are made through Participating
Organizations in which case there is no minimum. Participating Organizations may
aggregate their customers' purchases to satisfy the required minimums.
Purchases may be effected on business days when the Advisor, Distributor and
Custodian are open for business. The Funds reserve the right to reject any
purchase order, including purchases made with foreign and third party drafts or
checks.
A purchase order for T Shares received in good order by the Funds by 11:00 a.m.
Central Time on a business day is effected at the net asset value per share
calculated as of 11:00 a.m. Central Time, and investors will receive the
dividend declared that day, if the Custodian has received the purchase price in
federal funds or other immediately available funds by 3:00 p.m. Central Time
that day. A purchase order for T Shares received after 11:00 a.m. Central Time
and prior to 3:00 p.m. Central Time on a business day for which such funds have
been received by 3:00 p.m. Central Time will be effected as of 3:00 p.m. Central
Time, and will begin to accrue dividends on the following business day. If
federal funds are not available by 3:00 p.m. Central Time, the order will be
canceled. Payment for orders which are not accepted or are canceled will be
returned after prompt inquiry to the transmitting organization.
While the Funds themselves do not presently levy sales, redemption or account
service charges, Participating Organizations may elect to do so and the Funds
may elect to do so in the future. Investors should inquire regarding the nature
and costs of services provided by Participating Organizations and determine if
such services are desired, because the costs thereof will reduce the Funds'
yields to the investor below that obtainable by investing in the Funds directly.
14
<PAGE>
Customers wishing to purchase shares through their Participating Organization
should contact such entity directly for appropriate instructions. (For a list of
the Participating Organizations in your area, call the Funds at 1-800-798-1819
or 515-244-5426.) Direct investors may purchase shares in accordance with the
procedures described below, "Purchase Procedures".
Certificates representing Fund shares purchased will not be issued. However, all
purchases are confirmed in writing to the investor and credited to their account
in the shareholder records maintained by the Transfer Agent. Investors will have
the same rights to their shares as if certificates had been issued.
PURCHASE PROCEDURES
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
BY MAIL $250 (minimum) $25 (minimum)
Please make your check Please make your check
payable to the Fund selected payable to the Fund
and mail to the address selected, with your
indicated on the application. account number on the
check and mail to the
address printed on your
account statement.
BY WIRE Please call for an account See instructions below.
number before initial invest-
ment at 1-800-798-1819 or
515-244-5426.
Federal Funds should be wired to: Federal Reserve Bank of Chicago for AMCORE
Investment Group, N.A., Rockford, Illinois, together with the name of the
Fund, your account number and names.
Please note that when accounts are opened by wire you must send a completed
application at your earliest convenience. Your application must be received
by the Fund before any instructions for redemption will be accepted.
BY ELECTRONIC Not available for initial Shareholders who have
FUNDS TRANSFER purchase. an account with an
(ACH) institution which is a
member of the Automated
Clearing House, may
elect to purchase Fund
shares via electronic
funds transfer. Select
this service on your
application or call
the Fund.
SHAREHOLDER SERVICES
Some shareholder services may not be available if shares are purchased through
Participating Organizations. Call the Funds at 1-800-798-1819 for more
information.
EXCHANGE PRIVILEGE. You may exchange T Shares of either Fund for T Shares in the
other Fund described in this Prospectus. An exchange involves a redemption of
the shares of the Fund being liquidated and a purchase of the shares of the Fund
in which the redemption proceeds are to be invested. The exchange privilege is
offered as a convenience to shareholders and is not intended to be a means of
speculating on short-term movements in securities prices by transactions
involving frequent purchases and sales of shares. Each Fund reserves the right
at any time and without prior notice, to suspend, limit, modify or terminate
exchange privileges or their use by individual shareholders in order to prevent
transactions considered to be disadvantageous to existing shareholders.
TELEPHONE TRANSFERS. This service allows you to authorize transfers of money to
purchase or sell shares. Using Telephone Transfer you can move money between
your bank account and your account in the Funds with one phone call. Moneys may
15
<PAGE>
be transferred either by wire or electronic funds transfer with an institution
which is a member of the Automated Clearing House ("ACH").
Wire transfers may be used to transfer federal funds directly to/from the Funds'
custodian bank. A $15.00 fee may be charged to your account for redemptions by
wire.
Allow two (2) days after the call for electronic funds transfer via ACH to move
moneys between your bank account and your account with either Fund.
For moneys recently invested, allow normal clearing time before redemption
proceeds are sent to your bank. In order to change the financial institution
account designated to receive redemption proceeds, it will be necessary to send
a written request to the Fund with a signature guarantee from a national or
state bank, a trust company or a federal savings and loan association, or a
member firm of the New York, American, Boston, Midwest or Pacific Stock
Exchange.
You can also arrange systematic periodic investments (minimum $50) into your
Fund account. Simply select the regular investment schedule you would like when
completing your account application. Your bank account will automatically be
debited to purchase shares of the Fund you select. You will receive confirmation
of each transaction.
Your bank must be a member of ACH and you must have a checking or NOW/Money
Market Deposit account to use electronic funds transfer or systematic investing.
Please allow 20 days after receipt of your application to activate the Telephone
Transfer capability.
STATEMENTS AND REPORTS. You will receive a statement of your account listing
every transaction that affects your share balance no less than once per month.
At least twice a year you will receive the financial statements of the Fund in
which you have invested with a summary of that Fund's portfolio composition and
performance. Each Fund's Annual Report is reported on by the Funds' independent
auditors, KPMG Peat Marwick LLP.
REDEEMING SHARES
Shareholders may request redemption of their shares at any time. Shares will be
redeemed at their net asset value as next determined after a redemption request
in good order is received by the Fund's Distributor. Redemption orders received
in good order by the Distributor before 11:00 a.m. Central Time on a business
day will be redeemed as of 11:00 a.m. Central Time and will earn dividends
through the previous day; proceeds normally will be sent electronically the same
day (or mailed by check the next business day) to the organization that placed
the redemption order in good form. Redemption orders received after 11:00 a.m.
Central Time or on a non-business Day will be redeemed as of 3:00 p.m. Central
Time or at the next determined net asset value and earn dividends through the
date the redemption request was received; proceeds will be sent electronically
on the next business day (or mailed by check on the second business day
thereafter). While the Funds use their best efforts to maintain their net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount originally invested.
If you purchase shares through a Participating Organization, you may redeem
shares in accordance with that Organization's rules regarding redemption
requests. Direct shareholders may redeem shares in accordance with the
procedures described under "How to Redeem Shares".
The Funds intend to pay redemption proceeds within two business days and in no
event will payment be made later than seven days after receipt of a redemption
request in good order. Payments to investors who request to redeem shares within
a few days after a purchase paid for by check may be delayed until the Funds can
verify the check has been collected.
The Funds reserve the right to suspend redemptions or to postpone the payment
therefore when: (a) trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, or the Exchange is closed
for other than customary weekend and holiday closings; (b) the Securities and
Exchange Commission has permitted such suspension; or (c) an emergency as
determined by the Securities and Exchange Commission exists, making sale of
portfolio securities or valuations of the Funds' net assets not reasonably
practicable.
16
<PAGE>
If an investor's account drops below $250 due to redemptions, the Funds reserve
the right to redeem any remaining shares, if after 30 days' notice, additional
investments to bring the account value to $250 are not made.
HOW TO REDEEM SHARES
BY MAIL-- Send a "letter of instruction": a
TO: 2203 GRAND AVENUE letter specifying the name of the
DES MOINES, IA 50312-5338 Fund, the number of shares to be
sold, your name, your account number,
and the additional requirements
listed below that apply to your
particular account.
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole Letter of instruction signed by all
Proprietorship, Custodial (Uniform persons required to sign for the
Gifts or Transfers To Minors Act), account, exactly as it is registered,
General Partners accompanied by signature guarantee(s).
Corporation, Association Letter of instruction and a corporate
resolution signed by person(s)
authorized to act on the account,
accompanied by signature guarantee(s).
Trust A letter of instruction signed by
the Trustee(s) (as Trustee), with a
signature guarantee. (If the Trustee's
name is not registered on your
account, also provide a copy of the
trust document, certified within the
last 60 days.)
If you do not fall into any of these registration categories (e.g.,
Executors, Administrators, Conservators or Guardians) please call for further
instructions.
A signature guarantee is designed to protect you and the Fund against
fraudulent transactions by unauthorized persons. A signature guarantee is
required for all persons registered on an account. A signature guarantee may
be obtained from an eligible guarantor institution, as defined by the
Securities and Exchange Commission. These institutions include banks, savings
and loan associations, credit unions, brokerage firms, and others. The words,
"SIGNATURE GUARANTEED" must be stamped or typed near each person's signature
and appear with the printed name, title, and signature of an officer and the
name of the guarantor institution. PLEASE NOTE THAT A NOTARY PUBLIC STAMP OR
SEAL IS NOT A SIGNATURE GUARANTEE.
FOR ALL OPTIONS BELOW, PLEASE CALL 1-800-798-1819
BY EXCHANGE-- You must meet the minimum investment
requirement of the other fund. You
can only exchange between accounts
with identical names, addresses, and
taxpayer identification numbers.
BY ELECTRONIC FUNDS You must have applied for the
TRANSFER (ACH) OR WIRE-- Telephone Transfer feature on your
application. Allow two days via ACH.
Call before 10:00 a.m. for same day
wire. $15.00 fee for bank wires.
17
<PAGE>
TABLE OF CONTENTS
Prospectus Summary..........................................................2
Expense Summary of T Shares.................................................2
Investment Objectives, Policies and Restrictions............................7
Liquid Assets...............................................................7
Municipal Assets............................................................9
Performance................................................................12
Distributions and Taxes....................................................13
Organization and Shares of the Funds.......................................14
Shareholder Reports and Meetings...........................................13
Management and Fees........................................................15
Opening an Account.........................................................17
Share Price................................................................17
Purchasing Shares..........................................................17
Shareholder Services.......................................................19
Redeeming Shares...........................................................21
NO SALESMAN, OR OTHER PERSON, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS OR BY BISYS FUND SERVICES, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY BISYS FUND SERVICES, INC., IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
18
<PAGE>
I SHARES
LIQUID ASSETS FUND AND MUNICIPAL ASSETS FUND
2203 Grand Avenue, Des Moines, Iowa 50312-5338
________________________________________________________________________________
FOR CURRENT YIELD, PURCHASE AND REDEMPTION INFORMATION CALL.........800-798-1819
....................................................................515-244-5426
________________________________________________________________________________
PROSPECTUS JANUARY 16, 1998
________________________________________________________________________________
Liquid Assets Fund and Municipal Assets Fund, each of these a "Fund",
(collectively, the "Funds") are money market mutual funds designed to enable
investors to meet short-term goals. Investors choose whichever Fund best suits
their needs and may, without charge, exchange Funds as their investment outlook
or goals change.
Liquid Assets Fund offers four classes of shares and Municipal Assets Fund
offers three classes of shares. This Prospectus describes the "I Shares" of each
Fund. I Shares are offered to individual and institutional customers (acting on
their own behalf or on the behalf of individuals). The Funds also offer "S
Shares" and "T Shares" which accrue daily dividends in the same manner as I
Shares except that each class bears separate distribution and/or shareholder
administrative servicing fees. "S2 Shares" are also offered by Liquid Assets
Fund. (see "Organization and Shares of the Funds").
LIQUID ASSETS FUND, ("Liquid Assets") seeks maximum current income consistent
with safety of principal and maintenance of liquidity. MUNICIPAL ASSETS FUND,
("Municipal Assets") seeks maximum current income exempt from federal income
tax, consistent with safety of principal and maintenance of liquidity. I Shares
are offered and redeemed at $1.00 per share under rules which allow the Funds to
use the amortized cost method of valuing the Funds' assets.
AN INVESTMENT IN SHARES OF THE FUNDS IS NOT INSURED OR GUARANTEED BY THE UNITED
STATES GOVERNMENT, BY ANY STATE, OR BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A
BANK, OR GUARANTEED BY A BANK. INVESTMENTS IN THE FUNDS INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE FUNDS SEEK TO MAINTAIN A CONSTANT NET ASSETS VALUE OF $1.00, BUT UNDER
EXTRAORDINARY CIRCUMSTANCES THE VALUE OF SHARES MAY VARY FROM $1.00 AND
CONSEQUENTLY, THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth basic information about each Fund that investors
should know before investing and should be retained for future reference.
Statements of Additional Information (as of the date of this Prospectus) which
contain more detailed information about each Fund have been filed with the
Securities and Exchange Commission and are hereby incorporated by reference. The
Statements of Additional Information are available free upon request from the
Funds at the address and telephone number indicated above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS SUMMARY
TYPE OF COMPANY
Each Fund is a diversified series of an open-end, management investment company.
INVESTMENT OBJECTIVE
For Liquid Assets, maximum current income consistent with safety of principal
and maintenance of liquidity.
For Municipal Assets, maximum current income exempt from federal income tax,
consistent with safety of principal and maintenance of liquidity.
INVESTMENT POLICY
Under normal market conditions, Liquid Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term debt obligations
including, primarily, redeemable Certificates backed by federally insured
student loans and Farmers Home Administration guaranteed loans, commercial
paper, bank obligations, short-term corporate obligations and obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations having a
dollar-weighted average maturity of 90 days or less. The Fund seeks to maintain
a net asset value of $1.00 per share.
Under normal market conditions, Municipal Assets will invest in a diversified
portfolio of high quality, U.S. dollar denominated short-term municipal
securities which mature or have a demand feature exercisable in one year or less
from the date of acquisition having a dollar-weighted average maturity of 90
days or less. The Fund seeks to maintain a net asset value of $1.00 per share.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Funds is subject to certain risks, as set forth in detail
under "INVESTMENT OBJECTIVES, POLICIES AND Restrictions." As with all mutual
funds, there can be no assurance that the Funds will achieve their investment
objectives.
OFFERING PRICE
The public offering price of each Fund is equal to its net asset value of $1.00
per Share.
SHARES OFFERED
I Shares of common stock ("Shares") of Liquid Assets and Municipal Assets, each
a separate investment portfolio of the IMG Mutual Funds, Inc., a Maryland
Corporation. See "OPENING AN ACCOUNT", "PURCHASING SHARES" and "REDEEMING
2
<PAGE>
SHARES" for detailed information about how to buy and sell shares.
MINIMUM PURCHASE
The minimum initial investment is $250 with $25 minimum subsequent investments
(subject to certain exceptions).
DIVIDENDS
Dividends are declared daily and paid monthly and will be automatically
reinvested unless the shareholder elects otherwise.
INVESTMENT ADVISOR
Investors Management Group, Ltd. (the "Advisor").
ADMINISTRATOR
Investors Management Group, Ltd. (the "Administrator").
DISTRIBUTOR
BISYS Fund Services Inc., Columbus, Ohio (the "Distributor")
3
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
LIQUID MUNICIPAL
ASSETS ASSETS
Maximum Sales Charge Imposed on Purchases None None
Maximum Sales Charge on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fee * None None
Exchange Fee None None
* A $15.00 fee may be charged to an individual shareholder account for
redemption by wire.
LIQUID MUNICIPAL
ASSETS ASSETS
ESTIMATED ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees.................................... 0.35% 0.35%
Other Expenses After Limitations 1
Administrative Fees.............................. 0.06% 0.06%
Other Expenses................................... 0.11% 0.15%
Total Other Expenses............................. 0.17% 0.21%
Total Fund Operating Expenses After Limitations 1.. 0.52% 0.56%
The purpose of the above table is to assist a potential purchaser of a Fund's
Shares in understanding the various costs and expenses that an investor in I
Shares of a Fund will bear directly or indirectly. The table reflects current
fees and estimates other expenses. From time to time, the Fund's Advisor may
voluntarily waive the Management Fees and/or absorb certain expenses for a Fund
or class of Shares of a Fund. Long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers. Wire transfers may be used to
transfer federal funds directly to/from the Funds' custodian bank.
1 The Funds are subject to a Management and Administration Agreement pursuant to
which the Funds are authorized to pay a periodic amount calculated at an annual
rate of 0.21% of the average daily net assets of such Funds. Currently, however,
the fee has been voluntarily limited to an annual rate of 0.06%. Absent the
waiver of these fees, "Total Operating Expenses" as a percentage of average
daily net assets would have been 0.67% for Liquid Assets and 0.71% for Municipal
Assets.
EXAMPLE
You would pay the following expenses on a $1,000 investment in each Fund
assuming, (1) a (hypothetical) five percent annual return and (2) redemption at
the end of each time period.
1 Year 3 Years 5 Years 10 Years
Liquid Assets $ 5 $17 $29 $65
Municipal Assets $ 6 $18 $31 $70
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. The above Example is based on the expense information
included in the previous Expense Summary. The Expense Summary and Examples do
not reflect any charges that may be imposed by financial institutions on their
customers. Please refer to "MANAGEMENT AND FEES" for a more complete discussion
of the Shareholder transaction expenses and annual operating expenses for the
Fund.
4
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
LIQUID ASSETS
The investment objective of Liquid Assets is maximum current income consistent
with safety of principal and maintenance of liquidity. The Fund invests in the
following money market instruments maturing in 397 days or less from time of
investment, (with certain exceptions):
(1) Obligations issued or guaranteed by the U.S. government or any agency or
instrumentality thereof. Such securities will include those supported by
the full faith and credit of the United States Treasury or the right of
the agency or instrumentality to borrow from the Treasury, as well as
those supported only by the credit of the issuing agency or
instrumentality.
(2) Repurchase agreements involving securities in the immediately foregoing
categories. A repurchase agreement involves the sale of such securities
to the Fund with the concurrent agreement of the seller to repurchase
them at a specified time and price to yield an agreed upon rate of
interest. Repurchase agreements may involve certain risks which are
described in greater detail in the Statement of Additional Information.
(3) Redeemable interest-bearing trust certificates ("Student Loan
Certificates") issued by the Iowa Student Loan Trust and/or other Student
Loan Trusts established by the Fund, ("Student Loan Trusts"), created for
the sole purpose of purchasing from banks (which qualify as "eligible
lenders") federally insured student loans originated by banks. The
Student Loan Certificates will have original maturities of no more than
397 days but will be redeemable by the Fund at their face amount upon not
more than five days' written notice to the issuing Student Loan Trust.
Further details concerning the Student Loan Trusts and the Fund's
investments in Student Loan Certificates are found in the Statement of
Additional Information.
(4) Redeemable interest-bearing ownership certificates ("FmHA Certificates")
issued by one or more guaranteed loan trusts ("FmHA Trusts"), each
created for the purpose of acquiring participation interests in the
guaranteed portion of Farmer's Home Administration ("FmHA") guaranteed
loans. The FmHA Certificates will have original maturities of no more
than 397 days but will be redeemable by the Fund at their face amount
upon not more than five days' written notice to the issuing FmHA Trust.
Further details concerning the FmHA Trusts and the Fund's investment in
FmHA Certificates and FmHA guaranteed loans are found in the Statement of
Additional Information.
(5) Commercial paper which at the time of investment (a) is rated (or the
issuer of which has been rated) highest quality by two nationally
recognized statistical rating organizations ("NRSRO") if rated by two or
more NRSROs; (b) is rated (or the issuer of which has been rated) highest
quality if rated by only one NRSRO; or (c) is determined to be of
equivalent quality by the Fund's Board of Directors if unrated.
(6) U.S. dollar-denominated bank obligations (certificates of deposit and
bankers' acceptances) issued by domestic offices of U.S. banks which, at
the date of investment, have capital, surplus, and undivided profits (as
of the date of their most recently published financial statements) in
excess of $10,000,000; and obligations of other banks or savings and
loans if such obligations are insured by the Federal Deposit Insurance
Corporation, provided that not more than 10 percent of the total assets
of the Fund will be invested in such insured obligations.
(7) Short-term (maturing in one year or less) corporate obligations which at
the time of investment (a) are rated in the highest rating category by
two NRSROs, if rated by two or more NRSROs; (b) are rated in the highest
rating category if rated by only one NRSRO; or (c) are determined to be
of equivalent quality by the Fund's Board of Directors if unrated.
5
<PAGE>
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not have invested more than five percent of its total
assets in securities issued by a single issuer. For additional requirements of
Rule 2a-7, see "Opening an Account -- Share Price". Assets of the Fund will
consist of securities with maturities of 397 days or less at date of purchase
or, if maturing beyond 397 days, will be backed by Liquidity and Servicing
Agreements or Guaranteed Funding Agreements and will have variable interest
rates adjustable at least semiannually. In determining whether particular
variable rate investments backed by Liquidity and Servicing Agreements or
Guaranteed Funding Agreements may be made, the period remaining until maturity
will be deemed to be the longer of the demand notice period required before the
Fund is entitled to receive payment of the principal amount or the period
remaining until the next interest adjustment. The dollar-weighted average
maturity of Fund investments will be 90 days or less, determined in the same
manner. While the underlying security in a repurchase agreement may have a
maturity of more than 397 days, the repurchase agreement itself will terminate
in less than 397 days, and typically within a few days. The Fund intends to
invest at least 25 percent of its total assets in Student Loan Certificates,
and/or FmHA Certificates, except when such investments are either not available
in sufficient quantity or do not carry yields competitive with alternative
investments.
It is the policy of the Fund that any illiquid securities (including repurchase
agreements of more than seven days duration) may not constitute, at the time of
purchase or at any time, more than ten percent of the value of the total net
assets of the Fund.
As a fundamental policy, the Fund will not concentrate its investments in any
one industry and pursuant to Section 18(f) of the 1940 Act, the Fund may not
issue senior securities. As a general policy, it is the Fund's intention to hold
investments until they mature. However, in an effort to increase portfolio
yields the Fund may periodically trade securities to take advantage of perceived
disparities between markets for various short-term money market instruments. It
is also possible that redemptions of Fund shares could necessitate the sale of
portfolio investments prior to maturity and at times when such sale would be
undesirable because of unfavorable market conditions.
While investments by the Fund will be confined to high quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible Participating Banks or borrowers will default on the provisions of
their agreements with the Fund or that banks will default on repurchase
agreements with the Student Loan Trusts or the FmHA Trusts, which could cause
the net asset value per share to decrease.
In light of these various contingencies, there can be no assurances the Fund
will achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described above; (2) invest more than 80 percent of its total assets
in Student Loan Certificates and/or FmHA Certificates; (3) purchase or sell real
estate (other than short-term loans secured by real estate or interests therein
or loans to companies which invest in or engage in other activities related to
real estate), commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (4) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
repayment and guarantee arrangements on loan participations purchased from
Participating Banks), calls, straddles, spreads or combinations thereof; (5)
make loans to other persons, provided the Fund may invest up to 80 percent of
its total assets in Student Loan Certificates or FmHA Certificates, as described
in (2) above, and may make the investments and enter into repurchase agreements
as described above; (6) invest in securities with legal or contractual
restrictions on resale (except for repurchase agreements, Student Loan
Certificates, and FmHA Certificates) or for which no ready market exists; (7)
enter into repurchase agreements if, as a result thereof, more than five percent
6
<PAGE>
of the Fund's total assets (taken at market value at the time of such
investment) would be subject to repurchase agreements maturing in more than
seven days.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (a) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (b)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
MUNICIPAL ASSETS
The investment objective of Municipal Assets is maximum current income exempt
from federal income tax, consistent with safety of principal and maintenance of
liquidity. The Fund invests in the following types of money market instruments
maturing in 397 days or less from time of investment (with certain exceptions),
as defined herein:
(1) Tax-exempt debt obligations issued by state and municipal governmental
units and public authorities within the United States and participation
interests therein. With few exceptions such obligations will be nonrated
and of limited marketability. However, they will be backed by demand
repurchase commitments of the issuers thereof and irrevocable bank
letters of credit or guarantees (collectively referred to herein as
"Liquidity Agreements"). The Liquidity Agreements will permit the holder
of the securities to demand payment of the unpaid principal balance plus
accrued interest upon a specified number of days' notice either from the
issuer or by drawing on an irrevocable bank letter of credit or
guarantee. In addition, all obligations with maturities longer than 397
days from date of purchase will, by their terms, bear rates of interest
that are adjusted upward or downward no less frequently than semiannually
by means of a formula intended to reflect market changes in interest
rates. Certain types of industrial development bonds issued by public
bodies to finance the construction of industrial and commercial
facilities and equipment are also purchased. The Statement of Additional
Information contains further details concerning the Fund's policies and
procedures with respect to investments in such tax-exempt obligations and
participation interests.
(2) High quality tax-exempt debt obligations issued by state and municipal
governments and by public authorities, including issues sold as interim
financing in anticipation of tax collections, revenue receipts or bond
sales, and tax-exempt Project Notes secured by the full faith and credit
of the United States. Such obligations will be purchased only if backed
by the full faith and credit of the United States or rated Aaa, Aa,
MIG-1, MIG-2 or Prime-1 by Moody's Investors Service, Inc., or AAA, AA,
or A-1 by Standard & Poor's Corporation. Nonrated securities may also be
purchased if determined by the Fund's board of directors to be of
comparable quality to the rated securities in which the Fund may invest.
(3) Taxable obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government may be acquired from time to time on a temporary
basis for defensive purposes.
(4) Repurchase agreements involving securities in the immediate foregoing
category. A repurchase agreement involves the sale of such securities to
the Fund with the concurrent agreement of the seller to repurchase them
at a specified time and price, to yield an agreed upon rate of interest.
Repurchase agreements may involve certain risks which are described in
greater detail in the Statement of Additional Information.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar-denominated instruments
determined by the Board of Directors to present minimal credit risk and which
are "Eligible Securities" as that term is defined by Rule 2a-7. Pursuant to Rule
2a-7, the Fund shall not invest more than five percent of its total assets in
securities issued by a single issuer. For additional requirements of Rule 2a-7,
see "Opening an Account -- Share Price". Assets of the Fund will consist of
securities with maturities of 397 days or less at date of purchase or, if
7
<PAGE>
maturing beyond 397 days, securities which are backed by Liquidity Agreements
and which have variable interest rates adjustable at least semi-annually and
upon the adjustment of the interest rate the value of the securities will be
approximately equal to par. In determining whether particular variable rate
investments backed by Liquidity Agreements may be made, the period remaining
until maturity will be deemed to be the longer of the demand notice period
required before the Fund is entitled to receive payment of the principal amount
or the period remaining until the next interest adjustment. The dollar-weighted
average maturity of Fund investments will be 90 days or less, determined in the
same manner.
Under normal market conditions, the Fund as a matter of fundamental policy, will
invest at least 80 percent of its total net assets in tax-exempt securities, the
interest on which is exempt from federal income tax, except to the extent that
some or all of which may be subject to the alternative minimum tax. This
fundamental policy may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
It is the policy of the Fund that any illiquid securities may not constitute, at
the time of purchase or at anytime, more than ten percent of the value of the
total net assets of the Fund. The Fund will not concentrate its investments in
any one industry and pursuant to Section 18(f) of the 1940 Act may not issue
senior securities.
As a general policy, it is the Fund's intention to hold investments until they
mature or until immediately prior to the expiration of an applicable Liquidity
Agreement. However, in an effort to increase portfolio yields, the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of portfolio
investments prior to maturity and at times when such sale would be undesirable
because of unfavorable market conditions.
New issues of tax-exempt debt obligations are usually offered on a when-issued
basis with the securities to be delivered and paid for approximately 45 days
following the initial purchase commitment. The Fund may occasionally enter into
such commitments, subject to certain limitations and procedures discussed in the
Statement of Additional Information.
While investments by the Fund will be confined to high-quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances, described in more detail in the Statement of Additional
Information, the net asset value of Fund shares could decrease. It is also
possible an issuer or bank will default on the provisions of their Liquidity
Agreements, which could cause the net asset value per share to decrease. In
light of these various contingencies, there can be no assurances the Fund will
achieve its investment objectives.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described under "Investment Policy"; (2) invest more than 80 percent
of its total assets in tax-exempt fixed and variable rate debt obligations (or
participation interests therein) issued by state and local governmental units
within the United States which are backed by Liquidity Agreements; (3) invest
more than five percent of its total assets (determined as of the date of
purchase) in tax-exempt obligations or participation interests therein subject
to Liquidity Agreements issued by any one bank; (4) purchase or sell real
estate, commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs; (5) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
Liquidity Agreements covering certain tax-exempt obligations purchased by the
Fund), calls, straddles, spreads or combinations thereof; (6) make loans to
other persons, provided the Fund may make investments and enter into repurchase
agreements as described above; (7) invest in securities with legal or
contractual restrictions on resale (except for tax-exempt debt obligations
subject to Liquidity Agreements) or for which no ready market exists; (8) enter
into a Liquidity Agreement with any bank unless such bank is a United States
bank which has a record, together with predecessors, of at least five years of
continuous operations; (9) enter into repurchase agreements if, as a result
thereof, more than five percent of the Fund's total assets (taken at market
value at the time of such investment) would be subject to repurchase agreements
maturing in more than seven days; and (10) enter into Liquidity Agreements with
8
<PAGE>
any bank if five percent or more of the securities of such bank are owned by the
Advisor or by directors and officers of the Fund or the Advisor, or if any
director or officer of the Fund or the Advisor owns more than 1/2 percent of the
voting securities of such bank.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (1) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (2)
more than 50 percent of the outstanding Common Stock, whichever is less. The
Statement of Additional Information includes discussion of certain other
investment policies and restrictions, some of which are also considered
fundamental and may not be changed without shareholder approval.
PERFORMANCE
Performance of each Fund may be quoted in advertising in terms of current yield
and effective yield. CURRENT YIELD refers to the income generated by an
investment in either Fund over a seven-day period. This income is then
"annualized". That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The Fund may also present a 30-day
yield which is calculated similarly but instead refers to a 30-day period rather
than a seven-day period. EFFECTIVE YIELD is calculated similarly but, when
annualized, that income earned from the investment is assumed to be reinvested
weekly. Effective yield will be slightly higher than current yield because of
the compounding effect of this assumed reinvestment.
Performance of the Funds may also be compared to other mutual funds with similar
investment objectives, relevant indices or rankings prepared by independent
services or other financial publications, or yields on deposits at financial
institutions. Unlike the Funds, deposit accounts at financial institutions are
generally insured by the Federal Deposit Insurance Corporation and do not
fluctuate to the extent of the Funds.
Additionally, Municipal Assets may quote a taxable-equivalent yield based on a
stated income tax rate. Please see each Fund's Statement of Additional
Information for further discussion of the manner in which yields are calculated
and the comparative performance data which may be used.
Of course, the Funds' yields are not fixed nor is principal guaranteed. Yields
are functions of the type and quality of instruments held in the portfolio,
operating expenses, and market conditions. Consequently, current yields will
fluctuate and are not necessarily representative of the future results.
DISTRIBUTIONS AND TAXES
Dividends from the net income of each Fund are declared daily on each business
day and paid monthly to holders of record immediately before 3:00 p.m. Central
Time. Dividends are automatically reinvested in I Shares unless cash payment has
been selected on the Account Application. If a shareholder has elected to
receive dividends and/or distributions in cash and the checks are returned and
marked as "undeliverable" or remain uncashed for six months, your cash election
will be changed automatically and future dividends will be reinvested in I
Shares of the Fund. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in I Shares of
the Fund at the per share net asset value determined as of the date of
cancellation. If a shareholder redeems the entire amount in his account during
the month, dividends credited to the account from the beginning of the month
through the date of redemption are paid with the redemption proceeds.
Dividends on each class of shares are determined in the same manner and are paid
in the same amounts irrespective of class, except that each class bears separate
distribution and/or shareholder servicing fees (see "Organization and Shares of
the Funds").
Dividends declared in October, November, or December of any year, payable to
shareholders of record on a specified date in such months, will be deemed to
have been received by the shareholders and paid by the Funds on December 31 of
such year, in the event that such dividends are actually paid during January of
the following year.
9
<PAGE>
Each Fund intends to qualify as a regulated investment company by distributing
substantially all of its taxable net income, including any realized capital
gains, and thus will not incur any Federal income taxes. Shareholders will
receive taxable dividend income, tax-exempt dividend income and/or capital
gains, as the case may be, from distributions whether paid in cash or received
in the form of additional shares.
Dividends derived from interest on federally tax-exempt debt obligations owned
by Municipal Assets are intended to constitute "exempt-interest dividends" which
are generally not Federally taxable to shareholders, although some could be
includable for purposes of the alternative minimum tax. Dividends derived from
other interest and the realization of capital gains are taxable to shareholders
whether or not reinvested.
Municipal Assets expenses will be allocated between tax-exempt and taxable
income in the same proportion as the Fund's tax-exempt income bears to the total
of such exempt income and its gross income (excluding from gross income the
excess of capital gains over capital losses).
Promptly after the end of each calendar year, each shareholder will receive a
statement of the Federal income tax status of all dividends and distributions
paid during the year. This discussion is only a summary and relates solely to
Federal tax matters. Further discussion of the Federal Income Tax consequences
of an investment in the Fund is provided in the Statement of Additional
Information. Dividends may also be subject to local taxation. Shareholders are
encouraged to consult with their personal tax advisors.
ORGANIZATION AND SHARES OF THE FUNDS
IMG Mutual Funds, Inc. is a Maryland corporation organized on November 16, 1994.
The Funds were created on October 30, 1997, to acquire the assets and continue
the business of the corresponding substantially identical investment portfolios
of the Liquid Assets Funds, Inc., and the Municipal Assets Funds, Inc., two
separately registered open-end, diversified management investment companies
organized as Iowa corporations. References herein to the "immediate predecessor"
of the Funds refer to the respective companies which correspond to such Fund. .
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.
The Articles of Incorporation of the Company permit the Company, by resolution
of its Board of Directors, to create new series of common stock relating to new
investment portfolios or to subdivide existing series of Shares into subseries
or classes. Classes are utilized to create differing expense and fee structures
for investors in the same Fund. Differences 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.
I Shares of the Funds are described in this Prospectus. S Shares and T Shares
and S2 Shares are offered in separate Prospectuses which may be obtained by
calling the Fund at 1-800-798-1819 or writing to the address on the cover of
this Prospectus. Please read the Prospectus carefully before investing or
sending money. All shares are offered to individual and institutional investors
acting on their own behalf or on behalf of their customers and bear their pro
rata portion of all operating expenses paid by the Funds, except that S Shares,
T Shares and S2 Shares bear separate distribution and/or shareholder servicing
fees. I Shares bear no distribution or shareholder servicing fees.
Each class of shares offers different privileges. S Shares and S2 Shares are
normally offered through financial institutions providing automatic "sweep"
investment programs to their customers, and offer a check writing privilege. T
Shares are normally offered through trust organizations or others providing
shareholder services such as establishing and maintaining accounts and records
for their customers who invest in T Shares, assisting customers in processing
purchase, exchange and redemption requests, and responding to customers'
inquiries concerning their investments. I Shares are available directly from the
10
<PAGE>
Distributor only and offer only the Exchange and Telephone Transfer services.
Each class of shares is exchangeable only for shares of the same class.
Financial institutions selling or servicing S Shares, T Shares and S2 Shares may
receive different compensation with respect to one class over another.
Shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held. Shares of each Fund will vote
together and not by class unless otherwise required by law or permitted by each
Fund's Board of Directors. All shareholders of each Fund will vote together as a
single class on matters relating to the Fund's investment advisory agreement,
investment objective and fundamental policies. Only holders of S Shares and S2
Shares will vote on matters relating to the Distribution Plan for S Shares and
S2 Shares. Only holders of S Shares, S2 Shares and T Shares will vote on matters
pertaining to the Administrative Services Plan.
Shares of the Funds have non-cumulative voting rights and, accordingly, the
holders of more than 50 percent of each Fund's outstanding shares (irrespective
of class) may elect all of the Directors. Shares have no preemptive rights and
only such conversion and exchange rights as each Fund's Board may grant in its
discretion. When issued for payments as described in this Prospectus, shares
will be fully paid and nonassessable. All shares are held in uncertificated form
and will be evidenced by the appropriate notation on the books of the transfer
agent.
SHAREHOLDER REPORTS AND MEETINGS
Each shareholder will receive monthly Fund information, an unaudited semiannual
report, and an annual report containing audited financial statements. If you
have questions about your account, call 1-800-798-1819. You may also write the
Fund at the address on the cover of this Prospectus. You may order statements
for the current and preceding year at no charge. However, there will be a $10.00
fee per statement for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Funds
have adopted the appropriate provisions in their Bylaws and may, in their
discretion, not hold annual meetings of shareholders for the election of
Directors unless otherwise required by the 1940 Act. The Funds have also adopted
provisions in their Bylaws for the removal of Directors by the shareholders.
Shareholders may receive assistance in communicating with other shareholders as
provided in Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Shareholders of the Funds may remove a Director by the affirmative vote of a
majority of the Funds' outstanding voting shares. In addition, the Directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Director or for any other purpose when requested
in writing to do so by the shareholders or record of not less than 10 percent of
the Funds' outstanding voting securities.
All consideration received by the Funds for shares of one of the Funds and all
assets in which such consideration is invested, belong to that Fund (subject
only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one Fund
are treated separately from those of the other Funds.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Funds, will 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 such matter. Rule 18f-2 further provides that a Fund shall 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 the interest of such
Fund.
11
<PAGE>
However, the Rule exempts the selection of independent auditors and the election
of Directors from the separate voting requirements of the Rule.
MANAGEMENT AND FEES
Overall responsibility for management of the Company rests with the Board of
Directors, who are elected by the Shareholders of the Company's Funds. The
Company will be managed by the Directors in accordance with laws of Maryland
governing corporations. The Directors, in turn, elect the officers of the
Company to supervise the day-to-day operations. The Directors receive fees and
are reimbursed for their expenses in connection with each meeting of the Board
of Directors they attend. The officers of the Company receive no compensation
directly from the Company for performing the duties of their offices.
Investors Management Group, ("IMG") manages the investments and business affairs
of the Funds. IMG is a federally registered Investment Advisor organized in 1982
and located at 2203 Grand Avenue, Des Moines, Iowa 50312-5338. IMG has been
providing continuous investment management to pension and profit-sharing plans,
insurance companies, public agencies, banks, endowments and charitable
institutions, other mutual funds, individuals and others for over 15 years. As
of November 30, 1997, IMG had approximately $1.6 billion in equity, fixed income
and money market assets under management.
The Funds will be managed by Jeffrey D. Lorenzen, CFA, Managing Director,
Kathryn D. Beyer, CFA, Managing Director, and Elizabeth S. Pierson, CFA, Senior
Fixed Income Manager. Mr. Lorenzen is a fixed income strategist and is a member
of IMG's Investment Policy Committee. Prior to joining IMG in 1992, his
experience includes serving as a securities analyst and corporate fixed income
analyst for The Statesman Group from 1989 to 1992. Mr. Lorenzen received his
Masters of Business Administration degree from Drake University, Des Moines,
Iowa, and his Bachelor of Business Administration degree from the University of
Iowa, Iowa City, Iowa. Ms. Beyer is a fixed income strategist and is a member of
IMG's Investment Policy Committee. Prior to joining IMG in 1993, her experience
includes serving as a securities analyst and director of mortgage-backed
securities for Central Life Assurance Company from 1988 to 1993. Ms. Beyer
received her Master of Business Administration degree from Drake University, Des
Moines, Iowa, and her Bachelor of Science degree in agricultural engineering
from Iowa State University, Ames, Iowa. Ms. Pierson is a fixed income strategist
and is a member of IMG's Investment Policy Committee. She began her investment
career in 1984 with AMCORE Capital Management, Inc. Ms. Pierson received her
Bachelor of Science degree from the University of Illinois, Champaign-Urbana.
Under an Investment Advisory Agreement between the Funds and IMG, a fee is paid
to IMG for investment advisory services. Each Fund is responsible for paying
operating expenses not assumed by IMG. The investment management fee for each
Fund is calculated daily and paid monthly. The maximum management fee for each
Fund is 0.35 percent of each Fund's average daily net assets.
From time to time, IMG may voluntarily waive all or a portion of the management
fee and/or absorb certain expenses of a Fund or class of shares without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for a
Fund or class of shares and increasing the overall yield to investors in that
Fund or class of shares at the time any such amounts are waived and/or absorbed.
IMG may not seek reimbursement of such waived fees at a later date. The waiver
of such fee will cause the yield of a Fund to be higher than it would otherwise
be in the absence of such a waiver.
IMG also provides management and administration, fund accounting, transfer
agency, and shareholder recordkeeping services to the Funds. Under a Management
and Administration Agreement, IMG will supervise all aspects of the operations
of the Funds, except those performed under the Investment Advisory Agreement, by
the Custodian, under the Transfer Agency Agreement and under the Fund Accounting
Agreement. For these services the Funds each pay IMG a fee calculated daily and
paid monthly at an annual rate of up to 0.25% of the average daily net assets of
each Fund. Presently, the fee is calculated at 0.06% annually. Under a Fund
Accounting Agreement, IMG provides bookkeeping and accounting services to the
Funds, including calculating daily net asset value and yield quotations. For
these services, the Funds each pay IMG a fee calculated daily and paid monthly
at an annual rate of 0.03% of the average daily net assets of each Fund. Under a
Transfer Agency Agreement, IMG provides customary and usual services of a
12
<PAGE>
transfer agent to the Funds. For these services, IMG is paid various fees
depending on the class of shares of the Funds. The fees are charged to each
class of shares separately and are not computed on a periodic percentage of net
assets, but at a flat annual fee depending on the number of accounts. The fees
received and the services provided under these contracts are in addition to
those received and paid to IMG under the Advisory Agreement.
At its expense, IMG provides office space and all necessary office facilities,
equipment, and personnel for servicing the investments of the Funds. Except for
the expenses expressly assumed by IMG pursuant to its investment advisory
agreement, each Fund is responsible for all its other expenses, including,
without limitation, governmental fees, interest charges, taxes if applicable,
membership dues in the Investment Company Institute allocable to the Fund,
broker commissions, and other expenses connected with the execution, recording
and settlement of Fund security transactions, expenses of repurchasing and
redeeming shares and expenses of servicing shareholder accounts; expenses for
preparing, printing and distributing periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions;
insurance premiums, fees and expenses of the Fund's custodian, including
safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Funds;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Funds; compensation and
expenses of Directors who are not "interested persons" of the Advisor; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses to existing shareholders are borne by the
Funds except that the Funds' Distribution Agreement requires that the
Distributor pay for prospectuses that are to be used for sales purposes with
persons other than current shareholders.
From time to time, IMG may voluntarily waive all or a portion of the investment
management fee and/or other fees and/or absorb certain expenses of a Fund
without further notification of the commencement or termination of such waiver
or absorption. Any such waiver will have the effect of lowering the overall
expense ratio for that Fund and increasing the Fund's overall yield to investors
at the time any such amounts are waived and/or absorbed.
Except as voluntarily absorbed by IMG, all expenses incurred in the operation of
the Funds will be borne by the Funds. Expenses attributable to a particular Fund
are charged against the assets of that Fund; other expenses of the Funds are
allocated among the Funds on a reasonable basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Fund.
The Glass-Steagall Act and other applicable laws prohibit banks from engaging in
the business of underwriting, selling, or distributing securities. Insofar as
Participating Organizations (including banks) are compensated under the Plans,
their only function will be to perform administrative and shareholder services
for their clients who wish to invest in the Funds. If a Participating
Organization at a future date is prohibited from acting in this capacity, the
shareholder may lose the services provided by the Participating Organization;
however, it is not expected that the shareholders would incur any adverse
financial consequences. It is intended that none of the services provided by
such Participating Organizations other than through registered brokers will
involve the solicitation or sale of shares of the Funds.
AMCORE Investment Group, N.A., Rockford, Illinois, acts as custodian for the
Funds' cash and investments.
OPENING AN ACCOUNT
The Funds require a completed and signed application (which is attached) at the
time you open each new account. Additional paperwork may be required from
corporations, associations and certain fiduciaries. IF YOU HAVE QUESTIONS CALL
THE FUNDS AT 1-800-798-1819 FROM 8:00 A.M. TO 4:30 P.M. CENTRAL TIME.
13
<PAGE>
SHARE PRICE
The shares of each Fund are sold without a sales charge. The price of one share
is its "net asset value" or NAV (generally $1.00). NAV is computed by adding the
value of each Fund's investments, plus cash and other assets, deducting
liabilities and then dividing the result by the number of shares outstanding.
The NAV of each Funds' shares is determined twice each business day, at 11:00
a.m. Central Time and at the close of the New York Stock Exchange (normally 3:00
p.m. Central Time). The Funds are open for business each day the Federal Reserve
is open.
Your purchase will be processed at the next NAV calculated after your investment
has been converted to federal funds. If you invest by check, the Funds must
generally allow one or more days for conversion into federal funds before
accepting your purchase.
Rule 2a-7 under the Investment Company Act of 1940 permits the Funds to compute
net asset value per share using the amortized cost method of valuing portfolio
securities. As a condition for using the amortized cost method of valuation, the
Board of Directors established procedures to stabilize each Fund's net asset
value at $1.00 per Share. These procedures are described in more detail in each
Fund's Statement of Additional Information.
Under the amortized cost method of valuation, a security is initially valued at
cost on the date of purchase and, thereafter, any discount or premium is
amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security. U.S. government
obligations, Student Loan Certificates and FmHA Certificates, which are subject
to mandatory repurchase at their original purchase price, investments in taxable
and tax-exempt debt obligations rated by a recognized bond rating agency and
regularly traded in the secondary market, and nonrated fixed and variable rate
tax-exempt obligations and participation interests therein, not regularly traded
in the secondary market but subject to Liquidity Agreements will be valued at
amortized cost. Other assets are valued at a fair value determined in good faith
by the board of directors of each Fund.
PURCHASING SHARES
Shares of each Fund may be purchased directly from BISYS Fund Services, Inc., as
the distributor. Shares may also be purchased by customers of qualified banks,
savings and loan associations, broker/dealers, investment advisory firms, and
other organizations ("Participating Organizations") that have entered into
servicing agreements with the Distributor. The Participating Organization is
responsible for transmitting purchase orders directly to the Fund's Distributor.
A Participating Organization may elect to hold record ownership of shares for
its customers and to show beneficial ownership of shares on the account
statements it provides to them. In the alternative, a Participating Organization
may elect to establish its customers' accounts of record with IMG as transfer
agent for the Funds. Generally, shares purchased through Participating
Organizations will be held by the Participating Organization as shareholder of
record.
Shares of each Fund are offered without any purchase or redemption charge
imposed by the Fund. The minimum initial investment that may be made in each
Fund is $250. Subsequent investments in each Fund must be made in amounts of not
less than $25, except where purchases are made through Participating
Organizations in which case there is no minimum. Participating Organizations may
aggregate their customers' purchases to satisfy the required minimums.
Purchases may be effected on business days when the Advisor, Distributor and
Custodian are open for business. The Funds reserve the right to reject any
purchase order, including purchases made with foreign and third party drafts or
checks.
A purchase order for I Shares received in good order by the Funds by 11:00 a.m.
Central Time on a business day is effected at the net asset value per share
calculated as of 11:00 a.m. Central Time, and investors will receive the
dividend declared that day, IF THE CUSTODIAN HAS RECEIVED THE PURCHASE PRICE IN
FEDERAL FUNDS OR OTHER IMMEDIATELY AVAILABLE FUNDS BY 3:00 P.M. CENTRAL TIME
THAT DAY. A purchase order for I Shares received after 11:00 a.m. Central Time
and prior to 3:00 p.m. Central Time on a business day for which such funds have
been received by 3:00 p.m. Central Time will be effected as of 3:00 p.m. Central
14
<PAGE>
Time, and will begin to accrue dividends on the following business day. If
federal funds are not available by 3:00 p.m. Central Time, the order will be
canceled. Payment for orders which are not accepted or are canceled will be
returned after prompt inquiry to the transmitting organization.
While the Funds themselves do not presently levy sales, redemption or account
service charges, Participating Organizations may elect to do so and the Funds
may elect to do so in the future. Investors should inquire regarding the nature
and costs of services provided by Participating Organizations and determine if
such services are desired, because the costs thereof will reduce the Funds'
yields to the investor below that obtainable by investing in the Funds directly.
Customers wishing to purchase shares through their Participating Organization
should contact such entity directly for appropriate instructions. (For a list of
the Participating Organizations in your area, CALL THE FUNDS AT 1-800-798-1819
OR 515-244-5426.) Direct investors may purchase shares in accordance with the
procedures described below, "Purchase Procedures".
Certificates representing Fund shares purchased will not be issued. However, all
purchases are confirmed in writing to the investor and credited to their account
in the shareholder records maintained by the Transfer Agent. Investors will have
the same rights to their shares as if certificates had been issued.
PURCHASE PROCEDURES
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
BY MAIL $250 (minimum) $25 (minimum)
Please make your check Please make your check
payable to the Fund selected payable to the Fund
and mail to the address selected, with your
indicated on the application. account number on the
check and mail to the
address printed on your
account statement.
BY WIRE Please call for an account See instructions below.
number before initial invest-
ment at 1-800-798-1819 or
515-244-5426.
Federal Funds should be wired to: Federal Reserve Bank of Chicago for AMCORE
Investment Group, N.A., Rockford, Illinois, together with the name of the
Fund, your account number and names.
Please note that when accounts are opened by wire you must send a completed
application at your earliest convenience. Your application must be received
by the Fund before any instructions for redemption will be accepted.
BY ELECTRONIC Not available for initial Shareholders who have
FUNDS TRANSFER purchase. an account with an
(ACH) institution which is a
member of the Automated
Clearing House, may
elect to purchase Fund
shares via electronic
funds transfer. Select
this service on your
application or call
the Fund.
SHAREHOLDER SERVICES
Some shareholder services may not be available if shares are purchased through
Participating Organizations. Call IMG Financial Services, Inc., at
1-800-798-1819 for more information.
EXCHANGE PRIVILEGE. You may exchange I Shares of either Fund for I Shares in the
other Fund described in this Prospectus. An exchange involves a redemption of
the shares of the Fund being liquidated and a purchase of the shares of the Fund
15
<PAGE>
in which the redemption proceeds are to be invested. The exchange privilege is
offered as a convenience to shareholders and is not intended to be a means of
speculating on short-term movements in securities prices by transactions
involving frequent purchases and sales of shares. Each Fund reserves the right
at any time and without prior notice, to suspend, limit, modify or terminate
exchange privileges or their use by individual shareholders in order to prevent
transactions considered to be disadvantageous to existing shareholders.
TELEPHONE TRANSFERS. This service allows you to authorize transfers of money to
purchase or sell shares. Using Telephone Transfer you can move money between
your bank account and your account in the Funds with one phone call. Moneys may
be transferred either by wire or electronic funds transfer with an institution
which is a member of the Automated Clearing House ("ACH").
Wire transfers may be used to transfer federal funds directly to/from the Funds'
custodian bank. A $15.00 fee may be charged to your account for redemptions by
wire.
Allow two (2) days after the call for electronic funds transfer via ACH to move
moneys between your bank account and your account with either Fund.
For moneys recently invested, allow normal clearing time before redemption
proceeds are sent to your bank. In order to change the financial institution
account designated to receive redemption proceeds, it will be necessary to send
a written request to the Fund with a signature guarantee from a national or
state bank, a trust company or a federal savings and loan association, or a
member firm of the New York, American, Boston, Midwest or Pacific Stock
Exchange.
You can also arrange systematic periodic investments (minimum $50) into your
Fund account. Simply select the regular investment schedule you would like when
completing your account application. Your bank account will automatically be
debited to purchase shares of the Fund you select. You will receive confirmation
of each transaction.
Your bank must be a member of ACH and you must have a checking or NOW/Money
Market Deposit account to use electronic funds transfer or systematic investing.
Please allow 20 days after receipt of your application to activate the Telephone
Transfer capability.
STATEMENTS AND REPORTS. You will receive a statement of your account listing
every transaction that affects your share balance no less than once per month.
At least twice a year you will receive the financial statements of the Fund in
which you have invested with a summary of that Fund's portfolio composition and
performance. Each Fund's Annual Report is reported on by the Funds' independent
auditors, KPMG Peat Marwick LLP.
REDEEMING SHARES
Shareholders may request redemption of their shares at any time. Shares will be
redeemed at their net asset value as next determined after a redemption request
in good order is received by the Fund's Distributor. Redemption orders received
in good order by the Distributor before 11:00 a.m. Central Time on a business
day will be redeemed as of 11:00 a.m. Central Time and will earn dividends
through the previous day; proceeds normally will be sent electronically the same
day (or mailed by check the next business day) to the organization that placed
the redemption order in good form. Redemption orders received after 11:00 a.m.
Central Time or on a non-business Day will be redeemed as of 3:00 p.m. Central
Time or at the next determined net asset value and earn dividends through the
date the redemption request was received; proceeds will be sent electronically
on the next business day (or mailed by check on the second business day
thereafter). While the Funds use their best efforts to maintain their net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount originally invested.
If you purchase shares through a Participating Organization, you may redeem
shares in accordance with that Organization's rules regarding redemption
requests. Direct shareholders may redeem shares in accordance with the
procedures described under "How to Redeem Shares".
16
<PAGE>
The Funds intend to pay redemption proceeds within two business days and in no
event will payment be made later than seven days after receipt of a redemption
request in good order. Payments to investors who request to redeem shares within
a few days after a purchase paid for by check may be delayed until the Funds can
verify the check has been collected.
The Funds reserve the right to suspend redemptions or to postpone the payment
therefore when: (a) trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, or the Exchange is closed
for other than customary weekend and holiday closings; (b) the Securities and
Exchange Commission has permitted such suspension; or (c) an emergency as
determined by the Securities and Exchange Commission exists, making sale of
portfolio securities or valuations of the Funds' net assets not reasonably
practicable.
If an investor's account drops below $250 due to redemptions, the Funds reserve
the right to redeem any remaining shares if after 30 days' notice additional
investments to bring the account value to $250 are not made.
HOW TO REDEEM SHARES
BY MAIL-- Send a "letter of instruction": a
TO: 2203 GRAND AVENUE letter specifying the name of the
DES MOINES, IA 50312-5338 Fund, the number of shares to be
sold, your name, your account number,
and the additional requirements
listed below that apply to your
particular account.
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole Letter of instruction signed by all
Proprietorship, Custodial (Uniform persons required to sign for the
Gifts or Transfers To Minors Act), account, exactly as it is registered,
General Partners accompanied by signature guarantee(s).
Corporation, Association Letter of instruction and a corporate
resolution signed by person(s)
authorized to act on the account,
accompanied by signature guarantee(s).
Trust A letter of instruction signed by
the Trustee(s) (as Trustee), with a
signature guarantee. (If the Trustee's
name is not registered on your
account, also provide a copy of the
trust document, certified within the
last 60 days.)
If you do not fall into any of these registration categories (e.g.,
Executors, Administrators, Conservators or Guardians) please call for further
instructions.
A signature guarantee is designed to protect you and the Fund against
fraudulent transactions by unauthorized persons. A signature guarantee is
required for all persons registered on an account. A signature guarantee may
be obtained from an eligible guarantor institution, as defined by the
Securities and Exchange Commission. These institutions include banks, savings
and loan associations, credit unions, brokerage firms, and others. The words,
"SIGNATURE GUARANTEED" must be stamped or typed near each person's signature
and appear with the printed name, title, and signature of an officer and the
name of the guarantor institution. PLEASE NOTE THAT A NOTARY PUBLIC STAMP OR
SEAL IS NOT A SIGNATURE GUARANTEE.
17
<PAGE>
FOR ALL OPTIONS BELOW, PLEASE CALL 1-800-798-1819
BY EXCHANGE-- You must meet the minimum investment
requirement of the other fund. You
can only exchange between accounts
with identical names, addresses, and
taxpayer identification numbers.
BY ELECTRONIC FUNDS You must have applied for the
TRANSFER (ACH) OR WIRE-- Telephone Transfer feature on your
application. Allow two days via ACH.
Call before 10:00 a.m. for same day
wire. $15.00 fee for bank wires.
18
<PAGE>
TABLE OF CONTENTS
Prospectus Summary..........................................................2
Expense Summary of I Shares.................................................2
Investment Objectives, Policies and Restrictions............................7
Liquid Assets...............................................................7
Municipal Assets............................................................9
Performance................................................................12
Distributions and Taxes....................................................13
Organization and Shares of the Funds.......................................14
Shareholder Reports and Meetings...........................................13
Management and Fees........................................................15
Opening an Account.........................................................16
Share Price................................................................16
Purchasing Shares..........................................................17
Shareholder Services.......................................................19
Redeeming Shares...........................................................21
NO SALESMAN, OR OTHER PERSON, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS OR BY BISYS FUND SERVICES, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY BISYS FUND SERVICES, INC., IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
PROSPECTUS
VINTAGE BOND FUND
IMG FINANCIAL SERVICES, INC.
2203 GRAND AVENUE
DES MOINES, IA 50312-5338
1-800-798-1819
IMG Mutual Funds, Inc. (the "Company") is a Maryland corporation organized as an
open-end management investment company issuing its shares in series (each series
referred to as a "Fund" and collectively as "Funds"), representing a diversified
portfolio of investments with its own investment objectives and policies. The
Vintage Bond Fund is offered by this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE VINTAGE BOND FUND seeks to obtain income by investing in a portfolio of
fixed income securities 75 percent of which at all times will be Investment
Grade Fixed Income Securities and, secondarily, seeks capital appreciation
consistent with the preservation of capital and prudent investment risk.
For a more detailed discussion of the investment objectives and policies of the
Fund, see "INVESTMENT OBJECTIVES AND POLICIES", "IMPLEMENTATION OF POLICIES AND
RISKS" and "INVESTMENT RESTRICTIONS".
This Prospectus contains information you should be aware of before investing in
the Fund. Please read this Prospectus carefully and keep it for future
reference. A Statement of Additional Information as of the date of this
Prospectus for the Fund has been filed with the Securities and Exchange
Commission. This Statement, which may be revised from time to time, contains
further information about the Fund and is incorporated by reference in this
Prospectus. Upon request, the Fund will provide a copy of the Statement of
Additional Information without charge to each person to whom a Prospectus is
delivered.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 16, 1998.
<PAGE>
TABLE OF CONTENTS
SUMMARY...................................................................3
EXPENSES..................................................................4
INVESTMENT OBJECTIVES AND POLICIES........................................6
FIXED INCOME SECURITIES.................................................6
INVESTMENT OBJECTIVE....................................................7
IMPLEMENTATION OF POLICIES AND RISKS......................................9
INVESTMENT RESTRICTIONS..................................................20
MANAGEMENT...............................................................21
HOW TO INVEST............................................................24
ADDITIONAL INVESTMENT INFORMATION........................................25
HOW TO REDEEM SHARES.....................................................27
SHAREHOLDER SERVICES.....................................................29
DISTRIBUTIONS AND TAXES..................................................32
CAPITAL STOCK............................................................33
SHAREHOLDER REPORTS AND MEETINGS.........................................33
CUSTODIAN, FUND ACCOUNTANT, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND SHAREHOLDER SERVICING AGENT.......................34
PERFORMANCE INFORMATION..................................................34
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
STATEMENT OF ADDITIONAL INFORMATION, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE>
SUMMARY
INVESTMENT OBJECTIVES AND POLICIES
The Fund is managed as a separate diversified open-end management investment
company, with distinct investment objectives and policies.
The Vintage Bond Fund's investment objective is to obtain income by investing in
a portfolio of fixed income securities and, secondarily, to seek capital
appreciation consistent with the preservation of capital and prudent investment
risk. The Fund will invest at least 65 percent of its total assets in
High-Quality Fixed Income Securities at all times. (See "INVESTMENT OBJECTIVES
AND POLICIES".) Because of this emphasis, capital appreciation is not a
significant consideration. The Vintage Bond Fund is designed for the investor
seeking a consistent level of income, which is higher than money market or
short- and intermediate-term bond funds usually provide. Unlike money market
mutual funds, the Vintage Bond Fund does not seek to maintain a stable net asset
value and may not be able to return dollar-for-dollar the money invested. The
Vintage Bond Fund seeks income from a portfolio of fixed income securities and,
secondarily, seeks capital appreciation.
RISKS AND INVESTMENT PRACTICES
The Vintage Bond Fund's investments in Fixed Income securities, including
derivatives and junk bonds (up to 25 percent of its total assets), and the
Advisor's policies relating thereto should not expose the Vintage Bond Fund to
risks that are substantially different than other investment companies with
similar investment objectives and policies; however, the investments in junk
bonds and derivative securities could result in the Fund experiencing some
volatility in its net asset value unrelated to interest rate risk, if the issuer
of the junk bond defaults, the interest rate trends abruptly move up or down or
the indices used to adjust yield on derivative securities move rapidly up or
down. As with any bond fund, the principal risk of investing in a fund comprised
of fixed income securities is that the net asset value will fluctuate inversely
to the rise and fall of interest rates. This volatility can be reduced to some
extent by managing the average portfolio maturity -- a shorter average portfolio
maturity reduces volatility (which reduces yield) and a longer portfolio
maturity increases volatility (which increases yield). The Advisor intends to
manage the portfolio maturity to minimize the effect of interest rate volatility
while maximizing yield by actively managing the portfolio in light of the
Advisor's forecast for interest rates. There can be no assurance that the Fund
will achieve its objective or that the Advisor's management approach will be
successful.
For a complete description of the Fund's investment practices and risks thereof
see "INVESTMENT OBJECTIVES AND POLICIES," "IMPLEMENTATION OF POLICIES AND
RISKS," herein and "INVESTMENT POLICIES AND TECHNIQUES" in the Statement of
Additional Information.
The Fund may use a variety of hedging techniques to, among other things,
minimize adverse price movements or fluctuations of securities held and hedge
against unfavorable future fluctuations in interest rates. Such techniques
include the use of options, futures and options on futures. The Fund may also
purchase put and sell call options on Fund securities and, within specified
limits, invest in repurchase agreements; illiquid securities; foreign
securities; mortgage- and asset-backed securities; zero coupon, deferred
interest and PIK bonds; collateralized mortgage obligations and multi-class
pass-through securities; stripped mortgage-backed securities; loan
participations; delayed delivery transactions; variable- or floating-rate
securities; and warrants; and may loan Fund securities. The Fund may engage in
3
<PAGE>
short-term trading, subject to constraints of remaining qualified under
Subchapter M of the Internal Revenue Code of 1986, as amended. (See
"DISTRIBUTIONS AND TAXES".)
MANAGEMENT
The Fund's investment advisor is Investors Management Group, Ltd., ("IMG" or the
"Advisor"), an Iowa corporation. IMG provides ongoing investment advisory
services for the Fund. IMG is a federally registered investment advisor
providing investment management services to mutual funds, financial
institutions, insurance companies, public agencies and individuals, with
approximately $1.6 billion presently under management. IMG's portfolio managers
will be responsible for the day-to-day management of the Funds and their
investments. (See "MANAGEMENT".)
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are available through BISYS Financial Services, Inc., as
Distributor to the Funds ("BISYS") at the net asset value per share of the Fund.
One hundred percent of the dollars invested in the Fund are used to purchase
shares of the Fund without any deduction or initial sales charge. Shares of the
Fund are redeemable at any time at the next-determined net asset value per
share, without any deduction or deferred sales charge. Shares of the Fund may be
exchanged without charge. The net asset value per share changes daily with the
value of the Fund's holdings. (See "HOW TO INVEST" and "HOW TO REDEEM SHARES".)
SHAREHOLDER SERVICES
Services offered include mail or telephone purchase, exchange and redemption; an
automatic investment plan; and automatic dividend reinvestment. (See
"SHAREHOLDER SERVICES".)
DIVIDENDS AND DISTRIBUTIONS
The policy of the Fund is to distribute substantially all of the net investment
income of the Fund, if any, on a regular basis. Any dividends from the net
income of the Fund normally will be distributed quarterly. Any net realized
capital gains for the Fund will be distributed at least annually. (See
"DISTRIBUTIONS AND TAXES".)
EXPENSES
The following information is provided in order to assist you in understanding
the various costs and expenses that, as an investor in the Fund, you will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases....................... None
Maximum Sales Charge on Reinvested Dividends.................... None
Exchange Fee.................................................... None
Redemption Fee*................................................. None
Maximum Contingent Deferred Sales Charge........................ None
*There is a $10 charge associated with redemptions payable by wire transfer.
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee.................................................. 0.55%
Rule 12b-1 Fees 1............................................... 0.00%
Other Expenses 2
Shareholder Servicing Fees................................. 0.00%
Administrative Fees........................................ 0.26%
Other Expenses............................................. 0.16%
-----
Total Other Expenses............................................ 0.42%
-----
Total Operating Expenses ....................................... 0.97%
Investors should be aware that the above table is not intended to reflect in
detail the fees and expenses associated with an investment in the Funds. The
table has been provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, investors should refer to the appropriate sections of the
Prospectus.
1 The Fund has adopted a Distribution and Shareholder Service Plan (the "Plan")
pursuant to which the Fund is authorized to pay or reimburse the Distributor a
periodic amount calculated at an annual rate not to exceed 0.25% of the average
daily net assets of the Fund ("Rule 12b-1 Fees). Currently, however, no such
amounts will be paid under the Plan by the Fund. Shareholders will be given at
least 30 days' notice prior to the payment of any fees under the Plan.
2 The Fund has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which the Fund is authorized to pay banks and other financial
institutions which agree to provide certain ministerial, recordkeeping and/or
administrative support services for their customers or account holders a
periodic amount calculated at an annual rate not to exceed 0.25% of the average
daily net assets of the Fund ("Shareholder Servicing Fees"). Currently the Fund
is not paying any such fees under the Services Plan, however, it may elect to
pay such fees at any time without further notice to shareholders. Total Fund
Operating Expenses as a percentage of average daily net assets would be 1.47%
for the Fund if the Fund pays the maximum under the Plan and the Services Plan.
EXAMPLE OF EXPENSES
The example below assumes the purchase of shares of each class with no
conversion to any other class of shares. You would pay the following expenses on
a $1,000 investment, assuming a 5 percent annual return and redemption at the
end of each time period:
1 Year $ 10
3 Years $ 31
5 Years $ 54
10 Years $119
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly.
PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
5
<PAGE>
THOSE SHOWN. FOR MORE COMPLETE DESCRIPTIONS OF THE EXPENSES OF THE FUND, PLEASE
SEE: "MANAGEMENT".
INVESTMENT OBJECTIVES AND POLICIES
FIXED INCOME SECURITIES
The Fund may invest in the fixed income investments described below
(collectively "Fixed Income Securities"). The Fund's authority to invest in
certain types of Fixed Income Securities may be restricted or subject to
objective investment criteria. For complete information on these restrictions
see the description of the Fund's investment objectives and policies in this
section.
Fixed Income Securities consist of (i) corporate debt securities, including
bonds, debentures, and notes; (ii) bank obligations, such as certificates of
deposit, bankers' acceptances, and time deposits of domestic banks, foreign
branches and subsidiaries of domestic banks, and domestic and foreign branches
of foreign banks and domestic savings and loan associations (in amounts in
excess of the insurance coverage (currently $100,000 per account) provided by
the Federal Deposit Insurance Corporation); (iii) commercial paper; (iv)
variable and floating rate securities (including variable account master demand
notes); (v) repurchase agreements; (vi) illiquid debt securities (such as
private placements, restricted securities and repurchase agreements maturing in
more than seven days); (vii) foreign securities -- debt securities issued by
foreign issuers traded either in foreign markets or in domestic markets through
depository receipts; (viii) convertible securities -- debt securities of
corporations convertible into or exchangeable for equity securities or debt
securities that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (ix) preferred stocks -- securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (x) U.S. government
securities; (xi) mortgage-backed securities, collateralized mortgage obligations
and similar securities (including corporate asset-backed securities); and (xii)
when issued or delayed delivery securities.
Fixed Income Securities include fixed rate securities and variable or floating
rate securities (income producing debt instruments with interest rates which
change at stated intervals or in relation to a specified interest rate index).
(See "IMPLEMENTATION OF POLICIES AND RISKS -- Variable or Floating Rate
Securities".)
Corporate debt securities, including bonds, debentures, and notes, may be
unsecured or secured by the issuer's assets. They may be senior or subordinate
in right of payment to other creditors of the issuer and may be listed on a
national securities exchange or traded in the over-the-counter market. The Fund
may invest in the obligations of banks and savings and loan associations.
However, the Fund will only invest in obligations of banks and savings and loan
associations which present minimal credit risks.
"U.S. government securities" include bills, notes, bonds, and other debt
securities differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or issued or guaranteed by U.S.
government agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States; (b)
the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage
6
<PAGE>
Association and the Federal Home Loan Mortgage Corporation, whose securities are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, the Interamerican Development Bank, and the International
Bank for Reconstruction and Development, whose securities are supported only by
the credit of such agencies. While the U.S. government provides financial
support to U.S. government agencies or instrumentalities, no assurance can be
given that it always will do so. The U.S. government, its agencies, and
instrumentalities do not guarantee the market value of their securities and
consequently, the value of such securities may fluctuate.
Fixed Income Securities in which the Funds may invest will primarily be
"High-Quality Fixed Income Securities". High-Quality Fixed Income Securities are
considered to be (i) corporate debt securities rated in the three highest
categories by Moody's Investors Service ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc. ("D&P"), Fitch Investors Services, Inc.
("Fitch"), or of similar quality as determined by another Nationally Recognized
Statistical Rating Organization ("NRSRO") as that term is used in applicable
rules of the SEC; (ii) U.S. government securities (as defined above); (iii) bank
obligations (certificates of deposit, bankers' acceptances, and time deposits)
issued by banks with a long-term CD rating in one of the three highest
categories of an NRSRO, with respect to obligations purchased by the Fund and
maturing in more than one year (e.g., A or higher by S&P), and in one of the
three highest categories, with respect to obligations purchased by the Fund and
maturing in one year or less (e.g., A-3 or higher by S&P); (iv) preferred stock
rated in one of the three highest categories by an NRSRO (e.g., A or higher by
S&P); (v) commercial paper rated in the two highest categories by S&P, Moody's,
D&P, Fitch or another NRSRO (e.g., A-2 or higher by S&P); (vi) repurchase
agreements involving these securities; and (vii) unrated securities which, in
the opinion of the Advisor, are of a quality comparable to the foregoing. See
Appendix A of the Statement of Additional Information for descriptions of the
rating services' bond ratings.
The Fund's average maturity represents an average based on the stated maturity
dates of the Fund's Fixed Income Securities, except that (i) variable-rate
securities are deemed to mature at the next interest rate adjustment date, (ii)
debt securities with put features are deemed to mature at the next put exercise
date, and (iii) the maturity of mortgage-backed securities is determined on an
"expected life" basis.
The investment objective for the Fund is described below. Because of the risks
involved in all investments there can, of course, be no assurance that the
objectives of the Fund will be met. Except for the investment objectives of the
Fund, and certain additional limitations listed under "INVESTMENT RESTRICTIONS"
and in the Statement of Additional Information, the investment policies of the
Fund are not fundamental. Accordingly, they may be changed by the Board of
Directors of the Fund without an affirmative vote of a majority of the Fund's
outstanding voting shares.
INVESTMENT OBJECTIVE
The investment objective of the Vintage Bond Fund is to obtain income by
investing in a portfolio of Fixed Income Securities and, secondarily, to seek
capital appreciation consistent with the preservation of capital and prudent
investment risk. The Vintage Bond Fund is designed for the investor seeking a
more consistent level of income than typical equity or balanced funds, which is
higher than money market or short- and intermediate-term bond funds usually
provide. The Fund will invest at least 65 percent of its total assets in
High-Quality Fixed Income Securities (including Cash Equivalents). Investments
will be made generally upon a long-term basis, but the Fund may make short-term
investments from time to time. Longer maturities typically provide better yields
7
<PAGE>
but will subject the Fund to a greater possibility of substantial changes in the
values of its securities as interest rates change. Unlike a money market fund,
the Fund's net asset value will rise and fall in inverse relationship to changes
in interest rates.
The Fund will invest at least 65 percent of its total assets in debt instruments
which the Advisor considers to be bonds which include corporate debt securities,
U.S. government securities, bank obligations, commercial paper, repurchase
agreements, variable and floating rate securities, foreign fixed income
securities, mortgage-backed securities, collateralized mortgage obligations and
similar securities.
To meet the objectives of the Fund and to seek additional stability of
principal, the Fund will be managed to adjust the average maturity based on the
interest rate outlook. During periods of rising interest rates and falling
prices, a shorter average maturity may be adopted to cushion the effect of price
declines on the Fund's net asset value. When rates are falling and prices are
rising, a longer average maturity for the Fund may be considered.
Under normal circumstances, the Fund will invest at least 65 percent of its
total assets in Fixed Income Securities which are considered to be of
High-Quality. Up to 25 percent of the Fund's total assets could be invested in
below-Investment Grade securities (commonly known as "junk bonds"). Currently,
the Fund does not expect to invest in (i) securities rated lower than "Ba" by
Moody's or "BB" by S&P, Fitch, D&P, or of similar quality by another NRSRO; and
(ii) unrated debt securities of similar quality. Securities of "BBB/Baa" or
lower quality may have speculative characteristics and poor credit protection.
The ratings services' descriptions of the below-Investment Grade securities
ratings categories in which the Fund may invest are as follows:
Moody's Investors Service, Inc. Bond Ratings: Bonds which are rated "Ba" are
judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Standard and Poor's Corporation Bond Ratings: Debt rated "BB", "B", "CCC", and
"CC" is regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "CC" the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Fitch Investors Services, Inc. Bond Ratings: Bonds which are rated "BB" are
considered speculative and of low investment grade. The obligor's ability to pay
interest and repay principal is not strong and is considered likely to be
affected over time by adverse economic changes.
Duff & Phelps, Inc. Long Term Ratings: Bonds which are rated "BB+", "BB", and
"BB-", are below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
See "IMPLEMENTATION OF POLICIES AND RISKS -- Lower Rated Securities" for
information concerning risks associated with investing in below investment grade
bonds.
8
<PAGE>
The Fund's assets may be invested in all types of Fixed Income Securities in any
proportion, including corporate debt securities, bank obligations, commercial
paper, repurchase agreements, private placements, foreign securities,
convertible securities, preferred stocks, U.S. government securities, and
mortgage-backed and similar securities. (See "Fixed Income Securities" above.)
Common stocks acquired through exercise of conversion rights or warrants or
acceptance of exchange or similar offers will normally not be retained by the
Fund, but will be disposed of in an orderly fashion consistent with the best
obtainable price. There is no maximum or anticipated average maturity for the
Vintage Bond Fund. The maturities selected will vary depending on the interest
rate outlook.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
additional restrictions described below), the Fund may invest in some or all of
the following securities and employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of these securities and investment techniques and their
associated risks is contained in the Statement of Additional Information.
REPURCHASE OBLIGATIONS
The Fund may enter into repurchase agreements with member banks of the Federal
Reserve System or dealers registered under the Securities and Exchange Act of
1934. In a repurchase agreement, the Fund buys a security at one price and, at
the time of sale, the seller agrees to repurchase the obligation at an agreed
upon time and price (usually within seven days). The repurchase agreement
thereby determines the yield during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the value of the underlying
security. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than the repurchase price plus accrued interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party to the agreement, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
The Fund may not enter into repurchase agreements if, as a result, more than 10
percent of the Fund's net asset value at the time of the transaction would be
invested in the aggregate in repurchase agreements maturing in more than seven
days and other securities which are not readily marketable. (See "Illiquid
Securities" below.)
The Fund may also enter into reverse repurchase agreements. In a reverse
repurchase agreement, the Fund sells a security to another party, such as a bank
or broker-dealer, in return for cash and agrees to repurchase the instrument at
a particular price and time.
FIXED INCOME SECURITIES
The net asset value of the shares of open-end investment companies, such as the
Vintage Bond Fund, which invest in Fixed Income Securities, changes as the
general levels of interest rates fluctuate. When interest rates decline, the net
asset value of the Vintage Bond Fund can be expected to rise. Conversely, when
interest rates rise, the net asset value of the Vintage Bond Fund can be
expected to decline.
Although changes in the value of securities subsequent to their acquisition are
reflected in the net asset value of shares of the Fund, such changes will not
affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to the
9
<PAGE>
income received by the Fund from its investments, which would in any case be
reduced by the Fund's expenses before it is distributed to shareholders.
When and if available, the Fund may purchase Fixed Income Securities at a
discount from face value. However, the Fund does not intend to hold such
securities to maturity for the purpose of achieving potential capital
appreciation, unless current yields on these securities remain attractive.
LOWER RATED SECURITIES
Investments in below-Investment Grade Fixed Income Securities by the Vintage
Bond Fund, while generally providing greater income and opportunity for gain
than investments in higher rated securities, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such securities), and involve greater volatility of price (especially
during periods of economic uncertainty or change) than investments in higher
rated securities and because yields may vary over time, no specific level of
income can ever be assured. In particular, securities rated lower than "Baa" by
Moody's or "BBB" by S&P or comparable securities either rated by another NRSRO
or unrated (commonly known as "junk bonds") are considered speculative. These
lower rated, higher yielding Fixed Income Securities generally tend to reflect
economic changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated Fixed Income Securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Fund's lower rated, high yielding Fixed Income
Securities are paid primarily because of the increased risk of loss of principal
and income, arising from such factors as the heightened possibility of default
or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Fund may continue to earn the same level of
interest income while its net asset value declines due to Fund losses, which
could result in an increase in the Fund's yield despite the actual loss of
principal.
The prices for these securities may be affected by legislative and regulatory
developments. For example, federal rules require that savings and loan
associations gradually reduce their holdings of high-yield securities. An effect
of such legislation may be to depress the prices of outstanding lower rated,
high yielding Fixed Income Securities.
Changes in the value of securities subsequent to their acquisition will not
affect cash income or yield to maturity of the Fund, but will be reflected in
the net asset value of shares of the Fund. The market for these lower rated
Fixed Income Securities may be less liquid than the market for Investment Grade
Fixed Income Securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, the Advisor's judgment may at times play a greater role in valuing
these securities than in the case of Investment Grade Fixed Income Securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities at their fair market value to
meet redemption requests or to respond to changes in the market.
As noted above, the Vintage Bond Fund may invest up to 25 percent of its total
assets in Fixed Income Securities that are rated lower than Investment Grade.
10
<PAGE>
For the fiscal year ended April 30, 1997, the Fund had not invested in any
income securities that are rated below Investment Grade. See "Fixed Income
Securities" above. To the extent the Fund invests in these lower rated Fixed
Income Securities, the achievement of its investment objective may be more
dependent on the Advisor's own credit analysis than in the case of a fund
investing in higher quality bonds. While the Advisor will refer to ratings
issued by established ratings agencies, it is not a policy of the Fund to rely
exclusively on ratings issued by these agencies, but rather to supplement such
ratings with the Advisor's own independent and ongoing review of credit quality.
The Funds may also invest in Fixed Income Securities rated in the fourth highest
category by one or more NRSROs (e.g., "Baa" by Moody's), and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, may have speculative characteristics and changes in economic
conditions and other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade Fixed Income Securities.
For further discussion, see "INVESTMENT POLICIES AND TECHNIQUES -- Low-Rated and
Comparable Unrated Fixed Income Securities" in the Statement of Additional
Information.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES
During periods of unusual market conditions when the Advisor believes that
investing for defensive purposes is appropriate, a large portion or all of the
assets of the Fund may be invested temporarily in cash or Short-Term Cash
Equivalents including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances and repurchase agreements), high
quality commercial paper and short-term notes (rated in the two highest
categories by S&P and/or Moody's or any other NRSRO or determined to be of
comparable quality by the Advisor), other money market funds, obligations issued
or guaranteed by the U.S. government or any of its agencies or instrumentalities
and related repurchase agreements.
ILLIQUID SECURITIES
The Fund may invest up to 10 percent of its net assets in illiquid securities.
For purposes of this restriction, illiquid securities include restricted
securities (securities the disposition of which is restricted under the federal
securities laws, such as private placements), other securities without readily
available market quotations (including options traded in the over-the-counter
market, and interest-only and principal-only stripped mortgage-backed
securities), and repurchase agreements maturing in more than seven days. Risks
associated with restricted securities include the potential obligation to pay
all or part of the registration expenses in order to sell certain restricted
securities. A considerable period of time may elapse between the time of the
decision to sell a security and the time the Fund may be permitted to sell it
under an effective registration statement. If, during such a period, adverse
conditions were to develop, the Fund might obtain a less favorable price than
that prevailing when it decided to sell. A complete description of these
investment practices and their associated risks is contained in the Statement of
Additional Information.
FUTURES AND OPTIONS ACTIVITIES
The Fund may, subject to certain restrictions, invest in interest rate futures
contracts and index futures contracts. Interest rate futures contracts are
contracts for the future delivery of debt securities, such as U.S. Treasury
11
<PAGE>
bonds, U.S. Treasury bills, U.S. Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, 90-day commercial
paper, bank certificates of deposit, and Eurodollar certificates of deposit.
Index futures contracts are contracts in which the parties agree to take or make
delivery of an amount of cash equal to the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the futures contract was originally written.
The Fund may also (i) purchase covered spread options which give the Fund the
right to sell a security that it owns at a fixed dollar spread or yield spread
in relationship to another security that the Fund does not own, but which is
used as a benchmark (up to 5 percent of the Fund's total net assets); (ii) write
call options and purchase put options on interest rate and index futures
contracts; (iii) write covered call options on its portfolio securities and
purchase covered put options on its portfolio securities; and (iv) enter into
closing transactions with respect to these options. The Fund may enter into
futures transactions and options on futures contracts and Fund securities only
for traditional hedging purposes. Premiums may be generated through the use of
call options. However, the premiums which may be generated are not the primary
reason for writing covered call options.
These investment practices will primarily be used to attempt to minimize adverse
principal or price fluctuations and unfavorable fluctuations in interest rates.
They do, however, involve risks that are different in some respects from the
investment risks associated with similar funds which do not engage in these
activities. With respect to futures contracts and options on futures contracts,
the correlation between changes in prices of futures contracts (and options
thereon) and of the securities being hedged can only be approximate.
Consequently, even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate trends. Because of low
margin deposits required, futures trading involves an extremely high degree of
leverage. As a result, a relatively small price movement in a futures contract
or an option thereon may result in immediate and substantial gain, as well as
loss, to the investor. Therefore, a purchase or sale of a futures contract may
result in gains or losses in excess of the amount initially invested in the
futures contract. Since most U.S. futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day,
the Fund may not be able to close futures positions at favorable prices.
Over-the-counter options are not traded on contract markets regulated by the
CFTC or the SEC, and many of the protections afforded to exchange participants
are not available. These options have no limits on daily price fluctuations, and
pose the risks of inability to find a counterparty to a transaction, lack of a
liquid secondary market, and the risk of default of the counterparty. A complete
description of futures and options investment practices and their associated
risks is contained in the Statement of Additional Information. The Fund's
transactions in futures, options on futures, and options on Fund securities are
subject to certain restrictions. (See "INVESTMENT RESTRICTIONS".)
VARIABLE OR FLOATING RATE SECURITIES
The Fund may invest in Fixed Income Securities which offer a variable or
floating rate of interest. Variable rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating rate securities provide for automatic adjustment
of the interest rate whenever some specified interest rate index changes. The
interest rate on variable or floating rate securities is ordinarily determined
by reference to or is a percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial paper or bank certificates
of deposit, an index of short-term interest rates, or some other objective
measure.
12
<PAGE>
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on seven days' notice; in other
cases, the demand feature is exercisable at any time on 30 days' notice or on
similar notice at intervals of not more than one year. Securities with a demand
feature exercisable over a period in excess of seven days are considered to be
illiquid. (See "Illiquid Securities" above.) Some securities which do not have
variable or floating interest rates may be accompanied by puts producing similar
results and price characteristics.
Variable rate demand notes include master demand notes which are obligations
that permit the Fund to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these notes fluctuate from time to time.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. The interest rate on a floating rate demand
obligation 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 obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies.
If not so rated, the Fund may invest in them only if the Advisor determines that
at the time of investment the obligations are of comparable quality to the other
obligations in which the Fund may invest. The Advisor, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable rate demand obligations owned by the Fund.
MORTGAGE-BACKED SECURITIES
Mortgage loans made by banks, savings and loan institutions, and other lenders
are often assembled into pools which are issued and guaranteed by an agency or
instrumentality of the U.S. government, though not necessarily backed by the
full faith and credit of the U.S. government itself, or collateralized by U.S.
Treasury obligations or by U.S. government agency securities. Interests in such
pools are described herein as "Mortgage-Backed Securities". These include
securities issued by the Government National Mortgage Association ("GNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal National
Mortgage Association ("FNMA"). The Fund may invest in Mortgage-Backed Securities
representing undivided ownership interests in pools of mortgage loans, including
GNMA, FHLMC, and FNMA Certificates and so-called "CMOs" (i.e., collateralized
mortgage obligations which are issued by nongovernmental entities but which are
collateralized by U.S. Treasury obligations or by U.S. government agency
securities). The Fund may also invest in REMIC Certificates issued by FNMA.
Investors may purchase beneficial interests in REMICs, which are known as
"regular" interests or "residual" interests. The Fund is not presently permitted
to invest in "residual" interests.
GNMA Certificates are Mortgage-Backed Securities which evidence an undivided
interest in a pool of mortgage loans. GNMA Certificates differ from bonds in
that principal is paid monthly by the borrowers over the term of the loan rather
than returned in a lump sum at maturity. GNMA Certificates that the Fund may
13
<PAGE>
purchase are the "modified pass-through" type. "Modified pass-through" GNMA
Certificates entitle the holder to receive a share of all interest and principal
payments paid and owed on the mortgage pool, net of fees paid to the "issuer"
and GNMA, regardless of whether or not the mortgagor actually makes the payment.
GNMA Certificates are backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government.
FHLMC issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. The FHLMC guarantees timely payments of interest on PCs and the full
return of principal. GMCs also represent a pro rata interest in a pool of
mortgages. However, these PCs or GMCs pay interest semi-annually and return
principal once a year in guaranteed minimum payments. This type of security is
guaranteed by FHLMC as to timely payment of principal and interest but it is not
guaranteed by the full faith and credit of the U.S. government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The principal and the timely payment of interest on FNMA
Certificates are guaranteed only by FNMA itself, not by the full faith and
credit of the U.S. government. FNMA also issues REMIC Certificates, which
represent an interest in a trust funded with FNMA Certificates. REMIC
Certificates are guaranteed by FNMA and not by the full faith and credit of the
U.S. government.
Each of the Mortgage-Backed Securities described above is characterized by
periodic payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as the Fund), like the payments on the underlying loans,
represent both principal and interest. Although the underlying mortgage loans
are for specified periods of time, such as 20 or 30 years, the borrowers can,
and typically do, pay them off sooner. Thus, the security holders frequently
receive prepayments of principal in addition to the principal which is part of
the regular payments. A borrower is more likely to prepay a mortgage which bears
a relatively high rate of interest. This means that in times of declining
interest rates, some of the Fund's higher-yielding Mortgage-Backed Securities
might be converted to cash, and the Fund will be forced to accept lower interest
rates when that cash is used to purchase additional securities in the
Mortgage-Backed Securities sector or in other investment sectors. Investments in
mortgage-backed securities can be volatile depending upon the makeup of the
mortgage portfolio underlying the particular security and the prepayment
experience on the underlying mortgage. In addition to the foregoing, the Fund
may invest in similar asset-backed securities which are backed not by mortgages
but other assets such as receivables.
ASSET-BACKED SECURITIES
The Fund may invest in corporate asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a pool of
assets, such as credit card and automobile loan receivables, representing the
obligations of a number of different parties Corporate asset-backed securities
present certain risks. For instance, in the case of credit card receivables,
these securities may not have the benefit of any security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to sell-off certain
amounts owed on the credit cards, thereby reducing the balance due. Most issuers
14
<PAGE>
of automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities. The underlying assets (i.e., loans) are
also subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS
The Fund may invest in zero coupon bonds, deferred interest bonds and PIK bonds.
Zero coupon bonds are debt obligations which are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a period
of delay before the regular payment of interest begins. PIK bonds are debt
obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest. The Fund will accrue income
on such investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other Fund securities to satisfy the
Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
The Fund may invest a portion of its assets in Collateralized Mortgage
Obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Fund may also
15
<PAGE>
invest a portion of their net assets in multi-class pass-through securities
which are interests in a trust composed of Mortgage Assets. CMOs (which include
multi-class pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. government or by private originators or investors
in mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. Payments of principal and interest on Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multi-class pass-through securities. In a
CMO, a series of bonds or certificates is usually issued in multiple classes
with different maturities. Each class of CMOs, often referred to as a "tranche",
is issued at a specific fixed or floating coupon rate and has a stated maturity
or final distribution date. Principal repayments on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates, resulting in a loss of all or part of the premium
if any has been paid. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. As a part of the process of creating
more predictable cash flows on most of the tranches in a series of CMOs, one or
more of the tranches generally must be created to absorb most of the volatility
in the cash flows in the underlying mortgage assets. The yields on these more
volatile tranches are generally higher than prevailing market yields on
government asset backed securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, and the sensitivity thereof to
changes in prepayment rates on the underlying mortgage assets, the market price
of and yield on these tranches tend to be highly volatile. The same is true for
multi-class pass-through securities. Certain CMOs may be stripped (securities
which provide only the principal or interest factor of the underlying security).
See "Stripped Mortgage-Backed Securities" in the Statement of Additional
Information for a discussion of the risks of investing in classes consisting
primarily of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest a portion of its assets in stripped mortgage-backed
securities ("SMBS"), which are derivative multi-class mortgage securities
usually structured with two classes that receive different proportions of
interest and principal distributions from an underlying pool of mortgage assets.
The market value of a class consisting entirely or primarily of principal
payments is unusually volatile in response to changes in interest rates. For a
further description of SMBS and the risks related to transactions therein, see
the Statement of Additional Information.
16
<PAGE>
LOAN PARTICIPATIONS
The Fund may invest a portion of its assets in "loan participations". By
purchasing a loan participation, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants which must be met
by the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buyouts and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods and services. These claims may
also be purchased at a time when the company is in default. Some of the loan
participations acquired by the Fund may involve revolving credit facilities or
other standby financing commitments which obligate the Fund to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans makes such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Fund may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. To the extent that the Advisor determines that any such
investments are illiquid, the Fund will include them in the investment
limitations on Illiquid Securities described above. For a further discussion of
loan participations and the risks related to transactions therein, see the
Statement of Additional Information.
DERIVATIVE SECURITIES
The Fund may invest in securities which are created by combining transactions in
two or more underlying markets, often referred to as "derivative securities",
which have a return that is tied to a formula based upon an index which may
differ from the return of a simple security of the same maturity. A formula may
have a cap or other limitation on the rate of interest to be paid or the amount
of market fluctuation. These securities may have varying degrees of volatility
at different times, or under different market conditions. Allowable investments
are floating rate notes, variable rate notes, and notes whose maturity value
fluctuates.
LENDING OF SECURITIES
The Fund may lend its securities, up to 30 percent of the Fund's total assets,
to broker-dealers or institutional investors. The loans will be secured
continuously by collateral equal at least to the value of the securities lent.
The collateral may consist of cash, government securities, letters of credit, or
other collateral permitted by regulatory agencies. The Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer of the
securities lent. The Fund may also receive interest on the investment of the
collateral or a fee from the borrower as compensation for the loan. Any cash
collateral pursuant to these loans will be invested in short-term liquid debt
securities. The Fund will retain the right to call, upon notice, the securities
lent. While there may be delays in recovery or even loss of rights in the
collateral should the borrower fail financially, the creditworthiness of the
entities to which loans are made is examined to evaluate those risks. Loans will
not be made unless the consideration which can be earned from such loans
justifies the risks. The Fund may pay reasonable custodial and services fees in
connection with the loans. (See "Reverse Repurchase Agreements" and "Securities
Lending" in the Statement of Additional Information.)
17
<PAGE>
FOREIGN SECURITIES
The Fund may invest up to 15 percent of its total assets directly in the
securities of foreign issuers, including the securities of foreign branches and
foreign subsidiaries of domestic banks and domestic and foreign branches of
foreign banks. The Fund may also invest in foreign securities in domestic
markets through sponsored depository receipts without regard to this limitation.
Foreign investments may involve risks which are in addition to the risks
inherent in domestic investments. In many countries, there is less publicly
available information about issuers than is available in the reports and ratings
published about companies in the United States.
Foreign companies may not be subject to uniform accounting, auditing, and
financial reporting standards. The value of foreign investments may rise or fall
because of changes in currency exchange rates, and the Fund may incur certain
costs in converting securities denominated in foreign currencies to U.S.
dollars. Dividends and interest on foreign securities may be subject to foreign
withholding taxes, which would reduce the Fund's income without providing a tax
credit for the Fund's shareholders. Obtaining judgments, when necessary, in
foreign countries may be more difficult and more expensive than in the United
States. Although the Fund intends to invest in securities of foreign issuers
located in developed countries which are considered as having stable and
friendly governments, there is the possibility of expropriation, confiscatory
taxation, nationalization, currency blockage, or political or social instability
which could affect investments in those nations.
In addition, the net asset value of the Fund is determined and shares of the
Fund can be redeemed only on days the New York Stock Exchange ("NYSE") is open
for business. However, foreign securities held by the Fund may be traded on days
and at times when the NYSE is closed. Accordingly the net asset value of the
Fund may be significantly affected on days when the investor is unable to
purchase or redeem shares.
DELAYED DELIVERY SECURITIES
The Fund may invest up to 15 percent of its total assets, measured at the time
of purchase, in securities purchased on a when-issued or delayed delivery basis
("Delayed Delivery" or "When-Issued" Securities). Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days. Purchasing securities on a when-issued
basis allows the Fund to lock in a fixed price or yield on a security it intends
to purchase. At the time the Fund purchases a When-Issued Security, it records
the transaction and reflects the value of the security in determining its net
asset value (although the Fund will not accrue interest income prior to actual
delivery).
The Fund may also sell securities on a delayed delivery basis. When the Fund has
sold a security on a delayed delivery basis, the Fund does not participate in
further gains or losses with respect to the security.
Delayed Delivery Securities are subject to changes in value based on the market
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Delayed Delivery Securities may
expose the Fund to this risk because they may experience such fluctuation prior
to actual delivery. The greater the Fund's outstanding commitments to purchase
these securities, the greater the Fund's exposure to possible fluctuations in
its net asset value. Purchasing (or selling) Delayed Delivery Securities may
involve the additional risk that the yield available in the market when delivery
occurs may be higher (or lower) than that obtained at the time of commitment.
18
<PAGE>
Although the Fund may be able to sell Delayed Delivery Securities prior to the
delivery date, the Fund will only purchase Delayed Delivery Securities for the
purpose of actually acquiring the securities, unless after entering into the
commitment a sale appears desirable for investment reasons. The Fund will
segregate and maintain cash, cash-equivalents, or other high-quality, liquid
debt securities in an amount at least equal to the amount of outstanding
commitments for Delayed Delivery Securities at all times. See the Statement of
Additional Information for further discussion of Delayed Delivery Transactions.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Fund may enter into "dollar roll" transactions with selected banks and
broker-dealers pursuant to which the Fund sells Mortgaged-Backed Securities for
delivery in the current month and simultaneously contracts with the same
counterparty to repurchase similar (same type, coupon and maturity) but not
identical securities on a specified future date. The Fund will only enter into
covered rolls. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash position or a cash equivalent security position
which matures on or before the forward settlement date of the dollar roll
transaction. The Fund gives up the right to receive principal and interest paid
on the securities sold. However, the Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation, and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of the Fund. The Fund will hold and maintain in a segregated account until the
settlement date cash or liquid, high grade debt securities in an amount equal to
the forward purchase price. The benefits derived from the use of mortgage dollar
rolls may depend upon the Advisor's ability to correctly predict mortgage
prepayments and interest rates. There is no assurance that mortgage dollar rolls
can be successfully employed.
For financial reporting and tax purposes, the Fund proposes to treat mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale. The Fund currently does
not intends to enter into mortgage dollar rolls that are accounted for as a
financing. Mortgage dollar rolls are considered illiquid securities. (See
"Illiquid Securities" above.)
PORTFOLIO TURNOVER
The Fund attempts to increase return by trading to take advantage of short-term
market variations. This policy may lead to higher annual portfolio turnover
rates. The rate of portfolio turnover for the Vintage Bond Fund is estimated to
fall between 100 percent and 300 percent. These rates should not be considered
as limiting factors. For the fiscal year ended April 30, 1997, the portfolio
turnover rates for Vintage Bond Fund was 42.22%.
The annual portfolio turnover rate indicates changes in the Fund's securities'
positions. The turnover rate may vary from year to year, as well as within a
year. It may also be affected by sales of Fund securities necessary to meet cash
requirements for redemptions of shares. High turnover in any year will result in
the payment by the Fund of above average amounts of brokerage commissions and
could result in the payment by shareholders of above average amounts of taxes on
realized investment gains. However, to the extent the Fund purchases Fixed
Income Securities, it is not anticipated that high turnover will produce a
negative effect, because Fixed Income Securities will normally be purchased on a
principal basis.
19
<PAGE>
The Fund intends to limit its turnover so that realized short-term gains on
securities held for less than three months do not exceed 30 percent of gross
income. This enables the Fund to derive the benefits of favorable tax treatment
available under the Internal Revenue Code. (See "DISTRIBUTIONS AND TAXES".)
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions. These "fundamental"
investment restrictions cannot be changed without approval by holders of a
majority of the Fund's outstanding voting shares. As defined in the Investment
Company Act of 1940 ("1940 Act"), this means the lesser of (a) 67 percent of the
shares of the Fund at a meeting where more than 50 percent of the outstanding
shares are present in person or by proxy, or (b) more than 50 percent of the
outstanding shares of the Fund. However, except where expressly stated to be
fundamental, the Fund's investment restrictions are not fundamental and may be
changed without shareholder approval. Please refer to the Statement of
Additional Information for a complete list of investment restrictions adopted by
the Fund.
The fundamental investment restrictions provide, among other things, that the
Fund may not:
1. Purchase securities of any company having less than three years of
continuous operation (including operations of any predecessors) if the
purchase would cause the value of the Fund's investments in all such
companies to exceed 5 percent of the value of its net assets.
2. Purchase the securities of any issuer if such purchase would cause, as to
75 percent of the Fund's total assets, more than 5 percent of the value of
the Fund's total assets to be invested in securities of any one issuer
(except securities of the U.S. government or any instrumentality thereof),
or purchase more than 10 percent of the outstanding voting securities of
any one issuer.
3. Borrow money except for temporary or emergency purposes (but not for the
purpose of purchasing investments) and then, only in an amount not to
exceed 25 percent of the value of the Fund's net assets at the time the
borrowing is incurred; provided, however, that the Fund may enter into
transactions in options, futures, and options on futures. The Fund may
borrow from a bank or by engaging in a reverse repurchase agreement. The
Fund will not purchase securities when borrowings exceed 5 percent of its
total assets. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. To this extent,
purchasing securities when borrowings are outstanding may involve an
element of leverage. See the Statement of Additional Information for an
explanation of reverse repurchase agreements.
4. Enter into futures contracts or related options if more than 30 percent of
the Fund's net assets would be represented by futures contracts or more
than 5 percent of the Fund's total assets would be committed to initial
margin and premiums on futures and related options.
5. Invest in options (options on futures, indexes and securities) if
securities covering these options exceed 25 percent of the Fund's net
assets or the premiums paid for such options exceed 5 percent of the Fund's
net assets.
20
<PAGE>
MANAGEMENT
Under the laws of the State of Maryland, the property, affairs and business of
the Company and the Funds are managed by the Board of Directors. The Directors
elect officers who are charged with the responsibility for the day-to-day
operation of the Fund and the execution of policies formulated by the Directors.
The Directors receive fees and are reimbursed for their expenses in connection
with each meeting of the Board of Directors they attend. However, no officer or
employee of Investors Management Group, AMCORE Financial, Inc., or any of its
subsidiaries, or BISYS Fund Services, Inc., receives any compensation from the
Company for acting as a Director of the Company. The officers of the Company
receive no compensation directly from the Company for performing the duties of
their offices. Investors Management Group receives fees from the Funds for
acting as investment adviser, administrator and transfer agent and for providing
certain fund accounting services. BISYS Fund Services receives fees from the
Funds for acting as distributor and sub-transfer agent.
The Directors and Officers are:
*David W. Miles, Director.
Senior Managing Director, Investors Management Group, and
IMG Financial Services, Inc.
*Mark A. McClurg, President and Director.
Senior Managing Director, Investors Management Group, and
IMG Financial Services, Inc.
Johnny Danos, Director.
President, Danos, Inc., a personal investment company.
Debra Johnson, Director.
Vice President and CFO, Business Publications Corporation/Iowa Title
Company, a publishing and abstracting service company.
Edward J. Stanek, Director.
CEO, Iowa Lottery, a government operated lottery.
*Ruth L. Prochaska, Secretary.
Controller/Compliance Officer, Investors Management Group, and
IMG Financial Services, Inc.
*Mr. Miles, Mr. McClurg, and Ms. Prochaska are deemed to be "interested person",
as defined in the Investment Company Act of 1940.
The mailing address of all officers and directors of the Fund is 2203 Grand
Avenue, Des Moines, Iowa 50312-5338.
THE ADVISOR
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Investors Management Group, ("IMG" or the "Advisor"), to serve
as the Fund's investment advisor. Investors Management Group, a wholly owned
subsidiary of AMCORE Financial Inc., is a federally registered Investment
Advisor organized in 1982 and located at 2203 Grand Avenue, Des Moines, Iowa.
21
<PAGE>
Since then its principal business has been providing continuous investment
management to pension and profit-sharing plans, insurance companies, public
agencies, banks, endowments and charitable institutions, other mutual funds,
individuals and others. As of November 30, 1997, IMG hadapproximately $1.6
billion in equity, fixed income, and money market assets under management.
Pursuant to the Advisory Agreement with the Fund, IMG provides investment
advisory assistance and the day-to-day management of the Fund's investments,
subject to the supervision and authority of the Board of Directors.
The following individuals serve as portfolio managers for the Fund and are
primarily responsible for the day-to-day management of the Fund's portfolio.
Jeffrey D. Lorenzen, CFA, and Kathryn D. Beyer, CFA, have managed the Fund since
inception.
JEFFREY D. LORENZEN, CFA, MANAGING DIRECTOR. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. He received his Masters of Business
Administration degree from Drake University and his Bachelor of
Business Administration degree from the University of Iowa.
KATHRYN D. BEYER, CFA, MANAGING DIRECTOR. Ms. Beyer is a fixed income
strategist and is a member of IMG's Investment Policy Committee. Prior
to joining IMG in 1993, her experience includes serving as a securities
analyst and director of mortgage-backed securities for Central Life
Assurance Company from 1988 to 1993. Ms. Beyer received her Masters of
Business Administration degree from Drake University and her Bachelor
of Science degree in agricultural engineering from Iowa State
University.
ELIZABETH S. PIERSON, VICE PRESIDENT AND SENIOR FIXED INCOME MANAGER.
AMCORE Capital Management, Inc. (or a predecessor) since 1984 when she
began her investment career. AMCORE Capital Management, Inc., was
merged with IMG in December 1997. She has a B.S. degree from the
University of Illinois, Champaign-Urbana and is a Chartered Financial
Analyst. She has been responsible for investment management and credit
responsibilities in numerous individually managed advisory portfolios.
She also manages the fixed securities of the Balanced Fund.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment objective and restrictions, IM G manages
the investments of the Fund, makes decisions with respect to and places orders
for all purchases and sales of the Fund's portfolio securities, and maintains
the Fund's records relating to such purchases and sales.
INVESTMENT ADVISORY FEES
Under the terms of the Advisory Agreement, each Fund has agreed to pay IMG a
monthly investment management fee. The Fund pays IMG an investment management
fee computed daily and paid monthly, at the annual rate of fifty five
one-hundredths of one percent (0.55%) of the Fund's average daily net assets.
During the fiscal year ended April 30, 1997, IMG received advisory fees of
$23,868 from the Fund.
At its expense, IMG provides office space and all necessary office facilities,
22
<PAGE>
equipment, and personnel for servicing the investments of the Funds.
Except for the expenses expressly assumed by IMG as set forth above or as
described below with respect to the distribution of the Fund's shares, the Fund
is responsible for all its other expenses, including, without limitation,
governmental fees, interest charges, taxes if applicable, membership dues in the
Investment Company Institute allocable to the Fund, brokerage commissions, and
other expenses connected with the execution, recording and settlement of Fund
security transactions, expenses of repurchasing and redeeming shares and
expenses of servicing shareholder accounts; expenses for preparing, printing and
distributing periodic reports, notices and proxy statements to shareholders and
to governmental officers and commissions; insurance premiums; fees and expenses
of the Fund's custodian, including safekeeping of funds and securities and
maintaining required books and accounting; expenses of calculating the net asset
value of shares of the Fund; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Fund; compensation and expenses of Directors who are not "interested
persons" of the Advisor; and expenses of shareholder meetings. Expenses relating
to the issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses to existing shareholders are
borne by the Fund except that the Fund's Distribution Agreement with BISYS
requires BISYS to pay for prospectuses that are to be used for sales purposes
with persons other than current shareholders.
From time to time, IMG may voluntarily waive all or a portion of the investment
management fee and/or absorb certain expenses of the Fund without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for
the Fund and increasing the Fund's overall yield to investors at the time any
such amounts are waived and/or absorbed.
Except as voluntarily absorbed by IMG, all expenses incurred in the operation of
the Fund will be borne by the Fund.
DISTRIBUTOR
BISYS serves as distributor and principal underwriter for the Fund pursuant to a
Distribution Agreement and a Rule 12b-1 Plan. BISYS bears all its expenses of
providing services pursuant to the agreement, including the payment of any
commissions. BISYS provides for the preparation of advertising or sales
literature and bears the cost of printing and mailing prospectuses to persons
other than current shareholders. The Fund bears the cost of qualifying and
maintaining the qualification of Fund's shares for sale under the securities
laws of the various states and the expense of registering their shares with the
Securities and Exchange Commission. For its services under the Distribution
Agreement, BISYS receives a fee, payable monthly, at the annual rate up to 0.25
percent. This fee is accrued daily as an expense of each Fund. Currently, no
distribution services fee is being charged by BISYS. The Fund is not required to
reimburse the distributor for distribution expenses in excess of such fees. (See
"ADDITIONAL INVESTMENT INFORMATION".)
Since the Distribution Agreement provides for fees that are used by BISYS to pay
for distribution services, that agreement along with the related selling group
agreements (collectively, the "Plan") is approved and reviewed in accordance
with the Fund's Rule 12b-1 Plan under the 1940 Act, which regulates the manner
in which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
For further information, see "MANAGEMENT OF THE FUNDS" in the Statement of
23
<PAGE>
Additional Information.
FEES FOR SHAREHOLDER SERVICES
IMG also provides information and administrative services for shareholders of
the Fund pursuant to an Administrative Services Agreement ("Administrative
Services Agreement") under a "Shareholder Services Plan" adopted by the Board of
Directors and reviewed at least annually. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Funds and their special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. IMG bears all its expenses
of providing services pursuant to the Administrative Services Agreement,
including the payment of any services fees. For services under the
Administrative Services Agreement, the Fund pays IMG a fee, payable monthly, at
the annual rate of up to 0.25 percent. IMG may periodically waive all or a
portion of its administrative fee to increase the net income of the Fund
available for distribution as dividends. IMG may not seek reimbursement of such
waived fees at a later date. The waiver of such fee will cause the yield of the
Fund to be higher than it would otherwise be in the absence of such a waiver.
FUND ACCOUNTING
IMG provides fund accounting services pursuant to the Fund Accounting Agreement.
The Fund pays IMG fees equal to an annual rate of 0.03 percent of average daily
net assets.
HOW TO INVEST
You can purchase shares of the Fund in several ways, each of which is described
below, from BISYS as distributor of the Fund's shares. Please review the
information under "ADDITIONAL INVESTMENT INFORMATION", and "HOW TO REDEEM
SHARES". All purchases are subject to acceptance by the Fund and the Fund may
decline to accept a purchase order upon receipt when it would not be in the best
interest of existing shareholders to accept the order. The purchase price of
your shares will be the net asset value next determined after BISYS receives
your investment in proper form. (See "ADDITIONAL INVESTMENT INFORMATION --
Determining Your Share Price".)
BY MAIL
You can purchase shares of the Fund by sending an application and a check or
money order payable to "IMG Mutual Funds, Inc." to the address on the back cover
of this Prospectus. To make additional purchases, enclose a check payable to IMG
Mutual Funds, Inc. along with the Additional Investment Form provided with your
account statement. Or, you may send a check along with an indication of the
account in which it should be deposited. (See "ADDITIONAL INVESTMENT INFORMATION
- -- Minimum Investments".) If your check does not clear, you will be charged a
$20 service fee. You will also be responsible for any losses suffered by the
Fund as a result. All your purchases must be made by checks payable to IMG
Mutual Funds, Inc. drawn on U.S. banks. Third-party checks are not accepted.
24
<PAGE>
BY WIRE
You may purchase additional shares by wire. Please call 1-800-798-1819 for
complete wire instructions. The Fund will not be responsible for the
consequences of delays resulting from the banking or Federal Reserve wire
systems.
BY EXCHANGE
You can open a new account by exchanging from one Fund account to another.
Exchanges may only be made between identically registered accounts. There is no
charge for this service. You may request an exchange by calling or writing
BISYS. Your purchase price will be the offering price next determined after your
exchange request is received in proper form. The telephone exchange minimum is
the lesser of $50 or the balance of your account, with no minimum for written
exchanges. Check the minimum initial investment requirements for the Fund you
are investing in under "ADDITIONAL INVESTMENT INFORMATION -- Minimum
Investments". Please review the information about this privilege under
"SHAREHOLDER SERVICES -- Telephone Exchange and Redemption Privilege".
BY TELEPHONE PURCHASE
You can make additional investments from $50 to $25,000 into your IMG Funds
account by telephone. Upon your authorization, money from your bank checking or
NOW account will be withdrawn to make the investment. The price you receive will
be the offering price next computed after BISYS receives your funds from your
bank, which is normally two banking days after you have initiated the
transaction through BISYS. To establish the telephone purchase privilege,
request a form by calling 1-800-798-1819. Neither the Fund nor its transfer
agent will be responsible for the authenticity of purchase instructions received
by telephone. Further documentation may be requested from corporations,
executors, administrators, trustees, guardians, agents, or attorneys-in-fact.
ADDITIONAL INVESTMENT INFORMATION
The shares of the Fund may be purchased at the net asset value of the Fund's
shares next determined after the Fund receives the order for such purchase. The
Fund reserves the right to cease offering its shares for sale at any time.
SIGNATURE GUARANTEES
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. A signature guarantee is required for all
persons registered on an account. Some instances in which you will need a
signature guarantee include:
1. when you add the telephone redemption option to your existing account;
2. if you transfer the ownership of your account to another individual or
organization;
3. for a written redemption request over $25,000;
4. when you want redemption proceeds sent to a different name or address than
is registered on your account;
25
<PAGE>
5. if you add/change your name or add/remove an owner on your account; and
6. if you add/change the beneficiary on your retirement account.
A signature guarantee may be obtained from any eligible guarantor institution.
These institutions include banks, savings and loan associations, credit unions,
brokerage firms, and others. The words "SIGNATURE GUARANTEED" must be stamped or
typed near each person's signature and appear with the printed name, title, and
signature of an officer and the name of the guarantor institution. PLEASE NOTE
THAT A NOTARY PUBLIC STAMP OR SEAL IS NOT A SIGNATURE GUARANTEE.
POWER OF ATTORNEY -- ATTORNEY-IN-FACT
If you are investing as attorney-in-fact for another person, please complete the
account application in the name of such person. You should sign the back of the
application in the following form: "[person's name] by [your name],
attorney-in-fact". An affidavit for the Power of Attorney document must be
submitted with the application if you wish to establish telephone or check
writing privileges for the account. You will also be required to provide an
affidavit of the Power of Attorney document to process all redemption requests
from the attorney-in-fact.
The following form of affidavit typed on the Power of Attorney document and
signed is acceptable:
I hereby certify that this affidavit is a true and complete copy of the
original Power of Attorney, still in full force and effect, and that
the maker is still alive and competent.
BY:_____________________________________ ____________________________
(Attorney-in-Fact) (Date)
_____________________________________
(Print Name and Title) (Notary Seal)
This affidavit must be notarized and dated within two weeks of the date it is
received by the Funds.
CORPORATIONS AND TRUSTS
If you are investing for a corporation, please include with your account
application a certified copy of your corporate resolution indicating which
officers are authorized to act on behalf of your account. Corporate resolutions
may need to be updated annually. As an alternative, you may complete a Corporate
Resolution Form, which can be obtained from the Fund. Until a valid corporate
resolution or Form is received by the Fund, services such as telephone
redemption and wire redemption will not be established. If you are investing as
a trustee, please include the date of the trust and attach a copy of the title
and signature pages of the trust agreement, as well as any pages indicating
which signatures are required to execute transactions. All trustees must sign
the application. If not, then services such as telephone redemptions, wire
redemptions, and check writing (if available) will not be established. All
trustees must sign redemption requests unless proper documentation to the
contrary is provided to the Fund. Failure to provide these documents, or
signatures as required, when you invest may result in delays in processing
redemption requests.
26
<PAGE>
MINIMUM INVESTMENTS
For IRA accounts and Uniform Gifts/Transfers to Minors accounts, the minimum
initial investment in is $250. Minimum investments are waived for employee
benefit plans qualified under Section 401, 403(b)(7), or 457 of the Internal
Revenue Code. These minimums can be changed by the Fund at any time.
Shareholders will be given at least 30 days' notice of any increase in the
minimums. The Fund will waive the minimum initial investment for shareholders
using the Automatic Investment Plan or Automatic Exchange. Subsequent
investments must be at least $50. (See "HOW TO INVEST -- No Minimum Investment
Program".)
DETERMINING YOUR SHARE PRICE
Except as provided herein, when you make investments in the Fund, the purchase
price of your shares will be the net asset value next determined after BISYS's
receipt of an order, or exchange request in proper form. Except as provided
below, if BISYS receives your order prior to the close of the NYSE on a day in
which the NYSE is open, your price will be the net asset value determined that
day. The method used to calculate the net asset value is described below under
"Calculation of Net Asset Value".
CALCULATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of trading on the
NYSE, currently 3:00 p.m. Central Time, on days the NYSE is open for business.
However, net asset values will not be determined on days during which the Fund
receive no orders to purchase shares and no shares are tendered for redemption.
Net asset value is calculated by taking the fair value of the Fund's total
assets, subtracting all liabilities, and dividing by the total number of
outstanding shares. Expenses are accrued daily and applied when determining the
net asset value. Fixed Income Securities are valued on the basis of valuations
furnished by a pricing service that utilizes electronic data processing
techniques to determine valuations for normal institutional sized trading units
of Fixed Income Securities without regard to sale or bid prices when such
valuations are believed to more accurately reflect the fair market value of such
institutional securities. Otherwise sale or bid prices are used. Any securities
or other assets for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Directors. Fixed
Income Securities in the Fund having maturities of 60 days or less are valued by
the amortized cost method unless the Board of Directors believes unusual
circumstances indicate another method of determining fair value should be used.
Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
assumed each day regardless of the impact of fluctuating interest rates on the
market value of the security.
HOW TO REDEEM SHARES
You may request redemption of your shares at any time. The price you receive
will be the net asset value next determined after the Funds receive your request
in proper form. (See "ADDITIONAL INVESTMENT INFORMATION -- Calculation of Net
Asset Value".) Once your redemption request is received in proper form, each of
the Funds will normally mail you the proceeds the next business day. Proceeds
will ordinarily be mailed no later than seven days after receipt of a redemption
request in proper form. However, the Fund may withhold payment until investments
which were made by check, telephone, or the Automatic Investment Plan have been
collected. (This is a security precaution only and does not affect your
investment. Your money is invested the day your purchase order is accepted.)
Checks generally are collected in 10 calendar days.
27
<PAGE>
The right of redemption may be suspended during any period, when: (a) trading on
the NYSE is restricted, as determined by the Commission, or such NYSE is closed
for other than weekends and holidays; (b) the Commission has permitted such
suspension by order; or (c) an emergency as determined by the Commission exists,
making disposal of Fund securities or valuation of net assets of the Fund not
reasonably practicable.
If you are exchanging into another Fund, see "SHAREHOLDER SERVICES -- Telephone
Exchange and Redemption Privilege" for a discussion of procedures and certain
tax consequences.
You may redeem shares in any of the following ways:
WRITTEN REDEMPTION
To make a written redemption, please send your request to IMG Mutual Funds,
Inc., 2203 Grand Avenue, Des Moines, Iowa 50312-5338, and include:
1. your account number,
2. the number of shares or dollar amount you want to redeem,
3. each owner's name as registered on the account,
4. your street address as registered on the account, and
5. the signature of each owner as the name appears on the account.
Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. In addition,
redemptions over $25,000 require a signature guarantee. (See "ADDITIONAL
INVESTMENT INFORMATION -- Signature Guarantees".)
RETIREMENT PLAN REDEMPTION
To redeem from an Individual Retirement Account (IRA), you may either use the
distribution form which you may request by calling 1-800-798-1819, or you may
send your request which includes the information described under "Written
Redemption" above.
In addition, you must:
1. indicate whether (a) 10 percent or more of the redemption proceeds
should be withheld for taxes, or (b) no portion of the proceeds should
be withheld for taxes;
2. include the type of distribution (e.g., a normal distribution or a
premature distribution); and
3. write that you certify under penalties of perjury that your social
security number is correct and that you are not subject to backup
withholding.
For redemptions from any other retirement plan, please call BISYS for the
appropriate distribution form.
TELEPHONE REDEMPTION
Telephone redemption privileges are only available to those shareholders who
have previously made a written election to use the privilege.
28
<PAGE>
Once you authorize the telephone redemption option on your application, you may
redeem shares in amounts of $500 (or the balance of your account) or more by
telephone. If you would like to add the option to your account, you may request
a telephone redemption form from BISYS. Each owner's signature must be
guaranteed in order to add the option to existing accounts. (See "ADDITIONAL
INVESTMENT INFORMATION -- Signature Guarantees".)
To place a redemption request by telephone, call BISYS at 1-800-798-1819.
Redemption proceeds can be directly deposited by Electronic Funds Transfer
("EFT") or wired only to a commercial bank that you have authorized on your
account application or telephone redemption form. They may also be mailed to the
registered address on your account. Once you place your telephone redemption
request, it cannot be canceled or modified. The Fund and their Transfer Agent
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, including refusing a telephone redemption if they believe
it advisable to do so. The Fund will tape record all telephone redemption
requests and will ask the social security number or other personal identifying
information of the shareholder and will only send redemption proceeds to the
shareholder of record at their address or to a financial account which has been
established by the shareholder pursuant to written authorization. BISYS does not
charge a fee for redemptions directly deposited to your bank account by EFT.
However, a $10.00 fee is applicable to each wire redemption. Further
documentation may be requested from corporations, executors, administrators,
trustees, guardians, agents, or attorneys-in-fact. Shareholders may experience
difficulty in implementing a telephone redemption during periods of drastic
economic or market changes.
SHAREHOLDER SERVICES
As an IMG Mutual Funds, Inc. shareholder, you will enjoy the advantages of:
o Automatic Dividend Reinvestment
o Telephone Purchase Privilege
o Telephone Exchange and Redemption Privilege
o Automatic Investment Plan
o Payroll Direct Deposit Plan
o Automatic Exchange Plan
o Dollar Cost Averaging
o Systematic Withdrawal Plan
AUTOMATIC DIVIDEND REINVESTMENT
You can automatically reinvest all dividends and capital gains distributions,
have them directly deposited by EFT to your bank account, or receive them in the
form of a check. If you elect to have them reinvested, your dividends and
capital gains distributions will purchase additional shares at the net asset
value determined on the dividend or capital gains distribution payment date (no
sales charges). Dividend reinvestment may not result in a conversion to another
class of shares. You may change your election at any time by writing BISYS.
BISYS must receive any such change seven days (15 days for EFT) prior to a
dividend or capital gains distribution payment date in order for the change to
be effective for that payment.
TELEPHONE PURCHASE PRIVILEGE
The Fund offer free telephone purchase privileges. (See "HOW TO INVEST -- By
Telephone Purchase".)
29
<PAGE>
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
You may exchange shares between identically registered Fund accounts either in
writing or by telephone. Shares are exchanged on the basis of the Fund's
relative net asset value per share next computed following receipt of a properly
executed exchange request. Shares will be exchanged for the lowest fee class of
shares for which the shareholder is eligible in the new Fund. Once an exchange
request is made, either in writing or by telephone, it may not be modified or
canceled. A $50 minimum, or the balance of your account if less, applies to
telephone exchanges. When opening a new account by an exchange, the initial
minimum investment is required. An exchange transaction is a sale and purchase
of shares for federal income tax purposes and may result in a capital gain or
loss.
You may authorize the telephone exchange or redemption privilege by completing
the "telephone authorization" section on your application. If you add the
telephone redemption privilege to your existing account, you must have each
owner's signature guaranteed. (See "ADDITIONAL INVESTMENT INFORMATION --
Signature Guarantees".) By establishing the telephone exchange and redemption
services, you authorize the Fund and their agents to act upon your instruction
by telephone to redeem or exchange shares from any account for which you have
authorized such services. (See "HOW TO REDEEM SHARES -- Telephone Redemption".)
The Fund reserves the right, at any time without prior notice, to suspend,
limit, modify, or terminate the exchange privilege or its use in any manner by
any person or class. In particular, since an excessive number of exchanges may
be disadvantageous to the Fund, the Fund reserves the right to terminate the
exchange privilege of any shareholder who makes more than five exchanges of
shares in a year and/or three exchanges of shares in a calendar quarter.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows you to make regular, systematic investments
in the Fund from your bank checking or NOW account. You may choose to make
investments on the fifth and/or twentieth day of each month from your financial
institution in amounts of $50 or more. There is no service fee for participating
in this Plan. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearinghouse. For an application
call 1-800-798-1819. The Fund reserves the right to suspend, modify, or
terminate the Automatic Investment Plan or its use by any person without notice.
If the Automatic Investment Plan is discontinued before the investor reaches the
minimum investment that would otherwise be required (see "ADDITIONAL INVESTMENT
INFORMATION -- Minimum Investments"), the Fund reserves the right to close the
investor's account. A service fee of $20 will be deducted from your account for
any Automatic Investment Plan purchase that does not clear due to insufficient
funds or, if prior to notifying BISYS in writing to terminate the Plan, you
close your bank account or in any manner prevent withdrawal of funds from the
designated checking or NOW account. (See "Dollar Cost Averaging" below.)
PAYROLL DIRECT DEPOSIT PLAN
You may purchase additional share of the Funds through the Payroll Direct
Deposit Plan. Through this Plan, periodic investments (minimum $50) are made
automatically from your payroll check into your existing Fund account. By
enrolling in the Plan, you authorize your employer or its agents to deposit a
specified amount from your payroll check into the Funds' bank account. In most
cases, your Fund account will be credited the day after the amount is received
by the Fund's bank. In order to participate in the Plan, your employer must have
30
<PAGE>
direct deposit capabilities by EFT available to its employees. The Plan may be
used for other direct deposits, such as social security checks, military
allotments and annuity payments.
This privilege may be selected by completing the Authorization for Direct
Deposit Form, which may be obtained by calling 1-800-798-1819. To enroll in the
Plan, the Authorization Form must be signed by you and given to your employer's
payroll department. You may alter the amount of the deposit, the frequency of
the deposit, or terminate your participation in the Plan by notifying your
employer. The Fund reserves the right, at any time and without prior notice, to
suspend, limit, or terminate the Automatic Direct Deposit privilege or its use
in any manner by any person. (See "Dollar Cost Averaging" below.)
AUTOMATIC EXCHANGE PLAN
The Automatic Exchange Plan allows you to make regular, systematic exchanges
(minimum $50) from one Fund account into another Fund account. By establishing
the Automatic Exchange Plan, you authorize the Fund and its agents to redeem a
set dollar amount or number of shares from your first Fund account and purchase
shares of a second Fund. An exchange transaction is a sale and purchase of
shares for federal income tax purposes and may result in a capital gain or loss.
To establish the Automatic Exchange Plan on your account, request a form by
calling 1-800-798-1819. (See "Dollar Cost Averaging" below.)
If the Automatic Exchange Plan is discontinued before you reach the minimum
initial investment that would otherwise be required in the second Fund, or the
account balance in the first Fund falls below the minimum initial investment,
the Funds reserve the right to close your account(s). (See "ADDITIONAL
INVESTMENT INFORMATION -- Minimum Investments".)
To participate in the Automatic Exchange Plan, you must have an initial account
balance in the first account of $12,000. Exchanges may be made monthly,
quarterly or annually. If the amount remaining in the first account is less than
the exchange amount you requested, then the remaining amount will be exchanged.
At such time as the first account has a zero balance, the participation in the
Plan will be terminated. The Plan may also be terminated at any time by written
request to the Fund. Once participation in the Plan has been terminated for any
reason, investing additional funds will not reinstate the Plan. Participation in
the Plan may be reinstated only by written request to the Fund. The Fund
reserves the right, at any time and without prior notice, to modify, suspend, or
terminate the Automatic Exchange Plan privilege or its use in any manner by any
person.
DOLLAR COST AVERAGING
The IMG Mutual Funds' Automatic Investment Plan, Payroll Direct Deposit Plan,
and Automatic Exchange privilege, all discussed above, are methods of
implementing dollar cost averaging. Dollar cost averaging is an investment
strategy that involves investing a fixed amount of money at a regular time
interval. By always investing the same set amount, you'll be purchasing more
shares when the price is low and fewer shares when the price is high.
Ultimately, by using this principle in conjunction with fluctuations in share
price, your average cost per share may be less than the average transaction
price. A program of regular investment cannot ensure a profit or protect against
a loss. Since such a program involves continuous investment regardless of
fluctuating share values, you should consider your financial ability to continue
the program through periods of low share price levels.
31
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
The owner of $24,000 or more of the Fund's shares may provide for the withdrawal
of a maximum of 10 percent per year from the owner's account to be paid on a
monthly, quarterly, semi-annual or annual basis. One request will be honored in
any 12 month period. The minimum periodic payment is $200. Any income and
capital gain dividends will be automatically reinvested at net asset value. A
sufficient number of full and fractional shares will be redeemed to make the
designated payment.
The right is reserved to amend the Systematic Withdrawal Plan on 30 days'
notice. The Plan may be terminated at any time by the shareholder or the Fund.
DISTRIBUTIONS AND TAXES
The Fund will qualify and intends to remain qualified as a "regulated investment
company" under the Internal Revenue Code and intends to take all other action
required to ensure that no federal income taxes will be payable by the Fund. Any
dividends from the net income of the Vintage Bond Fund normally will be
distributed quarterly. Any net realized capital gains will be distributed
annually, after using any available capital loss carry-over. The Fund will
attempt to do so in such a manner as to avoid the Fund paying income tax on
their net investment income and net realized capital gains or being subject to
federal excise taxes. Shares purchased on a day on which the Fund calculates
their net asset value will not begin to accrue dividends until the following
day, and redemption orders effected on any particular day will receive dividends
declared through the day of redemption.
Distributions for the Fund are made on a per share basis to shareholders as of
the record date of the distribution of the Fund, regardless of how long the
shares have been held. Such distributions are taxable income and are subject to
federal income tax (except for shareholders exempt from income tax), whether
such distributions are received in cash or are reinvested in additional Fund
shares. After every quarterly or semi-annual distribution, the value of a share
drops by the amount of the distribution, net of any subsequent market
fluctuations. Because the purchase price of shares (particularly those shares
purchased shortly before the semi-annual distribution) may include earned and
undistributed dividend and/or capital gains income, some portion of the purchase
price may be returned to the shareholder in the semi-annual distribution as
taxable dividends and/or capital gains. However, the dividends and capital gains
that are reinvested in additional Fund shares may increase the shareholder's
costs basis. If dividends and capital gains distributions are not automatically
reinvested in additional Fund shares (See "SHAREHOLDER SERVICES--AUTOMATIC
DIVIDEND REINVESTMENT") checks for cash dividends and distributions will be
mailed to shareholders, usually within ten days after the record date of the
distribution or they may be deposited in your bank account by EFT. Full
information regarding income dividends and any capital gains distributions will
be mailed to shareholders for tax purposes on or before January 31st of each
year. For federal income tax purposes, dividends paid by the Fund and
distributions from net realized short-term capital gains, whether received in
cash or reinvested in additional shares, are taxable as ordinary income.
Distributions paid by the Fund from net realized long-term capital gains,
whether received in cash or reinvested in additional shares, are taxable as
long-term capital gains. The capital gain holding period is determined by the
length of time the Fund has held the instrument and not the length of time you
have held shares in the Fund. If you are not required to pay tax on your income,
you will not be required to pay federal income taxes on the amounts distributed
to you. Promptly after the end of each calendar year, you will receive a
statement of the federal income tax status on all dividends and capital gains
distributions paid during the year.
32
<PAGE>
If you do not furnish the Fund with your correct social security number or
employer identification number, such Fund will be required to withhold federal
income tax at a rate of 31 percent (backup withholding tax) from your
distribution and redemption proceeds. To avoid backup withholding, you must
provide a social security number or employer identification number and state
that you are not subject to such withholding due to the under reporting of your
income. This certification is included as part of your application.
You should complete it when opening your account.
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on you. There may be other
federal, state or local tax considerations applicable to your particular
investment. You are urged to consult your tax advisor.
CAPITAL STOCK
IMG Mutual Funds, Inc. (the "Company"), is a Maryland corporation organized on
November 16, 1994. The Company consists of several Funds organized as separate
series of shares. Each share represents an equal proportionate interest in a
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.
Each share has one vote, and all shares participate equally in dividends and
other capital gains distributions by the respective Fund and in the residual
assets of the respective Fund in the event of liquidation. Fractional shares
have the same rights proportionately as do full shares. Shares of the Funds have
no preemptive subscription rights. Cumulative voting is not authorized. You are
entitled to redeem shares as set forth under "HOW TO REDEEM SHARES". All shares
are held in uncertificated form and will be evidenced by the appropriate
notation on the books of the transfer agent. Please read the Prospectus
carefully before investing or sending money.
SHAREHOLDER REPORTS AND MEETINGS
The Fund will confirm all transactions for your account in writing. You will
also receive quarterly Fund information, a semiannual report, and an annual
report containing audited financial statements. If you have questions about your
account, call 1-800-798-1819. You may also write to the Fund at the address on
the cover of this Prospectus. You may order statements for the current and
preceding year at no charge. However, there will be a $10.00 fee per statement
per year for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Fund has
adopted the appropriate provisions in the Bylaws and may, in its discretion, not
hold annual meetings of shareholders for the election of Directors unless
otherwise required by the 1940 Act. The Fund has also adopted provisions in the
Bylaws for the removal of Directors by the shareholders. Shareholders may
receive assistance in communicating with other shareholders as provided in
Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Shareholders of the Fund may remove a Director by the affirmative vote of a
majority of the Fund's outstanding voting shares. In addition, the Directors are
33
<PAGE>
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Director or for any other purpose when requested
in writing to do so by the shareholders of record of not less than 10 percent of
the Fund's outstanding voting securities.
All consideration received by the Fund for shares of the Fund and all assets in
which such consideration is invested, belong to the Fund (subject only to the
rights of creditors of the Fund) and will be subject to the liabilities related
thereto. The income and expenses attributable to the Fund are treated separately
from those of other Funds within the Company.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Fund, will 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 such matter. Rule 18f-2 further provides that the Fund shall 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 such Fund. However, the Rule exempts the selection of independent accountants
and the election of Directors from the separate voting requirements of the Rule.
CUSTODIAN, FUND ACCOUNTANT, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND SHAREHOLDER SERVICING AGENT
Bankers Trust Company, New York, New York, acts as custodian of the Fund's
assets. IMG, 2203 Grand Avenue, Des Moines, Iowa 50312-5338, acts as fund
accountant, transfer agent, dividend disbursing agent and shareholder servicing
agent for the Funds. IMG is compensated for its services based on an annual fee
as a percent of assets. The fees received and the services provided as fund
accountant, transfer agent, dividend disbursing agent and shareholder servicing
agent are in addition to those received and paid to IMG under the Advisory
Agreement and the Administrative Services Agreement, or payable to BISYS under
the Distribution Agreement with the Funds.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise several types of performance
information. The Fund may advertise "average annual total return", "total
return", "cumulative total return", and "yield". Each of these figures is based
upon historical results and is not necessarily representative of the future
performance of the Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund for the
period in question, assuming the reinvestment of all dividends. Thus, these
figures reflect the change in the value of an investment in the Fund during a
specified period. Average annual total return will be quoted for at least the
one, five, and ten year periods ending on a recent calendar quarter (or if such
periods have not elapsed, at the end of the shorter period corresponding to the
life of the Fund). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. Total return figures are not annualized and represent the aggregate
percentage or dollar value change over the period in question. Cumulative total
return reflects the Fund's performance over a stated period of time.
34
<PAGE>
Yield refers to the net investment income per share generated by a hypothetical
investment in the Fund over a specific one month, or 30 day period. Returns,
yields, and net asset values will fluctuate. Shares of the Fund are redeemable
by an investor at the then current net asset value per share, which may be more
or less than original cost. Additional information concerning Fund performance
appears in the Statement of Additional Information.
35
<PAGE>
VINTAGE GOVERNMENT ASSETS FUND
VINTAGE INCOME FUND
VINTAGE MUNICIPAL BOND FUND
VINTAGE EQUITY FUND
VINTAGE BALANCED FUND
VINTAGE AGGRESSIVE GROWTH FUND
VINTAGE LIMITED TERM BOND FUND
For current yield, purchase, and
redemption information, call (800)
798-1819.
IMG Mutual Funds, Inc. (the "Company") is a Maryland corporation
organized as an open-end management investment company issuing its shares in
series (each series referred to as a "Fund" and collectively as "Funds"), each
representing a diversified portfolio of investments with its own investment
objectives and policies. The portfolios offered in this prospectus are the
Vintage Government Assets Fund (the "Government Fund"), the Vintage Income Fund,
the Vintage Municipal Bond Fund, the Vintage Equity Fund, the Vintage Balanced
Fund, the Vintage Aggressive Growth Fund, and the Vintage Limited Term Bond Fund
(the "Limited Term Fund"). The IMG Core Stock Fund, IMG Bond Fund, Vintage
Liquid Assets Fund and Vintage Municipal Assets Fund are offered in separate
Prospectuses which can be obtained by calling the Company at the number
indicated above.
The Government Fund and Equity Fund offer two classes of shares. T
Shares are normally offered through trust organizations or others providing
shareholder services such as establishing and maintaining records and accounts
for their customers who invest in T Shares, assisting customers in processing
purchase, exchange and redemption requests, and responding to customers'
inquiries regarding their accounts. S Shares are offered directly or through
other broker-dealers. S Shares accrue daily dividends in the same manner as T
Shares except that S Shares bear distribution and/or shareholder administrative
servicing fees which T Shares do not (see "GENERAL INFORMATION - Description of
the Fund and Its Shares"). Differences in class level expenses may affect
performance.
The Government Fund's investment objective is to seek current income
consistent with maintaining liquidity and stability of principal. The Government
Fund invests exclusively in short-term U.S. Treasury bills, notes and other
short-term obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and repurchase agreements with respect thereto.
THE GOVERNMENT FUND SEEKS TO MAINTAIN A CONSTANT NET ASSET VALUE OF
$1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT THE NET ASSET VALUE WILL NOT
VARY. AN INVESTMENT IN THE GOVERNMENT FUND IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT.
The investment objective of the Income Fund is to seek current income,
consistent with the preservation of capital. The Income Fund invests primarily
in fixed income securities and expects to maintain a dollar-weighted average
portfolio maturity of 4 to 10 years.
The investment objective of the Municipal Bond Fund is to seek current
income, consistent with the preservation of capital, that is exempt from federal
income taxes. The Municipal Bond Fund invests primarily in a diversified
portfolio of tax-exempt fixed income securities and expects to maintain a
dollar-weighted average portfolio maturity of 4 to 10 years.
<PAGE>
The investment objective of the Equity Fund is long-term capital
appreciation. The Equity Fund invests primarily in a diversified portfolio of
equity securities of mainly large capitalization companies with strong earnings
potential. The Equity Fund offers two classes of shares. T Shares are normally
offered through trust organizations or others providing shareholder services
such as establishing and maintaining records and accounts for their customers
who invest in T Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customers' inquiries regarding their
accounts. The Equity Fund also offers "S Shares" which accrue daily dividends in
the same manner as T Shares except that each class bears separate distribution
and/or shareholder administrative servicing fees (see "GENERAL INFORMATION -
Description of the Fund and Its Shares"). Differences in class level expenses
may affect performance.
The investment objective of the Balanced Fund is to seek long-term
growth of capital and income. The Balanced Fund invests primarily in a
diversified portfolio of equity securities and fixed income securities. The
Balanced Fund expects to maintain a dollar-weighted average portfolio maturity
of 4 to 10 years on the fixed income portion of the portfolio.
The investment objective of the Aggressive Growth Fund is long-term
capital growth. The Aggressive Growth Fund invests primarily in common stocks
and other equity-type securities of small, medium and large capitalized
companies that exhibit a strong potential for price appreciation relative to
other equity securities.
The investment objective of the Limited Term Fund is to seek total
return from a portfolio of limited term fixed income securities. The Limited
Term Fund invests primarily in a diversified portfolio of fixed income
securities including certain types of fixed income securities that may exhibit
greater volatility. The Limited Term Bond Fund expects to maintain a
dollar-weighted average portfolio maturity of 1to 4 years.
Investors Management Group acts as the investment adviser to the Funds.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY A BANK OR ANY BANKING AFFILIATE AND THE SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENTS IN THE FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
Additional information about the Funds, contained in a Statement of
Additional Information, has been filed with the Securities and Exchange
Commission (the "Commission") and is available upon request without charge by
writing to the Funds at their address or by calling the Funds at the telephone
number shown above. The Statement of Additional Information bears the same date
as this Prospectus and is incorporated by reference in its entirety into this
Prospectus.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor ought to know before investing. Please read this
Prospectus carefully and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is January 14, 1998
2
<PAGE>
PROSPECTUS SUMMARY
The Funds Vintage Government Assets Fund (the
"Government Fund"), Vintage Income Fund,
Vintage Municipal Bond Fund, Vintage Equity
Fund, Vintage Balanced Fund, Vintage
Aggressive Growth Fund, and Vintage Limited
Term Bond Fund (the "Limited Term Fund"),
each a diversified investment portfolio
(collectively, the "Funds") of IMG Mutual
Funds, Inc., an open-end management
investment company organized as a Maryland
corporation.
Shares Offered Shares of common stock ("Shares") of the
Funds. See "HOW TO PURCHASE AND REDEEM
SHARES".
Offering Price The public offering price of the Government
Fund's Shares is equal to the net asset
value per Share, which the Government Fund
will seek to maintain at $1.00.
The public offering price of the Income
Fund, the Municipal Bond Fund, the Equity
Fund, the Balanced Fund, the Aggressive
Growth Fund and the Limited Term Fund's
Shares is equal to the net asset value per
Share.
Minimum Purchase $1,000 minimum for the initial investment
with a $50 minimum for subsequent
investments. (See "HOW TO PURCHASE AND
REDEEM SHARES--Purchases of Shares and Auto
Invest Plan" for a discussion of lower
minimum purchase amounts).
Investment Objective The Government Fund seeks current income
consistent with maintaining liquidity and
stability of principal.
The Income Fund seeks current income,
consistent with the preservation of capital.
The Municipal Bond Fund seeks current
income, consistent with the preservation of
capital, that is exempt from federal income
taxes.
The Equity Fund seeks long-term capital
appreciation.
The Balanced Fund seeks long-term growth of
capital and income.
3
<PAGE>
The Aggressive Growth Fund seeks long-term
capital growth.
The Limited Term Fund seeks total return
from a portfolio of limited term fixed
income securities.
Investment Policy and Risks See "INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS OF THE FUNDS". The Government
Fund invests exclusively in short-term U.S.
Treasury bills, notes and other short-term
obligations issued or guaranteed by the U.S.
Government or its agencies or
instrumentalities, and repurchase agreements
with respect thereto.
Under normal market conditions, the Income
Fund invests primarily in fixed income
securities and expects to maintain a
dollar-weighted average portfolio maturity
of 4 to 10 years. Investment in the Income
Fund is subject to the interest rate risks
inherent in investing in fixed income
securities and junk bonds.
Under normal market conditions, the
Municipal Bond Fund invests primarily in
tax-exempt obligations that have a stated
maturity of 25 years or less and expects to
maintain a dollar-weighted average portfolio
maturity of 4 to 10 years. Investment in the
Municipal Fund is subject to the interest
rate risk inherent in investing in fixed
income securities and junk bonds.
Under normal market conditions, the Equity
Fund invests primarily in equity securities
of mainly large capitalization companies
with strong earnings potential. Investment
in the Equity Fund is subject to the
inherent risks associated with investing in
common stock and various types of equity
securities, call options and foreign
securities.
Under normal market conditions, the Balanced
Fund invests primarily in a diversified
portfolio of equity securities and fixed
income securities, and expects to maintain a
dollar-weighted average portfolio maturity
of 4 to 10 years on the fixed income portion
of the portfolio. Investment in the Balanced
Fund is subject to the interest rate risks
inherent in investing in fixed income
securities and the risks inherent in
investing in equity securities.
4
<PAGE>
Under normal market conditions, the
Aggressive Growth Fund invests primarily in
equity securities of small, medium and large
capitalized companies that exhibit a strong
potential for price appreciation relative to
other equity securities. Investment in the
Aggressive Growth Fund is subject to the
inherent risks of investing in common
stocks, of equity securities, foreign
securities and options of companies that
exhibit a strong potential for price
appreciation.
Under normal market conditions, the Limited
Term Fund invests primarily in a diversified
portfolio of fixed income securities
including certain types of fixed income
securities that may exhibit greater
volatility and expects to maintain a
dollar-weighted average portfolio maturity
of 1 to 4 years. Investment in the Limited
Term Fund is subject to the interest rate
risks inherent in investing in fixed income
securities.
Investment Adviser Investors Management Group, Ltd., Des
and Administrator Moines, Iowa ("IMG").
Dividends The Government Fund intends to declare
dividends from net income daily and pay such
dividends monthly. The Income Fund and the
Municipal Bond Fund intend to declare
dividends from net investment income and pay
such dividends monthly. The Equity Fund, the
Balanced Fund, the Aggressive Growth Fund
and the Limited Term Fund intend to declare
dividends from net investment income
quarterly and pay such dividends quarterly.
Distributor BISYS Fund Services, Inc.
5
<PAGE>
<TABLE>
<CAPTION>
EXPENSE SUMMARY
GOVERNMENT INCOME MUNICIPAL BOND EQUITY
FUND FUND FUND FUND
T SHARES S SHARES T SHARES S SHARES
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES 1
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
as applicable) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Redemption Fees (as a percentage
of amount redeemed, if applicable) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Exchange Fee $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.40% 0.40% 0.60% 0.60% 0.75% 0.75%
12b-1 Fees 2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses
Shareholder Servicing Fees 0.00% 0.25% 0.00% 0.00% 0.00% 0.25%
Administrative Fees 0.21% 0.21% 0.26% 0.26% 0.26% 0.26%
Other Expenses 0.16% 0.16% 0.15% 0.23% 0.13% 0.13%
----- ----- ----- ----- ----- -----
Total Other Expenses 3 0.37% 0.62% 0.41% 0.49% 0.39% 0.64%
----- ----- ----- ----- ----- -----
Total Fund Operating Expenses 0.77% 1.02% 1.01% 1.09% 1.14% 1.39%
</TABLE>
The purpose of the above table is to assist a potential purchaser of a
Fund's Shares in understanding the various costs and expenses that an investor
in a Fund will bear directly or indirectly. The table reflects the current fees
for the Funds. The Management Fees are based on the maximum allowable under the
Investment Advisory Agreements. From time to time, the Fund's Advisor may
voluntarily waive the Management Fees and/or absorb certain expenses for a Fund
or class of Shares of a Fund. See "MANAGEMENT OF THE FUNDS" and "GENERAL
INFORMATION" for a more complete discussion of the Shareholder transaction
expenses and annual operating expenses for the Fund. THE FOREGOING SUMMARY
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 A Participating Organization (as defined in this Prospectus) or a Bank (as
defined in this Prospectus) may charge a Customer's (as defined in the
Prospectus) account fees for automatic investment and other investment
management services provided in connection with investment in the Fund. (See
"HOW TO PURCHASE AND REDEEM SHARES--Purchases of Shares.")
2 The Company has adopted a Distribution and Shareholder Service Plan (the
"Plan") pursuant to which a Fund is authorized to pay or reimburse the
Distributor a periodic amount calculated at an annual rate not to exceed
0.25% of the average daily net assets of such Fund ("distribution fees").
Currently, however, no such amounts will be paid under the Plan by any of the
Funds. Shareholders will be given at least 30 days' notice prior to the
payment of any fees under the Plan.
6
<PAGE>
3 The Company has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which a Fund is authorized to pay banks and other financial
institutions which agree to provide certain ministerial, recordkeeping and/or
administrative support services for their customers or account holders a
periodic amount calculated at an annual rate not to exceed 0.25% of the
average daily net assets of such Fund ("Shareholder Servicing Fees").
Currently the Company is not paying any such fees under the Services Plan for
the T Shares of the Funds; however, it may elect to pay such fees at any time
without further notice to shareholders. S Shares currently bear such fees.
"Total Fund Operating Expenses" as a percentage of average daily net assets
would be 1.02% for the Government Fund-T Shares, 1.27% for Government Fund-S
Shares, 1.51% for the Income Fund, 1.59% for the Municipal Bond Fund, 1.64%
for the Equity Fund-T Shares and 1.64% for Equity-S Shares, if the Company
pays the maximum under the Services Plan.
EXAMPLE
You would pay the following expenses on a $1,000 investment in each Fund
assuming, (1) 5% annual return and (2) redemption at the end of each time
period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Government Fund T Shares $8 $25 $43 $95
Government Fund S Shares $10 $32 $56 $125
Income Fund $10 $32 $56 $124
Municipal Bond Fund $11 $35 $60 $133
Equity Fund - T Shares $12 $36 $63 $139
Equity Fund - S Shares $14 $44 $76 $167
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. The above Example is based on the expense information
included in the previous Expense Summary. The Expense Summary and Examples do
not reflect any charges that may be imposed by financial institutions on their
customers. Please refer to "MANAGEMENT AND FEES" for a more complete discussion
of the Shareholder transaction expenses and annual operating expenses for the
Funds.
<TABLE>
<CAPTION>
AGGRESSIVE
BALANCED GROWTH LIMITED TERM
FUND FUND FUND
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES 1
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 0.00% 0.00% 0.00%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering price) 0.00% 0.00% 0.00%
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable) 0.00% 0.00% 0.00%
Redemption Fees (as a percentage of amount
redeemed, if applicable) 0.00% 0.00% 0.00%
Exchange Fee $0.00 $0.00 $0.00
7
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.75% 0.95% 0.60%
12b-1 Fees 2 0.00% 0.00% 0.00%
Other Expenses
Shareholder Servicing Fees 0.00% 0.00% 0.00%
Administrative Fees 0.26% 0.26% 0.26%
Other Expenses 0.35% 0.23% 0.20%
----- ----- -----
Total Other Expenses 3 0.61% 0.49% 0.46%
----- ----- -----
Total Fund Operating Expenses 1.36% 1.44% 1.06%
</TABLE>
The purpose of the above table is to assist a potential purchaser of a
Fund's Shares in understanding the various costs and expenses that an investor
in a Fund will bear directly or indirectly. The table reflects the current fees
for the Funds. The Management Fees are based on the maximum allowable under the
Investment Advisory Agreements. From time to time, the Fund's Advisor may
voluntarily waive the Management Fees and/or absorb certain expenses for a Fund
or class of Shares of a Fund. See "MANAGEMENT OF THE FUND" and "GENERAL
INFORMATION" for a more complete discussion of the Shareholder transaction
expenses and annual operating expenses for the Fund. THE FOREGOING SUMMARY
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 A Participating Organization (as defined in this Prospectus) or a Bank (as
defined in this Prospectus) may charge a Customer's (as defined in the
Prospectus) account fees for automatic investment and other investment
management services provided in connection with investment in the Fund. (See
"HOW TO PURCHASE AND REDEEM SHARES--Purchases of Shares.")
2 The Company has adopted a Distribution and Shareholder Service Plan (the
"Plan") pursuant to which a Fund is authorized to pay or reimburse the
Distributor a periodic amount calculated at an annual rate not to exceed
0.25% of the average daily net assets of such Fund. Currently, however, no
fees will be paid under the Plan by any of the Funds. Shareholders will be
given at least 30 days' notice prior to the payment of any increased fees
under the Plan.
3 The Company has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which a Fund is authorized to pay banks and other financial
institutions which agree to provide certain ministerial, recordkeeping and/or
administrative support services for their customers or account holders a
periodic amount calculated at an annual rate not to exceed 0.25% of the
average daily net assets of such Fund ("Shareholder Servicing Fees").
Currently the Company is not paying any such fees under the Services Plan for
the Funds; however, it may elect to pay such fees at any time without further
notice to shareholders. "Total Fund Operating Expenses" as a percentage of
average daily net assets would be 1.86% for the Balanced Fund, 1.94% for the
Aggressive Growth Fund, and 1.56% for the Limited Term Fund, if the Company
pays the maximum under the Service Plan.
8
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment in each Fund
assuming, (1) 5% annual return and (2) redemption at the end of each time
period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Balanced Fund $14 $43 $74 $164
Aggressive Growth Fund $15 $46 $79 $172
Limited Term Bond Fund $11 $34 $58 $129
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. The above Example is based on the expense information
included in the previous Expense Summary. The Expense Summary and Examples do
not reflect any charges that may be imposed by financial institutions on their
customers. Please refer to "MANAGEMENT AND FEES" for a more complete discussion
of the Shareholder transaction expenses and annual operating expenses for the
Funds.
INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS OF THE FUNDS
Each Fund has its own investment objective and policies, which are
described below. There is no assurance that a Fund will be successful in
achieving its investment objective. The investment objective of each Fund is a
fundamental policy and, as such, may not be changed without a vote of the
holders of a majority of the outstanding Shares of a Fund (as described in the
Statement of Additional Information). The other policies of a Fund may be
changed without a vote of the holders of a majority of Shares unless (1)the
policy is expressly deemed to be a fundamental policy of the Fund or (2)the
policy is expressly deemed to be changeable only by such majority vote.
GOVERNMENT ASSETS FUND
The investment objective of the Government Fund is to seek current
income consistent with maintaining liquidity and stability of principal. The
Fund seeks to maintain a stable net asset value of $1.00 per Share.
The Government Fund invests exclusively in U.S. Treasury bills, notes
and other obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government Obligations") which have
remaining maturities of 397calendar days (thirteen months) or less, and in
repurchase agreements with respect to U.S. Government Obligations. The
short-term U.S. Government Obligations in the Fund's portfolio will differ only
in their interest rates, maturities and times of issuance. The dollar-weighted
average maturity of the obligations held by the Government Fund will not exceed
90days.
INCOME FUND
The investment objective of the Income Fund is to seek current income,
consistent with the preservation of capital. Because the market value of fixed
income securities can be expected to vary inversely to changes in prevailing
interest rates, investing in such fixed income securities can provide an
opportunity for capital appreciation when interest rates are expected to
decline.
Under normal conditions, the Income Fund will invest substantially all,
but in no event less than 65%, of the value of its total assets in fixed income
securities rated within the three highest rating categories at the time of
9
<PAGE>
purchase by a nationally recognized statistical rating organization (an "NRSRO")
or, if unrated, found by the Advisor to be of comparable quality. Such
securities will include but not be limited to, corporate debt securities
(including notes, bonds and debentures), U.S. Government Obligations and
mortgage-related securities, variable and floating rate notes, taxable municipal
bonds, asset backed securities, high quality money market instruments
(commercial paper, certificates of deposit and bankers' acceptances), variable
amount master demand notes, leasing instruments and trust certificates. In
addition, the Income Fund may engage in certain loans of portfolio securities,
repurchase agreements and reverse repurchase agreements and futures and options.
The Income Fund may also invest in securities of other investment companies and
in other investment portfolios advised by IMG. The Income Fund expects to
maintain a dollar-weighted average portfolio maturity of four to ten years.
The Income Fund expects 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, 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. The Income Fund will invest in such corporate
debt securities only if they are rated within the five highest rating categories
at the time of purchase by a nationally recognized statistical rating
organization (an "NRSRO") or, if unrated, found by the Advisor to be of
comparable quality. Securities rated in the fourth highest rating category have
speculative characteristics, even though they are of investment-grade quality.
Up to 25% of the Income Fund's total assets could be invested in securities
rated in the fifth highest rating category, which are considered
below-Investment Grade securities (commonly known as "junk bonds"). See
"INVESTMENT OBJECTIVE AND POLICIES--Additional Information on Portfolio
Instruments" in the Statement of Additional Information for information
concerning risks associated with investing in below investment grade bonds.
Currently, the Fund does not expect to invest in (i) securities rated lower than
"Ba" by Moody's or "BB" by S&P, Fitch, D&P, or of similar quality by another
NRSRO; and (ii) unrated debt securities of similar quality. Securities of
"BBB/Baa" or lower quality may have speculative characteristics and poor credit
protection. The rating services' descriptions of the below- Investment Grade
securities ratings categories in which the Income Fund may invest are as
follows:
Moody's Investors Services, Inc., Bond Ratings: Bonds which are rated
"Ba" are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
Standard and Poor's Corporation Bond Ratings: Debt rated, "BB", "B",
"CCC", and "CC" is regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest
degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
Fitch Investors Services, Inc., Bond Ratings: Bonds which are rated
"BB" are considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and
is considered likely to be affected over time by adverse economic
changes.
Duff & Phelps, Inc., Long Term Ratings: Bonds which are rated "BB+",
"BB", and "BB-", are below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection
10
<PAGE>
factors fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently according to industry
conditions or company fortunes. Overall quality may move up or down
frequently within this category.
The respective rating services apply classifications in each rating
category to indicate the security's ranking within the category. The Income Fund
may invest in securities within any of the classifications in a category. For a
description of the rating symbols of certain NRSROs, see the Appendix to the
Statement of Additional Information.
Subject to the foregoing limitations, the Income Fund may invest in
U.S. dollar-denominated international certificates of deposit, banker's
acceptances and foreign fixed income issues for which the primary trading market
is in the United States ("Yankee Obligations").
The Income Fund will purchase commercial paper rated at the time of
purchase within the two highest rating categories by an NRSRO or, if not rated,
found by IMG to be of comparable quality. See the Appendix to the Statement of
Additional Information for a description of these ratings.
For temporary defensive purposes, the Income Fund may invest all or any
portion of its assets in the money market instruments and repurchase agreements
described above when, in the opinion of the Advisor, it is in the best interests
of the Fund to do so.
MUNICIPAL BOND FUND
The Municipal Bond Fund seeks to produce current income, consistent
with the preservation of capital, that is exempt from federal income taxes to
the extent described below. The Municipal Bond Fund invests primarily in a
diversified portfolio of tax-exempt fixed income securities.
As a fundamental policy, under normal market conditions at least 80% of
the net assets of the Municipal Bond Fund will be invested in a diversified
portfolio of obligations (such as bonds, notes, and debentures) issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and other political subdivisions, agencies, instrumentalities and
authorities, the interest on which is both exempt from regular federal income
taxes and not treated as a preference item for individuals for purposes of the
federal alternative minimum tax ("Municipal Securities"). It should be noted
that interest on such bonds will nonetheless be part of an adjustment to the
alternative minimum taxable income for purposes of the alternative minimum tax
imposed on corporations as well as the environmental tax imposed on corporations
under Section 59A of the Internal Revenue Code of 1986, as amended. Under normal
market conditions, the Municipal Bond Fund will invest in Municipal Securities
that have a stated or remaining maturity of 25 years or less or in Municipal
Securities with a stated or remaining maturity in excess of 25 years if such
securities have an unconditional put to sell or redeem the securities within 25
years from the date of purchase. The Municipal Bond Fund expects to maintain a
dollar-weighted average portfolio maturity of four to ten years.
Under normal market conditions, the Municipal Bond Fund may invest up
to 20% of its net assets in obligations the interest on which is either subject
to regular federal income taxation or treated as a preference item for purposes
of the federal alternative minimum tax ("Taxable Obligations"). At times, the
Advisor may determine that, because of unstable conditions in the markets for
Municipal Securities, pursuing the Municipal Bond Fund's basic investment
strategies is inconsistent with the best interests of the Shareholders of the
Municipal Bond Fund. At such times, the Advisor may use temporary defensive
strategies differing from those designed to achieve the Municipal Bond Fund's
investment objective, by increasing the Municipal Bond Fund's holdings in
11
<PAGE>
Taxable Obligations to over 20% of the Municipal Bond Fund's total assets and by
holding uninvested cash reserves pending investment. Taxable Obligations may
include U.S. Government Obligations (some of which may be subject to repurchase
agreements), certificates of deposit, demand and time deposits, and bankers'
acceptances of selected banks, and commercial paper meeting the Municipal Bond
Fund's quality standards (as described below) for tax-exempt commercial paper.
These obligations are described further in the Statement of Additional
Information.
The Municipal Bond Fund may also invest in private activity bonds.
Interest on private activity bonds is exempt from the regular federal income tax
only if the bonds fall within certain defined categories of qualified private
activity bonds and meet the requirements specified in those respective
categories. Even if private activity bonds so qualify, interest on private
activity bonds may be subject to the alternative minimum tax, and, in the case
of corporate investors, to the environmental tax under Code Section 59A.
However, private activity bonds will only be considered Municipal Securities for
the purposes of this Prospectus if the interest thereon is not an item of tax
preference for individuals. For additional information on the federal
alternative minimum tax, see "DIVIDENDS AND TAXES."
The Municipal Bond Fund invests in Municipal Securities that are rated
within the five highest rating categories at the time of purchase by an NRSRO in
the case of bonds and rated within the two highest rating categories in the case
of notes, tax-exempt commercial paper, and variable rate demand obligations. The
respective rating services apply classifications in each rating category to
indicate the security's ranking within the category. The Municipal Bond Fund may
invest in securities within any of the classifications in a category. Securities
rated in the fourth highest rating category have speculative characteristics,
even though they are of investment-grade quality. Up to 25% of the Municipal
Bond Fund's total assets could be invested in securities rated in the fifth
highest rating category, which are considered below-Investment Grade securities
(commonly known as "junk bonds"). Currently, the Fund does not expect to invest
in (i) securities rated lower than "Ba" by Moody's or "BB" by S&P, Fitch, D&P,
or of similar quality by another NRSRO; and (ii) unrated debt securities of
similar quality. Securities of "BBB/Baa" or lower quality may have speculative
characteristics and poor credit protection. The rating services' descriptions of
the below- Investment Grade securities ratings categories in which the Municipal
Bond Fund may invest are described above with respect to the Income Fund. See
"INVESTMENT OBJECTIVE AND POLICIES--Additional Information on Portfolio
Instruments" in the Statement of Additional Information for information
concerning risks associated with investing in below investment grade bonds.
The Fund may also invest up to 10% of the Municipal Bond Fund's total
assets in Municipal Securities that are unrated at the time of purchase but are
determined to be of comparable quality by the Advisor pursuant to guidelines
approved by the Fund's Board of Directors. Municipal Securities may be purchased
in reliance upon a rating only when the rating organization is not affiliated
with the issuer or guarantor of the Municipal Securities. The applicable
Municipal Securities ratings are described in the Appendix to the Statement of
Additional Information.
The two principal classifications of Municipal Securities that may be
held by the Municipal Bond Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues 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 such as the
user of the facility being financed. Private activity bonds held by the
Municipal Bond Fund are in most cases revenue securities and are not payable
12
<PAGE>
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved.
Municipal Securities in which the Municipal Bond Fund may invest may
also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If the issuer of moral obligation bonds is unable to
meet its debt service obligations from current revenues, it may draw on a
reserve fund, the restoration of which is a moral commitment but not a legal
obligation of the state or municipality that created the issue.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Municipal
Bond Fund, the Advisor, nor legal counsel to either will review the proceedings
relating to the issuance of Municipal Securities or the basis for such opinions.
The Municipal Bond Fund does not intend to invest more than 25% of its
total assets in Municipal Securities which are related in such a way that an
economic, business, or political development or change affecting one such
security would likewise affect the other Municipal Securities. Examples of such
securities are obligations the repayment of which is dependent upon similar
types of projects or projects located in the same state. Such investments would
be made only if deemed necessary or appropriate by the Advisor. To the extent
that the Municipal Bond Fund's assets are concentrated in Municipal Securities
that are so related, the Municipal Bond Fund will be subject to the peculiar
risks presented by such Municipal Securities, such as negative developments in a
particular industry or state, to a greater extent than it would be if the
Municipal Bond Fund's assets were not so concentrated.
Municipal Securities purchased by the Municipal Bond Fund may include
rated and unrated variable and floating rate tax-exempt notes. There may be no
active secondary market with respect to a particular variable or floating rate
note. Nevertheless, the periodic readjustments of their interest rates tend to
assure that their value to the Municipal Bond Fund will approximate their par
value. Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with other securities
which are not readily marketable, exceeds 15% of the Municipal Bond Fund's net
assets only if such notes are subject to a demand feature that will require
payment of the principal within seven days after demand by the Municipal Bond
Fund.
The Municipal Bond Fund may also invest in master demand notes in order
to satisfy short-term needs or, if warranted, as part of its temporary defensive
investment strategy. Such notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangements between the issuer and a United States commercial bank acting as
agent for the payees of such notes. Master demand notes are direct lending
arrangements between the Municipal Bond Fund and the issuer of such notes.
Master demand notes are callable on demand by the Municipal Bond Fund, but are
not marketable to third parties. The quality of master demand notes will be
reviewed by the Advisor at least quarterly, which review will consider the
earning power, cash flow and debt-to-equity ratios indicating the borrower's
ability to pay principal together with accrued interest on demand. While master
demand notes are not typically rated by credit rating agencies, issuers of such
notes must satisfy the same criteria for the Municipal Bond Fund set forth above
for commercial paper.
EQUITY FUND
The investment objective of the Equity Fund is long term capital
appreciation. The Equity Fund will invest primarily in equity securities of
13
<PAGE>
mainly large capitalization companies with strong earnings potential and will
strive for high over-all return while minimizing risk through the selection of a
majority of quality dividend paying equity securities.
Under normal market conditions, the Equity Fund will invest
substantially all, but in no event less than 75%, of its total assets in equity
securities, which are defined as common stocks, preferred stocks, securities
convertible into common stocks, warrants and any rights to purchase common
stocks. The remainder of the Equity Fund's assets may be invested in U.S.
Government Obligations and repurchase agreements with respect thereto. The
Equity Fund may also use call options on equity securities, as described below.
Because the market value of fixed income securities, such as U.S. Government
Obligations, can be expected to vary inversely to changes in prevailing interest
rates, investing in such fixed income securities can provide an opportunity for
capital appreciation when interest rates are expected to decline.
The Equity Fund may, for daily cash management purposes, also invest in
high quality money market securities (commercial paper, certificates of deposit
and bankers' acceptances), as well as the repurchase agreements referred to
above. In addition, the Equity Fund may invest, without limit, in any
combination of U.S. Government Obligations, money market instruments and
repurchase agreements referred to above when, in the opinion of the Advisor, it
is determined that a temporary defensive position is warranted based upon
current market conditions. The Equity Fund may also invest in securities of
other investment companies including the other investment portfolios advised by
IMG, as described more fully under "Other Investment Policies."
Subject to the foregoing limitations, the Equity Fund may invest in
foreign securities through the purchase of American Depository Receipts
("ADRs"). Ownership of unsponsored ADRs may not entitle the Equity Fund to
financial or other reports from the issuer, to which it would be entitled as the
owner of sponsored ADRs. Investment in foreign securities is subject to special
risks that differ in some respects from those related to investments in
securities of U.S. domestic issuers. Such risks include trade balances and
imbalances, and related economic policies, future adverse political, economic
and social developments, the possible imposition of withholding taxes on
interest and dividend income and other taxes, 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. For additional information regarding the special
risks associated with investments in foreign securities, see "FOREIGN
INVESTMENTS" in the Statement of Additional Information.
BALANCED FUND
The investment objective of the Balanced Fund is to seek long-term
growth of capital and income. The Balanced Fund will invest in a diversified
portfolio of equity securities and fixed income securities. The investment
manager will allocate holdings within established ranges to best take advantage
of economic conditions, general market trends, interest rate levels, and changes
in fiscal and monetary policies.
To the extent that the Balanced Fund invests in equity securities, it
will invest in equity securities which consist of common stocks, preferred
stocks, securities convertible into common stocks, warrants and any rights to
purchase common stocks. Under normal market conditions, the Balanced Fund may
invest up to 75% of its total assets in equity securities. The Balanced Fund may
also invest in foreign securities through the purchase of ADR's.
Under normal conditions, the Balanced Fund will invest at least 25%, of
the value of its total assets in fixed income senior securities. Such securities
will include but not be limited to, corporate debt securities (including notes,
bonds and debentures), U.S. Government Obligations, mortgage-related securities,
high quality money market instruments (commercial paper, certificates of deposit
14
<PAGE>
and bankers' acceptances), variable amount master demand notes, variable and
floating rate notes, taxable municipal bonds, leasing instruments and trust
certificates and asset backed securities. In addition, the Balanced Fund may
engage in certain loans of portfolio securities, repurchase agreements and
reverse repurchase agreements and futures and options. The Balanced Fund may
also invest in securities of other investment companies and in other investment
portfolios advised by IMG. The Balanced Fund expects to maintain a
dollar-weighted average portfolio maturity of four to ten years on the fixed
income portion of the portfolio.
The Balanced Fund expects 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, 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. The Balanced Fund will invest in such
corporate debt securities only if they are rated within the five highest rating
categories at the time of purchase by a nationally recognized statistical rating
organization (an "NRSRO") or, if unrated, found by the Advisor to be of
comparable quality. Securities rated in the fourth highest rating category have
speculative characteristics, even though they are of investment-grade quality.
Up to 25% of the Balanced Fund's total assets could be invested in securities
rated in the fifth highest rating category, which are considered
below-Investment Grade securities (commonly known as "junk bonds"). See
"INVESTMENT OBJECTIVE AND POLICIES--Additional Information on Portfolio
Instruments" in the Statement of Additional Information for information
concerning risks associated with investing in below investment grade bonds.
Currently, the Fund does not expect to invest in (i) securities rated lower than
"Ba" by Moody's or "BB" by S&P, Fitch, D&P, or of similar quality by another
NRSRO; and (ii) unrated debt securities of similar quality. Securities of
"BBB/Baa" or lower quality may have speculative characteristics and poor credit
protection. The rating services' descriptions of the below- Investment Grade
securities ratings categories in which the Income Fund may invest are described
above with respect to the Income Fund.
The respective rating services apply classifications in each rating
category to indicate the security's ranking within the category. The Balanced
Fund may invest in securities within any of the classifications in a category.
For a description of the rating symbols of certain NRSROs, see the Appendix to
the Statement of Additional Information.
Under normal market conditions the Balanced Fund will invest at least
25% of its total assets in fixed income senior securities. In addition, the
Balanced Fund may invest, without limit, in any combination of U.S. Government
Obligations, money market instruments and repurchase agreements when, in the
opinion of the Advisor, it is determined that a temporary defensive position is
warranted based upon current market conditions.
AGGRESSIVE GROWTH FUND
The investment objective of the Aggressive Growth Fund is long-term
capital growth. The Aggressive Growth Fund will invest primarily in equity
securities of small, medium and large capitalization companies that exhibit a
strong potential for price appreciation relative to the general equity markets.
Dividend income is not a factor in selecting investment securities.
The Aggressive Growth Fund may invest in equity securities which
consist of common stocks, preferred stocks, securities convertible into common
stocks, warrants and any rights to purchase common stocks.
The manager will consider numerous factors in a company, among them:
quality of management over time, the company's leadership in its field,
distinctive marketing capabilities, return on equity over the past 3-5 years,
15
<PAGE>
cash flows, debt levels, and earnings growth. The Fund will seek positions in
high growth industries, firms with products in niche markets, and stocks which
are perceived to be temporarily undervalued. Positions may be accumulated in
industry sectors or firms which are felt to be particularly attractive;
positions may be decreased or eliminated in industry sectors or firms which are
less attractive.
The Aggressive Growth Fund may, for daily cash management purposes,
also invest in high quality money market securities (commercial paper,
certificates of deposit and bankers' acceptances), as well as the repurchase
agreements referred to above. In addition, the Aggressive Growth Fund may
invest, without limit, in any combination of U.S. Government Obligations, money
market instruments and repurchase agreements when, in the opinion of the
Advisor, it is determined that a temporary defensive position is warranted based
upon current market conditions. The Aggressive Growth Fund may also invest in
securities of other investment companies including the other investment
portfolios advised by the Advisor, as described more fully under "Other
Investment Policies."
Subject to the foregoing limitations, the Aggressive Growth Fund may
invest in foreign securities through the purchase of American Depository
Receipts ("ADRs"). Ownership of unsponsored ADRs may not entitle the Aggressive
Growth Fund to financial or other reports from the issuer, to which it would be
entitled as the owner of sponsored ADRs. Investment in foreign securities is
subject to special risks that differ in some respects from those related to
investments in securities of U.S. DOMESTIC issuers. Such risks include trade
balances and imbalances, and related economic policies, future adverse
political, economic and social developments, the possible imposition of
withholding taxes on interest and dividend income and other taxes, 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. For additional information regarding
the special risks associated with investments in foreign securities, see
"FOREIGN INVESTMENTS" in the Statement of Additional Information.
LIMITED TERM BOND FUND
The investment objective of the Limited Term Fund is to seek total
return from a portfolio of limited term fixed income securities. Total return
includes a combination of interest income from the Fund's underlying fixed
income securities, appreciation or depreciation in the value of these fixed
income securities and gains or losses realized upon the sale of such securities.
Because the market value of fixed income securities can be expected to vary
inversely to changes in prevailing interest rates, investing in such fixed
income securities provides an opportunity for appreciation when interest rates
decline and depreciation when interest rates rise. It is anticipated that the
Fund will place primary emphasis on capital appreciation as well as capital
preservation through periodic adjustment of the average maturity or duration of
the Fund's portfolio through securities selection, maturity structure and sector
allocation, with the level of current income being a secondary consideration and
that investments will be made without regard to tax ramifications.
Under normal conditions, the Limited Term Fund will invest substa
ntially all of the value of its total assets in fixed income securities rated
within the five highest rating categories at the time of purchase by a NRSRO or,
if unrated, found by the Advisor to be of comparable quality. Such securities
will include but not be limited to, corporate debt securities (including notes,
bonds and debentures), U.S. Government Obligations, mortgage-related securities,
high quality money market instruments (commercial paper, certificates of deposit
and bankers' acceptances), variable amount master demand notes, variable and
floating rate notes, taxable municipal bonds, leasing instruments and trust
certificates and asset backed securities.
The Limited Term Fund expects to invest in bonds, notes and debentures
of a wide range of U.S. Corporate issuers. Such obligations, in the case of
16
<PAGE>
debentures, will represent unsecured promises to pay, 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. The Limited Term Fund will invest in such
corporate debt securities only if they are rated within the five highest rating
categories at the time of purchase by a nationally recognized statistical rating
organization (an "NRSRO") or, if unrated, found by IMG to be of comparable
quality. Securities rated in the fourth highest rating category have speculative
characteristics, even though they are of investment-grade quality. Up to 25% of
the Limited Term Fund's total assets could be invested in securities rated in
the fifth highest rating category, which are considered below-Investment Grade
securities (commonly known as "junk bonds"). See "INVESTMENT OBJECTIVE AND
POLICIES--Additional Information on Portfolio Instruments" in the Statement of
Additional Information for information concerning risks associated with
investing in below investment grade bonds. Currently, the Fund does not expect
to invest in (i) securities rated lower than "Ba" by Moody's or "BB" by S&P,
Fitch, D&P, or of similar quality by another NRSRO; and (ii) unrated debt
securities of similar quality. Securities of "BBB/Baa" or lower quality may have
speculative characteristics and poor credit protection. The rating services'
descriptions of the below- Investment Grade securities ratings categories in
which the Income Fund may invest are described above with respect to the Income
Fund.
The respective rating services apply classifications in each rating
category to indicate the security's ranking within the category. The Limited
Term Fund may invest in securities within any of the classifications in a
category. For a description of the rating symbols of certain NRSROs, see the
Appendix to the Statement of Additional Information.
In addition, the Limited Term Fund may engage in certain loans of
portfolio securities, repurchase agreements and reverse repurchase agreements
and futures and options. The Limited Term Fund may also invest in securities of
other investment companies and in other investment portfolios advised by IMG, as
described more fully under "Other Investment Policies." The Limited Term Bond
Fund expects to maintain a dollar-weighted average portfolio maturity of one to
four years. The Limited Term Bond Fund, unlike the Income Fund, may invest in
Treasury Zero Coupon securities but it will not invest more than 10% of its
total assets in such securities.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. Government Obligations invested in by a Fund will
include obligations issued or guaranteed as to payment of principal and interest
by the full faith and credit of the U.S. Treasury, such as Treasury bills,
notes, bonds and certificates of indebtedness, and obligations issued or
guaranteed by the agencies or instrumentalities of the U.S. Government, but not
supported by such full faith and credit. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as the Government National
Mortgage Association and the Export-Import Bank of the United States, 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 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 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. A Fund will invest in
the obligations of such agencies or instrumentalities only when IMG believes
that the credit risk with respect thereto is minimal. The U.S. Government does
not guarantee the market value of any security; therefore, the market value of
the U.S. Government Obligations in a Fund's portfolio and of the Shares of a
Fund can be expected to fluctuate as interest rates change.
17
<PAGE>
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
Mortgage-related securities in which each of the Income Fund, the
Limited Term Bond Fund, the Balanced Fund and the Municipal Bond Fund may invest
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
private issuers (such as commercial banks, savings and loan institutions,
mortgage bankers and private mortgage insurance companies). Collateralized
mortgage obligations structured as pools of mortgage pass-through certificates
or mortgage loans ("CMOs") will be purchased only if they meet the rating
requirements set forth above with respect to each of the Income Fund, Limited
Term Bond Fund, the Balanced Fund and the Municipal Bond Fund's investments in
debt securities of U.S. Corporations. For additional information on the Income
Fund, Limited Term Bond Fund, the Balanced Fund and the Municipal Bond Fund
investments in mortgage-related securities, see the Statement of Additional
Information.
Although certain mortgage-related securities may be guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. Thus, for example, if the Funds purchase
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 due to changes in interest
rates or prepayments of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of mortgage-related securities are
inversely affected by changes in interest rates. However, although 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. For this and other
reasons, the stated maturity of a mortgage-related security may be shortened by
unscheduled prepayments on the underlying mortgages and, accordingly, it is not
possible to predict accurately the security's return to the Fund(s). In
addition, regular payments received in respect to mortgage-related securities
include both interest and principal. No assurance can be given to the return the
Fund(s) will receive when these amounts are reinvested.
Asset-backed securities (unrelated to first mortgage loans) in which
the Income Funds may invest represent fractional interests in pools or leases,
retail installment loans or revolving credit receivables, both secured (such as
Certificates for Automobile Receivables or "CARSSM") and unsecured (such as
Credit Card Receivable Securities or "CARDSSM"). These assets are generally held
by a trust and payments of principal and interest or interest only are passed
through monthly or quarterly to certificate holders and may be guaranteed up to
certain amounts by letters of credit issued by a financial institution
affiliated or unaffiliated with the trustee or originator of the trust.
Asset-backed securities will be purchased only if they meet the rating
requirements set forth above with respect to the Income Fund, the Limited Term
Bond Fund, the Balanced Fund and the Municipal Bond Fund's investments in debt
securities of U.S. Corporations.
Like mortgages underlying mortgage-backed securities, underlying
automobile sales contracts or credit card receivables are subject to prepayment,
which may reduce the overall return to certificate holders. Nevertheless,
principal repayment rates tend not to vary much with interest rates and the
short-term nature of the underlying car loans or other receivables tend to
dampen the impact of any change in the prepayment level. Certificate holders may
also experience delays in payment on the certificates if the full amounts due on
underlying sales contracts or receivables are not realized by the trust because
of unanticipated legal or administrative costs or enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors. If consistent with its investment
objective and policies, the Income Fund, the Limited Term Bond Fund, the
Balanced Fund and the Municipal Bond Fund may invest in other asset-backed
securities that may be developed in the future.
18
<PAGE>
Issuers of mortgage-backed and asset-backed securities often issue one
or more classes of which one (the "Residual") is in the nature of equity. The
Income Fund, the Limited Term Bond Fund or the Balanced Fund will not invest in
any Residual.
REPURCHASE AGREEMENTS
Securities held by a Fund 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 from registered
broker-dealers which the Advisor deems creditworthy under guidelines approved by
the Company's Board of Directors. The seller agrees 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
must be of the same type and quality although, for the Government Fund, not
subject to the same maturity requirements as those in which a Fund may invest
directly. The seller under a repurchase agreement will be required to maintain
at all times the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). This requirement will be
continually monitored by IMG. In addition, securities subject to a repurchase
agreement will be held in a segregated account. If the seller were to default on
its repurchase obligation or become insolvent, a Fund would suffer a loss if the
proceeds from a sale of the underlying portfolio securities were less than the
repurchase price under the agreement, or the disposition of such securities by a
Fund were delayed pending court action. Repurchase agreements are considered to
be loans collateralized by the underlying security under the Investment Company
Act of 1940 (the "1940 Act"). For further information about repurchase
agreements, see "INVESTMENT OBJECTIVE AND POLICIES--Additional Information on
Portfolio Instruments--Repurchase Agreements" in the Statement of Additional
Information.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, a Fund would sell certain of its
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed upon date and price. At the time a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account liquid high grade debt securities, such as U.S. Government
Obligations, consistent with its 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 securities sold by a Fund may decline below the price at which
it is obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by an investment company under the 1940 Act. For
further information about reverse repurchase agreements, see "INVESTMENT
OBJECTIVES AND POLICIES--Additional Information on Portfolio
Instruments--Reverse Repurchase Agreements" in the Statement of Additional
Information.
FUTURES CONTRACTS AND RELATED OPTIONS
The Funds may invest in futures contracts and options on futures
contracts to the extent permitted by the Commodity Futures Trading Commission
("CFTC") and the Commission and thus will engage in such transactions solely for
bona fide hedging purposes to manage risk associated with various portfolio
securities and not for speculative purposes. Such transactions, including stock
or bond index futures contracts, or options thereon, act as a hedge to protect a
Fund from fluctuations in the value of its securities caused by anticipated
19
<PAGE>
changes in interest rate or market conditions without necessarily buying or
selling the securities. Hedging is a specialized investment technique that
entails skills different from other investment management. A stock or bond index
futures contract is an agreement in which one party agrees to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value (which assigns relative values to the common
stock or bonds included in the index) at the close of the last trading day of
the contract and the price at which the agreement is originally made. No
physical delivery of the underlying stock or bond in the index is contemplated.
Similarly, it may be in the best interest of a Fund to purchase or sell interest
rate futures contracts, or options thereon, which provide for the future
delivery of specified securities.
The purchase and sale of futures contracts or related options will not
be a primary investment technique of the Funds. The Funds will not purchase or
sell futures contracts (or related options thereon) if, immediately after
purchase, the aggregate initial margin deposits and premiums paid by a Fund on
its open futures and options positions, exceeds 5% of the liquidation value of
the Fund after taking into account any unrealized profits and unrealized losses
on any such futures or related options contracts into which it has entered.
CALL OPTIONS
The Equity Fund, the Balanced Fund and the Aggressive Growth Fund may
write covered call options on securities owned by the Fund. Such instruments may
also be referred to as equity derivatives. Derivatives generally are instruments
whose value is derived from or related to the value of some other instrument,
asset or specified benchmark, such as a specific stock or stock index. A call
option gives the purchaser of the option the right to buy, and obligates the
seller of the option to sell, the underlying security at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security. When a Fund writes a covered call option and such
option is exercised, it will forgo the appreciation, if any, on the underlying
security in excess of the exercise price. In order to close out a call option it
has written, a Fund may enter into a "closing purchase transaction"--the
purchase of a call option on the same security with the same exercise price and
expiration date as the call option which the Fund previously wrote on any
particular securities. When a portfolio security subject to a call option is
sold, the Fund may effect a closing purchase transaction to close out any
existing call option on that security. If a Fund is unable to effect a closing
purchase transaction, it will not be able to sell the underlying security until
the option expires or the Fund delivers the underlying security upon exercise.
Under normal conditions, it is not expected that these Funds would permit the
underlying value of their portfolio securities subject to such options to exceed
15% of net assets.
PUTABLE SECURITIES
The Income Fund, the Limited Term Bond Fund, the Balanced Fund and the
Municipal Bond Fund may acquire puts with respect to fixed income securities or
Municipal Securities as described above. Under a put, a Fund would have the
right to sell or redeem a specified security at a certain time or within a
certain period of time at a specified price. The security is sold to a third
party or redeemed by the issuer as provided contractually. The put may be an
independent feature or may be combined with a reset feature that is designed to
reduce downward price volatility as interest rates rise by enabling the holder
to liquidate the investment prior to maturity. The Funds may acquire putable
securities to facilitate portfolio liquidity, shorten the maturity of the
underlying security, or to permit the investment of funds at a more favorable
rate of return. The price of a putable security may be higher than the price
which otherwise would be paid for the security without such put feature, thereby
increasing the security's cost and reducing its yield. The time remaining to the
put date will apply for purposes of determining the maximum maturity of such
securities.
20
<PAGE>
LENDING OF PORTFOLIO SECURITIES
From time to time in order to generate additional income, a Fund may
lend its portfolio securities, provided such action is consistent with its
investment objective, policies, and restrictions. During the time portfolio
securities are on loan, the borrower will pay a Fund any dividends or interest
paid on the securities. In addition, loans will be subject to termination by a
Fund or the borrower at any time.
A Fund will enter into loan arrangements only with broker-dealers,
banks or other institutions that are not affiliated directly or indirectly with
the Company and which IMG has determined are creditworthy under guidelines
established by the Company's Board of Directors. While the lending of securities
may subject a Fund to certain risks, such as delays or an inability to regain
the securities in the event the borrower defaults on its lending agreement or
enters into bankruptcy, a Fund will receive 100% collateral on loaned securities
in the form of cash or U.S. Government Obligations. This collateral will be
valued daily by IMG and, should the market value of the loaned securities
increase, the borrower will be required to furnish additional collateral to the
Fund. Although each of the Funds does not expect to do so on a regular basis, it
may lend portfolio securities in amounts representing up to 15% of the value of
the Fund's total assets. Fees earned by the Municipal Bond Fund from lending its
securities will constitute taxable income to the Fund which, when distributed to
shareholders, will likewise generally be treated as taxable income.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
A Fund may purchase securities on a when-issued or delayed-delivery
basis. A Fund will engage in when-issued and delayed-delivery transactions only
for the purpose of acquiring portfolio securities consistent with its investment
objectives and policies, not for investment leverage. 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 those 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. When a Fund agrees to purchase such
securities, however, the Fund's custodian will set aside cash or liquid
securities equal to the amount of the commitment in a separate account.
Securities purchased on a when-issued basis are recorded as an asset and are
subject to changes in the value based upon changes in the general level of
interest rates. In when-issued and delayed-delivery transactions, a Fund relies
on the seller to complete the transaction; the seller's failure to do so may
cause a Fund to miss a price or yield considered to be advantageous.
The Income Fund's, the Limited Term Bond Fund's, the Municipal Bond
Fund's and the Government Fund's commitments to purchase when-issued securities
will not exceed 25%, and the Equity Fund's, the Balanced Fund's and the
Aggressive Growth Fund's commitments will not exceed 5%, of the value of its
total assets absent unusual market conditions. Each of the Funds does not intend
to purchase when-issued securities for speculative purposes but only in
furtherance of its investment objectives.
OTHER INVESTMENT POLICIES
Each of the Funds, except the Government Fund, may also invest up to 5%
of its total assets in another investment company, including the Government
Fund, not to exceed 10% of the value of its total assets in the securities of
other investment companies. In order to avoid the imposition of additional fees
as a result of investing in Shares of the Government Fund, the Advisor and the
Administrator (see "MANAGEMENT OF THE COMPANY--Investment Adviser", "MANAGEMENT
OF THE COMPANY--Administrator and Distributor") will waive any portion of their
usual service fees from that Fund that are attributable to investments therein
21
<PAGE>
by another Fund. A Fund will incur additional expenses due to the duplication of
expenses as a result of investing in mutual funds other than the Funds.
Additional restrictions on a Fund's investments in the securities of other
mutual funds are contained in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
A Fund is subject to a number of investment restrictions that may be
changed only by a vote of a majority of the outstanding Shares of such a Fund
(as defined in the Statement of Additional Information).
Each of the Income Fund, the Municipal Bond Fund, the Equity Fund, the
Balanced Fund, the Aggressive Growth Fund and the Limited Term Bond Fund will
not:
1. 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, with respect
to 75% of its portfolio, more than 5% of the value of the total assets
of the Fund would be invested in such issuer, or the Fund would hold
more than 10% of any class of securities of the issuer or more than 10%
of the outstanding voting securities of the issuer.
Each of the Income Fund, the Equity Fund, the Balanced Fund, the
Aggressive Growth Fund and the Limited Term Bond Fund will not:
1. Purchase any securities which would cause more than 25% of
the value of the Fund's total assets at the time of purchase to be
invested in securities of one or more issuers conducting their
principal business activities in the same industry, provided that
(a)there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government or its agencies 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.
The Municipal Bond Fund will not:
1. Purchase any securities which would cause more than 25% of
the value of the Fund's total assets at the time of purchase to be
invested in securities of one or more issuers conducting their
principal business activities in the same industry, provided that
(a)there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
and repurchase agreements secured by obligations of the U.S. Government
or its agencies or instrumentalities; (b)there is no limitation with
respect to Municipal Securities, which, for purposes of this limitation
only, do not include private activity bonds that are backed only by the
assets and revenues of a non-governmental user; (c)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 (d)utilities will be divided according to their
services. For example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry.
2. Write or sell puts, calls, straddles, spreads or
combinations thereof except that the Fund may acquire puts with respect
to Municipal Obligations in its portfolio and sell those puts in
conjunction with a sale of those Municipal Obligations.
22
<PAGE>
Each of the Funds will not:
1. Borrow money or issue senior securities, except that the
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 the Fund's total assets at the time of
its borrowing. The Fund will not purchase securities while borrowings
(including reverse repurchase agreements) in excess of 5% of its total
assets are outstanding.
2. Make loans, except that the Fund may purchase or hold debt
securities and lend portfolio securities in accordance with its
investment objective and policies, and may enter into repurchase
agreements.
In addition to the above investment restrictions, each Fund is subject
to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES
AND POLICIES--Investment Restrictions" in the Funds' Statement of Additional
Information.
VALUATION OF SHARES
The net asset value of each of the Funds, except the Government Fund,
is determined and its Shares are priced as of the close of regular trading on
the New York Stock Exchange ("NYSE") (generally 3:00p.m. Central Time) on each
Business Day. The net asset value of the Government Fund is determined and its
Shares are priced as of 11:00 a.m. Central Time ("Valuation Times"). As used
herein, a "Business Day" constitutes any day on which the NYSE is open for
trading, and any other day except days on which there are not sufficient changes
in the value of the Fund's portfolio securities that the Fund's net asset value
might be materially affected and days during which no Shares are tendered for
redemption and no orders to purchase Shares are received. Currently, the NYSE is
closed on 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. Net asset value per Share for purposes of pricing sales and
redemptions is calculated by dividing the value of all securities and other
assets of the Fund less the liabilities charged to the Fund by the number of its
outstanding Shares.
For the Income Fund, the Municipal Bond Fund, the Equity Fund, The
Balanced Fund, the Aggressive Growth Fund and the Limited Term Bond Fund (the
"Variable NAV Funds"), the net asset value per share will fluctuate as the value
of each of the Variable NAV Fund's investment portfolio changes.
The securities in the Variable NAV Funds will be valued at market
value. If market quotations are not available, the securities will be valued by
a method which the Board of Directors believes accurately reflects fair value.
For further information about valuation of investments, see "NET ASSET VALUE" in
the Statement of Additional Information.
The assets in the Government Fund are valued based upon the amortized
cost method, which the Directors of the Company believe fairly reflects the
market-based net asset value per Share. Pursuant to rules and regulations of the
Commission regarding the use of the amortized cost method, the Government Fund
will maintain a dollar-weighted average portfolio maturity of 90 days or less.
Although the Company seeks to maintain the Government Fund's net asset value per
share at $1.00, there can be no assurance that the net asset value will not
vary.
23
<PAGE>
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares of the Funds are sold on a continuous basis by the Company's
Distributor, BISYS Fund Services, Inc. The principal office of the distributor
is 3435 Stelzer Road, Columbus, Ohio 43219. If you wish to purchase Shares,
contact the Funds at (800)798-1819.
PURCHASES OF SHARES
Shares of the Funds are continuously offered and may be purchased
directly either by mail, by telephone or by electronic transfer. Shares may also
be purchased through a broker-dealer who has established a dealer agreement with
the Distributor. The minimum investment is generally $1,000 for the initial
purchase of Shares and $50 for subsequent purchases. For purchases that are made
in connection with 401(k) plans, 403(b) plans and other similar plans or payroll
deduction plans, the minimum investment amount for initial and subsequent
purchases is $25. In the case of such retirement plan investments, the minimum
purchase amounts are not restricted to the purchase of Shares of one Fund. Thus,
the $25 minimum amount may be spread among any of the Funds. (But, see "HOW TO
PURCHASE AND REDEEM SHARES--Auto Invest Plan" below for minimum investment
requirements under the Auto Invest Plan).
Purchasers of Shares of the Funds will pay the next calculated net
asset value per Share after the Distributor's receipt of an order to purchase
Shares in good form ("public offering price") (see "HOW TO PURCHASE AND REDEEM
SHARES" below).
In the case of orders for the purchase of Shares placed through a
broker-dealer, the public offering price will be the net asset value as so
determined, but only if the broker-dealer receives the order prior to the
Valuation Time for that day and transmits it to the Funds by the Valuation Time.
If the broker-dealer receives the order after the Valuation Time for that day,
the price will be based on the net asset value determined as of the Valuation
Time for the next Business Day.
PURCHASES BY MAIL
To purchase Shares of a Fund, complete an Account Application and
return it along with a check (or other negotiable bank draft or money order) in
at least the minimum initial purchase amount, made payable to the appropriate
Fund to:
IMG Mutual Funds, Inc.
2203 Grand Avenue
Des Moines, Iowa 50312-5338
An Account Application form can be obtained by calling the Funds at
(800)798-1819. Subsequent purchases of Shares of a Fund may be made at any time
by mailing a check payable to a Fund, to the above address.
PURCHASES BY TELEPHONE
Shares of a Fund may be purchased by calling the Funds at
(800)798-1819, if your Account Application has been previously received by the
Distributor. Payment for Shares ordered by telephone is made by electronic
transfer to the Funds' custodian. Prior to wiring funds and in order to ensure
that wire orders are invested promptly, investors must call the Funds at the
number above to obtain instructions regarding the bank account number to which
the funds should be wired and other pertinent information.
24
<PAGE>
OTHER INFORMATION REGARDING PURCHASES
Shares may also be purchased through selected financial services firms
such as broker-dealer firms and banks ("Firms"). Shares of a Funds sold to the
Firms acting in a fiduciary, advisory, custodial, or other similar capacity on
behalf of customers will normally be held of record by the Firms. With respect
to Shares sold, it is the responsibility of the holder of record to transmit
purchase or redemption orders to the Distributor and to deliver funds for the
purchase thereof by the Fund's custodian within the settlement requirements
defined in the Securities Exchange Act of 1934. If payment is not received
within the prescribed time periods or a check timely received does not clear,
the purchase will be canceled and the investor could be liable for any losses or
fees incurred. Any questions regarding current settlement requirements or
electronic payment instructions should be directed to the Funds at (800)
798-1819.
Purchases of Shares in a Fund will be effected only on a Business Day
(as defined in "VALUATION OF SHARES"). The public offering price of the Variable
NAV Funds will be the net asset value per Share (see "VALUATION OF SHARES") as
determined on the Business Day the order is received by the Distributor, but
only if the Distributor receives the order by the Valuation Time. Otherwise, the
price will be determined as of the Valuation Time on the next Business Day. In
the case of an order for the purchase of Shares placed through a broker-dealer,
it is the responsibility of the broker-dealer to transmit the order to the
Distributor promptly.
Firms provide varying arrangements for their clients to purchase and
redeem Fund shares. Some may establish higher minimum investment requirements
than set forth above. They may arrange with their clients for other investment
or administrative services. Such Firms may independently establish and charge
additional amounts to their clients for such services, which charges would
reduce the client's yield or return. Firms may also hold Fund shares positions
in nominee or street name as agent for and on behalf of their customers. In such
instances, the Fund's transfer agent will have no information with respect to or
control over accounts of specific shareholders. Such shareholders may obtain
access to their accounts and information about their accounts only from their
Firms. Some of the Firms may receive compensation from the Fund's Shareholder
Service Agent for recordkeeping and other expenses related to these nominee
accounts. In addition, certain privileges with respect to the purchase and
redemption of shares or the reinvestment of dividends may not be available
through such Firms. Some Firms may participate in a program allowing them access
to their clients' accounts for servicing including, without limitation,
transfers of registration and dividend payee changes; and may perform functions
such as generation of confirmation statements and disbursement of cash
dividends. This Prospectus should be read in connection with such Firms'
material regarding their fees and services. Shareholders should also consider
that certain Firms may offer services which may not be available directly from
the Fund.
Shares of the Government Fund are purchased at the net asset value per
Share (see "VALUATION OF SHARES") next determined after receipt by the
Distributor of an order to purchase Shares. An order to purchase Shares of the
Government Fund will be deemed to have been received by the Distributor only
when federal funds with respect thereto are available to the Funds' custodian
for investment. Federal funds are monies credited to a bank's account with a
Federal Reserve Bank. Payment for an order to purchase Shares of the Government
Fund which is transmitted by federal funds wire will be available the same day
for investment by the Funds' custodian, if received prior to the last Valuation
Time (see "VALUATION OF SHARES"). Payments transmitted by other means (such as
by check drawn on a member of the Federal Reserve System) will normally be
converted into federal funds within two banking days after receipt. The
Government Fund strongly recommends that investors of substantial amounts use
federal funds to purchase Shares.
25
<PAGE>
An order received prior to a Valuation Time on any Business Day for the
Government Fund will be executed at the net asset value determined as of the
next Valuation Time on the date of receipt. An order received after the
Valuation Time on any Business Day will be executed at the net asset value
determined as of the next Valuation Time on the next Business Day of the
Government Fund. Shares purchased before 11:00 a.m., Central Time, begin earning
dividends on the same Business Day. Shares purchased after 11:00 a.m., Central
Time, begin earning dividends on the next Business Day. All Shares of the
Government Fund continue to earn dividends through the day before their
redemption.
Depending upon the terms of the particular Customer account, a Bank may
charge a Customer account fees for services provided in connection with
investments in a Fund. Information concerning these services and any charges
will be provided by the Bank. This Prospectus should be read in conjunction with
any such information so received from a Bank.
The Company reserves the right to reject any order for the purchase of
a Fund's Shares in whole or in part including purchases made with foreign and
third party checks.
Every Shareholder of record will receive a confirmation of each
transaction in his or her account, which will also show the total number of
Shares of a Fund owned by the Shareholder. Sending confirmations for purchases
and redemptions of Shares held by a Bank on behalf of its Customer will be the
responsibility of the Bank. Shareholders may rely on these statements in lieu of
certificates. Certificates representing Shares of the Funds will not be issued.
The Distributor, at its expense, will also provide other compensation
to dealers in connection with sales of Shares of a Fund. Compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Funds, and other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell a
significant amount of Shares. Compensation will also include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will also include the following types of non-cash compensation
offered through sales contests: (1)vacation trips, including the provision of
travel arrangements and lodging at luxury resorts at exotic locations;
(2)tickets for entertainment events (such as concerts, cruises and sporting
events) and (3)merchandise (such as clothing, trophies, clocks and pens).
Dealers may not use sales of Shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Funds or their Shareholders.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
An IRA enables individuals, even if they participate in an
employer-sponsored retirement plan, to establish their own retirement program.
IRA contributions may be tax-deductible and earnings are tax-deferred. Under the
Tax Reform Act of 1986, the tax deductibility of IRA contributions is restricted
or eliminated for individuals who participate in certain employer pension plans
and whose annual income exceeds certain limits. Existing IRAs and future
contributions up to the IRA maximums, whether deductible or not, still earn
income on a tax-deferred basis.
All IRA distribution requests must be made in writing to the
Distributor. Any additional deposits to an IRA must distinguish the type and
year of the contribution.
26
<PAGE>
For more information on an IRA call the Funds at (800) 798-1819.
Investment in Shares of the Municipal Bond Fund would not be appropriate for any
IRA. Shareholders are advised to consult a tax adviser on IRA contribution and
withdrawal requirements and restrictions.
AUTO INVEST PLAN
The Auto Invest Plan enables Shareholders of the Funds to make regular
monthly or quarterly purchases of Shares through automatic deductions from their
bank accounts (which must be with a domestic member of the Automatic Clearing
House). With Shareholder authorization, the Transfer Agent or Sub-Transfer Agent
will deduct the amount specified from the Shareholder's bank account which will
automatically be invested in Shares at the public offering price on the dates of
the deduction. The required minimum initial investment when opening an account
using the Auto Invest Plan is $250; the minimum amount for subsequent
investments in a Fund is $25. To participate in the Auto Invest Plan,
Shareholders should complete the appropriate section of the account application
which can be acquired by calling (800) 798-1819. For a Shareholder to change the
Auto Invest instructions, the request must be made in writing to the
Distributor.
EXCHANGE PRIVILEGE
The Funds offer an exchange program whereby Shareholders are entitled
to exchange their Shares for Shares of the other Funds. Such exchanges will be
executed on the basis of the relative net asset values of the Shares exchanged.
The Shares exchanged must have a current value that equals or exceeds the
minimum investment that is required (either the minimum amount required for
initial or subsequent investments as the case may be) for the Fund whose Shares
are being acquired. Share exchanges will only be permitted where the Shares to
be acquired may legally be sold in the investor's state of residence. An
exchange is considered to be a sale of Shares for federal income tax purposes on
which a Shareholder may realize a taxable gain or loss. A Shareholder may make
an exchange request by calling the Funds at (800) 798-1819 or by providing
written instructions to the Funds. An investor should consult the Funds for
further information regarding exchanges. During periods of significant economic
or market change, telephone exchanges may be difficult to complete. If a
Shareholder is unable to contact the Funds by telephone, a Shareholder may also
mail the exchange request to the Funds at the address listed under "HOW TO
PURCHASE AND REDEEM SHARES--Redemption By Mail." The Funds reserve the right to
modify or terminate the exchange privilege described above at any time and to
reject any exchange request. If an exchange request in good order is received by
the Distributor by the Valuation Time, on any Business Day, the exchange usually
will occur on that day. Any Shareholder who wishes to make an exchange should
obtain and review the current prospectus of the Fund in which he or she wishes
to invest before making the exchange. Shareholders wishing to make use of the
Funds' exchange program must so indicate on the Account Application.
This option will be suspended for a period of 30 days following a
telephonic address change.
AUTO EXCHANGE
Auto Exchange enables Shareholders to make regular, automatic
withdrawals from the Government Fund and use those proceeds to benefit from
dollar-cost averaging by automatically making purchases of shares of another
Fund. With shareholder authorization, the Company's transfer agent will withdraw
the amount specified (subject to the applicable minimums) from the shareholder's
Government Fund account and will automatically invest that amount in the Fund
designated by the Shareholder at the public offering price on the date of such
deduction. In order to participate in the Auto Exchange, Shareholders must have
27
<PAGE>
a minimum initial purchase of $10,000 in their Government Fund account and
maintain a minimum account balance of $1,000. To participate in the Auto
Exchange, Shareholders should complete the appropriate section of the Account
Application Form, which can be acquired by calling the Distributor. To change
the Auto Exchange instructions or to discontinue the feature, a Shareholder must
send a written request to the IMG Mutual Funds, Inc., 2203 Grand Avenue, Des
Moines, IA 50312-5338. The Auto Exchange may be amended or terminated without
notice at any time by the Distributor.
REDEMPTION OF SHARES
Shareholders may redeem their Shares on any day that net asset value is
calculated (see "VALUATION OF SHARES"). Redemptions will be effected at the net
asset value per share next determined after receipt of a redemption request in
good order. Redemptions may ordinarily be requested by mail or by telephone.
All or part of a Customer's Shares may be required to be redeemed in
accordance with instructions and limitations pertaining to his or her account
held by a Bank. For example, if a Customer has agreed to maintain a minimum
balance in his or her account, and the balance in that account falls below that
minimum, the Customer may be obliged to redeem, or the Bank may redeem for and
on behalf of the Customer, all or part of the Customer's Shares to the extent
necessary to maintain the required minimum balance. There may be no notice
period affording Shareholders an opportunity to increase the account balance in
order to avoid an involuntary redemption under these circumstances.
REDEMPTION BY MAIL
A written request for redemption must be received by the Funds in order
to honor the request. The Funds' address is: IMG Mutual Funds, Inc., 2203 Grand
Avenue, Des Moines, IA 50312-5338. The Transfer Agent or Sub-Transfer Agent may
require a signature guarantee by an eligible guarantor institution. For purposes
of this policy, the term "eligible guarantor institution" shall include banks,
brokers, dealers, credit unions, securities exchanges and associations, clearing
agencies and savings associations as those terms are defined in Rule17Ad-15
under the Securities Exchange Act of 1934. The Transfer Agent or Sub-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 signature guarantee requirement
will be waived if all of the following conditions apply: (1)the redemption check
is payable to the Shareholder(s)of record and (2)the redemption check is mailed
to the Shareholder(s) at the address of record or the proceeds are either mailed
or wired to a commercial bank account previously designated on the Account
Application. There is no charge for having redemption requests mailed to a
designated bank account.
If the Company receives a redemption order but a shareholder has not
clearly indicated the amount of money or number of shares involved, the Company
cannot execute the order. In such cases, the Company will request the missing
information and process the order on the day such information is received.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the Shareholder selected that
option on the Account Application. The Shareholder may have the proceeds mailed
to his or her address or mailed or sent electronically to a commercial bank
account previously designated on the Account Application. Electronic payment
requests may be made by the Shareholder by telephone to the Funds at (800)
798-1819. For a wire redemption, the then-current wire redemption charge may be
28
<PAGE>
deducted from the proceeds of a wire redemption. This charge, if applied, will
vary depending on the receiving institution for each wire redemption. It is not
necessary for Shareholders to confirm telephone redemption requests in writing.
During periods of significant economic or market change, telephone redemptions
may be difficult to complete. If a Shareholder is unable to contact the Funds by
telephone, a Shareholder may also mail the redemption request to the Distributor
at the address listed above under "HOW TO PURCHASE AND REDEEM SHARES--Redemption
by Mail". Neither the Distributor, the Transfer Agent, the Sub-Transfer Agent,
the Advisor nor the Company will be liable for any losses, damages, expense or
cost arising out of any telephone transaction (including exchanges and
redemptions) effected in accordance with the Funds' telephone transaction
procedures, upon instructions reasonably believed to be genuine. The Fund will
employ procedures designed to provide reasonable assurance that instructions by
telephone are genuine; if these procedures are not followed, the Fund or its
service contractors may be liable for any losses due to unauthorized or
fraudulent instructions. These procedures include recording all phone
conversations, sending confirmations to shareholders within 72hours of the
telephone transaction, verification of account name and account number or tax
identification number, and sending redemption proceeds only to the address of
record or to a previously authorized bank account.
This option will be suspended for a period of 30 days following a
telephonic address change.
REDEMPTION BY CHECK
Free check writing is available for the Government Fund. With this
service, a Shareholder may write up to five checks a month in amounts of $250 or
more. To establish this service and to obtain checks at the time the account is
opened, a Shareholder must complete the Signature Card section of the Account
Application Form. To establish this service and obtain checks after opening an
account in the Government Fund, the Shareholder must contact the Funds by
telephone or mail to obtain an Account Application Form and complete and return
the signature card. A Shareholder will receive the dividends and distributions
declared on the Shares to be redeemed up to the day that a check is presented
for payment. Upon 30 days' prior written notice to Shareholders, the check
writing privilege may be modified or terminated. An investor may not close a
Fund account by writing a check.
AUTO WITHDRAWAL PLAN
The Auto Withdrawal Plan enables Shareholders of a Fund to make regular
monthly or quarterly redemptions of Shares. With Shareholder authorization, the
Transfer Agent or Sub-Transfer Agent will automatically redeem Shares at the net
asset value on the dates of the withdrawal and have a check in the amount
specified mailed to the Shareholder. The required minimum withdrawal is $100. To
participate in the Auto Withdrawal Plan, Shareholders should call (800) 798-1819
for more information. Purchases of additional Shares concurrent with withdrawals
may be disadvantageous to certain Shareholders because of tax liabilities. For a
Shareholder to change the Auto Withdrawal instructions the request must be made
in writing to the Distributor.
DIRECTED DIVIDEND OPTION
A Shareholder may elect to have all income dividends and capital gains
distributions paid by check or reinvested in any of the Company's other Funds,
(provided the other Fund is maintained at the minimum required balance).
The Directed Dividend Option may be modified or terminated by the
Company at any time after notice to participating Shareholders. Participation in
29
<PAGE>
the Directed Dividend Option may be terminated or changed by the Shareholder at
any time by writing the Distributor. The Directed Dividend Option is not
available to participants in an IRA.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per Share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within the
settlement requirements defined in the Securities Exchange Act of 1934 after
receipt by the Distributor of the request for redemption. However, to the
greatest extent possible, the Company will attempt to honor requests from
Shareholders for (a)same day payments upon redemption of Government Fund Shares
if the request for redemption is received by the Distributor before 11:00 a.m.
Central Time on a Business Day or, if the request for redemption is received
after 11:00 a.m. Central Time, to honor requests for payment on the next
Business Day, or (b)next day payments upon redemption of the Variable NAV Funds
if received by the Distributor before the Valuation Time on a Business Day or if
the request for redemption is received after the Valuation Time, to honor
requests for payment within two Business Days, unless it would be
disadvantageous to the Fund or the Shareholders of the Fund to sell or liquidate
portfolio securities in an amount sufficient to satisfy requests for payments in
that manner.
At various times, a Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, a Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares, which delay may be for up to 10 days or more. A Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, a Fund may make payment wholly or partly in portfolio securities at
their then-current market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, the
Funds reserve the right to redeem, at net asset value, the Shares of any
Shareholder if, because of redemptions of Shares by or on behalf of the
Shareholder (but not as a result of a decrease in the market price of such
Shares), the account of such Shareholder has a value of less than $500. Before
the Funds exercise their right to redeem such Shares and to send the proceeds to
the Shareholder, the Shareholder will be given notice that the value of the
Shares in his or her account is less than the minimum amount and will be allowed
60 days to make an additional investment in an amount which will increase the
value of the account to at least $500.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION--Matters Affecting
Redemption" in the Statement of Additional Information for examples of when the
Company may, under applicable law and regulation, suspend the right of
redemption if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
DIVIDENDS AND TAXES
DIVIDENDS
The Income Fund and Municipal Bond Fund each intend to declare their
net investment income monthly as a dividend to Shareholders at the close of
business on the day of declaration. The Government Fund intends to declare its
net investment income daily as a dividend to Shareholders at the close of
business on the day of declaration. These Funds will generally pay such
dividends monthly. Each Fund also intends to distribute its capital gains, if
any, at least annually, normally in December of each year. The Equity Fund, the
Balanced Fund, the Aggressive Growth Fund and the Limited Term Bond Fund intend
to declare their net investment income quarterly as a dividend to Shareholders
at the close of business on the day of declaration, and generally will pay such
dividends quarterly. A Shareholder will automatically receive all income
30
<PAGE>
dividends and capital gains distributions in additional full and fractional
Shares of a Fund at net asset value as of the ex-dividend date, unless the
Shareholder elects to receive dividends or distributions in cash. Such election
must be made on the Account Application; any change in such election must be
made in writing to the Funds at 2203 Grand Avenue, Des Moines, IA 50312-5338,
and will become effective with respect to dividends and distributions having
record dates after its receipt by the Transfer Agent or Sub-Transfer Agent.
Dividends are paid in cash not later than seven business days after a
Shareholder's complete redemption of his or her Shares.
If you elect to receive distributions in cash, and checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share net
asset value determined as of the date of payment of the distribution. In
addition, any undeliverable checks or checks that remain uncashed for six months
will be canceled and will be reinvested in the Fund at the per share net asset
value determined as of the date of cancellation.
FEDERAL TAXES
The following discussion is intended for general information only.
Investors should consult with their tax adviser as to the tax consequences of an
investment in the Funds, including the status of distributions from the Funds
under applicable state or local law.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify, each Fund must meet certain income, distribution and
diversification requirements. In any year in which a Fund qualifies as a
regulated investment company and timely distributes all of its income and
substantially all of its net tax-exempt interest income, the Fund generally will
not pay any U.S. federal income or excise tax.
Dividends that are distributed by a Fund that are derived from interest
income exempt from federal income tax and are designated by the Fund as
"exempt-interest dividends" will be exempt from regular federal income taxation.
However, if tax exempt interest earned by the Fund constitutes an item of tax
preference for purposes of the alternative minimum tax, then a portion of the
exempt-interest dividends paid by the Fund may likewise constitute an item of
tax preference. In addition, any exempt-interest dividends received by corporate
shareholders may constitute an adjustment to alternative minimum taxable income
for purposes of the alternative minimum tax and the environmental tax imposed
under Code Sections 55 and 59A, respectively. Only the Municipal Bond Fund is
expected to be eligible to designate certain of its dividends as
"exempt-interest dividends."
Exempt-interest dividends of a Fund, although exempt from regular
federal income tax, are includible in the tax base for determining the extent to
which Social Security and railroad benefits will be subject to federal income
tax. All shareholders are required to report the receipt of dividends and
distributions, including exempt-interest dividends, on their federal income tax
returns.
Dividends paid out of a Fund's investment company taxable income
(including dividends, taxable interest and net short-term capital gains) will be
taxable to a U.S. Shareholder as ordinary income. A portion of the Equity Fund,
Balanced Fund and Aggressive Growth Fund's income may consist of dividends paid
by U.S. Corporations. Therefore, a portion of the dividends paid by these Funds
may be eligible for the corporate dividends-received deduction. Because no
portion of the other Funds' income is expected to consist of dividends paid by
U.S. Corporations, no portion of the dividends paid by those Funds is expected
to be eligible for the corporate dividends-received deduction. Distributions of
31
<PAGE>
net capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, designated by a Fund as capital gain dividends are
taxable as long-term capital gains, regardless of the length of time the
Shareholder has held a Fund's Shares. Dividends are generally treated in the
same manner whether received in cash or reinvested in additional Fund Shares.
A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by a Fund in October, November or December of
that year to shareholders of record on a date in such a month and paid by a Fund
during January of the following calendar year. Such distributions will be
treated as received by Shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Each year the Funds will notify Shareholders of the tax status of
dividends and distributions.
Investments in securities that are issued at a discount will result
each year in income to a Fund equal to a portion of the excess of the face value
of the securities over their issue price, even though the Fund receives no cash
interest payments from the securities. Such income generally will, however, have
to be distributed to shareholders on a timely basis.
A portion of the income earned by the Municipal Bond Fund may be
taxable rather than tax-exempt. Accordingly, a portion of the dividends paid by
the Municipal Bond Fund may be taxable to Shareholders.
Any gain or loss realized by a Shareholder upon the sale or other
disposition of Shares of a Fund, or upon receipt of a distribution in complete
liquidation of a Fund, generally will be a taxable capital gain or loss which
will be long-term or short-term, generally depending upon the Shareholder's
holding period for the Shares. In some cases, Shareholders will not be permitted
to take sales charges into account in determining the amount of gain or loss
realized on the disposition of their shares.
See "Additional Tax Information" in the Statement of Additional Information.
Shareholders should be aware that redeeming shares of the Municipal
Bond Fund after tax-exempt interest income has been accrued by the Fund but
before that income has been declared as a dividend may be disadvantageous. This
is because the gain, if any, on the redemption will be taxable, even though such
gain may be attributable in part to the accrued tax-exempt interest which, if
distributed to the shareholder as a dividend rather than as redemption proceeds,
might have qualified as an exempt-interest dividend.
The Funds may be required to withhold U.S. federal income tax at the
rate of 31% of all reportable dividends (which does not include exempt-interest
dividends) and capital gain distributions (as well as redemptions for all Funds
except the Government Fund), payable to Shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the Shareholder's U.S. FEDERAL income tax
liability.
Further information relating to tax consequences is contained in the
Statement of Additional Information.
STATE AND LOCAL TAXES
Distributions from all of the Funds may be subject to state and local
taxes. Distributions of a Fund which are derived from interest on obligations of
32
<PAGE>
the U.S. Government and certain of its agencies and instrumentalities may be
exempt from state and local taxes in certain states. In certain states,
distributions of the Municipal Bond Fund which are derived from interest on
obligations of that state or its municipalities or any political subdivisions
thereof may be exempt from state and local taxes. Shareholders should consult
their tax advisers regarding the possible exclusion for state and local income
tax purposes of the portion of dividends paid by a Fund which is attributable to
interest from obligations of the U.S. Government and its agencies, authorities
and instrumentalities, and the particular tax consequences to them of an
investment in a Fund, including the application of state and local tax laws.
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
Under the laws of the State of Maryland, the property, affairs and
business of the Company and the Funds are managed by the Board of Directors. The
Directors elect officers who are charged with the responsibility for the
day-to-day operation of the Funds and the execution of policies formulated by
the Directors.
The Directors receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Directors they attend. However, no
officer or employee of Investors Management Group, Ltd., AMCORE Financial, Inc.,
or any of its subsidiaries, or BISYS Fund Services, Inc., receives any
compensation from the Company for acting as a Director of the Company. The
officers of the Company (see the Statement of Additional Information) receive no
compensation directly from the Company for performing the duties of their
offices. Investors Management Group receives fees from the Funds for acting as
investment adviser, administrator and transfer agent and for providing certain
fund accounting services. BISYS Fund Services receives fees from the Funds for
acting as distributor and sub-transfer agent.
INVESTMENT ADVISER
Investors Management Group, Ltd., ("IMG"), manages the investments and
business affairs of the Company. IMG a wholly owned subsidiary of AMCORE
Financial Inc., is a federally registered Investment Adviser organized in 1982
and located at 2203 Grand Avenue, Des Moines, Iowa. Since then its principal
business has been providing continuous investment management to pension and
profit-sharing plans, insurance companies, public agencies, banks, endowments
and charitable institutions, other mutual funds, individuals and others. As of
November 30, 1997, IMG had approximately $1.6 billion in equity, fixed income
and money market assets under management.
The following individuals serve as portfolio managers for the Funds and
are primarily responsible for the day-to-day management of the Fund's
portfolios:
GOVERNMENT, INCOME, MUNICIPAL BOND, LIMITED TERM, AND BALANCED FUNDS
JEFFREY D. LORENZEN, CFA, MANAGING DIRECTOR. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. Mr. Lorenzen received his Masters of Business
Administration degree from Drake University, Des Moines, Iowa, and his
Bachelor of Business Administration from the University of Iowa, Iowa
City, Iowa.
33
<PAGE>
KATHRYN D. BEYER, CFA, MANAGING DIRECTOR. Ms. Beyer is a fixed income
strategist and is a member of IMG's Investment Policy Committee. Prior
to joining IMG in 1993, her experience includes serving as a securities
analyst and director of mortgage-backed securities for Central Life
Assurance Company from 1988 to 1993. Ms. Beyer received her Masters of
Business Administration degree from Drake University, Des Moines, Iowa,
and her Bachelor of Science Degree in Agricultural Engineering from
Iowa State University, Ames, Iowa.
ELIZABETH S. PIERSON, VICE PRESIDENT AND SENIOR FIXED INCOME MANAGER.
AMCORE Capital Management, Inc. (or a predecessor) since 1984 when she
began her investment career. AMCORE Capital Management, Inc., was
merged with IMG in December 1997. She has a B.S. degree from the
University of Illinois, Champaign-Urbana and is a Chartered Financial
Analyst. She has been responsible for investment management and credit
responsibilities in numerous individually managed advisory portfolios.
She also manages the fixed securities of the Balanced Fund.
EQUITY, AGGRESSIVE GROWTH, AND BALANCED FUNDS
DARRELL C. THOMPSON, SENIOR VICE PRESIDENT AND SENIOR EQUITY MANAGER.
AMCORE Capital Management, Inc. (or a predecessor) since 1973. AMCORE
Capital Management, Inc., was merged with IMG in December 1997. He
began his investment career in 1957. He has a B.S. from Southern
Illinois University. He has been responsible for investment operations
in the Equity Fund since its inception.
JULIE A. O'ROURKE, VICE PRESIDENT AND EQUITY MANAGER. AMCORE Capital
Management, Inc. (or a predecessor) since 1991 where she began her
investment career. AMCORE Capital Management, Inc., was merged with IMG
in December 1997. She has a B.S. from Rockford College, Rockford,
Illinois, and is a Chartered Financial Analyst. Other responsibilities
include equity research and equity account management. She is
chairperson of the Equity Research Committee. She has the
responsibility of managing the equity securities of the Balanced Fund.
Subject to the general supervision of the Company's Board of Directors
and in accordance with a Fund's investment objective and restrictions, IMG
manages the investments of a Fund, makes decisions with respect to and places
orders for all purchases and sales of a Fund's portfolio securities, and
maintains a Fund's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to its
investment advisory agreement with the Company, IMG receives a fee computed
daily and paid monthly, at the annual rate of sixty one-hundredths of one
percent (0.60%) of each of the Income Fund, Limited Term Bond Fund, and the
Municipal Bond Fund's average daily net assets, at the annual rate of forty
one-hundredths of one percent (0.40%) of the Government Fund's average daily net
assets, at the annual rate of seventy-five one-hundredths of one percent (0.75%)
of each of the Equity Fund and the Balanced Fund's average daily net assets, and
at the annual rate of ninety-five one-hundredths of one percent (0.95%) of the
Aggressive Growth Fund's average daily net assets. The investment advisory fees
and administrative fees paid by the Income Fund, Municipal Bond Fund, Equity
Fund, Balanced Fund, Aggressive Growth Fund and Limited Term Bond Fund, absent
fee waivers, are higher than those paid by most other investment companies. IMG
may periodically waive all or a portion of its advisory fee or otherwise absorb
other expenses to increase the net income of a Fund available for distribution
as dividends. IMG may not seek reimbursement of such waived fees at a later
34
<PAGE>
date. The waiver or absorption of such fee or expenses will cause the yield of a
Fund to be higher than it would otherwise be in the absence of such a waiver.
ADMINISTRATOR
IMG is also the administrator for the Funds (the "Administrator"). The
Administrator generally assists in all aspects of the Funds' administration and
operation. For expenses assumed and services provided as administrator pursuant
to its management and administration agreement with the Funds, the Administrator
receives a fee computed daily and paid periodically, calculated at an annual
rate of twenty-one one-hundreths of one percent (0.21%) of the average daily net
assets of the Government Fund and twenty-six one-hundredths of one percent
(0.26%) of the average daily net assets for all other Vintage Funds. The
Administrator may periodically waive all or a portion of its administrative fee
to increase the net income of a Fund available for distribution as dividends.
The Administrator may not seek reimbursement of such waived fees at a later
date. The waiver of such fee will cause the yield of a Fund to be higher than it
would otherwise be in the absence of such a waiver.
DISTRIBUTOR
BISYS Fund Services, Inc., serves as distributor and principal
underwriter (the "Distributor") for the Company pursuant to a Distribution
Agreement and a Distribution and Shareholder Services Plan. The Distributor acts
as agent for the Funds in the distribution of their Shares and, in such
capacity, solicits orders for the sale of Shares, advertises, and pays the costs
of advertising, office space and its personnel involved in such activities.
EXPENSES AND PORTFOLIO TRANSACTIONS
The Advisor and the Administrator each bear all expenses in connection
with the performance of their services as investment adviser and general manager
and administrator, respectively, other than the cost of securities (including
brokerage commissions, if any) purchased for the Funds.
The policy of each of the Funds, regarding purchases and sales of
securities for its portfolio, is that primary consideration be given to
obtaining the most favorable prices and efficient execution of transactions. In
seeking to implement the Fund's policies, IMG effects transactions with those
brokers and dealers whom IMG believes provide the most favorable prices and are
capable of providing efficient executions. If IMG believes such price and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or IMG. Such services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investments; wire
services; and appraisals or evaluations of portfolio securities. Such
information may be useful to IMG in serving both the Funds and other clients
and, conversely, supplemental information obtained by the placement of business
of other clients may be useful to IMG in carrying out its obligations to the
Funds.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commission charged by other broker-dealers in
recognition of their research or execution services. In order to cause the Funds
to pay such higher commissions, IMG must determine in good faith that such
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by such executing broker-dealers, viewed in terms of
a particular transaction or IMG's overall responsibilities to the Funds. In
35
<PAGE>
reaching this determination, IMG will not attempt to place a specific dollar
value on the brokerage and/or research services provided, or to determine what
portion of the compensation should be related to those services.
DISTRIBUTION PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a
Distribution and Shareholder Service Plan (the "Plan"), under which each Fund is
authorized to pay or reimburse BISYS Fund Services, Inc., as Distributor, a
periodic amount calculated at an annual rate not to exceed twenty-five one
hundredths of one percent (0.25%) of the average daily net assets of the Fund.
Such amount may be used to pay banks for administrative and shareholder services
and to pay broker-dealers and other institutions for similar services, including
distribution services (each such bank, broker-dealer and other institution is
hereafter referred to as a "Participating Organization"), pursuant to an
agreement between BISYS Fund Services, Inc., and the Participating Organization.
Under the Plan, a Participating Organization may include BISYS Fund Services,
Inc., its subsidiaries and its affiliates.
As authorized by the Plan, the Distributor has entered into a Rule
12b-1 Agreement with AMCORE Bank pursuant to which AMCORE Bank has agreed to
provide certain administrative and shareholder support services in connection
with Shares of a Fund purchased and held by AMCORE Bank for the accounts of its
Customers and Shares of a Fund purchased and held by Customers of AMCORE Bank
directly, including, but not limited to, processing automatic investments of
AMCORE Bank's Customer account cash balances in Shares of a Fund and
establishing and maintaining the systems, accounts and records necessary to
accomplish this service, establishing and maintaining Customer accounts and
records, processing purchase and redemption transactions for Customers,
answering routine Customer questions concerning the Funds and providing such
office space, equipment, telephone facilities and personnel as is necessary and
appropriate to accomplish such matters. In consideration of such services,
AMCORE Bank may receive a monthly fee, computed at the annual rate of
twenty-five one-hundredths of one percent (.25%) of the average aggregate net
asset value of the Shares of the Fund held during the period in Customer
accounts for which AMCORE Bank has provided services under this Agreement. The
Distributor will be compensated by a Fund in an amount equal to any payments it
makes to AMCORE Bank under the Rule 12b-1 Agreement. Currently, it is intended
that no such amounts will be paid under the Plan or the Rule 12b-1 Agreement by
any of the Funds.
ADMINISTRATIVE SERVICES PLAN
The Company has adopted an Administrative Services Plan (the "Services
Plan") pursuant to which each Fund is authorized to pay compensation to banks
and other financial institutions (each a "Service Organization"), including
AMCORE Financial, Inc. and its correspondent and affiliated banks, which agree
to provide certain ministerial, recordkeeping and/or administrative support
services for their customers or account holders (collectively, "customers") who
are the beneficial or record owner of Shares of that Fund. In consideration for
such services, a Service Organization receives a fee from a Fund, computed daily
and paid monthly, at an annual rate of up to 0.25% of the average daily net
asset value of Shares of that Fund owned beneficially or of record by such
Service Organization's customers for whom the Service Organization provides such
services.
The servicing agreements adopted under the Services Plan (the
"Servicing Agreements") require the Service Organizations receiving such
compensation to perform certain ministerial, recordkeeping and/or administrative
support services with respect to the beneficial or record owners of Shares of
the Funds, such as processing dividend and distribution payments from the Fund
on behalf of customers, providing periodic statements to customers showing their
positions in the Shares of the Fund, providing sub-accounting with respect to
Shares beneficially owned by such customers and providing customers with a
36
<PAGE>
service that invests the assets of their accounts in Shares of the Fund pursuant
to specific or pre-authorized instructions.
As authorized by the Services Plan, the Company has entered into
Servicing Agreements with Service Organizations pursuant to which the Service
Organization 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, (i)processing dividend and distribution payments from a Fund on behalf of
customers, (ii)providing periodic statements to its customers showing their
positions in the Shares; (iii)arranging for bank wires; (iv)responding to
routine customer inquiries relating to services performed by the affiliate;
(v)providing sub-accounting with respect to the Shares beneficially owned by the
affiliate's customers or the information necessary for sub-accounting; (vi)if
required by law, forwarding shareholder communications from a Fund (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices)to its customers; (vii)aggregating and
processing purchase, exchange, and redemption requests from customers and
placing net purchase, exchange, and redemption orders for customers; and
(viii)providing customers with a service that invests the assets of their
account in the Shares pursuant to specific or pre-authorized instructions. In
consideration of such services, the Company, on behalf of each Fund, has agreed
to pay the affiliate a monthly fee, computed at an annual rate of twenty-five
one-hundredths of one percent (.25%) of the average aggregate net asset value of
Shares of that Fund held during the period by customers for whom the affiliate
has provided services under the Servicing Agreement. At present, the Company
only pays servicing fees on the S Shares of the Government Fund and the Equity
Fund. No servicing fees are paid on the other Vintage Fundsor on the T Shares of
the Government Fund and the Equity Fund, although it may begin to do so at any
time without further notice to shareholders.
CUSTODIAN
Bankers Trust Company, One Bankers Trust Plaza, New York, New York
10006 (the "Custodian") serves as custodian for the Funds' assets. Pursuant to
the Custodian Agreement with the Company, the Custodian receives compensation
from each Fund for such services in an amount equal to a designated annual fee
plus fixed fees charged for certain portfolio transactions and out-of-pocket
expenses.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
IMG, 2203 Grand Avenue, Des Moines, Iowa 50312-5338, serves as the
Funds' transfer agent pursuant to a Transfer Agency Agreement for the Funds and
receives a fee for such services. BISYS Fund Services, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219, serves as sub-transfer agent to the Funds through an
agreement with the Funds and IMG. IMG also provides certain accounting services
for the Funds pursuant to a Fund Accounting Agreement and receives a fee for
such services. The fees received and the services provided as fund accountant,
transfer agent, dividend disbursing agent and shareholder servicing agent are in
addition to those received and paid under the Advisory Agreement and the
Administrative Services Agreement. See "MANAGEMENT OF THE COMPANY - Transfer
Agency and Fund Accounting Services" in the Statement of Additional Information
for further information.
37
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF THE COMPANY AND ITS SHARES
The Company is a Maryland corporation organized on November 16, 1994.
The Company consists of several Funds organized as separate series of shares.
Each share represents an equal proportionate interest in a 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 (see "Miscellaneous" below).
The Government Fund and Equity Fund each offer shares in two separate
classes, T Shares and S Shares. The other Vintage Funds offered by this
Prospectus are only currently offered in one class, which class bears fees
substantially the same as the T Shares offered by the Government Fund and Equity
Fund. Shares are offered to individual and institutional investors acting on
their own behalf or on behalf of their customers and bear their pro rata portion
of all operating expenses paid by each Fund. Each class of shares offers
different privileges and bears different expenses which may affect performance.
T Shares of the Equity Fund and Government Fund will be offered to fiduciary
accounts through trust organizations or others providing shareholder services,
such as establishing and maintaining accounts and records for their customers
who invest in T Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customers' inquiries concerning their
investments. Participating Organizations selling or servicing T Shares may
receive different compensation with respect to one class over another. All other
shareholders of the Equity Fund and Government Fund will be offered S Shares.
Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for any fractional shares held, and will vote in
the aggregate and not by series or class except as otherwise expressly required
by law. For example, shareholders of each fund will vote in the aggregate with
other shareholders of the Company with respect to the election of Directors and
ratification of the selection of independent auditors. However, shareholders of
a particular Fund will vote as a Fund, and not in the aggregate with other
shareholders of the Company, for purposes of approval of that Fund's investment
advisory agreement, Plan and Services Plan, except that shareholders of the
Government Fund will vote by class on matters relating to that Fund's Plan and
Services Plan.
Under the laws of the State of Maryland, the Company may operate
without an annual meeting of shareholders under specified circumstances if an
annual meeting is not required by the 1940 Act. The Company has adopted the
appropriate provisions in its Bylaws and may, in its discretion, not hold annual
meetings of shareholders for the election of Directors unless otherwise required
by the 1940 Act. The Company has adopted provisions in its Bylaws for the
removal of Directors by the shareholders. Shareholders may receive assistance in
communicating with other shareholders as provided in Section 16(c) of the 1940
Act.
There normally will be no meetings of shareholders for the purpose of
electing Directors unless and until such time as less than a majority of the
Directors holding office have been elected by shareholders at which time the
Directors then in office will call a shareholders' meeting for the election of
Directors. Shareholders of the Company may remove a Director by the affirmative
vote of a majority of the Company's outstanding voting shares. In addition, the
Directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Directors or for any other
purpose when requested in writing to do so by the shareholders of record of not
less than 10 percent of the Company's outstanding voting shares.
All consideration received by the Funds for shares of one of the Funds and all
38
<PAGE>
assets in which such consideration is invested, belong to that Fund (subject
only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one Fund
are treated separately from those of the other Funds.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Funds, will 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 such matter. Rule 18f-2 further provides that a Fund shall 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 the interest of such
Fund. However, the Rule exempts the selection of independent auditors and the
election of Directors from the separate voting requirements of the Rule.
PERFORMANCE INFORMATION
From time to time the Funds may advertise their average annual total
return, aggregate total return, yield and effective yield in advertisements,
sales literature and shareholder reports. SUCH PERFORMANCE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Average
annual total return will be calculated for the period since the establishment of
the Fund and will reflect the imposition of the maximum sales charge. Average
annual total return is measured by comparing the value of an investment in the
Fund at the beginning of the relevant period to the redemption value of the
investment at the end of the period (assuming immediate reinvestment of any
dividends or capital gains distributions) and annualizing the difference.
Aggregate total return is calculated similarly to average annual total return
except that the return figure is aggregated over the relevant period instead of
annualized. Yield for each of the Variable NAV Funds will be computed by
dividing the Fund's net investment income per share earned during a recent
one-month period by the Fund's per share maximum offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
day of the period and annualizing the result.
The yield of the Government Fund refers to the income generated by an
investment therein over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over an annual period and is shown as a percentage of the investment. The
effective yield is calculated similarly but, when annualized, the income earned
by an investment in the Government Fund is assumed to be reinvested weekly. The
effective yield is slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
Distribution rates will be computed by dividing the distribution per
share made by the Fund over a twelve-month period by the maximum offering price
per share. The distribution rate includes both income and capital gain dividends
and does not reflect unrealized gains or losses. 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.
The Municipal Bond Fund may also present its tax equivalent yield and
tax equivalent effective yield which reflect the amount of income subject to
federal income taxation that a taxpayer would have to earn in order to obtain
the same after-tax income as that derived from the yield and effective yield,
respectively, of the Municipal Bond Fund. The tax equivalent yield and tax
equivalent effective yield will be significantly higher than the yield and
effective yield of the Municipal Bond Fund.
39
<PAGE>
Investors may also judge the performance of the Fund by comparing its
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices and to data prepared by various services which may be
published by such services or by other services or publications. In addition to
performance information, general information about the Fund that appears in such
publications may be included in advertisements, sales literature and in reports
to Shareholders.
Yield and total return are functions of the type and quality of
instruments held in the portfolio, operating expenses, and market conditions.
Consequently, current yields and total return will fluctuate and are not
necessarily representative of future results. Any fees charged by IMG or any of
its affiliates with respect to customer accounts for investing in shares of the
Funds will not be included in performance calculations; such fees, if charged,
will reduce the actual performance from that quoted.
Additional information regarding the investment performance of the
Funds is contained in the annual report of the Funds which may be obtained
without charge by writing or calling the Funds.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
reports audited by independent auditors.
As used in this Prospectus and in the Statement of Additional
Information, "assets belonging to a Fund" means the consideration received by
the Fund upon the issuance or sale of shares in that Fund, together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange, or liquidation of such
investments, and any funds or amounts derived from any reinvestment of such
proceeds, and any general assets of the Company not readily identified as
belonging to a particular Fund that are allocated to the Fund by the Company's
Board of Directors. The Board of Directors may allocate such general assets in
any manner it deems fair and equitable. Determinations by the Board of Directors
of the Company as to the timing of the allocation of general liabilities and
expenses and as to the timing and allocable portion of any general assets with
respect to the Fund are conclusive.
As used in this Prospectus and in the 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 a Fund present at a meeting at
which the holders of more than 50% of the votes attributable to Shareholders of
record of the Fund are represented in person or by proxy, or (b)the holders of
more than 50% of the outstanding votes of Shareholders of a Fund.
Inquiries regarding the Funds may be directed in writing to the Funds
at 2203 Grand Avenue, Des Moines, Iowa 50312-5338, or by calling toll free (800)
798-1819.
40
<PAGE>
LIQUID ASSETS FUND 2203 GRAND AVENUE
DES MOINES, IA 50312-5338
STATEMENT OF ADDITIONAL INFORMATION JANUARY 16, 1998
This statement is not a Prospectus but should be read in conjunction with the
Fund's current Prospectuses (dated January 16, 1998). Please retain this
Statement for future reference. To obtain the Annual Report or any Prospectus
please call the Fund at the number indicated below.
For current yield, purchase and redemption information call.........800-798-1819
....................................................................515-244-5426
Table of Contents:
General Information and History........................................2
Investment Objectives, Policies and Restrictions.......................2
Purchases of Fund Shares...............................................4
The Distributor and Distribution Plan..................................5
Administrative Services ..............................................6
Valuing the Fund's Shares..............................................7
Calculation of Yield...................................................8
Dividends..............................................................8
Taxation ..............................................................9
Management.............................................................9
Compensation Table....................................................10
The Investment Advisory Agreement.....................................11
Student Loan Trusts...................................................11
Guaranteed Loan Trusts................................................13
Other Information.....................................................14
Federal Holidays..................................................14
Portfolio Transactions............................................14
Reports to Shareholders...........................................14
Shareholder Meetings..............................................14
Principal Shareholders............................................15
Custodian, Transfer Agent and Dividend Paying Agent...............15
Independent Auditors..............................................15
<PAGE>
GENERAL INFORMATION
IMG Mutual Funds, Inc. (the "Company") is an open-end management investment
company which currently offers it shares in series representing eleven
diversified investment portfolios: IMG Core Stock Fund, IMG Bond Fund, Vintage
Equity Fund, Vintage Aggressive Growth Fund, Vintage Balanced Fund, Vintage
Municipal Bond Fund, Vintage Income Fund, Vintage Limited Term Bond Fund, Liquid
Assets Fund, Government Assets Fund and Municipal Assets Fund (Individually a
"Fund" and collectively the "Funds"). The Company was organized on November 16,
1994 under the laws of Maryland. Shares of the Funds are also issued in classes
with differing distribution and shareholder servicing arrangements. Subject to
the class level expenses, each Fund's share represents an equal proportionate
interest in a 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, subject to the class level expenses, as are declared at the
discretion of the Directors. The Liquid Assets Fund was created on October 30,
1997, to acquire the assets and continue the business of the corresponding
substantially identical investment portfolio of the Liquid Assets Funds, Inc., a
separately registered open-end diversified management investment company
organized as an Iowa corporation. References herein to the "immediate
predecessor" of the Fund refer to the respective corresponding company.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Liquid Assets Fund ("Liquid Assets" or the "Fund" hereafter) seeks to provide
maximum current income consistent with safety of principal and maintenance of
liquidity. In order to accomplish this goal, assets of the Fund will be invested
in the following money market instruments maturing in 397 days or less from time
of investment, (with certain exceptions):
(1) Securities issued or guaranteed by the United States Government. These
include, for example, Treasury Bills, Bonds and Notes which are direct
obligations of the United States Government.
(2) Obligations issued or guaranteed by agencies or instrumentalities of
the United States Government. Such agencies and instrumentalities
include for example, Federal Intermediate Credit Banks, Federal Home
Loan Banks, Federal National Mortgage Association and Farmers Home
Administration. Such securities will include, for example, those
supported by the full faith and credit of the United States Treasury or
the right of the agency or instrumentality to borrow from the Treasury
as well as those supported only by the credit of the issuing agency or
instrumentality.
(3) Repurchase agreements involving securities in the immediately foregoing
categories. A repurchase agreement involves the sale of such securities
to the Fund with the concurrent agreement of the seller to repurchase
them at a specified time and price, to yield an agreed upon rate of
interest. The Fund will enter into repurchase agreements with brokers
and banks. Thus, the Fund must initially rely upon the credit of a
particular broker or bank for completion of the repurchase agreement.
Such repurchase agreements are intended to be fully collateralized, in
an amount equal to at least the principal amount of the transaction
plus accrued interest earned thereon, by the underlying Government or
agency securities valued at their fair market value each day. Although
the Fund will normally have legal title to and constructive possession
of the collateral, it cannot eliminate the risk of a default by a
broker or bank which could result in a loss to the Fund on the sale of
the underlying securities or delays in obtaining the collateral because
of bankruptcy or insolvency proceedings.
(4) Redeemable interest-bearing Trust Certificates ("Student Loan
Certificates") issued by the Iowa Student Loan Trust and/or other
Student Loan Trusts established by the Fund, ("Student Loan Trusts"),
created for the sole purpose of purchasing from banks (which qualify as
"eligible lenders") federally insured student loans originated by
banks. The Student Loan Certificates will have original maturities of
not more than 397 days but will be redeemable by the Fund at their face
amount upon not more than five days' written notice to the issuing
Student Loan Trust. Funds will be made available to the issuing Student
Loan Trust to meet early redemptions of Student Loan Certificates under
an agreement between the Student Loan Trusts and various financial
institutions ("Participating Banks") requiring the Participating Banks
to repurchase, on not less than five business days' written notice, all
federally insured student loans sold to the Student Loan Trust or, if
permissible under applicable securities laws, to purchase an agreed to
amount of Student Loan Certificates. There will be no public market for
the Student Loan Certificates. See "Student Loan Trusts".
2
<PAGE>
(5) Redeemable interest-bearing ownership certificates ("Certificates")
issued by one or more guaranteed loan trusts ("FmHA Trusts"), each
created for the purpose of acquiring participation interests in the
guaranteed portion of Farmer's Home Administration ("FmHA") guaranteed
loans. The FmHA Certificates will have original maturities of not more
than 397 days but will be redeemable by the Fund at their face amount
upon not more than five days' written notice to the issuing FmHA Trust.
Funds will be made available to the issuing FmHA Trust to meet early
redemption of FmHA Certificates under an unconditional purchase
commitment between the FmHA Trusts and various financial institutions
("Participating Banks") requiring the Participating Banks to
repurchase, on not less than five business days' written notice an
agreed to amount of the guaranteed portion of FmHA guaranteed loans
held by the FmHA Trust. See "Guaranteed Loan Trusts".
(6) Commercial paper which at the time of investment (a) is rated (or the
issuer of which has been rated) highest quality by two nationally
recognized statistical rating organizations ("NRSRO") if rated by two
or more NRSROs; (b) is rated (or the issuer of which has been rated)
highest quality if rated by only one NRSRO; of (c) is determined to be
of equivalent quality by the Fund's Board of Directors if unrated.
(7) U.S. dollar denominated obligations (certificates of deposit and
bankers' acceptances) issued by domestic offices of U.S. banks which,
at the date of investment, have capital, surplus, and undivided profits
(as of the date of their most recently published financial statements)
in excess of $10,000,000; and obligations of other banks or savings and
loans if such obligations are insured by the Federal Deposit Insurance
Corporation, provided that not more than 10 percent of the total assets
of the Fund will be invested in such insured obligations.
(8) Short-term (maturing in one year or less) corporate obligations which
at the time of investment (a) are rated in the top two categories by
two NRSROs, if rated by two or more NRSROs; (b) are rated in the top
two categories if rated by only one NRSRO; or (c) are determined to be
of equivalent quality by the Fund's Board of Directors if unrated.
Assets of the Fund will consist of securities with maturities of 397 days or
less at date of purchase or, if maturing beyond 397 days, securities which are
backed by Liquidity and Servicing Agreements or Guaranteed Funding Agreements
and which have variable interest rates adjustable at least semiannually. In
determining whether particular variable rate investments backed by Liquidity and
Servicing Agreements or Guaranteed Funding Agreements may be made, the period
remaining until maturity will be deemed to be the longer of the demand notice
period required before the Fund is entitled to receive payment of the principal
amount or the period remaining until the next interest adjustment. For purposes
of Rule 2a-7 and the diversification requirements thereunder, the unconditional
commitments are limited in amounts necessary to keep any one financial
institution from being obligated to purchase more than five percent of the total
assets held by the Fund (determined as of the date of purchase of the Student
Loan and/or FmHA Certificates). The dollar-weighted average maturity of Fund
investments will be 90 days or less, determined in the same manner. While the
underlying security in a repurchase agreement may have a maturity of more than
one year, the repurchase agreement itself will terminate in less than 397 days,
and typically within a few days. The underlying securities will be issued or
guaranteed by the United States Government, its agencies or instrumentalities.
In attempting to provide its shareholders with the highest income consistent
with safety of principal, the Fund will not necessarily purchase investments
bearing the highest interest rates available as such investments may also
involve a higher degree of risk.
As a fundamental policy the Fund does not concentrate its investments in any one
industry and will not issue senior securities.
As a general policy, it is the Fund's intention to hold investments until they
mature. However, in an effort to increase portfolio yields the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of portfolio
investments prior to maturity and at times when such sale would be undesirable.
While investments by the Fund will be confined to high-quality financial
instruments, the complete elimination of risk is not possible. Under certain
circumstances (see "Valuing the Fund's Shares" and "Dividends"), the net asset
value of Fund shares could decrease. It is also possible Participating Banks or
issuers will default on the provisions of their agreements with the Fund or that
banks originating student loans will default on their repurchase agreements with
the Student Loan Trusts or the FmHA Trusts, which could cause the net asset
value per share to decrease. In light of these various contingencies, there can
be no assurances the Fund will achieve its investment objectives.
3
<PAGE>
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the board of directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described under "Investment Objectives, Policies and Restrictions";
(2) invest more than 80 percent of its total assets in loans and/or loan
participations purchased from Participating Banks, Student Loan Certificates
and/or FmHA Certificates; (3) invest more than five percent of its total assets
in loan participations purchased from, or loans backed by letters of credit
issued by, any one Participating Bank (determined as of the date of purchase);
(4) invest with a view to exercising control or influencing management; (5)
invest more than ten percent of the value of its total assets in securities of
other investment companies, except in connection with a merger, acquisition,
consolidation or reorganization, subject to Section 12(d)(1) of the Investment
Company Act of 1940; (6) purchase or sell real estate, commodities or commodity
contracts, interests in oil, gas or other mineral exploration or development
programs; (7) purchase any securities on margin, except for the clearing of
occasional purchases or sales of portfolio securities; (8) make short sales of
securities or maintain a short position or write purchase or sell puts
(excluding repayment and guarantee arrangements on loan participations purchased
from Participating Banks), calls, straddles, spreads or combinations thereof;
(9) make loans to other persons, provided the Fund may invest up to 80 percent
of its total assets in loans and/or loan participations purchased from
Participating Banks, Student Loan Certificates and/or FmHA Certificates, as
described in (2) above, and may make the investments, and enter into repurchase
agreements, as described under "Investment Objectives, Policies and
Restrictions"; (10) borrow money, except to meet extraordinary or emergency
needs for funds, and then only from banks in amounts not exceeding ten percent
of its total assets, nor purchase securities at any time borrowings exceed five
percent of the Fund's total assets; (11) mortgage, pledge, hypothecate, or in
any manner transfer, as security for indebtedness, any securities owned by the
Fund except as may be necessary in connection with borrowings outlined in (10)
above and then securities mortgaged, hypothecated or pledge may not exceed five
percent of the Funds' total assets taken at market value; (12) invest in
securities with legal or contractual restrictions on resale (except for
repurchase agreements, loans, loan participations purchased from Participating
Banks and Student Loan and FmHA Certificates) or for which no ready market
exists; (13) purchase loan participations other than from banks which have
entered into a Liquidity and Servicing Agreement and which have a record,
together with predecessors, of at least five years of continuous operation; (14)
act as an underwriter of securities; (15) enter into repurchase agreements if,
as a result thereof, more than five percent of the Fund's total assets (taken at
market value at the time of such investment) would be subject to repurchase
agreements maturing in more than seven calendar days; and (16) purchase loan
participations from any Participating Bank if five percent or more of the
securities of such Bank are owned by the Advisor or by directors and officers of
the Fund or the Advisor, or if any director or officer of the Fund or the
Advisor owns more than 1/2 percent of the voting securities of such
Participating Bank.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (a) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (b)
more than 50 percent of the outstanding Common Stock, whichever is less.
The Fund intends to invest at least 25 percent of its total assets in Student
Loan Certificates and/or FmHA Certificates, except when such investments are
either not available in sufficient quantity or do not carry yields competitive
with alternative investments.
PURCHASES OF FUND SHARES
See "Opening An Account - Purchasing Shares" in the Prospectus for basic
information on how to purchase shares of the Fund.
An order to purchase shares of the Fund is accepted when the Fund's Custodian
Bank receives payment in Federal Funds (funds available for immediate
investment). This will occur upon receipt of the purchase price by Federal Funds
wire or electronic funds transfer via the ACH system from the purchaser's bank,
or when a check or other negotiable bank draft received by the Fund has been
converted into Federal Funds (normally one to two business days after its
receipt by the Fund).
An investor will become a shareholder when the net asset value applicable to his
order is determined. Net asset value of the Fund's shares is determined twice
each day at 11:00 a.m. Central Time and at the close of the New York Stock
Exchange (normally 3:00 p.m. Central Time). If a purchase order is received in
good order by the Fund by 11:00 a.m. Central Time and Federal Funds are
available to the Fund before 3:00 p.m. Central Time, an order will be effective
the same day, the investor will become a shareholder of record that day, and
shares will commence earning dividends the day the order becomes effective. If a
purchase order is received in good order by the Fund after 11:00 a.m. Central
Time but before 3:00 p.m. Central Time and Federal Funds are available before
3:00 p.m. Central Time, the shares will not commence earning dividends until the
day after the order is received.
4
<PAGE>
Investments in Shares in the Fund may be made through transactions directly with
the Fund's Distributor, BISYS Fund Services, Inc., and through qualified banks,
savings and loan associations, broker/dealers, investment advisory firms, and
other organizations ("Participating Organizations") approved by the Board of
Directors of the Fund, based upon the Participating Organization's capacity to
provide processing of Fund transactions for its customers in conjunction with
other customer account relationships. Participating Organizations will be
required to enter into agreements to provide certain services to persons
("Participating Investors") who invest in the Fund through Participating
Organizations. These will include: distributing copies of the Prospectus and
sales literature to prospective investors who request it; furnishing
Participating Investors with periodic account statements containing information
regarding Fund share purchases and redemptions, income earned and Fund
investment balances; and forwarding to Participating Investors periodic reports
and proxy material mailed by the Fund to its shareholders. Participating
Organizations may satisfy the Fund's required minimum, initial and subsequent
purchase amounts by aggregating investments on behalf of customers whose
individual investments are less than the Fund's required minimums. Participating
Investors may, if they so elect, authorize their Participating Organizations to
purchase and redeem Fund shares by means of special investment arrangements
(including automatic "sweep" investment programs) offered by the Participating
Organization.
T Shares may be purchased only by financial institutions acting on their own
behalf or on behalf of certain customers' accounts. I Shares may be purchased by
individual and institutional investors directly from the Fund's Distributor.
The Fund reserves the right to reject any purchase order and to modify
investment minimums from time to time. All purchase orders are subject to
acceptance and are not binding until so accepted. Once a purchase order has been
accepted by the Fund, it may not be canceled or revoked by the investor although
the purchased shares may be redeemed.
THE DISTRIBUTOR AND DISTRIBUTION PLAN
The Company has entered into a Distribution Agreement (the "Distribution
Agreement") with BISYS Fund Services, Inc., ("BISYS"). Under the Distribution
Agreement, BISYS serves as the Distributor of the Fund as well as some of the
other Funds. The Distribution Agreement continues in effect only if approved
annually by vote of the Board of Directors, including a majority of the
non-interested directors. The Distribution Agreement terminates automatically in
the event of its assignment and may be terminated without penalty on not less
than 60 days notice by the Board of Directors, by a majority of the outstanding
voting securities of the Fund, or by BISYS. BISYS receives no compensation from
the Fund for such services, but is paid a fee equal to 0.01 percent of the
average daily net asset value of all Funds, distributed by BISYS, not to exceed
$100,000 annually by the Advisor.
The Fund adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under
the Investment Company Act of 1940 on November 3, 1997 in connection with its
organization which is substantially identical to the Plan adopted by the
immediate predecessor . The Plan continues in force only if approved annually by
the Board of Directors and by a majority of directors who are not parties to the
Plan or interested persons of any party to the Plan, cast in person at a meeting
called for the purpose of voting on such approval, or by a majority of the
outstanding securities of the Fund. In adopting the Plan, the directors
considered various factors and determined that the Plan would benefit the Fund
and its shareholders. The Distribution Plan is designed to promote sales,
thereby increasing the net assets of the Fund. Such an increase may reduce the
expense ratio to the extent the Fund's fixed costs are spread over a larger net
asset base. Also, an increase in net assets may lessen the adverse effects that
could result were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the Fund
will increase or that the other benefits referred to above will be realized. The
Plan is only applicable to S Shares and S2 shares of the Fund.
The Distribution Plan provides that the Fund may pay various Participating
Organizations a daily distribution fee payable quarterly and equal to an annual
basis of a maximum fee payable of 0.50 percent of the average net asset value of
the S Shares and 0.25 percent of the average net asset value of the S2 Shares.
The purpose of such payments is to compensate the Participating Organizations
for their distribution services to the Fund. Participating Organizations make
available to their customers transaction services (including automatic "sweep"
investment programs) and may provide monthly shareholder account reporting and
related ministerial duties with respect to customer accounts. Except as to
securities dealers, none of the compensation paid to such Participating
Organizations constitute expenses relating to advertising, distribution of
prospectuses to other than current shareholders, underwriter's compensation or
compensation to dealers, or compensation of sales personnel, and payments made
are related solely to the Participating Organization's services in providing the
customer transaction services. Participating Organizations are not authorized to
actually make sales of shares of the Fund. All orders to purchase shares are
subject to acceptance by the Fund's Distributor on behalf of the Fund. While the
Fund itself does not presently levy sales, redemption or account service
5
<PAGE>
charges, Participating Organizations may elect to do so and the Fund may elect
to do so in the future. Investors should inquire regarding the nature and costs
of services provided by Participating Organizations and determine if such
services are desired because the costs thereof will reduce the Fund's yield to
the investor below that obtainable by investing in the Fund directly. While the
Fund may purchase portfolio securities from Participating Organizations, it will
not give any preference to them in selecting their investments.
No director or officer of the Fund or the Advisor has any direct or indirect
financial interest in the Plan. The Fund's Plan results in an efficient system
of customer investment in the Fund thereby potentially increasing the Fund's
ability to attract shareholders. The services rendered by the Participating
Organizations with respect to customer transactions (including automatic sweep
investment programs) are more efficient and direct than that which the Fund
might otherwise provide. The Fund believes that the Plan and agreements with the
Participating Organizations reduce expenses for shareholder transactions thereby
reducing costs of the Fund and increasing yields
The Plan and any agreements related thereto will automatically terminate if
assigned and may be terminated by either party on 60 days' notice. The Plan may
be terminated by a majority of non-interested directors who have no direct or
indirect financial interest in the Plan or it may be terminated by a majority of
the outstanding voting shares of the Fund. Any changes in the Plan that would
materially increase the distribution costs require shareholder approval;
otherwise, the directors, including a majority of the non-interested directors,
may amend the Plan. The directors review quarterly a written report of
distribution costs incurred pursuant to the Plan.
The Glass-Steagall Act and other applicable laws prohibit banks from engaging in
the business of underwriting, selling, or distributing securities. Since the
only function of banks who may be engaged as Participating Organizations is to
perform administrative and shareholder servicing functions, the Fund believes
that such laws should not preclude banks from acting as Participating
Organizations; however, future changes in either Federal or State statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as judicial or administrative decisions or
interpretations of statutes or regulations, could prevent a bank from continuing
to perform all or part of its shareholder servicing activities. If a bank were
prohibited from so acting, its shareholder customers would be permitted to
remain shareholders in the Fund, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur, and shareholders serviced by such bank might
no longer be able to avail themselves of any investment or other services then
being provided by the bank. It is not expected that shareholders would incur any
adverse financial consequences as a result of any of these occurrences. It is
intended that none of the services provided by Participating Organizations other
than registered broker/dealers will involve the solicitation or sale of shares
of the Fund.
ADMINISTRATIVE SERVICES
The Directors of the Fund have adopted a Administrative Services Plan ("Services
Plan") with respect to T Shares, S Shares and S2 Shares. Pursuant to the
Services Plan, the Fund may enter into Servicing Agreements with Participating
Organizations providing that those Participating Organizations will render
certain shareholder administrative support services to their customers who are
record or beneficial owners of shares. Services provided pursuant to the
Services Plan may include some or all of the following: (i) processing dividend
and distribution payments from the Fund on behalf of customers; (ii) providing
information periodically to customers showing their position in Shares; (iii)
arranging for bank wires; (iv) responding to routine customer inquiries relating
to services performed by the Participating Organizations; (v) providing
sub-accounting with respect to shares owned of record or beneficially by
customers or the information needed for sub-accounting; (vi) forwarding
shareholder communications (such as proxies, shareholder reports, annual and
semi-annual financial reports, and dividend, distribution and tax notices) to
customers; (vii) forwarding to customers proxy statements and proxies containing
any proposals regarding the Services Plan; (viii) aggregating and processing
purchase, redemption, and exchange requests from customers and placing net
purchase and redemption orders with the Fund's Distributor; (ix) providing
customers with a service that invests the assets of their accounts in Shares
pursuant to specific or pre-authorized instructions; (x) maintaining records
relating to each customer's share transactions; or (xi) other similar services
if requested by the Fund and permitted by law. In addition, Participating
Organizations may also provide dedicated facilities and equipment in various
local locations to serve the needs of investors, including walk-in facilities,
800 numbers, and communication systems to handle shareholder inquiries, and in
connection with such facilities, provide on-site management personnel and
monitoring services for their customers who have invested in Shares, including
the operation of telephone lines for daily quotations of return information.
6
<PAGE>
The Services Plan is an administrative support services plan. Pursuant to the
Services Plan, the Fund's arrangement with Participating Organizations must be
approved annually by a majority of the Fund's Directors, including a majority of
the Directors who are not "interested persons" of the Fund as defined in the
1940 Act and have no direct or indirect financial interest in such arrangements.
Under the terms of the Services Plan, the Fund may pay a fee to Participating
Organizations equal to maximum annual rate of 0.25 percent of the average net
assets of the T Shares, S Shares and S2 Shares. At the present time fees paid
under the Shareholder Services Plan with respect to T Shares will not exceed
0.15 percent of the annual average net asset value of such shares.
The Company has also entered a Management and Administration Agreement with
Investors Management Group, Ltd. ("IMG") pursuant to which IMG provides the Fund
supervisory administrative services relating to all operations of the Fund,
except as may be provided under the Investment Advisory Agreement, the Custodian
Agreement, the Transfer Agency Agreement and the Fund Accounting Agreement. Some
of these services include the provision of office facilities, preparation of
reports and tax returns, assistance in preparing Annual and Semi-Reports to
shareholders and providing virtually all other day to day operational tasks for
the Fund. For these services the Fund will pay IMG a monthly fee equal to 0.06
percent of the average daily net asset value of the Fund. At present IMG is
waiving 0.15 percent of this fee until further notice.
IMG also provides fund accounting services to the Fund under a Fund Accounting
Agreement. Pursuant to this Agreement, IMG is responsible for maintaining all
usual, customary and required books, journals and ledgers of accounts and
providing pricing and reporting all computational services. Under the Agreement,
IMG will be paid a fee computed and paid monthly, at the annual rate of 0.03
percent of average daily net assets of each Fund.
VALUING THE FUND'S SHARES
The net asset value of the Fund's shares is determined twice each day, at 11:00
a.m. Central time and at the close of the New York Stock Exchange (normally 3:00
p.m. Central time). The Fund is required to compute its net asset value on each
day (except days on which no purchase or redemption orders are received) on
which the New York Stock Exchange is open for trading or during which there is a
sufficient degree of trading in its portfolio securities that its net asset
value might be materially affected. Net asset value is computed by adding the
value of all securities and other assets (including accrued interest),
subtracting liabilities (including dividends payable), and dividing by the
number of shares outstanding.
Rule 2a-7 under the Investment Company Act of 1940 permits the Fund to compute
its net asset value per share using the amortized cost method of valuing
portfolio securities. As a condition for using the amortized cost method of
valuation, the Board of Directors of the Fund established procedures to
stabilize the Fund's net asset value at $1.00 per share. These procedures
include a review by the Board of Directors as to the extent of any deviation of
net asset value based on available market quotations from the Fund's $1.00
amortized cost value per share. If such deviation exceeds $.005, the Board of
Directors will consider what action, if any, should be initiated to reasonably
eliminate or reduce material dilution or other unfair results to shareholders.
Such action may include redemption of shares in kind; selling portfolio
securities prior to maturity; withholding dividends or utilizing a net asset
value per share as determined by using available market quotations. In addition,
the Fund must maintain a dollar-weighted average portfolio maturity appropriate
to its investment objective, but in any event not longer than 90 days, must
limit portfolio investments to those instruments which the Board of Directors
determines present minimal credit risks, and must observe certain other
reporting and record keeping procedures.
Under the amortized cost method of valuation, a security is initially valued at
cost on the date of purchase and, thereafter, any discount or premium is
amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security.
Accordingly, U.S. Government obligations, and Student Loan Certificates and FmHA
Certificates which are subject to mandatory repurchase at their original
purchase price, will be valued at amortized cost. Other assets are valued at a
fair value determined in good faith by the Board of Directors of the Fund.
7
<PAGE>
CALCULATION OF YIELD
"Current yield" (a seven-calendar-day historical yield) is calculated by first
dividing the average daily net investment income per share for that seven-day
period by the average daily net asset value per share for the same period. This
return is then annualized by multiplying the result times 365/7. That is, the
amount of income generated by the investment during that week is assumed to be
generated over an annual period and is shows as a percentage of the investment.
Net investment income does not include realized or unrealized gains or losses.
"Effective yield" is based on current yield and the distribution of dividends
monthly. When annualized, that income earned from the investment is assumed to
be reinvested weekly. Effective yield will be slightly higher than current yield
because of the compounding effect of this assumed reinvestment.
Yield on shares of the Fund may fluctuate daily and does not provide a basis for
determining future yields. Yield is not guaranteed nor is the principal of the
Fund insured. In comparing the Fund's yield with those of alternative
investments (such as savings accounts, various types of bank deposits and other
money market funds), investors should consider differences between the Fund and
the alternative investments, including differences in the periods and methods
used in calculating the yields being compared. In addition, unlike the Fund,
deposit accounts at financial institutions are generally insured by the Federal
Deposit Insurance Corporation and do not fluctuate to the extent of the Fund.
From time to time, the Fund may quote its yield in advertisements or in reports
and other communications to shareholders. The Fund's yield changes in response
to fluctuations in interest rates and in the Fund's expenses. Consequently, any
given yield quotations should not be considered as representative of what the
Fund's yields may be for any specified period in the future.
Yield information may be useful in reviewing performance of the Fund and for
providing a basis for comparison with other investment alternatives. However,
the Fund's yields will fluctuate, unlike other investments which may pay a fixed
yield for a stated period of time.
Investors should recognize that in periods of declining interest rates the
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates, the Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to the
Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields in the balance of the Fund's holdings,
thereby reducing the current yields of the Fund. In periods of rising interest
rates, the opposite can be expected to occur.
Advertisements and other sales literature may, from time to time, include
comparative performance information including data relating to the yield on
deposits at banking and savings and loan institutions (including savings
accounts, interest-bearing checking accounts, NOW accounts and money market
deposit accounts). Yields are compiled periodically by the Advisor from a survey
of banking and savings and loan institutions and from reports published by major
newspapers. Additionally, such advertisements and other sales literature may
include references to yield information compiled by IBC's MONEY FUND REPORT, The
Bank Rate Monitor, Banxquote and other recognized industry sources. Demand and
savings deposit accounts at banking and savings and loan institutions are
generally FDIC-insured and such yields generally do not fluctuate to the extent
of the Fund.
DIVIDENDS
The daily net income of the Fund is declared as a dividend each business day to
holders of record immediately before 3:00 p.m. Central Time. Dividends are
credited to shareholders' accounts each business day and distributed monthly.
Dividends are automatically reinvested in the Fund unless cash payment has been
selected on the Account Application. If a shareholder elects to receive
dividends and/or distributions in cash and the checks are returned and marked as
"undeliverable" or remain uncashed for six months, your cash election will be
changed automatically and future dividends will be reinvested. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation. If a shareholder redeems the entire
amount in his account during the month, dividends credited to the account from
the beginning of the month through the date of redemption are paid with the
redemption proceeds.
For purposes of calculating dividends, daily net income consists of interest
earned, including the amortization of any discount or premium to the date of
maturity, less accrued expenses of the Fund since the previous business day.
Monthly dividend distributions are reinvested in additional shares unless the
shareholder has requested payment in cash. A statement summarizing account
activity and a check for the amount of any dividends the shareholder may have
requested to be paid in cash are normally mailed monthly.
8
<PAGE>
The Fund attempts to maintain its net asset value at $1.00 per share. See
"Valuing the Fund's Shares". While this is expected to be possible under most
conditions, should the Fund incur or anticipate any unusual expenses, loss,
depreciation, gain or appreciation which would affect either net asset value per
share or income, the Board of Directors of the Fund will consider whether to
adhere to the dividend policy previously described or revise it in light of the
existing circumstances.
If the Fund's net asset value per share were reduced, or was expected to be
reduced, below $.995, the Board of Directors might temporarily suspend or reduce
dividend payments in order to maintain a net asset value of $1.00 per share. As
a result of such suspension or reduction of dividends, an investor might receive
less income during a given period than he might otherwise. Such expenses, losses
or depreciation might therefore result in an investor receiving no dividends for
the period he held his shares and receiving upon redemption a price per share
lower than the price he paid.
In its endeavor to maintain net asset value at $1.00 per share, the Fund is
required to adhere to certain conditions of Rule 2a-7 promulgated by the
Securities and Exchange Commission which permits the Fund to value its assets at
their amortized cost. These conditions require that: (1) the Fund seek to
maintain a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value and, in no event, longer than
90 days; (2) the Board of Directors of the Fund undertake to assure, to the
extent reasonably practicable, when taking into account current market
conditions affecting its investment objective, that the Fund's market-based net
asset value per share (that is, its net asset value computed on the basis of
available market quotations and estimates) will not deviate from $1.00; and (3)
the Board of Directors consider reducing or suspending dividend payments if the
market-based net asset value per share declines below $.995.
TAXATION
The Fund has qualified as a regulated investment company under Subchapter M of
the Internal Revenue Code (the "Code") since its inception, and intends to
qualify as a regulated investment company in the current fiscal year by
distributing substantially all of its taxable net income, including any realized
capital gains, and thus will not incur any Federal income taxes. Shareholders
will receive taxable dividend income or capital gains, as the case may be, from
distributions whether paid in cash or received in the form of additional shares.
Promptly after the end of each calendar year, each shareholder will receive a
statement of the Federal income tax status of all dividends and distributions
paid during the year.
The Fund is subject to the backup withholding provisions of the Code. Under
these provisions, the Fund is required to deduct and withhold income tax from
dividends paid to Fund shareholders at a 31 percent rate if a shareholder fails
to furnish the Fund with his taxpayer identification number in the manner
required, if the Internal Revenue Service notifies the Fund that the taxpayer
identification number furnished by the shareholder is incorrect, or in certain
other instances involving the shareholder's under-reporting of dividend income
or failure to make proper certification with respect thereto. Accordingly, Fund
shareholders are urged to complete and return Internal Revenue Service Form W-9
when requested to do so by the Fund.
This discussion of the Fund's tax matters is only a summary and relates
principally to Federal tax matters. Thus, shareholders are encouraged to consult
with their personal tax advisors.
MANAGEMENT
Directors and Officers, together with information as to their principal business
occupations during the last five years, and other information are shown below.
Each Director who is deemed an "interested person", as defined in the Investment
Company Act, is indicated by an asterisk.
* David W. Miles, age 40, Director.
President, Treasurer and Senior Managing Director, Investors Management
Group, and IMG Financial Services, Inc.
* Mark A. McClurg, age 44, President and Director.
Vice President, Secretary and Senior Managing Director, Investors
Management Group, and IMG Financial Services, Inc.
Johnny Danos, age 57, Director.
President, Danos, Inc., a personal investment company, 1994-Present; Audit
Partner, KPMG Peat Marwick, 1963-1994.
9
<PAGE>
Debra Johnson, age 36, Director.
Vice President and CFO, Business Publications Corporation/Iowa Title
Company, a publishing and abstracting service company.
Edward J. Stanek, age 50, Director.
CEO, Iowa Lottery, a government operated lottery.
Ruth L. Prochaska, age 44, Secretary.
Controller/Compliance Officer, Investors Management Group, and
IMG Financial Services, Inc.
The address for Messrs. Miles, McClurg, and Ms. Prochaska is 2203 Grand Avenue,
Des Moines, Iowa 50312-5338.
As of the date hereof, Officers and Director beneficially owned no more than 1
percent of the shares of common stock of any of the Company's Funds or of the
Company's Funds in the aggregate.
Directors and Officers of the Fund who are officers, directors, employees, or
stockholders of the Advisor do not receive any remuneration from the Fund for
serving as Directors or Officers. Those Directors of the Funds who are not so
affiliated with the Advisor receive $250 for each Board of Directors meeting
attended, plus reimbursement for out-of-pocket expenses in attending meetings.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Aggregate Pension or Retire- Estimated Total Compensation
Name of Compensa- ment Benefits Annual From Registrant
Person, tion From Accrue As Part of Benefits Upon and Fund Complex
Position Registrant Fund Expenses Retirement Paid to Director
________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
David W. Miles $ 0 $ 0 $ 0 $ 0
Director
Mark A. McClurg 0 0 0 0
President &
Director
Johnny Danos 1,000 0 0 1,000
Director
Debra Johnson 1,000 0 0 1,000
Director
Edward J. Stanek 1,000 0 0 1,000
Director
</TABLE>
MANAGEMENT OF THE ADVISOR. David W. Miles and Mark A. McClurg each beneficially
own more than 20 percent of the outstanding voting securities of the Advisor and
are deemed to be control persons of the Advisor. Senior Managing Directors of
Investors Management Group are David W. Miles and Mark A. McClurg. They intend
to devote substantially all their time to the operation of the Advisor.
10
<PAGE>
THE INVESTMENT ADVISORY AGREEMENT
The Advisor furnishes continuous investment supervision to the Fund under an
Investment Advisory Agreement (the "Management Agreement"). For its services the
Advisor is entitled to receive a fee, computed and accrued daily and payable
monthly at the rate of 0.35 percent of the average daily closing net asset value
of the Fund.
From time to time, the Advisor may voluntarily waive all or a portion of the
management fee and/or absorb certain expenses of the Fund without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for
the Fund and increasing the Fund's overall yield to investors at the time any
such amounts are waiver and/or absorbed. The Advisor may not seek reimbursement
of such waived fees at a later date.
Under the Management Agreement, the Advisor agrees to provide a continuous
investment program for the Fund including investment research and management
with respect to all securities and investments. This would include the
solicitation and approval of commercial banks selected as Participating Banks
from which the Fund may purchase participation interests in short-term loans
subject to Liquidity and Servicing Agreements or which may issue irrevocable
letters of credit to back the demand repayment commitments of borrowers. A
careful review of the financial condition and loan loss record of a prospective
bank will be undertaken prior to the bank being approved to enter into a
Liquidity and Servicing Agreement and, once approved, a Participating Bank's
financial condition and loan loss record will be reviewed at least annually
thereafter.
The principal criteria which the Advisor will consider in approving, rejecting
or terminating Liquidity and Servicing Agreements with Participating Banks will
include a bank's (a) ratio of capital to deposits; (b) ratio of loan charge offs
to average loans outstanding; (c) ratio of loan loss reserves to net loans
outstanding; and (d) ratio of capital to total assets. Ordinarily, the Advisor
will recommend that the Fund not enter into or continue a Liquidity and
Servicing Agreement with any bank whose ratios (as described above) are less
favorable than the average of all Iowa banks. The Advisor will also consider a
bank's classified loan experience, historical and current earnings and growth
trends, quality and liquidity of investments and stability of management and
ownership. Typically, the Advisor will utilize a variety of information sources;
including, annual audited financial statements, unaudited interim financial
statements, quarterly reports of condition and income filed with regulatory
agencies and periodic examination reports (if available) and reports of
federally insured banks concerning past-due-loans, renegotiated loans and other
loan problems.
The Advisor has also agreed to reimburse the Fund, up to the amount of the
advisory fees paid to the Advisor, to the extent that the total annual expenses
of the Fund, exclusive of all taxes, interest, brokers' commissions and other
related charges but including fees paid to the Advisor, exceed the most
restrictive limits prescribed by any state in which the Fund's shares may
eventually be offered for sale. The Fund believes that it presently is not
subject to any such restrictions.
The Management Agreement will continue in effect as long as it is approved
annually by a majority of those directors who are not parties to the Management
Agreement or "interested persons" of such parties and by either the board of
directors of the Fund or a majority of the outstanding voting securities of the
Fund. The Management Agreement which was approved by the Fund's directors, as
described above, on November 3, 1997 may be terminated by either party without
penalty on 60 days' written notice and will automatically terminate in the event
of its assignment.
The Management Agreement provides that neither the Advisor nor any of its
officers or directors, agents or employees will have any liability to the Fund
or its shareholders for any error of judgment, mistake of law or any loss
arising out of any investments or for any other act or omission in the
performance of its duties as investment advisor under the Management Agreement,
except for liability resulting from willful misfeasance, bad faith or gross
negligence on the part of the Advisor in the performance of its duties or from
reckless disregard by the Advisor of its obligations under the Management
Agreement.
STUDENT LOAN TRUSTS
The Fund is authorized to purchase Student Loan Certificates from one or more
Student Loan Trusts. The Fund will only purchase Student Loan Certificates from
Student Loan Trusts formed for the purpose of purchasing federally insured
student loans originated and sold by banks subject to purchase, at the option of
the Student Loan Trust, on no more than five business days' written notice.
Student Loan Trusts are funded by the issuance and sale to the Fund of Student
11
<PAGE>
Loan Certificates which have an original maturity of no more than 397 days and
which may be redeemed by the Fund upon not more than five business days' written
notice to the issuing Student Loan Trust. The Fund is under no obligation to
purchase Student Loan Certificates issued by any Student Loan Trust.
The Fund's election to purchase Student Loan Certificates will be based upon the
amount of funds available for investment, the investment yield borne by the
Student Loan Certificates compared with yields available on other short-term
liquid investments and upon the aggregate amount of Student Loan Certificates,
commercial and industrial loans and participation interests therein owned by the
Fund which may not exceed 80 percent of Fund assets. The yield to the Fund on
Student Loan Certificates will be commensurate with current net yields on
federally insured student loans. Presently, net of servicing and trust fees,
such loans yield approximately the 91-day U.S. Treasury Bill rate plus 0.65 to
0.75 percent. Such fees will be paid out of the Student Loan Trust assets and no
other fees will be paid directly or indirectly by the Fund.
The Higher Education Act (the "Act") sets forth provisions establishing a
program of (i) direct federal insurance to holders of student loans, and (ii)
reimbursement to state agencies or private non-profit corporations administering
student loan insurance programs of losses sustained in the operation of their
programs (the "Federal GSL Program"). Under the Federal GSL Program, the
Secretary of Education (the "Secretary") is authorized to enter into guarantee
and interest subsidy agreements with the Iowa College Aid Commission, and
similar organizations (collectively the "Agencies"). The Federal GSL Program
provides for reimbursements to the Agencies for default claims paid by them, the
payments of administrative cost allowances to the Agencies, advances for the
Agencies' reserve funds and interest subsidy payments and Special Allowance
Payments to the holders of qualifying student loans made pursuant to the Federal
GSL Program.
Pursuant to Section 428(c)(1)(A) of the Act, the Agencies have entered into
guarantee agreements with the Secretary under which the respective Agencies
operate a Guarantee Program, whereby the Secretary agrees to reimburse the
Agencies in an amount equal to 80 percent of the amount expended by them in the
discharge of their insurance obligations on the unpaid balance of principal and
accrued interest with respect to loans guaranteed by the Agencies. The Act also
authorizes the Secretary to enter into supplemental guarantee agreements whereby
such federal reimbursement will be increased to a maximum of 100 percent of the
amount expended by the agencies in the discharge of their insurance obligations.
The supplemental guarantee agreements are subject to annual renegotiation and
the Secretary is not authorized to renew them unless the Agencies' Guarantee
Programs comply with all the terms of the supplemental guarantee agreements and
all the provisions of applicable federal regulations.
The Secretary and the Agencies have entered into interest subsidy agreements
under Section 428 (b) of the Act whereby the Secretary agrees to pay interest
subsidy payments to the holders of qualifying student loans for the benefit of
students meeting certain requirements. To be eligible for federal reimbursement
programs, such loans must be made by an "eligible lender" under the Agencies'
Guarantee Program, which must meet requirements prescribed by the rules and
regulations promulgated under the Act. The Trustee will be an eligible lender
and will purchase only loans originated by eligible lenders.
The Act, as amended in 1976, provides for Special Allowance Payments by the
Secretary to holders of qualifying student loans such as the Trust. Special
Allowance Payments are computed on the basis of the average of the bond
equivalent rates of the 91-day U.S. Treasury Bills auctioned during the
preceding quarter, and are provided as an inducement to lenders or holders of
loans to compensate them for the difference between the interest rate carried by
the student loan and the current commercial interest rates.
The Student Loan Reform Act of 1993 made various changes to the Federal
Guaranteed Student Loan Program. Effective October 1, 1993, Agencies are only
required to guarantee student loans at 98 percent of the unpaid balance of
principal and accrued interest on loans made after October 1, 1993. In addition,
other changes were made relating to origination fees, borrower interest rates,
technical revisions on how consolidated loans are treated and a limitation on
the amount of guarantee fee that can be charged by Agencies. Commencing July 1,
1995, the lender yield for Guaranteed Student Loans disbursed after July 1,
1995, was reduced to the 90 day Treasury Bill rate plus 2.5 percent.
The Student Loan Trusts from which the Fund purchases Student Loan Certificates
have agreed that all student loans purchased by the Trust will be insured either
directly by the Secretary or under the Federal GSL Program and will qualify for
interest subsidy payments and Special Allowance Payments. Loans typically will
be in amounts of $25,000 or less, repayable over a term of 15 years or less.
These Certificates have an original maturity of not more than 364 days and may
be redeemed by the Fund upon not more than five business days' written notice to
the Iowa Student Loan Trust. Proceeds from the issuance of Student Loan
Certificates have been used by the Iowa Student Loan Trust to purchase federally
insured student loans initiated by Iowa banks which may be required to purchase
12
<PAGE>
such loans from the Iowa Student Loan Trust on not more than five business days'
written notice. In the event a bank was unable to honor its purchase commitment
it would be necessary for the Iowa Student Loan Trust to seek other purchasers
of the loans. Because such loans are federally insured and bear a variable
interest rate the Fund believes that a ready market for them exists.
GUARANTEED LOAN TRUSTS
The Fund may purchase FmHA Certificates from one or more guaranteed loan trusts
created for the purpose of acquiring participation interests in the guaranteed
portion of FmHA guaranteed loans ("FmHA Trusts"). Interest and principal
payments of the FmHA Loans would accrue to the benefit of the Fund net of
certain FmHA Trust fees and other fees payable to certain parties for servicing
the FmHA Loans and arising out of the participation of the guaranteed portion of
the FmHA Loans. Each FmHA Certificate will provide certain identifying
information regarding the specific FmHA Loan acquired including the effective
rate and reset provision. Each FmHA Certificate will also be redeemable upon not
more than five business days' written notice by the Fund to the Trustee for an
amount equal to the unpaid balance of the participated portion of the FmHA Loan
and accrued interest due thereon. The redemption feature of the FmHA
Certificates is backed by unconditional purchase commitments between the
Trustee, and Participating Banks which require the banks to purchase such loans
at par less a processing fee upon no more than five business days prior written
notice. Such purchase commitments are unconditional and are operative whether
the FmHA Loans are in default or experiencing difficulties. The unconditional
purchase commitments by the Participating Banks are intended to provide
liquidity for the FmHA Loans held by the FmHA Trust and beneficially owned by
the Fund. Insofar as the unconditional commitment creates this liquidity, for
purposes of Rule 2a-7 and the diversification requirements thereunder, the
unconditional commitments are limited in amounts necessary to keep any one
Participating Bank from being obligated to purchase more than 5 percent of the
total assets held by the Fund (as of the date of purchase of the FmHA
Certificate).
The sole purpose of the trust arrangement is to provide a convenient structure
for servicing the FmHA Loans and to eliminate the premium risk that could arise
if the Fund invested directly in the FmHA Loans and prepayment were to occur.
The Board of Directors believes that the arrangement presents minimal credit
risk and that the arrangement is a permissible investment. For purposes of Rule
2a-7, the Fund does not consider the FmHA Loans or the certificates evidencing
ownership as illiquid and considers the arrangement with the participating banks
as standby unconditional put commitments.
FmHA guaranteed loans are originated by financial institutions, mostly
commercial banks, as a direct loan to the borrower. The FmHA guaranteed loans
acquired by the Fund will all have variable rates of interest which will rest no
less frequently than semi-annually and upon the adjustment of the interest rate
the value of the securities will be approximately equal to par. The FmHA, a
division of the U.S. Department of Agriculture, is an independent agency of the
United States Government and has the authority to grant the United States
Government's full faith and credit guarantee on loans originated by commercial
lenders. Through the Rural Development Act of 1972, the FmHA guaranteed loan
program was enacted by Congress to help meet the financing needs of small
businesses, farms and community facilities in rural areas. Guarantees are issued
on loans obtained by those persons who meet FmHA criteria. Typically borrowers
eligible for FmHA loans face a degree of financial stress which prevents them
from qualifying for non-guaranteed credit based on the standards of commercial
lenders. Applications for loan guarantees are submitted by the lender to the
local FmHA county officer for approval. The application is reviewed by local
officials to determine whether the borrower, lender and proposed loan meet
program requirements. Loan terms are negotiated with the lender and the
borrowers, but the terms must fall within FmHA guidelines. The FmHA will
guarantee up to 90 percent of the total loan depending upon the loan's
soundness.
Under the FmHA Loan program, the guaranteed portion of FmHA loans may be
participated, sold by the originating bank and traded in the secondary market.
The Fund will only invest in the guaranteed portions of FmHA Loans which are so
participated. While the most current government figures indicate the outstanding
balance on guaranteed loans to be over $4 billion, it is estimated that
approximately 20 percent of the total outstanding balance of guaranteed loans
have actually been participated in the secondary market.
The FmHA guaranty guarantees the repayment of principal and interest
unconditionally and accrues to the benefit of the person owning the participated
portion of the guaranteed FmHA loan. When the FmHA loans are sold the guaranty
is assigned to the purchaser and is unconditional and irrevocable. All FmHA
loans purchased by the Trust will be valued by the Fund at par.
The trustee will communicate to the Fund's Investment Advisor the status of loan
payments and delinquencies. In addition, Participating Banks, subject to the
unconditional commitments to purchase the participated FmHA Loans, will be
subject to on-going credit review by the Fund's Investment Advisor. To the
extent that any of the banks deteriorate in credit quality from the standard set
13
<PAGE>
by regional banks with the highest credit ratings by NRSRO's the Investment
Advisor will take action to replace such banks with another bank with an
appropriate credit rating or if unrated, with a comparable credit quality based
on the Investment Advisor's analysis.
OTHER INFORMATION
FEDERAL HOLIDAYS. The Fund will be closed for business and, therefore, will not
accept purchase or redemption orders nor calculate net asset value, on all
Federal Holidays -- currently; New Year's Day, Martin Luther King, Jr. Day,
President's Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Thanksgiving Day, Veterans' Day and Christmas Day.
PORTFOLIO TRANSACTIONS. Subject to policies set forth by the board of directors
of the Fund, the Advisor is authorized to determine, consistent with the Fund's
investment objectives and policies, which securities will be purchased, sold and
held by the Fund. Most of the Fund's portfolio securities will be purchased on a
principal basis directly from the issuer, from banks, underwriters or market
makers and, thus, will not involve payment of a brokerage commission. There were
no agency transactions in the last three fiscal years and thus no brokerage
commissions have been paid. Such purchases may include a discount, concession or
mark-up retained by an underwriter or dealer. The Advisor is authorized to
select the brokers or dealers that will execute the purchases and sales of
portfolio securities and is directed to use its best efforts to obtain the best
available price and most favorable execution on brokerage transactions. Some of
the portfolio transactions may be directed to brokers who furnish special
research and statistical information or services rendered in the execution of
orders which are of benefit to the Advisor. These may include advice or
information with respect to particular securities or issuers, information
concerning general market or economic conditions and the obtaining of
information from brokers, underwriters or market makers. While no dollar value
can be placed on such information or services, it allows the Advisor to
supplement its own research and analysis activities which can reduce its costs
but not those of the Fund.
REPORTS TO SHAREHOLDERS. Semiannual and annual reports will include financial
statements which, in the case of the annual report, will be reported upon by the
Fund's independent auditors, KPMG Peat Marwick LLP. The Annual Report is
incorporated herein by reference into the Fund's Statement of Additional
Information and is available upon request without charge by calling the number
on the cover page of this Statement of Additional Information.
SHAREHOLDER MEETINGS. The Maryland Corporation Law permits registered investment
companies to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Fund has
adopted the appropriate Bylaw provisions and may not hold an annual meeting in
any year in which the election of Directors is not required to be acted on by
shareholders under the 1940 Act.
he Bylaws also contain procedures for removal of Directors by shareholders. At
any meeting of shareholders, due called and at which a quorum is present, the
shareholders may, by the affirmative vote of the holders of a majority of the
votes entitled to be cast thereon, remove any Director or Directors from office
and may elect a successor or successors to fill any resulting vacancies for the
unexpired terms of removed Directors.
Upon the written request of the holders of shares entitled to not less than 10
percent of all the votes entitled to be cast at such meeting, the Secretary of
the Funds shall promptly call a special meeting of shareholders for the purpose
of voting upon the question of removal of any Director. Whenever 10 or more
shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least 1 percent of the total outstanding
shares, whichever is less, shall apply to the Secretary in writing, stating that
they wish to communicate with other shareholders with a view to obtaining
signatures to a request for a meeting as described above and accompanied by a
form of communication and request which they wish to transmit, the Secretary
shall within five business days after such application either: (1) afford to
such applicants access to a list of the names and addresses of all shareholders
of record; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the last
sentence of the preceding paragraph, the Secretary, upon the written request of
such applicants, accompanied by a tender or the material to be mails and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record at their addresses as recorded on the
books unless within five business days after such tender the Secretary shall
mail to such applicants and file with the Securities and Exchange Commission,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Board of Directors to the effect that in their
14
<PAGE>
opinion either such material contains untrue statements of fact or omits to
state facts necessary to make the statements contained therein not misleading,
or would be in violation of applicable law, and specifying the basis of such
opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the Securities and Exchange Commission may, and if demanded
by the Board of Directors or by such applicants shall, enter an order either
sustaining one or more of such objections or refusing to sustain any of them. If
the Securities and Exchange Commission shall enter an order refusing to sustain
any of such objections, or if, after the entry of an order sustaining one or
more of such objections, the Securities and Exchange Commission shall find,
after notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail copies
of such material to all shareholders with reasonable promptness after the entry
of such order and the renewal of such tender.
PRINCIPAL SHAREHOLDERS. As of the date hereof, to the knowledge of the Fund, no
shareholders owned beneficially five percent or more of the Fund's outstanding
shares and the Fund's officers and directors owned none of the Fund's shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT. AMCORE Investment Group,
N.A., 501 Seventh Street, Rockford, IL 61110-0037, (the "Custodian") serves as
the Fund's custodian. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on each
Fund investment, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price of shares of the Fund. The Custodian does
not determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities. IMG serves
as the Fund's Transfer Agent and Dividend Paying Agent.
INDEPENDENT AUDITORS. KPMG Peat Marwick LLP, 2500 Ruan Center, Des Moines, Iowa,
50309, has been selected unanimously by the members of the Board of Directors of
the Fund who are not interested persons of the Fund as the Fund's independent
auditors to examine the books and securities of the Fund and to report on the
financial statements of the Fund.
15
<PAGE>
MUNICIPAL ASSETS FUND 2203 GRAND AVENUE
DES MOINES, IA 50312-5338
STATEMENT OF ADDITIONAL INFORMATION JANUARY 16, 1998
This statement is not a Prospectus but should be read in conjunction with the
Fund's current Prospectuses (dated January 16, 1998). Please retain this
Statement for future reference. To obtain the Annual Report or any Prospectus
please call the Fund at the number indicated below.
..................................................................1-800-798-1819
..................................................................1-515-244-5426
Table of Contents:
General Information and History..................................2
Investment Objectives, Policies and Restrictions.................2
Purchases of Fund Shares.........................................6
The Distributor and Distribution Plan............................6
Administrative Services..........................................7
Valuing the Fund's Shares........................................8
Calculation of Yield.............................................9
Dividends.......................................................10
Taxation .......................................................10
Management......................................................11
Compensation Table..............................................12
The Investment Advisory Agreement...............................12
Other Information...............................................13
Federal Holidays.......................................13
Portfolio Transactions.................................13
Reports to Shareholders................................13
Shareholder Meetings...................................13
Principal Shareholders.................................14
Custodian, Transfer Agent and Dividend Paying Agent....14
Independent Auditors...................................14
Appendix A......................................................15
Appendix B......................................................16
<PAGE>
GENERAL INFORMATION
IMG Mutual Funds, Inc. (the "Company") is an open-end management investment
company which currently offers it shares in series representing eleven
diversified investment portfolios: IMG Core Stock Fund, IMG Bond Fund, Vintage
Equity Fund, Vintage Aggressive Growth Fund, Vintage Balanced Fund, Vintage
Municipal Bond Fund, Vintage Income Fund, Vintage Limited Term Bond Fund, Liquid
Assets Fund, Government Assets Fund and Municipal Assets Fund (Individually a
"Fund" and collectively the "Funds"). The Company was organized on November 16,
1994 under the laws of Maryland. Shares of the Funds are also issued in classes
with differing distribution and shareholder servicing arrangements. Subject to
the class level expenses, each Fund's share represents an equal proportionate
interest in a 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, subject to the class level expenses, as are declared at the
discretion of the Directors. The Municipal Assets Fund was created on November
3, 1997, to acquire the assets and continue the business of the corresponding
substantially identical investment portfolio of the Municipal Assets Funds,
Inc., a separately registered open-end diversified management investment company
organized as an Iowa corporation. References herein to the "immediate
predecessor" of the Fund refer to the respective corresponding company.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Municipal Assets Fund, ("Municipal Assets") seeks to provide maximum current
income, exempt from Federal income taxes, consistent with safety of principal
and maintenance of liquidity. In order to accomplish this goal, assets of the
Fund will be invested in the following types of securities maturing in 397 days
or less from time of investment (with certain exceptions):
(1) Tax-exempt debt obligations issued by state and municipal
governmental units and public authorities within the United States
and participation interests therein. With few exceptions, such
obligations will be non-rated and of limited marketability. However,
they will be backed by demand repurchase commitments of the issuers
thereof and irrevocable bank letters of credit or guarantees
(collectively referred to herein as "Liquidity Agreements"). The
Liquidity Agreements will permit the holder of the securities to
demand payment of the unpaid principal balance plus accrued interest
upon a specified number of days notice either from the issuer or by
drawing on an irrevocable bank letter of credit or guarantee. The
issuer of the security may have a corresponding right to prepay the
principal and accrued interest. In addition, all obligations with
maturities longer than one year from date of purchase will, by their
terms, bear rates of interest that are adjusted upward or downward no
less frequently than semiannually by means of a formula intended to
reflect market changes in interest rates.
The time period covered by Liquidity Agreements may be shorter than
the final maturity of the obligations covered thereby. At or before
the expiration of such Liquidity Agreements, the Fund will seek to
obtain either extensions thereof or replace them with new agreements
and if unable to do so the Fund will exercise its rights under
existing Liquidity Agreements to require that the obligations be
purchased. Thus, at no time will the Fund's investments include
obligations with maturities longer than one year unless the
obligations bear interest rates subject to periodic adjustment at
least semiannually and are subject to sale on seven calendar days
notice under existing Liquidity Agreements.
The only banks (the "Participating Banks") which will be permitted to
sell participations in fixed and variable rate tax-exempt debt
obligations of United States governmental units to the Fund (or to
provide irrevocable letters of credit or guarantees to back the
demand repurchase commitments of the issuers of such obligations)
will be United States banks which have entered into irrevocable
written agreements with respect thereto and have agreed to furnish to
the Fund whatever financial information may be requested for purposes
of evaluating the Participating Banks financial condition and
capacity to fulfill its obligations to the Fund and to perform such
servicing duties as may be mutually agreed to by the parties.
The Fund's investments may include participation interests, purchased
from Participating Banks, in fixed and variable rate tax-exempt debt
obligations (including industrial development bonds hereinafter
described) owned by the banks. A participation interest gives the
Fund an undivided interest in the tax-exempt obligation in the
proportion that the Fund's participation interest bears to the total
principal amount of the obligation and carries a demand repurchase
feature. Each participation is backed by an irrevocable letter of
2
<PAGE>
credit or guarantee of the Participating Bank which issued the
participation. The Fund has the right to liquidate the participation,
in whole or in part, by drawing on the letter of credit or guarantee
of the Participating Bank which issued the participation. The Fund
has the right to liquidate the participation, in whole or in part, by
drawing on the letter of credit on demand, after seven calendar days'
notice, for all or any part of the principal amount of the Fund's
participation, plus accrued interest.
The Fund intends to exercise its rights under Liquidity Agreements
only: (1) upon default in the terms of the tax-exempt debt
obligations covered thereby; (2) to provide the Fund with needed
liquidity to cover redemptions of Fund shares; or (3) to insure that
the value of the Fund's investment portfolio does not vary materially
from the amortized cost thereof. Participating Banks have no
contractual obligation to offer participations to the Fund, and the
Fund is not obligated to purchase or resell any participations
offered or sold by Participating Banks. The Liquidity Agreements
govern the obligations of the parties as to securities or
participations actually purchased by the Fund.
The financial condition and investment and loan loss record of all
banks seeking to sell participations in fixed and variable rate
tax-exempt debt obligations to the Fund (or to provide letters of
credit or guarantees to back the demand repurchase commitments of the
issuers of such obligations) will be carefully evaluated by the
Advisor, based upon guidelines established by the Board of Directors,
prior to the execution of a Liquidity Agreement by a Participating
Bank and periodically thereafter. Purchased obligations will bear
interest at or above current market rates and the rates borne by
obligations with maturities longer than one year will be adjustable
at least semi-annually to reflect changes in market rates subsequent
to issuance of the securities. It is anticipated that the tax-exempt
debt obligations purchased or participated in by the Fund will be
those traditionally acquired by United States banks. These include
both general obligation and revenue bonds issued for a variety of
public purposes such as the construction of a wide range of
facilities including schools, streets, water and sewer works,
highways, bridges, and housing. Also included are bonds issued to
refund outstanding obligations, to obtain funds for general operating
purposes and to lend to other public institutions and facilities.
Certain types of industrial development bonds issued by public bodies
to finance the construction of industrial and commercial facilities
and equipment are also purchased. Revenue generating facilities such
as parking garages, airports, sports and convention complexes and
water supply, gas, electricity, and sewage treatment and disposal
systems are financed through issuance of tax-exempt debt obligations
as well.
Tax-exempt debt obligations are normally categorized as "general
obligation" or "revenue" issues. General obligations are secured by a
pledge of the full taxing power of the issuer while revenue
obligations are payable only from revenues generated by a facility or
facilities, a specified source of tax or other revenues or, in the
case of industrial development bonds, from lease rental or loan
payments made by a commercial or industrial user of the facilities.
Revenue obligations do not generally carry the pledge of the credit
of the issuer.
Short-term tax-exempt debt obligations usually mature in less than
two years, are typically general obligations of the issuer and most
often issued in anticipation of receipts to be realized from tax
collections or the sale of long-term bonds. Project Notes are issued
by local agencies under a program administered by the United States
Department of Housing and Urban Development and are secured by the
full faith and credit of the United States.
From time to time the Fund may invest 25 percent or more of its
assets in tax-exempt debt obligations, or participations therein,
sufficiently similar in character that an economic, business or
political development or change affecting one such security would
also affect the other securities. Examples might be securities whose
principal and interest payments are dependent upon revenues derived
from similar projects or whose issuers are located in the same state.
In addition, investments in tax-exempt debt obligations of issuers
may from time to time become concentrated within a single state, and
the Fund may also invest 25 percent or more of its assets in
industrial development bonds or participations therein.
For entering into a Liquidity Agreement, a Participating Bank will
retain a service and letter of credit fee in an amount equal to the
excess of the interest paid on the tax-exempt obligations above the
negotiated yield at which the instruments were purchased by the Fund.
Such fees may be adjusted if adjustments are made in the interest
rate paid on the tax-exempt obligations. Each Participating Bank
executing a Liquidity Agreement must be approved by the Board of
Directors of the Fund prior to, or at the next quarterly Board
meeting following, such executions. See "The Investment Management
Agreement" on page 10 for a discussion of the criteria to be used in
selecting Participating Banks. The Board of Directors will review all
Participating Banks and Liquidity Agreements quarterly in an effort
to assure continued liquidity and high quality in the Fund's
portfolio.
3
<PAGE>
(2) High quality tax-exempt debt obligations issued by state and
municipal governments and by public authorities, including issues
sold as interim financing in anticipation of tax collections, revenue
receipts or bond sales, and tax-exempt Project Notes secured by the
full faith and credit of the United States. Such obligations will be
purchased only if backed by the full faith and credit of the United
States or rated Aaa, Aa, MIG-1, MIG-2 or Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or AAA, AA, or A-1 by Standard & Poor's
Corporation ("S & P"). See "Appendix A" on page 13. Following
purchase of a rated obligation by the Fund the rating may be
withdrawn or reduced below the Fund's minimum requirement. This will
not require sale of the issue by the Fund but the Advisor will take
such changes into consideration in determining whether the issue
should be retained by the Fund. Non-rated securities may also be
purchased if determined by the Fund's Board of Directors to be of
comparable quality to the rated securities in which the Fund may
invest.
(3) Taxable obligations issued or guaranteed by agencies or
instrumentalities of the United States Government may be acquired
from time to time on a temporary basis for defensive purposes. Such
agencies and instrumentalities include, for example, Federal
Intermediate Credit Banks, Federal Home Loan Banks, Federal National
Mortgage Association and Farmers Home Administration. Such securities
will include those supported by the full faith and credit of the
United States Treasury or the right of the agency or instrumentality
to borrow from the Treasury as well as those supported only by the
credit of the issuing agency or instrumentality.
(4) Repurchase agreements involving securities in the immediately
foregoing category. A repurchase agreement involves the sale of such
securities to the Fund with the concurrent agreement of the seller to
repurchase them at a specified time and price, to yield an agreed
upon rate of interest. The Fund will enter into repurchase agreements
with brokers and banks. Thus, the Fund must initially rely upon the
credit of a particular broker or bank for completion of the
repurchase agreement. Such repurchase agreements are intended to be
fully collateralized, in an amount equal to at least the principal
amount of the transaction plus accrued interest earned thereon, by
the underlying Government or agency securities valued at their fair
market value each day. Although the Fund will normally have legal
title to and constructive possession of the collateral, it cannot
eliminate the risk of a default by a broker or bank which could
result in a loss to the Fund on the sale of the underlying securities
or delays in obtaining the collateral because of bankruptcy or
insolvency proceedings. Repurchase agreements may be deemed to be
loans under the Investment Company Act of 1940.
Assets of the Fund will consist of securities with maturities of 397 days or
less at date of purchase or, if maturing beyond 397 days, securities which are
backed by Liquidity Agreements and which have variable interest rates adjustable
at least semiannually. In determining whether particular variable rate
obligations backed by Liquidity Agreements may be purchased, the period
remaining until maturity will be deemed to be the longer of the demand notice
period required before the Fund is entitled to receive payment of the principal
amount or the period remaining until the next interest adjustment. For purposes
of Rule 2a-7 and the diversification requirements thereunder, the unconditional
commitments are limited in amounts necessary to keep any one bank from being
obligated to purchase more than five percent of the total assets held by the
Fund (determined as of the date of purchase). The dollar weighted average
maturity of Fund investments will be 90 days or less, determined in the same
manner. In attempting to provide its shareholders with the highest income
consistent with preservation of capital, the Fund will not necessarily purchase
investments bearing the highest interest rates available as such investments may
also involve a higher degree of risk.
As a fundamental policy, the Fund will not concentrate its investments in any
one industry and will not issue senior securities.
As a general policy, it is the Fund's intention to hold investments until they
mature or until immediately prior to the expiration of an applicable Liquidity
Agreement. However, in an effort to increase portfolio yields, the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of portfolio
investments prior to maturity and at times when such sale would be undesirable.
While investments by the Fund will be confined to high-quality financial
instruments which, in the case of tax-exempt obligations covered by Liquidity
Agreements, will be backed by demand repurchase commitments of the issuers
thereof and by irrevocable bank letters of credit or guarantees, the complete
elimination of risk is not possible. Under certain circumstances (see "Valuing
the Fund's Shares" and "Dividends"), the net asset value of the Fund's shares
could decrease. It is also possible a Participating Bank or an issuer will
default on the provisions of their Liquidity Agreements which could cause the
net asset value per share to decrease. In light of these various contingencies,
there can be no assurance the Fund will achieve its investment objectives.
4
<PAGE>
New issues of tax-exempt debt obligations are usually offered on a when-issued
basis with the securities to be delivered and paid for approximately 45 days
following the initial commitment to purchase. The terms of the commitment
establish the price to be paid and the yield of the securities to be purchased.
Such commitments will only occasionally be entered into by the Fund and only
with the intention of actually acquiring the securities. It is possible that
market yields at time of delivery may exceed the negotiated yield on when-issued
securities. The Fund will maintain a separate account consisting of cash or
liquid securities, valued at market or fair value daily, equal to its
outstanding when-issued commitments. Settlement on when-issued securities may be
made by using available cash, selling securities or, though not expected,
selling the when-issued securities themselves (which may have a value greater or
lesser than the Fund's commitment). Sale of securities to meet such commitments
may result in realization of capital gains or losses which are not exempt from
Federal income tax. When-issued commitments outstanding at any one time will not
exceed ten percent of the Fund's net assets.
Yields on tax-exempt debt obligations are dependent on a variety of factors
including general economic and money market conditions as well as supply and
demand factors within the market for tax-exempt obligations. Yields actually
realized by Fund investors will be reduced by the management fees, operating
expenses and fees received by Participating Banks and Participating
Organizations.
The Fund has adopted a number of investment policies and restrictions, some of
which can be changed by the board of directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following:
Without shareholder approval the Fund may not: (1) purchase any securities other
than those described under "Investment Objectives, Policies and Restrictions";
(2) invest more than 80 percent of its total assets in tax-exempt fixed and
variable rate debt obligations (or participation interests therein) issued by
state and local governmental units within the United States which are backed by
Liquidity Agreements; (3) invest more than five percent of its total assets in
tax-exempt obligations or participation interests therein subject to Liquidity
Agreements issued by any one Participating Bank; (4) invest with a view to
exercising control or influencing management; (5) invest more than ten percent
of the value of its total assets in securities of other investment companies,
except in connection with a merger, acquisition, consolidation or
reorganization, subject to Section 12(d)(1) of the Investment Company Act of
1940; (6) purchase or sell real estate, commodities or commodity contracts,
interests in oil, gas or other mineral exploration or development programs; (7)
purchase any securities on margin, except for the clearing of occasional
purchases or sales of portfolio securities; (8) make short sales of securities
or maintain a short position or write, purchase, or sell puts (excluding
Liquidity Agreements covering certain tax-exempt obligations purchased by the
Fund), calls, straddles, spreads or combinations thereof; (9) make loans to
other persons, provided the Fund may make investments and enter into repurchase
agreements as described under "Investment Objectives, Policies, and
Restrictions"; (10) borrow money, except to meet extraordinary or emergency
needs for funds, and then only from banks in amounts not exceeding ten percent
of its total assets, nor purchase securities at any time borrowings exceed five
percent of its total assets; (11) mortgage, pledge, hypothecate, or in any
manner transfer, as security for indebtedness, any securities owned by the Fund
except as may be necessary in connection with borrowings outlined in (10) above
and then securities mortgaged, hypothecated or pledged may not exceed five
percent of the Fund's total assets taken at market value; (12) invest in
securities with legal or contractual restrictions on resale (except for
tax-exempt debt obligations subject to Liquidity Agreements) or for which no
ready market exists; (13) enter into a Liquidity Agreement with any bank unless
such bank is a United States bank which has a record, together with its
predecessors, of at least five years of continuous operation; (14) act as an
underwriter of securities; (15) enter into repurchase agreements if, as a result
thereof, more than five percent of the Fund's total assets (taken at market
value at the time of such investment) would be subject to repurchase agreements
maturing in more than seven calendar days; and (16) enter into Liquidity
Agreements with any Participating Bank if five percent or more of the securities
of such Bank are owned by the Advisor or by directors and officers of the Fund
or the Advisor, or if any director or officer of the Fund or the Advisor owns
more than 1/2 percent of the voting securities of such Participating Bank.
The foregoing investment restrictions are considered fundamental policies which
cannot be changed without the approval of a "majority" of the Fund's outstanding
voting securities, that is, by (a) 67 percent or more of the securities voting
at a special or annual meeting if more than 50 percent of the outstanding shares
of Common Stock are represented at such meeting in person or by proxy; or (b)
more than 50 percent of the outstanding Common Stock, whichever is less.
The Fund intends to invest at least 25 percent of its total assets in tax-exempt
debt obligations or participation interests therein subject to Liquidity
Agreements, except when such investments are either not available in sufficient
quantity or do not carry yields competitive with alternative investments.
5
<PAGE>
PURCHASES OF FUND SHARES
See "Opening An Account - Purchasing Shares" in the Prospectus for basic
information on how to purchase shares of the Fund.
An order to purchase shares of the Fund is accepted when the Fund's Custodian
Bank receives payment in Federal funds (funds available for immediate
investment). This will occur upon receipt of the purchase price by Federal funds
wire or electronic funds transfer via the ACH system from the purchaser's bank,
or when a check or other negotiable bank draft received by the Fund has been
converted into Federal funds (normally one to two business days after its
receipt by the Fund).
An investor will become a shareholder when the net asset value applicable to his
order is determined. Net asset value of the Fund's shares is determined twice
each day at 11:00 a.m. Central time and at the close of the New York Stock
Exchange (normally 3:00 p.m. Central Time). If a purchase order is received in
good order by the fund by 11:00 a.m. Central Time and Federal funds are
available to the Fund before 3:00 p.m. Central Time, an order will be effective
the same day, the investor will become a shareholder of record that day, and
shares will commence earning dividends the day the order becomes effective. If a
purchase order is received in good order by the Fund after 11:00 a.m. Central
Time but before 3:00 p.m. Central Time and Federal funds are available 3:00 p.m.
Central Time the shares will not commence earning dividends until the day after
the order is received.
Investments in S Shares of the Fund may be made through transactions directly
with the Fund's Distributor, BISYS Fund Services, Inc., and through qualified
banks, savings and loan associations, broker/dealers, investment advisory firms,
and other organizations ("Participating Organizations") selected by the Advisor
and approved by the Board of Directors of the Fund, based upon the Participating
Organization's capacity to provide processing of Fund transactions for its
customers in conjunction with other customer account relationships.
Participating Organizations will be required to enter into agreements with the
Fund's Distributor to provide certain services to persons ("Participating
Investors") who invest in the Fund through Participating Organizations. These
will include: distributing copies of the Prospectus and sales literature to
prospective investors who request it; furnishing Participating Investors with
periodic account statements containing information regarding Fund share
purchases and redemptions, income earned and Fund investment balances; and
forwarding to Participating Investors periodic reports and proxy material mailed
by the Fund to its shareholders. Participating Organizations may satisfy the
Fund's required minimum, initial and subsequent purchase amounts by aggregating
investments on behalf of customers whose individual investments are less than
the Fund's required minimums. Participating Investors may, if they so elect,
authorize their Participating Organizations to purchase and redeem Fund shares
by means of special investment arrangements (including automatic "Sweep"
investment programs) offered by the Participating Organization.
"T Shares" may be purchased only by financial institutions acting on their own
behalf or on behalf of certain customers' accounts. "I Shares" may be purchased
by individual and institutional customers directly from the Fund's Distributor.
THE DISTRIBUTOR AND DISTRIBUTION PLAN
The Company has entered into a Distribution Agreement (the "Distribution
Agreement") with BISYS Fund Services, Inc., ("BISYS"). Under the Distribution
Agreement, BISYS serves as the Distributor of the Fund as well as some of the
other Funds. The Distribution Agreement continues in effect only if approved
annually by vote of the Board of Directors, including a majority of the
non-interested directors. The Distribution Agreement terminates automatically in
the event of its assignment and may be terminated without penalty on not less
than 60 days notice by the Board of Directors, by a majority of the outstanding
voting securities of the Fund, or by BISYS. BISYS receives no compensation from
the Fund for such services, but is paid a fee equal to 0.01 percent of the
average daily net asset value of all Funds, distributed by BISYS, not to exceed
$100,000 annually by the Advisor.
The Fund adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under
the Investment Company Act of 1940 on November 3, 1997 in connection with its
organization which is substantially identical to the Plan adopted by the
immediate predecessor . The Plan continues in force only if approved annually by
the Board of Directors and by a majority of directors who are not parties to the
Plan or interested persons of any party to the Plan, cast in person at a meeting
called for the purpose of voting on such approval, or by a majority of the
outstanding securities of the Fund. In adopting the Plan, the directors
considered various factors and determined that the Plan would benefit the Fund
and its shareholders. The Distribution Plan is designed to promote sales,
thereby increasing the net assets of the Fund. Such an increase may reduce the
expense ratio to the extent the Fund's fixed costs are spread over a larger net
asset base. Also, an increase in net assets may lessen the adverse effects that
could result were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the Fund
will increase or that the other benefits referred to above will be realized. The
Plan is only applicable to S Shares of the Fund.
6
<PAGE>
The Distribution Plan provides that the Fund may pay various Participating
Organizations a daily distribution fee payable quarterly and equal to an annual
basis of a maximum fee payable of 0..25 percent of the average net asset value
of the S Shares.. The purpose of such payments is to compensate the
Participating Organizations for their distribution services to the Fund.
Participating Organizations make available to their customers transaction
services (including automatic "sweep" investment programs) and may provide
monthly shareholder account reporting and related ministerial duties with
respect to customer accounts. Except as to securities dealers, none of the
compensation paid to such Participating Organizations constitute expenses
relating to advertising, distribution of prospectuses to other than current
shareholders, underwriter's compensation or compensation to dealers, or
compensation of sales personnel, and payments made are related solely to the
Participating Organization's services in providing the customer transaction
services. Participating Organizations are not authorized to actually make sales
of shares of the Fund. All orders to purchase shares are subject to acceptance
by the Fund's Distributor on behalf of the Fund. While the Fund itself does not
presently levy sales, redemption or account service charges, Participating
Organizations may elect to do so and the Fund may elect to do so in the future.
Investors should inquire regarding the nature and costs of services provided by
Participating Organizations and determine if such services are desired because
the costs thereof will reduce the Fund's yield to the investor below that
obtainable by investing in the Fund directly. While the Fund may purchase
portfolio securities from Participating Organizations, it will not give any
preference to them in selecting their investments.
No director or officer of the Fund or the Advisor has any direct or indirect
financial interest in the Plan. The Fund's Plan results in an efficient system
of customer investment in the Fund thereby potentially increasing the Fund's
ability to attract shareholders. The services rendered by the Participating
Organizations with respect to customer transactions (including automatic sweep
investment programs) are more efficient and direct than that which the Fund
might otherwise provide. The Fund believes that the Plan and agreements with the
Participating Organizations reduce expenses for shareholder transactions thereby
reducing costs of the Fund and increasing yields
The Plan and any agreements related thereto will automatically terminate if
assigned and may be terminated by either party on 60 days' notice. The Plan may
be terminated by a majority of non-interested directors who have no direct or
indirect financial interest in the Plan or it may be terminated by a majority of
the outstanding voting shares of the Fund. Any changes in the Plan that would
materially increase the distribution costs require shareholder approval;
otherwise, the directors, including a majority of the non-interested directors,
may amend the Plan. The directors review quarterly a written report of
distribution costs incurred pursuant to the Plan.
The Glass-Steagall Act and other applicable laws prohibit banks from engaging in
the business of underwriting, selling, or distributing securities. Since the
only function of banks who may be engaged as Participating Organizations is to
perform administrative and shareholder servicing functions, the Fund believes
that such laws should not preclude banks from acting as Participating
Organizations; however, future changes in either Federal or State statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as judicial or administrative decisions or
interpretations of statutes or regulations, could prevent a bank from continuing
to perform all or part of its shareholder servicing activities. If a bank were
prohibited from so acting, its shareholder customers would be permitted to
remain shareholders in the Fund, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur, and shareholders serviced by such bank might
no longer be able to avail themselves of any investment or other services then
being provided by the bank. It is not expected that shareholders would incur any
adverse financial consequences as a result of any of these occurrences. It is
intended that none of the services provided by Participating Organizations other
than registered broker/dealers will involve the solicitation or sale of shares
of the Fund.
ADMINISTRATIVE SERVICES
The Directors of the Fund have adopted a Administrative Services Plan ("Services
Plan") with respect to T Shares and S Shares. Pursuant to the Services Plan, the
Fund may enter into Servicing Agreements with Participating Organizations
providing that those Participating Organizations will render certain shareholder
administrative support services to their customers who are record or beneficial
owners of shares. Services provided pursuant to the Services Plan may include
some or all of the following: (i) processing dividend and distribution payments
from the Fund on behalf of customers; (ii) providing information periodically to
customers showing their position in Shares; (iii) arranging for bank wires; (iv)
responding to routine customer inquiries relating to services performed by the
Participating Organizations; (v) providing sub-accounting with respect to shares
owned of record or beneficially by customers or the information needed for
sub-accounting; (vi) forwarding shareholder communications (such as proxies,
7
<PAGE>
shareholder reports, annual and semi-annual financial reports, and dividend,
distribution and tax notices) to customers; (vii) forwarding to customers proxy
statements and proxies containing any proposals regarding the Services Plan;
(viii) aggregating and processing purchase, redemption, and exchange requests
from customers and placing net purchase and redemption orders with the Fund's
Distributor; (ix) providing customers with a service that invests the assets of
their accounts in Shares pursuant to specific or pre-authorized instructions;
(x) maintaining records relating to each customer's share transactions; or (xi)
other similar services if requested by the Fund and permitted by law. In
addition, Participating Organizations may also provide dedicated facilities and
equipment in various local locations to serve the needs of investors, including
walk-in facilities, 800 numbers, and communication systems to handle shareholder
inquiries, and in connection with such facilities, provide on-site management
personnel and monitoring services for their customers who have invested in
Shares, including the operation of telephone lines for daily quotations of
return information.
The Services Plan is an administrative support services plan. Pursuant to the
Services Plan, the Fund's arrangement with Participating Organizations must be
approved annually by a majority of the Fund's Directors, including a majority of
the Directors who are not "interested persons" of the Fund as defined in the
1940 Act and have no direct or indirect financial interest in such arrangements.
Under the terms of the Services Plan, the Fund may pay a fee to Participating
Organizations equal to maximum annual rate of 0.25 percent of the average net
assets of the T Shares and S Shares. At the present time fees paid under the
Shareholder Services Plan with respect to T Shares will not exceed 0.15 percent
of the annual average net asset value of such shares.
The Company has also entered a Management and Administration Agreement with
Investors Management Group, Ltd. ("IMG") pursuant to which IMG provides the Fund
supervisory administrative services relating to all operations of the Fund,
except as may be provided under the Investment Advisory Agreement, the Custodian
Agreement, the Transfer Agency Agreement and the Fund Accounting Agreement. Some
of these services include the provision of office facilities, preparation of
reports and tax returns, assistance in preparing Annual and Semi-Reports to
shareholders and providing virtually all other day to day operational tasks for
the Fund. For these services the Fund will pay IMG a monthly fee equal to 0.06
percent of the average daily net asset value of the Fund. At present IMG is
waiving 0.15 percent of this fee until further notice.
IMG also provides fund accounting services to the Fund under a Fund Accounting
Agreement. Pursuant to this Agreement, IMG is responsible for maintaining all
usual, customary and required books, journals and ledgers of accounts and
providing pricing and reporting all computational services. Under the Agreement,
IMG will be paid a fee computed and paid monthly, at the annual rate of 0.03
percent of average daily net assets of each Fund.
VALUING THE FUND'S SHARES
The net asset value of the Fund's shares is determined twice each day, at 11:00
a.m. Central Time and at the close of the New York Stock Exchange (normally 3:00
p.m. Central Time). The Fund is required to compute its net asset value on each
day (except days on which no purchase or redemption orders are received) on
which the New York Stock Exchange is open for trading or during which there is a
sufficient degree of trading in its portfolio securities that its net asset
value might be materially affected. Net asset value is computed by adding the
value of all securities and other assets (including accrued interest),
subtracting liabilities (including dividends payable) and dividing by the number
of shares outstanding.
Rule 2a-7 under the Investment Company Act of 1940 permits the Fund to compute
its net asset value per share using the amortized cost method of valuing
portfolio securities. As a condition for using the amortized cost method of
valuation, the Board of Directors of the Fund established procedures to
stabilize the Fund's net asset value at $1.00 per share. These procedures
include a review by the Board of Directors as to the extent of any deviation of
net asset value based on available market quotations from the Fund's $1.00
amortized cost value per share. If such deviation exceeds $.005, the Board of
Directors will consider what action, if any, should be initiated to reasonably
eliminate or reduce material dilution or other unfair results to shareholders.
Such action may include redemption of shares in kind; selling portfolio
securities prior to maturity; withholding dividends or utilizing a net asset
value per share as determined by using available market quotations. In addition,
the Fund must maintain a dollar-weighted average portfolio maturity appropriate
to its investment objective; but in any event not longer than 90 days, must
limit portfolio investments to those instruments which the Board of Directors
determines present minimal credit risks, and must observe certain other
reporting and record keeping procedures.
8
<PAGE>
Under the amortized cost method of valuation, a security is initially valued at
cost on the date of purchase and, thereafter, any discount or premium is
amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security.
Accordingly, the Fund's investments in taxable and tax-exempt debt obligations
rated by a recognized bond rating agency and regularly traded in the secondary
market, and non-rated fixed and variable rate tax-exempt obligations and
participation interests therein, not regularly traded in the secondary market,
but subject to Liquidity Agreements, will be valued at amortized cost. Other
assets are valued at a fair value determined in good faith by the Board of
Directors of the Fund.
CALCULATION OF YIELD
"Current yield" (a seven-calendar-day historical yield) is calculated by first
dividing the average daily net investment income per share for that seven-day
period by the average daily net asset value per share for the same period. This
return is then annualized by multiplying the result times 365/7. That is, the
amount of income generated by the investment during that week is assumed to be
generated over an annual period and is shown as a percentage of the net
investment income and does not include realized or unrealized gains or losses.
"Effective yield" is based on current yield and the distribution of dividends
monthly. When annualized, that income earned from the investment is assumed to
be reinvested weekly. Effective yield will be slightly higher than current yield
because of the compounding effect of this assumed reinvestment.
Yield on shares of the Fund may fluctuate daily and does not provide a basis for
determining future yields. Yield is not guaranteed nor is the principal of the
Fund insured. In comparing the Fund's yield with those of alternative
investments (such as savings accounts, various types of bank deposits and other
money market funds), investors should consider differences between the Fund and
the alternative investments, including differences in the periods and methods
used in calculating the yields being compared. In addition, unlike the Fund,
deposit accounts at financial institutions are generally insured by the Federal
Deposit Insurance Corporation and do not fluctuate to the extent of the Fund..
The Prospectus may be in use for several months and accordingly, it can be
expected that yields will fluctuate substantially from the example shown above.
From time to time the Fund may quote its yield in advertisements or in reports
and other communications to shareholders. The Fund's yield changes in response
to fluctuations in interest rates and in the Fund's expenses. Consequently, any
given yield quotations should not be considered as representative of what the
Fund's yields may be for any specified period in the future.
Yield information may be useful in reviewing performance of the Fund and for
providing a basis for comparison with other investment alternatives. However,
the Fund's yields will fluctuate, unlike other investments which may pay a fixed
yield for a stated period of time.
Investors should recognize that in periods of declining interest rates the
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates, the Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to the
Fund from the continuous sale of it shares will likely be invested in
instruments producing lower yields in the balance of the Fund's holdings,
thereby reducing the current yields of the Fund. In periods of rising interest
rates, the opposite can be expected to occur.
Advertisements and other sales literature may from time to time include
comparative performance information including data relating to the yield on
deposits at banking and savings and loan institutions (including savings
accounts, interest bearing checking accounts, NOW accounts and money market
deposit accounts). Yields are compiled periodically by the Advisor from a survey
of banking and savings and loan institutions and from reports published by major
newspapers. Additionally, such advertisements and other sales literature may
include references to yield information compiled by IBC's MONEY FUND REPORT, THE
BANK RATE MONITOR, BANXQUOTE and other recognized industry sources. Demand and
savings deposit accounts at banking and savings and loan institutions are
generally FDIC-insured and such yields generally do not fluctuate to the extent
of the Fund.
9
<PAGE>
DIVIDENDS
The daily net income of the Fund is declared as a dividend each business day to
holders of record immediately before 3:00 p.m. Des Moines time. Dividends are
credited to shareholders' accounts each business day and distributed monthly.
Dividends are automatically reinvested in the Fund unless cash payment has been
selected on the Account Application. If a shareholder elects to receive
dividends and/or distributions in cash and the checks are returned and marked as
"undeliverable" or remain uncashed for six months, your cash election will be
changed automatically and future dividends will be reinvested. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation. If a shareholder redeems the entire
amount in his account during the month, dividends credited to the account from
the beginning of the month through the date of redemption are paid with the
redemption proceeds.
For purposes of calculating dividends, daily net income consists of interest
earned, including the amortization of any discount or premium to the date of
maturity, less accrued expenses of the Fund since the previous business day.
Monthly dividend distributions are reinvested in additional shares unless the
shareholder has requested payment in cash. A statement summarizing account
activity and a check for the amount of any dividends the shareholder may have
requested to be paid in cash are normally mailed monthly.
The Fund attempts to maintain its net asset value at $1.00 per share. See
"Valuing the Fund's Shares" on page 6. While this is expected to be possible
under most conditions, should the Fund incur or anticipate any unusual expenses,
loss, depreciation, gain or appreciation which would affect either net asset
value per share or income, the Board of Directors of the Fund will consider
whether to adhere to the dividend policy previously described or revise it in
light of the existing circumstances.
If the Fund's net asset value per share were reduced, or was expected to be
reduced, below $.995, the Board of Directors might temporarily suspend or reduce
dividend payments in order to maintain a net asset value of $1.00 per share. As
a result of such suspension or reduction of dividends, an investor might receive
less income during a given period than he might otherwise. Such expenses, losses
or depreciation might therefore result in an investor receiving no dividends for
the period he held his shares and receiving upon redemption a price per share
lower than the price he paid.
In its endeavor to maintain net asset value at $1.00 per share, the Fund is
required to adhere to certain conditions of Rule 2a-7 promulgated by the
Securities and Exchange Commission which permits the Fund to value its assets at
their amortized cost. These conditions require that: (1) the Fund seek to
maintain a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value and, in no event, longer than
90 days; (2) the board of directors of the Fund undertake to assure, to the
extent reasonably practicable, when taking into account current market
conditions affecting its investment objective, that the Fund's market-based net
asset value per share (that is, its net asset value computed on the basis of
available market quotations and estimates) will not deviate from $1.00; and (3)
the Board of Directors consider reducing or suspending dividend payments if the
market-based net asset value per share declines below $.995.
TAXATION
The Fund has qualified as a regulated investment company under Subchapter M of
the Internal Revenue Code since its inception, and intends to qualify as a
regulated investment company in the current fiscal year by meeting certain
requirements relating to the sources of its income, diversification of its
assets and distributing substantially all of its taxable net income, including
any realized capital gains, and thus will not incur any Federal income taxes.
Shareholders will receive taxable dividend income or capital gains, as the case
may be, from distributions whether paid in cash or received in the form of
additional shares. Promptly after the end of each calendar year, each
shareholder will receive a statement of the Federal income tax status of all
dividends and distributions paid during the year.
Dividends derived from interest on tax-exempt debt obligations owned by the Fund
are intended to constitute "exempt-interest dividends" which are generally not
Federally taxable to Fund shareholders. Dividends derived from other interest
and the realization of capital gains are taxable to shareholders whether or not
reinvested. The Fund will elect to qualify as a "regulated investment company,"
and will distribute annually substantially all of its tax-exempt interest and
other income, including realized capital gains, and will thus not be liable for
Federal income taxes. Fund expenses will be allocated between tax-exempt and
taxable income in the same proportion as the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses).
10
<PAGE>
Promptly after the end of each year, each shareholder will receive a statement
setting forth the dollar amount of income exempt from Federal tax and the dollar
amount, if any, subject to Federal tax. Daily dividends derived from taxable
interest will be designated as taxable in the same percentage as the actual
taxable income earned bears to total income earned on that day.
In accordance with the Internal Revenue Code, interest on indebtedness incurred,
or continued, to purchase or carry shares of the Fund is not deductible.
Dividends may also be subject to state and local taxation. The Fund may not be a
suitable investment for any person who is a "principal user" or "related
person," as defined in Section 144 of the Internal Revenue Code, of certain
facilities if qualified small issue bonds used to finance such facilities are
owned by the Fund.
This discussion of the Fund's tax matters is only a summary and relates
principally to Federal tax matters. Thus, shareholders are encouraged to consult
with their personal tax advisors.
MANAGEMENT
Directors and Officers, together with information as to their principal business
occupations during the last five years, and other information are shown below.
Each Director who is deemed an "interested person", as defined in the Investment
Company Act, is indicated by an asterisk.
* David W. Miles, age 40, Director.
President, Treasurer and Senior Managing Director, Investors Management
Group, and IMG Financial Services, Inc.
* Mark A. McClurg, age 44, President and Director.
Vice President, Secretary and Senior Managing Director, Investors
Management Group, and IMG Financial Services, Inc.
Johnny Danos, age 57, Director.
President, Danos, Inc., a personal investment company, 1994-Present; Audit
Partner, KPMG Peat Marwick, 1963-1994.
Debra Johnson, age 36, Director.
Vice President and CFO, Business Publications Corporation/Iowa Title
Company, a publishing and abstracting service company.
Edward J. Stanek, age 50, Director.
CEO, Iowa Lottery, a government operated lottery.
Ruth L. Prochaska, age 44, Secretary.
Controller/Compliance Officer, Investors Management Group, and
IMG Financial Services, Inc.
The address for Messrs. Miles, McClurg, and Ms. Prochaska is 2203 Grand Avenue,
Des Moines, Iowa 50312-5338.
As of the date hereof, Officers and Director beneficially owned no more than 1
percent of the shares of common stock of any of the Company's Funds or of the
Company's Funds in the aggregate.
Directors and Officers of the Fund who are officers, directors, employees, or
stockholders of the Advisor do not receive any remuneration from the Fund for
serving as Directors or Officers. Those Directors of the Funds who are not so
affiliated with the Advisor receive $250 for each Board of Directors meeting
attended, plus reimbursement for out-of-pocket expenses in attending meetings.
11
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Aggregate Pension or Retire- Estimated Total Compensation
Name of Compensa- ment Benefits Annual From Registrant
Person, tion From Accrue As Part of Benefits Upon and Fund Complex
Position Registrant Fund Expenses Retirement Paid to Director
_______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
David W. Miles $ 0 $ 0 $ 0 $ 0
Director
Mark A. McClurg 0 0 0 0
President &
Director
Johnny Danos 1,000 0 0 1,000
Director
Debra Johnson 1,000 0 0 1,000
Director
Edward J. Stanek 1,000 0 0 1,000
Director
</TABLE>
MANAGEMENT OF THE ADVISOR. David W. Miles and Mark A. McClurg each beneficially
own more than 20 percent of the outstanding voting securities of the Advisor and
are deemed to be control persons of the Advisor. Senior Managing Directors of
Investors Management Group are David W. Miles and Mark A. McClurg. They intend
to devote substantially all their time to the operation of the Advisor.
THE INVESTMENT ADVISORY AGREEMENT
The Advisor furnishes continuous investment supervision to the Fund under an
Investment Advisory Agreement (the "Management Agreement"). For its services the
Advisor is entitled to receive a fee, computed and accrued daily and payable
monthly at the rate of 0.35 percent of the average daily closing net asset value
of the Fund.
From time to time, the Advisor may voluntarily waive all or a portion of the
management fee and/or absorb certain expenses of the Fund without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for
the Fund and increasing the Fund's overall yield to investors at the time any
such amounts are waiver and/or absorbed. The Advisor may not seek reimbursement
of such waived fees at a later date.
Under the Management Agreement, the Advisor agrees to provide a continuous
investment program for the Fund including investment research and management
with respect to all securities and investments. This would include the
solicitation and approval of commercial banks selected as Participating Banks
from which the Fund may purchase participation interests in short-term loans
subject to Liquidity and Servicing Agreements or which may issue irrevocable
letters of credit to back the demand repayment commitments of borrowers. A
careful review of the financial condition and loan loss record of a prospective
bank will be undertaken prior to the bank being approved to enter into a
Liquidity and Servicing Agreement and, once approved, a Participating Bank's
financial condition and loan loss record will be reviewed at least annually
thereafter.
The principal criteria which the Advisor will consider in approving, rejecting
or terminating Liquidity and Servicing Agreements with Participating Banks will
include a bank's (a) ratio of capital to deposits; (b) ratio of loan charge offs
to average loans outstanding; (c) ratio of loan loss reserves to net loans
outstanding; and (d) ratio of capital to total assets. Ordinarily, the Advisor
will recommend that the Fund not enter into or continue a Liquidity and
Servicing Agreement with any bank whose ratios (as described above) are less
12
<PAGE>
favorable than the average of all Iowa banks. The Advisor will also consider a
bank's classified loan experience, historical and current earnings and growth
trends, quality and liquidity of investments and stability of management and
ownership. Typically, the Advisor will utilize a variety of information sources;
including, annual audited financial statements, unaudited interim financial
statements, quarterly reports of condition and income filed with regulatory
agencies and periodic examination reports (if available) and reports of
federally insured banks concerning past-due-loans, renegotiated loans and other
loan problems.
The Advisor has also agreed to reimburse the Fund, up to the amount of the
advisory fees paid to the Advisor, to the extent that the total annual expenses
of the Fund, exclusive of all taxes, interest, brokers' commissions and other
related charges but including fees paid to the Advisor, exceed the most
restrictive limits prescribed by any state in which the Fund's shares may
eventually be offered for sale. The Fund believes that it presently is not
subject to any such restrictions.
The Management Agreement will continue in effect as long as it is approved
annually by a majority of those directors who are not parties to the Management
Agreement or "interested persons" of such parties and by either the board of
directors of the Fund or a majority of the outstanding voting securities of the
Fund. The Management Agreement which was approved by the Fund's directors, as
described above, on November 3, 1997 may be terminated by either party without
penalty on 60 days' written notice and will automatically terminate in the event
of its assignment.
The Management Agreement provides that neither the Advisor nor any of its
officers or directors, agents or employees will have any liability to the Fund
or its shareholders for any error of judgment, mistake of law or any loss
arising out of any investments or for any other act or omission in the
performance of its duties as investment advisor under the Management Agreement,
except for liability resulting from willful misfeasance, bad faith or gross
negligence on the part of the Advisor in the performance of its duties or from
reckless disregard by the Advisor of its obligations under the Management
Agreement.
OTHER INFORMATION
FEDERAL HOLIDAYS. The Fund will be closed for business and, therefore, will not
accept purchase or redemption orders nor calculate net asset value, on all
Federal Holidays -- currently New Year's Day, Martin Luther King, Jr. Day,
President's Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Thanksgiving Day, Veterans Day and Christmas Day.
PORTFOLIO TRANSACTIONS. Subject to policies set forth by the board of directors
of the Fund, the Advisor is authorized to determine, consistent with the Fund's
investment objectives and policies, which securities will be purchased, sold and
held by the Fund. Most of the Fund's portfolio securities will be purchased on a
principal basis directly from the issuer, from banks, underwriters or market
makers and, thus, will not involve payment of a brokerage commission. There were
no "agency" transactions in the last three fiscal years and hence, no brokerage
commissions paid. Such purchases may include a discount, concession or mark-up
retained by an underwriter or dealer. The Advisor is authorized to select the
brokers or dealers that will execute the purchases and sales of portfolio
securities and is directed to use its best efforts to obtain the best available
price and most favorable execution on brokerage transactions. Some of the
portfolio transactions may be directed to brokers who furnish special research
and statistical information or services rendered in the execution of orders
which are of benefit to the Advisor. These may include advice or information
with respect to particular securities or issuers, information concerning general
market or economic conditions and the obtaining of information from brokers,
underwriters or market makers. While no dollar value can be placed on such
information or services, it allows the Advisor to supplement its own research
and analysis activities which can reduce its costs but not those of the Fund.
REPORTS TO SHAREHOLDERS. Semiannual and annual reports will include financial
statements which, in the case of the annual report, will be reported upon by the
Fund's independent auditors, KPMG Peat Marwick LLP. The Annual Report is
incorporated herein by reference into the Fund's Statement of Additional
Information and is available upon request without charge by calling the number
on the cover page of this Statement of Additional Information.
SHAREHOLDER MEETINGS. The Maryland Corporation Law permits registered investment
companies to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Fund has
adopted the appropriate Bylaw provisions and may not hold an annual meeting in
any year in which the election of Directors is not required to be acted on by
shareholders under the 1940 Act.
The Bylaws also contain procedures for removal of Directors by shareholders. At
any meeting of shareholders, duly called and at which a quorum is present, the
shareholders may, by the affirmative vote of the holders of a majority of the
13
<PAGE>
votes entitled to be cast thereon, remove any Director or Directors from office
and may elect a successor or successors to fill any resulting vacancies for the
unexpired terms of removed Directors.
Upon the written request of the holders of shares entitled to not less than 10
percent of all the votes entitled to be cast at such meeting, the Secretary of
the Funds shall promptly call a special meeting of shareholders for the purpose
of voting upon the question of removal of any Director. Whenever 10 or more
shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least 1 percent of the total outstanding
shares, whichever is less, shall apply to the Secretary in writing, stating that
they wish to communicate with other shareholders with a view to obtaining
signatures to a request for a meeting as described above and accompanied by a
form of communication and request which they wish to transmit, the Secretary
shall within five business days after such application either: (1) afford to
such applicants access to a list of the names and addresses of all shareholders
of record; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the last
sentence of the preceding paragraph, the Secretary, upon the written request of
such applicants, accompanied by a tender or the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record at their addresses as recorded on the
books unless within five business days after such tender the Secretary shall
mail to such applicants and file with the Securities and Exchange Commission,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Board of Directors to the effect that in their
opinion either such material contains untrue statements of fact or omits to
state facts necessary to make the statements contained therein not misleading,
or would be in violation of applicable law, and specifying the basis of such
opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the Securities and Exchange Commission may, and if demanded
by the Board of Directors or by such applicants shall, enter an order either
sustaining one or more of such objections or refusing to sustain any of them. If
the Securities and Exchange Commission shall enter an order refusing to sustain
any of such objections, or if, after the entry of an order sustaining one or
more of such objections, the Securities and Exchange Commission shall find,
after notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail copies
of such material to all shareholders with reasonable promptness after the entry
of such order and the renewal of such tender.
PRINCIPAL SHAREHOLDERS AND CONTROL PERSONS. As of the date hereof o the
knowledge of the Fund, no other shareholders owned beneficially as of the record
date five percent or more of the Fund's outstanding shares and the Fund's
officers and directors as a group owned less than 1 percent of the Fund's
shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT. AMCORE Financial Group,
N.A., 501 seventh Street, Rockford, Illinois 61110-0037, (the "Custodian")
serves as the Fund's custodian. The Custodian's responsibilities include
safekeeping and controlling the Fund's cash and securities, handling the receipt
and delivery of securities, determining income and collecting interest and
dividends on each Fund investment, maintaining books of original entry for
portfolio and fund accounting and other required books and accounts, and
calculating the daily net asset value and public offering price of shares of the
Fund. The Custodian does not determine the investment policies of the Fund or
decide which securities the Fund will buy or sell. The Fund may, however, invest
in securities of the Custodian and may deal with the Custodian as principal in
securities transactions. IMG serves as the Fund's Transfer Agent and Dividend
Paying Agent.
INDEPENDENT AUDITORS. KPMG Peat Marwick LLP, 2500 Ruan Center, Des Moines, Iowa
50309, has been selected unanimously by the members of the board of directors of
the Fund who are not interested persons of the Fund as the Fund's independent
auditors to examine the books and securities of the Fund and to report upon the
financial statements of the Fund.
14
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS. The Fund invests in tax-exempt debt
obligations, including both bonds and notes, rated in the top two grades by
Moody's and S & P. These ratings have to do with the financial strength of the
issuer of the obligations at the time they are first issued. The ratings do not
reflect opinions regarding the market value or the marketability of the
obligations. Both could be affected by a change in rating, however. Moody's four
highest ratings are Aaa, Aa, A and Baa. S & P's are AAA, AA, A and BBB.
Bonds rated Aaa or AAA are judged to be of the best quality. Interest
and principal are secure with market prices responsive to changes in interest
rates.
Bonds rated Aa or AA are also judged to be of high quality although
interest and principal do not enjoy the margin of safety that would be true of
bonds rated Aaa or AAA. Long-term risks would be somewhat greater also, with
price fluctuations primarily the result of interest rate changes.
Bonds rated A by the two rating agencies are considered to be of upper
medium grade. While interest and principal protection is judged to be adequate,
it could be susceptible to future impairment. While the price of such
obligations will be affected principally by interest rate fluctuations, economic
conditions will also have an impact.
Bonds rated Baa or BBB are considered medium grade obligations.
Interest and principal are adequately secure over the short-term but the
obligations may be somewhat speculative. Changing economic conditions may also
impact the security of the indebtedness resulting in market prices being more
affected by changes therein than by interest rate fluctuations.
TAX-EXEMPT NOTE AND COMMERCIAL PAPER RATINGS. Ratings for tax-exempt
notes are designated "MIG" (Moody's Investment Grade) by Moody's. Notes rated
MIG-1 are the highest quality and enjoy excellent protection by virtue of
established cash flows available for debt service or ready access to the market
for refinancing, or both.
Notes rated MIG-2 are high quality with ample cash flow protection
although less than available to obligations bearing the top rating.
Notes rated MIG-3 are of good quality as measured by the relevant
factors associated with credit-worthiness. However, the unquestioned financial
strength ascribed to issues in the two preceding rating categories is lacking
and ready access to the market for refinancing is less well established.
Tax-exempt commercial paper rated Prime-1 (P-1) by Moody's is supported
by the issuer's superior capacity to repay, while commercial paper rated Prime-2
(P-2) is backed by strong repayment capacity.
S & P's commercial rating A-1 indicates the obligations enjoy extremely
strong credit backing in terms of the issuer's capacity to repay, while an A-2
rating indicates strong issuer repayment capacity exists.
15
<PAGE>
APPENDIX B
Tax-Exempt vs. Taxable Yields. Set forth below is a table which may be used to
compare equivalent taxable yields to tax-exempt rates of return based upon the
investor's level of taxable income. The rates shown are those in effect under
the Internal Revenue Code as of January 1, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
Marginal The following TAX-EXEMPT INTEREST RATES:
TAXABLE INCOME * Single Income 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
Joint Return Return Tax
Bracket Equal the TAXABLE
INTEREST RATES shown below:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6,450 - $ 45,450 $ 2,650 - $ 26,150 15.0% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
45,450 - 92,850 26,150 - 55,500 28.0% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
92,850 - 156,000 55,500 - 126,150 31.0% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
156,000 - 275,300 126,150 - 272,550 36.0% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over 275,300 Over 272,550 39.6% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
Maximum Corporate Rate 34.0% 5.30% 6.06% 6.82% 7.58% 8.33% 9.09% 9.85%
</TABLE>
* Net amount subject to Federal income tax after deductions and exemptions.
Assumes alternative minimum tax is not applicable and receipt of tax-exempt
interest does not cause any portion of social security benefits received to
become taxable to the taxpayer.
State tax considerations are excluded.
16
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
VINTAGE BOND FUND
IMG Financial Services, Inc.
2203 Grand Avenue
Des Moines, IA 50312-5338
Telephone: 1-515-244-5426
Toll-Free: 1-800-798-1819
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of Vintage Bond Fund, (the "Fund"), dated
January 16, 1998. Requests for copies of the Prospectus should be made by
writing to Vintage Bond Fund, 2203 Grand Avenue, Des Moines, IA 50312-5338; or
by calling one of the numbers listed above.
This Statement of Additional Information is dated January, 16, 1998.
<PAGE>
IMG MUTUAL FUNDS, INC.
TABLE OF CONTENTS
Page No.
--------
INVESTMENT POLICIES AND TECHNIQUES.................................... 3
Fixed Income Securities...................................... 3
Illiquid Securities.......................................... 4
Delayed Delivery Transactions................................ 5
Stripped Mortgage-Backed Securities.......................... 6
Reverse Repurchase Agreements................................ 6
Securities Lending........................................... 6
Loan Participations and Other Direct Indebtedness............ 7
Futures Contracts............................................ 8
Federal Tax Treatment of Futures Contracts................... 11
Options on Futures........................................... 11
Covered Call and Put Options................................. 12
Over-The-Counter Options..................................... 14
Spread Transactions.......................................... 15
Federal Tax Treatment of Options............................. 15
Certain Considerations Regarding Options..................... 16
Asset Coverage for Futures and Options Positions............. 16
Low-Rated and Comparable Unrated Fixed Income Securities..... 16
INVESTMENT RESTRICTIONS............................................... 18
DIRECTORS AND OFFICERS ............................................... 21
COMPENSATION TABLE.................................................... 22
PRINCIPAL SHAREHOLDERS................................................ 22
MANAGEMENT OF THE FUND................................................ 23
FUND TRANSACTIONS AND BROKERAGE....................................... 27
TAXES ............................................................. 28
DETERMINATION OF NET ASSET VALUE...................................... 28
SHAREHOLDER SERVICES.................................................. 29
Systematic Withdrawal Plan................................... 29
Automatic Investment Plan.................................... 29
General Procedures for Shareholder Accounts.................. 30
Telephone Exchange Privilege and Automatic Exchange Plan..... 30
SHAREHOLDER MEETINGS.................................................. 30
VALUATION OF FUND SECURITIES.......................................... 31
PERFORMANCE INFORMATION............................................... 32
GENERAL INFORMATION................................................... 34
REPORTS TO SHAREHOLDERS............................................... 35
INDEPENDENT AUDITORS.................................................. 35
APPENDIX A............................................................ 36
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated January 16 1998, and if given or
made, such information or representations may not be relied upon as having been
authorized by the Fund.
This Statement of Additional Information does not constitute an offer to sell
securities.
2
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objectives, policies, and techniques that are described in detail in the
Prospectus under the captions "INVESTMENT OBJECTIVES AND POLICIES" and
"IMPLEMENTATION OF POLICIES AND RISKS".
FIXED INCOME SECURITIES
The Fund is invested primarily in Fixed Income Securities. These include,
without limitation, the following:
1. U.S. government securities, including bills, notes, bonds, and other debt
securities differing as to maturity and rates of interest, which are
either issued or guaranteed by the U.S. Treasury or are issued or
guaranteed by U.S. government agencies or instrumentalities. U.S.
government agency securities include securities issued by (a) the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, and the Government
National Mortgage Association, whose securities are supported by the full
faith and credit of the United States; (b) the Federal Home Loan Banks,
Federal Intermediate Credit Banks, and the Tennessee Valley Authority,
whose securities are supported by the right of the agency to borrow from
the U.S. Treasury; (c) the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, the Interamerican Development Bank, and the
International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their
securities, and consequently, the value of such securities may fluctuate.
2. Certificates of deposit issued against funds deposited in a bank or
savings and loan association. Such certificates are for a definite period
of time, earn a specified rate of return, and are normally negotiable. If
such certificates of deposit are nonnegotiable, they will be considered
illiquid securities and be subject to the Fund's 10 percent restriction
on investments in illiquid securities. Pursuant to the certificate of
deposit, the issuer agrees to pay the amount deposited plus interest to
the bearer of the certificate on the date specified thereon. Under
current FDIC regulations, the maximum insurance payable as to any one
certificate of deposit is $100,000; therefore, certificates of deposit
purchased by the Fund will not generally be fully insured.
3. Bankers' acceptances which are short-term credit instruments used to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount
of funds to pay for specific merchandise. The draft is then "accepted" by
a bank that, in effect, unconditionally guarantees to pay the face value
of the instrument on its maturity date. The acceptance may then be held
by the accepting bank as an asset or it may be sold in the secondary
market at the going rate of interest for a specific maturity.
3
<PAGE>
4. Repurchase agreements which involve purchases of debt securities. In such
a transaction, at the time the Fund purchases the security, it
simultaneously agrees to resell and redeliver the security to the seller,
who also simultaneously agrees to buy back the security at a fixed price
and time. This assures a predetermined yield for the Fund during its
holding period since the resale price is always greater than the purchase
price and reflects an agreed-upon market rate. Such transactions afford
an opportunity for the Fund to invest temporarily available cash. The
Fund may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Fund may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement
provides that the Fund is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement is entered into,
however, and if the seller defaults under a repurchase agreement when the
value of the underlying collateral is less than the repurchase price, the
Fund could incur a loss of both principal and interest. The value of the
collateral is monitored at the time the transaction is consummated and at
all times during the term of the repurchase agreement to insure that the
value of the collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Fund. If the seller were to become
subject to a federal bankruptcy proceeding, the ability of the Fund to
liquidate the collateral could be delayed or impaired because of certain
provisions of the bankruptcy laws.
5. Bank time deposits, which are monies kept on deposit with banks or
savings and loan associations for a stated period of time at a fixed rate
of interest. There may be penalties for the early withdrawal of such time
deposits, in which case the yields of these investments will be reduced.
6. Commercial paper consists of short-term unsecured promissory notes,
including variable rate and master demand notes issued by corporations to
finance their current operations. Master demand notes are direct lending
arrangements between the Fund and the corporation. There is no secondary
market for the notes. However, they are redeemable by the Fund at any
time. In purchasing commercial paper, the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity ratios)
will be evaluated and will continuously be monitored because the Fund's
liquidity might be impaired if the corporation were unable to pay
principal and interest on demand. Investments in commercial paper will be
limited to commercial paper rated in the two highest categories of a
nationally recognized statistical rating organization ("NRSRO") or
unrated commercial paper which is of comparable quality.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities, which include restricted securities
(privately placed securities) and other securities without readily available
market quotations. However, the Fund will not acquire such securities and other
illiquid securities or securities without readily available market quotations,
such as repurchase agreements maturing in more than seven days, options traded
in the over-the-counter market, and private issuer interest-only and
principal-only stripped mortgage-backed securities, if as a result they would
comprise more than 10 percent of the value of the Fund's net assets.
The Board of Directors has the ultimate authority to determine, to the extent
permissible under the federal securities laws, which securities are liquid or
illiquid for purposes of the 10 percent limitation. Certain securities exempt
4
<PAGE>
from registration or issued in transactions exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), may be considered
liquid. The Board of Directors has delegated to the Advisor the day-to-day
determination of the liquidity of a security, although it has retained oversight
and ultimate responsibility for such determinations. Although no definitive
liquidity criteria are used, the Board of Directors has directed the Advisor to
look to such factors as (i) the nature of the market for a security (including
the institutional private resale market), (ii) the terms of certain securities
or other instruments allowing for the disposition to a third party or the issuer
thereof (e.g., certain repurchase obligations and demand instruments), (iii) the
availability of market quotations, and (iv) other permissible relevant factors.
Certain securities, such as repurchase obligations maturing in more than seven
days and other securities that are not readily marketable, are currently
considered illiquid.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the 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, the Fund should be in a position where
more than 10 percent of the value of its net assets are invested in illiquid
assets, including restricted securities which are not readily marketable, the
Fund will take steps as deemed advisable, if any, to protect liquidity.
DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a delayed delivery or when-issued basis.
(See "IMPLEMENTATION OF POLICIES AND RISKS -- Delayed Delivery Securities" in
the Prospectus.) These transactions involve a commitment by the Fund to purchase
or sell specific securities at a predetermined price and/or yield, with payment
and delivery taking place after the customary settlement period for that type of
security (and more than seven days in the future). Typically, no interest
accrues to the purchaser until the security is delivered. The Fund may receive
fees for entering into delayed delivery transactions.
When purchasing securities on a delayed delivery basis, the Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for the securities until
the delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed delivery
purchases may result in a form of leverage. When delayed delivery purchases are
outstanding, the Fund will set aside liquid assets; i.e., readily marketable
debt securities, U.S. government securities and/or cash, in a segregated
custodial account to cover its purchase obligations. When the Fund has sold a
security on a delayed delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a delayed
delivery transaction fails to deliver or pay for the securities, the Fund could
miss a favorable price or yield opportunity, or could suffer a loss.
The Fund may dispose of or renegotiate delayed delivery transactions after they
are entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
5
<PAGE>
STRIPPED MORTGAGE-BACKED SECURITIES
As described in the Prospectus, the Fund may invest a portion of their assets in
stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies or instrumentalities of the U.S.
government, or by private originators, or investors in mortgage loans, including
savings and loan institutions, mortgage banks, commercial banks and investment
banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest while the other class will
receive all of the principal. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities. The market value of the class
consisting primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, the Fund sells a security to another party,
such as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Fund will maintain cash
and appropriate liquid assets; i.e., readily marketable debt securities and U.S.
government securities, in a segregated custodial account to cover its obligation
under the agreement. The Fund will enter into reverse repurchase agreements only
with parties whose creditworthiness is deemed satisfactory by the Fund's
Advisor, Investors Management Group ("IMG").
SECURITIES LENDING
Each of the Fund may seek to increase its income by lending Fund securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and to member firms (and subsidiaries thereof) of the New York Stock
Exchange ("NYSE") and would be required to be secured continuously by collateral
in cash, cash equivalents, or U.S. government securities maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
Investment of the collateral underlying the Fund's securities lending activities
will be limited to short-term, liquid debt securities. The Fund would have the
right to call a loan and obtain the securities loaned at any time on customary
industry settlement notice (which will usually not exceed five days). During the
existence of a loan, the Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would also
receive compensation based on investment of the collateral. The Fund would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially. However, the
loans would be made only to firms deemed to be of good standing, and when the
consideration which could be earned currently from securities loans of this type
justifies the attendant risk. The value of the securities loaned will not exceed
30 percent of the value of the Fund's total assets.
6
<PAGE>
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
Each of the Fund may purchase loan participations and other direct claims
against a borrower. In purchasing a loan participation, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their rights against the borrower.
Alternately, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade claims or other claims
against companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loan participations acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the Fund
to pay additional cash on a certain date or on demand. These commitments may
have the effect of requiring the Fund to increase its investment in a company at
a time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account cash or
other high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
investments which the Fund will purchase, the Advisor will rely upon their own
credit analysis of the borrower (and not that of the original lending
institution). As the Fund may be required to rely upon another lending
institution to collect and pass on to the Fund amounts payable with respect to
the loan and to enforce the Fund's rights under the loan, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Fund from receiving such amounts. In such cases, the Fund will evaluate as well
the creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification of
the Fund's investments. The highly leveraged nature of many such loans may make
such loans especially vulnerable to adverse changes in economic or market
conditions. Investments in such loans may involve additional risk to the Fund.
For example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
7
<PAGE>
absence of definitive regulatory guidance, the Fund relies on the Advisor's
research in an attempt to avoid situations where fraud and misrepresentation
could adversely affect the Fund. In addition, loan participations and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
To the extent that the Advisor determines that any such investments are
illiquid, the Fund will include them in the investment limitations on Illiquid
Securities described above.
FUTURES CONTRACTS
The Fund may enter into interest rate futures contracts (hereinafter referred to
as "Futures" or "Futures Contracts"), as a hedge against changes in prevailing
levels of interest rates in order to establish more definitely the effective
return on securities held or intended to be acquired by the Fund. The Fund's
hedging may include sales of Futures as an offset against the effect of expected
increases in interest rates or decline in the market value of its securities and
purchases of Futures as an offset against the effect of expected declines in
interest rates.
The Fund will not enter into Futures Contracts for speculation and will, to the
extent required by regulatory authorities, enter only into Futures Contracts
which are traded on national futures exchanges and are standardized as to
maturity date and, if applicable, underlying financial instruments. The
principal futures exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (the "CFTC.")
Although techniques other than sales and purchases of Futures Contracts could be
used to reduce the Fund's exposure to interest rate fluctuations, the Fund may
be able to hedge its exposure more effectively, and perhaps at a lower cost,
through using Futures Contracts, since Futures Contracts involve fewer
transaction costs than options on securities transactions.
The Fund will not enter into a Futures Contract if, as a result thereof, (i)
more than 30 percent of the Fund's net assets would be represented by Futures
Contracts (including the then current aggregate Futures market prices of
financial instruments required to be delivered under open Futures Contract sales
plus the then current aggregate purchase prices of financial instruments
required to be purchased under open Futures Contract purchases) or (ii) more
than 5 percent of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to initial margin deposits on
such Futures Contracts and options on Futures Contracts.
An interest rate Futures Contract provides for the future sale by one party and
purchase by another party of a specified amount of a specified instrument (debt
security) for a specified price at a designated date, time, and place.
Transactions costs are incurred when a Futures Contract is bought or sold and
margin deposits must be maintained. A Futures Contract may be satisfied by
delivery or purchase, as the case may be, of the instrument. More commonly,
Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. If the offsetting
purchase price is less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction cost must also be included in
these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
8
<PAGE>
Futures Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract.
As an example of an offsetting transaction in which the underlying financial
instrument is not delivered pursuant to an interest rate Futures Contract, the
contractual obligations arising from the sale of one Futures Contract of
September Treasury Bills on an exchange may be fulfilled at any time before
delivery is required (i.e., on a specified date in September, the "delivery
month") by the purchase of one Futures Contract of September Treasury Bills on
the same exchange. In such instance, the difference between the price at which
the Futures Contract was sold and the price paid for the offsetting purchase,
after allowance for transaction costs, represents the profit or loss to the
Fund.
Persons who trade in Futures Contracts may be broadly classified as "hedgers"
and "speculators". Hedgers, such as the Fund, whose business activity involves
investment or other commitments in securities or other obligations, use the
Futures markets primarily to offset unfavorable changes in value that may occur
because of fluctuations in the value of the securities or obligations held or
expected to be acquired by them. Debtors and other obligors may also hedge the
interest cost of their obligations. The speculator, like the hedger, generally
expects neither to deliver nor to receive the financial instrument underlying
the Futures Contract, but, unlike the hedger, hopes to profit from fluctuations
in prevailing interest rates or financial markets.
A public market exists in interest rate Futures Contracts covering primarily the
following financial instruments: U.S. Treasury bonds; U.S. Treasury notes;
Government National Mortgage Association ("GNMA") modified pass-through
mortgage-backed securities; three-month U.S. Treasury bills; 90-day commercial
paper; bank certificates of deposit; and Eurodollar certificates of deposit. It
is expected that Futures Contracts trading in additional financial instruments
will be authorized. The standard contract size is generally $100,000 for Futures
Contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass-through
securities and $1,000,000 for the other designated Futures Contracts.
The Fund's Futures transactions will be entered into for traditional hedging
purposes; that is, Futures Contracts will be sold to protect against a decline
in the price of securities that the Fund owns, or Futures Contracts will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase. As evidence of this hedging intent, the Fund expects that
approximately 75 percent of such Futures Contract purchases will be "completed";
that is, upon the sale of these long Futures Contracts, equivalent amounts of
related securities will have been or are then being purchased by the Fund in the
cash market.
Margin is the amount of funds that must be deposited by the Fund with its
custodian in a segregated account in the name of the futures commission merchant
in order to initiate Futures trading and to maintain the Fund's open positions
in Futures Contracts. A margin deposit is intended to ensure the Fund's
performance of the Futures Contract. The margin required for a particular
Futures Contract is set by the exchange on which the Futures Contract is traded,
and may be significantly modified from time to time by the exchange during the
term of the Futures Contract. Futures Contracts are customarily purchased and
sold on margins that may range upward from less than 5 percent of the value of
the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
9
<PAGE>
value of a position increases because of favorable price changes in the Futures
Contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Fund. In computing daily net asset value, the Fund will
mark to market the current value of its open Futures Contracts. The Fund expect
to earn interest income on margin deposits.
The prices of Futures Contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and fluctuations in
the general level of stock prices, which in turn are affected by fiscal and
monetary policies and national and international political and economic events.
At best, the correlation between changes in prices of the Futures Contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances such as: variation in
speculative market demand for Futures and for debt securities, including
technical influences in Futures trading and differences between the financial
instruments being hedged and the instruments underlying the standard Futures
Contracts available for trading. For example, in the case of interest rate
Futures Contracts, the interest rate levels, maturities and creditworthiness of
the issues underlying the Futures Contract may differ from the financial
instruments held in the Fund. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, interest rate or market
trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10
percent of the value of the Futures Contract is deposited as margin, a
subsequent 10 percent decrease in the value of the Futures Contract would result
in a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15 percent decrease would result
in a loss equal to 150 percent of the original margin deposit, if the Futures
Contract were closed out. Thus, a purchase or sale of a Futures Contract may
result in losses in excess of the amount initially invested in the Futures
Contract. However, the Fund would presumably have sustained comparable losses
if, instead of the Futures Contract, it had invested in the underlying financial
instrument and sold it after the decline.
Most United States Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a Futures or Futures option position. The Fund would
continue to be required to meet margin requirements until the position is
closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
10
<PAGE>
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
For federal income tax purposes, the Fund is required to recognize at the end of
each taxable year its net unrealized gains and losses on Futures Contracts as of
the end of the year as well as those actually realized during the year. Except
for transactions in Futures Contracts which the taxpayer elects to classify as
part of a "mixed straddle", any gain or loss recognized with respect to a
Futures Contract is considered to be 60 percent long-term capital gain or loss
and 40 percent short-term capital gain or loss, without regard to the holding
period of the Futures Contract. In the case of a Futures transaction classified
as a "mixed straddle", the recognition of losses may be deferred to a later
taxable year.
Sales of Futures Contracts which are intended to hedge against a change in the
value of securities held by the Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for the Fund to continue to qualify for federal income tax treatment as
a regulated investment company, at least 90 percent of its gross income for a
taxable year must be derived from qualifying income (i.e., dividends, interest,
income derived from loans of securities and gains from the sale of securities,
and other income (including gains on options and Futures Contracts)) derived
with respect to the Fund's business of investing in securities. It is
anticipated that any net gain realized from the closing out of Futures Contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90 percent requirement. For purposes of applying
these tests any increase in value on a position that is part of a designated
hedge will be offset by any decrease in value (whether or not realized) on any
other position that is part of such hedge.
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes (including unrealized gains
at the end of the Fund's fiscal year) on Futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments.
OPTIONS ON FUTURES
The Fund may also purchase put and write call options on Futures Contracts and
enter into closing transactions with respect to such options to terminate an
existing position. A futures option gives the holder the right, in return for
the premium paid, to assume a long position (call) or short position (put) in a
Futures Contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the holder acquires a long position in
the Futures Contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. Prior to exercise or expiration,
a futures option may be closed out by an offsetting purchase or sale of a
futures option of the same series.
The Fund may use its options on Futures Contracts in connection with hedging
strategies. Generally, these strategies would be employed under the same market
and market sector conditions in which the Fund uses put and call options on
securities. (See "Covered Call and Put Options" below.) The purchase of put
options on Futures Contracts is analogous to the purchase of puts on securities
so as to hedge the Fund's securities against the risk of declining market
prices. The writing of a call option on a Futures Contract constitutes a partial
hedge against declining prices of the securities being hedged. If the futures
price at expiration of a written call option is below the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
11
<PAGE>
hedge against any decline that may have occurred in the Fund's holdings of
securities. If the futures price when the option is exercised is above the
exercise price, however, the Fund will incur a loss, which may be offset, in
whole or in part, by the increase in the value of the securities that were being
hedged.
As with investments in Futures Contracts, the Fund is also required to deposit
and maintain margin with respect to options on Futures Contracts written by it.
Such margin deposits will vary depending on the nature of the underlying Futures
Contracts (and the related initial margin requirements), the current market
value of the option and other futures positions held by the Fund.
The risks associated with the use of options on Futures Contracts include the
risk that the Fund may close out its position as a writer of an option only if a
liquid secondary market exists for such options, which cannot be assured. The
Fund's successful use of options on Futures Contracts also depends on the
ability to correctly predict the movement in prices of Futures Contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the Futures
Contract subject to the option. (See "Futures Contracts".)
Neither Fund will purchase or write options on Futures Contracts if, as a result
(i) the aggregate market value of all Fund securities covering the Fund's
options (including options on Futures Contracts and Fund securities) exceeds 25
percent of the Fund's net assets; (ii) the value of all options (including
options on Futures Contracts and Fund securities) exceeds 5 percent of the
Fund's total assets; (iii) the aggregate premiums paid for all options
(including options on Futures Contracts and Fund securities) held exceeds 5
percent of the Fund's net assets; or (iv) more than 5 percent of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial margin and premiums paid on Futures Contracts and
options on Futures Contracts.
COVERED CALL AND PUT OPTIONS
The Fund may write (sell) covered call options and purchase options to close out
options previously written by the Fund. The purpose of writing covered call
options is to reduce the effect of price fluctuations of the securities owned by
the Fund (and involved in the options) on the Fund's net asset value per share.
Although premiums may be generated through the use of covered call options, the
Advisor does not consider such premiums as the primary reason for writing
covered call options.
A call option gives the holder (buyer) the right to purchase a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, such writer may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the writer to deliver the
underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing the option the
writer previously sold. To secure the writer's obligation to deliver the
underlying security in the case of a call option, the writer is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the clearing corporations and of the exchanges. A put option gives the
holder (buyer) the right to sell a security at a specified price (the exercise
price) at any time until a certain date (the expiration date). The Fund will
only write covered call options and purchase covered put options. This means
that the Fund will only write a call option or purchase a put option on a
security that the Fund already owns. The Fund will not write call options on
when-issued securities. The Fund will write covered call options and purchase
12
<PAGE>
covered put options in standard contracts, which may be quoted on NASDAQ or on
national securities exchanges, or write covered call options with and purchase
covered put options directly from investment dealers meeting the
creditworthiness criteria of the Advisor. In order to comply with the
requirements of the securities laws in several states, the Fund will not write a
covered call option or purchase a put option on Fund securities if, as a result,
(i) the aggregate market value of all Fund securities covering the Fund's
options (including options on Futures Contracts and Fund securities) exceeds 25
percent of the Fund's net assets; (ii) the value of all options (including
options on Futures Contracts and Fund securities) exceeds 5 percent of the
Fund's total assets; or (iii) the aggregate premiums paid for all options
(including options on Futures Contracts and Fund securities) held exceeds 5
percent of the Fund's net assets.
Securities on which put options will be purchased and call options may be
written will be purchased solely on the basis of investment considerations
consistent with the Fund's investment objective. The writing of covered call
options is a conservative investment technique believed to involve relatively
little risk (in contrast to the writing of naked or uncovered options, which the
Fund will not do), but capable of enhancing the Fund's total return. When
writing a covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. If a call option which the Fund has written expires, the
Fund will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security. The Fund will purchase put
options involving Fund securities only when a temporary defensive position is
desirable in light of market conditions and the Fund will hold the Fund
security. As a result, the purchase of put options will be utilized to protect
the Fund's holdings in an underlying security against a substantial decline in
market value. Such protection is, of course, only provided during the life of
the put option when the Fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline in
the underlying security's market price. By using put options in this manner, the
Fund will reduce any profit they might otherwise have realized in their
underlying security by the premium paid for the put option and by transaction
costs. The securities covering the call option will be maintained in a
segregated account of the Custodian. The Fund do not consider a security covered
by a call option or put option to be "pledged" as that term is used in the
Fund's policy limiting the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Fund will
receive from writing a call option will reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to such market price, the historical price volatility of the underlying
security, the length of the option period, the general supply of and demand for
credit and the general interest rate environment. The premium received by the
Fund for writing covered call options will be recorded as a liability in the
Fund's Statement of Assets and Liabilities. This liability will be adjusted
daily to the option's current market value, which will be the latest sale price
at the time at which the net asset value per share of the Fund is computed
(close of the New York Stock Exchange), or, in the absence of such sale, the
latest asked price. The liability will be extinguished upon expiration of the
option, the purchase of an identical option in a closing transaction or delivery
of the underlying security upon the exercise of the option.
The premium paid by the Fund when purchasing a put option will be recorded as an
asset in the Fund's Statement of Assets and Liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
13
<PAGE>
sale, the latest bid price. The asset will be extinguished upon expiration of
the option, the selling (writing) of an identical option in a closing
transaction or the delivery of the underlying security upon the exercise of the
option.
The Fund will only purchase a call option to close out a covered call option it
has written. The Fund will only write a put option to close out a put option it
has purchased. Such closing transactions will be effected in order to realize a
profit on an outstanding call or put option, to prevent an underlying security
from being called or put, or to permit the sale of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option or purchased a
put option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If the Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs, including brokerage commissions. The Fund will pay brokerage
commissions in connection with the writing or purchase of options to close out
previously written options. Such brokerage commissions are normally higher than
the transaction costs applicable to purchases and sales of Fund securities.
Call options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it rather than delivering such security from
its portfolio. In such cases additional transaction costs will be incurred.
The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the call option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different call or put option. Also, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
OVER-THE-COUNTER OPTIONS
Subject to restrictions on investments in Illiquid Securities, and its own
investment limitations, the Fund may invest in over-the-counter options. Unlike
transactions entered into by the Fund in Futures Contracts or exchange-traded
options, over-the-counter options on securities are not traded on contract
markets regulated by the CFTC or the United States Securities and Exchange
Commission ("SEC"). To the contrary, such instruments are traded through
financial institutions acting as market-makers. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer could lose amounts substantially in excess
of their initial investments, due to the margin and collateral requirements
associated with such positions.
14
<PAGE>
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, until exercise, expiration or maturity. This in turn could
limit the Fund's ability to profit from open positions or to reduce losses
experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency, metal or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Advisor.
SPREAD TRANSACTIONS
The Fund may purchase from securities dealers covered spread options. Such
covered spread options are not presently exchange listed or traded. The purchase
of a spread option gives the Fund the right to put or sell a security that it
owns at a fixed dollar spread or fixed yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. The risk
to the Fund in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Fund against adverse changes in prevailing
credit quality spreads (i.e., the yield spread between high-quality and
lower-quality securities). Such protection is only provided during the life of
the spread option. The security covering the spread option will be maintained in
a segregated account by the Fund's custodian. The Fund do not consider a
security covered by a spread option to be "pledged" as that term is used in the
Fund's policy limiting the pledging or mortgaging of its assets.
FEDERAL TAX TREATMENT OF OPTIONS
Certain option transactions have special tax results. Expiration of a call
option written by the Fund will result in a short-term capital gain. If the call
option is exercised, the Fund will realize a gain or loss from the sale of the
security covering the call option, and in determining such gain or loss the
premium will be included in the proceeds of the sale.
If the Fund writes options other than "qualified covered call options", as
defined in the Code or purchases puts, any losses on such options transactions,
to the extent they do not exceed the unrealized gains on the securities covering
the options, may be subject to deferral until the securities covering the
options have been sold.
In the case of transactions involving "non-equity options" and options on
Futures Contracts, the Fund will treat any gain or loss arising from the lapse,
closing out or exercise of such positions as 60 percent long-term and 40 percent
short-term gain or loss as required by Section 1256 of the Code. In addition,
such positions must be marked-to-market as of the last business day of the year
and gain or loss recognized for federal income tax purposes in accordance with
the 60/40 rule discussed above even though the position has not been terminated.
15
<PAGE>
CERTAIN CONSIDERATIONS REGARDING OPTIONS
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or elsewhere may exist. The writing and
purchasing of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Fund
securities transactions. Imperfect correlation between the options and
securities markets may detract from the effectiveness of attempted hedging.
Options transactions may result in significantly higher transaction costs and
portfolio turnover for the Fund.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
The Fund will comply with regulatory requirements of the SEC and the CFTC with
respect to coverage of options and futures positions by registered investment
companies. The Fund will set aside cash, and other liquid, high grade debt
securities in a segregated custodial account to cover their obligations under
options and futures transactions. Securities held in a segregated account cannot
be sold while the futures or options position is outstanding, unless replaced
with other permissible assets. As a result, there is a possibility that the
segregation of a large percentage of the Fund's assets may force the Fund to
close out futures and options positions and/or liquidate other Fund securities,
any of which may occur at disadvantageous prices, in order for the Fund to meet
redemption requests or other current obligations.
LOW-RATED AND COMPARABLE UNRATED FIXED INCOME SECURITIES
The Fund may invest up to 25 percent of its total assets in non-Investment-Grade
Debt Securities. Non-Investment-Grade Debt Securities (hereinafter referred to
as "junk bonds" or "low-rated and comparable unrated securities") include (i)
bonds rated as low as "Ba" by Moody's Investors Service, Inc. ("Moody's"), or
"BB" by Standard & Poor's Corporation ("S&P"), Fitch Investors Services, Inc.
("Fitch") or Duff & Phelps, Inc. ("D&P") or of similar quality by another NRSRO;
and (ii) unrated debt securities of comparable quality.
Low-rated and comparable unrated securities, while generally offering higher
yields than investment-grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with such
investments are discussed below. Refer to Appendix B of this Statement of
Additional Information for a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
low-rated and comparable unrated securities tend to reflect individual corporate
development to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Low-rated and
comparable unrated securities also tend to be more sensitive to economic
16
<PAGE>
conditions than are higher-rated securities. As a result, they generally involve
more credit risk than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of low-rated and comparable unrated securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by an issuer of low-rated and
comparable unrated securities is significantly greater than that of issuers of
higher-rated securities because such securities are generally unsecured and are
often subordinated to other creditors. Further, if the issuer of a low-rated and
comparable unrated security defaulted, the Fund might incur additional expenses
to seek recovery. Periods of economic uncertainty and changes would also
generally result in increased volatility in the market prices of low-rated and
comparable unrated securities and thus in the Fund's net asset value.
As previously stated, the value of such a security will decrease in a rising
interest rate market and accordingly, so will the Fund's net asset value. If the
Fund experiences unexpected net redemptions in such a market, it may be forced
to liquidate a portion of its Fund securities without regard to their investment
merits. Due to the limited liquidity of high-yield securities (discussed below)
the Fund may be forced to liquidate these securities at a substantial discount.
Any such liquidation would reduce the Fund's asset base over which expenses
could be allocated and could result in a reduced rate of return for the Fund.
PAYMENT EXPECTATIONS. Low-rated and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, the Fund
may have to replace the securities with a lower-yielding security, which would
result in a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the credit analysis than would be the case with investments in
investment-grade debt securities. The Advisor employs its own credit research
and analysis, which includes a study of existing debt, capital structure,
ability to service debt and to pay dividends, the issuer's sensitivity to
economic conditions, its operating history, and the current trend of earnings.
The Advisor continually monitors the investments owned by the Fund and carefully
evaluates whether to dispose of or to retain low-rated and comparable unrated
securities whose credit ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. The Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
17
<PAGE>
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. As a result,
the Fund's asset value and the Fund's ability to dispose of particular
securities, when necessary to meet the Fund's liquidity needs or in response to
a specific economic event, may be impacted. The lack of a liquid secondary
market for certain securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's securities.
Market quotations are generally available on many low-rated and comparable
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During periods
of thin trading, the spread between bid and asked prices is likely to increase
significantly. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
low-rated and comparable unrated securities, especially in a thinly-traded
market.
NEW AND PROPOSED LEGISLATION. Legislation has been adopted and, from
time to time, proposals have been discussed regarding new legislation designed
to limit the use of certain low-rated and comparable unrated securities by
certain issuers. An example of legislation is a recent law which requires
federally insured savings and loan associations to divest their investment in
these securities over time. New legislation could further reduce the market
because such securities, generally, could negatively affect the financial
condition of the issuers of high-yield securities, and could adversely affect
the market in general. It is not currently possible to determine the impact of
the recent legislation on this market. However, it is anticipated that if
additional legislation is enacted or proposed, it could have a material effect
on the value of low-rated and comparable unrated securities and the existence of
a secondary trading market for the securities.
INVESTMENT RESTRICTIONS
The Prospectus sets forth the investment objectives and policies applicable to
the Fund under the caption "INVESTMENT OBJECTIVES AND POLICIES". The following
is a list of investment restrictions applicable to the Fund. If a percentage
limitation is adhered to at the time of an investment by the Fund, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of the restriction.
The Fund's "fundamental" investment restrictions may be changed by the Fund
without the approval of a majority of its shareholders, which means the vote at
any shareholder meeting of the Fund, of (i) 67 percent or more of the shares
present or represented by proxy at the meeting (if holders of more than 50
percent of the outstanding shares are present or represented by proxy) or (ii)
more than 50 percent of the outstanding shares, whichever is less. However,
except for the fundamental investment limitations set forth below, the
investment policies and limitations described in this Statement of Additional
Information are not fundamental, and may be changed without shareholder
approval.
Except as otherwise stated, the following fundamental restrictions apply to the
Fund. The Fund may not individually:
1. Purchase the securities of any issuer if such purchase would cause, as to
75 percent of the Fund's total assets, more than 5 percent of the value
of the Fund's total assets to be invested in securities of any one issuer
(except securities of the U.S. government or any instrumentality
thereof), or purchase more than 10 percent of the outstanding voting
securities of any one issuer, or more than 10 percent of the outstanding
securities of any class.
18
<PAGE>
2. Borrow money except for temporary or emergency purposes (but not for the
purpose of purchasing investments) and then, only in an amount not to
exceed 25 percent of the value of the Fund's net assets at the time the
borrowing is incurred; provided, however, that the Fund may enter into
transactions in options, futures and options on futures. The Fund will
not purchase securities when borrowings exceed 5 percent of its total
assets. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. To this extent,
purchasing securities when borrowings are outstanding may involve an
element of leverage.
3. Invest in commodities or physical commodity contracts. However, the Fund
may purchase and sell financial futures contracts and options on such
contracts.
4. Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with their investment objectives and policies,
(ii) enter into repurchase agreements, and (iii) lend Fund securities
against collateral (consisting of cash or securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities) equal at all
times to not less than 100 percent of the value of the securities loaned
provided no such loan may be made if as a result the aggregate of such
loans of the Fund's securities exceeds 30 percent of the value of the
Fund's total assets.
5. Invest in real estate, although they may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.
6. Issue senior securities, bonds or debentures.
7. Underwrite securities of other issuers, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held by it.
8. Invest in the securities of a company for the purpose of exercising
control or management.
9. Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any securities
on margin, except that it may obtain such short-term credits as are
necessary for the clearance of transactions. The deposit or payment of
margin in connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
10. oncentrate investments in any industry. However, the Fund may invest
up to 25 percent of the value of its total assets in any one industry.
The following limitations are not fundamental and may be changed without
shareholder approval. The Fund do not currently intend to:
A. Purchase securities of any company having less than three years of
continuous operation (including the operations of any predecessors) if
the purchase would cause the value of the Fund's investments in all such
companies to exceed 5 percent of the value of its net assets.
B. Enter into a Futures Contract or an option thereon unless if, as a result
thereof, (i) the then current aggregate futures market prices of
instruments required to be delivered under open Futures Contract sales
plus the then current aggregate purchase prices of instruments required
19
<PAGE>
to be purchased under open Futures Contract purchases would not exceed 30
percent of the Fund's net assets (taken at market value at the time of
entering into the contract) and (ii) not more than 5 percent of the
Fund's total assets (taken at market value at the time of entering into
the contract) would be committed to initial margin and premiums paid on
Futures Contracts or options on Futures Contracts. Transactions in
Futures Contracts or options thereon may be entered into only for hedging
purposes.
C. Engage in the purchase and sale of put, spread or call options on
specific securities or Futures Contracts, or engage in writing such
options, except that the Fund may, subject to the provisions of Items B
and D, (i) purchase warrants where the grantor of the warrants is the
issuer of the underlying securities, provided that not more than 5
percent of the Fund's net assets may be invested in such warrants; (ii)
purchase covered spread options, provided that the value of such options
at any time does not exceed 5 percent of the Fund's net assets; (iii)
write covered call options, and purchase covered put options with respect
to all of its Fund securities and enter into closing transactions with
respect to such options; and (iv) write call options and purchase put
options on Futures Contracts and enter into closing transactions with
respect to such options.
D. Purchase or write options on specific securities, Futures Contracts and
indexes if as a result thereof, (i) the aggregate market value of all
Fund securities covering such options (including options on Futures
Contracts and Fund securities) exceeds 25 percent of the Fund's net
assets; (ii) the value of all such options (including options on Futures
Contracts and Fund securities) exceeds 5 percent of the Fund's total
assets; (iii) the aggregate premiums paid for all such options (including
options on Futures Contracts and Fund securities) held exceeds 5 percent
of the Fund's net assets; or (iv) more than 5 percent of the Fund's total
assets (taken at market value at the time of entering into the contract)
would be committed to initial margin and premiums paid on Futures
Contracts and options on Futures Contracts.
E. Invest more than 10 percent of any Fund's total assets in securities of
other open-end investment companies, invest more than 5 percent of total
assets in the securities of any one investment company, or acquire more
than 3 percent of the outstanding voting securities of any one investment
company except in connection with a merger, consolidation or plan of
reorganization.
F. Borrow money, except (a) from a bank or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements are
treated as borrowings for purposes of fundamental investment limitation
(2)). The Fund may not purchase any security while borrowings
representing more than 5 percent of its total assets are outstanding.
G. Purchase or retain securities issued by an issuer, any of whose officers
or directors or security holders is an Officer or Director of the Fund or
its Advisor if, or so long as, the Officers and Directors of the Fund and
of the Advisor together own beneficially more than 5 percent of any class
of securities of the issuer.
H. Invest in oil, gas or other mineral exploration or development programs,
although the Fund may invest in securities of issuers which invest in or
sponsor such programs.
For further discussion of the limitations of the Fund's investments which are
not fundamental and may be changed without shareholder approval, see "INVESTMENT
POLICIES AND TECHNIQUES" above.
20
<PAGE>
DIRECTORS AND OFFICERS
Directors and Officers, together with information as to their principal business
occupations during the last five years, and other information are shown below.
Each Director who is deemed an "interested person", as defined in the Investment
Company Act, is indicated by an asterisk.
*David W. Miles, age 40, Director.
President, Treasurer and Senior Managing Director, Investors Management
Group, and IMG Financial Services, Inc.
*Mark A. McClurg, age 44, President and Director.
Vice President, Secretary and Senior Managing Director, Investors
Management Group, and IMG Financial Services, Inc.
Johnny Danos, age 57, Director.
President, Danos, Inc., a personal investment company, 1994-Present; Audit
Partner, KPMG Peat Marwick, 1963-1994.
Debra Johnson, age 36, Director.
Vice President and CFO, Business Publications Corporation/Iowa Title
Company, a publishing and abstracting service company.
Edward J. Stanek, age 50, Director.
CEO, Iowa Lottery, a government operated lottery.
Ruth L. Prochaska, age 44, Secretary.
Controller/Compliance Officer, Investors Management Group, and
IMG Financial Services, Inc.
The address for Messrs. Miles, McClurg, and Ms. Prochaska is 2203 Grand Avenue,
Des Moines, Iowa 50312-5338.
As of the date hereof, Officers and Director beneficially owned no more than 1
percent of the shares of common stock of the Fund.
Directors and Officers of the Fund who are officers, directors, employees, or
stockholders of the Advisor do not receive any remuneration from the Fund for
serving as Directors or Officers. Those Directors of the Fund who are not so
affiliated with the Advisor receive $250 for each Board of Directors meeting
attended, plus reimbursement for out-of-pocket expenses in attending meetings.
21
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Aggregate Pension or Retire- Estimated Total Compensation
Name of Compensa- ment Benefits Annual From Registrant
Person, tion From Accrue As Part of Benefits Upon and Fund Complex
Position Registrant Fund Expenses Retirement Paid to Director
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David W. Miles $ 0 $ 0 $ 0 $ 0
Director
Mark A. McClurg 0 0 0 0
President &
Director
David Lundquist 1,000 0 0 1,000
Chairman &
Director
Johnny Danos 1,000 0 0 1,000
Director
Debra Johnson 1,000 0 0 1,000
Director
Edward J. Stanek 1,000 0 0 1,000
Director
</TABLE>
MANAGEMENT OF THE ADVISOR. David W. Miles and Mark A. McClurg each beneficially
own more than 20 percent of the outstanding voting securities of the Advisor and
are deemed to be control persons of the Advisors. Senior Managing Directors of
Investors Management Group are David W. Miles and Mark A. McClurg. They intend
to devote substantially all their time to the operation of the Advisor.
PRINCIPAL SHAREHOLDERS
As of December 31, 1997, the following persons owned 5 percent or more of the
outstanding shares of the Fund:
SELECT SHARES
Name Amount % Ownership
Reichardt, Douglas $376,007 12.44
Flagg, Donna B 313,207 10.36
Swanson, Margaret B 189,815 6.28
Oakridge Neighborhood 186,667 6.18
Eyerly Ball 160,571 5.31
22
<PAGE>
INSTITUTIONAL SHARES
Name Amount % Ownership
The Sargent Group $1,477,674 43.15
Science Center of Iowa 484,973 14.16
Friends of Faith 480,564 14.03
Child, Tom 215,391 6.29
SCRS Investments 175,911 5.14
MANAGEMENT OF THE FUND
THE ADVISOR
The Fund's advisor is Investors Management Group ("IMG" or the "Advisor"), a
registered investment advisor incorporated in the state of Iowa A brief
description of the Fund's investment advisory agreement is set forth in the
Prospectus under "MANAGEMENT".
The Advisory Agreement, (the "Advisory Agreement"), was approved by the initial
shareholder on November 17, 1994. The Advisory Agreement is required to be
approved annually by the Board of Directors of the Fund or by a vote of a
majority of the Fund's outstanding voting securities (as defined in the
Investment Company Act). In either case, each annual renewal must be approved by
the vote of a majority of the Fund's Directors who are not parties to the
Advisory Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement is terminable, without penalty, on 60 days' written notice by the
Board of Directors of the Fund, by vote of a majority of the Fund's outstanding
voting securities, or by IMG. In addition, the Advisory Agreement will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, IMG is responsible for all day-to-day
management of the Fund, subject to the supervision of the Fund's Board of
Directors.
The following individuals serve as portfolio managers for the Fund and are
primarily responsible for the day-to-day management of the Fund's portfolio.
Jeffrey D. Lorenzen, CFA, and Kathryn D. Beyer, CFA, have managed the Fund since
inception.
JEFFREY D. LORENZEN, CFA, MANAGING DIRECTOR. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. He received his Masters of Business
Administration degree from Drake University and his Bachelor of
Business Administration degree from the University of Iowa.
KATHRYN D. BEYER, CFA, MANAGING DIRECTOR. Ms. Beyer is a fixed income
strategist and is a member of IMG's Investment Policy Committee. Prior
to joining IMG in 1993, her experience includes serving as a securities
analyst and director of mortgage-backed securities for Central Life
Assurance Company from 1988 to 1993. Ms. Beyer received her Masters of
Business Administration degree from Drake University and her Bachelor
of Science degree in agricultural engineering from Iowa State
University.
23
<PAGE>
ELIZABETH S. PIERSON, VICE PRESIDENT AND SENIOR FIXED INCOME MANAGER.
AMCORE Capital Management, Inc. (or a predecessor) since 1984 when she
began her investment career. AMCORE Capital Management, Inc., was
merged with IMG in December 1997. She has a B.S. degree from the
University of Illinois, Champaign-Urbana and is a Chartered Financial
Analyst. She has been responsible for investment management and credit
responsibilities in numerous individually managed advisory portfolios.
IMG is responsible for investment decisions and supplies investment research and
Fund management. At its expense, IMG provides office space and all necessary
office facilities, equipment, and personnel for servicing the investments of the
Fund.
Except for the expenses expressly assumed by IMG as set forth above or as
described below with respect to the distribution of the Fund's shares, the Fund
are responsible for all their other expenses, including, without limitation,
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Fund, brokerage commissions, and other
expenses connected with the execution, recording and settlement of Fund security
transactions; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of registering or qualifying shares for sale;
expenses for preparing, printing and distributing periodic reports, notices and
proxy statements to shareholders and to governmental officers and commissions;
insurance premiums; fees and expenses of the Fund's custodian including
safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Fund;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; compensation and
expenses of Directors who are not "interested persons" of the Advisor; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Fund's Distribution Agreement with IMG Financial Services, Inc. requires IMG
Financial Services, Inc. to pay for prospectuses that are to be used for sales
purposes.
As compensation for its services, the Fund pays to the Advisor a monthly
management fee at an annual rate of 0.55 percent of average net assets of the
Fund. (See "ADDITIONAL INVESTMENT INFORMATION -- Calculation of Net Asset Value"
in the Prospectus.) The Fund paid management fees of $23,868 to the Advisor for
the fiscal year ended April 30, 1997 and $15,625 for the period from inception,
July 7, 1995, through fiscal year end on April 30, 1996.
From time to time, IMG may voluntarily waive all or a portion of their
management fees for one or more of the Fund. The organizational expenses of the
Fund were borne by IMG and will not be reimbursed by the Fund.
The Advisory Agreement requires IMG to reimburse the Fund in the event that the
expenses and charges payable by the Fund in any fiscal year, including the
advisory fee but excluding taxes, interest, brokerage commissions, and similar
fees, exceed that percentage of the average net asset value of the Fund for such
year, which is the most restrictive percentage provided by the state laws of the
various states in which the Fund's common stock is qualified for sale. Such
excess is determined by valuations made as of the close of each business day of
the year. No percentage limitation is currently applicable to the Fund.
Reimbursement of expenses in excess of the applicable limitation will be made on
a monthly basis and will be paid to the Fund by reduction of the Advisor's fee,
subject to later adjustment, month by month, for the remainder of the Fund's
24
<PAGE>
fiscal year. IMG may from time to time voluntarily absorb expenses for the Fund
in addition to the reimbursement of expenses in excess of applicable
limitations.
THE DISTRIBUTOR
The Directors of the Fund have adopted a Distribution Plan (the "Distribution
Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder,
after having concluded that there was a reasonable likelihood that the
Distribution Plan would benefit the Fund and the shareholders of the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan provides that the Fund shall pay IMG Financial Services,
Inc. ("IFS"), as the Fund's distributor, a daily distribution fee payable
monthly and equal on an annual basis to 0.15 percent of Select Shares of the
Fund. Institutional Shares do not pay a distribution service fee. The purpose of
such payments is to compensate IFS for its distribution services to the Fund.
IFS pays the cost of fees to broker-dealers, and for expenses of printing
prospectuses and reports used for sales purposes, expenses of the preparation
and printing of sales literature and other distribution-related expenses,
including, without limitation, the cost necessary to provide
distribution-related services, of personnel, travel, office expenses and
equipment.
The Fund paid distribution fees totaling $5,594 for the fiscal year ended April
30, 1997 and $3,525 for the period from inception, July 7, 1995 through fiscal
year end on April 30, 1996.
In accordance with Rule 12b-1, all agreements relating to the Distribution Plan
entered into between either the Fund or IFS and other organizations must be
approved by the Fund's Board of Directors, including a majority of the Directors
who are not "interested persons" of the Fund (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Directors"). The Distribution Plan further provides that the selection and
nomination of Qualified Directors shall be committed to the discretion of the
non-interested Directors then in office.
The Distribution Plan requires that the Fund shall provide to the Directors, and
the Directors shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under the Distribution Plan. The Distribution
Plan may be terminated at any time by vote of a majority of the Qualified
Directors or by vote of the holders of a majority of the shares of the Fund (as
defined in "Investment Restrictions" above). The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of shareholders and may not be materially amended in any
case without a vote of the majority of both the Directors and the Qualified
Directors.
The Fund have entered into a Distribution Agreement (the "Distribution
Agreement"), with IFS in accordance with the provisions of the Distribution
Plan. Under the Agreement IFS will serve as distributor for the continuous
offering of shares of the Fund. The public offering price of shares of the Fund
is their net asset value next computed after the sale (see "HOW TO INVEST" in
the Prospectus). The Distribution Agreement will continue in effect only if such
continuance is specifically approved at least annually by vote of both a
majority of the Directors and a majority of the Qualified Directors of the Fund.
25
<PAGE>
The Distribution Agreement will be terminated automatically if assigned, and may
be terminated at any time by a majority of the Qualified Directors or by vote of
the holders of a majority of the shares of the Fund.
ADMINISTRATIVE SERVICES AGREEMENT
IMG provides information and administrative services for shareholders of the
Fund pursuant to a Shareholder Services Plan and Administrative Services
Agreement (the "Administrative Services Agreement"). Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund and their special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. IMG bears all its expenses
of providing services pursuant to the Administrative Services Agreement,
including the payment of any services fees. For services under the
Administrative Services Agreement, the Fund may pay IMG a fee, payable monthly,
at the annual rate of up to 0.25 percent of net assets of the Fund. For the
fiscal year ended April 30, 1997, IMG received fees of $9,821 from the Fund. As
long as the Administrative Services Agreement or any Amendment thereto shall
remain in effect, it is understood that IMG shall be paid fees as set forth in
the Administrative Services Agreement. Unless otherwise specifically approved by
the Board of Directors, IMG shall be solely responsible for all costs and
expenses incurred by it in delivery of such services and its sole compensation
shall be the receipt of its fees.
SHAREHOLDER SERVICING, TRANSFER AND DIVIDEND DISBURSING AGENT
IMG provides shareholder servicing, transfer agency and dividend disbursing
services pursuant to a Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing Agent Agreement with the Fund (the "Agency Agreement").
IMG's responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of the shares of the Fund. For these
services, IMG receives a fee, computed and paid monthly, at the annual rate of
.05 percent of average daily net assets of the Fund.
FUND ACCOUNTING SERVICES
IMG provides fund accounting services under the Fund Accounting Agreement.
Pursuant to this Agreement, IMG is responsible for maintaining all usual,
customary and required books, journals and ledgers of accounts and providing
pricing and reporting all computational services. Under the Agreement, IMG will
be paid a fee computed and paid monthly, at the annual rate of 0.03 percent of
average daily net assets of the Fund. For the fiscal year ended April 30, 1997,
IMG received fees of $5,658 from the Fund.
CUSTODIAN
Bankers Trust Company, New York, New York (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price of shares of the Fund. The Custodian does
not determine the investment policies of any Fund or decide which securities the
Fund will buy or sell. Any Fund may, however, invest in securities of the
26
<PAGE>
Custodian and may deal with the Custodian as principal in securities
transactions.
FUND TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for the Fund
and for the placement of its business and the negotiation of the commissions to
be paid on such transactions. It is the policy of the Advisor to seek the best
execution at the best security price available with respect to each transaction,
in light of the overall quality of brokerage and research services provided to
the Advisor or the Fund. In over-the-counter transactions, orders are placed
directly with a principal market maker unless it is believed that a better price
and execution can be achieved by using a broker. Normally, the Fund will pay no
brokerage commissions on purchases and sales of Fund securities since most of
their purchases and sales will be principal transactions. In selecting
broker-dealers and in negotiating commissions, the Advisor considers the firm's
reliability, the quality of its execution services on a continuing basis, and
its financial condition.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay a
broker or dealer who supplies brokerage and research services a commission for
effecting a transaction in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing, purchasing, or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, strategy, and the performance of accounts; and (c)
effecting securities transactions and performing functions incidental thereto
(such as clearance, settlement and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may cause
the Fund to pay a broker which provides brokerage and research services to the
Advisor a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting the transaction. The
Advisor is of the opinion that the continued receipt of supplemental investment
research services from broker-dealers is essential to its provision of
high-quality management services to the Fund. The Advisory Agreement provides
that such higher commissions will not be paid by the Fund unless (a) the Advisor
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Advisor's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (b) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (c) in the opinion of the Advisor, the total commissions
paid by the Fund will be reasonable in relation to the benefits to the Fund over
the long term. The investment advisory fee paid by the Fund under the Advisory
Agreement is not reduced as a result of the Advisor's receipt of research
services.
The Advisor is authorized to use research services provided by and to place
transactions with brokerage firms that have provided assistance in the
distribution of shares of the Fund or shares of other funds managed by the
Advisor to the extent permitted by law.
The Advisor places portfolio transactions for other advisory accounts, including
other mutual funds managed by the Advisor. Research services furnished by firms
through which the Fund effect their securities transactions may be used by the
Advisor in servicing all of its accounts; not all of such services may be used
by the Advisor in connection with the Fund. In the opinion of the Advisor, it is
27
<PAGE>
not possible to separately measure the benefits from research services to each
of the accounts (including the Fund) managed by the Advisor. Because the volume
and nature of the trading activities of the accounts are not uniform, the amount
of commissions in excess of those charged by another broker paid by each account
for brokerage and research services will vary. However, in the opinion of the
Advisor, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations between the Fund and other advisory accounts, the main factors
considered by the Advisor are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for recommending the
investment.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, IMG may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
TAXES
As indicated under "DISTRIBUTIONS AND TAXES" in the Prospectus, it is the Fund's
intent to qualify each of the Fund as a "regulated investment company" under the
Code. This qualification does not involve governmental supervision of the Fund's
management practices or policies.
A dividend or capital gains distribution received shortly after the purchase of
shares reduces the net asset value of the shares by the amount of the dividend
or distribution and, although in effect a return of capital, will be subject to
income taxes. Net gain on sales of securities when realized and distributed,
actually or constructively, is taxable as capital gain. If the net asset value
of shares were reduced below a shareholder's cost by distribution of gains
realized on sales of securities, such distribution would be a return of
investments although taxable as stated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "ADDITIONAL INVESTMENT
INFORMATION -- Calculation of Net Asset Value," the net asset value of the Fund
will be determined as of the close of trading on each day the NYSE is open for
trading. The NYSE is open for trading Monday through Friday except New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Additionally,
if any of the aforementioned holidays falls on a Saturday, the NYSE will not be
open for trading on the preceding Friday, and when any such holiday falls on a
Sunday, the NYSE will not be open for trading on the succeeding Monday unless
unusual business conditions exist, such as the ending of a monthly or the yearly
accounting period.
The Fund have intended to comply with Rule 18f-3 under the 1940 Act which
permits the Fund, among other things, (a) to issue three classes of shares,
("Adviser" Shares, "Select" Shares and "Institutional" Shares), representing
interests in the same portfolio of securities; and (b) to allow conversions
28
<PAGE>
between the classes of shares. See the Prospectus for a complete description of
the Adviser, Select and Institutional Shares.
SHAREHOLDER SERVICES
As described under "SHAREHOLDER SERVICES -- Automatic Dividend Reinvestment" in
the Prospectus, all income dividends and capital gain distributions will be
invested automatically in additional shares of the Fund paying the distribution
unless the Fund are otherwise notified in writing.
SYSTEMATIC WITHDRAWAL PLAN
You can set up automatic withdrawals from your account at monthly, quarterly or
annual intervals. To begin distributions, you must have an initial balance of
$24,000 in the Fund account, and a maximum of 10 percent per year may be
withdrawn pursuant to the Systematic Withdrawal Plan. To establish the
Systematic Withdrawal Plan, call 1-800-798-1819 and request an application. To
establish the Systematic Withdrawal Plan, you appoint the Fund as your agent to
effect redemptions of Fund shares held in your account for the purpose of making
monthly, quarterly or annual withdrawal payments of a fixed amount to you out of
your account. One request will be honored in any 12 month period
The minimum periodic withdrawal payment is $200. Redemptions will be made on the
fifth business day preceding the last day of each month or, if that day is a
holiday, on the next preceding business day. The shareholder may wish to
consider reinvesting dividends in additional Fund shares at net asset value. You
may deposit additional Fund shares in your account at any time.
The right is reserved to amend the Systematic Withdrawal Plan on 30 days'
notice. The Plan may be terminated at any time by the shareholder or the Fund.
Withdrawal payments cannot be considered to be yield or income on the
shareholder's investment since portions of each payment will normally consist of
a return of capital. Depending on the size or the frequency of the disbursements
requested and the fluctuation in the value of the Fund's securities, redemptions
for the purpose of making such disbursements may reduce or even exhaust your
account.
You may vary the amount or frequency of withdrawal payments, temporarily
discontinue them, or change the designated payee or payee's address by notifying
the Fund.
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan may be established at any time. By participating in
the Automatic Investment Plan, you may automatically make purchases of shares of
any Fund on a regular, convenient basis. You may choose to make contributions on
the fifth and/or twentieth day of each month in an amount of $50 or more.
Under the Automatic Investment Plan, your bank or other financial institution
debits preauthorized amounts drawn on your account each month and applies such
amounts to the purchase of shares of the Fund. The Automatic Investment Plan can
be implemented with any financial institution that is a member of the Automated
Clearinghouse. You may obtain an application to establish the Automatic
29
<PAGE>
Investment Plan from the Fund. No service fee is charged by the Fund for
participating in the Automatic Investment Plan.
GENERAL PROCEDURES FOR SHAREHOLDER ACCOUNTS
As set forth under "CAPITAL STOCK" in the Prospectus, certificates for Fund
shares will not be issued.
Either an investor or the Fund, by written notice to the other, may terminate
the investor's participation in the plans, programs, privileges, or other
services described under "SHAREHOLDER SERVICES" in the Prospectus without
penalty at any time, except as discussed in the Prospectus.
Your account may be terminated by the Fund on not less than 30 days' notice if,
at the time of any transfer or redemption of shares in the account, the value of
the remaining shares in the account at the current net asset value falls below
$1,000 ($250 for UF/TMA and IRA accounts). Upon any such termination, the shares
will be redeemed at the then current net asset value and a check for the
proceeds of redemption sent within seven days of such redemption.
TELEPHONE EXCHANGE PRIVILEGE AND AUTOMATIC EXCHANGE PLAN
A discussion of the Telephone Exchange Privilege and Automatic Exchange Plan is
set forth in the Prospectus under the captions "SHAREHOLDER SERVICES --
Telephone Exchange and Redemption Privilege" and -- "Automatic Exchange Plan".
Shares of the Fund may be exchanged for each other at relative net asset values.
Exchanges will be effected by redemption of shares of the Fund held and purchase
of shares of the Fund for which Fund shares are being exchanged (the "New
Fund"). Investments in the New Fund will be made into the lowest fee class of
shares for which the shareholder is eligible in the New Fund. For federal income
tax purposes, any such exchange constitutes a sale upon which a capital gain or
loss will be realized, depending upon whether the value of the shares being
exchanged is more or less than the shareholder's adjusted cost basis. Upon a
telephone exchange, the transfer agent establishes a new account in the New Fund
with the same registration and dividend and capital gains options as the
redeemed account, unless otherwise specified, and confirms the purchase to you.
In order to establish a Systematic Withdrawal Plan for the new account, however,
an exchanging shareholder must file a specific written request.
The Telephone Exchange Privilege and Automatic Exchange Plan are available only
in states where shares of the New Fund may be sold, and the privilege may be
modified or discontinued at any time. Additional information concerning these
exchange privileges is contained in the Fund's Prospectus.
SHAREHOLDER MEETINGS
The Maryland Corporation Law permits registered investment companies, such as
the Fund, to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the Investment Company Act
of 1940. The Company has adopted the appropriate Bylaw provisions and may not
hold an annual meeting in any year in which the election of Directors is not
required to be acted on by shareholders under the 1940 Act.
The Bylaws also contain procedures for the removal of Directors by shareholders.
At any meeting of shareholders, duly called and at which a quorum is present,
the shareholders may, by the affirmative vote of the holders of a majority of
30
<PAGE>
the votes entitled to be cast thereon, remove any Director or Directors from
office and may elect a successor or successors to fill any resulting vacancies
for the unexpired terms of removed Directors.
Upon the written request of the holders of shares entitled to not less than 10
percent of all the votes entitled to be cast at such meeting, the Secretary of
the Fund shall promptly call a special meeting of shareholders for the purpose
of voting upon the question of removal of any Director. Whenever 10 or more
shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least 1 percent of the total outstanding
shares, whichever is less, shall apply to the Secretary in writing, stating that
they wish to communicate with other shareholders with a view to obtaining
signatures to a request for a meeting as described above and accompanied by a
form of communication and request which they wish to transmit, the Secretary
shall within five business days after such application either: (1) afford to
such applicants access to a list of the names and addresses of all shareholders
of record; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the last
sentence of the preceding paragraph, the Secretary, upon the written request of
such applicants, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record at their addresses as recorded on the
books unless within five business days after such tender the Secretary shall
mail to such applicants and file with the SEC, together with a copy of the
material to be mailed, a written statement signed by at least a majority of the
Board of Directors to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the SEC may, and if demanded by the Board of Directors or by
such applicants shall, enter an order either sustaining one or more of such
objections or refusing to sustain any of them. If the SEC shall enter an order
refusing to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the SEC shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Secretary shall mail copies of such
material to all shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
VALUATION OF FUND SECURITIES
The Fund's net asset value per share is determined by the Custodian, under
procedures established by the Board of Directors. Fund securities are valued
primarily on the basis of valuations furnished by a pricing service which uses
both dealer-supplied valuations and electronic data processing techniques that
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, with exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities. Use
of the pricing service has been approved by the Board of Directors. There are a
number of pricing services available, and the Directors, or Officers acting on
31
<PAGE>
behalf of the Directors, on the basis of ongoing evaluation of these services,
may use other pricing services or discontinue the use of any pricing service in
whole or in part.
Securities not valued by the pricing service and for which quotations are
readily available are valued at market values determined on the basis of their
latest available bid prices as furnished by recognized dealers in such
securities. Futures contracts and options are valued on the basis of market
quotations, if available. Securities and other assets for which quotations or
pricing service valuations are not readily available are valued at their fair
value as determined in good faith under consistently applied procedures under
the general supervision of the Board of Directors.
PERFORMANCE INFORMATION
As described in the "PERFORMANCE INFORMATION" section of the Fund's Prospectus,
the historical performance or return of the Fund may be shown in the form of
"yield", "average annual total return", "total return", and "cumulative total
return".
Each class of shares' average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for a specific period is found by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's respective
shares on the first day of the period and computing the "redeemable value" of
that investment at the end of the period. The redeemable value is then divided
by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period.
Calculation of the Fund's total return is subject to a standardized format.
Total return performance for a specific period is calculated by first taking an
investment (assumed below to be $10,000) ("initial investment") in the shares on
the first day of the period and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains dividends paid by the
Fund have been reinvested at net asset value on the reinvestment dates during
the period. Total return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Cumulative total return represents the simple change in value of your investment
over a stated period and may be quoted as a percentage or as a dollar amount.
Total returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to illustrate the
relationship between these factors and their contributions to total return.
Cumulative total return historically has been:
AVERAGE ANNUAL TOTAL RETURNS 1 YEAR LIFE OF FUND
IMG Bond Fund-Select Shares 6.97% 4.98%
IMG Bond Fund-Institutional Shares 7.19% 5.19%
32
<PAGE>
Yield for the shares of the IMG Bond Fund is computed in accordance with a
standardized method prescribed by rules of the SEC. Under that method, the
current yield quotation for the Fund is based on a one month or 30-day period.
Yield is computed by dividing the net investment income per share earned during
the 30-day or one month period by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b
YIELD = 2 (-------- + 1)6 - 1
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yields for the 30-day period ended April 30, 1997 for the IMG Bond Fund were
6.12 percent, and 6.31 percent for Select, and Institutional shares,
respectively.
In computing yield, the Fund follows certain standardized accounting practices
specified by SEC rules. These practices are not necessarily consistent with
those that the Fund uses to prepare annual and interim financial statements in
conformity with generally accepted accounting principles. Therefore, the quoted
yields as calculated above may differ from the actual dividends paid.
Performance figures are based upon historical results and are not necessarily
representative of future performance. Returns and net asset value will fluctuate
and shares are redeemable at the then current net asset value, which may be more
or less than original cost. Factors affecting performance include general market
conditions, operating expenses and investment management. Any additional fees
charged by a dealer or other financial services firm would reduce the returns
described in this section.
The Fund may compare its share performance to that of U.S. Treasury bonds, bills
or notes because such instruments represent alternative income producing
products. Treasury obligations are issued in selected denominations. Rates of
Treasury obligations are fixed at the time of issuance and payment of principal
and interest is backed by the full faith and credit of the United States
Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
From time to time, in marketing and other Fund literature, performance may be
compared to the performance of other mutual funds in general or to the
performance of particular types of mutual funds, with similar investment goals,
as tracked by independent organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are based on changes in net
asset value, with all income and capital gain dividends reinvested. Such
calculations do not include the effect of any sales charges. Shares of the Fund
will be compared to Lipper's appropriate fund category; that is, by Fund
objective and holdings. Lipper also issues a monthly yield analysis for Fixed
Income Securities and the Fund may, from time to time, advertise those rankings.
33
<PAGE>
Performance may also be compared to the performance of other mutual funds by
Morningstar, Inc. which rates funds on the basis of historical risk and total
return. Morningstar's ratings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the historical risk level and
total return of a fund as a weighted average for three, five, and ten year
periods. Ratings are not absolute or necessarily predictive of future
performance.
Evaluations of performance made by independent sources may also be used in
advertisements concerning the Fund, including reprints of, or selections from,
editorials or articles about the Fund, especially those with similar objectives.
Sources for the performance information and articles about the Fund may include
publications such as Money, Forbes, Kiplinger's, Financial World, Business Week,
U.S. News and World Report, The Wall Street Journal, Barron's and a variety of
investment newsletters. The Fund may compare Fund performance to a wide variety
of indices including, but not limited to the following:
IMG BOND FUND
Lehman Brothers Government Corporate Index
Lehman Brothers Intermediate Bond Index
Merrill Lynch Government Corporate Master Index
Lehman Brothers All Government Bond Index
Lehman Brothers One to Three Years Government Bond Index
Merrill Lynch Government Master Index
Merrill Lynch Short-Term U.S. Treasury Index
Merrill Lynch Intermediate-Term
U.S. Treasury Index
Merrill Lynch All Mortgages Index
Merrill Lynch All GNMAs
IBC Money Fund Index
There are differences and similarities between the investments which the Fund
may purchase and the investments measured by the indices which are noted herein.
The market prices and yields of bonds will fluctuate. There are important
differences among the various investments included in the indices that should be
considered in reviewing this information.
Investors may want to compare the Fund's performance to that of certificates of
deposit offered by banks and other depository institutions. Certificates of
deposit represent an alternative (taxable) income producing product.
Certificates of deposit may offer fixed or variable interest rates and principal
is guaranteed and may be insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time specified by the
issuing institution. The bonds held by the IMG Bond Fund are generally of longer
term than most certificates of deposit and may reflect longer term market rate
fluctuations.
Investors may also want to compare performance of the Fund to that of money
market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
GENERAL INFORMATION
The Advisor believes that actively managing the Fund's investments is the best
way to achieve the Fund's objective. This policy is based on a fundamental
34
<PAGE>
belief that economic and financial conditions create favorable and unfavorable
investment periods and sectors, and that these different periods require
different investment approaches.
Financial goals vary from person to person. Investors may choose one or more of
the Fund to help them reach their financial goals. To help you better understand
each of the Fund and determine which Fund or combination of Funds best meets
your personal investment objectives, study the Prospectus carefully before you
invest.
REPORTS TO SHAREHOLDERS
Semi-Annual and Annual Reports will include financial statements which, in the
case of the Annual Report, will be reported on by the Fund's independent
auditors, KPMG Peat Marwick LLP. The Annual Report is incorporated by reference
into the Fund's Statement of Additional Information.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, P.O. Box 772, Des Moines, Iowa, 50309, have been selected
as the independent accountants for the Fund.
35
<PAGE>
APPENDIX A
BOND RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
"AAA" Bonds have the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA" Bonds have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in small degrees.
"A" Bonds have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB" Bonds are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit 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 bonds in this
category than in higher rated categories.
"BB", "B", "CCC", "CC" and "C" Bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the least degree of
speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. A "C" rating
is typically applied to debt subordinated to senior debt which is assigned an
36
<PAGE>
actual or implied "CCC" rating. It may also be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
MOODY'S BOND RATINGS
"Aaa" Bonds 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.
"Aa" Bonds 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 protection 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 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.
"Baa" Bonds 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.
"Ba" Bonds are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes Bonds in
this class.
"B" Bonds generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
"Caa" Bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
"Ca" Bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
"C" Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
FITCH INVESTORS SERVICES, INC. BOND RATINGS
The Fitch Bond Rating provides a guide to investors in determining the
investment risk associated with a particular security. The rating represents its
assessment of the issuer's ability to meet the obligations of a specific debt
issue. Fitch bond ratings are not recommendations to buy, sell or hold
37
<PAGE>
securities since they incorporate no information on market price or yield
relative to other debt instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and of
any guarantor, as well as the political and economic environment that might
affect the future financial strength and credit quality of the issuer.
Bonds which have the same rating are of similar but not necessarily identical
investment quality since the limited number of rating categories cannot fully
reflect small differences in the degree of risk. Moreover, the character of the
risk factor varies from industry to industry and between corporate, health care
and municipal obligations.
In assessing credit risk, Fitch Investors Services relies on current information
furnished by the issuer and/or guarantor and other sources which it considers
reliable. Fitch does not perform an audit of the financial statements used in
assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to reflect changes in
the financial condition of the issuer, the status of the issue relative to other
debt of the issuer, or any other circumstances that Fitch considers to have a
material effect on the credit of the obligor.
"AAA" rated Bonds are considered to be investment grade and of the highest
credit quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" rated Bonds are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for "AAA" rated securities or more subject to
possible change over the term of the issue.
"A" rated Bonds 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.
"BBB" rated Bonds 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 weaken this ability than bonds with
higher ratings.
"BB" rated bonds are considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
"B" rated Bonds are considered highly speculative. Bonds in this class are
highly protected as to the obligor's ability to pay interest over the life of
the issue and repay principal when due.
"CCC" rated Bonds may have certain identifiable characteristics which, if not
remedied, could lead to the possibility of default in either principal or
interest payments.
"CC" rated Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
38
<PAGE>
"C" rated Bonds are in actual or imminent default in payment of interest or
principal.
DUFF & PHELPS, INC. LONG-TERM RATINGS
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination. Each rating also
takes into account the legal form of the security, (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent of rating dispersion among
the various classes of securities is determined by several factors, including
relative weightings of the different security classes in the capital structure,
the overall credit strength of the issuer, and the nature of covenant
protection. Review of indenture restrictions is important to the analysis of a
company's operating and financial constraints. The Credit Rating Committee
formally reviews all ratings once per quarter (more frequently, if necessary).
RATING
SCALE DEFINITION
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA+ High credit quality. Protection factors are strong. Risk is
modest, but may AA vary slightly from time to time because
of economic conditions. AA-
A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of economic
A- stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet obligations
BB when due. Present or prospective financial protection
BB- factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down
frequently within this category.
B+ Below investment grade and possessing risk that obligations
B will not be met when due. Financial protection factors will
B- fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable
39
<PAGE>
economic/ industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend averages.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The categories are as follows:
"A" Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues within this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
"A-1" Designation indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are designated "A-1+".
"A-2" Designation indicates that the capacity for timely payment is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
"A-3" Designation indicates a satisfactory capacity for timely payment. Issues
with this designation, however, are somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" Issues are regarded as having only an adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
"C" Issues have a doubtful capacity for payment.
"D" Issues are in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the due date even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period.
MOODY'S COMMERCIAL PAPER RATINGS
Moody's rates commercial paper as either Prime, which contains three categories,
or Not Prime. The commercial paper ratings are as follows:
"P-1" Issuers (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations, normally evidenced by the
following characteristics: (i) leading market positions in well established
industries, (ii) high rates of return on funds employed, (iii) conservative
capitalization structures with moderate reliance on debt and ample asset
40
<PAGE>
protection, (iv) broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and (v) well established access to a range of
financial markets and assured sources of alternate liquidity.
"P-2" Issuers (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations, normally evidenced by many of
the characteristics of a "P-1" rating, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
"P-3" Issuers (or related supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect 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. "Not Prime" Issuers (or related
supporting institutions) do not fall within any of the Prime rating categories.
FITCH INVESTORS SERVICES, INC. SHORT-TERM RATINGS
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
Fitch-1+.
Fitch-2 (Good Credit Quality) Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as great
as the two higher categories.
Fitch-3 (Fair Credit Quality) Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse change is likely to cause these securities to be rated below
investment grade.
Fitch-S (Weak Credit Quality) Issues carrying this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near term adverse changes in financial and economic conditions.
D (Default) Issues carrying this rating are in actual or imminent payment
default.
DUFF & PHELPS, INC. SHORT-TERM RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds, including trade
credit, bank lines and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
41
<PAGE>
A. Category 1: High Grade
- ---------------------------
Duff 1+ 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 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1 - High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
B. Category 2: Good Grade
- ---------------------------
Duff 2 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.
C. Category 3: Satisfactory Grade
- -----------------------------------
Duff 2 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.
D. Category 4: Non-investment Grade
- -------------------------------------
Duff 4 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.
E. Category 5: Default
- ------------------------
Duff 5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMAS BANKWATCH (TBW) SHORT-TERM RATINGS
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less. The TBW Short-Term Ratings specifically assess the
likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; 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 TBW-1.
42
<PAGE>
TBW-3 The lowest investment grade category; 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.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
43
<PAGE>
Vintage Government Assets Fund
Vintage Income Fund
Vintage Municipal Bond Fund
Vintage Equity Fund
Vintage Balanced Fund
Vintage Aggressive Growth Fund
Vintage Limited Term Bond Fund
Each an Investment Portfolio of the IMG Mutual Funds, Inc.
Statement of Additional Information
January 14, 1998
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectus for the Vintage Government Assets Fund (the
"Government Assets Fund"), the Vintage Income Fund (the "Income Fund"), the
Vintage Municipal Bond Fund (the "Municipal Bond Fund"), the Vintage Equity Fund
(the "Equity Fund"), the Vintage Balanced Fund (the "Balanced Fund"), the
Vintage Aggressive Growth Fund (the "Aggressive Growth Fund") and the Vintage
Limited Term Bond Fund (the "Limited Term Fund") each dated the same date as the
date hereof (the "Prospectus"), hereinafter referred to collectively as the
"Funds" and singly, a "Fund". This Statement of Additional Information is
incorporated in its entirety into the Prospectus. Copies of the Prospectus may
be obtained by writing the Funds at 2203 Grand Avenue, Des Moines, Iowa
50312-5338 or by calling 1-800-798-1819.
<PAGE>
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION 3
INVESTMENT OBJECTIVE AND POLICIES 3
Additional Information on Portfolio Instruments 3
Investment Restrictions 21
Portfolio Turnover 22
NET ASSET VALUE 22
Valuation of the Government Assets Fund 23
Valuation of the Variable NAV Funds 24
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 25
Matters Affecting Redemption 25
MANAGEMENT OF THE COMPANY 25
Directors and Officers 25
Investment Adviser 27
Portfolio Transactions 28
Banking Laws 29
Administrator 30
Distributor 31
Administrative Services Plan 34
Custodian 35
Transfer Agency and Fund Accounting Services 35
Independent Auditors 36
Legal Counsel 36
ADDITIONAL INFORMATION 36
Description of Shares 36
Shareholder Meetings 38
Vote of a Majority of the Outstanding Shares 39
Additional Tax Information 39
Additional Tax Information Concerning the Municipal Bond Fund 41
Yields and Total Returns of the Government Assets Fund 41
Yields and Total Returns of the Variable NAV Funds 42
Performance Comparisons 45
Miscellaneous 46
FINANCIAL STATEMENTS 46
APPENDIX 47
2
<PAGE>
GENERAL INFORMATION
IMG Mutual Funds, Inc. (the "Company") is an open-end management
investment company which currently offers it shares in series representing
eleven investment portfolios: IMG Core Stock Fund, IMG Bond Fund, Vintage Equity
Fund, Vintage Aggressive Growth Fund, Vintage Balanced Fund, Vintage Municipal
Bond Fund, Vintage Income Fund, Vintage Limited Term Bond Fund, Liquid Assets
Fund, Government Assets Fund and Municipal Assets Fund (Individually a "Fund"
and collectively the "Funds"). The Company was organized on November 16, 1994
under the laws of Maryland. Shares of some of the Funds may also be issued in
classes with differing distribution and shareholder servicing arrangements.
Subject to the class level expenses, each Fund's share ("Share") represents an
equal proportionate interest in a 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, subject to the class level expenses, as are
declared at the discretion of the Directors. Investors Management Group, Ltd.
("IMG") acts as the Company's investment adviser and provides various other
services to the Funds. This Statement of Additional Information deals with seven
Funds, the Vintage Government Assets Fund, the Vintage Income Fund, the Vintage
Municipal Bond Fund, the Vintage Equity Fund, the Vintage Balanced Fund, the
Vintage Aggressive Growth Fund and the Vintage Limited Term Bond Fund which were
established November 3, 1997 to acquire the assets and succeed to the business
of the Vintage Government Obligations Fund, Vintage Fixed Income Fund, Vintage
Intermediate Tax-Free Fund, Vintage Equity Fund, Vintage Balanced Fund, Vintage
Aggressive Growth Fund and Vintage Total Return Fund, respectively. Capitalized
terms not defined herein are defined in the Prospectus. No investment in Shares
of a Fund should be made without first reading the Prospectus. References to the
"Variable NAV Funds" shall mean all of the Funds except the Government Assets
Fund.
INVESTMENT OBJECTIVE AND POLICIES
Additional Information on Portfolio Instruments
- -----------------------------------------------
The following policies supplement the investment objective and policies
of the Funds as set forth in their respective Prospectuses.
BANK OBLIGATIONS. Each Fund, with the exception of the Government
Assets Fund, may invest in bank obligations such as bankers' acceptances,
certificates of deposit, and time deposits.
3
<PAGE>
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by the Funds will be those guaranteed by
domestic and foreign banks having, at the time of investment, capital, surplus,
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and time deposits will be those of domestic and foreign banks and savings and
loan associations, if (a) at the time of investment the depository institution
has capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements), or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
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.
The Income Fund and the Municipal Bond Fund may purchase commercial
paper consisting of issues rated at the time of purchase within the four highest
rating categories by a nationally recognized statistical rating organization (an
"NRSRO"). The Balanced Fund, Aggressive Growth Fund and Equity Fund may purchase
commercial paper consisting of issues rated at the time of purchase within the
three highest rating categories by an NRSRO. The Limited Term Fund may purchase
commercial paper consisting of issues rated at the time of purchase within the
four highest rating categories by an NRSRO. These Funds may also invest in
commercial paper that is not rated but is determined by IMG under guidelines
established by the Company's Board of Directors, to be of comparable quality.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes, in which the Income Fund, the Limited Term Fund, the Balanced Fund and
the Municipal Bond Fund may invest, are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic readjustments in the
interest rate according to the terms of the instrument. They are also referred
to as variable rate demand notes. 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 or during specified periods not
4
<PAGE>
exceeding one year, depending upon the instrument involved, and may resell the
note at any time to a third party. IMG will consider the earning power, cash
flow, and other liquidity ratios of the issuers of such notes and will
continuously monitor their financial status and ability to meet payment on
demand. In determining dollar-weighted average portfolio maturity, a variable
amount master demand note will be deemed to have a maturity equal to the longer
of the period of time remaining until the next interest rate adjustment or the
period of time remaining until the principal amount can be recovered from the
issuer through demand.
VARIABLE AND FLOATING RATE NOTES. The Municipal Bond Fund, the
Government Assets Fund, the Limited Term Fund, the Balanced Fund and the Income
Fund may acquire variable and floating rate notes, subject to such Fund's
investment objective, policies and restrictions. A variable rate note is one
whose terms provide for the readjustment of its interest rate on set dates and
which, upon such readjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate note is one whose terms provide
for the readjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by a Fund will be determined by IMG under guidelines approved by the
Company's Board of Directors to be of comparable quality at the time of purchase
to rated instruments eligible for purchase under the Fund's investment policies.
In making such determinations, IMG will consider the earning power, cash flow
and other liquidity ratios of the issuers of such notes (such issuers include
financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by a Fund, the Fund may resell the note any time to a third party. The
absence of an active secondary market, however, could make it difficult for the
Fund to dispose of a variable or floating rate note in the event the issuer of
the note defaulted on its payment obligations and the Fund could, as a result or
for other reasons, suffer a loss to the extent of the default. Variable or
floating rate notes may be secured by bank letters of credit.
U.S. GOVERNMENT OBLIGATIONS. The Government Assets Fund will invest
exclusively in short-term U.S. Treasury bills, notes and other obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
subject to its investment objective and policies (collectively, "U.S. Government
Obligations"). The Variable NAV Funds may also invest in U.S. Government
Obligations. Obligations of certain agencies and instrumentalities of the U.S.
Government are supported by the full faith and credit of the U.S. Treasury;
5
<PAGE>
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others are supported only by the
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. A Fund will invest
in the obligations of such agencies or instrumentalities only when IMG believes
that the credit risk with respect thereto is minimal.
STRIPPED TREASURY SECURITIES. The Variable NAV Funds may invest in
certain U.S. Government Obligations referred to as "Stripped Treasury
Securities." Stripped Treasury Securities are U.S. Treasury securities that have
been stripped of their unmatured interest coupons (which typically provide for
interest payments semi-annually), interest coupons that have been stripped from
such U.S. Treasury securities, and receipts and certificates for such stripped
debt obligations and stripped coupons. Stripped bonds and stripped coupons are
sold at a deep discount because the buyer of those securities receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest payments on the security.
Stripped Treasury Securities will include coupons that have been
stripped from U.S. Treasury bonds, which may be held through the Federal Reserve
Bank's book-entry system called "Separate Trading of Registered Interest and
Principal of Securities" ("STRIPS") or through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES").
The U.S. Government does not issue Stripped Treasury Securities
directly. The STRIPS program, which is ongoing, is designed to facilitate the
secondary market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
CUBES, like STRIPS, are direct obligations of the U.S. Government.
CUBES are coupons that have previously been physically stripped from U.S.
Treasury notes and bonds, but which were deposited with the Federal Reserve
Bank's book-entry system and are now carried and transferable in book-entry form
6
<PAGE>
only. Only stripped U.S. Treasury coupons maturing on or after January 15, 1988,
that were stripped prior to January 5, 1987, were eligible for conversion to
book-entry form under the CUBES program.
By agreement, the underlying debt obligations will be held separate
from the general assets of the custodian and nominal holder of such securities,
and will not be subject to any right, charge, security interest, lien or claim
of any kind in favor of or against the custodian or any person claiming through
the custodian, and the custodian will be responsible for applying all payments
received on those underlying debt obligations to the related receipts or
certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in interest, are entitled to the rights and privileges of the underlying
debt obligations, including the right, in the event of default in payment of
principal or interest to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
FOREIGN INVESTMENTS. The Equity Fund, the Income Fund, the Limited Term
Fund, the Balanced Fund and the Aggressive Growth Fund may, subject to their
respective investment objectives and policies, invest in certain obligations or
securities of foreign issuers. Permissible investments include American
Depository Receipts ("ADRs") for the Equity Fund, the Balanced Fund and the
Aggressive Growth Fund and Yankee Obligations (as described in the Prospectus)
for the Income Fund, the Limited Term Fund, the Balanced Fund and the Aggressive
Growth Fund. Investment in securities issued by foreign branches of U.S. banks,
foreign banks, or other foreign issuers, including ADRs may subject such Funds
to investment risks that differ in some respects from those related to
investment in obligations of U.S. domestic issuers. Such risks include future
adverse political and economic developments, possible seizure, nationalization,
or expropriation of foreign investments, less stringent disclosure requirements,
the possible establishment of exchange controls or taxation at the source or
other taxes, and the adoption of other foreign governmental restrictions.
Additional risks include less publicly available information, the risk
that companies may not be subject to the accounting, auditing and financial
reporting standards and requirements of U.S. companies, the risk that foreign
securities markets may have less volume and therefore many securities traded in
these markets may be less liquid and their prices more volatile than U.S.
securities, and the risk that custodian and brokerage costs may be higher.
Foreign issuers of securities or obligations are often subject to accounting
7
<PAGE>
treatment and engage in business practices different from those respecting
domestic issuers of similar securities or obligations. Foreign branches of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than those applicable to domestic branches of U.S. banks.
FUTURE CONTRACTS. As discussed in the Prospectus, the Funds may invest
in futures contracts and options thereon (stock or bond index futures contracts
or interest rate futures or options) to hedge or manage risks associated with a
Fund's securities investments. To enter into a futures contract, an amount of
cash and cash equivalents, equal to the market value of the futures contracts,
is deposited in a segregated account with the Fund's Custodian and/or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of such futures is unleveraged. Positions in futures contracts may
be closed out only on an exchange that provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund had insufficient
cash, it might have to sell portfolio securities to meet daily margin
requirements at a time when it would be disadvantageous to do so. In addition, a
Fund might be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on a Fund's ability to hedge or manage risks
effectively.
Successful use of futures by a Fund is also subject to the Adviser's
ability to predict movements correctly in the direction of the market. There is
an imperfect correlation between movements in the price of the future and
movements in the price of the securities that are the subject of the hedge. In
addition, the price of futures may not correlate perfectly with movement in the
cash market due to certain market distortions. Due to the possibility of price
distortion in the futures market and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
Adviser may still not result in a successful hedging transaction over a short
time frame.
The trading of futures contracts is also subject to the risk of trading
halts, suspension, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruption of normal trading activity, which could at times make it difficult or
impossible to liquidate existing position or to recover excess variation margin
payments.
8
<PAGE>
CALL OPTIONS. The Equity Fund, the Balanced Fund and the Aggressive
Growth Fund may write (sell) "covered" call options and purchase options to
close out options previously written by them. Such options must be listed on a
National Securities Exchange and issued by the Options Clearing Corporation. The
purpose of writing covered call options is to generate additional premium income
for a Fund. This premium income will serve to enhance the Fund's total return
and will reduce the effect of any price decline of the security involved in the
option. Covered call options will generally be written on securities which, in
IMG's opinion, are not expected to make any major price moves in the near future
but which, over the long term, are deemed to be attractive investments for a
Fund.
A call option gives the holder (buyer) the "right to purchase" a
security at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security against payment of the exercise price. This obligation terminates upon
the expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To secure his obligation to deliver the underlying
security in the case of a call option, a writer is required to deposit in escrow
the underlying security or other assets in accordance with the rules of the
Options Clearing Corporation. A Fund will write only covered call options. (In
order to comply with the requirements of the securities laws in several states,
a Fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities covering all call options exceeds 15%
of the market value of its net assets.)
Fund securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with a Fund's
investment objective. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked or uncovered options, which the Funds will not do), but
capable of enhancing a Fund's total return. When writing a covered call option,
a Fund, in return for the premium, gives up the opportunity for profit from a
price increase in the underlying security above the exercise price, but retains
the risk of loss should the price of the security decline. Unlike one who owns
securities not subject to an option, a Fund has no control over when it may be
required to sell the underlying securities, since it may be assigned an exercise
notice at any time prior to the expiration of its obligation as a writer. If a
call option which a Fund has written expires, the Fund will realize a gain in
the amount of the premium; however, such gain may be offset by a decline in the
9
<PAGE>
market value of the underlying security during the option period. If the call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security. The security covering the call will be maintained in a
segregated account of a Fund's Custodian. The Funds do not consider a security
covered by a call to be "pledged" as that term is used in each Fund's policy
which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium a
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, IMG in determining whether a particular call
option should be written on a particular security, will consider the
reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for such option. The premium received by a Fund for
writing covered call options will be recorded as a liability in the Fund's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sale price at the
time at which the net asset value per share of a Fund is computed (close of the
New York Stock Exchange), or, in the absence of such sale, the latest asked
price. The liability will be extinguished upon expiration of the option, the
purchase of an identical option in a closing transaction, or delivery of the
underlying security upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
or to permit the sale of the underlying security. Furthermore, effecting a
closing transaction will permit a Fund to write another call option on the
underlying security with either a different exercise price or expiration date or
both. If a Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will seek to effect a closing transaction
prior to, or concurrently with, the sale of the security. There is, of course,
no assurance that a Fund will be able to effect such closing transactions at a
favorable price. If a Fund cannot enter into such a transaction, it may be
required to hold a security that it might otherwise have sold, in which case it
would continue to be at market risk on the security. This could result in higher
transaction costs. The Funds will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by a Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
10
<PAGE>
securities at the time the options are written. From time to time, a Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional costs will be incurred.
A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
PUT OPTIONS. The Municipal Bond Fund may acquire "puts" with respect to
Municipal Securities held in its portfolio and the Income Fund, the Limited Term
Fund and the Balanced Fund may acquire "puts" with respect to debt securities
held in their portfolio. A put is a right to sell or redeem a specified security
(or securities) at a certain time or within a certain period of time at a
specified exercise price. The put may be an independent feature or may be
combined with a reset feature that is designed to reduce downward price
volatility as interest rates rise by enabling the holder to liquidate the
investment prior to maturity.
The amount payable to a Fund upon its exercise of a "put" is normally
(i) the Fund's acquisition cost of the securities subject to the put (excluding
any accrued interest which the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Puts may be acquired by a Fund to facilitate the liquidity of the
portfolio assets. Puts may also be used to facilitate that reinvestment of
assets at a rate of return more favorable than that of the underlying security.
Puts may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets.
The Municipal Bond Fund, the Income Fund, the Limited Term Bond Fund
and the Balanced Fund will, if necessary or advisable, pay for puts either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the puts (thus reducing the yield to maturity otherwise
available for the same securities).
11
<PAGE>
WHEN-ISSUED SECURITIES. As discussed in the Prospectuses of the Funds,
each of the Funds may purchase securities on a when-issued or delayed-delivery
basis. 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 those 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. 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, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when 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, the Fund's liquidity and the
ability of IMG to manage it might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its total
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 the
Fund incurring a loss or missing the opportunity to obtain a price considered to
be advantageous. The Funds will engage in when issued delivery transactions only
for the purpose of acquiring portfolio securities consistent with the Funds'
investment objectives and policies, not for investment leverage.
MORTGAGE-RELATED SECURITIES. The Income Fund, the Limited Term Fund and
the Balanced Fund may, consistent with their respective investment objectives
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 the 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 nongovernmental issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
12
<PAGE>
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 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 a Fund will
receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued by
the 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 United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow Funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by the 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 United States. 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 United States, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
13
<PAGE>
constitute a debt or obligation of the United States 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.
The Income Fund, the Limited Term Fund and the Balanced Fund may also
invest in mortgage-related securities which are collateralized mortgage
obligations ("CMOs") structured on pools of mortgage pass-through certificates
or mortgage loans. The CMOs in which these Funds may invest represent securities
issued by a private corporation or a U.S. Government instrumentality that are
backed by a portfolio of mortgages or mortgage-backed securities held under an
indenture. The issuer's obligations to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
CMOs are issued with a number of classes or series which have different
maturities and which may represent interests in some or all of the interest or
principal on the underlying collateral or a combination thereof. CMOs of
different classes are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of a CMO first to mature
generally will be retired prior to its maturity. Thus, the early retirement of a
particular class or series of a CMO held by a Fund would have the same effect as
the prepayment of mortgages underlying a mortgage-backed pass-through security.
Mortgage-related securities will be purchased only if rated within the three
highest bond rating categories assigned by an NRSRO or, if unrated, which IMG
deems to present attractive opportunities and are of comparable quality.
OTHER ASSET-BACKED SECURITIES. The Income Fund and the Limited Term
Fund may also invest in interests in pools of receivables, such as motor vehicle
installment purchase obligations (known as Certificates of Automobile
Receivables or CARSSM) and credit card receivables (known as Certificates of
Amortizing Revolving Debts or CARDSSM). 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.
14
<PAGE>
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 Income Fund
only when rated within the three highest rating categories by an NRSRO at the
time of purchase. In addition, such securities generally will have remaining
estimated lives at the time of purchase of 7 years or less.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund, except the
Government Assets Fund, may invest in securities issued by the other investment
companies, including Shares of the Government Assets Fund. Each of these Funds
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; (c) not more than 3%
of the outstanding voting stock of any one investment company will be owned by
any of the Funds; and (d) not more than 10% of the outstanding voting stock of
any one investment company will be owned in the aggregate by the 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 the Fund bears directly in connection with its own operations. In
order to avoid the imposition of additional fees as a result of investing in
Shares of the Government Assets Fund, IMG and the Administrator will waive any
portion of their usual service fees that are attributable to investments therein
by another Fund. Investment companies in which a Fund may invest 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 the Funds and, therefore, will be borne directly by Shareholders.
REPURCHASE AGREEMENTS. Securities held by each Fund 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 registered broker-dealers which IMG deems creditworthy 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 the 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. The seller
15
<PAGE>
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). If the seller were to default on its
repurchase obligation or become insolvent, the 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 the 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 Prospectuses, each
Fund 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. 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 the 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. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
MUNICIPAL SECURITIES. Under normal market conditions, at least 80% of
the net assets of the Municipal Bond Fund will be invested in Municipal
Securities, the interest on which is exempt from the regular federal income tax
and not treated as a preference item for purposes of the federal alternative
minimum tax imposed on non-corporate taxpayers.
Municipal Securities include debt obligations issued by governmental
entities to obtain Funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
16
<PAGE>
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Securities if the interest paid thereon
is exempt from regular federal individual income taxes and is not treated as a
preference item for purposes of the federal alternative minimum tax.
Other types of Municipal Securities which the Municipal Bond Fund may
purchase are short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper,
Project Notes, Construction Loan Notes and other forms of short-term tax-exempt
loans. Such instruments are issued with a short-term maturity in anticipation of
the receipt of tax funds, the proceeds of bond placements or other revenues. The
Municipal Bond Fund will not purchase municipal lease obligations.
Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the
federal government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.
As described in the Prospectus, the two principal classifications of
Municipal Securities consist of "general obligation" and "revenue" issues. The
Municipal Bond Fund may also acquire "moral obligation" issues, which are
normally issued by special purpose authorities. There are, of course, variations
in the quality of Municipal Securities, both within a particular classification
and between classifications, and the yields on Municipal Securities depend upon
a variety of factors, including general money market conditions, the financial
condition of the issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The ratings of Moody's and S&P represent their opinions as to the
quality of Municipal Securities. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and securities with the
same maturity, interest rate and rating may have different yields, while
securities of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to purchase, an issue of Municipal Securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Municipal Bond Fund. IMG will consider such an
event in determining whether the Fund should continue to hold the obligation.
17
<PAGE>
An issuer's obligations for Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
LOW-RATED AND COMPARABLE UNRATED FIXED INCOME SECURITIES. The Income
Fund, the Balanced Fund, the Municipal Bond Fund and the Limited Term Bond Fund
may invest in below-Investment-Grade Securities. Below-Investment-Grade
Securities (hereinafter referred to as "junk bonds" or "low-rated and comparable
unrated securities") include (i) bonds rated as low as "Ba" by Moody's Investors
Service, Inc. ("Moody's"), or "BB" by Standard & Poor's Corporation ("S&P"),
Fitch Investors Services, Inc. ("Fitch") or Duff & Phelps, Inc. ("D&P") or of
similar quality by another NRSRO; and (ii) unrated debt securities of comparable
quality.
Low-rated and comparable unrated securities, while generally offering
higher yields than investment-grade securities with similar maturities, involve
greater risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with such investments are discussed below.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES
The low-rated and comparable unrated securities market is relatively
new, and its growth paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such a prolonged economic downturn could severely disrupt the market for and
adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect individual
corporate development to a greater extent than do higher-rated securities, which
react primarily to fluctuations in the general level of interest rates.
Low-rated and comparable unrated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risk than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of low-rated and comparable unrated securities
18
<PAGE>
may experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than that
of issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, the Fund might incur
additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased volatility in the market prices
of low-rated and comparable unrated securities and thus in the Fund's net asset
value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will the Fund's net asset value.
If the Fund experiences unexpected net redemptions in such a market, it may be
forced to liquidate a portion of its Fund securities without regard to their
investment merits. Due to the limited liquidity of high-yield securities
(discussed below) the Fund may be forced to liquidate these securities at a
substantial discount. Any such liquidation would reduce the Fund's asset base
over which expenses could be allocated and could result in a reduced rate of
return for the Fund.
PAYMENT EXPECTATIONS
Low-rated and comparable unrated securities typically contain redemption, call
or prepayment provisions which permit the issuer of such securities containing
such provisions to, at their discretion, redeem the securities. During periods
of falling interest rates, issuers of high-yield securities are likely to redeem
or prepay the securities and refinance them with debt securities with a lower
interest rate. To the extent an issuer is able to refinance the securities, or
otherwise redeem them, the Fund may have to replace the securities with a
lower-yielding security, which would result in a lower return for the Fund.
CREDIT RATINGS
Credit ratings issued by credit-rating agencies evaluate the safety of principal
and interest payments of rated securities. They do not, however, evaluate the
market value risk of low-rated and comparable unrated securities and, therefore,
may not fully reflect the true risks of an investment. In addition,
credit-rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
19
<PAGE>
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in low-rated and
comparable unrated securities will be more dependent on the credit analysis than
would be the case with investments in investment-grade debt securities. The
Advisor employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history, and the
current trend of earnings. The Advisor continually monitors the investments
owned by the Funds and carefully evaluates whether to dispose of or to retain
low-rated and comparable unrated securities whose credit ratings or credit
quality may have changed.
LIQUIDITY AND VALUATION
The Fund may have difficulty disposing of certain low-rated and comparable
unrated securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in low-rated and comparable
unrated securities, there is no established retail secondary market for many of
these securities. The Fund anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market does exist, it is generally not as liquid as the
secondary market for higher-rated securities. As a result, the Fund's asset
value and the Fund's ability to dispose of particular securities, when necessary
to meet the Fund's liquidity needs or in response to a specific economic event,
may be impacted. The lack of a liquid secondary market for certain securities
may also make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's securities. Market quotations are
generally available on many low-rated and comparable unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to increase significantly. In
addition, adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated and
comparable unrated securities, especially in a thinly-traded market.
NEW AND PROPOSED LEGISLATION
Legislation has been adopted and, from time to time, proposals have been
discussed regarding new legislation designed to limit the use of certain
low-rated and comparable unrated securities by certain issuers. An example of
legislation is a recent law which requires federally insured savings and loan
associations to divest their investment in these securities over time. New
legislation could further reduce the market because such securities, generally,
20
<PAGE>
could negatively affect the financial condition of the issuers of high-yield
securities, and could adversely affect the market in general. It is not
currently possible to determine the impact of the recent legislation on this
market. However, it is anticipated that if additional legislation is enacted or
proposed, it could have a material effect on the value of low-rated and
comparable unrated securities and the existence of a secondary trading market
for the securities.
Investment Restrictions
- -----------------------
The following are fundamental investment restrictions and are in
addition to the investment restrictions set forth in the Prospectus. Under these
restrictions a Fund may not:
1. Underwrite 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";
2. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Funds;
3. Purchase or sell real estate (although investments by the Equity
Fund and the Income Fund in marketable securities of companies engaged in such
activities are not prohibited by this restriction);
The following additional investment restrictions are not fundamental
and may be changed with respect to a particular Fund without the vote of a
majority of the outstanding Shares of that Fund. A Fund may not:
1. Enter into repurchase agreements with maturities in excess of seven
days if such investments, together with other instruments in that Fund that are
not readily marketable or are otherwise illiquid, exceed 15% of that Fund's net
assets (10% of net assets in the case of the Government Assets Fund).
2. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities;
3. Engage in any short sales;
4. Purchase participation or direct interests in oil, gas or other
mineral exploration or development programs (although investments by the Equity
Fund and the Income Fund in marketable securities of companies engaged in such
activities are not prohibited in this restriction);
21
<PAGE>
5. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, and (b)
a Fund may invest in other investment companies, including other Funds for which
IMG acts as adviser, as specified in the Prospectus subject to such restrictions
as may be imposed by the 1940 Act or any state laws.
6. Invest more than 5% of total assets in puts, calls, straddles,
spreads or any combination thereof.
7. With respect to the Equity Fund, the Balanced Fund, the Aggressive
Growth Fund, the Limited Term Fund, and the Fixed Income Fund, invest more than
5% of total assets in securities of issuers which together with any predecessors
have a record of less than three years continuous operation.
If any percentage restriction described above 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.
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
calculation excludes all securities whose remaining maturities at the time of
acquisition were one year or less.
Portfolio turnover for any of the Funds may vary greatly from year to
year as well as within a particular year. High turnover rates will generally
result in higher transaction costs to a Fund. Portfolio turnover will not be a
limiting factor in making investment decisions.
Because the Government Assets Fund intends to invest entirely in
securities with maturities of less than one year and because the Commission
requires such securities to be excluded from the calculation of the portfolio
turnover rate, the portfolio turnover with respect to the Government Assets Fund
is expected to be zero percent for regulatory purposes.
NET ASSET VALUE
As indicated in the Prospectuses, the net asset value of each Fund is
determined and the Shares of each Fund are priced as of the Valuation Times
applicable to such Fund on each Business Day of the Company. A "Business Day"
constitutes any day on which the New York Stock Exchange (the "NYSE") is open
for trading, the Federal Reserve Bank of Chicago is open, and any other day
22
<PAGE>
except days on which there are not sufficient changes in the value of the Fund's
portfolio securities that the Fund's net asset value might be materially
affected and days during which no Shares are tendered for redemption and no
orders to purchase Shares are received. Currently, either the NYSE or Federal
Reserve Bank of Chicago are closed on New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
Valuation of the Government Asset Fund
- --------------------------------------
The Government Assets Fund has elected to use the amortized cost method
of valuation pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an
instrument at its cost initially and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Government Assets Fund would receive if it sold the
instrument. The value of securities in the Government Assets Fund can be
expected to vary inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Government Assets Fund will maintain a
dollar-weighted average portfolio maturity appropriate to the Fund's objective
of maintaining a stable net asset value per share, provided that the Fund will
not purchase securities with a remaining maturity of more than 397 days
(thirteen months) (securities subject to repurchase agreements may bear longer
maturities) nor maintain a dollar-weighted average 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 Fund, to stabilize the net asset
value per share of the Fund for purposes of sales and redemptions at $1.00.
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 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 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
23
<PAGE>
number of the Government Assets Fund's outstanding Shares without monetary
consideration, or utilizing a net asset value per share determined by using
available market quotations.
Valuation of the Variable NAV Funds
- -----------------------------------
Portfolio securities for which market quotations are readily available
are valued based upon their current available bid prices in the principal market
(closing sales prices if the principal market is an exchange) in which such
securities are normally traded. Unlisted securities for which market quotations
are readily available will be valued at the current quoted bid prices. Other
securities and assets for which quotations are not readily available, including
restricted securities and securities purchased in private transactions, are
valued at their fair value in IMG's best judgment under the supervision of the
Company's Board of Directors.
Among the factors that will be considered, if they apply, in valuing
portfolio securities held by the Variable NAV Funds are the existence of
restrictions upon the sale of the security by the Fund, the absence of a market
for the security, the extent of any discount in acquiring the security, the
estimated time during which the security will not be freely marketable, the
expenses of registering or otherwise qualifying the security for public sale,
underwriting commissions if underwriting would be required to effect a sale, the
current yields on comparable securities for debt obligations traded
independently of any equity equivalent, changes in the financial condition and
prospects of the issuer, and any other factors affecting fair value. In making
valuations, opinions of counsel may be relied upon as to whether or not
securities are restricted securities and as to the legal requirements for public
sale.
The Company may use a pricing service to value certain portfolio
securities where the prices provided are believed to reflect the fair market
value of such securities. A pricing service would normally consider such factors
as yield, risk, quality, maturity, type of issue, trading characteristics,
special circumstances and other factors it deems relevant in determining
valuations of normal institutional trading units of debt securities and would
not rely exclusively on quoted prices. The methods used by the pricing service
and the valuations so established will be reviewed by the Company under the
general supervision of the Company's Board of Directors. Several pricing
services are available, one or more of which may be used by the Adviser from
time to time.
24
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
- ----------------------------
Shares in each of the Company's Funds are sold on a continuous basis by
BISYS Fund Services, Inc., (the "Distributor") which has agreed to use
appropriate efforts to solicit all purchase orders. In addition to purchasing
Shares directly from the Distributor, Shares may be purchased through procedures
established by the Distributor in connection with the requirements of accounts
at AMCORE Bank, N.A., ("AMCORE Bank") or AMCORE Bank's affiliated entities
(collectively, "Banks"). Customers purchasing Shares of the Funds may include
officers, directors, or employees of the Banks.
The Company may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Commission, (b) the Exchange is closed for other than customary weekend and
holiday closings, (c) the Commission has by order permitted such suspension for
the protection of security holders of the Company, or (d) the Commission has
determined that 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 each of the Funds involuntarily if
redemption appears appropriate in light of the Company's responsibilities under
the 1940 Act. See "NET ASSET VALUE" 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
Directors elect the officers of the Company to supervise actively its day-to-day
operations.
Directors and Officers, together with information as to their principal
business occupations during the last five years, and other information are shown
below. Each Director who is deemed an "interested person", as defined in the
Investment Company Act, is indicated by an asterisk.
25
<PAGE>
*David W. Miles, age 40, Director.
President, Treasurer and Senior Managing Director, Investors Management
Group, and IMG Financial Services, Inc.
*Mark A. McClurg, age 44, President and Director.
Vice President, Secretary and Senior Managing Director, Investors
Management Group, and IMG Financial Services, Inc.
Johnny Danos, age 57, Director.
President, Danos, Inc., a personal investment company, 1994 to Present;
Audit Partner, KPMG Peat Marwick, 1963-1994.
Debra Johnson, age 36, Director.
Vice President and CFO, Business Publications Corporation/Iowa Title
Company, a publishing and abstracting service company.
Edward J. Stanek, age 50, Director.
CEO, Iowa Lottery, a government operated lottery.
Ruth L. Prochaska, age 44, Secretary.
Controller/Compliance Officer, Investors Management Group, and IMG
Financial Services, Inc.
The address for Messrs. Miles, McClurg, and Ms. Prochaska is 2203 Grand
Avenue, Des Moines, Iowa 50312-5338.
As of the date hereof, Officers and Directors beneficially owned no more
than 1 percent of the shares of common stock of the Fund.
Directors and Officers of the Fund who are officers, directors, employees,
or stockholders of the Advisor do not receive any remuneration from the Fund for
serving as Directors or Officers. Those Directors of the Funds who are not so
affiliated with the Advisor receive $250 for each Board of Directors meeting
attended, plus reimbursement for out-of-pocket expenses in attending meetings.
26
<PAGE>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Total Comp-
Position Compensation Retirement Bene- Annual Bene- ensation
From Registrant fits Accrue as fits Upon From Regis-
Part of Fund Retirement trant and
Expenses Fund Complex
Paid to
Director
- --------------------------------------------------------------------------------
David W. Miles $0 $0 $0 $0
Director
Mark A. McClurg 0 0 0 0
President & Director
David Lundquist 1,000 0 0 1,000
Chairman & Director
Johnny Danos 1,000 0 0 1,000
Director
Debra Johnson 1,000 0 0 1,000
Director
Edward J. Stanek 1,000 0 0 1,000
Director
Investment Adviser
- ------------------
Investment advisory services are provided by IMG, Des Moines, Iowa,
pursuant to an Investment Advisory Agreement dated as of October 30, 1997 (the
"Investment Advisory Agreement").
Under the Investment Advisory Agreement, the Adviser has agreed to
provide investment advisory services as described in the Prospectus of the
Funds. For the services provided pursuant to the Investment Advisory Agreement,
each of the Funds pays IMG a fee computed daily and paid monthly, at an annual
rate, calculated as a percentage of the average daily net assets of that Fund,
of sixty one-hundredths of one percent (.60%) for both the Income Fund, the
Municipal Bond Fund and Limited Term Fund, of forty one-hundredths of one
percent (.40%) for the Government Assets Fund, of seventy-five one- hundredths
of one percent (.75%) for the Equity Fund and the Balanced Fund and ninety-five
27
<PAGE>
one-hundredths of one percent (.95%) for the Aggressive Growth Fund. IMG may
periodically waive all or a portion of its advisory fee with respect to any Fund
to increase the net income of the Fund available for distribution as dividends.
Unless sooner terminated, the Investment Advisory Agreement will
continue in effect as to each Fund until December 1999 and from year to year
thereafter, if 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 the
relevant Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Funds' Prospectus), and a majority of the Directors who are not parties to the
Investment Advisory Agreement or interested persons (as defined in the 1940 Act)
of any party to the Investment Advisory Agreement by votes cast in person at a
meeting called for such purpose. The Investment Advisory Agreement is terminable
as to a 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
IMG. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that IMG shall not be liable
for any error of judgment or mistake of law or for any loss suffered by a Fund
in connection with the performance of the Investment Advisory Agreement, 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 IMG in the performance of its duties,
or from reckless disregard by IMG of its duties and obligations thereunder.
Portfolio Transactions
- ----------------------
Pursuant to the Investment Advisory Agreement, IMG determines, 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
portfolio securities with respect to the Funds 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 portfolio securities generally include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers may include the spread between the bid and asked price.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. Transactions in the over-the-counter market are generally principal
transactions with dealers. With respect to the over-the-counter market, IMG,
28
<PAGE>
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.
The Company, on behalf of the Funds, will not execute portfolio
transactions through, acquire portfolio securities issued by, make savings
deposits in, or enter into repurchase or reverse repurchase agreements with
AMCORE Investment Group, N.A. the Distributor, or their affiliates, and will not
give preference to AMCORE Investment Group, N.A. 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 or any other investment company or account managed by IMG.
Any such other Fund, investment company or account may also invest in the same
securities as the Company on behalf of the Funds. When a purchase or sale of the
same security is made at substantially the same time on behalf of more than one
Fund or 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 IMG believes to be equitable to the Fund(s) 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, IMG may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other Funds or for other investment companies or
accounts in order to obtain best execution. As provided by the Investment
Advisory Agreement, in making investment recommendations for the Funds, IMG will
not inquire or take into consideration whether an issuer of securities proposed
for purchase or sale by the Funds is a customer of AMCORE its parent or its
subsidiaries or affiliates and, in dealing with its customers, AMCORE, its
parent, subsidiaries, and affiliates will not inquire or take into consideration
whether securities of such customers are held by the Funds.
Banking Laws
- ------------
IMG, AMCORE Investment Group N.A. and their brokerage affiliates
believe that they possesses the legal authority to perform the services for the
Funds contemplated by the Prospectus, this Statement of Additional Information,
and Rule 12b-1 Agreement described below without violation of applicable
statutes and regulations. IMG, AMCORE Investment Group N.A. and their brokerage
affiliates have been advised by its counsel that, while the question is not free
from doubt, such laws should not prevent IMG, AMCORE Investment Group N.A. and
their brokerage affiliates from providing the services required of it under the
29
<PAGE>
Rule 12b-1 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 IMG, AMCORE
Investment Group N.A. or their brokerage affiliates from continuing to perform
such services for the Funds. Depending upon the nature of any changes in the
services which could be provided by IMG, AMCORE Investment Group N.A. or their
brokerage affiliates the Board of Directors of the Company would review the
Funds' relationship with IMG or AMCORE Investment Group N.A. and consider taking
all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of IMG, AMCORE Investment Group, N.A. and
their brokerage affiliates and/or its affiliated and correspondent banks in
connection with Customer purchases of Shares of the Funds, those banks might be
required to alter materially or discontinue the services offered by them to
Customers. It is not anticipated, however, that any change in the Company's
method of operations would affect its net asset value per share or result in
financial losses to any Customer.
Administrator
- -------------
IMG serves as administrator (the "Administrator") to the Funds pursuant
to a Management and Administration Agreement dated October 30, 1997 (the
"Administration Agreement"). The Administrator assists in supervising all
operations of each Fund (other than those performed by the Adviser under the
Investment Advisory Agreement, the Custodian under the Custodian Agreement, the
Transfer Agency Agreement and Fund Accounting Agreement.
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities; furnish statistical and research data, clerical,
certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Commission on Form N-SAR or any replacement forms
therefor; compile data for, prepare for execution by the Funds and file all of
the Funds' federal and state tax returns and required tax filings other than
those required to be made by the Funds' Custodian and Sub-Transfer Agent;
prepare compliance filings pursuant to state securities laws with the advice of
the Company's counsel; assist to the extent requested by the Funds with the
Fund's preparation of its Annual and Semi-Annual Reports to Shareholders and its
Registration Statement; compile data for, prepare and file timely Notices to the
Commission required pursuant to Rule 24f-2 under the 1940 Act; keep and maintain
30
<PAGE>
the financial accounts and records of each Fund, including calculation of daily
expense accruals; and generally assists in all aspects of the Funds' operations
other than those performed by IMG under the Investment Advisory Agreement, by
the Custodian under the Custodian Agreement and by BISYS Fund Services Ohio,
Inc. under the Sub-Transfer Agency Agreement. Under the Administration
Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
equal to the lesser of (1) a fee calculated daily and paid periodically, at the
annual rate equal to twenty-six one-hundredths of one percent (0.26%) of that
Fund's average daily net assets or (2) such other fee as may be agreed upon in
writing by the Company and the Administrator. The Administrator may periodically
waive all or a portion of its fee with respect to any Fund in order to increase
the net income of one or more of the Funds available for distribution as
dividends.
Unless sooner terminated as provided therein, the Administration
Agreement will continue in effect until October 30, 1999. The Administration
Agreement thereafter shall be renewed automatically for successive five-year
terms, unless written notice not to renew is given by the non-renewing party to
the other party at least 60 days prior to the expiration of the then-current
term. The Administration Agreement is terminable with respect to a particular
Fund only upon mutual agreement of the parties to the Administration Agreement
and for cause (as defined in the Administration Agreement) by the party alleging
cause, on not less than 60 days' notice by the Company's Board of Directors or
by the Administrator.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
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.
Distributor
- -----------
BISYS Fund Services, Inc., serves as distributor to the Funds pursuant
to the Distribution Agreement dated February 2, 1998, (the "Distribution
Agreement"). Unless otherwise terminated, the Distribution Agreement will
continue in effect until February 2, 1999, if such continuance is approved at
least annually (i) by the Company's Board of Directors or by the vote of a
majority of the outstanding Shares of the Funds and (ii) by the vote of a
majority of the Directors of the Company who are not parties to the Distribution
31
<PAGE>
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.
In its capacity as Distributor, BISYS Fund Services, Inc., 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 compensation under the Distribution Agreement with the Company, but
may receive compensation under the Distribution and Shareholder Service Plan
described below.
As described in the Prospectus, the Company has adopted a Distribution
and Shareholder Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940
Act under which the Funds are authorized to pay the Distributor for payments it
makes to banks, including AMCORE Investment Group, N.A., other institutions and
broker-dealers, and for expenses the Distributor and any of its affiliates or
subsidiaries incur (with all of the foregoing organizations being referred to as
"Participating Organizations") for providing administration, distribution or
shareholder service assistance. Payments to such Participating Organizations may
be made pursuant to agreements entered into with the Distributor. The Plan
authorizes the Funds to make payments to the Distributor in an amount not to
exceed, on an annual basis, 0.25% of the average daily net asset value of the
"S" Shares of the Equity Fund and Government Assets Fund and the shares of the
other Funds.
As required by Rule 12b-1, the Plan was approved by the sole
Shareholder of each class of shares of a Fund and by the Board of Directors,
including a majority of the Directors who are not interested persons 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 with respect
to a Fund by vote of a majority of the Independent Directors, or by vote of a
majority of the outstanding Shares of the Fund. 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. However, any change in the Plan that would materially increase the
distribution cost to a Fund requires Shareholder approval. For so long as the
Plan is in effect, selection and nomination of the Independent Directors shall
be committed to the discretion of such disinterested persons.
32
<PAGE>
All agreements with any person relating to the implementation of the
Plan may be terminated, with respect to a Fund, at any time on 60 days' written
notice without payment of any penalty, by vote of a majority of the Independent
Directors or by vote of a majority of the outstanding Shares of the Fund. The
Plan will continue in effect for successive one-year periods, provided that each
such continuance is specifically approved (i) by the vote of a majority of the
Independent Directors, and (ii) by the 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 it 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 of the Funds to which it applies 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.
As authorized by the Plan, the Distributor has entered into a Rule
12b-1 Agreement with AMCORE Investment Group, N.A. pursuant to which AMCORE
Investment Group, N.A. has agreed to provide certain administrative and
shareholder support services in connection with Shares of the Funds purchased
and held by AMCORE Investment Group, N.A. for the accounts of its Customers and
Shares of the Fund purchased and held by Customers of AMCORE Investment Group,
N.A. directly, including, but not limited to, processing automatic investments
of AMCORE Investment Group, N.A.'s Customer account cash balances in Shares of a
Fund and establishing and maintaining the systems, accounts and records
necessary to accomplish this service, establishing and maintaining Customer
accounts and records, processing purchase and redemption transactions for
Customers, answering routine Customer questions concerning the Funds and
providing such office space, equipment, telephone and personnel as is necessary
and appropriate to accomplish such matters. In consideration of such services
the Distributor has agreed to pay AMCORE Investment Group, N.A. a monthly fee,
computed at the annual rate of 0.25% of the average aggregate net asset value of
Shares of the Funds held during the period in Customer accounts for which AMCORE
Investment Group, N.A. has provided services under this Agreement. The
Distributor will be compensated by each Fund in an amount equal to its payments
to AMCORE Investment Group, N.A. with respect to each Fund's Shares under the
Rule 12b-1 Agreement.
33
<PAGE>
Administrative Services Plan
- ----------------------------
The Company has adopted an Administrative Services Plan (the "Services
Plan") pursuant to which each Fund is authorized to pay compensation to banks
and other financial institutions (each a "Service Organization"), which may
include the Adviser, its correspondent and affiliated banks, and the
Distributor, which agree to provide certain ministerial, recordkeeping and/or
administrative support services for their customers or account holders
(collectively, "customers") who are the beneficial or record owner of Shares of
that Fund. In consideration for such services, a Service Organization receives a
fee from a Fund, computed daily and paid monthly, at an annual rate of up to
0.25% of the average daily net asset value of Shares of that Fund owned
beneficially or of record by such Service Organization's customers for whom the
Service Organization provides such services.
The servicing agreements adopted under the Services Plan (the
"Servicing Agreements") require the Service Organizations receiving such
compensation to perform certain ministerial, recordkeeping and/or administrative
support services with respect to the beneficial or record owners of Shares of
the Funds, such as processing dividend and distribution payments from the Fund
on behalf of customers, providing periodic statements to customers showing their
positions in the Shares of the Fund, providing 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 Fund pursuant
to specific or pre-authorized instructions.
As authorized by the Services Plan, the Company has entered into
Servicing Agreements with the Adviser pursuant to which the Adviser 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, (i) processing dividend
and distribution payments from a Fund on behalf of customers, (ii) providing
periodic statements to its customers showing their positions in the Shares;
(iii) arranging for bank wires; (iv) responding to routine customer inquiries
relating to services performed by the Adviser; (v) providing sub-accounting with
respect to the Shares beneficially owned by the Adviser's customers or the
information necessary for sub-accounting; (vi) if required by law, forwarding
shareholder communications from a Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to its customers; (vii) aggregating and processing purchase, exchange,
and redemption requests from customers and placing net purchase, exchange, and
redemption orders for customers; and (viii) providing customers with a service
34
<PAGE>
that invests the assets of their account in the Shares pursuant to specific or
pre-authorized instructions. In consideration of such services, the Company, on
behalf of each Fund, has agreed to pay the Adviser a monthly fee, computed at an
annual rate of twenty-five one-hundredths of one percent (0.25%) of the average
aggregate net asset value of Shares of that Fund held during the period by
customers for whom the Adviser has provided services under the Servicing
Agreement.
Custodian
- ---------
Bankers Trust Company, New York, New York, serves as custodian (the
"Custodian") to the Funds pursuant to the Custodian Agreement dated as of
October 30, 1997, between the Company and the Custodian (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 of the Funds pays the Custodian an annual
fee plus fixed fees charged for certain portfolio transactions and out-of-pocket
expenses.
Unless sooner terminated, the Custodian Agreement will continue in
effect until terminated by either party upon 60 days' advance written notice to
the other party. Notwithstanding the foregoing, the Custodian Agreement, with
respect to a Fund, must be 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 "GENERAL INFORMATION - Miscellaneous" in the Prospectus), and a
majority of the Directors who are not parties to the Custodian Agreement or
interested persons (as defined in the 1940 Act) of any party to the Custodian
Agreement ("Disinterested Persons") by votes cast in person at a meeting called
for such purpose.
Transfer Agency and Fund Accounting Services
- --------------------------------------------
IMG also serves as transfer agent and dividend disbursing agent (the
"Transfer Agent") for the Funds, pursuant to the Transfer Agency Agreement dated
October 30, 1997. Pursuant to such Agreement, the Transfer Agent, among other
things, performs the following services in connection with each of the Funds'
Shareholders of record: maintenance of shareholder records for each of the
Fund's Shareholders of record; processing shareholder purchase and redemption
orders; processing transfers and exchanges of Shares of the Funds 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. IMG has contracted with BISYS Fund Services
35
<PAGE>
Ohio, Inc. ("BISYS Fund Services Ohio" of the "Sub-Transfer Agent") to serve as
Sub-Transfer Agent.
In addition, IMG provides certain fund accounting services to the Funds
pursuant to a Fund Accounting Agreement dated October 30, 1997. IMG receives a
fee from each Fund for such services equal to a fee computed daily and paid
periodically at an annual rate of three one-hundredths of one percent (.03%) of
that Fund's average daily net assets. Under such Agreement, IMG maintains the
accounting books and records for each Fund, including journals containing an
itemized daily record of all purchases and sales of portfolio securities, all
receipts and disbursements of cash and all other debits and credits, general and
auxiliary ledgers reflecting all asset, liability, reserve, capital, income and
expense accounts, including interest accrued and interest received, and other
required separate ledger accounts; maintains a monthly trial balance of all
ledger accounts; performs certain accounting services for the Fund, including
calculation of the net asset value per Share, calculation of the dividend and
capital gain distributions, if any, and of yield, reconciliation of cash
movements with the Custodian, affirmation to the Custodian of all portfolio
trades and cash settlements, verification and reconciliation with the Custodian
of all daily trade activity; provides certain reports; obtains dealer
quotations, prices from a pricing service or matrix prices on all portfolio
securities in order to mark the portfolio to the market; and prepares an interim
balance sheet, statement of income and expense, and statement of changes in net
assets for each Fund.
Independent Auditors
- --------------------
KPMG Peat Marwick LLP, P.O. Box 772, Des Moines, Iowa 50309, have been
selected as independent auditors for the Company for the fiscal year ended April
30, 1998. KPMG Peat Marwick LLP will perform an annual audit of the Funds'
financial statements and provide other services related to filings with respect
to securities regulations. Reports of their activities will be provided to the
Company's Board of Directors.
Legal Counsel
- -------------
Cline, Williams, Wright, Johnson & Oldfather, 233 S. 13th, Suite 1900,
Lincoln, Nebraska 68508, is counsel to the Company.
ADDITIONAL INFORMATION
Description of Shares
- ---------------------
The Company is a Maryland corporation, organized on November 16, 1994.
The Company's Articles of Incorporation are on file with the Secretary of State
of Maryland. The Articles of Incorporation authorize the Board of Directors to
36
<PAGE>
issue 100,000,000,000 shares, with a par value of $0.001 per share. The Company
consists of several funds organized as separate series of shares. Some series
are further divided presently in up to four additional "classes" of shares which
bear differing class level fees. Additional classes of a series may be
authorized in the future. At present, only the Equity Fund and the Government
Assets Fund described in their Prospectus and this Statement of Additional
Information are offered with classes. In both cases, the classes are referred to
"T shares" and "S shares." S shares bear the Rule 12b-1 distribution fees
described herein and in the Prospectus, while T Shares are not subject to Rule
12b-1 distribution fees. The establishment of classes of Shares was approved by
the Board of Directors under the provisions of a plan adopted pursuant to Rule
18f-3, which Plan sets forth the basis for allocating certain expenses among the
classes of the Company's shares. Under Rule 18f-3 and the plan the Company is
permitted to establish separate classes that allow for different arrangement for
shareholder services, distribution of shares and other services and to pay
different amounts of the expenses.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Directors may grant in its
discretion. When issued for payment as described in the Prospectuses and this
Statement of Additional Information, the shares will be fully paid and
nonassessable. In the event of a liquidation or dissolution of the Company,
shareholders of a fund are entitled to receive the assets available for
distribution belonging to that fund, and a proportionate distribution, based
upon the relative asset values of the respective funds, of any general assets
not belonging to any particular fund which are available for distribution. All
shares are held in uncertificated form and will be evidenced by the appropriate
notation on the books of the Transfer Agent.
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
37
<PAGE>
by a majority of the outstanding Shares of such Fund. Approval of changes to the
Rule 12b-1 Plan applicable to a Fund, or to a class of shares of a Fund would
only be effectively acted upon with respect to the Fund or to a class of shares
of a Fund, if approved by a majority of the outstanding Shares of such Fund or
class of Shares. 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.
Shareholder Meetings
- --------------------
The Maryland Corporation Law permits registered investment companies to
operate without an annual meeting of shareholders under specified circumstances
if an annual meeting is not required by the 1940 Act. The Fund has adopted the
appropriate Bylaw provisions and may not hold an annual meeting in any year in
which the election of Directors is not required to be acted on by shareholders
under the 1940 Act.
The Bylaws also contain procedures for removal of Directors by
shareholders. At any meeting of shareholders, duly called and at which a quorum
is present, the shareholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any Director or
Directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of removed Directors.
Upon the written request of the holders of shares entitled to not less
than 10 percent of all the votes entitled to be cast at such meeting, the
Secretary of the Funds shall promptly call a special meeting of shareholders for
the purpose of voting upon the question of removal of any Director. Whenever 10
or more shareholders of record who have been such for at least six months
preceding the date of application, and who hold in the aggregate either shares
having a net asset value of at least $25,000 or at least 1 percent of the total
outstanding shares, whichever is less, shall apply to the Secretary in writing,
stating that they wish to communicate with other shareholders with a view to
obtaining signatures to a request for a meeting as described above and
accompanied by a form of communication and request which they wish to transmit,
the Secretary shall within five business days after such application either: (1)
afford to such applicants access to a list of the names and addresses of all
shareholders of record; or (2) inform such applicants as to the approximate
number of shareholders of record and the approximate cost of mailing to them the
proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of
the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender or the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
38
<PAGE>
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
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 that 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 votes of Shareholders of that Fund.
Additional Tax Information
- --------------------------
TAXATION OF THE FUNDS. Each Fund intends to qualify annually and to
elect to be treated as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code").
To qualify as a regulated investment company, each Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, and gains from the sale of securities, invest in
securities within certain statutory limits, and distribute at least 90% of its
net income each taxable year. Each Fund intends to distribute to its
Shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains.
39
<PAGE>
There are tax uncertainties with respect to whether increasing rate
securities will be treated as having an original issue discount. If it is
determined that the increasing rate securities have original issue discount, a
holder will be required to include as income in each taxable year, in addition
to interest paid on the security for that year, an amount equal to the sum of
the daily portions of original issue discount for each day during the taxable
year that such holder holds the security. There may be tax uncertainties with
respect to whether an extension of maturity on an increasing rate note will be
treated as a taxable exchange. In the event it is determined that an extension
of maturity is a taxable exchange, a holder will recognize a taxable gain or
loss, which will be a short-term capital gain or loss if the holder holds the
security as a capital asset, to the extent that the value of the security with
an extended maturity differs from the adjusted basis of the security deemed
exchanged therefor.
FOREIGN TAXES. Investment income on certain foreign securities may be
subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which a Fund
would be subject. However, if a Fund invests in the stock of certain foreign
corporations that constitute a Passive Foreign Investment Company ("PFIC"), then
federal income taxes may be imposed on a Fund upon disposition of PFIC
investments.
SHAREHOLDERS' TAX STATUS. Shareholders are subject to federal income
tax on dividends and capital gains received as cash or additional shares. The
dividends received deduction for corporations will apply to ordinary income
distributions to the extent the distribution represents amounts that would
qualify for the dividends received deduction to the Funds if those Funds were
regular corporations, and to the extent designated by those Funds as so
qualifying. These dividends, and any short-term capital gains are taxable as
ordinary income.
CAPITAL GAINS. Capital gains, when experienced by a Fund, could result
in an increase in dividends. Capital losses could result in a decrease in
dividends. When a Fund realizes net long-term capital gains, it will distribute
them at least once every 12 months.
BACKUP WITHHOLDING. Each Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all reportable dividends (which does not
include exempt-interest dividends) and capital gain distributions (as well as
redemptions for all Funds except the Government Assets Fund) payable to
Shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
40
<PAGE>
notified by the IRS that they are subject to backup withholding. Corporate
Shareholders and certain other Shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the Shareholder's U.S. federal
income tax liability.
Additional Tax Information Concerning the Municipal Bond Fund
- -------------------------------------------------------------
The Municipal Bond Fund intends to qualify under the Code to pay
"exempt-interest dividends" to its Shareholders. The Municipal Bond Fund will be
so qualified if, at the close of each quarter of its taxable year, at least 50%
of the value of its total assets consists of securities on which the interest
payments are exempt from the regular federal income tax. To the extent that
dividends distributed by the Municipal Bond Fund to its Shareholders are derived
from interest income exempt from federal income tax and are designated as
"exempt-interest dividends" by the Fund, they will be excludable from the gross
incomes of the Shareholders for regular federal income tax purposes. The
Municipal Bond Fund will inform Shareholders annually as to the portion of the
distributions from the Fund which constituted "exempt-interest dividends."
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting purchasers of Shares of the Municipal Bond
Fund. No attempt is made to present a detailed explanation of the income tax
treatment of the Municipal Bond Fund or its Shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Municipal Bond Fund are urged to consult their tax
advisers with specific reference to their own tax situation.
Yields and Total Returns of the Government Assets Fund
- ------------------------------------------------------
As summarized in the Prospectus of the Government Assets Fund under the
heading "Performance Information," the yield of the Government Assets Fund for a
seven-day period (the "base period") will be computed by determining the net
change in value (calculated as set forth below) of a hypothetical account having
a balance of one share at the beginning of the period, dividing the net change
in account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by
365/7 with the resulting yield figure carried to the nearest hundredth of one
percent. Net changes in value of a hypothetical account will include the value
41
<PAGE>
of additional Shares purchased with dividends from the original Share and
dividends declared on both the original Share and any such additional Shares,
but will not include realized gains or losses or unrealized appreciation or
depreciation on portfolio investments. Yield may also be calculated on a
compound basis (the "effective yield") which assumes that net income is
reinvested in Fund Shares at the same rate as net income is earned for the base
period.
The yield and effective yield of the Government Assets Fund will vary
in response to fluctuations in interest rates and in the expenses of the Fund.
For comparative purposes the current and effective yields should be compared to
current and effective yields offered by competing financial institutions for the
same base period and calculated by the methods described below.
The Government Assets Fund may wish to publish total return figures in
its sales literature and other advertising materials. For a discussion of the
manner in which such total return figures are calculated, see "Yields and Total
Returns of the Variable NAV Funds--Total Return Calculations" below.
Yields and Total Returns of the Variable NAV Funds
- --------------------------------------------------
YIELD CALCULATIONS. As summarized in the Prospectuses of the Funds
under the heading "PERFORMANCE INFORMATION", yields of each of the Funds except
the Government Assets Fund will be computed by dividing the net investment
income per share (as described below) earned by the Fund during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. A Fund's net investment income per share
earned during the period is based on the average daily number of Shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
a - b
Yield = 2 [(------- + 1)exp(6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
42
<PAGE>
c = the average daily number of Shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per Share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in that Fund. Interest earned on any debt
obligations held by a Fund is calculated by computing the yield to maturity of
each obligation held by that Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
Business Day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by that Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Undeclared earned income will be subtracted from the net asset value
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared as a dividend
shortly thereafter.
During any given 30-day period, the Advisor or the Administrator may
voluntarily waive all or a portion of their fees with respect to a Fund. Such
waiver would cause the yield of that Fund to be higher than it would otherwise
be in the absence of such a waiver.
From time to time, the tax equivalent 30-day yield of the Municipal
Bond Fund may be presented in advertising and sales literature. The tax
equivalent 30-day yield will be computed by dividing that portion of the Fund's
yield which is tax-exempt by one minus a stated tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt.
43
<PAGE>
TOTAL RETURN CALCULATIONS. As summarized in the Prospectuses of the
Funds under the heading "PERFORMANCE INFORMATION", 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 the Fund immediately rather than paid to the investor in cash. The
Funds compute their average annual total returns by determining the average
annual compounded rates of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
payment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result. This calculation can be expressed as
follows:
Average Annual ERV
Total Return = [(------)exp (1/n) - 1]
P
Where: ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their aggregate total returns by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total ERV
Return = [(------] - 1]
P
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
44
<PAGE>
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Performance Comparisons
- -----------------------
Investors may judge the performance of the Funds by comparing them to
the performance of other mutual funds or mutual fund portfolios 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 or
Ibbotson Associates, Inc. Comparisons may also be made to indices or data
published in IBC's MONEY FUND REPORT, a nationally recognized money market fund
reporting service, Money Magazine, Forbes, Barron's, The Wall Street Journal,
The New York Times, Business Week, and U.S.A. Today. In addition to performance
information, general information about the Funds that appears in a publication
such as those mentioned above may be included in advertisements and in reports
to Shareholders. The Funds may also include in advertisements and reports to
Shareholders information comparing the performance of IMG or its predecessors to
other investment advisers; such comparisons may be published by or included in
Nelsons Directory of Investment Managers, Roger's, Casey/PIPER Manager Database
or CDA/Cadence.
Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are functions of a Fund's quality, composition and maturity, as well
as expenses allocated to the Fund. Fees imposed upon Customer accounts by the
Adviser or its affiliated or correspondent banks for cash management services
will reduce a Fund's effective yield to Customers.
From time to time, the Fund 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. The Funds may also include calculations,
such as hypothetical compounding examples, which describe hypothetical
45
<PAGE>
investment results in such communications. Such performance examples will be
based on an express set of assumptions and are not indicative of the performance
of any Fund.
Miscellaneous
- -------------
The Funds may include information in their Annual Reports and
Semi-Annual Reports to Shareholders that (1) describes general economic trends,
(2) describes general trends within the financial services industry or the
mutual fund industry, (3) describes past or anticipated portfolio holdings for a
fund within the Company or (4) describes investment management strategies for
such funds. Such information is provided to inform Shareholders of the
activities of the Funds for the most recent fiscal year or half-year and to
provide the views of IMG and/or Company officers regarding expected trends and
strategies.
Individual Directors are elected by the Shareholders and, subject to
removal by the vote of two-thirds of the Board of Directors, serve for a term
lasting until the next meeting of Shareholders at which Directors are elected.
Such meetings are not required to be held at any specific intervals.
Shareholders owning not less than 10% of the outstanding Shares of the Company
entitled to vote may cause the Directors to call a special meeting, including
for the purpose of considering the removal of one or more Directors. Any Trustee
may be removed at any meeting of Shareholders by vote of two-thirds of the
Company's outstanding shares. The Declaration of Trust provides that the
Directors will assist shareholder communications to the extent required by
Section 16(c) of the 1940 Act in the event that a shareholder request to hold a
special meeting is made.
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 Prospectuses 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 Prospectuses and this Statement of Additional Information.
46
<PAGE>
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by the Adviser with regard to
portfolio investments for the Funds include Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P") and Duff & Phelps, Inc.
("D&F"). Set forth below is a description of the relevant ratings of each such
NRSRO. The NRSROs that may be utilized by the Advisor and the description of
each NRSRO's ratings is as of the date of this Statement of Additional
Information, and may subsequently change.
LONG TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds)
Description of the three highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
Aaa Bonds which are rated Aaa 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.
Aa Bonds which 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 risk appear somewhat
larger than in Aaa securities.
A Bonds which are rated A 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.
47
<PAGE>
Description of the three highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A 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.
Description of the three highest long-term debt ratings by D&P;
AAA Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality Protection factors are strong. AA Risk is
modest but may vary slightly from time to time AA- because of economic
conditions.
A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods of
A- economic stress.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on Funds employed.
48
<PAGE>
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial
markets and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayments of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have
extremely strong safety characteristics are denoted with a
plus sign (+).
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
49
<PAGE>
D&P's description of the short-term debt ratings (D&P incorporates gradations of
"1+" (one plus) and "1-" (one minus) to assist investors in recognizing quality
differences within the highest rating category);
Duff 1+ 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 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Duff 2 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.
Short-Term Loan/Municipal Note Ratings
- --------------------------------------
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
S&P's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
50
<PAGE>
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
Export-Import Bank of the United States, 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 of the
Government National Mortgage Association and the Export-Import Bank of the
United States, 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
51
<PAGE>
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.
52
