CROSS-REFERENCE SHEET
Explanatory Note: The Registrant is a "series" company. The Registration
Statement relates to all eight series of the Registrant's shares: The Starwood
Strategic Fund, The Aggressive Growth Fund, The Fiduciary Value Fund, The
Asset Allocation Fund, The Taxable Fixed Income Fund, The Municipal Fixed
Income Fund, The Taxable Money Market Fund and The Tax-Free
Money Market Fund. All of the Funds' shares are offered pursuant to a
combined Prospectus (the "Combined Prospectus") and a combined Statement
of Additional Information. In addition, the shares of The Taxable Money
Market Fund and The Tax-Free Money Market Fund are offered pursuant to a
separate Prospectus for those Funds only (the "Money Market Fund
Prospectus"). Both the Combined Prospectus and the Money Market Fund
Prospectus were included in Part A of Post-Effective Amendment Number 3.
The Prospectus headings below refer to the headings in the Combined Prospectus;
the Prospectus headings in the Money Market Fund Prospectus are
substantially identical.
PART A. INFORMATION REQUIRED IN THE PROSPECTUS.
Item in Form N-1A Prospectus Heading
Item 1. Cover Page . . . . . . . . . . . . . .Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . .Summary of Fund Expenses;
Highlights; Certain Risk
Factors
Item 3. Condensed Financial Information . . .Financial Highlights;
Performance Information
Item 4. General Description of Registrant. . .Highlights; Investment
Objectives and Policies;
Certain Investments and
Investment Techniques;
General Information;
Supplement to Prospectus
Item 5. Management of the Fund . . . . . . . .The Trust and Its
Management; Expenses
Item 5A. Management's Discussion of Fund. . . .Not Applicable
Performance
Item 6. Capital Stock and Other Securities . .General Information;
Dividends and Distributions;
Taxes
Item 7. Purchase of Securities Being . . . . .How to Buy Shares;
Offered Shareholder Services; Net
Asset Value; The Trust and
its Management
Item 8. Redemption or Repurchase . . . . . . .How to Redeem Shares;
Exchange Privilege
Item 9. Pending Legal Proceedings. . . . . . .Not Applicable
PART B. INFORMATION REQUIRED IN THE STATEMENT OF
ADDITIONAL INFORMATION.
Item in Form N-1A Statement Heading
Item 10. Cover Page . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . . . Information About the
Trust
Item 13. Investment Objectives and Policies. . . . . Investment Objectives
and Policies; Types of
Investments and
Investment Techniques;
Investment Limitations
Item 14. Management of the Fund. . . . . . . . . . . Management of the Trust
Item 15. Control Persons and Principal Holders
of Securities . . . . . . . . .. . . . . . . Management of the Trust
Item 16. Investment Advisory and Other Services. . . Investment Advisory
Arrangements;
Distribution
Arrangements;
Administrative
Services Arrangements;
Custodian, Transfer
Agent, Fund Accounting
Agent, Independent
Accountants
Item 17. Brokerage Allocation and Other Practices . . Brokerage
Transactions
Item 18. Capital Stock and Other Securities . . . . . Information About the
Trust
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . Purchase and
Redemption;
Determination of Net
Asset Value
Item 20. Tax Status . . . . . . . . . . . . . . . . . Tax Status
Item 21. Underwriters . . . . . . . . . . . . . . . . Not Applicable
Item 22. Calculation of Performance Data . . . . . . Performance
Information
Item 23. Financial Statements . . . . . . . . . . . . Financial Statements
PART C. OTHER INFORMATION
Information required to be included in Part C was set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
April 17, 1996
THE VINTAGE FUNDS
SUPPLEMENT TO PROSPECTUS
DATED JANUARY 29, 1996
Effective April 17, 1996, The Vintage Funds (the "Trust") authorized
changes to the investment policies and limitations of the Taxable Fixed
Income Fund and the Municipal Fixed Income Fund (the "Fixed Income Funds")
to permit each Fund to invest principally in other mutual funds. Either Fund
may invest up to 25% of its assets in any one mutual fund, and up to 100% of
its assets in other mutual funds in general. Although the Fixed Income Funds
are permitted to invest principally in other mutual funds, they do not
necessarily intend to do so. Neither Fund is required to invest in other
mutual funds at any time.
Each Fixed Income Fund will invest only in other mutual funds that have an
investment objective similar to the Fund's, or that invest primarily in
securities which are permitted investments under the Fund's investment
policies described in the Prospectus. In addition, each Fixed Income Fund
will invest only in other funds that have fundamental investment restrictions
that are substantially no less restrictive than its own. Nevertheless, the
other funds purchased by the Fixed Income Funds likely will have certain
investment policies, and use certain investment practices, that are different
from those of the Funds and not described in the Prospectus. These other
policies and practices may subject the other funds' assets to varying or
greater degrees of risk.
Prior to the effective date of this Supplement, the Aggressive Growth Fund
and the Asset Allocation Fund were authorized to, and had the stated
intention to, invest principally in other mutual funds. As a result of the
changes made effective with this Supplement, the disclosures found in the
Prospectus regarding investments in other mutual funds by the Aggressive
Growth Fund and the Asset Allocation Fund will apply to the Fixed Income
Funds, except that the Fixed Income Funds do no have the stated intention to
invest principally in other mutual funds. To the extent a Fund invests in
other mutual funds, the risks associated with such investments become more
significant, and investors should carefully read "Investment Objectives and
Policies --Investments in Other Mutual Funds" (at pages 17-18 of the
Prospectus) and other disclosures therein relating to investing in other
mutual funds (e.g., the last paragraph under "Summary of Fund Expenses").
The fundamental investment limitations described at pages 19-20 of the
Prospectus were modified by an affirmative vote of a majority of the
shareholders of each of the Fixed Income Funds so that, effective with this
Supplement, each Fixed Income Fund is permitted to invest in other mutual
funds to the same extent as the Aggressive Growth Fund and the Asset
Allocation Fund. The investment limitations listed fourth and sixth on page
19 of the Prospectus have been modified to provide that the exceptions
applicable to the Aggressive Growth Fund and the Asset Allocation Fund are
also applicable to each Fixed Income Fund.
This Supplement, and the Prospectus dated January 29, 1996, contain
information that you should know before investing in any of the Funds and
should be retained for future reference. Additional information, including
information related to the changes in investment policies and limitations, is
included in the Statement of Additional Information dated April 17, 1996. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. It is available
upon request and without charge by calling (800) 408-4682 (1-800-40-VINTAGE).
<PAGE>
THE VINTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
April 17, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
The Vintage Funds (the "Trust"), dated January 29, 1996, and the Supplement
to the Prospectus dated April 17, 1996, as may be revised from time to time.
To obtain a copy of the Trust's Prospectus, please write to The Vintage Funds
at P.O. Box 6110, Indianapolis, Indiana 46206-6110, or call 1-800-408-4682
(1-800-40-VINTAGE).
TABLE OF CONTENTS
Page
Investment Objectives and Policies. . . . . . . . . . . . . . . . . .3
Types of Investments and Investment Techniques. . . . . . . . . . . .4
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . 21
Management of the Trust . . . . . . . . . . . . . . . . . . . . . . 24
Investment Advisory Arrangements. . . . . . . . . . . . . . . . . . 26
Distribution Arrangements . . . . . . . . . . . . . . . . . . . . . 27
Administrative Services Arrangements. . . . . . . . . . . . . . . . 28
Brokerage Transactions. . . . . . . . . . . . . . . . . . . . . . . 28
Purchase and Redemption . . . . . . . . . . . . . . . . . . . . . . 28
Determination of Net Asset Value . . . . . . . . . . . . . . . . . 29
Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Performance Information . . . . . . . . . . . . . . . . . . . . . . 31
Information About the Trust . . . . . . . . . . . . . . . . . . . . 33
Custodian, Transfer Agent, Fund Accounting Agent,
and Independent Accountants . . . . . . . . . . . . . . . . . . 33
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 34
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers eight separate Funds, each with its own investment
objective and policies. The Funds' investment objectives cannot be changed
without shareholder approval. While there is no assurance that any Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in the Prospectus and this Statement of
Additional Information. Unless otherwise indicated, the Funds' investment
policies may be changed by the Trust's Board of Trustees without shareholder
approval. Shareholders will be notified before any material change in
investment policies becomes effective.
The Starwood Strategic Fund seeks growth of capital. The Fund
pursues this objective by investing principally in a diversified portfolio of
equity securities of seasoned, financially strong growth companies.
The Aggressive Growth Fund seeks growth of capital. The Fund
pursues this objective by investing primarily in a diversified portfolio of
other no-load mutual funds that invest principally in large capitalization
stocks, and secondarily in other no-load mutual funds that invest principally
in small capitalization and emerging growth company equity securities.
The Fiduciary Value Fund seeks growth of capital, current income and
growth of income. The Fund pursues this objective by investing principally in
a diversified portfolio of common stocks, preferred stocks and securities
convertible into common stocks of companies which offer the prospect of
growth of earnings while paying current dividends. The Fund may also
purchase securities that do not pay current dividends but which offer prospects
for growth of capital and future income.
The Asset Allocation Fund seeks preservation of capital, capital
appreciation and current income. The Fund pursues this objective through a
flexible policy of investing principally in a diversified portfolio of other
no-load index mutual funds, including domestic and international stock and
investment grade bond index funds, as well as money market funds. The Fund
may invest directly in equity securities, investment grade corporate and
municipal debt obligations, U.S. government securities and money market
instruments, but under normal circumstances at least 65% of its assets will
be invested in other no-load index funds.
The Taxable Fixed Income Fund seeks a high level current income
consistent with the preservation of capital. The Fund pursues this objective
by investing principally in a diversified portfolio of U.S. government
securities and investment grade corporate debt obligations, as well as other
no-load mutual funds that invest principally in these securities.
The Municipal Fixed Income Fund seeks a high level of current income
that is exempt from federal regular income tax consistent with the preservation
of capital. The Fund pursues this objective by investing principally in a
diversified portfolio of investment grade municipal securities, as well as
other no-load mutual funds that invest principally in these securities.
The Taxable Money Market Fund seeks a high level of current income
consistent with the preservation of capital and maintenance of liquidity. The
Fund pursues this objective by investing principally in a diversified portfolio
of high quality, short-term money market instruments. The Fund intends to
maintain a constant net asset value of $1.00 per share, although there is no
assurance that it will be able to do so.
The Tax-Free Money Market Fund seeks a high level of current income
that is exempt from Federal income tax consistent with the preservation of
capital and maintenance of liquidity. The Fund pursues this objective by
investing principally in a diversified portfolio of high quality, short-term
municipal securities. The Fund intends to maintain a constant net asset value
of $1.00 per share, although there is no assurance that it will be able to do
so.
The Funds' investment policies are described in the Prospectus. Certain
policies also are described below under "Types of Investments and Investment
Techniques."
TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
In the case of the Taxable Fixed Income Fund and the Municipal Fixed
Income Fund, all references to various types of securities are deemed to
include mutual funds that invest in such securities.
Convertible Securities
The Funds may invest in convertible securities. Convertible securities
are fixed income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock at the
option of the holder during a specified period. Convertible securities may
take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a combination
of the features of several of these securities. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for a variety of investment strategies.
The Funds will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of the investment adviser, the
investment characteristics of the underlying common shares will assist the Fund
in achieving its investment objective. The Funds may also elect to hold or
trade convertible shares. In selecting convertible securities, a Fund's
investment adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument, and the investment potential of the
underlying equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the investment
adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's
management capability and practices.
Warrants
The Funds (other than the money market Funds) may invest in
warrants. Warrants are basically options to purchase common stock at a
specific price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants may
have a life ranging from less than one year to twenty years, or they may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, a warrant is worthless if the market price of the
common stock does not exceed the warrant's exercise price during the life of
the warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. No Fund will invest more than 5% of the value of its
total assets in warrants. Warrants acquired in units or attached to securities
may be deemed to be without value for purposes of this policy.
Corporate Debt Obligations
The Funds may invest in corporate debt obligations, including
corporate bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest.
Ratings. The Funds will not invest in corporate debt obligations
having a rating of less than Baa by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P"),
Fitch Investors Service ("Fitch"), Duff & Phelps, Inc. ("Duff") or Thompson
Bankwatch ("Bankwatch"). (The money market Funds have higher rating
requirements, as described in the Prospectus.) In certain cases a Fund's
investment adviser may choose bonds which are unrated if it determines that
such bonds are of comparable quality or have similar characteristics to
investment grade bonds. Bonds rated Baa or BBB may have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and interest
payments than higher rated bonds. Downgraded securities will be evaluated on
a case-by-case basis by the Fund's investment adviser. The adviser will
determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold. A description of the rating
categories is contained in the Appendix to this Statement of Additional
Information.
Floating Rate Corporate Debt Obligations. The Funds expect to
invest in floating rate corporate debt obligations, including increasing rate
securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Some of these floating rate corporate debt obligations include
floating rate corporate debt securities issued by savings and loans and
collateralized by adjustable rate mortgage loans, also known as
collateralized thrift notes. Many of these collateralized thrift notes have
received AAA ratings from nationally recognized statistical rating
organizations. Collateralized thrift notes differ from traditional "pass
through" certificates in which payments made are linked to monthly
payments made by individual borrowers net of any fees paid to the issuer
or guarantor of such securities. Collateralized thrift notes pay a floating
interest rate which is tied to a pre-determined index, such as the six-month
Treasury bill rate. Floating rate corporate debt obligations also include
securities issued to fund commercial real estate construction.
Increasing rate securities, which currently do not make up a
significant share of the market in corporate debt securities, are generally
offered at an initial interest rate which is at or above prevailing market
rates. Interest rates are reset periodically (most commonly every 90 days)
at different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate status.
These securities may also contain features which allow the issuer the
option to convert the increasing rate of interest to a fixed rate under such
terms, conditions, and limitations as are described in each issue's
prospectus.
Medium Term Notes and Deposit Notes. Medium term notes
("MTNs") and Deposit Notes are similar to Variable Rate Demand Notes
as described in the Prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years.
Section 4(2) Commercial Paper. Section 4(2) commercial paper
is commercial paper issued in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933. Section 4(2)
commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Funds, who
agree that they are purchasing the paper for investment purposes and not
with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold
to other institutional investors like the Funds through or with the
assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Trust
believes that Section 4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for liquidity established by the
Board of Trustees are quite liquid. The Funds intend, therefore, to treat
the restricted securities which meet the criteria for liquidity established by
the Trustees, including Section 4(2) commercial paper, as determined by
the Funds' investment advisers, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Trust intends to not subject
such paper to the limitation applicable to restricted securities.
Asset-Backed Securities
The money market Funds may invest in mortgage-related
asset-backed securities that are considered U.S. government securities.
The other Funds may invest in these and, to varying extents as described
in the Prospectus, in other asset-backed securities.
Asset-backed securities are created by the grouping of certain
governmental, government related and private loans, receivables and other
lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several
different tranches of debt securities, with some tranches entitled to receive
regular installments of principal and interest, other tranches entitled to
receive regular installments of interest, with principal payable at maturity
or upon specified call dates, and other tranches only entitled to receive
payments of principal and accrued interest at maturity or upon specified
call dates. Different tranches of securities will bear different interest
rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid
without penalty or premium, asset-backed securities are generally subject
to higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods
of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending
upon market conditions, the yield that a Fund receives from the
reinvestment of such prepayments, or any scheduled principal payments,
may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of
"locking in" interest rates than other types of debt securities having the
same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of
securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent
that the prepaid mortgage securities were purchased at a market premium
over their stated amount. Conversely, the prepayment of mortgage
securities purchased at a market discount from their stated principal
amount will accelerate the recognition of interest income by the Fund,
which would be taxed as ordinary income when distributed to the
shareholders.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the credit
quality of the assets underlying such securities, how well the entity issuing
the securities is insulated from the credit risk of the originator or any other
affiliated entities, and the amount and quality of any credit enhancement to
such securities.
Non-Mortgage Related Asset-Backed Securities. The Funds
may invest in non-mortgage related asset-backed securities including, but
not limited to, interests in pools of receivables, such as credit card and
accounts receivable and motor vehicle and other installment purchase
obligations and leases. These securities may be in the form of pass-through
instruments or asset-backed obligations. The securities, all of which are
issued by non-governmental entities and carry no direct or indirect
government guarantee, are structurally similar to collateralized mortgage
obligations and mortgage pass-through securities, which are described below.
Non-mortgage related asset-backed securities present certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same 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 set off
certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such receivables to
retain possession of the underlying obligations. If the servicer sells 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 asset-
backed securities. Further, if a vehicle is registered in one state and is
then registered because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved
in a typical issuance and technical requirements under state laws, the
trustee with the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is a possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
Mortgage-Related Asset-Backed Securities. The Funds may
also invest in various mortgage-related asset-backed securities. These
types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment
conduits, or other securities collateralized by or representing an interest in
real estate mortgages (collectively, "mortgage securities"). Many
mortgage securities are issued or guaranteed by government agencies.
Adjustable Rate Mortgage Securities ("ARMS").
ARMS are pass-through mortgage securities representing interests
in adjustable rather than fixed interest rate mortgages. The ARMS
in which the Funds invest are issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying
mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or
Veterans Administration ("VA"), while those collateralizing
ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and
maturity constraints.
Collateralized Mortgage Obligations ("CMOS").
CMOs are bonds issued by single-purpose, stand-alone finance
subsidiaries or trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction
industry. CMOs purchased by the Funds may be:
collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal
and interest by an agency or instrumentality of the
U.S. government;
collateralized by pools of mortgages in which
payment of principal and interest is guaranteed by
the issuer and such guarantee is collateralized by
U.S. government securities; or
securities in which the proceeds of the issuance are
invested in mortgage securities and payment of the
principal and interest is supported by the credit of
an agency or instrumentality of the U.S.
government.
All CMOs purchased by the Funds are investment grade, as
rated by a nationally recognized statistical rating organization.
Real Estate Mortgage Investment Conduits
("REMICS"). REMICs are offerings of multiple class real estate
mortgage-backed securities which qualify and elect treatment as
such under provisions of the Internal Revenue Code. Issuers of
REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages.
Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed
through the entity and is taxed to the person or persons who hold
interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer
adjustable rates of interest, and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of
the entity must be in assets directly or indirectly secured principally
by real property.
Resets of Interest. The interest rates paid on the ARMS, CMOs,
and REMICs in which the Funds invest generally are readjusted at
intervals of one year or less to an increment over some predetermined
interest rate index. There are two main categories of indices: those based
on U.S. Treasury securities and those derived from a calculated measure,
such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant
maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day
Treasury Bill rate, rates on longer-term Treasury securities, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels.
To the extent that the adjusted interest rate on the mortgage
security reflects current market rates, the market value of an adjustable
rate mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, ARMs which use indices that lag changes in market rates should
experience greater price volatility than adjustable rate mortgage securities
that closely mirror the market.
Caps and Floors. The underlying mortgages which collateralize
the ARMS, CMOs, and REMICs in which the Funds invest will frequently
have caps and floors which limit the maximum amount by which the loan
rate to the residential borrower may change up or down: (1) per reset or
adjustment interval, and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Funds invest may be
affected if market interest rates rise or fall faster and farther than the
allowable caps or floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying residential
mortgages are adjustable, amortization and prepayments may occur,
thereby causing the effective maturities of the mortgage securities in
which the Funds invest to be shorter than the maturities stated in the
underlying mortgages.
Municipal Securities
The Municipal Fixed Income Fund and the Tax-Free Money
Market Fund will invest in municipal securities.
Ratings. The municipal securities in which the Municipal Fixed
Income Fund invests are rated, at the time of purchase, Baa or better by
Moody's or BBB or better by S&P, Fitch, Duff or Bankwatch. (The Tax-Free
Money Market Fund has higher rating requirements, as described in the
Prospectus.) In certain cases the Fund's investment adviser may choose bonds
which are unrated if it determines that such bonds are of comparable quality
or have similar characteristics to investment grade bonds. Bonds rated Baa
or BBB have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. If the Fund
purchases an investment grade bond, and the rating of such bond is
subsequently downgraded so that the bond is no longer classified as
investment grade, the Fund is not required to drop the bond from the
portfolio, but will consider whether such action is appropriate. A
description of the rating categories is contained in the Appendix to this
Statement of Additional Information.
Investment Risks. Yields on municipal securities depend on a
variety of factors, including: the general conditions of the municipal note
market and of the municipal bond market; the size of the particular
offering; the maturity of the obligations; and the rating of the issue. The
ability of a Fund to achieve its investment objective also depends on the
continuing ability of the issuers of municipal securities and participation
interests, or the guarantors of either, to meet their obligations for the
payment of interest and principal when due. Since the Municipal Fixed
Income Fund will invest primarily in municipal securities bearing fixed
rates of interest, the net asset value of its shares will generally vary
inversely with changes in prevailing interest rates.
Concentration. The Municipal Fixed Income Fund will not invest
more than 25% of its total assets in any one industry (except that it may
invest without limitation in other investment companies). Governmental
issuers of municipal securities are not considered part of any "industry."
However, municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be related to
the industry in which such nongovernmental users engage, and the 25%
limitation would apply to such obligations. It is nonetheless possible that
the Fund may invest more than 25% of its assets in a broader segment of
the municipal securities market, such as industrial development bonds and
revenue obligations of hospitals and other health care facilities, housing
agency revenue obligations, or airport revenue obligations. This would be
the case only if the Fund determines that the yields available from
obligations in a particular segment of the market justified the additional
risks associated with a large investment in such segment. Although such
obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries,
economic, business, political and other developments generally affecting
the revenues of such users (for example, proposed legislation or pending
court decisions affecting the financing of such projects and market factors
affecting the demand for their services or products) may have a general
adverse effect on all municipal securities in such a market segment.
Participation Interests. The Funds may purchase participation
interests from financial institutions such as commercial banks, savings and
loan associations and insurance companies. These participation interests
give the Fund an undivided interest in one or more underlying municipal
securities. The financial institutions from which the Fund purchases
participation interests frequently provide or obtain irrevocable letters of
credit or guarantees to attempt to assure that the participation interests are
of high quality. These typically give the Fund the right to demand
payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
Municipal Leases. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation certificate
of any of the above.
Also included within the general category of municipal securities
are certain lease obligations or installment purchase contract obligations
and participations therein (hereinafter collectively called "lease
obligations") of municipal authorities or entities. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the municipality had
issued debt obligations to finance the underlying project or purchase.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. If the entity does not
appropriate funds for the future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, it is unlikely
that the trustee would be able to obtain an acceptable substitute source of
payment. The Fund does not intend to invest more than 10% of its total
assets in non-puttable lease obligations that contain "non-appropriation"
clauses.
In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds and some
lease obligations may be illiquid. Although "non-appropriation" lease
obligations are generally secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. In addition, the
tax treatment of such obligations in the event of non-appropriation is
unclear.
Some municipal leases may be considered to be illiquid. However,
some municipal leases may contain put provisions which grant the Fund
the right to sell the securities to the issuer at a predetermined price and
date. Such provisions improve the marketability and enhance the liquidity
of the security. In determining the liquidity of municipal lease securities,
the Fund's investment adviser will base its determination on the following
factors:
whether the lease can be terminated by the lessee;
the potential recovery, if any, from a sale of the leased
property upon termination of the lease;
the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
the likelihood that the lessee will discontinue appropriating
funding for the leased property because the property is no
longer deemed essential to its operations (e.g., the
potential for an "event of non-appropriation," which the
Fund's investment adviser will continually monitor); and
any credit enhancement or legal recourse provided upon an
event of non-appropriation or other termination of the
lease.
Industrial Development Bonds. Industrial development bonds
are generally issued to provide financing aid to acquire sites or construct
and equip facilities for use by privately or publicly owned corporations.
Most state and local governments have the power to permit the issuance
of industrial development bonds to provide financing for such
corporations in order to encourage the corporations to locate within their
communities. Industrial development bonds do not represent a pledge of
credit or create any debt of municipality or a public authority, and no
taxes may be levied for payment of principal or interest on these bonds.
The principal and interest is payable solely out of monies generated by the
entities using or purchasing the sites or facilities. These bonds will be
considered municipal securities if the interest paid on them, in the opinion
of bond counsel, is exempt from federal regular income tax.
Municipal Notes. Municipal securities in the form of notes
generally are used to provide for short-term capital needs, in anticipation
of an issuer's receipt of other revenues or financing, and typically have
maturities of up to three years. Such instruments may include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation
Notes, Tax and Revenue Anticipation Notes and Construction Loan
Notes. Tax Anticipation Notes are issued to finance the working capital
needs of governments. Generally, they are issued in anticipation of
various tax revenues, such as income, sales, property, use and business
taxes, and are payable from these specific future taxes. Revenue
Anticipation Notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under Federal Revenue
Sharing programs. Bond Anticipation Notes are issued to provide interim
financing until long-term bond financing can be arranged. In most cases,
the long-term bonds then provide the funds needed for repayment of the
notes. Tax and Revenue Anticipation Notes combine the funding sources
of both Tax Anticipation Notes and Revenue Anticipation Notes.
Construction Loan Notes are sold to provide construction financing.
These notes are secured by mortgage notes insured by the Federal
Housing Authority; however, the proceeds from the issuance may be less
than the economic equivalent of the payment of principal and interest on
the mortgage note if there has been a default. The obligations of an issuer
of municipal notes are generally secured by the anticipated revenues from
taxes, grants or bond financing. An investment in such instruments,
however, presents a risk that the anticipated revenues will not be received
or that such revenues will be insufficient to satisfy the issuer's payment
obligations under the notes or that refinancing will be otherwise
unavailable.
Pre-Refunded Municipal Securities. The Fund may invest in
pre-refunded municipal securities. The principal of and interest on pre-
refunded municipal securities are no longer paid from the original revenue
source for the municipal securities. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by
the U.S. Government. The assets in the escrow fund are derived from the
proceeds of refunding bonds issued by the same issuer as the pre-refunded
municipal securities, but usually on more favorable terms. Issuers of
municipal securities use this advance refunding technique to obtain more
favorable terms with respect to municipal securities that are not yet subject
to call or redemption by the issuer. For example, advance refunding enables
an issuer to refinance debt at lower market interest rates, restructure debt
to improve cash flow or eliminate restrictive covenants in the indenture or
other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and
interest payments are made, the pre-refunded municipal securities remain
outstanding on their original terms until they mature or are redeemed by the
issuer. The effective maturity of pre-refunded municipal securities will be
the redemption date if the issuer has assumed an obligation or indicated its
intention to redeem such securities on the redemption date. Pre-refunded
municipal securities are usually purchased at a price which represents a
premium over their face value.
Variable and Floating Rate Securities. The interest rates
payable on certain securities in which the Funds may invest are not fixed
and may fluctuate based upon changes in market rates. A variable rate
obligation has an interest rate which is adjusted at predesignated periods.
Interest on a floating rate obligation is adjusted whenever there is a
change in the market rate of interest on which the interest rate payable is
based. Variable or floating rate obligations generally permit the holders of
such obligations to demand payment of principal from the issuer or a third
party at any time or at stated intervals. Variable and floating rate
obligations are less effective than fixed rate instruments at locking in a
particular yield. Nevertheless, such obligations may fluctuate in value in
response to interest rate changes if there is a delay between changes in
market interest rates and the interest reset date for an obligation. The
Funds will take demand features into consideration in determining the
average portfolio duration of the Fund and the effective maturity of
individual municipal securities. In addition, the absence of an
unconditional demand feature exercisable within seven days will, and the
failure of the issuer or a third party to honor its obligations under a
demand feature might, require a variable or floating rate obligation to be
treated as illiquid for purposes of a Fund's 15% limitation on illiquid
investments.
Zero Coupon and Capital Appreciation Bonds. Zero coupon
and capital appreciation securities carry the risk that, unlike securities that
periodically pay interest to maturity, the Fund will realize no cash until a
specified future payment date unless a portion of such securities is sold
and, if the issuer of such securities defaults, the Fund may obtain no return
at all on its investment. In addition, even though such securities do not
pay current interest in cash, the Fund is nonetheless required to accrue
income on such investments and may be required to distribute such
amounts at least annually. Because no cash is received at the time of the
accrual, the Fund may be required to liquidate other portfolio securities to
satisfy the Fund's distribution obligations.
Insurance. The Funds may invest in "insured" municipal
securities. Insured municipal securities are those for which scheduled
payments of interest and principal are guaranteed by a private
(nongovernmental) insurance company. The insurance only entitles the
Fund to receive the face or par value of the securities held by the Fund.
The insurance does not guarantee the market value of the municipal
securities or the value of the shares of the Fund.
The Funds may utilize new issue or secondary market insurance.
A new issue insurance policy is purchased by a bond issuer who wishes to
increase the credit rating of a security. By paying a premium and meeting
the insurer's underwriting standards, the bond issuer is able to obtain a
high credit rating (usually, Aaa from Moody's or AAA from Standard &
Poor's) for the issued security. Such insurance is likely to increase the
purchase price and resale value of the security. New issue insurance
policies are non-cancellable and continue in force as long as the bonds are
outstanding. A secondary market insurance policy is purchased by an
investor (such as the Fund) subsequent to a bond's original issuance and
generally insures a particular bond for the remainder of its term. The
Funds may purchase bonds which have already been insured under a
secondary market insurance policy by a prior investor, or the Fund may
itself purchase such a policy from insurers for bonds which are currently
uninsured.
An insured municipal security acquired by a Fund will typically be
covered by only one of the above types of policies. All of the insurance
policies used by the Funds will be obtained only from insurance companies
rated, at the time of purchase, Aaa by Moody's or AAA by Standard &
Poor's.
Foreign Securities
Each Fund may invest in foreign securities, including foreign securities
not publicly traded in the United States. The Starwood Strategic Fund may
invest without limitation in foreign securities. Each of the other Funds may
invest up to 25% of its total assets in foreign securities. As described in
the Prospectus, investments in foreign securities involve special risks that
differ from those associated with investments in domestic securities.
Emerging and Developing Countries. The risks described in the
Prospectus often are heightened for investments in emerging or developing
countries. Compared to the United States and other developed countries,
emerging or developing countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade a
small number of securities. Prices on these exchanges tend to be volatile
and, in the past, securities in these countries have offered a greater
potential for gain (as well as loss) than securities of companies located in
developed countries. Further, investment by foreign investors are subject to
a variety of restrictions in many emerging or developing countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the type of
companies in which foreigners may invest. Additional restrictions may be
imposed at any time by these and other countries in which a Fund invests. In
addition, the repatriation of both investment income and capital from several
foreign countries is restricted and controlled under certain regulations,
including in some cases the need for certain government consents.
Currency Risks. Foreign securities are denominated in foreign
currencies. Therefore, the value in U.S. dollars of a Fund's assets and
income may be affected by changes in exchange rates and regulations.
Although each Fund values its assets daily in U.S. dollars, it will not
convert its holdings of foreign currencies to U.S. dollars daily. When a
Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference between
the prices at which they buy and sell currencies.
A Fund may engage in foreign currency exchange transactions in
connection with its investments in foreign securities. The Fund will
conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign
currencies.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When a Fund
enters into a contract for the purchase or sale of a security denominated in
a foreign currency, it may want to establish the U.S. dollar cost or
proceeds, as the case may be. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved
in an underlying security transaction, the Fund is able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result
from a positive change in such currency relationships.
A Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts where the Fund
would be obligated to deliver an amount of foreign currency in excess of
the value of the Fund's securities or other assets denominated in that
currency or denominated in a currency or currencies that the adviser
believes will reflect a high degree of correlation with the currency with
regard to price movements. The Fund generally will not enter into
forward foreign currency exchange contracts with a term longer than one
year.
Foreign Currency Options. A foreign currency option provides
the option buyer with the right to buy or sell a stated amount of foreign
currency at the exercise price on a specified date or during the option
period. The owner of a call option has the right, but not the obligation, to
buy the currency. Conversely, the owner of a put option has the right, but
not the obligation, to sell the currency. When the option is exercised, the
seller (i.e., writer) of the option is obligated to fulfill the terms of the
sold option. However, either the seller or the buyer may, in the secondary
market, close its position during the option period at any time prior to
expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency depreciates in
value. Although purchasing a foreign currency option can protect a Fund
against an adverse movement in the value of a foreign currency, the option
will not limit the movement in the value of such currency. For example, if
the Fund was holding securities denominated in a foreign currency that
was appreciating and had purchased a foreign currency put to hedge
against a decline in the value of the currency, the Fund would not have to
exercise their put option. Likewise, if the Fund were to enter into a
contract to purchase a security denominated in foreign currency and, in
conjunction with that purchase, were to purchase a foreign currency call
option to hedge against a rise in value of the currency, and if the value of
the currency instead depreciated between the date of purchase and the
settlement date, the Fund would not have to exercise its call. Instead, the
Fund could acquire in the spot market the amount of foreign currency
needed for settlement.
Buyers and sellers of foreign currency options are subject to the
same risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets in
foreign currency options are relatively new, and a Fund's ability to
establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although a Fund will not
purchase or write such options unless and until, in the opinion of the
Fund's investment adviser, the market for them has developed sufficiently
to ensure that the risks in connection with such options are not greater
than the risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a particular option
at any specific time. In addition, options on foreign currencies are
affected by all of those factors that influence foreign exchange rates and
investments generally. Foreign currency options that are considered to be
illiquid are subject to each Fund's 15% limitation on illiquid securities.
The value of a foreign currency option depends upon the value of
the underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting
of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. option markets are
closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying
markets that cannot be reflected in the options markets until they reopen.
Foreign Bank Instruments
Each Fund may invest in foreign bank instruments, including
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and
Europaper. These instruments are subject to somewhat different risks
than domestic obligations of domestic issuers. Examples of these risks
include international, economic and political developments, foreign
governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the
issuing bank, and the possible impact of interruptions of the flow of
international currency transactions. Different risks may also exist for
ECDs, ETDs, and Yankee CDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks,
such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and recording keeping and the public
availability of information. These factors will be carefully considered by a
Fund's adviser in selecting investments for the Fund.
U.S. Government Securities
Each Fund may invest in obligations issued or guaranteed by the
U.S. government and its agencies, authorities or instrumentalities. Some
U.S. government securities, such as Treasury bills, notes and bonds, which
differ only in their interest rates, maturities and times of issuance, are
supported by the full faith and credit of the United States of America.
Others, such as obligations issued or guaranteed by U.S. government
agencies, authorities or instrumentalities, are supported either by (a) the
full faith and credit of the U.S. government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of Federal Home Loan Banks), (c) the
discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of the Federal National Mortgage
Association), or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal
obligation to purchase the obligations of its agencies, authorities and
instrumentalities. Securities guaranteed as to principal and interest by the
U.S. government and its agencies, authorities or instrumentalities are
deemed to include (i) securities for which the payment of principal and
interest is based by a guaranty of the U.S. government or its agencies,
authorities or instrumentalities, and (ii) participations in loans made to
foreign governments or their agencies that are so guaranteed. The
secondary market for certain of these participations is limited. Such
participations may therefore be regarded as illiquid.
Options
Each Fund (other than the money market Funds) may attempt to
hedge all or a portion of its portfolio by buying put options on portfolio
securities. These Funds may also write covered call options on portfolio
securities to attempt to increase their current income. Each Fund
currently does not intend to invest more than 5% of its net assets in
premiums on options transactions.
Purchasing Put Options on Portfolio Securities. A Fund may
purchase put options on portfolio securities to protect against price
movements in particular securities in its portfolio. A put option gives the
Fund, in return for a premium, the right to sell the underlying security to
the writer (seller) at a specified price during the term of the option.
Writing Covered Call Options on Portfolio Securities. A Fund
may also write covered call options to generate income. As writer of a
call option, the Fund has the obligation upon exercise of the option during
the option period to deliver the underlying security upon payment of the
exercise price. The Fund may only sell call options either on securities
held in its portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration).
Purchasing and Writing Over-The-Counter Options. A Fund
may purchase and write over-the-counter options on portfolio securities in
negotiated transactions with the buyers or writers of the options for those
options on portfolio securities held by the Fund and not traded on an
exchange. Over-the-counter options are two party contracts with price
and terms negotiated between buyer and seller. In contrast,
exchange-traded options are third party contracts with standardized strike
prices and expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while
over-the-counter options may not.
Financial Futures and Options on Financial Futures
Each Fund (other than the money market Funds) may purchase
and sell financial futures contracts to hedge all or a portion of its portfolio
against changes in interest rates. However, none of the Funds intends to
do so during the current fiscal year. Financial futures contracts call for the
delivery of particular debt instruments at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument
called for in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
Each Fund (other than the money market Funds) may also write
call options and purchase put options on financial futures contracts as a
hedge to attempt to protect securities in its portfolio against decreases in
value. However, none of the Funds intends to do so during the current
fiscal year. When a Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely,
as purchaser of a put option on a futures contract, the Fund is entitled (but
not obligated) to sell a futures contract at the fixed price during the life of
the option.
No Fund may purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the
Fund's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. When a
Fund purchases a futures contract, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures
contract (less any related margin deposits), will be deposited in a
segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use of
such futures contract is unleveraged.
Risks. When a Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the securities
subject to the futures contracts may not correlate perfectly with the prices
of the securities in the Fund's portfolio. This may cause the futures
contracts and any related options to react differently than the portfolio
securities to market changes. In addition, the Fund's investment adviser
could be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, the Fund
may lose money on the futures contracts or options. It is not certain that
a secondary market for positions in futures contracts or for options will
exist at all times. Although the investment adviser will consider liquidity
before entering into options transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
Weighted Average Portfolio Duration
The Taxable Fixed Income Fund and the Municipal Fixed Income
Fund will seek to limit, to the extent consistent with the Fund's investment
objective of current income, the magnitude of fluctuations in the Fund's
net asset value by limiting the dollar-weighted average duration of the
Fund's portfolio as set forth in the Prospectus. Duration is a commonly
used measure of the potential volatility of the price of a debt security, or
the aggregate market value of a portfolio of debt securities, prior to
maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. A Fund
should be expected to maintain a higher average duration during periods
of lower expected market volatility, and a lower average duration during
periods of higher expected market volatility.
Duration measures the magnitude of the change in the price of a
debt security relative to a given change in the market rate of interest. The
duration of a debt security depends upon three primary variables: the
security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons
or longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted
values of cash flows of a security or portfolio of securities, including
principal and interest payments, by the sum of the present values of the
cash flows. Certain debt securities, such as asset-backed securities, may
be subject to prepayment at irregular intervals. The duration of these
instruments will be calculated based upon assumptions established by the
investment adviser as to the probable amount and sequence of principal
prepayments.
Credit Enhancement
Certain of the Funds' investments may have been credit enhanced
by a guaranty, letter of credit or insurance. The Funds typically evaluate
the credit quality and ratings of credit enhanced securities based upon the
financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, a
Fund will not treat credit enhanced securities as having been issued by the
credit enhancer for diversification purposes. However, under certain
circumstances applicable regulations may require the Fund to treat the
securities as having been issued by both the issuer and the credit enhancer.
The bankruptcy, receivership or default of the credit enhancer will
adversely affect the quality and marketability of the underlying security.
Demand Features
The Funds may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at
their principal amount (usually with accrued interest) within a fixed period
following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the
underlying security. A Fund uses these arrangements to provide the Fund
with liquidity and not to protect against changes in the market value of the
underlying securities. The bankruptcy, receivership or default by the
issuer of the demand feature, or a default on the underlying security or
other event that terminates the demand feature before its exercise, will
adversely affect the liquidity of the underlying security. Demand features
that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
When-Issued and Delayed Delivery Transactions
These transactions are arrangements in which a Fund purchases
securities with payment and delivery scheduled for a future time. The
Fund engages in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with the Fund's
investment objective and policies, and not for investment leverage.
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund. Settlement dates may be a
month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment
for the securities to be purchased are segregated at the trade date. These
securities are marked to market daily and are maintained until the
transaction is settled. Each Fund may engage in these transactions to an
extent that would cause the segregation of an amount up to 25% of the
value of its net assets.
Lending of Portfolio Securities
The collateral received when a Fund lends portfolio securities must
be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may
pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker.
Selling Securities Short
The Starwood Strategic Fund may sell securities short. When the
Fund makes a short sale, it must leave the proceeds from the short sale
with the broker and it must also deposit with the broker a certain amount
of cash or government securities to collateralize its obligation to replace
the borrowed securities which have been sold. In addition, the Fund must
put in a segregated account (not with the broker) an amount of cash or
U.S. government securities equal to the difference between the market
value of the securities sold short at the time they were sold short and any
cash or government securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds from the short
sale). In addition, until the Fund replaces the borrowed security, it will
daily maintain the segregated account at a level so that the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the greater of (a) the
current market value of the securities sold short and (b) the market value
of the securities at the time they were sold short. As a result of these
requirements, the Fund will not gain any leverage merely by selling short,
except to the extent that it earns interest on the immobilized cash or
government securities while also being subject to the possibility of gain or
loss from the securities sold short. The Fund may sell securities short to
the extent that would cause the amounts on deposits or segregated to
equal 25% of the value of its net assets.
Restricted and Illiquid Securities
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive safe harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
The Rule was expected to further enhance the liquidity of the secondary
market for securities eligible for resale under Rule 144A. The Trust
believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities eligible for resale under Rule 144A to
the Trustees. The Trustees consider the following criteria in determining
the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
dealer undertakings to make a market in the
security; and
the nature of the security and the nature of the
marketplace trades.
Repurchase Agreements
The Funds require the Custodian to take possession of the
securities subject to repurchase agreements, and these securities are
marked to market daily. To the extent that the original seller does not
repurchase the securities from a Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that a
defaulting seller files for bankruptcy or becomes insolvent, disposition of
securities by the Fund might be delayed pending court action. The Funds
believe that under the regular procedures normally in effect for custody of
the Funds' portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow retention
or disposition of such securities. A Fund will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Directors.
Reverse Repurchase Agreements
When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to
be purchased, are segregated at the trade date. These securities are
marked to market daily and are maintained until the transaction is settled.
Portfolio Turnover
The Funds will not attempt to set or meet a portfolio turnover rate
since any turnover would be incidental to transactions undertaken in an
attempt to achieve a Fund's investment objective, without regard to the
length of time a particular security may have been held. The Adviser does
not anticipate that portfolio turnover will result in adverse tax
consequences.
INVESTMENT LIMITATIONS
Except with respect to borrowing money, if a percentage limitation
set forth in the following investment limitations is adhered to at the time of
the investment, a later increase or decrease in percentage resulting from
any change in value or net assets will not result in a violation of such
limitation.
Selling Short and Buying on Margin
The Funds will not sell securities short or purchase securities on
margin, except that (a) the Starwood Strategic Fund may sell securities
short to the extent that would cause amounts on deposits or segregated as
a result thereof to equal 25% of the value of its net assets, (b) the Funds
(other than the Taxable Money Market Fund and the Tax-Free Money
Market Fund may purchase securities on margin in connection with the
purchase and sale of options, financial futures and options on financial
futures, and (c) all Funds may obtain such short-term credits as are
necessary for clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except as required by
forward commitments to purchase securities or currencies and except that
each Fund may borrow money and engage in reverse repurchase
agreements in amounts up to one-third of the value of its total assets,
including the amounts borrowed. The Funds (other than the Starwood
Strategic Fund) will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. Each Fund (other than the Starwood Strategic Fund)
will not purchase any securities while borrowings in excess of 5% of its
total assets are outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary to assure
completion of the reverse repurchase agreements, the Funds will restrict
the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, a Fund may
pledge assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 15% of the value of total assets at the time of the
borrowing. Margin deposits for the purchase and sale of options, financial
futures contracts and related options are not deemed to be a pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets (100% in the case of the Taxable Money Market Fund), each Fund
will not purchase securities of any one issuer (other than cash, cash items,
securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized
by U.S. government securities, and securities of other investment
companies) if as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer or the Fund would own
more than 10% of the outstanding voting securities of that issuer.
Investing in Real Estate
The Funds will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest in securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real estate.
Investing in Commodities
The Funds will not purchase or sell commodities, except that the
Funds (other than the Taxable Money Market Fund and the Tax-Free
Money Market Fund) may purchase and sell financial futures contracts
and related options. Further, the Funds may engage in transactions in
foreign currencies and may purchase and sell options on foreign currencies
and indices for hedging purposes.
Underwriting
The Funds will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which a Fund may
purchase pursuant to its investment objective, policies, and limitations.
Lending Cash or Securities
Each Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This shall not
prevent a Fund from purchasing or holding U.S. government obligations,
money market instruments, variable rate demand notes, bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies and limitations.
Concentration of Investments
Each Fund will not invest 25% or more of the value of its total
assets in any one industry or in government securities of any one foreign
country, except that (i) each Fund may invest without limitation in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, (ii) each of the Aggressive Growth Fund, the Asset
Allocation Fund, the Taxable Fixed Income Fund and the Municipal Fixed
Income Fund may invest without limitation in other investment
companies and (iii) each of the Taxable Money Market Fund and the Tax-Free
Money Market Fund may invest without limitation in domestic bank instruments.
Governmental issuers of municipal securities are not considered part of any
"industry." Each of the Municipal Fixed Income Fund and the Tax-Free Money
Market Fund may invest more than 25% of the value of its total assets in a
broader segment of the municipal securities market, such as revenue
obligations of hospitals and other health care facilities, housing agency
revenue obligations, or airport revenue obligations.
Investing in Securities of Other Investment Companies
Each Fund will limit its investments in other investment companies to no
more than 3% of the total outstanding voting securities of any one investment
company, will invest no more than 5% of its total assets in any one investment
company, and will invest no more than 10% of its total assets in investment
companies in general, except that each of the Aggressive Growth Fund, the Asset
Allocation Fund, the Taxable Fixed Income Fund and the Municipal Fixed Income
Fund may invest of up to 25% of its total assets in any one investment
company and up to 100% of its total assets in investment companies in general,
subject to the other limitations described herein. The foregoing limitations
are not applicable to investment company securities acquired as part of a
merger, consolidation, reorganization or other acquisition.
The foregoing investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed by
the Board of Trustees without shareholder approval. Shareholders will be
notified before any material change in these limitations becomes effective.
Investing in Restricted Securities
Each Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the Securities
Act of 1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Trustees.
Investing in Illiquid Securities
Each Fund will not invest more than 15% of the value of its net
assets (10% in the case of the money market Funds) in illiquid securities,
including repurchase agreements providing for settlement in more than
seven days after notice, over-the-counter options, certain foreign currency
options, and certain securities not determined by the Trustees to be liquid.
Investing in New Issuers
Each Fund will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors, that have
been in operation for less than three years. With respect to asset-backed
securities, the Funds will treat the originator of the asset pool as the
company issuing the security for purposes of determining compliance with
this limitation. Each of the Municipal Fixed Income Fund and the Tax-Free
Money Market Fund will not invest more than 5% of the value of its total
assets in industrial development bonds where the principal and interest are
the responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operations of any
predecessor.
Investing in Issuers whose Securities are Owned by Officers and
Trustees
Each Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Investing in Minerals
The Funds will not purchase or sell oil, gas, or other mineral
exploration or development programs or leases, although they may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Warrants
Each Fund (other than the Taxable Money Market Fund and the
Tax-Free Money Fund) may invest up to 5% of its total assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, each Fund will limit its investments
in such warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions change, this latter
restriction may be revised without notice to shareholder.) For purposes of
this investment restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by a Fund in units with or attached
to securities may be deemed to be without value.
Dealing in Puts and Calls
Each Fund (other the Taxable Money Market Fund and the Tax-Free Money
Market Fund) may write covered call options and secured put options on up to
25% of its net assets and may purchase put and call options, provided that no
more than 5% of the fair market value of its net assets may be invested in
premiums on such options.
MANAGEMENT OF THE TRUST
Trustees and Officers of the Trust
Trustees and officers of the Trust, together with information as to their
principal business occupations during at least the last five years, are shown
below. Each Trustee who is an "interested person" of the Trust, as
defined in the Investment Company Act of 1940, is indicated by an
asterisk.
Name, Address and Age Positions with the Trust and Principal Occupation
* Timothy L. Ashburn (44) Trustee (Chairman of the Board) and President
429 N. Pennsylvania St. of the Trust; Chairman of the Board and
Indianapolis, IN 46204 President, Vintage Advisers, Inc (December
1994 to present); Chairman of the Board,
Unified Corporation, Unified Management
Corporation and Unified Advisers, Inc.
(December 1989 to present); Trust Division
Manager and Senior Trust Officer, Vine Street
Trust Company (July 1991 to April 1994).
Charles H. Binger (38) Trustee of the Trust; Partner, Thompson &
One Merchantile Center Mitchell (1987 to present).
Suite 3300
St. Louis, MO 63101
Daniel J. Condon (44) Trustee of the Trust; Vice President and
101 Carley Court Officer, International Crankshaft Inc. (1990
Georgetown, KY 40324 to present); General Manager, Van Leer
Containers, Inc. (1988 through 1990).
Philip L. Conover (48) Trustee of the Trust; Adjunct Professor of
888 Blvd. Of the Arts #1606 Finance, University of South Florida (August
Sarasota, FL 34236 1994 to present); Managing Director and Chief
Operating Officer, Federal Housing Finance
Board (November 1990 through April 1994);
President and CEO, Trustcorp Bank (February
1989 through November 1990).
David E. LaBelle (47) Trustee of the Trust; Vice President of
200 Bent Creek Ct. Compensation and Benefits, Occidental
Southlake, TX 76092 Petroleum Corporation (May, 1990 to present);
Vice President of Human Resources, Island Creek
Coal Company (A subsidiary of Occidental
Petroleum) (June, 1990 to April, 1993);
Director of Human Resources, Occidental
Chemical Corporation (March, 1989 to May, 1990).
* Jack R. Orben (56) Trustee of the Trust; Chairman and CEO,
40 Wall St. Associated Family Services (January 1980 to
New York, NY 10005 present); Chairman and CEO, Starwood
Corporation (March 1984 to present); Chairman,
Fiduciary Counsel, Inc. (April 1979 to
present); Chairman, Estate Management Company
(January 1978 to present).
Thomas G. Napurano Treasurer of the Trust; Chief Financial
429 N. Pennsylvania St. Officer, Vintage Advisers, Inc. (January 1995
Indianapolis, IN 46204 to present; Senior Vice President and Chief
Financial Officer of Unified Corporation,
Unified Management Corporation and Unified
Advisers, Inc.
Lynn. E. Wood Secretary of the Trust; Chief Operating
429 N. Pennsylvania St. Officer, Vintage Advisers, Inc. (January 1995 to
Indianapolis, IN 46204. present); President and Chief Operating
Officer, Unified Corporation, Unified
Management Corporation and Unified Advisers,
Inc. (July 1993 to present); Vice President
and Managing Director, Unified Management
Corporation (January 1990 to July 1993).
The Board of Trustees has appointed an Executive Committee
composed of Trustees Ashburn, Conover and Orben. The Executive
Committee has all of the authority of the Board of Trustees except that,
without further authorization by resolution of the Board of Trustees, the
Executive Committee does not have the authority to (i) authorize
dividends or other distributions, (ii) approve or propose to shareholders
any action required to be approved by shareholders under the Trust's
Declaration of Trust, By-Laws or applicable law, (iii) fill vacancies on the
Board of Trustees or on any of its committees, (iv) amend the Trust's
Declaration of Trust or By-Laws, (v) approve any plan of merger
involving, or any sale of substantially all the assets of, any fund of the
Trust, whether or not requiring shareholder approval or (vi) authorize or
approve the issuance or sale or a contract for sale of shares of the Trust.
The Trust pays each Trustee who is not an "interested person" of
the Trust a fee of $2,000 for each meeting of the Board of Trustees
attended. In addition, the Trust reimburses these Trustees for reasonable
expenses incurred in connection with attendance at such meetings.
No executive officer of the Trust receives annual aggregate
compensation from the Trust in excess of $60,000, and no Trustee or
executive officer of the Trust receives any pension or retirement benefits
from the Trust. The table sets forth the estimated total compensation
payable by the Trust during the fiscal year ending September 30, 1996, to
each of its Trustees, all of which consists of the meeting fees referred to
above.
Compensation Table
Name of Trustee Total Compensation
Timothy L. Ashburn $8,000
Charles H. Binger $8,000
Daniel J. Condon $8,000
Philip L. Conover $8,000
David E. LaBelle $4,000
Jack R. Orben $8,000
Fund Ownership
At September 30, 1995, the Adviser owned more than 25% of
outstanding shares of each of the Aggressive Growth Fund, the Asset
Allocation Fund, the Taxable Fixed Income Fund, the Municipal Fixed
Income Fund and the Tax-Free Money Market Fund. At that date, no
other person was known to the Trust to own of record five percent or
more of the outstanding shares of any of the Funds. The Trust's Trustees
and officers as a group own less that 1% of the outstanding shares of each
Fund.
INVESTMENT ADVISORY ARRANGEMENTS
Investment Adviser
The Trust's investment adviser is Vintage Advisers, Inc. (the
"Adviser"). Timothy L. Ashburn, Chairman of the Board and President of
the Trust, is the Chairman of the Board and President of the Adviser, and
owns 25% of the Adviser's outstanding voting securities. Jack R. Orben,
Trustee of the Trust, is a director and Secretary of the Adviser and owns
25% of the Adviser's outstanding voting securities. Thomas G. Napurano,
Treasurer of the Trust, is the Executive Vice President and Chief Financial
Officer of the Adviser. Lynn E. Wood, Secretary of the Trust, is a
director and Executive Vice President and Chief Operating Officer of the
Adviser.
Sub-Advisers
Fiduciary Counsel, Inc. ("Fiduciary Counsel") is the sub-adviser to
each of the Fiduciary Value Fund, the Taxable Fixed Income Fund, the
Municipal Fixed Income Fund, the Taxable Money Market Fund, and the
Tax-Free Money Market Fund. Starwood Corporation, a wholly owned
subsidiary of Fiduciary Counsel, is the sub-adviser of the Starwood
Strategic Fund. Each of Fiduciary Counsel and Starwood Corporation
(the "Sub-Advisers") is a wholly owned subsidiary of Associated Family
Services, Inc. ("AFS"). Jack R. Orben, Trustee of the Trust, is Chairman
and CEO of each of Fiduciary Counsel, Starwood Corporation and AFS.
Mr. Orben owns 33% of the outstanding voting securities of AFS.
Advisory Fees
For their advisory services, the Adviser and each Sub-Adviser
receives an annual investment advisory fee as described in the Prospectus.
During the period from June 2, 1995 (commencement of operations)
through September 30, 1995, the Adviser waived its entire investment
advisory fee with respect to each Fund. The Sub-Advisers were not paid
any sub-advisory fees during that period.
The Adviser has undertaken to comply with the expense limitation
established by certain states for investment companies whose shares are
registered for sale in those states. If a Fund's operating expenses exceed
this expense limitation, the investment advisory fee will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be waived by the Adviser will be
limited, in any single fiscal year, by the amount of the investment advisory
fee.
DISTRIBUTION ARRANGEMENTS
Rule 12b-1 under the Investment Company Act of 1940 describes
the circumstances under which an investment company such as the Trust
may, directly or indirectly, bear the expenses of distributing its shares.
The Rule defines such distribution expenses to include the cost of any
activity which is primarily intended to result in the sale of Trust shares.
The Trust has adopted a Distribution Plan with respect to each of
the eight Funds. Pursuant to this Plan, the Funds are authorized to incur
distribution expenses including those incurred in connection with
preparing and distributing sales literature and advertising, preparing,
printing and distributing prospectuses and statements of additional
information used for other than regulatory purposes or distribution to
existing shareholders, implementing and operating the Plan, and
compensating third parties for their distribution services. Distribution
expenses attributable to a particular Fund are borne by that Fund.
Distribution expenses which are not readily identifiable as attributable to a
particular Fund are allocated among the Funds based on the relative size
of their average net assets.
Each Fund may expend annually up to 0.10% of the Fund's
average daily net assets pursuant to the Plan. A report of the amounts so
expended by each Fund and the purpose of the expenditures must be made
to and reviewed by the Board of Trustees at least quarterly. In addition,
the Plan may not be amended to increase materially the costs which any
Fund may bear for distribution pursuant to the Plan without approval of
the amendment by the shareholders of the affected Fund.
The Board of Trustees expects that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Funds
to achieve economic viability. It is also anticipated that an increase in the
size of each Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objective.
During the period from June 2, 1995 to September 30, 1995, no
amounts were expended under the Distribution Plan by any Fund, except
that the Taxable Money Market Fund expended $100 for compensation to
dealers.
ADMINISTRATIVE SERVICES ARRANGEMENTS
The Trust has adopted a Shareholders Services Plan (the "Services
Plan") with respect to each Fund. Pursuant to the Services Plan, the
Funds are authorized to incur annual expenses of up to 0.15% of their
average daily net assets for administrative support services provided their
shareholders. Such expenses may include costs and expense incurred by
third parties for administrative services to the Funds' shareholders,
including answering shareholder inquiries, maintenance of shareholder
accounts, performing sub accounting, obtaining taxpayer identification
number certificates from shareholders, personnel whose time is
attributable to servicing the shareholders of the Funds, and the provision
of personal services to shareholders. During the period from June 2, 1995
to September 30, 1995, no amounts were expended under the Services
Plan by any Fund.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and
sale of portfolio instruments, a Fund's investment adviser looks for prompt
execution of the order at a favorable price. In working with dealers, the
adviser will generally use those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser and the respective Sub-Advisers
make decisions on portfolio transactions and selects brokers and dealers
subject to review by the Board of Trustees.
The Adviser and Sub-Advisers may select brokers and dealers who
offer brokerage and research services. These services may be furnished
directly to the Fund or to the Adviser and Sub-Advisers and may include
advice as to the advisability of investing in securities, security analysis and
reports, economic studies, industry studies, receipt of quotations for
portfolio evaluations and similar services.
Research services provided by brokers may be used by the Adviser
and Sub-Advisers in advising the Fund's and other clients. To the extent
that receipt of these services may supplant services for which the Adviser
or the Sub-Advisers might otherwise have paid, it would tend to reduce
their expenses. During the period from June 2, 1995 to September 30,
1995, the Adviser did not direct any brokerage transactions to brokers
because of research services provided.
During the period from June 2, 1995 to September 30, 1995, no
Fund paid any brokerage commissions to the Distributor.
PURCHASE AND REDEMPTION
Terms of Purchase
The Trust reserves the right to reject any purchase order and to
change the amount of the minimum initial and subsequent investments in
the Funds upon notice.
Reopening an Account
A shareholder may reopen a closed account with a minimum
investment of $1,000 without filing a new account application, during the
calendar year the account is closed or during the following calendar year,
provided that the information on the existing account application remains
correct.
Redemption in Kind
The Trust has committed to pay in cash all redemption requests by
a shareholder of record, limited in amount during any 90-day period up to
the lesser of $250,000 or 1% of the value of the particular Fund's net
assets at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Securities and Exchange Commission.
In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part
in securities or other assets of the particular Fund. In this event, the
securities would be valued in the same manner as the particular Fund's net
asset value is determined. If the recipient sold such securities, brokerage
charges would be incurred.
Suspension of Redemptions
The right of redemption may be suspended or the date of payment
postponed (a) during any period when the New York Stock Exchange is
closed, (b) when trading in the markets the particular Fund normally uses
is restricted, or when an emergency exists as determined by the Securities
and Exchange Commission so that disposal of the particular Fund's
investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit to protect the particular Fund's
shareholders.
DETERMINATION OF NET ASSET VALUE
The methods and days on which net asset value is calculated by
each Fund are described in the Prospectus.
Valuation of Portfolio Securities
Portfolio securities owned by a Fund and listed or traded on any
national securities exchange are valued on the basis of the last sale on such
exchange each day the exchange is open for business. Securities not listed
on an exchange or national securities market, or securities in which there
were no transactions, are valued at the average of the most recently
reported bid and asked prices. Bid price is used when no asked price is
available. Options are valued at the last sales price on an exchange.
Options for which there were no transactions are valued at the average of
the most recently reported bid and asked prices. Money market
instruments (certificates of deposit, commercial paper, etc.) are valued at
amortized cost if not materially different from market value. Portfolio
securities for which market quotations are not readily available are to be
valued in good faith as determined by the Board of Trustees. Other assets,
which include cash, prepaid and accrued items and amounts receivable as
income on investment and from the sale of portfolio securities, are carried
at book value, as are all liabilities.
TAX STATUS
Status of the Funds
The Funds intend to pay no federal income tax because they
expect to meet the requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies and to receive the
special tax treatment afforded to such companies. To qualify for this
treatment, a Fund must, among other requirements:
derive at least 90% of its gross income from
dividends, interest, and gains from the sale of
securities;
derive less than 30% of its gross income from the
sale of securities held less than three months;
invest in securities within certain statutory limits;
and
distribute to its shareholders at least 90% of its net
income earned during the year.
For the tax year ended September 30, 1995, the Taxable Money
Market Fund did not qualify to be taxed as a regulated investment
company for federal income tax purposes and was subject to taxation as a
regular corporation. Accordingly, a provision for federal and state income
taxes of $500 was recorded. The Adviser has agreed to reimburse the
Taxable Money Market Fund for the taxes owned. As a result, the
Taxable Money Market Fund's shareholders will not be negatively
affected.
Shareholders' Tax Status
The Taxable Funds. Shareholders are subject to federal income
tax on dividends and capital gains received as cash or additional shares.
Depending on the composition of a Fund's income, a portion of the
dividends from net investment income may qualify for the dividends
received deduction allowable to certain U.S. corporations. In general,
dividend income of a Fund distributed to certain U.S. corporate
shareholders will be eligible for the corporate dividends received
deduction only to the extent that (i) the Fund's income consists of
dividends paid by certain U.S. corporations and (ii) the Fund would have
been entitled to the dividends received deduction with respect to such
dividend income if the Fund were not a regulated investment company.
The Tax Free Funds. Shareholders are not required to pay the
federal regular income tax on any dividends received from the Fund that
represent net interest on tax-exempt municipal bonds. However, under
the Tax Reform Act of 1986, dividends representing net interest earned on
some municipal bonds may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations. In addition, the Tax Reform Act of 1986 treats interest on
certain "private activity" bonds issued after August 7, 1986, as a tax
preference item for both individuals and corporations. Thus, should the
Fund purchase any such bonds, a portion of the Fund's dividends may be
treated as a tax preference item.
Dividends of the Fund representing net interest income earned on
some temporary investments and any realized net short-term gains are
taxed as ordinary income.
All Funds. The foregoing tax consequences apply whether
dividends are received in cash or as additional shares. No portion of any
income dividend paid by any Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held the Fund shares.
Foreign Taxes
Dividend and interest income received by a Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the
U.S. may reduce or eliminate these foreign taxes, however, and foreign
countries generally do not impose taxes on capital gains respecting
investments by foreign investors.
PERFORMANCE INFORMATION
Quotations of a Fund's performance are based on historical
earnings, show the performance of a hypothetical investment, and are not
intended to indicate future performance of a Fund. An investor's shares
when redeemed may be worth more or less than their original cost.
Performance of a Fund will vary based on changes in market conditions
and the level of the Fund's expenses.
Total Return
Cumulative total return of a Fund's shares reflects the applicable
Fund's total performance over a specific period of time. No Fund other
than the Taxable Money Market Fund (which does not advertise its total
return) had investment operations during the period from June 2, 1995 to
September 30, 1995
Yield
The yield of a Fund's shares (other than the money market Funds)
is determined each day by dividing the net investment income per share (as
defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the net asset value per share of the Fund on the
last day of the period. This value is annualized using semi-annual
compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a
12-month period and is reinvested every six months.
The "yield" of a money market Fund refers to the income
generated by an investment in the Fund over a seven-day period. This
income is then annualized. The amount of income generated by
investments during the week is assumed to be generated each week over a
52-week 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 Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
The yield of does not necessarily reflect income actually earned by
the applicable shares because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders. To the extent
that financial institutions and broker/dealers charge fees in connection with
services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
The annualized yield of the Taxable Money Market Fund for the
seven-day period ended September 30, 1995 was 2.72%. The effective
yield of the Taxable Money Market Fund for that seven-day period was
2.76%.
Tax-Equivalent Yield
The tax-equivalent yield of the Municipal Fixed Income Fund and
Tax-Free Money Market Fund is calculated similarly to the yield, but is
adjusted to reflect the taxable yield that the applicable shares would have
to earn to equal their actual yield, assuming tax rates of 15%, 28%, 31%
and 36%, and assuming that income is 100% tax-exempt.
Performance Comparisons
A comparison of the quoted non-standard performance of various
investments is valid only if performance is calculated in the same manner.
Because there are different methods of calculating performance, investors
should consider the effect of the methods used to calculate performance
when comparing performance of a particular Fund with the performance
quoted with respect to other investment companies or types of
investments.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations such as Investment Company Data, Inc. ("ICD"), Lipper
Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc.
("CDA"), Morningstar, Inc. and other independent organizations. When
these organizations' tracking results are used, a Fund will be compared to
the appropriate fund category, that is, by fund objective and portfolio
holdings or the appropriate volatility grouping, where volatility is a
measure of a fund's risk. Rankings may be listed among one or more of
the asset-size classes as determined by the independent ranking
organization. Footnotes in advertisements and other marketing literature
will include the organization issuing the ranking, time period, and
asset-size class, as applicable, for the ranking in question.
In addition, a particular Fund's performance may be compared to
unmanaged indices of securities that are comparable in their terms and
intent to those in which the Fund invests such as the Dow Jones Industrial
Average ("DJIA"), Standard & Poor's 500 Stock Index ("S&P 500"), the
Lehman Brothers Government/ Corporate Bond Index and the Consumer
Price Index ("CPI"). The DJIA and S&P 500 are unmanaged indices
widely regarded as representative of the equity market in general. The
CPI is a commonly used measured of inflation.
Marketing and other literature for the Funds may include a
description of the potential risks and rewards associated with an
investment in a particular Fund. The description may include a
comparison of a particular Fund to broad categories of comparable funds
in terms of potential risks and returns. The description may also compare
a particular Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the
U.S. government and offer a fixed rate of return. Because bank products
guarantee the principal value of an investment and money market funds
seek stability of principal, these investments are considered to be less risky
than investments in either bond or equity funds, which may involve loss of
principal.
The risks and rewards associated with an investment in bond or
equity funds depend upon many factors. For fixed income funds these
factors include, but are not limited to a fund's overall investment objective,
the average portfolio maturity, credit quality of the securities held, and
interest rate movements. For equity funds, factors include a fund's overall
investment objective, the types of equity securities held and the financial
position of the issuers of the securities. The risks and rewards associated
with an investment in international bond or equity funds will also depend
upon currency exchange rate fluctuation. Shorter-term bond funds
generally are considered less risky and offer the potential for less return
than longer-term fixed income funds. The same is true of domestic bond
funds relative to international fixed income funds, and fixed income funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than
growth funds. In addition, international equity funds usually are
considered more risky than domestic equity fund but generally offer the
potential for greater return.
INFORMATION ABOUT THE TRUST
The Trust was organized on February 1, 1995 as an Indiana
business trust. The By-Laws of the Trust provide that the Trustees shall
promptly call a special meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee or Trustees upon the written
request of shareholders of the Trust holding at least 10% of all votes
entitled to be cast at an election of Trustees.
CUSTODIAN, TRANSFER AGENT, FUND ACCOUNTING
AGENT, AND INDEPENDENT ACCOUNTANTS
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45201
("Custodian") serves as the custodian for each of the Funds. General
correspondence to the Custodian, such as for IRA information, etc.,
should be addressed to: Star Bank, P.O. Box 1038 Location 6118,
Cincinnati, Ohio 45201. When Fund purchases or deposits require
delivery directly to the Custodian, those correspondences should be
addressed to: The Vintage Funds, [name of specific Fund in which you
are purchasing shares], P.O. Box 640689, Cincinnati, Ohio, 45264-0689.
Unified Advisers, Inc., P.O. Box 6110, Indianapolis, Indiana
46206-6110, acts as the transfer agent, fund accounting agent and
administrator for the Trust.
Neither the Custodian nor Unified Advisers, Inc., has any part in
determining the investment policies of the Trust or any of the Funds or
which securities are to be purchased or sold by the Funds, and neither can
provide protection to shareholders against possible depreciation of assets.
McCurdy & Associates CPA's Inc., 27955 Clemens Road, Westlake, OH
44145, independent accountants, have been selected as the Trust's auditors.
FINANCIAL STATEMENTS
The financial statements required to be included in this Statement
of Additional Information are incorporated herein by reference to the
Trust's Annual Report to Shareholders for the year ended September 30,
1995. The Trust will provide the Annual Report without charge upon
request by calling the Trust at 1-800-408-4682.
APPENDIX
Standard & Poor's Corporation
Earnings and Dividend Rankings for Common Stock
Standard & Poor's Corporation ("Standard & Poor's") believes
that earnings and dividend performance is the end result of an interplay of
various factors - such as product and industry position, corporate
resources and financial policy - and that, over, the long run, the record of
this performance has a considerable bearing on relative quality. The
rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Growth and stability of earnings and dividends are considered key
elements in establishing earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications considered desirable
in establishing such rankings.
The point of departure in arriving at these rankings is a
computerized scoring system based on per-share earnings and dividend
records of the most recent ten years - a period deemed long enough to
measure significant time segments of secular growth, to capture
indications of basic change in trend as they develop, and to encompass the
full peak-to-peak range of the business cycle. Basic scores are computed
for earnings and dividends, then adjusted as indicated by a set of
predetermined modifiers for growth, stability within long-term trend, and
cyclicality. Adjusted scores for earnings and dividends are then combined
to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an
investment standpoint. Conversely, minimum size limits (in terms of
corporate sale volume) are set for various rankings, but the system
provides for making exceptions where the score reflects an outstanding
earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample
of stocks. The range of scores that may be assigned as follows: A+
(Highest); A (High); A- (Above Average); B+ (Average); B (Below
Average); B- (Lower); C (Lowest); D (In Reorganization); and NR (No
Ranking).
A ranking is not a forecast of future market price
performance, but is basically an appraisal of past performance of
earnings and dividends, and relative current standing. These
rankings must not be used as market recommendations; a high-score
stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings
based upon earnings and dividend records are no substitute for a
complete analysis. They cannot take into account potential effects of
management changes, internal company policies not yet fully
reflected in the earnings and dividend record, public relations
standing, recent competitive shifts, and a host of other factors that
may be relevant to investment status and decision.
Moody's Investors Services, Inc. Corporate Bond Ratings
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 edge." Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
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 risks appear
somewhat larger than in Aaa securities.
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
sometime in the future.
Bonds which are rated Baa 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.
Standard & Poor's Corporation Corporate Bond Ratings
Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal and in a majority of instances differ from AAA issues only in
small degree.
Bonds rated A are regarded as upper medium grade. They 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 bonds in higher rated
categories. Bonds rated BBB 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 debt in this category than in higher rated
categories.
Fitch Investor Services, Inc. Long-Term Bond Ratings
The ratings represent Fitch Investor Services, Inc.'s ("Fitch")
assessment of the issuer's ability to meet the obligations of a specific debt
issue or class of debt. The ratings take into consideration special features
of the issuer, the current financial condition and operative performance of
the issuer and of any guarantor, as well as the political and economic
environment that might affect the issuer's future financial strength and
credit quality.
Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA are considered to be
investment grade and of very high credit quality. The obligor's ability to
pay interest and repay principal is very strong, although not quite as
strong as bonds rated AAA. Bonds rated BBB are considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore, impair timely
payment. Plus (+) and minus (-) signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
Duff & Phelps, Inc. Bond Ratings
Bonds rated AAA by Duff & Phelps, Inc. ("Duff") are considered
highest credit quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt. Bonds rated AA are
considered high credit quality. Protection factors for AA rated bonds are
strong and risk is modest, but may vary slightly from time to time because
of economic conditions. Plus (+) and minus (-) signs are used with a
rating symbol (except AAA) to indicate the relative position of a credit
within the category.
Thompson Bankwatch Bond Ratings
Thompson BankWatch's ("BankWatch") highest category is AAA.
A rating of AAA indicates that the ability to repay principal and interest
on a timely basis is very high. The second highest rating category is AA.
A rating of AA indicates a superior ability to repay principal and interest
on a timely basis with limited incremental risk versus issues rated in the
highest category. Ratings may include a plus (+) or minus (-) designation
which indicates where within the respective category the issue is placed.
Standard and Poor's Corporation Municipal Bond Ratings
Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
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.
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.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Moody's Investors Service, Inc. Municipal Bond Ratings
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 edge". Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
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 risks appear
somewhat larger than in AAA securities.
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
sometime in the future.
Bonds which are rated Baa 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.
Standard and Poor's Corporation 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 (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc. Short-Term Loan Ratings
MIG1/VMIG1--This designation denotes best quality. There is a
present strong protection by established cash flows, superior liquidity
support or demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
Commercial Paper Ratings
Commercial paper assigned a rating of A-l by Standard & Poor's
indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation. A rating of A-2 by Standard & Poor's indicates that the
capacity for timely payment on issues is strong. However, the relative
degree of safety is not as high as for issues designated "A-l".
The rating PRIME-l ("P-l") is the highest commercial paper rating
assigned by Moody's. Issuers rated P-l (for related supporting
institutions) have a superior capacity for repayment of short-term
promissory obligations. P-l repayment capacity will normally be
evidenced by the following characteristics: Conservative capitalization
structure with moderate reliance on debt and ample asset protection;
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation; Well established access to a range of financial
markets and assured sources of alternative liquidity. Issuers rated
PRIME-2 ("P-2") (for related supporting institutions have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the aforementioned characteristics 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
alternative liquidity is maintained.
Commercial paper assigned a rating of FITCH-l ("F-l") by Fitch is
regarded as having the strongest degree of assurance for timely payment.
Commercial paper assigned a rating of FITCH-2 ("F-2") reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-l is the highest commercial paper rating assigned
by Duff. Paper rated Duff-l is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by
ample asset protection. Risk factors are minor.
The highest rating category for commercial paper given by
BankWatch is TBW-l. This rating indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
