REGIONS MORGAN KEEGAN SELECT FUNDS
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
Regions Morgan Keegan Select Treasury Money Market Fund
Regions Morgan Keegan Select Money Market Fund
Supplement dated January 22, 2009 to Prospectus dated April 1, 2008,
as supplemented on July 29, 2008, October 15, 2008, October 31, 2008,
November 24, 2008 and December 12, 2008
The following supplements certain information contained in the above-dated
Prospectus for Regions Morgan Keegan Select Mid Cap Growth Fund, Regions Morgan
Keegan Select Growth Fund, Regions Morgan Keegan Select Core Equity Fund,
Regions Morgan Keegan Select Mid Cap Value Fund, Regions Morgan Keegan Select
Value Fund, Regions Morgan Keegan Select Balanced Fund, Regions Morgan Keegan
Select Fixed Income Fund, Regions Morgan Keegan Select Limited Maturity Fixed
Income Fund, Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund,
Regions Morgan Keegan Select Treasury Money Market Fund and Regions Morgan
Keegan Select Money Market Fund (each an "RMK Fund" and collectively, the "RMK
Funds"), each a series of Regions Morgan Keegan Select Funds (the "Trust"). It
should be retained and read in conjunction with the Prospectus.
The purpose of this Supplement is to provide you with information about the
proposed reorganization of each RMK Fund into an existing or a newly created
corresponding mutual fund (each a "Pioneer Fund" and collectively, the "Pioneer
Funds") advised by Pioneer Investment Management, Inc. ("Pioneer").
Information Regarding the Proposed Reorganizations of
the RMK Funds into Corresponding Pioneer Funds
Morgan Asset Management, Inc. ("MAM"), the investment adviser to the RMK
Funds, is an indirect, wholly owned subsidiary of Regions Financial Corp.
("Regions"). MAM and Regions have entered into an agreement with Pioneer
pursuant to which Pioneer would acquire all of MAM's investment management
business relating to the RMK Funds.
Pioneer is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, and is an indirect, wholly owned subsidiary of
UniCredit S.p.A., one of the largest banking groups in Italy. Pioneer is part of
the global asset management group providing investment management and financial
services to mutual funds and institutional and other clients. As of December 31,
2008, assets under management of the group were over $200 billion worldwide,
including over $49 billion in assets under management by Pioneer. Pioneer's main
office is at 60 State Street, Boston, Massachusetts 02109.
On January 21, 2009, the Board of Trustees of the Trust approved the
reorganization of each RMK Fund into a corresponding Pioneer Fund (the
"Reorganizations"). The Reorganizations also have been approved by the Boards of
Trustees of the Pioneer Funds. Shareholders of each RMK Fund must approve the
Reorganization of their RMK Fund. A Special Meeting of RMK Fund shareholders
will be scheduled to vote on the Reorganizations. Complete details of the
proposed Reorganizations will be sent to shareholders along with proxy
materials. If the Reorganization is approved by the shareholders of an RMK Fund,
shareholders of that RMK Fund will become shareholders of the corresponding
Pioneer Fund.
A list of each RMK Fund and the corresponding Pioneer Fund into which it is
proposed to be reorganized is set out below. As noted below, it is proposed that
certain RMK Funds would be reorganized into an existing Pioneer Fund and others
into a new Pioneer Fund that is being created in connection with the
Reorganizations. Shares of these new Pioneer Funds are not yet available for
sale.
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RMK Fund (Acquired Fund) Pioneer Fund (Acquiring Fund)
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Core Equity Fund Pioneer Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Growth Fund Pioneer Growth Fund*
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Value Fund Pioneer Cullen Value Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Mid Cap Value Fund Pioneer Mid Cap Value Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Balanced Fund Pioneer Classic Balanced Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Fixed Income Fund Pioneer Bond Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Limited Maturity Fixed Income Fund Pioneer Short Term Income Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Intermediate Tax Exempt Bond Fund Pioneer Intermediate Tax Free Income Fund*
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Treasury Money Market Fund Pioneer Treasury Reserves Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Money Market Fund Pioneer Cash Reserves Fund
- ---------------------------------------------------------------------------------------------------------------------
RMK Select Mid Cap Growth Fund Pioneer Mid Cap Growth Fund II*
- ---------------------------------------------------------------------------------------------------------------------
* A new Pioneer Fund that is being created within the Pioneer fund complex to
receive the assets of the corresponding RMK Fund. This Pioneer Fund will
commence operations upon consummation of the proposed Reorganization.
Pioneer serves as the investment adviser for the Pioneer Funds and will
continue to provide the day-to-day portfolio management for the Pioneer Funds
after the Reorganizations.
It is anticipated that, subject to shareholder approval, the
Reorganizations will occur in the second quarter of 2009. Until then, however,
you will be able to purchase, redeem and exchange shares in each of the RMK
Funds (subject to any limitations described in the Prospectus). Accordingly, if
you intend to engage in such transactions, you should read this Supplement,
together with the Prospectus dated April 1, 2008, as supplemented.
If you have any questions concerning the Reorganizations, please contact
the RMK Funds at 877-757-7424 or www.rmkfunds.com.
Regions Morgan Keegan Select Funds
50 North Front Street
Memphis, TN 38103
800-366-7426
www.rmkfunds.com
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
REGIONS MORGAN KEEGAN SELECT FUNDS
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
Regions Morgan Keegan Select Treasury Money Market Fund
Regions Morgan Keegan Select Money Market Fund
Supplement dated July 29, 2008 to the Prospectus dated April 1, 2008
The following supplements certain information contained in the above-dated
Prospectus for Regions Morgan Keegan Select Mid Cap Growth Fund, Regions Morgan
Keegan Select Growth Fund, Regions Morgan Keegan Select Core Equity Fund,
Regions Morgan Keegan Select Mid Cap Value Fund, Regions Morgan Keegan Select
Value Fund, Regions Morgan Keegan Select Balanced Fund, Regions Morgan Keegan
Select Fixed Income Fund, Regions Morgan Keegan Select Limited Maturity Fixed
Income Fund, Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund,
Regions Morgan Keegan Select Treasury Money Market Fund and Regions Morgan
Keegan Select Money Market Fund (each a "Fund" and collectively, the "Funds"),
each a series of Regions Morgan Keegan Select Funds (the "Trust"). It should be
retained and read in conjunction with the Prospectus.
The following information supplements the disclosure in the "How to Buy Shares"
and "How to Exchange Shares" sections of the Funds' Prospectus:
Effective July 29, 2008, the Regions Morgan Keegan Select Fund Family only
consists of the Funds available in the Trust. Therefore, all references to
Morgan Keegan Select Fund, Inc. or the Regions Morgan Keegan Select Fund Family
are hereby deleted, and replaced with a reference to the Trust.
Regions Morgan Keegan Select Funds
50 North Front Street
Memphis, TN 38103
800-366-7426
www.rmkfunds.com
----------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
REGIONS MORGAN KEEGAN SELECT FUNDS
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
Regions Morgan Keegan Select Treasury Money Market Fund
Regions Morgan Keegan Select Money Market Fund
Supplement dated July 29, 2008 to the Statement of Additional Information
dated April 1, 2008
The following supplements certain information contained in the above-dated
Statement of Additional Information for Regions Morgan Keegan Select Mid Cap
Growth Fund, Regions Morgan Keegan Select Growth Fund, Regions Morgan Keegan
Select Core Equity Fund, Regions Morgan Keegan Select Mid Cap Value Fund,
Regions Morgan Keegan Select Value Fund, Regions Morgan Keegan Select Balanced
Fund, Regions Morgan Keegan Select Fixed Income Fund, Regions Morgan Keegan
Select Limited Maturity Fixed Income Fund, Regions Morgan Keegan Select
Intermediate Tax Exempt Bond Fund, Regions Morgan Keegan Select Treasury Money
Market Fund and Regions Morgan Keegan Select Money Market Fund, each a series of
Regions Morgan Keegan Select Funds (the "Trust"). It should be retained and read
in conjunction with the Statement of Additional Information.
The fifth paragraph on page 32 is deleted and the following information is
inserted in its place:
Redemptions
A redemption of a fund's shares (other than shares of the Money Market Funds)
will result in a taxable gain or loss to the redeeming shareholder, depending on
whether the redemption proceeds are more or less than the shareholder's adjusted
basis in the redeemed shares (which normally includes any sales load paid on
Class A Shares). An exchange of shares of a fund for shares of another fund in
the Trust generally will have similar tax consequences. Special rules apply when
a shareholder disposes of Class A Shares of a fund through a redemption or
exchange within 60 days after purchase thereof and subsequently reacquires Class
A Shares of that fund or acquires Class A Shares of another fund, including such
other funds, without paying a sales charge due to the reinstatement privilege or
exchange privilege. In these cases, any gain on the disposition of the original
Class A Shares will be increased, or any loss decreased, by the amount of the
sales charge paid when the shareholder acquired those shares, and that amount
will increase the basis in the shares subsequently acquired. In addition, if a
shareholder purchases shares of a fund (whether pursuant to the reinstatement
privilege or otherwise) within 30 days before or after redeeming at a loss other
shares of that fund (regardless of class), all or part of that loss will not be
deductible and instead will increase the basis in the newly purchased shares.
The second paragraph on page 40 is deleted and the following information is
inserted in its place:
Letter of Intent
Any investor may execute a Letter of Intent ("Letter) covering purchases of
Class A Shares of $50,000 or more to be made within a period of 13 months. Under
a Letter, purchases of shares of a fund, which are sold with a sales
-2-
charge made within a 13-month period starting with the first purchase pursuant
to a Letter will be aggregated for purposes of calculating the applicable sales
charges. To qualify under a Letter, purchases must be made for a single account;
and purchases made for related accounts may not be aggregated under a single
Letter. Investors may obtain a form of a Letter from their Morgan Keegan
financial adviser or Regions Morgan Keegan trust administrator. The Letter is
not a binding obligation to purchase any amount of shares, but its execution
will result in paying a reduced sales charge for the anticipated amount of the
purchase. If the total amount of shares purchased does not equal the amount
stated in the Letter, the investor will be notified and must pay, within 20 days
of the expiration of the Letter, the difference between the sales charge on the
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased under the Letter. Shares equal to 5% of the intended
amount will be held in escrow during the 13-month period (while remaining
registered in the name of the purchaser) for this purpose.
Regions Morgan Keegan Select Funds
50 North Front Street
Memphis, TN 38103
800-366-7426
www.rmkfunds.com
----------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
-3-
Regions Morgan Keegan Select Funds
Contents of Registration Statement
This Registration Statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Part A - Prospectus - Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity
Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax
Exempt Bond Fund
Regions Morgan Keegan Select Treasury Money
Market Fund
Regions Morgan Keegan Select Money Market Fund
Part B - Statement of Additional Information -
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity
Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax
Exempt Bond Fund
Regions Morgan Keegan Select Treasury Money
Market Fund
Regions Morgan Keegan Select Money Market Fund
Part C - Other Information
Signature Page
Powers of Attorney
Exhibit Index
Exhibits
[COVER GRAPHIC]
PROSPECTUS
April 1, 2008
REGIONS MORGAN KEEGAN SELECT FUNDS
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
Regions Morgan Keegan Select Treasury Money Market Fund
Regions Morgan Keegan Select Money Market Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the funds' shares described in this Prospectus or
determined whether this Prospectus is complete or accurate. Any representation
to the contrary is a criminal offense.
Each fund is a series of Regions Morgan Keegan Select Funds
[LOGO Regions Morgan Keegan Select Funds]
TABLE OF CONTENTS
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Page
----
Introduction...................................................................1
Mid Cap Growth Fund............................................................2
Growth Fund....................................................................7
Core Equity Fund..............................................................11
Mid Cap Value Fund............................................................16
Value Fund....................................................................20
Balanced Fund.................................................................24
Fixed Income Fund.............................................................29
Limited Maturity Fixed Income Fund............................................34
Intermediate Tax Exempt Bond Fund.............................................40
Treasury Money Market Fund....................................................44
Money Market Fund.............................................................48
Securities Descriptions.......................................................51
How to Buy Shares.............................................................58
How to Redeem Shares..........................................................64
How to Exchange Shares........................................................67
Account Policies..............................................................69
Distribution of Fund Shares...................................................72
Management of the Funds.......................................................74
Other Information.............................................................78
Privacy Policy Notice......................................................78
Proxy Voting Policies and Record of Voting Activity........................80
Quarterly Reports on Portfolio Holdings....................................80
Dividends, Capital Gain Distributions and Tax Considerations..................81
Financial Highlights..........................................................83
For Additional Information............................................Back Cover
SHARES OF REGIONS MORGAN KEEGAN SELECT FUNDS, LIKE SHARES OF ALL MUTUAL FUNDS,
ARE NOT BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
INTRODUCTION
- --------------------------------------------------------------------------------
Regions Morgan Keegan Select Funds (the "Trust") offers investment opportunities
to a wide range of investors, from investors with short-term goals who wish to
take little investment risk to investors with long-term goals willing to bear
the risks of the market for potentially greater returns. Morgan Asset
Management, Inc. (the "Adviser"), a registered investment adviser, and an
indirect, wholly owned subsidiary of Regions Financial Corporation ("Regions"),
is the investment adviser to the Trust.
This Prospectus describes Class A Shares, Class C Shares and Class I Shares
(individually and collectively referred to as "shares," as the context may
require) of Regions Morgan Keegan Select Mid Cap Growth Fund ("Mid Cap Growth
Fund"), Regions Morgan Keegan Select Growth Fund ("Growth Fund"), Regions Morgan
Keegan Select Core Equity Fund ("Core Equity Fund"), Regions Morgan Keegan
Select Mid Cap Value Fund ("Mid Cap Value Fund"), Regions Morgan Keegan Select
Value Fund ("Value Fund"), Regions Morgan Keegan Select Balanced Fund ("Balanced
Fund"), Regions Morgan Keegan Select Fixed Income Fund ("Fixed Income Fund"),
Regions Morgan Keegan Select Limited Maturity Fixed Income Fund ("Limited
Maturity Fixed Income Fund") and Regions Morgan Keegan Select Intermediate Tax
Exempt Bond Fund ("Intermediate Tax Exempt Bond Fund"), and Class A Shares and
Class I Shares of Regions Morgan Keegan Select Treasury Money Market Fund
("Treasury Money Market Fund") and Regions Morgan Keegan Select Money Market
Fund ("Money Market Fund") (each a "fund," and together, the "funds"). Each
fund has its own investment objective and strategies that are designed to meet
different investment goals. This Prospectus contains information you should
know before investing. Please read this Prospectus carefully before investing
and keep it for your future reference.
1
MID CAP GROWTH FUND
RISK/RETURN PROFILE
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PRINCIPAL OBJECTIVE
Mid Cap Growth Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Mid Cap Growth Fund invests primarily in equity securities of mid-capitalization
companies (I.E., companies whose market capitalization falls within the range
tracked by the Russell Mid Cap Growth Index at the time of purchase). Under
normal circumstances, the fund invests at least 80% of the value of its net
assets in equity securities of mid-capitalization companies. The fund will
provide shareholders with at least 60 days' prior notice of any changes in this
policy. As of February 29, 2008, the capitalization of issuers included in the
Russell Mid Cap Growth Index ranged from about $305 million to about $49.6
billion. The fund may also invest in larger companies that, in the opinion of
the Adviser, present opportunities for price appreciation based on potential
earnings and pricing patterns.
Under normal market conditions, the fund intends to invest in equity securities
of companies with prospects for above-average growth in revenues and/or
earnings. The Adviser looks for companies that have revenue growth. While the
Adviser does not have a set minimum revenue growth rate because individual
stocks and industries can change over time, the Adviser looks for at least 10%
growth, either from historical sales or forecasted sales. The Adviser selects
industry sectors that are experiencing rapid growth based on the current state
of the economy. Future growth prospects take precedence over current valuation
levels in the stock selection process. Selected companies are expected to
exhibit higher-than-average price/earnings (P/E) and price-to-book ratios.
Dividends are not considered to be important in the stock selection process.
The Adviser seeks to identify companies that have clearly established business
strategies, achieve increases in revenues and market share, and exploit market
inefficiencies and opportunities. The Adviser periodically reviews market
prices in relation to target prices and adjusts the fund's holdings accordingly.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o STOCK MARKET AND EQUITY SECURITIES RISK. The fund is subject to
fluctuations in the stock markets, which have periods of increasing and
decreasing values. Stocks have greater volatility than debt securities.
The fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
fund's share price may decline. The Adviser attempts to manage market risk
by limiting the amount the fund invests in any single company's equity
securities. However, diversification will not protect the fund against
widespread or prolonged declines in the stock market.
o GROWTH STOCK RISK. Due to their relatively high valuations, growth stocks
are typically more volatile than value stocks. For instance, the price of
a growth stock may experience a larger decline on a forecast of lower
earnings, a negative fundamental development, or an adverse market
development. Further, growth stocks may not pay dividends or may pay lower
dividends than value stocks. This means they depend more on price changes
2
for returns and may be more adversely affected in a down market compared
to value stocks.
o COMPANY SIZE RISK. Equity securities risk is also related to the market
capitalization of the company issuing the stock. Market capitalization is
determined by multiplying the number of a company's outstanding shares by
the current market price per share. Generally, the smaller the market
capitalization of a company, the fewer the number of shares traded daily,
the less liquid its stock and the more volatile its price. Stocks of
mid-capitalization companies are also usually more sensitive to adverse
business developments and economic, political, regulatory and market
factors than stock of large-capitalization companies. The fund may
experience difficulty in purchasing or selling securities of
mid-capitalization companies at the desired time and price.
o SECTOR RISK. When the fund emphasizes its investments in securities of
issuers in a particular industry, the fund's performance is closely tied
to events in that industry.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance. The fund began
operations on March 12, 1999 as the successor to a collective trust fund for
which Regions Bank was the trustee. The performance included in the bar chart
and table below prior to March 12, 1999 is that of the fund's predecessor, the
inception date of which was June 30, 1993. The collective trust fund was not
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and therefore was not subject to certain investment restrictions that are
imposed by the 1940 Act. If the collective trust fund had been registered under
the 1940 Act, its performance may have been adversely affected.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of any sales charges or any reduction for taxes that
a shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
3
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 20.71%
1999 41.89%
2000 33.00%
2001 (0.97)%
2002 (20.00)%
2003 39.62%
2004 8.40%
2005 18.48%
2006 6.20%
2007 18.98%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS A
SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A SHARES
ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES, EXPENSES
AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER THAN THE
EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
Year-to-date performance as of February 29, 2008: (4.48)%
Class A Shares highest quarterly return during
years shown: 31.24% December 31, 1999
Class A Shares lowest quarterly return during
years shown: (19.68)% September 30, 1998
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Russell Mid Cap
Growth Index.* The table also shows hypothetical total returns for Class A
Shares that have been calculated to reflect return after taxes on distributions
and return after taxes on distributions and assumed sale of the Class A Shares.
1 5 10 SINCE COMMENCEMENT
YEAR YEARS YEARS OF INVESTMENT
OPERATIONS(1)
CLASS A SHARES(2) Return Before Taxes
(with 5.50% sales charge) 12.43% 16.45% 14.47% -
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CLASS A SHARES(2) Return After Taxes on Distributions(3) 11.37% 15.26% 12.59% -
- ------------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions -
and Sale of Fund Shares(3) 11.19% 14.45% 12.06%
- ------------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes 17.75% 17.22% N/A 9.87%
(with applicable Contingent Deferred Sales Charge)
- ------------------------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 19.10% N/A N/A 13.53%
- ------------------------------------------------------------------------------------------------------------
RUSSELL MID CAP GROWTH INDEX* 11.43% 17.50% 7.59% -
- ------------------------------------------------------------------------------------------------------------
* THE RUSSELL MID CAP GROWTH INDEX TRACKS EQUITY SECURITIES OF COMPANIES
WHOSE MARKET CAPITALIZATION FALLS WITHIN THE $305 MILLION TO $49.6 BILLION
RANGE. TOTAL RETURNS FOR THE INDEX SHOWN ARE NOT ADJUSTED TO REFLECT
TAXES, SALES CHARGES, EXPENSES OR OTHER FEES THAT THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") REQUIRES TO BE REFLECTED IN THE FUND'S
PERFORMANCE. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED
BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING THE PREDECESSOR CLASS B SHARES),
CLASS C SHARES AND CLASS I SHARES COMMENCED INVESTMENT OPERATIONS ON JUNE
30, 1993, JANUARY 7, 2002 AND JUNE 23, 2004, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
4
(3) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
5
MID CAP GROWTH FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Mid Cap Growth Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 5.50% None None
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- -----------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and other
distributions None None None
- -----------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- -----------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- -----------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.75% 0.75% 0.75%
- -----------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- -----------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- -----------------------------------------------------------------------------------------------------------------
Other operating expenses 0.23% 0.23% 0.23%
- -----------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.02% 0.02% 0.02%
- -----------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.25% 2.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE
LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NET ASSET VALUE ("NAV") AT THE TIME OF REDEMPTION
WILL APPLY TO CLASS A SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR
NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE
DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE ESTIMATED AGGREGATE FEES AND
EXPENSES FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS.
THE IMPACT OF THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 671 $ 304 $ 102
- --------------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 671 $ 204 $ 102
- --------------------------------------------------------------------------------
3 YEARS $ 926 $ 630 $ 319
- --------------------------------------------------------------------------------
5 YEARS $ 1,201 $ 1,082 $ 555
- --------------------------------------------------------------------------------
10 YEARS $ 1,986 $ 2,338 $ 1,232
- --------------------------------------------------------------------------------
6
GROWTH FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Growth Fund seeks growth of capital and income.
PRINCIPAL INVESTMENT STRATEGIES
Growth Fund invests in the common stocks of companies that are expected to
achieve above-average growth in earnings. The Adviser selects industry sectors
that the Adviser expects to have favorable earnings growth, given the current
phase of the business cycle. Future growth prospects take precedence over
current valuation levels in the stock selection process. Selected companies are
expected to have large market capitalizations and above-average price/earnings
(P/E), price-to-book, and return-on-assets ratios. Dividend yields may be lower
than market averages, owing to the growth emphasis of the fund.
In addition to seeking companies with above-average potential for growth, the
Adviser will seek to identify companies that have clearly defined business
strategies, produce consistent revenue streams from an established customer
base, enjoy significant market share in their respective industries, produce
healthy cash flows, achieve consistent increases in sales, operating margins,
and corporate earnings, and have experienced management teams with consistent
records of delivering shareholder value. The Adviser periodically reviews
market prices in relation to the stock's target price and adjusts the fund's
holdings accordingly.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o STOCK MARKET AND EQUITY SECURITIES RISK. The fund is subject to
fluctuations in the stock markets, which have periods of increasing and
decreasing values. Stocks have greater volatility than debt securities.
The fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
fund's share price may decline. The Adviser attempts to manage market
risk by limiting the amount the fund invests in any single company's
equity securities. However, diversification will not protect the fund
against widespread or prolonged declines in the stock market.
o GROWTH STOCK RISK. Due to their relatively high valuations, growth
stocks are typically more volatile than value stocks. For instance, the
price of a growth stock may experience a larger decline on a forecast of
lower earnings, a negative fundamental development, or an adverse market
development. Further, growth stocks may not pay dividends or may pay lower
dividends than value stocks. This means they depend more on price changes
for returns and may be more adversely affected in a down market compared
to value stocks.
o SECTOR RISK. When the fund emphasizes its investments in securities
of issuers in a particular industry, the fund's performance is closely
tied to events in that industry.
7
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of sales charges or any reduction for taxes that a
shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 41.74%
1999 28.57%
2000 (21.60)%
2001 (19.20)%
2002 (20.43)%
2003 28.62%
2004 0.65%
2005 9.55%
2006 6.60%
2007 16.10%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
Year-to-date performance as of February 29, 2008: (7.00)%
Class A Shares highest quarterly return during
years shown: 24.09% December 31, 1998
Class A Shares lowest quarterly return during
years shown: (19.30)% March 31, 2001
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Standard & Poor's
500 Composite Stock Index ("Standard & Poor's 500 Index").* The table also
shows hypothetical total returns for Class A Shares that have been calculated to
reflect return after taxes on distributions and return after taxes on
distributions and assumed sale of the Class A Shares.
8
SINCE COMMENCEMENT
1 5 10 OF INVESTMENT
YEAR YEARS YEARS OPERATIONS(1)
CLASS A SHARES(2) Return Before Taxes
(with 5.50% sales charge) 9.72% 10.65% 4.30% -
- ----------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions(3) 9.19% 10.52% 3.93% -
- ----------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions
and Sale of Fund Shares(3) 6.99% 9.29% 3.65% -
- ----------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes
(with applicable Contingent Deferred Sales Charge) 14.59% 11.28% N/A 4.58%
- ----------------------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 16.34% N/A N/A 12.47%
- ----------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX* 5.49% 12.83% 5.91% -
- ----------------------------------------------------------------------------------------------------------
* THE STANDARD & POOR'S 500 INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED
INDEX OF 500 STOCKS DESIGNED TO MEASURE PERFORMANCE OF THE BROAD DOMESTIC
ECONOMY THROUGH CHANGES IN THE AGGREGATED MARKET VALUE OF 500 STOCKS
REPRESENTING ALL MAJOR INDUSTRIES. TOTAL RETURNS FOR THE INDEX SHOWN ARE
NOT ADJUSTED TO REFLECT TAXES, SALES CHARGES, EXPENSES OR OTHER FEES THAT
THE SEC REQUIRES TO BE REFLECTED IN THE FUND'S PERFORMANCE. THE INDEX IS
UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING
AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING PREDECESSOR CLASS B SHARES), CLASS C
SHARES AND CLASS I SHARES COMMENCED INVESTMENT OPERATIONS ON APRIL 20,
1992, JANUARY 7, 2002 AND MAY 19, 2005, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
(3) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
9
GROWTH FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Growth Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 5.50% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and other
distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses 0.21% 0.21% 0.21%
- ------------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.01% 0.01% 0.01%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.22% 1.97% 0.97%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE
LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A
SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV AT
THE TIME OF REDEMPTION WILL APPLY TO CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE ESTIMATED AGGREGATE FEES AND EXPENSES
FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 668 $ 301 $ 99
- ---------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 668 $ 201 $ 99
- ---------------------------------------------------------------------------
3 YEARS $ 917 $ 620 $ 310
- ---------------------------------------------------------------------------
5 YEARS $ 1,186 $ 1,066 $ 539
- ---------------------------------------------------------------------------
10 YEARS $ 1,954 $ 2,306 $ 1,197
- ---------------------------------------------------------------------------
10
CORE EQUITY FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Core Equity Fund seeks long-term growth of capital, current income and growth of
income.
PRINCIPAL INVESTMENT STRATEGIES
Core Equity Fund invests primarily in common stocks that the Adviser believes
have potential primarily for capital growth and secondarily for income. Income
includes both current income and the potential for growth of dividend income
over time. Under normal circumstances, the fund invests at least 80% of the
value of its net assets in equity securities. The fund will provide
shareholders with at least 60 days' prior notice of any changes to this policy.
The fund typically holds a combination of growth stocks and value stocks. By
investing in a blend of stocks that demonstrate strong long-term earnings
potential and undervalued stocks, the fund seeks to achieve strong returns with
less volatility. A portion of the fund's assets may also be invested in
preferred stocks, bonds (primarily investment grade) convertible into common
stock and securities of foreign issuers traded in U.S. securities markets. The
fund's investment in foreign issuers will be primarily through American
Depositary Receipts ("ADRs"). The fund expects to earn current income mainly
from dividends paid on common and preferred stocks and from interest on
convertible bonds. The Adviser also seeks to identify companies that may
increase their dividends over time. The Adviser utilizes both "top-down" and
"bottom-up" approaches in constructing the fund's portfolio. This means the
Adviser looks at the condition of the overall economy and industry segments in
addition to data on individual companies. The Adviser performs fundamental
analysis of companies by reviewing historical and relative valuation along with
historical and projected earnings growth rates. Quality and valuation ratings
are assigned to those companies being followed. The Adviser selects stocks with
the intent of realizing long-term capital appreciation, not for quick turnover.
The Adviser exercises patience and discipline in making decisions to sell or
continue to hold individual stocks over time. Decisions to sell portfolio
holdings are generally the result of changes in the Adviser's assessment of a
particular issue, changes in industry trends or other economic or financial
conditions that create more attractive alternatives in similar issues.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o STOCK MARKET AND EQUITY SECURITIES RISK. The fund is subject to
fluctuations in the stock markets, which have periods of increasing and
decreasing values. Stocks have greater volatility than debt securities.
The fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
fund's share price may decline. The Adviser attempts to manage market risk
by limiting the amount the fund invests in any single company's equity
securities. However, diversification will not protect the fund against
widespread or prolonged declines in the stock market.
o GROWTH STOCK RISK. Due to their relatively high valuations, growth stocks
are typically more volatile than value stocks. For instance, the price of
a growth stock may experience a larger decline on a forecast of lower
earnings, a negative fundamental development, or an adverse market
development. Further, growth stocks may not pay dividends or may pay lower
dividends than value stocks. This means they depend more on price changes
11
for returns and may be more adversely affected in a down market compared
to value stocks.
o VALUE STOCK RISK. Value stocks bear the risk that the companies may not
overcome the adverse business or other developments that caused the
securities to be out of favor or that the market does not recognize the
value of the company, such that the price of its securities declines or
does not approach the value the Adviser anticipates.
o FOREIGN ISSUER RISK. The fund's investments in foreign issuers (which will
be primarily through ADRs) carry potential risks that are in addition to
those associated with domestic investments. Such risks may include: (1)
currency exchange rate fluctuations, (2) political and financial
instability, (3) less liquidity and greater volatility of foreign
investments, (4) the lack of uniform accounting, auditing and financial
reporting standards, and (5) less government regulation and supervision of
foreign stock exchanges, brokers and listed companies.
o COMPANY SIZE RISK. Equity securities risk is also related to the market
capitalization of the company issuing the stock. Market capitalization is
determined by multiplying the number of a company's outstanding shares by
the current market price per share. Generally, the smaller the market
capitalization of a company, the fewer the number of shares traded daily,
the less liquid its stock and the more volatile its price. Stocks of
small- and mid-capitalization companies are also usually more sensitive to
adverse business developments and economic, political, regulatory and
market factors than stock of large-capitalization companies. Companies
with smaller market capitalizations also tend to have unproven track
records, a limited product or service base and limited access to capital.
These factors also increase risks and make these companies more likely to
fail than companies with larger market capitalizations. The fund may
experience difficulty in purchasing or selling securities of small- and
mid-capitalization companies at the desired time and price.
o SECTOR RISK. When the fund emphasizes its investments in securities of
issuers in a particular industry, the fund's performance is closely tied
to events in that industry.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risk of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance. The fund began
operations on February 18, 2005 as the successor to a substantially similar
series of an investment company. On that date, the fund merged with LEADER
Growth & Income Fund, a series of LEADER Mutual Funds, and assumed that series'
operating history and performance record. The performance included in the bar
chart and table below prior to February 18, 2005 is that of the fund's
predecessor, the inception date of which was October 26, 2000 (Class A Shares)
and September 1, 1994 (Class I Shares).
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class I Shares. Annual total returns for Class A Shares are not shown below
because the Class A Shares (including the predecessor fund's Class A Shares)
12
commenced investment operations on October 26, 2000. The fund's Class C Shares
commenced investment operations on April 3, 2006. The returns for the fund's
Class A Shares and Class C Shares would be lower than the Class I Shares'
returns shown in the bar chart because the Class A Shares' and Class C Shares'
total expenses are higher. The total returns displayed in the bar chart do not
reflect any reduction for taxes that a shareholder might have paid on fund
distributions or on the redemption of fund shares at a gain; if they did, the
total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS I SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 30.45%
1999 18.18%
2000 (9.60)%
2001 (11.08)%
2002 (19.85)%
2003 24.23%
2004 7.05%
2005 7.40%
2006 2.59%
2007 15.06%
(1) THE FUND'S PROSPECTUS, DATED JANUARY 1, 2006, SHOWED 10 YEAR ANNUAL TOTAL
RETURN INFORMATION FOR CLASS A SHARES WHICH INFORMATION PRIOR TO THE
INCEPTION DATE OF THE PREDECESSOR FUND'S CLASS A SHARES INCLUDED
PREDECESSOR FUND'S ADJUSTED CLASS I SHARES INFORMATION. THE FUND HAS
INSTEAD DECIDED TO SHOW TOTAL RETURN INFORMATION FOR CLASS I SHARES
(INCLUDING PREDECESSOR FUND'S CLASS I SHARES) BECAUSE THEY HAVE A LONGER
OPERATING HISTORY.
Year-to-date performance as of February 29, 2008: (11.72)%
Class I Shares highest quarterly return during
years shown: 16.30% December 31, 1998
Class I Shares lowest quarterly return during
years shown: (13.60)% September 30, 2002
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class I Shares, Class A Shares and Class C Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Standard & Poor's
500 Index* and the Lipper Large Cap Core Funds Index.(+) The table also shows
hypothetical total returns for Class I Shares that have been calculated to
reflect return after taxes on distributions and return after taxes on
distributions and assumed sale of the Class I Shares.
SINCE
COMMENCEMENT
1 5 10 OF INVESTMENT
YEAR YEARS YEARS OPERATIONS(1)
CLASS I SHARES Return Before Taxes 15.06% 11.01% 5.29% -
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES Return After Taxes on Distributions(2) 11.59% 9.47% 4.24% -
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES Return After Taxes on Distributions and
Sale of Fund Shares(2) 12.50% 9.33% 4.31% -
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES Return Before Taxes
(with a 5.50% sales charge) 8.47% 9.46% N/A 0.79%
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes 13.48% N/A N/A 6.91%
(with applicable Contingent Deferred Sales Charge)
- -------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX* 5.49% 12.83% 5.91% -
- -------------------------------------------------------------------------------------------------------
LIPPER LARGE CAP CORE FUNDS INDEX(+) 6.63% 11.55% 5.23% -
- -------------------------------------------------------------------------------------------------------
* THE STANDARD & POOR'S 500 INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED
INDEX OF 500 STOCKS DESIGNED TO MEASURE PERFORMANCE OF THE BROAD DOMESTIC
ECONOMY THROUGH CHANGES IN THE AGGREGATED MARKET VALUE OF 500 STOCKS
REPRESENTING ALL MAJOR INDUSTRIES. TOTAL RETURNS FOR THE INDEX SHOWN ARE
13
NOT ADJUSTED TO REFLECT TAXES, SALES CHARGES, EXPENSES OR OTHER FEES THAT
THE SEC REQUIRES TO BE REFLECTED IN THE FUND'S PERFORMANCE. THE INDEX IS
UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING
AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(+) THE LIPPER LARGE-CAP CORE FUNDS INDEX CONSISTS OF MANAGED MUTUAL FUNDS
THAT, BY PORTFOLIO PRACTICE, INVEST AT LEAST 75% OF THEIR EQUITY ASSETS IN
COMPANIES WITH MARKET CAPITALIZATION (ON A THREE-YEAR WEIGHTED BASIS) OF
GREATER THAN 33% OF THE DOLLAR-WEIGHTED MEDIAN MARKET CAPITALIZATION OF
THE STANDARD & POOR'S MIDCAP 400 INDEX. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING THE PREDECESSOR FUND'S CLASS A
SHARES), CLASS C SHARES AND CLASS I SHARES (INCLUDING THE PREDECESSOR
FUND'S CLASS I SHARES) COMMENCED INVESTMENT OPERATIONS ON OCTOBER 26,
2000, APRIL 3, 2006 AND SEPTEMBER 1, 1994, RESPECTIVELY.
(2) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS I SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
(3) THE FUND'S PROSPECTUS, DATED JANUARY 1, 2006, SHOWED 10 YEAR AVERAGE
ANNUAL TOTAL RETURNS FOR CLASS A SHARES WHICH INFORMATION PRIOR TO THE
INCEPTION DATE OF THE PREDECESSOR FUND'S CLASS A SHARES INCLUDED
PREDECESSOR FUND'S ADJUSTED CLASS I SHARES INFORMATION. THE FUND HAS
INSTEAD DECIDED TO SHOW AVERAGE ANNUAL TOTAL RETURN INFORMATION FOR CLASS
I SHARES (INCLUDING PREDECESSOR FUND'S CLASS I SHARES) BECAUSE THEY HAVE A
LONGER OPERATING HISTORY.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
14
CORE EQUITY FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Core Equity Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 5.50% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and other distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses 0.28% 0.28% 0.28%
- ------------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.03% 0.03% 0.03%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.31% 2.06% 1.06%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE
LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A
SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV AT
THE TIME OF REDEMPTION WILL APPLY TO CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE ESTIMATED AGGREGATE FEES AND EXPENSES
FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 676 $ 310 $ 108
- -----------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 676 $ 210 $ 108
- -----------------------------------------------------------------------------
3 YEARS $ 944 $ 648 $ 338
- -----------------------------------------------------------------------------
5 YEARS $ 1,231 $ 1,112 $ 587
- -----------------------------------------------------------------------------
10 YEARS $ 2,050 $ 2,400 $ 1,302
- -----------------------------------------------------------------------------
15
MID CAP VALUE FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Mid Cap Value Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Mid Cap Value Fund invests primarily in equity securities of mid-capitalization
companies (I.E., companies whose market capitalization fall within the range
tracked by the Russell Mid Cap Value Index at the time of purchase) that are
judged by the Adviser to be undervalued. Under normal circumstances, the fund
invests at least 80% of the value of its net assets in equity securities of mid-
capitalization companies. The fund will provide shareholders with at least 60
days' prior notice of any changes in this policy. As of February 29, 2008, the
capitalization of issuers included in the Russell Mid Cap Value Index ranged
from about $462 million to about $49.6 billion.
The fund invests in common and preferred stocks of companies that are judged to
be intrinsically undervalued in one of two ways: either the shares are
undervalued when compared to the underlying value of the firm's assets or the
shares are undervalued when compared to the growth prospects of the firm.
"Undervalued" means that a portfolio company's stock is trading on average at a
40% discount at the time of initial purchase when compared to the Adviser's best
internal estimate of its "intrinsic value." Intrinsic value is estimated by the
Adviser based on: (1) transactions involving comparable companies; (2)
discounted cash flow analysis; and/or (3) sum-of-the-parts analysis - looking at
the assets and operations of a company in parts then totaling them to estimate
its intrinsic value. The overall purpose of the Adviser's analysis and search
for undervalued opportunities is to determine what an independent, informed
third party might pay for an entire company and then to purchase the stock of
that publicly traded company at a substantial discount to the Adviser's
valuation.
The Adviser seeks to identify companies that have clearly defined business
strategies, enjoy significant or growing market share in their respective
industries, historically produce healthy cash flows and have experienced
management teams with consistent records of delivering shareholder value.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o STOCK MARKET AND EQUITY SECURITIES RISK. The fund is subject to
fluctuations in the stock markets, which have periods of increasing and
decreasing values. Stocks have greater volatility than debt securities.
The fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
fund's share price may decline. The Adviser attempts to manage market risk
by limiting the amount the fund invests in any single company's equity
securities. However, diversification will not protect the fund against
widespread or prolonged declines in the stock market.
o VALUE INVESTING RISK. The fund focuses its investments on securities that
the Adviser believes are undervalued or inexpensive relative to other
investments. Value stocks bear the risk that the companies may not
overcome the adverse business or other developments that caused the
securities to be out of favor or that the market does not recognize the
16
value of the company, such that the price of its securities declines or
does not approach the value the Adviser anticipates. In addition, during
certain time periods, market dynamics may favor "growth" securities over
"value" securities. Disciplined adherence to a "value" investment mandate
during such periods can result in significant underperformance relative to
overall market indices and other managed investment vehicles that pursue
growth style investments and/or flexible style mandates.
o COMPANY SIZE RISK. Equity securities risk is also related to the market
capitalization of the company issuing the stock. Market capitalization is
determined by multiplying the number of a company's outstanding shares by
the current market price per share. Generally, the smaller the market
capitalization of a company, the fewer the number of shares traded daily,
the less liquid its stock and the more volatile its price. Stocks of
mid-capitalization companies are also usually more sensitive to adverse
business developments and economic, political, regulatory and market
factors than stock of large-capitalization companies. The fund may
experience difficulty in purchasing or selling securities of
mid-capitalization companies at the desired time and price.
o SECTOR RISK. When the fund emphasizes its investments in securities of
issuers in a particular industry, the fund's performance is closely tied
to events in that industry.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 2003-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of any sales charges or any reduction for taxes that
a shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES
CALENDAR YEAR PERCENTAGES
2003 21.90%
2004 22.38%
2005 6.14%
2006 12.41%
2007 1.17%
17
Year-to-date performance as of February 29, 2008: (7.36)%
Class A Shares highest quarterly return during
years shown: 14.29% December 31, 2004
Class A Shares lowest quarterly return during
years shown: (4.71)% December 31, 2007
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Russell Mid Cap
Value Index.* The table also shows hypothetical total returns for Class A
Shares that have been calculated to reflect return after taxes on distributions
and return after taxes on distributions and assumed sale of the Class A Shares.
SINCE
1 5 COMMENCEMENT
YEAR YEARS OF INVESTMENT
OPERATIONS(1)
CLASS A SHARES Return Before Taxes
(with 5.50% sales charge) (4.39)% 11.22% 10.24%
- ----------------------------------------------------------------------------------------------
CLASS A SHARES Return After Taxes on Distributions(2) (5.25)% 8.96% 8.04%
- ----------------------------------------------------------------------------------------------
CLASS A SHARES Return After Taxes on Distributions
and Sale of Fund Shares(2) (1.72)% 8.94% 8.10%
- ----------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes
(with applicable Contingent Deferred Sales Charge) (0.56)% 11.89% 10.90%
- ----------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 1.45% N/A 8.35%
- ----------------------------------------------------------------------------------------------
RUSSELL MID CAP VALUE INDEX* (1.42)% 17.92% -
- ----------------------------------------------------------------------------------------------
* THE RUSSELL MID CAP VALUE INDEX TRACKS EQUITY SECURITIES OF MEDIUM-SIZED
COMPANIES WHOSE MARKET CAPITALIZATION FALLS WITHIN THE $462 MILLION TO
$49.6 BILLION RANGE. TOTAL RETURNS FOR THE INDEX SHOWN ARE NOT ADJUSTED TO
REFLECT TAXES, SALES CHARGES, EXPENSES OR OTHER FEES THAT THE SEC REQUIRES
TO BE REFLECTED IN THE FUND'S PERFORMANCE. THE INDEX IS UNMANAGED, AND
UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER
EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES AND CLASS C SHARES COMMENCED INVESTMENT
OPERATIONS ON DECEMBER 9, 2002. THE FUND'S CLASS I SHARES COMMENCED
INVESTMENT OPERATIONS ON MAY 10, 2005.
(2) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
18
MID CAP VALUE FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Mid Cap Value Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 5.50% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and
other distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses(3) 0.31% 0.31% 0.31%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.31% 2.06% 1.06%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT
DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE
SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A SHARES
REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE
PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO
CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) OTHER OPERATING EXPENSES ALSO INCLUDE THE FUND'S PORTION OF THE ESTIMATED
AGGREGATE FEES AND EXPENSES FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING
INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THESE FEES AND EXPENSES
ARE LESS THAN 0.01% OF THE AVERAGE NET ASSETS OF THE FUND AND THEREFORE
ARE NOT REPRESENTED AS A SEPARATE OPERATING EXPENSE IN THE TABLE. THE
IMPACT OF THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL
RETURNS FOR THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 676 $ 310 $ 108
- ---------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 676 $ 210 $ 108
- ---------------------------------------------------------------------------
3 YEARS $ 944 $ 648 $ 338
- ---------------------------------------------------------------------------
5 YEARS $ 1,231 $ 1,112 $ 587
- ---------------------------------------------------------------------------
10 YEARS $ 2,050 $ 2,400 $ 1,302
- ---------------------------------------------------------------------------
19
VALUE FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Value Fund seeks income and growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Value Fund invests in common and preferred stocks according to a sector-
weighting strategy in which attractive market valuation levels are assigned
priority over prospects for future earnings growth. The Adviser attempts to
identify those sectors of the economy that, given the current phase of the
business cycle, are likely to realize gains in share prices as market valuation
factors readjust over time. Selected sectors and companies will tend to possess
price-to-earnings (P/E) and price-to-book ratios below broad market averages,
while dividend yields generally will be higher than market averages. Common and
preferred stocks are expected to produce dividends, and selected companies will
generally possess market capitalizations of $2 billion or more at the time of
purchase. Convertible securities of smaller companies may also be included in
the fund's portfolio.
The Adviser seeks to identify companies that have clearly defined business
strategies, produce consistent revenue streams from an established customer
base, enjoy significant market share in their respective industries, produce
healthy cash-flows, achieve consistent increases in sales, operating margins,
and corporate earnings, and have experienced management teams with consistent
records of delivering shareholder value. The Adviser periodically reviews
market prices in relation to the stock's intrinsic value and adjusts the fund's
holdings accordingly.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o STOCK MARKET AND EQUITY SECURITIES RISK. The fund is subject to
fluctuations in the stock markets, which have periods of increasing and
decreasing values. Stocks have greater volatility than debt securities.
The fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
fund's share price may decline. The Adviser attempts to manage market risk
by limiting the amount the fund invests in any single company's equity
securities. However, diversification will not protect the fund against
widespread or prolonged declines in the stock market.
o VALUE INVESTING RISK. The fund focuses its investments on securities that
the Adviser believes are undervalued or inexpensive relative to other
investments. Value stocks bear the risk that the companies may not
overcome the adverse business or other developments that caused the
securities to be out of favor or that the market does not recognize the
value of the company, such that the price of its securities declines or
does not approach the value the Adviser anticipates. In addition, during
certain time periods, market dynamics may favor "growth" securities over
"value" securities. Disciplined adherence to a "value" investment mandate
during such periods can result in significant underperformance relative to
overall market indices and other managed investment vehicles that pursue
growth style investments and/or flexible style mandates.
20
o COMPANY SIZE RISK. Equity securities risk is also related to the market
capitalization of the company issuing the stock. Market capitalization is
determined by multiplying the number of a company's outstanding shares by
the current market price per share. Generally, the smaller the market
capitalization of a company, the fewer the number of shares traded daily,
the less liquid its stock and the more volatile its price. Stocks of
small- and mid-capitalization companies are also usually more sensitive to
adverse business developments and economic, political, regulatory and
market factors than stock of large-capitalization companies. Companies
with smaller market capitalizations also tend to have unproven track
records, a limited product or service base and limited access to capital.
These factors also increase risks and make these companies more likely to
fail than companies with larger market capitalizations. The fund may
experience difficulty in purchasing or selling securities of small- and
mid-capitalization companies at the desired time and price.
o SECTOR RISK. When the fund emphasizes its investments in securities of
issuers in a particular industry, the fund's performance is closely tied
to events in that industry.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of any sales charges or any reduction for taxes that
a shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 13.02%
1999 5.75%
2000 1.61%
2001 (11.00)%
2002 (17.37)%
2003 22.15%
2004 7.84%
2005 12.63%
2006 9.92%
2007 19.22%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND WERE CONVERTED TO
CLASS A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR
PORTION THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF
CLASS A SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL
CHARGES, EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE
GENERALLY HIGHER THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
21
Year-to-date performance as of February 29, 2008: (10.66)%
Class A Shares highest quarterly return during
years shown: 15.26% December 31, 1998
Class A Shares lowest quarterly return during
years shown: (18.70)% September 30, 2002
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Standard & Poor's
500/Citigroup Value Index.* The table also shows hypothetical total returns for
Class A Shares that have been calculated to reflect return after taxes on
distributions and return after taxes on distributions and assumed sale of the
Class A Shares.
1 5 10 SINCE COMMENCEMENT
YEAR YEARS YEARS OF INVESTMENT
OPERATIONS(1)
CLASS A SHARES(2) Return Before Taxes 12.66% 12.94% 5.08% -
(with 5.50% sales charge)
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions(3) 12.17% 12.72% 4.37% -
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions 8.61% 11.27% 4.04% -
and Sale of Fund Shares(3)
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes 17.14% 13.43% N/A 8.30%
(with applicable Contingent Deferred Sales Charge)
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 19.40% N/A N/A 14.50%
- --------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500/CITIGROUP VALUE INDEX* 1.99% 14.97% 6.68 % -
- --------------------------------------------------------------------------------------------------------
* THE STANDARD & POOR'S 500/CITIGROUP VALUE INDEX IS A SUB-INDEX OF THE
STANDARD & POOR'S 500 INDEX REPRESENTING 50% OF THE STANDARD & POOR'S 500
INDEX MARKET CAPITALIZATION AND IS COMPRISED OF THOSE COMPANIES WITH VALUE
CHARACTERISTICS BASED ON A SERIES OF RATIOS. TOTAL RETURNS FOR THE INDEX
SHOWN ARE NOT ADJUSTED TO REFLECT TAXES, SALES CHARGES, EXPENSES OR OTHER
FEES THAT THE SEC REQUIRES TO BE REFLECTED IN THE FUND'S PERFORMANCE. THE
INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR
TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN
INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING PREDECESSOR CLASS B SHARES), CLASS C
SHARES AND CLASS I SHARES COMMENCED INVESTMENT OPERATIONS ON DECEMBER 19,
1994, FEBRUARY 21, 2002 AND JUNE 16, 2004, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
(3) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
22
VALUE FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Value Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 5.50% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and
other distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses 0.22% 0.22% 0.22%
- ------------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.01% 0.01% 0.01%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.23% 1.98% 0.98%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT DEFERRED
SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE SHARES OR
THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A SHARES REDEEMED
WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE
PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO
CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE
ESTIMATED AGGREGATE FEES AND EXPENSES FOR THE CURRENT FISCAL YEAR OF THE
UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF THE
ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF THE
FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although actual costs
and returns may be higher or lower, based on these assumptions your costs would
be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 669 $ 302 $ 100
- ---------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 669 $ 202 $ 100
- ---------------------------------------------------------------------------
3 YEARS $ 920 $ 623 $ 313
- ---------------------------------------------------------------------------
5 YEARS $ 1,191 $ 1,071 $ 544
- ---------------------------------------------------------------------------
10 YEARS $ 1,965 $ 2,317 $ 1,209
- ---------------------------------------------------------------------------
23
BALANCED FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Balanced Fund seeks total return through capital appreciation, dividends and
interest.
PRINCIPAL INVESTMENT STRATEGIES
Balanced Fund invests primarily in common and preferred stocks, convertible
securities and debt securities. Under normal market conditions, the fund
maintains at least 25% of its assets in senior debt securities and at least 25%
of its assets in common stocks. The remaining 50% may be invested in those
securities, as well as ADRs, collateralized mortgage obligations, or other
investments as determined by the Adviser based on its assessment of the economy
and the markets. The fund's equity allocation will focus on high-quality
companies. Using a blend of growth and value styles, the Adviser seeks to
identify companies that have clearly defined business strategies, produce
revenue streams from an established customer base, enjoy significant market
share in their respective industries, produce healthy cash-flows, achieve
consistent increases in sales, operating margins, and corporate earnings, and
have experienced management teams with consistent records of delivering
shareholder value. The Adviser periodically reviews market prices in relation
to the stock's intrinsic value and adjusts the fund's holdings accordingly. The
fund's debt security allocation focuses on intermediate-term debt securities,
with an emphasis on U.S. Treasury and governmental agency issues. Investment
grade corporate bond issues may also be included as yield spreads become
attractive.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o STOCK MARKET AND EQUITY SECURITIES RISK. The fund is subject to
fluctuations in the stock markets, which have periods of increasing and
decreasing values. Stocks have greater volatility than debt securities.
The fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
fund's share price may decline. The Adviser attempts to manage market risk
by limiting the amount the fund invests in any single company's equity
securities. However, diversification will not protect the fund against
widespread or prolonged declines in the stock market.
o GROWTH STOCK RISK. Due to their relatively high valuations, growth stocks
are typically more volatile than value stocks. For instance, the price of
a growth stock may experience a larger decline on a forecast of lower
earnings, a negative fundamental development, or an adverse market
development. Further, growth stocks may not pay dividends or may pay lower
dividends than value stocks. This means they depend more on price changes
for returns and may be more adversely affected in a down market compared
to value stocks.
o VALUE STOCK RISK. Value stocks bear the risk that the companies may not
overcome the adverse business or other developments that caused the
securities to be out of favor or that the market does not recognize the
value of the company, such that the price of its securities declines or
does not approach the value the Adviser anticipates.
24
o INTEREST RATE AND RELATED RISKS. Generally, when market interest rates
rise, the value of debt securities declines, and vice versa. However,
market factors, such as the demand for particular debt securities, may
cause the price of certain debt securities to fall while the prices of
other debt securities rise or remain unchanged. The fund's investment in
debt securities means that the NAV of the fund will tend to decline if
market interest rates rise. The prices of long-term debt obligations
generally fluctuate more than prices of short-term debt obligations as
interest rates change. You can expect the NAV of the fund to fluctuate
accordingly. During periods of rising interest rates, the average life of
the debt securities held by the fund may be extended because of slower
than expected principal payments, thereby locking in a below market
interest rate, increasing the security's duration (the estimated period
until the principal and interest are paid in full) and reducing the value
of the security. This is known as extension risk. During periods of
declining interest rates, the issuer of a debt security held by the fund
may exercise its option to prepay principal earlier than scheduled,
thereby forcing the fund to reinvest in lower yielding securities. This is
known as call or prepayment risk.
o CREDIT RISK. Credit risk refers to an issuer's ability to make payments of
principal and interest when they are due. Many debt securities receive
credit ratings from services such as Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), and Moody's Investors Service, Inc.
("Moody's"). These services assign ratings to securities by assessing the
likelihood of issuer default. If a security has not received a rating, the
fund must rely upon the Adviser's credit assessment. Investment grade debt
securities are considered less risky than debt securities whose ratings
are below investment grade; however, ratings are no guarantee of quality.
Prices of debt securities typically decline if the issuer's credit quality
deteriorates. Lower grade debt securities may experience high default
rates. If an issuer defaults, the fund may lose some or all of its
investments in such securities. If this occurs, the fund's NAV and ability
to pay dividends to shareholders would be adversely affected.
o MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK. Mortgage-backed and
asset-backed securities are subject to prepayment risk. When interest
rates decline, unscheduled prepayments can be expected to accelerate, and
the fund would be required to reinvest the proceeds of the prepayments at
the lower interest rates then available. Unscheduled prepayments would
also limit the potential for capital appreciation on mortgage-backed and
asset-backed securities. Conversely, when interest rates rise, the values
of mortgage-backed and asset-backed securities generally fall. Since
rising interest rates typically result in decreased prepayments, this
could lengthen the average lives of such securities, and cause their value
to decline more than traditional debt securities. If the fund purchases
mortgage-backed or asset-backed securities that are "subordinated" to
other interests in the same mortgage pool, the fund as a holder of those
securities may only receive payments after the pool's obligations to other
investors have been satisfied. For example, an unexpectedly high rate of
defaults on the mortgages held by a mortgage pool may limit substantially
the pool's ability to make payments of principal or interest to the fund
as a holder of such subordinated securities, reducing the values of those
securities or in some cases rendering them worthless; the risk of such
defaults is generally higher in the case of mortgage pools that include
so-called "subprime" mortgages.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance.
25
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of any sales charges or any reduction for taxes that
a shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 19.93%
1999 8.82%
2000 (2.86)%
2001 (3.19)%
2002 (7.40)%
2003 13.50%
2004 2.54%
2005 11.39%
2006 6.92%
2007 12.90%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
Year-to-date performance as of February 29, 2008: (0.93)%
Class A Shares highest quarterly return during
years shown: 10.26% December 31, 1998
Class A Shares lowest quarterly return during
years shown: (6.42)% September 30, 2002
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Standard & Poor's
500 Index,* the Lehman Brothers Government/Credit Total Index,** and the
Standard & Poor's 500/Merrill Lynch 1-10 Year Government/Corporate A Rated and
Above Index.+ The table also shows hypothetical total returns for Class A
Shares that have been calculated to reflect return after taxes on distributions
and return after taxes on distributions and assumed sale of the Class A Shares.
SINCE
COMMENCEMENT
1 5 10 OF INVESTMENT
YEAR YEARS YEARS OPERATIONS(1)
CLASS A SHARES(2) Return Before Taxes
(with 5.50% sales charge) 6.69% 8.14% 5.33% -
- --------------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions(3) 4.98% 7.36% 4.26% -
- --------------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions 6.22% 6.83% 4.10% -
and Sale of Fund Shares(3)
- --------------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes 10.93% 8.57% N/A 5.59%
(with applicable Contingent Deferred Sales Charge)
- --------------------------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 13.10% N/A N/A 9.87%
- --------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX* 5.49% 12.83% 5.91% -
- --------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS GOVERNMENT/CREDIT TOTAL INDEX** 7.23% 4.44% 6.01% -
- --------------------------------------------------------------------------------------------------------------
26
- --------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500/MERRILL LYNCH 1-10 YEAR
GOVERNMENT/CORPORATE A RATED AND ABOVE INDEX(+) 6.79% 8.35% 6.13% N/A
- --------------------------------------------------------------------------------------------------------------
* THE STANDARD & Poor's 500 Index is a capitalization-weighted index of 500
stocks representing all major industries. Total returns for the index
shown are not adjusted to reflect taxes, sales charges, expenses or other
fees that the SEC requires to be reflected in the fund's performance. The
index is unmanaged, and unlike the fund, is not affected by cashflows or
trading and other expenses. It is not possible to invest directly in an
index.
** The Lehman Brothers Government/Credit Total Index is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; CORPORATE BONDS GUARANTEED
BY THE U.S. GOVERNMENT AND QUASI-FEDERAL CORPORATIONS; AND PUBLICLY
ISSUED, FIXED RATE, NON-CONVERTIBLE DOMESTIC BONDS OF COMPANIES IN
INDUSTRY, PUBLIC UTILITIES, AND FINANCE. TOTAL RETURNS FOR THE INDEX SHOWN
ARE NOT ADJUSTED TO REFLECT TAXES, SALES CHARGES, EXPENSES OR OTHER FEES
THAT THE SEC REQUIRES TO BE REFLECTED IN THE FUND'S PERFORMANCE. THE INDEX
IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING
AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(+) THE STANDARD & POOR'S 500/MERRILL LYNCH 1-10 YEAR GOVERNMENT/CORPORATE A
RATED AND ABOVE INDEX IS A 50%/50% WEIGHT BETWEEN THE TWO INDEXES. TOTAL
RETURNS FOR THE INDEX SHOWN ARE NOT ADJUSTED TO REFLECT TAXES, SALES
CHARGES, EXPENSES OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN
THE FUND'S PERFORMANCE. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS
NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING THE PREDECESSOR CLASS B SHARES),
CLASS C SHARES AND CLASS I SHARES COMMENCED INVESTMENT OPERATIONS ON
DECEMBER 18, 1994, JANUARY 14, 2002 AND SEPTEMBER 1, 2005, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
(3) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
27
BALANCED FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Balanced Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 5.50% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and
other distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.01% 0.01% 0.01%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.26% 2.01% 1.01%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT
DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE
SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A SHARES
REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE
PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO
CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE
ESTIMATED AGGREGATE FEES AND EXPENSES FOR THE CURRENT FISCAL YEAR OF THE
UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF
THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 672 $ 305 $ 103
- ---------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 672 $ 205 $ 103
- ---------------------------------------------------------------------------
3 YEARS $ 929 $ 633 $ 323
- ---------------------------------------------------------------------------
5 YEARS $ 1,206 $ 1,087 $ 560
- ---------------------------------------------------------------------------
10 YEARS $ 1,997 $ 2,348 $ 1,244
- ---------------------------------------------------------------------------
28
FIXED INCOME FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVES
Fixed Income Fund seeks current income, with capital appreciation as a secondary
objective.
PRINCIPAL INVESTMENT STRATEGIES
Fixed Income Fund invests a majority of its total assets in investment grade
debt securities. Under normal circumstances, the fund invests at least 80% of
the value of its net assets in debt securities. These securities include debt
securities of the U.S. Treasury and government agencies, mortgage-backed and
asset-backed securities, and corporate bonds. The fund will provide
shareholders with at least 60 days' prior notice of any changes in this policy.
The fund may invest up to 10% of its total assets in below investment grade debt
securities. The debt securities purchased by the fund will be rated, at the
time of investment, at least CCC (or a comparable rating) by at least one
nationally recognized statistical rating organization ("NRSRO") or, if unrated,
determined by the Adviser to be of comparable quality.
The Adviser employs a "top down" strategy in selecting investment securities.
Key factors include economic trends, inflation expectations, interest rate
momentum, and yield spreads. When investing in non-governmental securities, the
Adviser will conduct a credit analysis of the issuer, and will compare current
yield spreads to historical norms. The NAV of the fund is expected to fluctuate
with changes in interest rates and bond market conditions. The Adviser will
attempt to minimize principal fluctuation and increase return through, among
other things, diversification, careful credit analysis and security selection,
and adjustments of the fund's average portfolio maturity.
The average maturity of the fund's debt securities generally will be in the
range of three to ten years. When interest rates are at higher levels and lower
rates are forecasted for the future, the Adviser may choose to lengthen the
fund's effective duration. Likewise, when rising interest rates are expected,
the duration of the fund's bond portfolio may be shortened. Consistent with the
fund's primary objective of producing current income, the fund will focus on
investment-grade, intermediate-term debt securities.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o INTEREST RATE AND RELATED RISKS. Generally, when market interest rates
rise, the value of debt securities declines, and vice versa. However,
market factors, such as the demand for particular debt securities, may
cause the price of certain debt securities to fall while the prices of
other debt securities rise or remain unchanged. The fund's investment in
debt securities means that the NAV of the fund will tend to decline if
market interest rates rise. The prices of long-term debt obligations
generally fluctuate more than prices of short-term debt obligations as
interest rates change. You can expect the NAV of the fund to fluctuate
accordingly. During periods of rising interest rates, the average life of
the debt securities held by the fund may be extended because of slower
29
than expected principal payments, thereby locking in a below market
interest rate, increasing the security's duration (the estimated period
until the principal and interest are paid in full) and reducing the value
of the security. This is known as extension risk. During periods of
declining interest rates, the issuer of a debt security held by the fund
may exercise its option to prepay principal earlier than scheduled,
thereby forcing the fund to reinvest in lower yielding securities. This is
known as call or prepayment risk.
o CREDIT RISK. Credit risk refers to an issuer's ability to make payments of
principal and interest when they are due. Many debt securities receive
credit ratings from services such as S&P and Moody's. These services
assign ratings to securities by assessing the likelihood of issuer
default. If a security has not received a rating, the fund must rely upon
the Adviser's credit assessment. Investment grade debt securities are
considered less risky than debt securities whose ratings are below
investment grade; however, ratings are no guarantee of quality. Below
investment grade debt securities are commonly referred to as "junk bonds"
and are considered speculative with respect to an issuer's capacity to pay
interest and repay principal and may experience high default rates. The
market prices of below investment grade bonds are generally less sensitive
to interest rate changes than higher-rated investments, but more sensitive
to adverse economic or political changes, or individual developments
specific to the issuer. Prices of debt securities typically decline if the
issuer's credit quality deteriorates. If an issuer defaults, the fund may
lose some or all of its investments in such securities. If this occurs,
the fund's NAV and ability to pay dividends to shareholders would be
adversely affected.
o MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK. Mortgage-backed and
asset-backed securities are subject to prepayment risk. When interest
rates decline, unscheduled prepayments can be expected to accelerate, and
the fund would be required to reinvest the proceeds of the prepayments at
the lower interest rates then available. Unscheduled prepayments would
also limit the potential for capital appreciation on mortgage-backed and
asset-backed securities. Conversely, when interest rates rise, the values
of mortgage-backed and asset-backed securities generally fall. Since
rising interest rates typically result in decreased prepayments, this
could lengthen the average lives of such securities, and cause their value
to decline more than traditional debt securities. If the fund purchases
mortgage-backed or asset-backed securities that are "subordinated" to
other interests in the same mortgage pool, the fund as a holder of those
securities may only receive payments after the pool's obligations to other
investors have been satisfied. For example, an unexpectedly high rate of
defaults on the mortgages held by a mortgage pool may limit substantially
the pool's ability to make payments of principal or interest to the fund
as a holder of such subordinated securities, reducing the values of those
securities or in some cases rendering them worthless; the risk of such
defaults is generally higher in the case of mortgage pools that include
so-called "subprime" mortgages.
o LIQUIDITY RISK. The liquidity of individual bonds may vary considerably.
Below investment grade bonds generally are less liquid than investment
grade bonds. Instability in the markets for fixed income securities,
particularly mortgage-backed and asset-backed securities, may affect the
liquidity of the fund's portfolio, which means that some of the fund's
portfolio securities may be difficult to sell at a fair price when
necessary to pay for redemptions from the fund and for other purposes.
This illiquidity of portfolio securities may result in the fund incurring
greater losses on the sale of some portfolio securities than under more
stable market conditions. Such losses can adversely impact the fund's net
asset value per share.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
30
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of any sales charges or any reduction for taxes that
a shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 6.66%
1999 (0.31)%
2000 10.34%
2001 8.17%
2002 9.69%
2003 1.84%
2004 0.61%
2005 1.09%
2006 3.67%
2007 (1.28)%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
Year-to-date performance as of February 29, 2008: 2.10%
Class A Shares highest quarterly return during
years shown: 4.93% September 30, 2001
Class A Shares lowest quarterly return during
years shown: (2.62)% June 30, 2004
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Merrill Lynch
Domestic Master Index* and the Merrill Lynch 1-10 Year Government/Corporate A
Rated and Above Index.+ The table also shows hypothetical total returns for
Class A Shares that have been calculated to reflect return after taxes on
distributions and return after taxes on distributions and assumed sale of the
Class A Shares.
1 5 10 SINCE COMMENCEMENT
YEAR YEARS YEARS OF INVESTMENT
OPERATIONS(1)
- -----------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return Before Taxes
(with 2.00% sales charge) (3.25)% 0.76% 3.76% -
- -----------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions(3) (4.90)% (0.73)% 1.98% -
- -----------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions
and Sale of Fund Shares(3) (2.11)% (0.17)% 2.14% -
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes (3.00)% 0.42% N/A 1.64%
(with applicable Contingent Deferred Sales Charge)
- -----------------------------------------------------------------------------------------------------------
31
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes (1.03)% N/A N/A 1.33%
- -----------------------------------------------------------------------------------------------------------
MERRILL LYNCH DOMESTIC MASTER INDEX* 7.20% 4.49% 6.02% -
- -----------------------------------------------------------------------------------------------------------
* THE MERRILL LYNCH DOMESTIC MASTER INDEX IS COMPOSED OF U.S. DOLLAR
DENOMINATED SEC-REGISTERED INVESTMENT GRADE PUBLIC CORPORATE AND
GOVERNMENT DEBT. TREASURIES, MORTGAGE-BACKED SECURITIES, GLOBAL BONDS
(DEBT ISSUED SIMULTANEOUSLY IN THE EUROBOND AND U.S. DOMESTIC BOND
MARKETS) AND SOME YANKEE BONDS (DEBT OF FOREIGN ISSUERS ISSUED IN THE U.S.
DOMESTIC MARKET) ARE INCLUDED IN THE MERRILL LYNCH DOMESTIC MASTER INDEX.
TOTAL RETURNS FOR THE INDEX SHOWN ARE NOT ADJUSTED TO REFLECT TAXES, SALES
CHARGES, EXPENSES OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN
THE FUND'S PERFORMANCE. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS
NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING THE PREDECESSOR CLASS B SHARES),
CLASS C SHARES AND CLASS I SHARES COMMENCED INVESTMENT OPERATIONS ON APRIL
20, 1992, DECEMBER 3, 2001 AND AUGUST 14, 2005, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
(3) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF
EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS)
ON REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS.
ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT
RELEVANT TO INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH
AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE
SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
32
FIXED INCOME FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Fixed Income Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 2.00% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and
other distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses(3) 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 1.00% 1.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT
DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE
SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A SHARES
REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE
PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO
CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) OTHER OPERATING EXPENSES ALSO INCLUDE THE FUND'S PORTION OF THE ESTIMATED
AGGREGATE FEES AND EXPENSES FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING
INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THESE FEES AND EXPENSES
ARE LESS THAN 0.01% OF THE AVERAGE NET ASSETS OF THE FUND AND THEREFORE
ARE NOT REPRESENTED AS A SEPARATE OPERATING EXPENSE IN THE TABLE. THE
IMPACT OF THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL
RETURNS FOR THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 300 $ 278 $ 77
- -----------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 300 $ 178 $ 77
- -----------------------------------------------------------------------------
3 YEARS $ 513 $ 553 $ 241
- -----------------------------------------------------------------------------
5 YEARS $ 744 $ 952 $ 419
- -----------------------------------------------------------------------------
10 YEARS $ 1,407 $ 2,072 $ 936
- -----------------------------------------------------------------------------
33
LIMITED MATURITY FIXED INCOME FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Limited Maturity Fixed Income Fund seeks current income.
PRINCIPAL INVESTMENT STRATEGIES
Limited Maturity Fixed Income Fund invests in investment grade debt securities.
Under normal circumstances, the fund invests at least 80% of the value of its
net assets in debt securities. These securities include debt securities of the
U.S. Treasury and government agencies, mortgage-backed and asset-backed
securities, and corporate bonds. The fund will provide shareholders with at
least 60 days' prior notice of any changes in this policy.
The fund may invest up to 10% of its total assets in below investment grade debt
securities. The debt securities purchased by the fund will be rated, at the
time of investment, at least CCC (or a comparable rating) by at least one NRSRO
or, if unrated, determined by the Adviser to be of comparable quality.
The Adviser employs a "top down" strategy in selecting investment securities.
Key factors include economic trends, inflation expectations, interest rate
momentum, and yield spreads. When investing in non-governmental securities, the
Adviser will conduct a credit analysis of the issuer, and will compare current
yield spreads to historical norms. The NAV of the fund is expected to fluctuate
with changes in interest rates and bond market conditions. The Adviser will
attempt to minimize principal fluctuation and increase return through, among
other things, diversification, careful credit analysis and security selection,
and adjustments of the fund's average portfolio maturity.
The average maturity of the fund's debt securities generally will be in the
range of one to three years. When interest rates are at higher levels and lower
rates are forecasted for the future, the Adviser may choose to lengthen the
fund's effective duration. Likewise, when rising interest rates are expected,
the duration of the fund's bond portfolio may be shortened. Consistent with the
fund's objective of producing current income, the fund will focus on investment
grade debt securities with short- to intermediate-term maturities.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o INTEREST RATE AND RELATED RISKS. Generally, when market interest rates
rise, the value of debt securities declines, and vice versa. However,
market factors, such as the demand for particular debt securities, may
cause the price of certain debt securities to fall while the prices of
other debt securities rise or remain unchanged. The fund's investment in
debt securities means that the NAV of the fund will tend to decline if
market interest rates rise. The prices of long-term debt obligations
generally fluctuate more than prices of short-term debt obligations as
interest rates change. You can expect the NAV of the fund to fluctuate
accordingly. During periods of rising interest rates, the average life of
the debt securities held by the fund may be extended because of slower
than expected principal payments, thereby locking in a below market
interest rate, increasing the security's duration (the estimated period
until the principal and interest are paid in full) and reducing the value
of the security. This is known as extension risk. During periods of
declining interest rates, the issuer of a debt security held by the fund
34
may exercise its option to prepay principal earlier than scheduled,
thereby forcing the fund to reinvest in lower yielding securities. This is
known as call or prepayment risk.
o CREDIT RISK. Credit risk refers to an issuer's ability to make payments of
principal and interest when they are due. Many debt securities receive
credit ratings from services such as S&P and Moody's. These services
assign ratings to securities by assessing the likelihood of issuer
default. If a security has not received a rating, the fund must rely upon
the Adviser's credit assessment. Investment grade debt securities are
considered less risky than debt securities whose ratings are below
investment grade; however, ratings are no guarantee of quality. Below
investment grade debt securities are commonly referred to as "junk bonds"
and are considered speculative with respect to an issuer's capacity to pay
interest and repay principal and may experience high default rates. The
market prices of below investment grade bonds are generally less sensitive
to interest rate changes than higher-rated investments, but more sensitive
to adverse economic or political changes, or individual developments
specific to the issuer. Prices of debt securities typically decline if the
issuer's credit quality deteriorates. If an issuer defaults, the fund may
lose some or all of its investments in such securities. If this occurs,
the fund's NAV and ability to pay dividends to shareholders would be
adversely affected.
o MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK. Mortgage-backed and
asset-backed securities are subject to prepayment risk. When interest
rates decline, unscheduled prepayments can be expected to accelerate, and
the fund would be required to reinvest the proceeds of the prepayments at
the lower interest rates then available. Unscheduled prepayments would
also limit the potential for capital appreciation on mortgage-backed and
asset-backed securities. Conversely, when interest rates rise, the values
of mortgage-backed and asset-backed securities generally fall. Since
rising interest rates typically result in decreased prepayments, this
could lengthen the average lives of such securities, and cause their value
to decline more than traditional debt securities. If the fund purchases
mortgage-backed or asset-backed securities that are "subordinated" to
other interests in the same mortgage pool, the fund as a holder of those
securities may only receive payments after the pool's obligations to other
investors have been satisfied. For example, an unexpectedly high rate of
defaults on the mortgages held by a mortgage pool may limit substantially
the pool's ability to make payments of principal or interest to the fund
as a holder of such subordinated securities, reducing the values of those
securities or in some cases rendering them worthless; the risk of such
defaults is generally higher in the case of mortgage pools that include
so-called "subprime" mortgages.
o LIQUIDITY RISK. The liquidity of individual bonds may vary considerably.
Below investment grade bonds generally are less liquid than investment
grade bonds. Instability in the markets for fixed income securities,
particularly mortgage-backed and asset-backed securities, may affect the
liquidity of the fund's portfolio, which means that some of the fund's
portfolio securities may be difficult to sell at a fair price when
necessary to pay for redemptions from the fund and for other purposes.
This illiquidity of portfolio securities may result in the fund incurring
greater losses on the sale of some portfolio securities than under more
stable market conditions. Such losses can adversely impact the fund's net
asset value per share.
o FUTURES AND OPTIONS RISK. The Adviser may trade in options or futures in
order to hedge the fund's portfolio against market shifts as well as to
increase returns. However, if the Adviser does not correctly anticipate
market movements or is unable to close an option or futures position due
to conditions in the market, the fund could lose money. Funds that use
options and futures contracts to protect their investments or increase
their income take a risk that the prices of securities subject to the
futures or options may not correlate with the prices of the securities in
the fund's portfolio.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
35
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns displayed in the bar chart
do not reflect the payment of any sales charges or any reduction for taxes that
a shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 5.76%
1999 2.28%
2000 7.84%
2001 7.35%
2002 4.85%
2003 0.92%
2004 (0.33)%
2005 1.43%
2006 3.66%
2007 (5.01)%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS
A SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
Year-to-date performance as of February 29, 2008: 1.35%
Class A Shares highest quarterly return during
years shown: 3.00% September 30, 2001
Class A Shares lowest quarterly return during
years shown: (3.25)% June 30, 2007
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Merrill Lynch 1-3
Year Government/Credit Index* and the Merrill Lynch 1-3 Year Treasury Index.+
The table also shows hypothetical total returns for Class A Shares that have
been calculated to reflect return after taxes on distributions and return after
taxes on distributions and assumed sale of the Class A Shares.
36
1 5 10 SINCE COMMENCEMENT
YEAR YEARS YEARS OF INVESTMENT
OPERATIONS(1)
CLASS A SHARES(2) Return Before Taxes (6.43)% (0.21)% 2.65% -
(with 1.50% sales charge)
- ------------------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions(3) (7.98)% (1.41)% 1.11% -
- ------------------------------------------------------------------------------------------------------------------
CLASS A SHARES(2) Return After Taxes on Distributions (4.16)% (0.85)% 1.33% -
and Sale of Fund Shares(3)
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes (6.66)% (0.66)% N/A 0.14%
(with applicable Contingent Deferred Sales Charge)
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes (4.61)% N/A N/A (0.40)%
- ------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH 1-3 YEAR GOVERNMENT/CORPORATE A RATED AND ABOVE INDEX* 6.90% 3.35% 4.97% -
- ------------------------------------------------------------------------------------------------------------------
* THE MERRILL LYNCH 1-3 YEAR GOVERNMENT/CORPORATE A RATED AND ABOVE INDEX IS AN UNMANAGED INDEX COMPOSED OF
U.S. GOVERNMENT AND U.S. DOLLAR DENOMINATED SEC REGISTERED CORPORATE BONDS WITH AN INVESTMENT GRADE RATING
OF "A" OR HIGHER. ISSUERS HAVE A MATURITY OF BETWEEN 1 AND 3 YEARS. TOTAL RETURNS FOR THE INDEX SHOWN ARE
NOT ADJUSTED TO REFLECT TAXES, SALES CHARGES, EXPENSES OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED
IN THE FUND'S PERFORMANCE. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR
TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(1) THE FUND'S CLASS A SHARES (INCLUDING THE PREDECESSOR CLASS B SHARES), CLASS C SHARES AND CLASS I SHARES
COMMENCED INVESTMENT OPERATIONS ON DECEMBER 12, 1993, DECEMBER 14, 2001 AND SEPTEMBER 1, 2005, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS A SHARES. HISTORICAL TOTAL RETURN
INFORMATION FOR ANY PERIOD OR PORTION THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES, EXPENSES AND FEES INCURRED BY
CLASS B SHARES, WHICH WERE GENERALLY HIGHER THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
(3) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL FEDERAL MARGINAL INCOME AND CAPITAL
GAINS TAX RATES AND DO NOT REFLECT THE IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE EFFECT OF TAXES ON FUND
DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED
AT THE END OF EACH PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS) ON REDEMPTION, AS
WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS. ACTUAL AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE
INVESTOR'S OWN TAX SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT RELEVANT TO
INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS OR 401(K)
PLANS. AFTER-TAX RETURNS ARE SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE
DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
37
LIMITED MATURITY FIXED INCOME FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Limited Maturity Fixed Income Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 1.50% None None
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and
other distributions None None None
- ------------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.40% 0.40% 0.40%
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- ------------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- ------------------------------------------------------------------------------------------------------------------
Other operating expenses 0.46% 0.46% 0.46%
- ------------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.01% 0.01% 0.01%
- ------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES(4) 1.12% 1.87% 0.87%
- ------------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE
LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A
SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV
AT THE TIME OF REDEMPTION WILL APPLY TO CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE ESTIMATED AGGREGATE FEES AND EXPENSES
FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF THE FUND.
(4) EFFECTIVE APRIL 1, 2008, THE ADVISER HAS VOLUNTARILY AGREED TO WAIVE FEES AND REIMBURSE EXPENSES TO THE
EXTENT THAT THE FUND'S TOTAL ANNUAL OPERATING EXPENSES (EXCLUDING BROKERAGE, INTEREST, TAXES, AND
EXTRAORDINARY EXPENSES) EXCEED 1.00%, 1.75% AND 0.75% OF NET ASSETS OF CLASS A SHARES, CLASS C SHARES AND
CLASS I SHARES, RESPECTIVELY, ON AN ANNUALIZED BASIS FOR THE PERIOD THAT THE VOLUNTARY WAIVER IS IN EFFECT.
THE ADVISER WILL EVALUATE THE CONTINUANCE OF THIS VOLUNTARY WAIVER AT EACH MONTH-END AND IT CAN TERMINATE
THIS VOLUNTARY WAIVER AT ANY TIME.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming redemption $ 263 $ 290 $ 89
- --------------------------------------------------------------------------------
1 YEAR Assuming no redemption $ 263 $ 190 $ 89
- --------------------------------------------------------------------------------
3 YEARS $ 502 $ 590 $ 278
- --------------------------------------------------------------------------------
5 YEARS $ 760 $ 1,015 $ 484
- --------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------
10 YEARS $ 1,500 $ 2,201 $1,079
- --------------------------------------------------------------------------------
39
INTERMEDIATE TAX EXEMPT BOND FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Intermediate Tax Exempt Bond Fund seeks current income that is exempt from
federal income tax.
PRINCIPAL INVESTMENT STRATEGIES
Intermediate Tax Exempt Bond Fund invests primarily in a highly diversified
portfolio of tax-exempt bonds. The fund normally invests its assets so that at
least 80% of the income that it distributes is exempt from federal income tax
and is not a tax preference item for purposes of the alternative minimum tax.
This policy may not be changed without shareholder approval.
A primary consideration of the fund is to invest a large portion of its assets
in securities of issuers located within the southern United States. Key factors
in the security selection process include regional economic trends and
demographic patterns, national economic trends, interest rate momentum, and
yield spreads. The fund generally will invest a large portion of its assets in
direct general obligation bonds consistent with the Adviser's economic forecast.
Revenue bonds will be used to add additional yield, particularly in periods of
economic growth. When investing in tax-exempt securities, the Adviser will
conduct a credit analysis of the issuer and will compare current yield spreads
to historical norms. The debt securities in which the fund invests will have a
minimum credit rating of "A" (or a comparable rating) by at least one NRSRO at
the time of purchase.
The average maturity of the fund's debt securities generally will be in the
range of three to ten years. When interest rates are at higher levels and lower
rates are forecasted for the future, the Adviser may choose to lengthen the
fund's effective duration. Likewise, when rising interest rates are expected,
the duration of the fund's bond portfolio may be shortened and its allocation to
revenue bonds increased.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities. As
with any mutual fund, the value of the fund's shares will change and you could
lose money by investing in the fund. In addition, the performance of the fund
depends on the Adviser's ability to implement the fund's investment strategies.
There is no guarantee that the fund will meet its goals. An investment in the
fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o INTEREST RATE AND RELATED RISKS. Generally, when market interest rates
rise, the value of debt securities declines, and vice versa. However,
market factors, such as the demand for particular debt securities, may
cause the price of certain debt securities to fall while the prices of
other debt securities rise or remain unchanged. The fund's investment in
debt securities means that the NAV of the fund will tend to decline if
market interest rates rise. The prices of long-term debt obligations
generally fluctuate more than prices of short-term debt obligations as
interest rates change. You can expect the NAV of the fund to fluctuate
accordingly. During periods of rising interest rates, the average life of
the debt securities held by the fund may be extended because of slower
than expected principal payments, thereby locking in a below market
interest rate, increasing the security's duration (the estimated period
until the principal and interest are paid in full) and reducing the value
of the security. This is known as extension risk. During periods of
declining interest rates, the issuer of a debt security held by the fund
may exercise its option to prepay principal earlier than scheduled,
thereby forcing the fund to reinvest in lower yielding securities. This is
known as call or prepayment risk.
40
o TAX RISK. Tax risk is the risk that future legislative or court decisions
may materially affect the ability of the fund to pay tax-exempt dividends.
o CREDIT RISK. Credit risk refers to an issuer's ability to make payments of
principal and interest when they are due. Many debt securities receive
credit ratings from services such as S&P and Moody's. These services
assign ratings to securities by assessing the likelihood of issuer
default. If a security has not received a rating, the fund must rely upon
the Adviser's credit assessment. Investment grade debt securities are
considered less risky than debt securities whose ratings are below
investment grade; however, ratings are no guarantee of quality. Prices of
debt securities typically decline if the issuer's credit quality
deteriorates. Lower grade debt securities may experience high default
rates. If an issuer defaults, the fund may lose some or all of its
investments in such securities. If this occurs, the fund's NAV and ability
to pay dividends to shareholders would be adversely affected.
o SECTOR RISK. When the fund emphasizes its investments in securities of
issuers in a particular industry, the fund's performance is closely tied
to events in that industry.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance and by comparing its
performance with a broad measure of market performance. The fund commenced
investment operations on February 9, 2004.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 2005-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class C Shares and Class I Shares of the fund
differ from the Class A Shares' returns shown in the bar chart to the extent
their respective expenses differ. The total returns shown in the bar chart do
not reflect the payment of any sales charges or any reduction for taxes that a
shareholder might have paid on fund distributions or on the redemption of fund
shares at a gain; if they did, the total returns shown would be lower.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES
CALENDAR YEAR PERCENTAGES
2005 0.90%
2006 2.92%
2007 3.51%
Year-to-date performance as of February 29, 2008: (0.63)%
Class A Shares highest quarterly return during
years shown: 2.35% September 30, 2006
Class A Shares lowest quarterly return during
years shown: (0.91)% March 31, 2005
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
The following table represents the average annual total returns of the fund's
Class A Shares, Class C Shares and Class I Shares, reduced to reflect applicable
sales charges, if any, for the periods shown relative to the Merrill Lynch 3-7
Year Municipal Index.* The table also shows hypothetical total returns for Class
A Shares that have been calculated to reflect return after taxes on
41
distributions and return after taxes on distributions and assumed sale of the
Class A Shares.
1 SINCE COMMENCEMENT
YEAR OF INVESTMENT
OPERATIONS(1)
CLASS A SHARES Return Before Taxes 1.44% 1.57%
(with 2.00% sales charge)
- --------------------------------------------------------------------------------
CLASS A SHARES Return After Taxes on Distributions(2) 1.43% 1.53%
- --------------------------------------------------------------------------------
CLASS A SHARES Return After Taxes on Distributions 2.05% 1.79%
and Sale of Fund Shares(2)
- --------------------------------------------------------------------------------
CLASS C SHARES Return Before Taxes 1.90% 1.84%
(with applicable Contingent Deferred Sales Charge)
- --------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 3.77% 2.24%
- --------------------------------------------------------------------------------
MERRILL LYNCH 3-7 YEAR MUNICIPAL INDEX* 5.31% -
- --------------------------------------------------------------------------------
* THE MERRILL LYNCH 3-7 YEAR MUNICIPAL INDEX IS A TOTAL PERFORMANCE BENCHMARK
FOR THE INTERMEDIATE-TERM MUNICIPAL BOND MARKET. TOTAL RETURNS FOR THE
INDEX SHOWN ARE NOT ADJUSTED TO REFLECT TAXES, SALES CHARGES, EXPENSES OR
OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN THE FUND'S PERFORMANCE.
THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS
OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN
INDEX.
(1) THE FUND COMMENCED INVESTMENT OPERATIONS ON FEBRUARY 9, 2004.
(2) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME AND CAPITAL GAINS TAX RATES AND DO NOT REFLECT THE
IMPACT OF ANY APPLICABLE STATE AND LOCAL TAXES. RETURN AFTER TAXES ON
DISTRIBUTIONS ASSUMES A CONTINUED INVESTMENT IN THE FUND AND SHOWS THE
EFFECT OF TAXES ON FUND DISTRIBUTIONS. RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES ASSUMES ALL SHARES WERE REDEEMED AT THE END OF EACH
PERIOD, AND SHOWS THE EFFECT OF ANY TAXABLE GAIN (OR OFFSETTING LOSS) ON
REDEMPTION, AS WELL AS THE EFFECTS OF TAXES ON FUND DISTRIBUTIONS. ACTUAL
AFTER-TAX RETURNS TO AN INVESTOR DEPEND ON THE INVESTOR'S OWN TAX SITUATION
AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS ARE NOT RELEVANT TO
INVESTORS HOLDING SHARES THROUGH TAX-DEFERRED PROGRAMS, SUCH AS INDIVIDUAL
RETIREMENT ACCOUNTS OR 401(K) PLANS. AFTER-TAX RETURNS ARE SHOWN ONLY FOR
CLASS A SHARES. AFTER-TAX RETURNS FOR OTHER CLASSES WILL BE DIFFERENT.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
42
INTERMEDIATE TAX EXEMPT BOND FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Intermediate Tax Exempt Bond Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS C CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES SHARES
Maximum sales charge (Load) (as a percentage of offering price) 2.00% None None
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None(1) 1.00%(2) None
- -----------------------------------------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested dividends and other None None None
distributions
- -----------------------------------------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None None
- -----------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- -----------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
Investment advisory fee 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Distribution (12b-1) fee - 0.75% -
- -----------------------------------------------------------------------------------------------------------------
Shareholder service fee 0.25% 0.25% -
- -----------------------------------------------------------------------------------------------------------------
Other operating expenses 0.36% 0.36% 0.36%
- -----------------------------------------------------------------------------------------------------------------
Acquired fund fees and expenses(3) 0.01% 0.01% 0.01%
- -----------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 0.87% 1.62% 0.62%
- -----------------------------------------------------------------------------------------------------------------
(1) ON PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE, A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE
LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV AT THE TIME OF REDEMPTION WILL APPLY TO CLASS A
SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(2) A CONTINGENT DEFERRED SALES CHARGE OF 1.00% OF THE LOWER OF THE PURCHASE PRICE OF THE SHARES OR THEIR NAV
AT THE TIME OF REDEMPTION WILL APPLY TO CLASS C SHARES REDEEMED WITHIN ONE YEAR OF THE PURCHASE DATE.
(3) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE ESTIMATED AGGREGATE FEES AND EXPENSES
FOR THE CURRENT FISCAL YEAR OF THE UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although actual costs
and returns may be higher or lower, based on these assumptions your costs would
be:
CLASS A SHARES CLASS C SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 287 $ 265 $ 64
- --------------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 287 $ 165 $ 64
- --------------------------------------------------------------------------------
3 YEARS $ 473 $ 513 $ 199
- --------------------------------------------------------------------------------
5 YEARS $ 675 $ 885 $ 347
- --------------------------------------------------------------------------------
10 YEARS $ 1,258 $ 1,932 $ 779
- --------------------------------------------------------------------------------
43
TREASURY MONEY MARKET FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Treasury Money Market Fund seeks current income consistent with stability of
principal and liquidity.
PRINCIPAL INVESTMENT STRATEGIES
Treasury Money Market Fund invests primarily in U.S. Treasury obligations
maturing in 397 days or less and in repurchase agreements collateralized by U.S.
Treasury obligations. Under normal circumstances, the fund invests at least 80%
of the value of its net assets in U.S. Treasury investments. The fund will
provide shareholders with at least 60 days' prior notice of any changes in this
policy. The fund also may invest in short-term AAA-rated securities of other
investment companies, and engage in when-issued and delayed-delivery
transactions. Consistent with the fund's AAA rating by S&P, the fund will
maintain an average maturity of 60 days or less. To the extent that fund income
is derived from investments in U.S. Treasury securities, interest earned from
the fund may be exempt from state income taxation.
The fund will comply with the requirements of Rule 2a-7 under the 1940 Act,
which sets forth portfolio quality and diversification restrictions for money
market mutual funds.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities.
Although the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund. In addition, the
performance of the fund depends on the Adviser's ability to implement the fund's
investment strategies. There is no guarantee that the fund will meet its goals.
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o MONEY MARKET RISK. Prices of debt securities generally move in the
opposite direction of interest rates. Generally, when market interest
rates rise, the value of debt securities declines, and vice versa. The
prices of long-term debt obligations generally fluctuate more than prices
of short-term debt obligations as interest rates change. Money market
funds try to minimize this risk by purchasing short-term securities.
o CREDIT RISK. Credit risk refers to an issuer's ability to make payments of
principal and interest when they are due. Investment grade debt securities
are considered less risky than debt securities whose ratings are below
investment grade; however, ratings are no guarantee of quality. Prices of
debt securities typically decline if the issuer's credit quality
deteriorates. Lower grade debt securities may experience high default
rates. Money market funds attempt to minimize these risks by investing in
securities with high credit quality.
o INCOME RISK. It is possible that the fund's income will decline over time
because of a decrease in interest rates or other factors. Income risk is
generally lower for longer-term debt instruments and higher for
shorter-term debt instruments. Because interest rates vary, it is
impossible to predict the income or yield of the fund for any particular
period.
o SECURITY SELECTION RISK. The particular securities that are selected by
the Adviser for the fund may underperform the market or those securities
selected by other funds with similar objectives.
44
PERFORMANCE INFORMATION
The following information gives some indication of the risks of an investment in
the fund by showing yearly changes in its performance.
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 1998-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The fund's Class I Shares commenced investment operations on
April 3, 2006. The returns for Class I Shares of the fund differ from the Class
A Shares' returns shown in the bar chart to the extent its expenses differ.
Historically the fund has maintained a constant $1.00 NAV per share. The fund's
shares are not sold subject to a sales (load) charge; therefore, the total
returns displayed below are based upon NAV. The total returns displayed in the
bar chart do not reflect any reduction for taxes that a shareholder might have
paid on fund distributions.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES(1)
CALENDAR YEAR PERCENTAGES
1998 4.64%
1999 4.28%
2000 5.60%
2001 3.62%
2002 1.04%
2003 0.43%
2004 0.63%
2005 2.41%
2006 4.21%
2007 4.07%
(1) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS A
SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECTS ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
Year-to-date performance as of February 29, 2008: 0.42%
Class A Shares highest quarterly return during
years shown: 1.47% December 31, 2000
Class A Shares lowest quarterly return during
years shown: 0.08% March 31, 2004
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
SINCE COMMENCEMENT
1 5 10 OF INVESTMENT
YEAR YEARS YEARS OPERATIONS(1)
CLASS A SHARES(2) Return Before Taxes 4.07% 2.34% 3.08% -
- --------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 4.20% N/A N/A 4.12%
- --------------------------------------------------------------------------------
(1) THE FUND'S CLASS A SHARES (INCLUDING PREDECESSOR CLASS B SHARES) AND CLASS
I SHARES COMMENCED INVESTMENT OPERATIONS ON APRIL 14, 1992 AND APRIL 3,
2006, RESPECTIVELY.
(2) EFFECTIVE JUNE 4, 2004, ALL CLASS B SHARES OF THE FUND CONVERTED TO CLASS A
SHARES. HISTORICAL TOTAL RETURN INFORMATION FOR ANY PERIOD OR PORTION
THEREOF PRIOR TO THE COMMENCEMENT OF INVESTMENT OPERATIONS OF CLASS A
SHARES ON MAY 20, 1998 IS THAT OF CLASS B SHARES AND REFLECT ALL CHARGES,
EXPENSES AND FEES INCURRED BY CLASS B SHARES, WHICH WERE GENERALLY HIGHER
THAN THE EXPENSES OF CLASS A SHARES, DURING SUCH PERIODS.
45
The fund's Class A Shares seven-day yield as of February 29, 2008 was 2.25%.
Investors may call the fund at 877-757-7424 to acquire the current seven-day
yield.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
46
TREASURY MONEY MARKET FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Treasury Money Market Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES
Maximum sales charge (Load) (as a percentage of
offering price) None None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None None
- --------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested
dividends and other distributions None None
- --------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None
- --------------------------------------------------------------------------------
Exchange fee None None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES
Investment advisory fee 0.20% 0.20%
- --------------------------------------------------------------------------------
Shareholder service fee 0.25% -
- --------------------------------------------------------------------------------
Other operating expenses 0.19% 0.19%
- --------------------------------------------------------------------------------
Acquired fund fees and expenses(1) 0.01% 0.01%
- --------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 0.65% 0.40%
- --------------------------------------------------------------------------------
(1) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE
ESTIMATED AGGREGATE FEES AND EXPENSES FOR THE CURRENT FISCAL YEAR OF THE
UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF
THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although actual costs
and returns may be higher or lower, based on these assumptions your costs would
be:
CLASS A CLASS I
SHARES SHARES
1 YEAR Assuming Redemption $ 67 $ 41
- --------------------------------------------------------------------------------
1 YEAR Assuming No Redemption $ 67 $ 41
- --------------------------------------------------------------------------------
3 YEARS $ 209 $ 129
- --------------------------------------------------------------------------------
5 YEARS $ 364 $ 225
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10 YEARS $ 816 $ 509
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47
MONEY MARKET FUND
RISK/RETURN PROFILE
- --------------------------------------------------------------------------------
PRINCIPAL OBJECTIVE
Money Market Fund seeks maximum current income consistent with preservation of
capital and liquidity.
PRINCIPAL INVESTMENT STRATEGIES
Money Market Fund invests in a variety of U.S. dollar-denominated high-quality
money market instruments, including U.S. government securities, taxable
municipal debt, commercial paper and other corporate debt obligations,
certificates of deposit, repurchase agreements, bankers' acceptances and other
dollar-denominated bank obligations, including obligations issued by U.S. banks,
their foreign branches and/or foreign banks. At the time of purchase, all of
the fund's investments (other than U.S. government securities and related
repurchase agreements) will be rated in the highest short-term rating category
by a NRSRO (for example, A-1 or A-1+ by S&P) or, if unrated, deemed by the
Adviser to be of comparable quality. In addition, all fund investments will be
deemed to have a maturity of 397 days or less, and the fund's average maturity
will not exceed 90 days. While the fund typically holds securities until
maturity, decisions to sell portfolio holdings are generally the result of a
change in financial condition of the issuer of a security, for liquidity
purposes, or to rebalance the portfolio.
The fund will comply with the requirements of Rule 2a-7 under the 1940 Act,
which sets forth portfolio quality and diversification restrictions for money
market mutual funds.
PRINCIPAL RISKS
Investing in the fund involves risks common to any investment in securities.
Although the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund. In addition, the
performance of the fund depends on the Adviser's ability to implement the fund's
investment strategies. There is no guarantee that the fund will meet its goals.
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
The fund's investment performance is subject to a variety of risks, including
the following principal risks:
o MONEY MARKET RISK. Prices of debt securities generally move in the
opposite direction of interest rates. Generally, when market interest
rates rise, the value of debt securities declines, and vice versa. The
prices of long-term debt obligations generally fluctuate more than
prices of short-term debt obligations as interest rates change. Money
market funds try to minimize this risk by purchasing short-term
securities.
o CREDIT RISK. Credit risk refers to an issuer's ability to make
payments of principal and interest when they are due. Investment grade
debt securities are considered less risky than debt securities whose
ratings are below investment grade; however, ratings are no guarantee
of quality. Prices of debt securities typically decline if the
issuer's credit quality deteriorates. Lower grade debt securities may
experience high default rates. Money market funds attempt to minimize
these risks by investing in securities with high credit quality.
o INCOME RISK. It is possible that the fund's income will decline over
time because of a decrease in interest rates or other factors. Income
risk is generally lower for longer-term debt instruments and higher
for shorter-term debt instruments. Because interest rates vary, it is
impossible to predict the income or yield of the fund for any
particular period.
o SECURITY SELECTION RISK. The particular securities that are selected
by the Adviser for the fund may underperform the market or those
securities selected by other funds with similar objectives.
48
PERFORMANCE INFORMATION
The fund began operations on February 18, 2005 as the successor to a
substantially similar investment company. On that date, the fund merged with
LEADER Money Market Fund, a series of LEADER Mutual Funds, and assumed that
portfolio's operating history and performance record. The performance included
in the bar chart and table below for the periods prior to February 18, 2005 is
that of the fund's predecessor, the inception date of which was October 4, 2000
(Class A Shares).
ANNUAL TOTAL RETURNS
(CALENDAR YEARS 2000-2007)
The following bar chart illustrates the annual total returns for the fund's
Class A Shares. The returns for Class I Shares of the fund differ from the
Class A Shares' returns shown in the bar chart to the extent its expenses
differ. Historically the fund has maintained a constant $1.00 NAV per share.
The fund's shares are not sold subject to a sales (load) charge; therefore, the
total returns displayed below are based upon NAV. The total returns displayed
in the bar chart do not reflect any reduction for taxes that a shareholder might
have paid on fund distributions.
YEAR-BY-YEAR TOTAL RETURNS AS OF DECEMBER 31
FOR CLASS A SHARES
CALENDAR YEAR PERCENTAGES
2001 3.29%
2002 0.87%
2003 0.27%
2004 0.44%
2005 2.28%
2006 4.13%
2007 4.52%
Year-to-date performance as of February 29, 2008: 0.55%
Class A Shares highest quarterly return during
years shown: 1.15% September 31, 2007
Class A Shares lowest quarterly return during
years shown: 0.03% March 31, 2004
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 2007)
1 5 10 SINCE COMMENCEMENT
YEAR YEARS YEARS OF INVESTMENT
OPERATIONS(1)
CLASS A SHARES Return Before Taxes 4.52% 2.31% N/A 2.39%
- --------------------------------------------------------------------------------
CLASS I SHARES Return Before Taxes 4.79% 2.71% N/A 3.22%
- --------------------------------------------------------------------------------
(1) THE FUND'S CLASS A SHARES (INCLUDING THE PREDECESSOR FUND'S CLASS A SHARES)
AND CLASS I SHARES (INCLUDING THE PREDECESSOR FUND'S CLASS I SHARES)
COMMENCED INVESTMENT OPERATIONS ON OCTOBER 4, 2000 AND JULY 7, 1999,
RESPECTIVELY.
The fund's Class A Shares seven-day yield as of February 29, 2008 was 2.84%.
Investors may call the fund at 877-757-7424 to acquire the current seven-day
yield.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE (BEFORE AND AFTER TAXES)
WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MUTUAL FUND PERFORMANCE CHANGES OVER TIME AND
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR CURRENT TO
THE MOST RECENT MONTH-END PERFORMANCE, CALL 877-757-7424. MUTUAL FUNDS ARE NOT
BANK DEPOSITS OR OBLIGATIONS, ARE NOT GUARANTEED BY ANY BANK AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
49
MONEY MARKET FUND
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses you may pay if you buy and
hold shares of Money Market Fund.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS I
(EXPENSES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES
Maximum sales charge (Load) (as a percentage of
offering price) None None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (Load) None None
- --------------------------------------------------------------------------------
Maximum sales charge (Load) imposed on reinvested
dividends and other distributions None None
- --------------------------------------------------------------------------------
Redemption fee (as a percentage of amount redeemed) None None
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Exchange fee None None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS I
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) SHARES SHARES
Investment advisory fee 0.25% 0.25%
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Shareholder service fee 0.25% -
- --------------------------------------------------------------------------------
Other operating expenses 0.24% 0.24%
- --------------------------------------------------------------------------------
Acquired fund fees and expenses(1) 0.01% 0.01%
- --------------------------------------------------------------------------------
TOTAL ANNUAL OPERATING EXPENSES 0.75% 0.50%
- --------------------------------------------------------------------------------
(1) ACQUIRED FUND FEES AND EXPENSES REPRESENT THE FUND'S PORTION OF THE
ESTIMATED AGGREGATE FEES AND EXPENSES FOR THE CURRENT FISCAL YEAR OF THE
UNDERLYING INVESTMENT COMPANIES IN WHICH THE FUND INVESTS. THE IMPACT OF
THE ACQUIRED FUND FEES AND EXPENSES ARE INCLUDED IN THE TOTAL RETURNS OF
THE FUND.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. This example assumes that you
invest $10,000 in the fund and then redeem all of your shares at the end of the
time periods indicated. The example also assumes that your investment has a
hypothetical 5% return each year and that the fund's operating expenses are
those indicated in the table above and remain the same. Although your actual
costs and returns may be higher or lower, based on these assumptions your costs
would be:
CLASS A SHARES CLASS I SHARES
1 YEAR Assuming Redemption $ 77 $ 51
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1 YEAR Assuming No Redemption $ 77 $ 51
- --------------------------------------------------------------------------------
3 YEARS $ 241 $ 161
- --------------------------------------------------------------------------------
5 YEARS $ 419 $ 281
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10 YEARS $ 936 $ 633
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50
SECURITIES DESCRIPTIONS
- --------------------------------------------------------------------------------
The funds' "Principal Investment Strategies" described in the Risk/Return
Profiles earlier in this Prospectus include references to certain investments
the funds may make. Please refer to each fund's Risk/Return Profile to identify
which of the following investments and investment techniques are expected to be
principally used by that fund in pursuit of its investment objective. A more
complete discussion of each of these investments and investment techniques as
well as other investments and investment techniques that the funds may use and
their related risks can be found in the Statement of Additional Information
("SAI").
EQUITY SECURITIES
Equity securities are the fundamental unit of ownership in a company. They
represent a share of the issuer's earnings and assets, after the issuer pays its
liabilities. Generally, issuers have discretion as to the payment of any
dividends or other distributions. As a result, investors cannot predict the
income they will receive from equity securities. However, equity securities
offer greater potential for appreciation than many other types of securities
because their value increases directly with the value of the issuer's business.
The following describes certain types of equity securities.
COMMON STOCKS
Common stocks are the most prevalent type of equity securities. Common stock
typically entitles the owner to vote on the election of directors and other
important matters as well as to receive dividends and other distributions on
such stock. In the event an issuer is liquidated or declares bankruptcy, the
claims of owners of bonds, other debt holders, and owners of preferred stock
take precedence over the claims of those who own common stock.
PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or other
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and other distributions paid on
common stock. Preferred stocks may also permit the issuer to redeem the stock.
AMERICAN DEPOSITARY RECEIPTS
ADRs are certificates that represent an interest in the shares of a foreign-
based corporation that are held in trust by a bank. The foreign securities
underlying ADRs are not traded in the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. ADRs involve many of the same risks of investing
directly in foreign securities, including currency risks and risks of foreign
investing.
DEBT SECURITIES
A debt security is a security consisting of a certificate or other evidence of a
debt (secured or unsecured) on which the issuing company or governmental body
promises to pay the holder thereof a fixed, variable, or floating rate of
interest for a specified length of time, and to repay the debt on the specified
maturity date. Some debt securities, such as zero coupon bonds, do not make
regular interest payments but are issued at a discount to their principal or
maturity value. Debt securities include a variety of obligations, including, but
not limited to, corporate bonds, government securities, agency securities,
municipal obligations, convertible securities, mortgage-backed securities, and
asset-backed securities. Debt securities include investment grade securities,
below investment grade securities, and unrated securities. The following
describes certain types of debt securities.
51
FIXED INCOME SECURITIES
Fixed income securities pay interest at a specified rate. In addition, the
issuer of a fixed income security must repay the principal amount of the
security, normally within a specified time.
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for periodic adjustments in the
interest rate paid on the security. Variable rate securities provide for a
specified periodic adjustment in the interest rate, while floating rate
securities have interest rates that change whenever there is a change in a
designated benchmark rate. Some variable or floating rate securities are
structured with put features that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain financial
intermediaries.
ZERO COUPON BONDS, STEP-UP BONDS, OTHER OID SECURITIES AND PAYMENT-IN-KIND
SECURITIES
Zero coupon bonds are debt obligations that do not entitle the holders to any
periodic payments of interest either for the entire life of the obligations or
for an initial period after the issuance of the obligations. Like zero coupon
bonds, "step up" bonds ("step-ups") pay no interest initially but eventually
begin to pay a coupon rate prior to maturity, which rate may increase at stated
intervals during the life of the security. Certain other debt securities may
also be treated as debt securities that were originally issued at a discount.
Very generally, original issue discount ("OID") is defined as the difference
between the price at which a security was issued and its stated redemption price
at maturity. Payment-in-kind securities ("PIKs") are debt obligations that pay
"interest" in the form of other debt obligations of the issuer, instead of in
cash. Each of these instruments is typically issued and traded at a discount
from its face amount. The amount of the discount varies depending on such
factors as the time remaining until maturity of the securities, prevailing
interest rates, the liquidity of the security and the perceived credit quality
of the issuer. The market prices of zero coupon bonds, step-ups, other OID
securities and PIKs generally are more volatile than the market prices of
securities that pay interest currently in cash and are likely to respond to
changes in interest rates to a greater degree than do other types of securities
having similar maturities and credit quality.
INVESTMENT GRADE BONDS
Debt securities rated BBB- and higher by S&P, Baa3 or higher by Moody's, or
comparably rated by another NRSRO are considered investment grade securities,
but securities rated BBB or Baa are somewhat riskier than higher rated
obligations because they are regarded as having only an adequate capacity to pay
principal and interest, and are considered to lack outstanding investment
characteristics. This means that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case for higher rated debt securities.
BELOW INVESTMENT GRADE BONDS
Debt securities rated BB+ or lower by S&P, Ba1 or lower by Moody's, or
comparably rated by another NRSRO are considered below investment grade
securities. Below investment grade bonds have poor protection with respect to
the payment of interest and repayment of principal, or may be in default. These
securities are often considered to be speculative and involve greater risk of
loss or price changes due to changes in the issuer's capacity to pay. The
market prices of below investment grade bonds may fluctuate more than those of
higher-quality debt securities and may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest rates.
The market for below investment grade bonds may be thinner and less active than
that for higher-quality debt securities, which can adversely affect the prices
at which the former are sold.
U.S. GOVERNMENT SECURITIES
U.S. government securities include a variety of securities that are issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements secured thereby. These securities include securities
issued and guaranteed by the full faith and credit of the U.S. government, such
as Treasury bills, Treasury notes and Treasury bonds; obligations supported by
the right of the issuer to borrow from the U.S. Treasury, such as those of the
Federal Home Loan Banks; and obligations supported only by the credit of the
issuer, such as those of the Federal Intermediate Credit Banks. Other U.S.
52
government agencies, authorities and instrumentalities, may include, among
others, the Federal National Mortgage Association ("Fannie Mae"), the Government
National Mortgage Association ("Ginnie Mae"), the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), the Federal Housing Administration, the Resolution
Funding Corporation, the Federal Farm Credit Banks, the Tennessee Valley
Authority, the Student Loan Marketing Association and the Small Business
Administration.
U.S. government securities do not involve the level of credit risk associated
with investments in other types of debt securities, although, as a result, the
yields available from U.S. government securities are generally lower than the
yields available from corporate debt securities. Like other debt securities,
however, the values of U.S. government securities change as interest rates
fluctuate. Fluctuations in the value of portfolio securities will not affect
interest income on existing portfolio securities but will be reflected in a
fund's NAV.
Below are some of the categories of U.S. government securities.
U.S. TREASURY BILLS
U.S. Treasury Bills are direct obligations of the U.S. Treasury that are
issued in maturities of one year or less. No interest is paid on Treasury
bills; instead, they are issued at a discount and repaid at full face value
when they mature. They are backed by the full faith and credit of the U.S.
government.
U.S. TREASURY NOTES AND BONDS
U.S. Treasury Notes and Bonds are direct obligations of the U.S. Treasury
issued in maturities that vary between one and forty years, with interest
normally payable every six months. They are backed by the full faith and
credit of the U.S. government.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government-sponsored enterprises ("GSE") acting under federal authority. Some
GSE securities are supported by the full faith and credit of the U.S.
government. Other GSE securities receive support through federal subsidies,
loans or other benefits. A few GSE securities have no explicit financial
support but are regarded as having implied support because the federal
government sponsors their activities. Investors regard agency securities as
having low credit risks, but not as low as U.S. Treasury securities.
MUNICIPAL OBLIGATIONS
Municipal obligations are issued by state and local governments to acquire land,
equipment and facilities. Although the interest on most municipal obligations
is exempt from federal income tax, the funds may invest in taxable municipal
obligations. Municipal obligations are not always fully backed by the
municipality's credit, and risk of loss to a fund exists if a municipality does
not appropriate money to service its debts and defaults on its obligations.
GENERAL OBLIGATION BONDS
General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power. The issuer must impose and collect taxes
sufficient to pay principal and interest on the bonds. However, the
issuer's authority to impose additional taxes may be limited by its charter
or state law.
REVENUE BONDS
Revenue bonds are payable solely from specific revenues received by the
issuer, such as specific taxes, assessments, tolls or fees. Bondholders may
not collect from the municipality's general taxes or revenues. For example,
a municipality may issue bonds to build a toll road and pledge the tolls to
repay the bonds. Therefore, a shortfall in the tolls could result in a
default on the bonds.
53
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance privately
operated facilities including certain factories, pollution control
facilities, convention or trade show facilities, and airport, mass transit,
port or parking facilities. The credit quality of private activity bonds is
usually directly related to the credit standing of the corporate user of
the privately operated facilities.
CORPORATE DEBT SECURITIES
Corporate debt securities are issued by businesses. Notes, bonds, debentures and
commercial paper are the most common types of corporate debt securities, but
interests in bank loans to companies may also be considered corporate debt
securities. Interest on corporate debt securities may be fixed rate, floating
rate, variable rate, zero coupon, contingent, deferred, or have payment-in-kind
features.
The credit risks of corporate debt securities vary widely among issuers. In
addition, the credit risk of an issuer's debt security may vary based on its
priority for repayment. For example, higher-ranking (senior) debt securities
have a higher priority than lower-ranking (subordinated) securities. This means
that the issuer might not make payments on subordinated securities while
continuing to make payments on senior securities. In addition, in the event of
bankruptcy, holders of senior securities may receive amounts otherwise payable
to the holders of subordinated securities. Some subordinated securities, such
as trust preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Mortgage-backed securities come in a variety of forms.
Many have extremely complicated terms. The U.S. government mortgage-backed
securities include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by Ginnie Mae,
Fannie Mae or Freddie Mac or other government-sponsored enterprises. Other
mortgage-backed securities are issued by private issuers, generally originators
of and investors in mortgage loans, including savings associations, mortgage
bankers, commercial banks, investment bankers and special purpose entities.
Payments of principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement.
ASSET-BACKED SECURITIES
Asset-backed securities represent direct or indirect participations in, or are
secured by and payable from, pools of assets such as, among other things, motor
vehicle retail installment sales contracts, installment loan contracts, leases
of various types of real and personal property, and receivables from revolving
consumer credit (credit card) agreements, or a combination of the foregoing.
These assets are securitized through the use of trusts and special purpose
corporations. Credit enhancements, such as various forms of cash collateral
accounts or letters of credit, may support payments of principal and interest on
asset-backed securities. Although these securities may be supported by letters
of credit or other credit enhancements, payment of interest and principal
ultimately depends upon individuals paying the underlying loans, which may be
affected adversely by general downturns in the economy. Asset-backed securities
are subject to the same risk of prepayment described with respect to mortgage-
backed securities. The risk that recovery on repossessed collateral might be
unavailable or inadequate to support payments, however, is greater for asset-
backed securities than for mortgage-backed securities.
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks or other
securities that may be converted or exchanged (by the holder or by the issuer)
into shares of the underlying common stock (or cash or securities of equivalent
value) at a stated exchange ratio. A convertible security may also be called
for redemption or conversion by the issuer after a particular date and under
54
certain circumstances (including a specified price) established upon issue. If
a convertible security held by a fund is called for redemption or conversion,
the fund could be required to tender it for redemption, convert it into the
underlying common stock, or sell it to a third party.
BANK OBLIGATIONS
Bank obligations include certificates of deposit ("CDs"), bankers' acceptances,
fixed time deposits and other short-term and long-term debt obligations issued
by commercial banks. A CD is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either interest-
bearing or purchased on a discount basis. A bankers' acceptance is a short-term
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date. Fixed time deposits are obligations of branches of U.S.
banks or foreign banks that are payable at a stated maturity date and bear a
fixed rate of interest. Deposit notes are notes issued by commercial banks that
generally bear fixed rates of interest and typically have original maturities
ranging from eighteen months to five years.
FOREIGN SECURITIES
Foreign securities include securities issued or guaranteed by companies
organized under the laws of countries other than the United States and
securities issued or guaranteed by foreign governments, their agencies or
instrumentalities and supra-national governmental entities, such as the World
Bank. Foreign securities also include U.S. dollar-denominated debt obligations,
such as "Yankee Dollar" obligations, of foreign issuers and of supra-national
government entities. Yankee Dollar obligations are U.S. dollar-denominated
obligations issued in the U.S. capital markets by foreign corporations, banks
and governments.
Foreign investments involve risks relating to local political, economic,
regulatory or social instability, military action or unrest or adverse
diplomatic developments, and may be affected by actions of foreign governments
adverse to the interests of U.S. investors. Such actions may include
expropriation or nationalization of assets, confiscatory taxation, restrictions
on U.S. investment or on the ability to repatriate assets or convert currency
into U.S. dollars or other government intervention. There is no assurance that
the Adviser will be able to anticipate these potential events or counter their
effects. In addition, the value of securities denominated in foreign currencies
and of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each fund may invest in the securities of other investment companies, including
money market funds, to the extent that such investments are consistent with the
fund's investment objective and policies and permissible under the 1940 Act. A
fund, as a holder of the securities of other investment companies, will bear its
pro rata portion of the other investment companies' expenses, including advisory
fees. These expenses are in addition to the direct expenses of the fund's own
operations.
DERIVATIVE CONTRACTS
Some funds may enter into derivative contracts. Derivative contracts are
financial instruments that require payments based upon changes in the values of
designated (or underlying) securities, currencies, commodities, financial
indices or other assets. Some derivative contracts (such as futures, forwards
and options) require payments relating to a future trade involving the
underlying asset. Other derivative contracts (such as swaps) require payments
relating to the income or returns from the underlying asset. The other party to
a derivative contract is referred to as a "counterparty."
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
55
investors to close out their contracts by entering into offsetting contracts.
For example, a fund could close out an open contract to buy an asset at a future
date by entering into an offsetting contract to sell the same asset on the same
date. If the offsetting sale price is more than the original purchase price, a
fund realizes a gain; if it is less, a fund realizes a loss. Exchanges may
limit the amount of open contracts permitted at any one time. Such limits may
prevent a fund from closing out a position. If this happens, a fund will be
required to keep the contract open (even if it is losing money on the contract),
and to make any payments required under the contract (even if it has to sell
portfolio securities at unfavorable prices to do so). Inability to close out a
contract could also harm a fund by preventing it from disposing of or trading
any assets it has been using to secure its obligations under the contract.
Over-the-counter ("OTC") transactions are negotiated directly between the
counterparties. OTC contracts do not necessarily have standard terms, so they
cannot be directly offset with other OTC contracts. In addition, OTC contracts
with more specialized terms may be more difficult to price than exchange traded
contracts.
Depending upon how derivative contracts are used and the relationships between
the market value of a derivative contract and the underlying asset, derivative
contracts may increase or decrease exposure to interest rate, stock market,
currency and credit risks and may also expose a fund to liquidity and leverage
risks. OTC contracts are also subject to credit risks if a counterparty defaults
on the contract.
ILLIQUID AND RESTRICTED SECURITIES
Some funds may invest in illiquid investments which are investments that cannot
be sold or disposed of in the ordinary course of business at approximately the
prices at which they are valued. In the absence of market quotations, illiquid
investments are priced at fair value as determined in good faith by the
Adviser's Valuation Committee. Illiquid securities may be difficult to dispose
of at a fair price at the times when a fund believes it is desirable to do so.
The market price of illiquid securities generally is more volatile than that of
more liquid securities, which may adversely affect the price that a fund pays
for or recovers upon the sale of illiquid securities. Illiquid securities are
also more difficult to value and thus the Adviser's judgment plays a greater
role in the valuation process. Investment of a fund's assets in illiquid
securities may restrict the fund's ability to take advantage of market
opportunities. The risks associated with illiquid securities may be
particularly acute in situations in which a fund's operations require cash and
could result in the fund borrowing to meet its short-term needs or incurring
losses on the sale of illiquid securities.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, as amended (the "1933 Act"), or in a registered public offering.
The Adviser has the ability to deem restricted securities as liquid. In recent
years, a large institutional market has developed for certain securities that
are not registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
TEMPORARY DEFENSIVE INVESTMENTS
To minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions, a fund may temporarily depart from
its principal investment strategy by investing up to 100% of the fund's assets
in cash and cash equivalents, including short-term bank obligations, repurchase
agreements and other money market instruments and securities issued and/or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. This may cause a fund to temporarily fail to
meet its goal and forego greater investment returns for the safety of principal.
56
OTHER TRANSACTIONS
REPURCHASE AGREEMENTS
Some funds may enter into repurchase agreements. In a repurchase agreement, a
fund purchases instruments from financial institutions, such as banks and
broker-dealers, subject to the seller's agreement to repurchase them at an
agreed upon time and price. A fund will invest in repurchase agreements with
institutions that are deemed by the Adviser to be of good standing and
creditworthy pursuant to the guidelines established by the funds' Board of
Trustees ("Board"). A third party custodian bank takes possession of the
underlying securities of a repurchase agreement, the value of which is at all
times at least equal to the principal amount of the repurchase transaction,
including accrued interest. In the event of counterparty default on the
obligation to repurchase, a fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation.
REVERSE REPURCHASE AGREEMENTS
Some funds may enter into reverse repurchase agreements. In a reverse
repurchase agreement, a seller sells a security to another party, such as a bank
or broker-dealer, in return for cash and agrees to repurchase that security at
an agreed-upon price and time. While a reverse repurchase agreement is
outstanding, a fund will maintain appropriate liquid assets in a segregated
custodial account to cover their obligation under the agreement. A fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser. Such
transactions may increase fluctuations in the market value of fund assets and
may be viewed as a form of leverage.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS
Some funds may buy or sell securities on a delayed-delivery or when-issued
basis. These transactions involve a commitment to purchase or sell specific
securities at a predetermined price or yield, with payment and delivery taking
place after the customary settlement period for that type of security.
Typically, no interest accrues to the purchaser until the security is delivered.
When a fund purchases securities in this manner (on a when-issued or delayed-
delivery basis), it is required to create a segregated account with the Trust's
custodian and to maintain in that account cash, U.S. government securities or
other liquid securities in an amount equal to or greater than, on a daily basis,
the amount of the fund's when-issued or delayed-delivery commitments. The funds
may receive fees or price concessions for entering into delayed-delivery
transactions.
LENDING OF PORTFOLIO SECURITIES
Each fund may lend its portfolio securities to parties such as broker-dealers or
institutional investors; provided, that no fund may have outstanding at any time
loans with respect to portfolio securities having a value in excess of 33 - 1/3%
of the market value of the fund's total assets. Securities lending allows a
fund to retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to counterparties approved by the
funds' Board. Furthermore, loans of securities will only be made if, in the
Adviser's judgment, the consideration to be earned from such loans would justify
the risk.
Cash received through loan transactions may be invested in other eligible
securities. Investing this cash subjects that investment, as well as the
security loaned, to market forces (I.E., capital appreciation or depreciation).
PORTFOLIO TURNOVER
Although the funds do not intend to invest for the purpose of seeking short-term
profits, securities will be sold without regard to the length of time they have
been held when the funds' Adviser believes it is appropriate to do so in light
of a fund's investment goal. A higher portfolio turnover rate involves greater
transaction expenses which must be borne directly by a fund (and thus,
indirectly by its shareholders), and impact fund performance. In addition, a
high rate of portfolio turnover may result in the realization of larger amounts
of net capital gains that, when distributed to a fund's shareholders, are
taxable to them.
57
HOW TO BUY SHARES
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OPENING AN ACCOUNT
A Morgan Keegan & Company, Inc. ("Morgan Keegan") Financial Adviser or Regions
Morgan Keegan Trust Administrator can assist you with all phases of your
investment when buying shares of the funds.
MINIMUM INITIAL INVESTMENT FOR THE FUNDS' CLASS A SHARES AND CLASS C SHARES:
o $1,000
o $250 for an individual retirement account ("IRA") and if you are an
officer, director, employee or retired employee of Regions, or its
affiliates, or if you establish a $50 monthly minimum addition to your
account through the funds' Systematic Investment Program ("SIP").
MINIMUM SUBSEQUENT INVESTMENT FOR THE FUNDS' SHARES:
o $50 for any account
Initial and subsequent investments in an IRA established on behalf of a non-
working spouse of a shareholder who has an IRA invested in one of the funds
require a minimum amount of only $250. In addition, once you have established
an IRA, the minimum amount for subsequent investments therein will be waived if
an investment in an IRA or similar plan is the maximum amount permitted under
the Internal Revenue Code of 1986, as amended (the "Code").
In special circumstances, these minimums may be waived or lowered at the funds'
discretion. Keep in mind that investment professionals may charge you fees for
their services in connection with your share transaction. There is no minimum
initial investment for Class I Shares. However, Class I Shares are available
only to a limited group of investors at the discretion of the funds. If you are
investing through a special program, such as a large employer-sponsored
retirement plan or certain programs available through brokers, like wrap
accounts, you may be eligible to purchase Class I Shares. If you are investing
through a retirement plan or other special program, follow the instructions in
your program materials.
CHOOSING A SHARE CLASS
Treasury Money Market Fund and Money Market Fund (together, the "Money Market
Funds") offer Class A Shares and Class I Shares only. The other funds offer
three share classes - Class A Shares, Class C Shares and Class I Shares. Each
share class has its own expense structure.
Your investment plans will determine which class is most suitable for you. For
example, if you are investing a substantial amount or if you plan to hold your
shares for a long period, Class A Shares may make the most sense for you. If
you are investing for less than five years, you may want to consider Class C
Shares.
Class I Shares are available only to a limited group of investors at the
discretion of the funds. If you are investing through a special program, such
as a large employer-sponsored retirement plan or certain programs available
through brokers, like wrap accounts, you may be eligible to purchase Class I
Shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your investment professional can help you choose the share class that makes the
most sense for you.
58
The following information regarding the sales charges for each class of shares
of the funds as well as other information is also available free of charge and
in a clear and prominent format at www.rmkfunds.com. From the fund's website, a
hyperlink will take you directly to this disclosure for each fund.
CLASS COMPARISON
CLASS A SHARES - FRONT LOAD
o Initial sales charge of 5.50% for Mid Cap Growth Fund, Growth Fund, Core
Equity Fund, Mid Cap Value Fund, Value Fund, and Balanced Fund (in each
case, as a percentage of offering price which includes the sales load).
o Initial sales charge of 2.00% for Fixed Income Fund and Intermediate Tax
Exempt Bond Fund (in each case, as a percentage of offering price which
includes the sales load).
o Initial sales charge of 1.50% for Limited Maturity Fixed Income Fund (as a
percentage of offering price which includes the sales load).
o Class A Shares of the Money Market Funds are sold at NAV with no initial
sales charge; however, if you subsequently exchange those shares for Class
A Shares of another fund which imposes an initial sales charge, an initial
sales charge will be imposed on the Class A Shares received in the
exchange.
o Lower sales charges for larger investments of $50,000 or more; no sales
charge for purchases of $1 million or more.
o Annual shareholder service fee of 0.25% for Class A Shares of the fund.
o Lower annual expenses than Class C Shares.
o "Right of accumulation" allows you to determine the applicable sales load
on a purchase by including the value of your existing investments in funds
of the Trust or Morgan Keegan Select Fund, Inc. (all of the series of the
Trust and Morgan Keegan Select Fund, Inc. are referred to herein as series
or funds of the "Regions Morgan Keegan Select Fund Family"), as part of
your current investment.
o "Letter of intent" allows you to count all investments in the Regions
Morgan Keegan Select Fund Family over the next 13 months as if you were
making them all at once, for purposes of calculating sales charges.
REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS. Your investment may
qualify for a reduction or elimination of the sales charge, also known as a
breakpoint discount. The following tables list the sales charges, which will be
applied to your Class A Share purchase, subject to the breakpoint discounts
indicated in the tables and described below. Your investment professional must
notify the funds' transfer agent of eligibility for any applicable breakpoint
discount at the time of purchase.
Mid Cap Growth Fund, Growth Fund, Core Equity Fund, Mid Cap Value Fund, Value
Fund and Balanced Fund Class A Share's Sales Charges:
YOUR AS A % OF AS A % OF NET
INVESTMENT OFFERING PRICE AMOUNT INVESTED
Up to $49,999 5.50% 5.82%
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$50,000 to $99,999 4.50% 4.71%
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$100,000 to $249,999 3.75% 3.90%
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$250,000 to $499,999 2.50% 2.56%
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$500,000 to $999,999 2.00% 2.04%
- --------------------------------------------------------------------------------
$1 million or more(1) NAV NAV
- --------------------------------------------------------------------------------
Fixed Income Fund and Intermediate Tax Exempt Bond Fund Class A Share's Sales
Charges:
YOUR AS A % OF AS A % OF NET
INVESTMENT OFFERING PRICE AMOUNT INVESTED
Up to $49,999 2.00% 2.04%
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$50,000 to $99,999 1.75% 1.78%
- -------------------------------------------------------------------------------
$100,000 to $249,999 1.50% 1.52%
- -------------------------------------------------------------------------------
$250,000 to $499,999 1.00% 1.01%
- -------------------------------------------------------------------------------
59
$500,000 to $999,999 0.75% 0.76%
- -------------------------------------------------------------------------------
$1 million or more(1) NAV NAV
- --------------------------------------------------------------------------------
Limited Maturity Fixed Income Fund Class A Share's Sales Charges
YOUR AS A % OF AS A % OF NET
INVESTMENT OFFERING PRICE AMOUNT INVESTED
Up to $49,999 1.50% 1.52%
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$50,000 to $99,999 1.25% 1.27%
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$100,000 to $249,999 1.00% 1.01%
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$250,000 to $499,999 0.75% 0.76%
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$500,000 to $999,999 0.50% 0.50%
- --------------------------------------------------------------------------------
$1 million or more(1) NAV NAV
- --------------------------------------------------------------------------------
(1) YOU CAN PURCHASE $1 MILLION OR MORE OF CLASS A SHARES WITHOUT A SALES
CHARGE. HOWEVER, IF YOU PURCHASE SHARES OF THAT AMOUNT, THEY WILL BE
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM WITHIN ONE YEAR
OF THE DATE OF PURCHASE. THE CONTINGENT DEFERRED SALES CHARGE ON
REDEMPTIONS OF SHARES IS 1.00% OF THE LESSER OF THE PURCHASE PRICE OF THE
SHARES OR THEIR NAV AT THE TIME OF REDEMPTION. IN THE EVENT OF A PARTIAL
REDEMPTION, THE CONTINGENT DEFERRED SALES CHARGE WILL BE APPLIED TO THE
OLDEST SHARES HELD FIRST. THE DISTRIBUTOR MAY PAY A DEALER CONCESSION
AND/OR SERVICE FEE FOR PURCHASES OF $1 MILLION OR MORE.
In order to receive the applicable breakpoint discount, it may be necessary at
the time of purchase for you to inform your investment professional of the
existence of other accounts in which there are holdings eligible to be
aggregated to meet a sales charge breakpoint ("Qualifying Accounts").
Qualifying Accounts mean those accounts in the funds held directly or through an
investment professional or through a single-participant retirement account by
you, your legal spouse, and/or your children under age 21, which can be linked
using tax identification numbers (TINs), social security numbers (SSNs) or
broker identification numbers (BINs). To receive a Class A Shares front-end
sales charge reduction, you may add to your purchase of Class A Shares the value
of any concurrent purchases of Class A Shares of the Regions Morgan Keegan
Select Fund Family, the net amount invested, and the holdings of any Qualifying
Accounts in Class A Shares of any series of the Regions Morgan Keegan Select
Fund Family, except that no directly purchased shares of the Treasury Money
Market Fund or Money Market Fund (whether held by you, in a Qualifying Account,
or to be purchased concurrently) may be aggregated for purposes of calculating
any breakpoint discounts. Your discount will be determined based on the
schedule in the Class A sales charge table above.
In order to verify your eligibility for a breakpoint discount, you will be
required to provide to your investment professional certain information on your
new account form and may be required to provide account statements regarding
Qualifying Accounts. Failure to provide proper notification or verification of
eligibility for a breakpoint discount may result in your not receiving a
breakpoint discount to which you are otherwise entitled. Breakpoint discounts
apply only to your current purchase and do not apply retroactively to previous
purchases.
THE FRONT END SALES CHARGE FOR CLASS A SHARES MAY ALSO BE ELIMINATED OR REDUCED
AT PURCHASE IF:
o you purchase shares through financial intermediaries that do not receive
sales charge dealer concessions;
o you have redeemed shares from another broker-dealer and invest the same
amount or greater in the funds provided that you paid a sales charge in
connection with the purchase or redeeming of the shares and further
provided that the purchase of shares is within 30 days of redemption;
o you are a Trust customer purchasing through Regions Morgan Keegan Trust;
o you purchase shares through "wrap accounts", asset allocation programs, or
similar programs, under which clients may pay a fee for account services;
o you purchase shares through a retirement plan that is a customer of Regions
Morgan Keegan Trust (e.g. Express IRA, 401(k));
o you sign a letter of intent to purchase a specific dollar amount of
additional shares within 13 months (your discount will be determined based
on the schedule in the Class A Share's sales charge table above); or
o you are an officer, director, employee or retired employee of Regions, or
its affiliates, and your legal spouse and dependent children, or a Trustee
or officer of the Trust, and your legal spouse and dependent children.
60
Class A Shares may also be acquired without a sales charge if the purchase is
made through a Morgan Keegan Financial Adviser who formerly was employed as a
broker with another firm registered as a broker-dealer with the SEC, if the
following conditions are met: (1) the purchaser was a client of the investment
professional at the other firm for which the investment professional previously
served as a broker; (2) within 90 days of the purchase of the fund's shares, the
purchaser redeemed shares of one or more mutual funds for which that other firm
or its affiliates served as principal underwriter, provided that either the
purchaser had paid a sales charge in connection with investment in such funds or
a contingent deferred sales charge upon redeeming shares in such funds; and (3)
the aggregate amount of the fund's shares purchased pursuant to this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds,
noted in (2) above, from the shares of the mutual fund(s) for which the other
firm or its affiliates served as principal underwriter. In addition, Class A
Shares may be acquired without a sales charge if a purchase is made with the
proceeds of a redemption of other mutual fund shares, provided that the
purchaser paid a sales charge in connection with purchasing or redeeming these
shares and further provided that the purchase of the Class A Shares of any
series of Regions Morgan Keegan Select Fund Family is made within 30 days of
that redemption.
DEALER CONCESSIONS. Morgan Keegan, the distributor, may pay a dealer up to 100%
of any sales charge imposed, which may be paid in the form of an advance. The
dealer may be paid an advance commission for sales of the Class A Shares of any
series of the Trust. Such payments may be in the form of cash or promotional
incentives.
CLASS C SHARES - LEVEL LOAD
o No initial sales charge.
o Contingent deferred sales charge of 1.00% of the lesser of the purchase
price of the Class C Shares or their NAV at the time of redemption, payable
by you if you redeem shares within one year of purchase. In the event of a
partial redemption, the contingent deferred sales charge will be applied to
the oldest shares held first.
o Annual distribution (12b-1) fee of 0.75% for Class C Shares of the funds.
o Annual shareholder service fee of 0.25% for Class C Shares of the fund.
CLASS I SHARES - NO LOAD
o No sales charges of any kind.
o No distribution (12b-1) fees; annual expenses are lower than other share
classes.
o Available only to a limited group of investors at the discretion of the
funds, including employer-sponsored retirement plans, advisory accounts of
the Adviser, and certain programs available through brokers, like wrap
accounts. These programs usually involve special conditions and separate
fees. Contact your Morgan Keegan Financial Adviser or Regions Morgan Keegan
Trust Administrator for information.
TO ADD TO AN ACCOUNT
THROUGH MORGAN KEEGAN. You may purchase shares of a fund by contacting your
Morgan Keegan Financial Adviser or by calling Morgan Keegan at 800-222-8866.
You may also visit our website at www.morgankeegan.com to locate the Morgan
Keegan branch nearest you. New investors must complete Morgan Keegan's New
Account Form and return it along with a check for your initial investment
payable to "Morgan Keegan" to your Financial Adviser or to Morgan Keegan at 50
North Front Street, Memphis, TN 38103. Please indicate the fund, share class,
the account number, and the dollar value or number, if any, of shares on your
check. You can avoid future inconvenience by signing up now for any services
you might later use, including the SIP.
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
50 North Front Street
Memphis, Tennessee 38103
Call toll-free: 800-222-8866
(8:30 a.m. - 4:30 p.m., business days, Central Time)
Members New York Stock Exchange, SIPC
www.morgankeegan.com
61
THROUGH REGIONS MORGAN KEEGAN TRUST. Trust customers may purchase shares of a
fund through their local Regions Morgan Keegan Trust Administrator or by calling
Regions Morgan Keegan Trust at 877-757-7424.
THROUGH OTHER FINANCIAL INTERMEDIARY. You may purchase shares through a broker-
dealer, investment professional, or financial institution which has been
authorized to offer shares by Morgan Keegan ("Authorized Dealers"). Some
Authorized Dealers may charge a transaction fee for this service. If you
purchase shares of a fund through a program of services offered or administered
by an Authorized Dealer or other service provider, you should read the program
materials, including information relating to fees, in conjunction with the
funds' Prospectus. Certain features of a fund may not be available or may be
modified in connection with the program of services provided.
THROUGH SYSTEMATIC INVESTMENT PROGRAM. Once you have opened an account, you may
automatically purchase additional shares on a regular basis by completing the
appropriate SIP forms by contacting your investment professional. The minimum
investment amount for SIPs is $50.
POLICIES FOR BUYING SHARES
ANTI-MONEY LAUNDERING LAWS. If we are unable to verify your identity, as
required by anti-money laundering laws, we may refuse to open your account or
may open your account pending verification of your identity. If we subsequently
are unable to verify your identity, we may close your account and return to you
the value of your shares at the next calculated NAV, as permitted by applicable
law.
TIMING OF REQUESTS. Your purchase order must be received by your Morgan Keegan
Financial Adviser, Regions Morgan Keegan Trust Administrator, or Authorized
Dealer by 11:30 a.m. (Central Time) for the Money Market Funds or before the
close of the New York Stock Exchange ("NYSE") (normally 4:00 p.m. Eastern Time,
3:00 p.m. Central Time) for all other funds to get that day's closing share
price. You will receive the next calculated closing share price if your
investment professional forwards the order to the fund on the same day and the
fund receives payment on the same business day (in the case of the Money Market
Funds) or the next business day for the other funds. Each fund reserves the
right to reject any purchase request. It is the responsibility of your
investment professional or other service provider that has entered into an
agreement with the funds, its distributor, or administrative or shareholder
services agent, to promptly submit purchase orders to the funds. You are not
the owner of fund shares (and therefore will not receive dividends) until
payment for the shares is received.
SHORT-TERM TRADING. The funds attempt to deter short-term trading that may be
disruptive to the efficient management of the funds. The funds may consider
several factors when evaluating shareholder trading activity, including, but not
limited to: (1) dollar amount of the transaction; (2) volume of the transaction;
(3) frequency of trading; (4) developing trading patterns of the shareholder;
and (5) any other factors deemed pertinent by fund management.
The funds' Board has approved policies and procedures intended to discourage
excessive short-term trading of the funds' shares. These policies provide that,
when, in the sole discretion of fund management, short-term trading would have a
detrimental effect on the efficient management of a fund, the funds may refuse a
transaction by any person, group or commonly controlled account. The funds will
promptly notify the shareholder of a determination to reject a purchase request.
The funds reserve the right to restrict future purchases of fund shares.
There can be no assurance that the funds will be effective in limiting short-
term trading in all cases. If the funds are unable to deter this type of
trading, it may adversely affect the performance of the funds by requiring the
funds to maintain larger amounts of cash or cash equivalents than the Adviser
might otherwise choose to maintain, or to liquidate portfolio holdings at a
disadvantageous time, thereby increasing brokerage, administrative, and other
expenses.
The funds' objective is that its restrictions on short-term trading should apply
to all shareholders, regardless of the number or type of accounts in which
shares are held. However, the funds anticipate that limitations on its ability
to identify trading activity to specific shareholders, including where shares
are held in multiple or omnibus accounts, will mean that these restrictions may
not be able to be applied uniformly in all cases.
62
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
TO REDEEM SOME OR ALL OF YOUR SHARES
You may redeem Class A Shares, Class C Shares and Class I Shares through your
Morgan Keegan Financial Adviser, through your Authorized Dealer, or by
telephoning Morgan Keegan at 800-366-7426. Regions Morgan Keegan Trust
customers may redeem shares of a fund through their local Regions Morgan Keegan
Trust Administrator. You should note that redemptions will be made only on days
when a fund computes its NAV. When your redemption request is received in
proper form, it is processed at the next determined NAV.
BY MAIL. To redeem shares by mail, written requests must be received in proper
form and can be made through Morgan Keegan Financial Adviser, Regions Morgan
Keegan Trust, or any Authorized Dealer, as appropriate. The redemption request
should include the shareholder's name, fund name and class of shares, account
number and the share or dollar amount to be redeemed. It is the responsibility
of the service provider to promptly submit redemption requests to the fund. You
may redeem some or all of your shares by sending a letter of instruction to your
Financial Adviser or Morgan Keegan at Fifty North Front Street, Memphis,
Tennessee 38103. Trust customers should send a letter of instruction to your
local Regions Morgan Keegan Trust Administrator or to Regions Morgan Keegan
Trust at 1901 6[th] Avenue North, 4[th] Floor, Birmingham, Alabama 35203.
BY TELEPHONE. Telephone redemption instructions must be received by your
investment professional before 11:30 a.m. (Central Time) for Treasury Money
Market Fund and for Money Market Fund or before the close of the NYSE (normally
4:00 p.m. Eastern Time, 3:00 p.m. Central Time) for all other funds to be
redeemed at that day's closing share price. Orders for redemptions received
after these times on any business day will be executed at the close of the next
business day. As long as the transaction does not require a written request as
described in the "Policies for Redeeming Shares," you may redeem shares by
calling your Morgan Keegan Financial Adviser, Authorized Dealer, or Morgan
Keegan at 800-366-7426. Trust customers should call their local Regions Morgan
Keegan Trust Administrator or Regions Morgan Keegan Trust at 877-757-7424. A
check will be mailed to you on the following business day.
BY EXCHANGE. Please read the applicable prospectus carefully before you request
an exchange. To request an exchange, call or write to Morgan Keegan, Regions
Morgan Keegan Trust, or an Authorized Dealer, as appropriate. Call your Morgan
Keegan Financial Adviser or Morgan Keegan at 800-366-7426 or mail your written
exchange instructions to Morgan Keegan at 50 North Front Street, Memphis,
Tennessee 38103. Trust customers should call their local Regions Morgan Keegan
Trust Administrator or Regions Morgan Keegan Trust at 877-757-7424 or mail your
written exchange instructions to Regions Morgan Keegan Trust, 1901 6[th] Avenue
North, 4[th] Floor, Birmingham, Alabama 35203.
BY SYSTEMATIC WITHDRAWAL. This plan is designated for retirees and other
investors who want regular withdrawals from a fund account. You may
automatically redeem shares in a minimum amount of $100 on a regular basis.
Please contact your investment professional for the appropriate forms to
complete. Your account value must meet the minimum initial investment amount at
the time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Class A Shares that are
subject to a sales charge while redeeming shares using this program.
POLICIES FOR REDEEMING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS AND SIGNATURE GUARANTEES. Please
submit instructions in writing when any of the following apply:
o You are redeeming more than $100,000 worth of shares
63
o The name or address on the account has changed within the last 30 days
o You want the redemption proceeds to be sent or wired to a name or address
not on the account registration
o You are transferring shares to an account with a different registration or
share class
o You are redeeming shares held in a corporate or fiduciary account; for
these accounts additional documents are required:
o CORPORATE ACCOUNTS: certified copy of a corporate resolution
o FIDUCIARY ACCOUNTS: copy of power of attorney or other governing
document
To protect your account against fraud, all written requests must bear signature
guarantees. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
TIMING OF REQUESTS. Redemption requests for the funds must be received by 11:30
a.m. (Central Time) for the Money Market Funds or before the close of the NYSE
(normally 4:00 p.m. Eastern Time, 3:00 p.m. Central Time) for all other funds in
order for shares to be redeemed at that day's closing share price. Requests
received after these times on any business day will be executed the following
business day, at that day's closing share price.
SALES CHARGE WHEN YOU REDEEM
CLASS A SHARES (PURCHASE AMOUNT OF $1 MILLION OR GREATER). A contingent deferred
sales charge ("CDSC") of 1.00% of the lesser of the purchase price of the shares
or their NAV at the time of redemption applies to Class A Shares redeemed within
one year of the purchase date.
CLASS C SHARES. Redemptions of Class C Shares are subject to a CDSC of 1.00% of
the lesser of the purchase price of the shares or their NAV at the time of
redemption if the redemption is made within one year of the purchase date.
If your investment qualifies for a reduction or elimination of the CDSC, your
investment professional must notify the transfer agent at the time of
redemption. If the transfer agent is not notified, the CDSC will apply.
YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING CLASS C SHARES:
o if you are a Trust customer redeeming through Regions Morgan Keegan Trust;
o if you purchased shares through a retirement plan that is a customer of
Regions Morgan Keegan Trust (e.g. Express IRA, 401(k));
o on the portion of redemption proceeds attributable to increases in the
value of your account due to increases in the NAV;
o on shares acquired through reinvestment of dividends and capital gains;
o if your redemption is a required distribution and you are over the age of
70-1/2 from an IRA or other retirement plan;
o upon the death or disability of the last surviving shareholder(s) of the
account;
o when redeeming and directing the proceeds to the purchase of shares of a
series of the Regions Morgan Keegan Select Fund Family: It is your
responsibility to inform the broker of your intention to exercise this
option at the time of the redemption and purchase; or
o if a fund redeems your shares and closes your account for not meeting the
minimum balance requirement.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUNDS WILL REDEEM YOUR SHARES
IN THE FOLLOWING ORDER:
o shares that are not subject to a CDSC; and
o shares held the longest.
CHECK WRITING. The funds do not offer check writing privileges.
64
CONDITIONS FOR REDEMPTIONS
REDEEMING RECENTLY PURCHASED SHARES. If you redeem shares before the payment
for those shares has been collected, you will not receive the proceeds until
your initial payment has cleared. This may take up to 15 days after your
purchase date. Any delay would occur only when it cannot be determined that
payment has cleared.
LIMITATIONS ON REDEMPTION PROCEEDS. Redemption proceeds normally are wired or
mailed within one business day after receiving a request in proper form.
However, payment may be delayed up to seven days:
o during periods of market volatility; or
o when your trade activity or redemption amount adversely impacts a fund's
ability to manage its assets.
IN-KIND REDEMPTIONS. Each fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption by making
payment in whole or in part by securities valued in the same way as they would
be valued for purposes of computing the fund's per share NAV. However, each
fund has committed itself to pay in cash all requests for redemption by any
shareholder of record, limited in amount with respect to each shareholder during
any 90-day period to the lesser of (1) $250,000, or (2) 1% of the NAV of the
fund at the beginning of such period. Each fund will redeem in kind when the
Board of Trustees has determined that it is in the best interests of a fund's
shareholders as a whole. The Board of Trustees has adopted procedures for
making in kind redemptions to affiliated shareholders (I.E., shareholders with a
5% or greater holding in a fund). If payment is made in securities, a
shareholder will incur brokerage or transactional expenses in converting those
securities into cash and will be subject to fluctuation in the market price of
those securities until they are sold, and may realize taxable gain or loss
(depending on the value of the securities received and the shareholder's
adjusted basis of the redeemed shares).
65
HOW TO EXCHANGE SHARES
EXCHANGE PRIVILEGE
You may exchange shares of a fund into shares of the same class of any series of
the Regions Morgan Keegan Select Fund Family without paying a sales charge or a
CDSC by calling or writing to Morgan Keegan, Regions Morgan Keegan Trust or an
Authorized Dealer, as appropriate. Shares of any series of the Regions Morgan
Keegan Select Fund Family may be acquired in exchange for shares of the same
class of any other series of the Regions Morgan Keegan Select Fund Family, other
than shares of Treasury Money Market Fund or Money Market Fund on which no sales
charge has been paid, without paying a sales charge or a CDSC in the same
manner. The date of original purchase of exchanged Class C Shares will be used
for purposes of calculating the CDSC imposed upon redemption of exchanged-for-
shares. You may exchange Class C Shares of a fund with Class A Shares of
Treasury Money Market Fund or Money Market Fund since there are no Class C
Shares offered by these Funds.
To exchange shares, you must:
o meet any minimum initial investment requirements; and
o receive a prospectus for the fund into which you wish to exchange.
For more information about any series of the Regions Morgan Keegan Select Fund
Family not described in this Prospectus, including each fund's investment
policies and strategies, risks, charges and expenses, visit www.rmkfunds.com or
call your Morgan Keegan Financial Adviser, Regions Morgan Keegan Trust
Administrator or Authorized Dealer for a prospectus. Please read the applicable
prospectus carefully before you request an exchange.
Shareholders contemplating exchanges into the funds should consult their tax
advisers since the tax consequences of an investment in each fund may vary. An
exchange is treated as a redemption and a subsequent purchase, and is a taxable
transaction.
TO REQUEST AN EXCHANGE
Call or write to your investment professional, as appropriate. Call your Morgan
Keegan Financial Adviser or Morgan Keegan at 800-366-7426, or mail your written
exchange instructions to Morgan Keegan at 50 North Front Street, Memphis,
Tennessee 38103. Trust customers should call their local Regions Morgan Keegan
Trust Administrator or Regions Morgan Keegan Trust at 877-757-7424 or mail your
written exchange instruction to your local Trust Administrator or to Regions
Morgan Keegan Trust, 1901 6[th] Avenue North, 4[th] Floor, Birmingham, Alabama
35203.
POLICIES FOR EXCHANGING SHARES
TIMING OF REQUESTS. Telephone exchange instructions must be received by your
investment professional before 11:30 a.m. (Central Time) for the Money Market
Funds or before the close of the NYSE (normally 4:00 p.m. Eastern Time, 3:00
p.m. Central Time) for all other funds to be exchanged at that day's closing
share price. Orders for exchanges received after these times on any business day
will be executed at the close of the next business day.
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS AND SIGNATURE GUARANTEES.
Signatures must be guaranteed if you request an exchange into another fund with
a different shareholder registration.
FREQUENT EXCHANGES. The fund's management or Adviser may determine from the
amount, frequency and pattern of exchanges that a shareholder is engaged in
excessive trading which is detrimental to a fund and other shareholders. If
66
this occurs, the fund may terminate the availability of exchanges to that
shareholder and may bar that shareholder from purchasing other funds. The funds
may change or eliminate the exchange privilege at any time, may limit or cancel
any shareholder's exchange privilege and may refuse to accept any exchange
request. The funds will provide 60 days' prior written notice before materially
amending, suspending or eliminating exchange privileges.
67
ACCOUNT POLICIES
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BUSINESS HOURS
You can purchase, redeem or exchange shares of the funds any day the NYSE is
open (generally Monday through Friday). Representatives of the funds are
available normally from 8:30 a.m. to 4:30 p.m. Central Time on these days.
Purchases and redemptions by wire will not be available on days the Federal
Reserve wire system is closed. Please refer to the SAI for a listing of days
when the NYSE is closed.
CALCULATING SHARE PRICE
The Money Market Funds attempt to stabilize the NAV of their shares at $1.00 by
valuing their portfolio securities using the amortized cost method. Shares of
the other funds are sold at their NAV plus any applicable front-end sales charge
and redeemed at NAV less any applicable CDSC on days on which the NYSE is open
for trading. Each fund calculates its NAV as of the close of regular trading
(approximately 4:00 p.m. Eastern Time, or any earlier NYSE closing time that
day) on each day the NYSE is open for trading. The NYSE is not open for trading
on weekends and on certain days relating to the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, the
NAV may be calculated and purchase and redemption orders accepted on any such
day if the funds determine it is in the shareholders' interest to do so. Your
order will be priced at the next calculated NAV plus any applicable front-end
sales charge after your order is received in proper form (as described in this
Prospectus). The NAV for each class of a fund's shares is computed by
subtracting the liabilities from the total assets attributable to each class of
shares and dividing the result by the number of shares outstanding.
VALUATION OF PORTFOLIO INVESTMENTS
In accordance with Rule 2a-7 of the 1940 Act, portfolio investments of the Money
Market Funds are valued at amortized cost, which approximates fair value. Under
the amortized cost method, portfolio instruments are valued at the acquisition
cost as adjusted for amortization of premium or accumulation of discount rather
than at current market value.
Investments in securities listed or traded on a securities exchange are valued
at the last quoted sales price on the exchange where the security is primarily
traded as of the close of business on the NYSE, usually 4:00 p.m., Eastern Time,
on the valuation date. Equity securities traded on the Nasdaq Stock Market are
valued at the Nasdaq Official Closing Price ("NOCP") provided by Nasdaq each
business day. The NOCP is the most recently reported price as of 4:00:02 p.m.,
Eastern Time, unless that price is outside the range of the "inside" bid and
asked price (I.E., the bid and asked prices that dealers quote to each other
when trading for their own accounts); in that case, Nasdaq will adjust the price
to equal the inside bid or asked price, whichever is closer. Because of delays
in reporting trades, the NOCP may not be based on the price of the last trade to
occur before the market closes. Securities traded in the over-the-counter
market and listed securities for which no sales were reported for that date are
valued at the last quoted bid price.
Equity and debt securities issued in private placements are valued on the bid
side by a primary market dealer. Long-term debt securities (including U.S.
government securities, listed corporate bonds, other fixed income and asset-
backed securities and unlisted securities) are generally valued at the latest
price furnished by an independent pricing service or primary market dealer.
Short-term debt securities with remaining maturities of more than 60 days, for
which market quotations are readily available, are valued by an independent
pricing service or primary market dealer. Short-term debt securities with
remaining maturities of 60 days or less are valued at cost with interest accrued
68
or discount accreted to the date of maturity, unless such valuation, in the
judgment of the Adviser's Valuation Committee does not represent market value.
Futures contracts and options are valued on the basis of market quotations, if
available. Premiums received on the sale of call options are included in a
fund's NAV, and the current market value of options sold by the fund will be
subtracted from net assets. Any changes in the value of forward contracts due
to exchange rate fluctuations and days to maturity are included in the
calculation of the NAV. Investments in open-end registered investment companies
are valued at NAV as reported by those investment companies. There may be
circumstances in which those investment companies in which the funds invest fair
value their portfolio investments.
Foreign securities are valued based on prices furnished by independent brokers
or quotation services that express the value of securities in their local
currency. Securities which are valued in a currency other than U.S. dollars are
converted to U.S. dollar equivalents at a rate obtained from a recognized bank,
dealer or independent service on the valuation date. Because foreign markets
may be open on days when U.S. markets are closed, the value of foreign
securities could change on days when shares of a fund cannot be bought or sold.
The funds may use the fair value of securities that trade in a foreign market,
especially if significant events that appear likely to affect the value of those
securities occur between the time that foreign market closes and the time the
NYSE closes. These events may include (1) those impacting a single issuer, (2)
governmental actions that affect securities in one sector or country, (3)
natural disasters or armed conflicts affecting a country or region, or (4)
significant domestic or foreign market fluctuations.
When price quotations for certain securities are not readily available or if the
available quotations are not believed to be reflective of market value, those
securities will be valued at "fair value" as determined in good faith by the
Adviser's Valuation Committee using procedures established by and under the
supervision of the funds' Board. There can be no assurance that a fund could
purchase or sell a portfolio security at the price used to calculate the fund's
NAV.
A fund may use the fair value of a security to calculate its NAV when, for
example, (1) a portfolio security is not traded in a public market or the
principal market in which the security trades is closed, (2) trading in a
portfolio security is suspended and not resumed prior to the normal market
close, (3) a portfolio security is not traded in significant volume for a
substantial period, or (4) the Adviser determines that the quotation or price
for a portfolio security provided by a broker-dealer or an independent pricing
service is inaccurate.
The "fair value" of securities may be difficult to determine and thus judgment
plays a greater role in the valuation process. Among the factors that may be
considered by the Valuation Committee in determining the fair value of a
security are: (1) the fundamental analytical data relating to the investment;
(2) the nature and duration of restrictions on disposition of the securities;
(3) an evaluation of the forces that influence the market in which the
securities are purchased and sold; (4) type of security; (5) financial
statements of the issuer; (6) cost at date of purchase (generally used for
initial valuation); (7) size of the fund's holding; (8) for restricted
securities, any discount from market value of unrestricted securities of the
same class at the time of purchase; (9) the existence of a shelf registration
for restricted securities; (10) information as to any transactions or offers
with respect to the security; (11) special reports prepared by analysts; (12)
the existence of merger proposals, tender offers or similar events affecting the
security; and (13) the price and extent of public trading in similar securities
of the issuer or comparable companies. The degree of judgment involved in
determining the fair value of an investment security is dependent upon the
availability of quoted market prices or observable market parameters. When
observable market prices and parameters do not exist, the valuation process may
rely more heavily on consideration of factors such as interest rate changes,
movements in credit spreads, default rate assumptions, prepayment assumptions,
type and quality of collateral, security seasoning and market dislocation. In
determining the fair value of a security, the Valuation Committee may rely upon
information and data provided by an independent valuation consultant approved by
the Board.
The values assigned to fair valued investments are based on available
information and do not necessarily represent amounts that might ultimately be
realized, since such amounts depend on future developments inherent in long-term
investments. Changes in the fair valuation of portfolio securities may be less
frequent and of greater magnitude than changes in the price of portfolio
securities valued at their last sale price, by an independent pricing service,
or based on market quotations. Imprecision in estimating fair value can also
impact the amount of unrealized appreciation or depreciation recorded for a
69
particular portfolio security and differences in the assumptions used could
result in a different determination of fair value, and those differences could
be material.
TELEPHONE REQUESTS
When you open an account with Morgan Keegan, you automatically receive telephone
privileges, allowing you to place orders for your account by telephone. Your
financial adviser can also use these privileges to request exchanges and
redemptions of fund shares in your account. Morgan Keegan may accept telephone
redemption instructions from any person identifying himself as the owner of an
account or the owner's broker where the owner has not declined in writing to
utilize this service.
Unauthorized telephone requests are rare; however, as long as Morgan Keegan and
your investment professional take certain measures to authenticate telephone
requests on your account, you may be held responsible for unauthorized requests.
TRANSFER AGENT
Morgan Keegan, an affiliate of the Adviser, located at Morgan Keegan Tower, 50
North Front Street, Memphis, Tennessee 38103, is the funds' transfer agent and
receives a fee for its services. Regions Bank, an affiliate of the Adviser,
located at 1901 6[th] Avenue North, 4[th] Floor, Birmingham, Alabama 35203, and
other unaffiliated financial institutions may receive fees for sub-accounting,
administrative or transaction processing services related to the maintenance of
accounts for retirement and benefit plans and other omnibus accounts. These
fees ($10.00 per participant account, per year) paid by the funds are equal to
or less than the fees the funds would pay to the fund's transfer agent for
similar services.
CONFIRMATIONS AND ACCOUNT STATEMENTS
MORGAN KEEGAN. Morgan Keegan customers will receive confirmation of purchases,
redemptions and exchanges. In addition, you will receive periodic statements
reporting all account activity, including systematic program transactions,
dividends and capital gains paid. You have the duty to examine all statements,
confirmations, and other reports or notices upon receipt from Morgan Keegan and
report any errors or unauthorized trading to Morgan Keegan's Customer Service
Department within the time limits specified in the client agreement on the New
Account Form.
REGIONS MORGAN KEEGAN TRUST. Regions Morgan Keegan Trust customers will also
receive confirmation of purchases, redemptions and exchanges except for
systematic program transactions. You will receive periodic statements reporting
all account activity, including systematic program transactions, dividends and
capital gains paid. You have the duty to examine all statements, confirmations
and other reports or notices upon receipt from Regions Morgan Keegan Trust and
report any errors or unauthorized trading by calling 877-757-7424.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a fund may
redeem shares in your account and pay you the proceeds if your account balance
falls below the required minimum initial investment amount due to exchanges and
redemptions. Before shares are redeemed to close an account, you will be
notified in writing and allowed 30 days to purchase additional shares to meet
the minimum. If you do not take action within 30 days, Morgan Keegan may redeem
your shares and mail the proceeds to you at the address of record.
REINSTATING RECENTLY SOLD SHARES
For 120 days after you redeem Class A Shares, you have the right to "reinstate"
your investment by putting some or all of the proceeds into Class A Shares of
the same or another Regions Morgan Keegan Select family fund at NAV, without
payment of a sales charge. It is your responsibility to inform your investment
professional that your purchase is a reinstatement qualifying for this
treatment.
70
SHARE CERTIFICATES
The funds do not issue share certificates.
71
DISTRIBUTION OF FUND SHARES
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Morgan Keegan serves as distributor of the funds' shares. Morgan Keegan, a
wholly owned subsidiary of Regions (NYSE: RF) and an affiliate of the Adviser,
is registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended, and is a member of the Financial Industry Regulatory Authority
("FINRA"). Morgan Keegan provides personalized investment services to its
clients through more than 400 offices in 19 states.
Morgan Keegan may offer certain items of nominal value from time to time to any
shareholder or investor in connection with the sale of fund shares. Morgan
Keegan may select brokers, dealers and administrators (including depository or
other institutions such as commercial banks and savings associations) to provide
distribution and/or administrative services for which they will receive fees
from the distributor based upon shares owned by their clients or customers.
These services include general marketing services such as distributing
prospectuses and other information, providing account assistance, and
communicating or facilitating purchases and redemptions of the funds' shares.
RULE 12b-1 PLAN (CLASS C SHARES)
With the exception of the Money Market Funds, each fund has adopted a Rule 12b-1
Plan that allows it to pay Morgan Keegan for the sale, distribution,
administration and customer servicing of Class C Shares of the funds. Because
these shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.
Payments by the distributor to other financial institutions for shareholder
services are negotiated and may be based on such factors as the number or value
of shares that the financial institution sells or may sell, the value of client
assets invested, or the type and nature of services or support furnished by the
financial institution. These payments may be in addition to payments made by
the fund to the financial institution under the Rule 12b-1 Plan and/or Service
Fees arrangement. You can ask your financial institution for information about
any payments it received from the distributor and any services provided.
The 12b-1 fee paid by Class C Shares is as follows:
12b-1 FEE PAID
AS A PERCENTAGE OF
FUND CLASS C SHARES ASSETS
MID CAP GROWTH FUND 0.75%
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GROWTH FUND 0.75%
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CORE EQUITY FUND 0.75%
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MID CAP VALUE FUND 0.75%
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VALUE FUND 0.75%
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BALANCED FUND 0.75%
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FIXED INCOME FUND 0.75%
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LIMITED MATURITY FIXED INCOME FUND 0.75%
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INTERMEDIATE TAX EXEMPT BOND FUND 0.75%
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SHAREHOLDER SERVICES FEES (CLASS A SHARES AND CLASS C SHARES)
Morgan Keegan is the shareholder servicing agent for the funds. The funds'
Class A Shares and Class C Shares pay a fee of 0.25% of their average daily net
assets ("Service Fees") to investment professionals for providing services to
shareholders and maintaining shareholder accounts. Under certain agreements,
the funds pay Service Fees to Morgan Keegan or Regions Morgan Keegan Trust,
which use those fees to compensate investment professionals.
72
MANAGEMENT OF THE FUNDS
The Board governs the Trust and selects and oversees the Adviser.
FUNDS' ADVISER
Morgan Asset Management, Inc. serves as the investment adviser to the funds.
Pursuant to the funds' advisory agreements, the Adviser is responsible for the
investment management of the funds, including making investment decisions and
placing orders to buy, sell or hold particular securities. A discussion
regarding the Board's basis for approving the advisory agreements is available
in the funds' annual report to shareholders for the fiscal year ended November
30, 2007.
Founded in 1986, the Adviser is an indirect wholly owned subsidiary of Regions
(NYSE: RF), a publicly held financial holding company that provides retail and
commercial banking securities brokerage, mortgage and insurance products and
other financial services. The Adviser also serves as investment adviser to
Morgan Keegan Select Fund, Inc., a separately registered investment company
consisting of three open-end funds; RMK Advantage Income Fund, Inc., RMK High
Income Fund, Inc., RMK Multi-Sector High Income Fund, Inc. and RMK Strategic
Income Fund, Inc., each a separately registered closed-end investment company
listed on the NYSE under the ticker symbols RMA, RMH, RHY and RSF, respectively;
and Regions Morgan Keegan Trust. As of February 29, 2008, the Adviser has more
than $28.2 billion in total assets under management. The Adviser's principal
offices are located at 1901 6[th] Avenue North, 4[th] Floor, Birmingham, AL
35203.
The Adviser is entitled to receive an annual investment advisory fee equal to a
percentage of each fund's average daily net assets as follows:
FUND ANNUALIZED FEE
(AS A PERCENTAGE OF ASSETS)
MID CAP GROWTH FUND 0.75%
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GROWTH FUND 0.75%
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CORE EQUITY FUND 0.75%
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MID CAP VALUE FUND 0.75%
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VALUE FUND 0.75%
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BALANCED FUND 0.75%
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FIXED INCOME FUND 0.50%
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LIMITED MATURITY FIXED INCOME FUND 0.40%(1)
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INTERMEDIATE TAX EXEMPT BOND FUND 0.25%
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TREASURY MONEY MARKET FUND 0.20%
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MONEY MARKET FUND 0.25%
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(1) EFFECTIVE JULY 1, 2006, THE ADVISER BEGAN VOLUNTARILY WAIVING 0.15% OF THE
MANAGEMENT FEE. THE MANAGEMENT FEE CURRENTLY PAID BY THE FUND IS 0.25%. THE
ADVISER CAN TERMINATE THIS VOLUNTARY WAIVER AT ANY TIME.
INVESTMENT SUBADVISER TO THE MID CAP VALUE FUND
Channing Capital Management, LLC ("CCM") serves as the subadviser to the Mid Cap
Value Fund pursuant to an investment sub-advisory agreement with the Adviser and
the Fund. CCM is an independent Chicago-based investment manager specializing
in mid- and small-cap equity investing for institutions and individuals. Under
the subadvisory agreement, CCM manages the Fund, selects investments, and places
orders for purchases and sales of securities subject to the general supervision
of the Adviser and the Board in accordance with the Fund's investment
objectives, policies, and restrictions. Through its portfolio management team,
CCM makes the day-to-day investment decisions and continuously reviews and
administers the investment programs of the Fund. CCM's address is 10 South
73
LaSalle Street, Suite 2650, Chicago, IL 60603. A discussion regarding the
Board's basis for approving the sub-advisory agreement is available in the
funds' annual report to shareholders for the fiscal year ended November 30,
2007.
PORTFOLIO MANAGERS
Day-to-day management of each fund's portfolio is the responsibility of the
portfolio managers identified in the table below. The portfolio managers are
supported by the Adviser's equity and/or fixed income research teams which
provide fundamental research and quantitative analysis used to run the Adviser's
internal investment models.
FUND PORTFOLIO MANAGER(S)
MID CAP GROWTH FUND Charles A. Murray, CFA and David P. McGrath,
CFA
GROWTH FUND Charles A. Murray, CFA and David P. McGrath,
CFA
CORE EQUITY FUND Walter A. Hellwig and John B. Russell
MID CAP VALUE FUND Eric T. McKissack, CFA
VALUE FUND Walter A. Hellwig
BALANCED FUND Charles A. Murray, CFA
FIXED INCOME FUND Michael L. Smith and Scott M. Flurry, CFA
LIMITED MATURITY FIXED INCOME FUND Michael L. Smith
INTERMEDIATE TAX EXEMPT BOND FUND Dorothy E. Thomas, CFA
TREASURY MONEY MARKET FUND George R. McCurdy, IV, CFA
MONEY MARKET FUND George R. McCurdy, IV, CFA
SCOTT M. FLURRY, CFA - Mr. Flurry is a Vice President and Senior Portfolio
Manager for the Adviser. He has more than 14 years experience in investment
management and research. From 2003 to present, Mr. Flurry has served as a fixed
income Portfolio Manager responsible for managing domestic fixed income
portfolios for institutional clients. Prior to joining the Adviser in 2003, Mr.
Flurry worked for Compass Bank in various capacities. From 1998 to 2003, he
served as a Vice President, managing both fixed-income and equity portfolios for
institutional clients. Additionally, from 2001 to 2003, Mr. Flurry served as a
Portfolio Manager of the Expedition Equity Income Fund. From 1993 to 1998, Mr.
Flurry served as a credit analyst in the Investment Credit department of Compass
Bank and served as the Head of the Credit Department for the last three years of
that tenure. Mr. Flurry received a B.S. in Corporate Finance and Investment
Management from the University of Alabama in 1990. Mr. Flurry is a holder of
the Chartered Financial Analyst designation and an officer of the CFA Society of
Alabama.
WALTER A. HELLWIG - Mr. Hellwig is a Senior Vice President and Senior Portfolio
Manager for the Adviser. He has more than thirty years experience in investment
management and research. From 2004 to present, Mr. Hellwig has served as the
Portfolio Manager for Regions Morgan Keegan Select Core Equity Fund (formerly
the LEADER Growth & Income Fund) and Regions Morgan Keegan Select Value Fund.
From 1997 to 2004, Mr. Hellwig served as Senior Vice President and Senior
Portfolio Manager at Union Planters Investment Advisors and was also Chairman of
the firm's Equity Policy Committee. From 1994 to 1997, Mr. Hellwig served as a
Portfolio Manager for Federated Investors, Inc. From 1986 to 1994, Mr. Hellwig
held several positions within Boatmen's Investment Services and Boatmen's Trust
including Director of Investment Research and Research Analyst. Prior to
entering the investment industry, Mr. Hellwig served as a Vice President of
Commercial Loans at a Midwestern bank. Mr. Hellwig received a B.S. in Business
Administration in 1972 and an M.B.A. from Washington University in St. Louis,
Missouri.
GEORGE R. MCCURDY, IV, CFA - Mr. McCurdy is a Senior Portfolio Manager for the
Adviser. He has more than seven years experience in investment management and
banking. From 2007 to present, Mr. McCurdy has served as the Portfolio Manager
for Regions Morgan Keegan Select Treasury Money Market Fund and Regions Morgan
Keegan Select Money Market Fund. From 2005 to 2007, Mr. McCurdy served as the
Assistant Portfolio Manager for Regions Morgan Keegan Select Treasury Money
Market Fund and Regions Morgan Keegan Select Money Market Fund. From 2003 to
2005, Mr. McCurdy served as an Equity Research Analyst and Portfolio Manager of
personal trust accounts for the Adviser. From 2002 to 2003, Mr. McCurdy was an
Accounting Manager for SouthTrust Bank, where his primary responsibilities were
business unit profitability analysis and reporting. From 2000 to 2002, Mr.
McCurdy worked as a Finance Officer with State Street Bank, where he focused on
Investor Relations support and business unit reporting. Mr. McCurdy received a
B.S. in Finance from the University of Alabama in 1997 and an M.B.A. from Auburn
University at Montgomery in 1998. He is a holder of the Chartered Financial
Analyst designation.
74
DAVID P. MCGRATH, CFA - Mr. McGrath is a Vice President and Senior Portfolio
Manager for the Adviser. He has more than nine years experience in investment
management and research. From 2001 to present, Mr. McGrath has served as
Portfolio Manager for Regions Morgan Keegan Select Mid Cap Growth Fund and
Regions Morgan Keegan Select Growth Fund. From 1999 to 2004, Mr. McGrath served
as a Portfolio Manager for the Adviser assisting with the Regions Morgan Keegan
Select Mid Cap Growth Fund and the Regions Morgan Keegan Select Growth Fund as
well as managing various other accounts. Mr. McGrath received a B.S. in Finance
from The University of Memphis in 1995 and a M.B.A. from Bryant College in 1998.
He is a holder of the Chartered Financial Analyst designation.
ERIC T. MCKISSACK, CFA - Mr. McKissack has served as President, CEO, and Chief
Investment Officer of Channing Capital Management, LLC since it was established
in 2003. Mr. McKissack has more than twenty-two years experience in investment
management and research. From 2004 to present, Mr. McKissack has served as the
Portfolio Manager for the Regions Morgan Keegan Select Mid Cap Value Fund. From
1986 to 2003, Mr. McKissack was a principal at Ariel Capital Management, LLC, a
Chicago-based investment management firm with over $10 billion in assets under
management. He served as its Vice Chairman and Co-Chief Investment Officer for
the last eight years of his tenure. From 1981 to 1986, Mr. McKissack worked as
a research analyst for First Chicago and First Chicago Investment Advisors, then
led by Gary Brinson. First Chicago Investment Advisors later became Brinson
Partners, and is now part of UBS Global Asset Management. Mr. McKissack
received a B.S. in Management from Massachusetts Institute of Technology in 1976
and an M.B.A. from the University of California at Berkeley in 2004. He is a
holder of the Chartered Financial Analyst designation.
CHARLES A. MURRAY, CFA - Mr. Murray is a Senior Vice President, Senior Portfolio
Manager, and Senior Equity Strategist for the Adviser. He has more than thirty
years of experience in investment management, research and banking. From 1978
to the present, Mr. Murray has served as a Portfolio Manager for the Adviser.
and its predecessor, and currently serves as the Portfolio Manager for the
Regions Morgan Keegan Select Mid Cap Growth Fund, Regions Morgan Keegan Select
Growth Fund, and Regions Morgan Keegan Select Balanced Fund. From 1978 to 1988,
Mr. Murray served as the portfolio manager of various common trust funds at a
bank later acquired by Regions Financial Corporation. Mr. Murray was the first
portfolio manager of the First Priority Equity Fund (the predecessor fund to
Regions Morgan Keegan Select Growth Fund) from 1992 to 1995. Mr. Murray has
managed the Regions Morgan Keegan Select Mid Cap Growth Fund from its inception
in March 1999 to present. He assumed lead manager of the Regions Morgan Keegan
Select Growth Fund in September 2001 and was named primary portfolio manager of
the Regions Morgan Keegan Select Balanced Fund in August 2004. Mr. Murray
received a B.S. in Finance from the University of Alabama in 1970. He is a
holder of the Chartered Financial Analyst designation.
JOHN B. RUSSELL - Mr. Russell is an Assistant Vice President and Portfolio
Manager for the Adviser. Prior to joining the Adviser in 2002, Mr. Russell was
part of a Financial Management program with WorldCom, Inc., a global
telecommunications company. Mr. Russell graduated from Millsaps College with a
B.B.A. and a second major in Spanish and received an M.B.A. from Millsaps
College with a focus in Finance.
MICHAEL L. SMITH - Mr. Smith is a Senior Vice President and Senior Portfolio
Manager for the Adviser. He has more than sixteen years experience in
investment research, trading, and portfolio management. From 2004 to present,
Mr. Smith has served as the Portfolio Manager for the Regions Morgan Keegan
Select Limited Maturity Fixed Income Fund, and Regions Morgan Keegan Select
Fixed Income Fund. From 2000 to 2004, Mr. Smith served as a Senior Portfolio
Manager for SouthTrust Asset Management where he was responsible for managing
all core institutional fixed income portfolios. From 1999 to 2000, Mr. Smith
was a Vice-President and Institutional Salesperson at UBS Paine Webber. From
1993 to 1999, Mr. Smith was a Fixed Income Strategist and Portfolio Manager at
Salomon Smith Barney. Mr. Smith began his career at Lehman Brothers in the
fixed income trading area. Mr. Smith received a B.S. in Business Administration
from the University of Denver in 1986 and an M.B.A. from the Owen School at
Vanderbilt University in 1993.
DOROTHY E. THOMAS, CFA - Ms. Thomas is a Senior Vice President and Director of
Tax-Exempt Fixed Income for the Adviser. Ms. Thomas has more than 30 years
experience in investment research, trading and portfolio management. From 1983
to present, Ms. Thomas has overseen tax-exempt bond investments at AmSouth Asset
Management, Inc., which subsequently merged into the Adviser. From 1997 to
2005, Ms. Thomas served as a portfolio manager to the AmSouth Mutual Funds.
From 1983 to 2001, Ms. Thomas served as a Trust Portfolio Manager and from 1983
to 1989 as an Equity Analyst at AmSouth. From 1973 to 1983, Ms. Thomas served
as a Bond Analyst and Corporate Finance Manager at AmSouth. Ms. Thomas received
a B.A. in Economics from Stanford University and an M.B.A. from the University
of Alabama at Birmingham. She is a holder of the Chartered Financial Analyst
designation.
75
The funds' SAI provides additional information about the portfolio managers'
compensation, other accounts managed by the portfolio managers and their
ownership of securities in the funds.
76
OTHER INFORMATION
- --------------------------------------------------------------------------------
Please note that the funds maintain additional policies and reserve certain
rights, including:
Fund shares may not be held in, or transferred to, an account with any firm
other than Morgan Keegan, Regions Morgan Keegan Trust or an Authorized Dealer.
The funds may vary their initial or additional investment levels in the case of
exchanges, reinvestments, periodic investment plans, retirement and employee
benefit plans, sponsored arrangements and other similar programs.
At any time, the funds may change or discontinue their sales charge waivers and
any of their order acceptance practices, and may suspend the sale of shares or
refuse a purchase order. Additionally, in accordance with applicable law, the
funds may suspend the right of redemption.
To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to Morgan Keegan promptly.
Dealers may impose a transaction fee on the purchase or sale of shares by
shareholders.
PRIVACY POLICY NOTICE
The funds, their distributor (Morgan Keegan) and their agents (referred to as
the "funds," "we" or "us") recognize that consumers (referred to as "you" or
"your") expect us to protect both your assets and financial information. We
respect your right to privacy and your expectation that all personal information
about you or your account will be maintained in a secure manner. We are
committed to maintaining the confidentiality, security and integrity of client
and shareholder information. We want you to understand the funds' policy that
governs the handling of your information, how the funds gather information, how
that information is used and how it is kept secure.
INFORMATION THE FUNDS COLLECT
The funds collect nonpublic personal information about you from the following
sources:
o We may receive information from you, or from your financial
representative, on account applications, other forms or electronically
(such as through the funds' website (www.rmkfunds.com) or other
electronic trading mechanisms). Examples of this information include
your name, address, social security number, assets and income.
o We may receive information from you, or from your financial
representative, through transactions with us or others, correspondence
and other communications. Examples of this information include
specific investments and your account balances.
o We may obtain other personal information from you in connection with
providing you a financial product or service. Examples of this
information include depository, debit or credit account numbers.
INFORMATION SHARING POLICY
The funds may share the nonpublic personal information about you, as described
above, with financial or nonfinancial companies or other entities, including
companies that may be affiliated with the funds and other unaffiliated third
parties, for the following purposes:
o We may share information when it is necessary and required to process
a transaction or to service a customer relationship. For example,
information may be shared with a company that provides account record
keeping services or a company that provides proxy services to
shareholders.
77
o We may share information when it is required or permitted by law. For
example, information may be shared in response to a subpoena or to
protect you against fraud or with someone who has established a legal
beneficial interest, such as a power of attorney.
o We may disclose all of the information we collect, as described above,
to companies that perform marketing or other services on our behalf or
to other financial institutions with whom we have agreements, for the
limited purpose of jointly offering, endorsing or sponsoring a
financial product or service. For example, we may share information
about you for these limited purposes with the bank, broker-dealer or
other financial intermediary through whom you purchased the funds'
products or services, or with providers of marketing, legal,
accounting or other professional services. The funds will not,
however, disclose a consumer's account number or similar form of
access number or access code for credit card, deposit or transaction
accounts to any nonaffiliated third party for use in telemarketing,
direct mail or other marketing purposes.
Except as described above, the funds do not share customer information. We will
not rent, sell, trade, or otherwise release or disclose any personal information
about you. Any information you provide to us is for the funds' use only. If you
decide to close your account(s) or become an inactive customer, we will adhere
to the privacy policies and practices as described in this notice.
INFORMATION SECURITY
When the funds share nonpublic customer information with third parties hired to
facilitate the delivery of certain products or services to our customers, such
information is made available for limited purposes and under controlled circum-
stances designed to protect our customers' privacy. We require third parties to
comply with our standards regarding security and confidentiality of such
information. We do not permit them to use that information for their own or any
other purposes, or rent, sell, trade or otherwise release or disclose the
information to any other party. These requirements are reflected in written
agreements between the funds and the third party service providers.
The funds protect your personal information in several ways. We maintain
physical, electronic, and procedural safeguards to guard your nonpublic personal
information. Each of the following sections explains an aspect of the funds'
commitment to protecting your personal information and respecting your privacy.
EMPLOYEE ACCESS TO INFORMATION
All of the funds' employees must adhere to the funds' policy on confidentiality.
Employee access to customer information is authorized for business purposes
only, and the degree of access is based on the sensitivity of the information
and on an employee's or agent's need to know the information in order to service
a customer's account or comply with legal requirements.
VISITING THE FUNDS' WEBSITE
o The funds' website (www.rmkfunds.com) gathers and maintains statistics
about the number of visitors as well as what information is viewed
most frequently. This information is used to improve the content and
level of service we provide to our clients and shareholders.
o Information or data entered into a website will be retained.
o Where registration to a website or re-entering personal information on
a website is required, "cookies" are used to improve your online
experience. A cookie is a way for websites to recognize whether or not
you have visited the site before. It is a small file that is stored on
your computer that identifies you each time you re-visit our site so
you don't have to resubmit personal information. Cookies provide
faster access into the website.
o We may also collect non-personally identifiable Internet Protocol
("IP") addresses for all other visitors to monitor the number of
visitors to the site. These non-personally identifiable IP addresses
are never shared with any third party.
E-MAIL
If you have opted to receive marketing information from the funds by e-mail, it
is our policy to include instructions in all marketing messages on how to
unsubscribe from subsequent e-mail programs. Some products or services from the
funds are intended to be delivered and serviced electronically. E-mail
communication may be utilized in such cases. If you participate in an employer-
sponsored retirement plan administered by the funds, we may, at your employer's
request, send you e-mail on matters pertaining to the retirement plan.
78
Please do not provide any account or personal information such as social
security numbers, account numbers, or account balances within your e-mail
correspondence to us. We cannot use e-mail to execute transaction instructions,
provide personal account information or change account registration. We can,
however, use e-mail to provide you with the necessary forms. You can also use
customer service to do so. Call us toll-free at 877-757-7424.
SURVEYS/AGGREGATE DATA
Periodically, the funds may conduct surveys about financial products and
services or review elements of customer information in an effort to forecast
future business needs. The funds then generate reports that include aggregate
data regarding their customers. Aggregate data classifies customer information
in various ways but does not identify individual customers. These reports may
also include information on website traffic patterns and related information.
These reports are used for the funds' planning, statistical and other corporate
purposes. Aggregate data may also be shared with external parties, such as
marketing organizations. However, no information is shared by which any
individual customer could be identified.
CHANGES TO THE FUNDS' PRIVACY POLICY
The funds reserve the right to modify or remove parts of this privacy statement
at any time. Notice will be provided to you in advance of any changes that would
affect your rights under this policy statement.
PROXY VOTING POLICIES AND RECORD OF VOTING ACTIVITY
The funds vote proxies related to their portfolios' securities according to a
set of policies and procedures approved by the funds' Board. You may view the
proxy voting activity for each fund during the most recent twelve month period
ended June 30 as well as a description of the policies and procedures, without
charge, by calling 877-757-7424, by visiting the fund's website at
www.rmkfunds.com or by visiting the SEC's website at www.sec.gov.
QUARTERLY REPORTS ON PORTFOLIO HOLDINGS
The funds file their complete schedules of portfolio holdings as of the first
and third quarters of their fiscal years on Form N-Q with the SEC no more than
sixty days after the close of those quarters. You may obtain the funds' Form N-
Q filings, without charge, by calling 877-757-7424 or you may view these filings
by visiting the SEC's website at www.sec.gov. The funds' Form N-Q filings may
also be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 800-SEC-0330 for information on the operation of the Public Reference
Room. A description of the funds' policies and procedures with respect to
disclosure of portfolio securities is available in the funds' SAI.
79
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Each fund declares periodic dividends to persons who own shares in the fund on
the record date for the dividend. In addition, each fund distributes net
realized capital gains, if any, at least annually to record date shareholders.
Your dividends and capital gain distributions will be automatically reinvested
in additional shares of the same class of the distributing fund, unless you
elect cash payments.
Dividends are declared and paid by the funds according to the following
schedule:
FUND DIVIDENDS DECLARED/PAID
MID CAP GROWTH FUND Quarterly
- ---------------------------------------------------------------------
GROWTH FUND Quarterly
- ---------------------------------------------------------------------
CORE EQUITY FUND Quarterly
- ---------------------------------------------------------------------
MID CAP VALUE FUND Quarterly
- ---------------------------------------------------------------------
VALUE FUND Quarterly
- ---------------------------------------------------------------------
BALANCED FUND Quarterly
- ---------------------------------------------------------------------
FIXED INCOME FUND Daily/Monthly
- ---------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND Daily/Monthly
- ---------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND Daily/Monthly
- ---------------------------------------------------------------------
TREASURY MONEY MARKET FUND Daily/Monthly
- ---------------------------------------------------------------------
MONEY MARKET FUND Daily/Monthly
- ---------------------------------------------------------------------
Distributions by the Fixed Income Fund, Limited Maturity Fixed Income Fund,
Intermediate Tax Exempt Bond Fund and the Money Market Funds (collectively, the
"Income Funds") are expected to be primarily dividends (I.E., little, if any, of
these funds' distributions will be capital gain distributions), while all other
funds are expected to pay both dividends and capital gain distributions.
Each fund sends you a timely statement of your account activity to assist you in
completing your federal, state and local income tax returns.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS
Dividends (other than "exempt-interest dividends" the Intermediate Tax Exempt
Bond Fund distributes, as described below) and capital gain distributions are
taxable to shareholders whether received in cash or reinvested in fund shares.
In general, any dividends and distributions of the excess of net short-term
capital gain over net long-term capital loss you receive from a fund are taxable
as ordinary income. However, a fund's dividends attributable to "qualified
dividend income" (I.E., dividends the fund receives on stock of most U.S. and
certain foreign corporations with respect to which the fund satisfies certain
holding period and other restrictions), the amount of which is not expected to
be substantial for the Income Funds, generally are subject to a 15% maximum
federal income tax rate for individual shareholders who satisfy those
restrictions with respect to the fund shares on which the dividends were paid.
Capital gain distributions are taxable at different rates depending on the
length of time a fund held the assets that generated the gain, not on the length
of time you held your fund shares. Distributions of a fund's net capital gain
(I.E., the excess of net long-term capital gain over net short-term capital
loss) are generally taxable to its shareholders as long-term capital gains,
which also are subject to a 15% maximum federal income tax rate for individual
shareholders to the extent the distributions are attributable to net capital
gain the fund recognizes on sales or exchanges of capital assets through its
last taxable year beginning before January 1, 2011.
It is anticipated that Intermediate Tax Exempt Bond Fund distributions will be
primarily "exempt-interest dividends," I.E., dividends that are excludable from
its shareholders' gross income for federal income tax purposes. However, that
fund's income dividends may be subject to state and local income and other tax,
and a part thereof may be a tax preference item for purposes of the federal
alternative minimum tax.
80
If you purchase shares just before a fund declares a dividend or capital gain
distribution, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable distribution (except in the
case of an exempt-interest dividend), whether or not you reinvest the
distribution in fund shares. Therefore, you should consider the tax
implications of purchasing shares of a fund shortly before it declares a
dividend or capital gain distribution. Contact your investment professional or
Morgan Keegan for information concerning when a particular fund will pay
dividends and capital gain distributions.
A sale (redemption) of fund shares is a taxable event and may produce a gain or
loss. For tax purposes, an exchange generally is treated the same as a sale.
Any capital gain an individual shareholder recognizes on a redemption or
exchange through December 31, 2010, of his or her fund shares that have been
held for more than one year will qualify for the 15% maximum rate. Short-term
capital gains are taxed at the ordinary income rate.
Unless your investment is in a tax-deferred account, you may want to avoid
selling shares of a fund at a loss for tax purposes and reinvesting in shares of
that fund within 30 days before or after that sale, because such a transaction
is considered a "wash sale," and you will not be allowed to deduct all or part
of the tax loss at that time.
Your investment in the funds could have additional tax consequences. Please
consult your tax adviser regarding your federal, state and local tax liability
from purchasing, holding and disposing of fund shares.
BACKUP WITHHOLDING. By law, the funds must withhold 28% of distributions and
redemption proceeds (regardless of the extent to which you may have realized
gain or loss) otherwise payable to you if you have not provided complete,
correct taxpayer identification information and 28% of your distributions if you
are otherwise subject to backup withholding.
81
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights are intended to help you understand the financial
performance of the share classes of each fund for the past five years or since
its inception, if the life of a fund or share class is shorter.
Certain information reflects financial results for a single fund share. The
total returns in the tables represent the rate that a shareholder would have
earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and disbursements). The information should be read in conjunction
with the financial statements contained in the funds' Annual Report that are
incorporated by reference into the funds' SAI and available upon request.
This information has been audited by PricewaterhouseCoopers LLP, independent
registered public accounting firm, for the years ended November 30, 2003, 2004,
2005, 2006 and 2007 for Mid Cap Growth Fund, Growth Fund, Mid Cap Value Fund,
Value Fund, Balanced Fund, Fixed Income Fund, Limited Maturity Fixed Income
Fund, Intermediate Tax Exempt Bond Fund and Treasury Money Market Fund and for
the years ended November 30, 2006 and 2007 for Core Equity Fund and Money Market
Fund. The financial information for Core Equity Fund and Money Market Fund for
the period ended November 30, 2005 and the years ended August 31, 2005 and
August 31, 2004 were also audited by PricewaterhouseCoopers LLP. The financial
information for the year ended August 31, 2003 for Core Equity Fund and Money
Market Fund were audited by other independent auditors. The independent
registered public accounting firm's report, along with the funds' audited
financial statements, is included in the Annual Report to Shareholders.
82
FINANCIAL HIGHLIGHTS (CONTINUED)
- ---------------------------------------------------------------------
REGIONS MORGAN KEEGAN SELECT FUNDS
NET ASSET NET REALIZED TOTAL DIVIDENDS
VALUE, NET AND UNREALIZED FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAINS/(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL
OF PERIOD INCOME/(LOSS) ON INVESTMENTS OPERATIONS INCOME GAINS
- -----------------------------------------------------------------------------------------------------------------------------------
MID CAP GROWTH FUND
CLASS A SHARES
Year Ended November 30, 2007.................$ 18.82 (0.06) 2.27 2.21 -- (2.40)
Year Ended November 30, 2006.................$ 18.06 (0.06) 1.82 1.76 -- (1.00)
Year Ended November 30, 2005.................$ 16.57 (0.07) 2.93 2.86 -- (1.37)
Year Ended November 30, 2004.................$ 15.49 (0.11) 1.19 1.08 -- --
Year Ended November 30, 2003.................$ 11.99 (0.11)(6) 3.61 3.50 -- --
MID CAP GROWTH FUND
CLASS C SHARES
Year Ended November 30, 2007.................$ 18.24 (0.18) 2.27 2.09 -- (2.40)
Year Ended November 30, 2006.................$ 17.61 (0.06) 1.69 1.63 -- (1.00)
Year Ended November 30, 2005.................$ 16.24 (0.07) 2.81 2.74 -- (1.37)
Year Ended November 30, 2004.................$ 15.29 (0.11) 1.06 0.95 -- --
Year Ended November 30, 2003.................$ 11.92 (0.21)(6) 3.58 3.37 -- --
MID CAP GROWTH FUND
CLASS I SHARES
Year Ended November 30, 2007.................$ 18.92 (0.02) 2.27 2.25 -- (2.40)
Year Ended November 30, 2006.................$ 18.11 (0.06) 1.87 1.81 -- (1.00)
Year Ended November 30, 2005.................$ 16.59 (0.07) 2.96 2.89 -- (1.37)
Period Ended November 30, 2004 (7)...........$ 16.16 (0.11) 0.54 0.43 -- --
GROWTH FUND
CLASS A SHARES
Year Ended November 30, 2007.................$ 18.21 0.02 2.61 2.63 (0.02) --
Year Ended November 30, 2006.................$ 16.93 0.02 1.28 1.30 (0.02) --
Year Ended November 30, 2005.................$ 15.33 0.04 1.65 1.69 (0.09) --
Year Ended November 30, 2004.................$ 15.04 0.06 0.23 0.29 -- --
Year Ended November 30, 2003.................$ 13.03 (0.03)(6) 2.04 2.01 -- --
GROWTH FUND
CLASS C SHARES
Year Ended November 30, 2007.................$ 17.69 -- 2.50 2.50 -- --
Year Ended November 30, 2006.................$ 16.52 -- 1.17 1.17 -- --
Year Ended November 30, 2005.................$ 15.02 0.01 1.55 1.56 (0.06) --
Year Ended November 30, 2004.................$ 14.84 0.06 0.12 0.18 -- --
Year Ended November 30, 2003.................$ 12.95 (0.15)(6) 2.04 1.89 -- --
GROWTH FUND
CLASS I SHARES
Year Ended November 30, 2007.................$ 18.19 0.07 2.61 2.68 (0.07) --
Year Ended November 30, 2006.................$ 16.94 0.10 1.25 1.35 (0.10) --
Period Ended November 30, 2005 (8)...........$ 15.52 (0.04) 1.47 1.43 (0.01) --
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Total return is based on net asset value, which excludes the sales charge or contingent deferred sales charge, if applicable.
(2) Not annualized for periods less than one year.
(3) Ratio annualized for periods less than one year.
(4) Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares
issued.
83
REGIONS MORGAN KEEGAN SELECT FUNDS
RATIOS TO AVERAGE NET ASSETS SUPPLEMENTAL DATA
--------------------------------------------------- ---------------------------
NET ASSET
VALUE, NET NET ASSETS, PORTFOLIO
TOTAL END OF TOTAL INVESTMENT NET EXPENSES WAIVER/ END OF PERIOD TURNOVER
DISTRIBUTIONS PERIOD RETURN(1, 2) INCOME(3) EXPENSES(3) REIMBURSEMENT(3, 5) (000'S) RATE(4)
- -----------------------------------------------------------------------------------------------------------------------------------
(2.40) $ 18.63 13.72% (0.34)% 1.23% -- $ 308,921 52%
(1.00) $ 18.82 10.27% (0.32)% 1.25% -- $ 352,742 67%
(1.37) $ 18.06 18.91% (0.40)% 1.26% -- $ 318,644 73%
-- $ 16.57 6.97% (0.69)% 1.29% -- $ 294,325 56%
-- $ 15.49 29.19% (0.82)% 1.33% -- $ 175,867 49%
(2.40) $ 17.93 13.48% (1.09)% 1.98% -- $ 10,345 52%
(1.00) $ 18.24 9.76% (1.07)% 2.00% -- $ 9,168 67%
(1.37) $ 17.61 18.54% (1.15)% 2.01% -- $ 5,984 73%
-- $ 16.24 6.21% (1.39)% 1.99% -- $ 5,353 56%
-- $ 15.29 28.27% (1.62)% 2.08% -- $ 1,825 49%
(2.40) $ 18.77 13.87% (0.09)% 0.98% -- $ 66,510 52%
(1.00) $ 18.92 10.52% (0.07)% 1.00% -- $ 3,634 67%
(1.37) $ 18.11 19.09% (0.15)% 1.01% -- $ 1,315 73%
-- $ 16.59 2.66% (0.40)% 1.00% -- $ 1,032 56%
(0.02) $ 20.82 14.46% 0.10% 1.21% -- $ 379,550 41%
(0.02) $ 18.21 7.67% 0.12% 1.25% -- $ 387,871 27%
(0.09) $ 16.93 11.06% 0.22% 1.23% 0.05% $ 385,900 53%
-- $ 15.33 1.93% 0.37% 1.27% 0.05% $ 411,785 33%
-- $ 15.04 15.43% (0.23)% 1.27% 0.05% $ 319,180 44%
-- $ 20.19 14.13% (0.65)% 1.96% -- $ 5,562 41%
-- $ 17.69 7.08% (0.63)% 2.00% -- $ 3,609 27%
(0.06) $ 16.52 10.43% (0.53)% 1.98% 0.05% $ 3,082 53%
-- $ 15.02 1.21% (0.32)% 1.96% 0.05% $ 2,955 33%
-- $ 14.84 14.59% (1.06)% 2.02% 0.05% $ 1,072 44%
(0.07) $ 20.80 14.75% 0.35% 0.96% -- $ 121,118 41%
(0.10) $ 18.19 7.98% 0.37% 1.00% -- $ 26,685 27%
(0.01) $ 16.94 9.24% 0.47% 0.98% 0.05% $ 33,118 53%
- ------------------------------------------------------------------------------------------------------------------------------------
(5) This voluntary expense decrease is reflected in both the net expense and net investment income/(loss) ratios shown.
(6) Per share data calculated using average shares for the period.
(7) From the commencement of investment operations on June 23, 2004.
(8) From the commencement of investment operations on May 19, 2005.
The Notes to the Financial Statements are an integral part of, and should be read in conjunction with, the Financial Statements.
84
REGIONS MORGAN KEEGAN SELECT FUNDS
NET ASSET NET REALIZED TOTAL DIVIDENDS
VALUE, NET AND UNREALIZED FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAINS/(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL
OF PERIOD INCOME ON INVESTMENTS OPERATIONS INCOME GAINS
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY FUND
CLASS A SHARES
Year Ended November 30, 2007.............. $ 28.53 0.15 2.41 2.56 (0.18) (5.99)
Year Ended November 30, 2006.............. $ 27.94 0.26 0.59 0.85 (0.26) --
Period Ended November 30, 2005 (9)........ $ 27.56 0.05 0.39 0.44 (0.06) --
Year Ended August 31, 2005................ $ 24.38 0.27(6) 3.15(6) 3.42 (0.24) --
Year Ended August 31, 2004................ $ 22.68 0.12(6) 1.73(6) 1.85 (0.15) --
Year Ended August 31, 2003................ $ 21.14 0.18 1.55 1.73 (0.19) --
CORE EQUITY FUND
CLASS C SHARES
Year Ended November 30, 2007.............. $ 28.53 0.10 2.42 2.52 (0.13) (5.99)
Period Ended November 30, 2006 (10)....... $ 29.07 0.14 (0.54) (0.40) (0.14) --
CORE EQUITY FUND
CLASS I SHARES
Year Ended November 30, 2007.............. $ 28.56 0.22 2.41 2.63 (0.25) (5.99)
Year Ended November 30, 2006.............. $ 27.97 0.33 0.59 0.92 (0.33) --
Period Ended November 30, 2005 (9)........ $ 27.59 0.07 0.39 0.46 (0.08) --
Year Ended August 31, 2005................ $ 24.42 0.34(6) 3.16(6) 3.50 (0.33) --
Year Ended August 31, 2004................ $ 22.71 0.19(6) 1.73(6) 1.92 (0.21) --
Year Ended August 31, 2003................ $ 21.17 0.25 1.54 1.79 (0.25) --
MID CAP VALUE FUND
CLASS A SHARES
Year Ended November 30, 2007.............. $ 11.10 -- 0.50 0.50 -- (0.44)
Year Ended November 30, 2006.............. $ 11.43 -- 0.97 0.97 -- (1.30)
Year Ended November 30, 2005.............. $ 12.73 (0.06) 1.34 1.28 -- (2.58)
Year Ended November 30, 2004.............. $ 11.27 (0.06) 2.35 2.29 (0.00)(7) (0.83)
Period Ended November 30, 2003 (11)....... $ 10.00 (0.00)(6)(7) 1.27 1.27 -- --
MID CAP VALUE FUND
CLASS C SHARES
Year Ended November 30, 2007.............. $ 10.85 (0.14) 0.55 0.41 -- (0.44)
Year Ended November 30, 2006.............. $ 11.26 -- 0.89 0.89 -- (1.30)
Year Ended November 30, 2005.............. $ 12.63 (0.06) 1.27 1.21 -- (2.58)
Year Ended November 30, 2004.............. $ 11.25 (0.06) 2.27 2.21 -- (0.83)
Period Ended November 30, 2003 (11)....... $ 10.00 (0.06)(6) 1.31 1.25 -- --
MID CAP VALUE FUND
CLASS I SHARES
Year Ended November 30, 2007.............. $ 11.14 0.04 0.48 0.52 -- (0.44)
Year Ended November 30, 2006.............. $ 11.44 -- 1.00 1.00 -- (1.30)
Period Ended November 30, 2005 (12)....... $ 10.50 (0.06) 1.00 0.94 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Total return is based on net asset value, which excludes the sales charge or contingent deferred sales charge, if applicable.
(2) Not annualized for periods less than one year.
(3) Ratio annualized for periods less than one year.
(4) Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares
issued.
(5) This voluntary expense decrease is reflected in both the net expense and net investment income/(loss) ratios shown.
(6) Per share data calculated using average shares for the period.
(7) Represents less than $0.005.
85
REGIONS MORGAN KEEGAN SELECT FUNDS
RATIOS TO AVERAGE NET ASSETS SUPPLEMENTAL DATA
--------------------------------------------------- ---------------------------
NET ASSET
VALUE, NET NET ASSETS, PORTFOLIO
TOTAL END OF TOTAL INVESTMENT NET EXPENSES WAIVER/ END OF PERIOD TURNOVER
DISTRIBUTIONS PERIOD RETURN(1, 2) INCOME(3) EXPENSES(3) REIMBURSEMENT(3, 5) (000'S) RATE(4)
- ------------------------------------------------------------------------------------------------------------------------------------
(6.17) $ 24.92 11.35% 0.59%(13) 1.28% -- 4,764 113%
(0.26) $ 28.53 3.06% 0.87% 1.27% -- 5,990 120%
(0.06) $ 27.94 1.59% 0.75% 1.43% -- 5,346 6%
(0.24) $ 27.56 14.08% 0.95% 1.42% 0.02% 5,941 31%
(0.15) $ 24.38 8.16% 0.48% 1.43% 0.05% 12,445 10%
(0.19) $ 22.68 8.28% 0.96% 1.44% 0.08% 6,992 12%
(6.12) $ 24.93 11.16% (0.16)%(13) 2.03% -- --(8) 113%
(0.14) $ 28.53 (1.35)% 0.12% 2.02% -- --(8) 120%
(6.24) $ 24.95 11.63% 0.84%(13) 1.03% -- 61,858 113%
(0.33) $ 28.56 3.34% 1.12% 1.02% -- 94,099 120%
(0.08) $ 27.97 1.65% 1.01% 1.18% -- 112,720 6%
(0.33) $ 27.59 14.39% 1.27% 1.15% 0.16% 119,450 31%
(0.21) $ 24.42 8.48% 0.77% 1.13% 0.35% 136,532 10%
(0.25) $ 22.71 8.57% 1.26% 1.14% 0.38% 139,516 12%
(0.44) $ 11.16 4.58% 0.08% 1.31% -- 56,249 66%
(1.30) $ 11.10 9.75% -- 1.30% -- 75,786 33%
(2.58) $ 11.43 11.93% (0.44)% 1.25% 0.05% 89,810 68%
(0.83) $ 12.73 21.76% (0.70)% 1.38% 0.05% 106,222 23%
-- $ 11.27 12.70% 0.03% 1.38% 0.05% 68,034 126%
(0.44) $ 10.82 3.83% (0.67)% 2.06% -- 930 66%
(1.30) $ 10.85 9.13% (0.75)% 2.05% -- 1,274 33%
(2.58) $ 11.26 11.38% (1.19)% 2.00% 0.05% 848 68%
(0.83) $ 12.63 21.00% (1.13)% 1.81% 0.05% 384 23%
-- $ 11.25 12.50% (0.72)% 2.13% 0.05% 4 126%
(0.44) $ 11.22 4.75% 0.33% 1.06% -- 17,011 66%
(1.30) $ 11.14 10.03% 0.25% 1.05% -- 134 33%
-- $ 11.44 8.95% (0.19)% 1.00% 0.05% 140 68%
- ------------------------------------------------------------------------------------------------------------------------------------
(8) Represents less than $1,000.
(9) For the period September 1, 2005 to November 30, 2005.
(10) From the commencement of investment operations on April 3, 2006.
(11) From the commencement of investment operations on December 9, 2002.
(12) From the commencement of investment operations on May 10, 2005.
(13) Net investment income includes a one-time cash dividend of $21.50 per share of Florida East Coast Industries, Inc. Excluding
this dividend, the net investment income ratio to average net assets would have been 0.15%, (0.60)% and 0.40% for Class A
Shares, Class C Shares and Class I Shares, respectively.
The Notes to the Financial Statements are an integral part of, and should be read in conjunction with, the Financial Statements.
86
REGIONS MORGAN KEEGAN SELECT FUNDS
NET ASSET NET REALIZED TOTAL DIVIDENDS
VALUE, NET AND UNREALIZED FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAINS/(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL
OF PERIOD INCOME/(LOSS) ON INVESTMENTS OPERATIONS INCOME GAINS
- ----------------------------------------------------------------------------------------------------------------------------------
VALUE FUND
CLASS A SHARES
Year Ended November 30, 2007............. $ 17.76 0.20 2.79 2.99 (0.19) --
Year Ended November 30, 2006............. $ 16.23 0.13 1.52 1.65 (0.12) --
Year Ended November 30, 2005............. $ 14.40 0.15 1.86 2.01 (0.18) --
Year Ended November 30, 2004............. $ 13.13 0.12 1.23 1.35 (0.08) --
Year Ended November 30, 2003............. $ 12.22 0.08(6) 0.90 0.98 (0.07) --
VALUE FUND
CLASS C SHARES
Year Ended November 30, 2007............. $ 17.68 0.01 2.84 2.85 -- --
Year Ended November 30, 2006............. $ 16.16 0.01 1.51 1.52 -- --
Year Ended November 30, 2005............. $ 14.33 0.04 1.86 1.90 (0.07) --
Year Ended November 30, 2004............. $ 13.13 0.08 1.16 1.24 (0.04) --
Year Ended November 30, 2003............. $ 12.21 (0.00)(6)(7) 0.92 0.92 (0.00)(7) --
VALUE FUND
CLASS I SHARES
Year Ended November 30, 2007............. $ 17.76 0.25 2.79 3.04 (0.24) --
Year Ended November 30, 2006............. $ 16.26 0.20 1.49 1.69 (0.19) --
Year Ended November 30, 2005............. $ 14.42 0.18 1.87 2.05 (0.21) --
Period Ended November 30, 2004 (8)....... $ 13.69 0.07 0.70 0.77 (0.04) --
BALANCED FUND
CLASS A SHARES
Year Ended November 30, 2007............. $ 16.47 0.20 1.60 1.80 (0.20) (0.50)
Year Ended November 30, 2006............. $ 15.40 0.19 1.10 1.29 (0.19) (0.03)
Year Ended November 30, 2005............. $ 13.97 0.16 1.46 1.62 (0.19) --
Year Ended November 30, 2004............. $ 13.54 0.22(6) 0.40 0.62 (0.19) --
Year Ended November 30, 2003............. $ 12.88 0.20(6) 0.68 0.88 (0.22) --
BALANCED FUND
CLASS C SHARES
Year Ended November 30, 2007............. $ 16.46 0.08 1.60 1.68 (0.08) (0.50)
Year Ended November 30, 2006............. $ 15.38 0.06 1.11 1.17 (0.06) (0.03)
Year Ended November 30, 2005............. $ 13.95 0.06 1.46 1.52 (0.09) --
Year Ended November 30, 2004............. $ 13.54 0.13(6) 0.39 0.52 (0.11) --
Year Ended November 30, 2003............. $ 12.90 0.10(6) 0.67 0.77 (0.13) --
BALANCED FUND
CLASS I SHARES
Year Ended November 30, 2007............. $ 16.49 0.24 1.61 1.85 (0.24) (0.50)
Year Ended November 30, 2006............. $ 15.42 0.23 1.10 1.33 (0.23) (0.03)
Period Ended November 30, 2005 (9)....... $ 15.15 0.01 0.30 0.31 (0.04) --
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Total return is based on net asset value, which excludes the sales charge or contingent deferred sales charge, if applicable.
(2) Not annualized for periods less than one year.
(3) Ratio annualized for periods less than one year.
(4) Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares
issued.
(5) This voluntary expense decrease is reflected in both the net expense and net investment income/(loss) ratios shown.
87
REGIONS MORGAN KEEGAN SELECT FUNDS
RATIOS TO AVERAGE NET ASSETS SUPPLEMENTAL DATA
--------------------------------------------------- --------------------------
NET ASSET
VALUE, NET NET ASSETS, PORTFOLIO
TOTAL END OF TOTAL INVESTMENT NET EXPENSES WAIVER/ END OF PERIOD TURNOVER
DISTRIBUTIONS PERIOD RETURN(1, 2) INCOME(3) EXPENSES(3) REIMBURSEMENT(3, 5) (000'S) RATE(4)
- ------------------------------------------------------------------------------------------------------------------------------------
(0.19) $ 20.56 16.93% 1.03%(10) 1.22% -- $ 230,288 89%
(0.12) $ 17.76 10.19% 0.73% 1.23% -- $ 250,627 72%
(0.18) $ 16.23 14.05% 0.97% 1.25% 0.05% $ 224,301 58%
(0.08) $ 14.40 10.29% 0.92% 1.29% 0.05% $ 169,772 59%
(0.07) $ 13.13 8.12% 0.68% 1.25% 0.05% $ 209,319 231%
-- $ 20.53 16.12% 0.28%(10) 1.97% -- $ 2,734 89%
-- $ 17.68 9.41% (0.02)% 1.98% -- $ 2,633 72%
(0.07) $ 16.16 13.31% 0.22% 2.00% 0.05% $ 2,255 58%
(0.04) $ 14.33 9.45% 0.18% 2.00% 0.05% $ 2,056 59%
(0.00)(7) $ 13.13 7.55% 0.04% 2.00% 0.05% $ 368 231%
(0.24) $ 20.56 17.23% 1.28%(10) 0.97% -- $ 32,079 89%
(0.19) $ 17.76 10.46% 0.98% 0.98% -- $ 1,088 72%
(0.21) $ 16.26 14.31% 1.22% 1.00% 0.05% $ 806 58%
0.04 $ 14.42 5.63% 1.16% 1.02% 0.05% $ 531 59%
(0.70) $ 17.57 11.36% 1.19% 1.25% -- $ 166,421 34%
(0.22) $ 16.47 8.51% 1.23% 1.28% -- $ 176,281 29%
(0.19) $ 15.40 11.72% 1.16% 1.28% 0.05% $ 127,954 22%
(0.19) $ 13.97 4.63% 1.62% 1.33% 0.05% $ 117,968 79%
(0.22) $ 13.54 6.92% 1.58% 1.35% 0.05% $ 96,192 98%
(0.58) $ 17.56 10.54% 0.44% 2.00% -- $ 7,097 34%
(0.09) $ 16.46 7.69% 0.48% 2.03% -- $ 932 29%
(0.09) $ 15.38 10.96% 0.41% 2.03% 0.05% $ 1,382 22%
(0.11) $ 13.95 3.86% 0.92% 2.08% 0.05% $ 2,084 79%
(0.13) $ 13.54 6.07% 0.81% 2.10% 0.05% $ 978 98%
(0.74) $ 17.60 11.69% 1.44% 1.00% -- $ 250 34%
(0.26) $ 16.49 8.76% 1.48% 1.03% -- $ 561 29%
(0.04) $ 15.42 2.06% 1.41% 1.03% 0.05% $ 47,565 22%
- ------------------------------------------------------------------------------------------------------------------------------------
(6) Per share data calculated using average shares for the period.
(7) Represents less than $0.005.
(8) From the commencement of investment operations on June 16, 2004.
(9) From the commencement of investment operations on September 1, 2005.
(10) Net investment income includes a one-time cash dividend of $21.50 per share of Florida East Coast Industries, Inc. Excluding
this dividend, the net investment income ratio to average net assets would have been 0.90%, 0.15% and 1.15% for Class A Shares,
Class C Shares and Class I Shares, respectively.
The Notes to the Financial Statements are an integral part of, and should be read in conjunction with, the Financial Statements.
88
REGIONS MORGAN KEEGAN SELECT FUNDS
NET ASSET NET REALIZED TOTAL DIVIDENDS
VALUE, NET AND UNREALIZED FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAINS/(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL
OF PERIOD INCOME ON INVESTMENTS OPERATIONS INCOME GAINS
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUND
CLASS A SHARES
Year Ended November 30, 2007................... $ 10.24 0.48 (0.68) (0.20) (0.49) --
Year Ended November 30, 2006................... $ 10.23 0.47 0.02 0.49 (0.48) --
Year Ended November 30, 2005................... $ 10.54 0.39 (0.31) 0.08 (0.39) --
Year Ended November 30, 2004................... $ 11.02 0.37 (0.27) 0.10 (0.37) (0.21)
Year Ended November 30, 2003................... $ 11.10 0.41 (0.06) 0.35 (0.41) (0.02)
FIXED INCOME FUND
CLASS C SHARES
Year Ended November 30, 2007................... $ 10.24 0.41 (0.67) (0.26) (0.42) --
Year Ended November 30, 2006................... $ 10.23 0.39 0.02 0.41 (0.40) --
Year Ended November 30, 2005................... $ 10.55 0.31 (0.32) (0.01) (0.31) --
Year Ended November 30, 2004................... $ 11.02 0.28 (0.25) 0.03 (0.29) (0.21)
Year Ended November 30, 2003................... $ 11.10 0.32 (0.05) 0.27 (0.33) (0.02)
FIXED INCOME FUND
CLASS I SHARES
Year Ended November 30, 2007................... $ 10.24 0.50 (0.68) (0.18) (0.51) --
Year Ended November 30, 2006................... $ 10.23 0.49 0.02 0.51 (0.50) --
Period Ended November 30, 2005 (9)............. $ 10.40 0.13 (0.17) (0.04) (0.13) --
LIMITED MATURITY FIXED INCOME FUND
CLASS A SHARES
Year Ended November 30, 2007................... $ 9.69 0.41 (0.90) (0.49) (0.45) --
Year Ended November 30, 2006................... $ 9.65 0.35 0.04 0.39 (0.35) --
Year Ended November 30, 2005................... $ 9.84 0.29 (0.18) 0.11 (0.30) --
Year Ended November 30, 2004................... $ 10.11 0.27 (0.27) 0.00(7) (0.27) --
Year Ended November 30, 2003................... $ 10.31 0.27(6) (0.16) 0.11 (0.30) (0.01)
LIMITED MATURITY FIXED INCOME FUND
CLASS C SHARES
Year Ended November 30, 2007................... $ 9.69 0.34 (0.90) (0.56) (0.38) --
Year Ended November 30, 2006................... $ 9.65 0.28 0.04 0.32 (0.28) --
Year Ended November 30, 2005................... $ 9.84 0.22 (0.18) 0.04 (0.23) --
Year Ended November 30, 2004................... $ 10.11 0.20 (0.28) (0.08) (0.19) --
Year Ended November 30, 2003................... $ 10.31 0.19(6) (0.15) 0.04 (0.23) (0.01)
LIMITED MATURITY FIXED INCOME FUND
CLASS I SHARES
Year Ended November 30, 2007................... $ 9.69 0.44 (0.90) (0.46) (0.48) --
Year Ended November 30, 2006................... $ 9.64 0.34 0.05 0.39 (0.34) --
Period Ended November 30, 2005 (10)............ $ 9.74 0.07 (0.08) (0.01) (0.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Total return is based on net asset value, which excludes the sales charge or contingent deferred sales charge, if applicable.
(2) Not annualized for periods less than one year.
(3) Ratio annualized for periods less than one year.
(4) Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares
issued.
(5) This voluntary expense decrease is reflected in both the net expense and net investment income/(loss) ratios shown.
89
REGIONS MORGAN KEEGAN SELECT FUNDS
RATIOS TO AVERAGE NET ASSETS SUPPLEMENTAL DATA
------------------------------------------------ -----------------------------
NET ASSET
VALUE, NET NET ASSETS, PORTFOLIO
TOTAL END OF TOTAL INVESTMENT NET EXPENSES WAIVER/ END OF PERIOD TURNOVER
DISTRIBUTIONS PERIOD RETURN(1, 2) INCOME(3) EXPENSES(3) REIMBURSEMENT(3, 5) (000'S) RATE(4)
- -----------------------------------------------------------------------------------------------------------------------------------
(0.49) $ 9.55 (2.01)% 4.92% 1.00% -- $ 133,830 58%
(0.48) $ 10.24 4.91% 4.56% 1.00% -- $ 214,897 44%
(0.39) $ 10.23 0.75% 3.67% 0.97% 0.25% $ 231,426 39%
(0.58) $ 10.54 0.87% 3.44% 0.97% 0.25% $ 265,532 116%
(0.43) $ 11.02 3.16% 3.65% 0.97% 0.25% $ 316,857 72%
(0.42) $ 9.56 (2.64)% 4.17% 1.75% -- $ 3,096 58%
(0.40) $ 10.24 4.13% 3.81% 1.75% -- $ 2,750 44%
(0.31) $ 10.23 (0.10)% 2.92% 1.72% 0.25% $ 2,469 39%
(0.50) $ 10.55 0.12% 2.63% 1.72% 0.25% $ 2,531 116%
(0.35) $ 11.02 2.40% 2.90% 1.72% 0.25% $ 916 72%
(0.51) $ 9.55 (1.76)% 5.17% 0.75% -- $ 45,432 58%
(0.50) $ 10.24 5.17% 4.81% 0.75% -- $ 54,057 44%
(0.13) $ 10.23 (0.41)% 3.92% 0.72% 0.25% $ 77,969 39%
(0.45) $ 8.75 (5.24)% 4.23% 0.96% 0.15% $ 20,747 19%
(0.35) $ 9.69 4.15% 3.59% 1.00% 0.06% $ 52,023 83%
(0.30) $ 9.65 1.19% 3.01% 0.96% 0.30% $ 67,475 42%
(0.27) $ 9.84 (0.02)% 2.23% 0.97% 0.23% $ 110,249 144%
(0.31) $ 10.11 1.14% 2.67% 1.00% 0.20% $ 168,969 63%
(0.38) $ 8.75 (5.95)% 3.48% 1.71% 0.15% $ 1,466 19%
(0.28) $ 9.69 3.37% 2.84% 1.75% 0.06% $ 406 83%
(0.23) $ 9.65 0.43% 2.26% 1.71% 0.30% $ 502 42%
(0.19) $ 9.84 (0.77)% 1.41% 1.72% 0.23% $ 843 144%
(0.24) $ 10.11 0.38% 1.88% 1.75% 0.20% $ 164 63%
(0.48) $ 8.75 (4.91)% 4.48% 0.71% 0.15% $ --(8) 19%
(0.34) $ 9.69 4.18% 3.84% 0.75% 0.06% $ --(8) 83%
(0.08) $ 9.64 (0.19)% 3.26% 0.71% 0.30% $ --(8) 42%
- ------------------------------------------------------------------------------------------------------------------------------------
(6) Per share data calculated using average shares for the period.
(7) Represents less than $0.005.
(8) Represents less than $1,000.
(9) From the commencement of investment operations on August 14, 2005.
(10) From the commencement of investment operations on September 1, 2005.
The Notes to the Financial Statements are an integral part of, and should be read in conjunction with, the Financial Statements.
90
REGIONS MORGAN KEEGAN SELECT FUNDS
NET ASSET NET REALIZED TOTAL DIVIDENDS
VALUE, NET AND UNREALIZED FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAINS/(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL
OF PERIOD INCOME ON INVESTMENTS OPERATIONS INCOME GAINS
- ------------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND
CLASS A SHARES
Year Ended November 30, 2007.................. $ 9.54 0.31 (0.04) 0.27 (0.30) --
Year Ended November 30, 2006.................. $ 9.52 0.31 0.03 0.34 (0.31) (0.01)
Year Ended November 30, 2005.................. $ 9.77 0.30 (0.19) 0.11 (0.30) (0.06)
Period Ended November 30, 2004 (7)............ $ 10.00 0.25 (0.23) 0.02 (0.25) --
INTERMEDIATE TAX EXEMPT BOND FUND
CLASS C SHARES
Year Ended November 30, 2007.................. $ 9.55 0.26 (0.04) 0.22 (0.25) --
Year Ended November 30, 2006.................. $ 9.54 0.34 0.02 0.36 (0.34) (0.01)
Year Ended November 30, 2005.................. $ 9.77 0.26 (0.17) 0.09 (0.26) (0.06)
Period Ended November 30, 2004 (7)............ $ 10.00 0.20 (0.23) (0.03) (0.20) --
INTERMEDIATE TAX EXEMPT BOND FUND
CLASS I SHARES
Year Ended November 30, 2007.................. $ 9.54 0.33 (0.05) 0.28 (0.32) --
Year Ended November 30, 2006.................. $ 9.52 0.34 0.03 0.37 (0.34) (0.01)
Year Ended November 30, 2005.................. $ 9.77 0.32 (0.19) 0.13 (0.32) (0.06)
Period Ended November 30, 2004 (7)............ $ 10.00 0.22 (0.23) (0.01) (0.22) --
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Total return is based on net asset value, which excludes the sales charge or contingent deferred sales charge, if applicable.
(2) Not annualized for periods less than one year.
(3) Ratio annualized for periods less than one year.
(4) Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares
issued.
(5) This voluntary expense decrease is reflected in both the net expense and net investment income/(loss) ratios shown.
(6) Represents less than $1,000.
(7) From the commencement of investment operations on February 9, 2004.
The Notes to the Financial Statements are an integral part of, and should be read in conjunction with, the Financial Statements.
91
REGIONS MORGAN KEEGAN SELECT FUNDS
RATIOS TO AVERAGE NET ASSETS SUPPLEMENTAL DATA
------------------------------------------------- -----------------------------
NET ASSET
VALUE, NET NET ASSETS, PORTFOLIO
TOTAL END OF TOTAL INVESTMENT NET EXPENSES WAIVER/ END OF PERIOD TURNOVER
DISTRIBUTIONS PERIOD RETURN(1, 2) INCOME(3) EXPENSES(3) REIMBURSEMENT(3, 5) (000'S) RATE(4)
- -----------------------------------------------------------------------------------------------------------------------------------
(0.30) $ 9.51 2.90% 3.22% 0.86% -- $ 46,586 15%
(0.32) $ 9.54 3.66% 3.30% 0.80% -- $ 45,782 11%
(0.36) $ 9.52 1.07% 3.03% 0.77% 0.30% $ 52,670 16%
(0.25) $ 9.77 0.22% 3.18% 0.63% 0.50% $ 68,531 19%
(0.25) $ 9.52 2.30% 2.47% 1.61% -- $ 3,196 15%
(0.35) $ 9.55 3.84% 2.55% 1.55% -- $ --(6) 11%
(0.32) $ 9.54 0.95% 2.43% 1.37% 0.45% $ --(6) 16%
(0.20) $ 9.77 (0.27)% 2.58% 1.23% 0.50% $ --(6) 19%
(0.32) $ 9.50 3.05% 3.47% 0.61% -- $ 4,920 15%
(0.35) $ 9.54 3.94% 3.55% 0.55% -- $ 6,922 11%
(0.38) $ 9.52 1.33% 3.28% 0.52% 0.30% $ 8,769 16%
(0.22) $ 9.77 (0.04)% 3.43% 0.38% 0.50% $ 326 19%
- -----------------------------------------------------------------------------------------------------------------------------------
92
REGIONS MORGAN KEEGAN SELECT FUNDS
NET ASSET NET REALIZED TOTAL DIVIDENDS
VALUE, NET AND UNREALIZED FROM FROM NET
BEGINNING INVESTMENT GAINS/(LOSSES) INVESTMENT INVESTMENT
OF PERIOD INCOME ON INVESTMENTS OPERATIONS INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
TREASURY MONEY MARKET FUND
CLASS A SHARES
Year Ended November 30, 2007....................... $ 1.00 0.04 -- 0.04 (0.04)
Year Ended November 30, 2006....................... $ 1.00 0.04 -- 0.04 (0.04)
Year Ended November 30, 2005....................... $ 1.00 0.02 -- 0.02 (0.02)
Year Ended November 30, 2004....................... $ 1.00 0.01 -- 0.01 (0.01)
Year Ended November 30, 2003....................... $ 1.00 --(5) -- --(5) --(5)
TREASURY MONEY MARKET FUND
CLASS I SHARES
Year Ended November 30, 2007....................... $ 1.00 0.04 -- 0.04 (0.04)
Period Ended November 30, 2006 (7)................. $ 1.00 0.03 -- 0.03 (0.03)
MONEY MARKET FUND
CLASS A SHARES
Year Ended November 30, 2007....................... $ 1.00 0.04 -- 0.04 (0.04)
Year Ended November 30, 2006....................... $ 1.00 0.04 --(5) 0.04 (0.04)
Period Ended November 30, 2005 (8)................. $ 1.00 0.01 --(5) 0.01 (0.01)
Year Ended August 31, 2005......................... $ 1.00 0.02 --(5) 0.02 (0.02)
Year Ended August 31, 2004......................... $ 1.00 --(5) --(5) --(5) --(5)
Year Ended August 31, 2003......................... $ 1.00 --(5) --(5) --(5) --(5)
MONEY MARKET FUND
CLASS I SHARES
Year Ended November 30, 2007....................... $ 1.00 0.05 -- 0.05 (0.05)
Year Ended November 30, 2006....................... $ 1.00 0.04 --(5) 0.04 (0.04)
Period Ended November 30, 2005 (8)................. $ 1.00 0.01 --(5) 0.01 (0.01)
Year Ended August 31, 2005......................... $ 1.00 0.02 --(5) 0.02 (0.02)
Year Ended August 31, 2004......................... $ 1.00 0.01 --(5) 0.01 (0.01)
Year Ended August 31, 2003......................... $ 1.00 0.01 --(5) 0.01 (0.01)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Total return is based on net asset value, which excludes the sales charge or contingent deferred sales charge, if applicable.
(2) Not annualized for periods less than one year.
(3) Ratio annualized for periods less than one year.
(4) This voluntary expense decrease is reflected in both the net expense and net investment income/(loss) ratios shown.
(5) Represents less than $0.005.
(6) Represents less than $1,000.
(7) From the commencement of investment operations on April 3, 2006.
(8) For the period September 1, 2005 to November 30, 2005.
The Notes to the Financial Statements are an integral part of, and should be read in conjunction with, the Financial Statements.
93
REGIONS MORGAN KEEGAN SELECT FUNDS
RATIOS TO AVERAGE NET ASSETS SUPPLEMENTAL DATA
---------------------------------------------------- --------------------
NET ASSET
VALUE, NET NET ASSETS,
TOTAL END OF TOTAL INVESTMENT NET EXPENSES WAIVER/ END OF PERIOD
DISTRIBUTIONS PERIOD RETURN(1, 2) INCOME(3) EXPENSES(3) REIMBURSEMENT(3, 4) (000'S)
- ----------------------------------------------------------------------------------------------------------------------------------
(0.04) $ 1.00 4.21% 4.11% 0.64% -- $ 1,256,827
(0.04) $ 1.00 4.10% 4.03% 0.60% 0.04% $ 1,086,552
(0.02) $ 1.00 2.25% 2.19% 0.62% 0.30% $ 827,861
(0.01) $ 1.00 0.54% 0.55% 0.64% 0.29% $ 861,369
--(5) $ 1.00 0.47% 0.47% 0.66% 0.25% $ 764,892
(0.04) $ 1.00 4.24% 4.36% 0.39% -- $ 1,444
(0.03) $ 1.00 2.67% 4.03% 0.35% 0.04% $ --(6)
(0.04) $ 1.00 4.56% 4.41% 0.74% -- $ 136,165
(0.04) $ 1.00 4.03% 3.97% 0.82% -- $ 76,215
(0.01) $ 1.00 0.80% 2.94% 0.85% 0.15% $ 78,491
(0.02) $ 1.00 1.55% 1.45% 1.06% 0.17% $ 42,404
--(5) $ 1.00 0.20% 0.19% 1.12% 0.19% $ 68,301
--(5) $ 1.00 0.46% 0.47% 1.16% 0.18% $ 93,450
(0.05) $ 1.00 4.82% 4.66% 0.49% -- $ 11,834
(0.04) $ 1.00 4.29% 4.22% 0.57% -- $ 12,915
(0.01) $ 1.00 0.74% 3.21% 0.60% 0.15% $ 39,382
(0.02) $ 1.00 2.06% 1.92% 0.55% 0.31% $ 37,575
(0.01) $ 1.00 0.70% 0.70% 0.62% 0.44% $ 120,022
(0.01) $ 1.00 0.97% 0.95% 0.66% 0.43% $ 116,388
- ------------------------------------------------------------------------------------------------------------------------------------
94
REGIONS MORGAN KEEGAN SELECT FUNDS
- --------------------------------------------------------------------------------
SHARE TICKER
CLASSES SYMBOLS CUSIPs
Class A Shares RAGAX 75913Q 83 7
Class C Shares RMKAX 75913Q 75 3
MID CAP GROWTH FUND Class I Shares RMKIX 75913Q 45 6
- --------------------------------------------------------------------------------
Class A Shares RGRAX 75913Q 40 7
Class C Shares RMKGX 75913Q 76 1
GROWTH FUND Class I Shares RGRIX 75913Q 46 4
- --------------------------------------------------------------------------------
Class A Shares MGIFX 61741W 30 3
Class C Shares RCECX 75913Q 43 1
CORE EQUITY FUND Class I Shares MAGIX 61741W 40 2
- --------------------------------------------------------------------------------
Class A Shares RSEAX 75913Q 61 3
Class C Shares RSECX 75913Q 58 9
MID CAP VALUE FUND Class I Shares RMVIX 75913Q 48 0
- --------------------------------------------------------------------------------
Class A Shares RVLAX 75913Q 60 5
Class C Shares RMKVX 75913Q 78 7
VALUE FUND Class I Shares RVLIX 75913Q 47 2
- --------------------------------------------------------------------------------
Class A Shares FPALX 75913Q 20 9
Class C Shares RMKBX 75913Q 81 1
BALANCED FUND Class I Shares RBLIX 75913Q 49 8
- --------------------------------------------------------------------------------
Class A Shares RFIFX 75913Q 80 3
Class C Shares RMKFX 75913Q 77 9
FIXED INCOME FUND Class I Shares RFIIX 75913Q 51 4
- --------------------------------------------------------------------------------
Class A Shares RLMGX 75913Q 85 2
Class C Shares RMKLX 75913Q 79 5
LIMITED MATURITY FIXED INCOME FUND Class I Shares RLMIX 75913Q 52 2
- --------------------------------------------------------------------------------
Class A Shares RTEAX 75913Q 57 1
Class C Shares RTESX 75913Q 56 3
INTERMEDIATE TAX EXEMPT BOND FUND Class I Shares RTEIX 75913Q 55 5
- --------------------------------------------------------------------------------
Class A Shares FITXX 75913Q 87 8
TREASURY MONEY MARKET FUND Class I Shares RTIXX 75913Q 44 9
- --------------------------------------------------------------------------------
Class A Shares MIVXX 61741W 84 0
MONEY MARKET FUND Class I Shares MAGXX 61741W 83 2
- --------------------------------------------------------------------------------
95
[BACK COVER]
FOR ADDITIONAL INFORMATION
The SAI, dated April 1, 2008, containing further information about the funds,
including various types of investments and investment techniques and their
risks, investment limitations and additional policies and information about the
funds' management, has been filed with the SEC and, as amended or supplemented
from time to time, is incorporated by reference in this Prospectus.
Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
Free copies of the annual and semi-annual reports and SAI may be obtained:
o By visiting the funds' website at www.rmkfunds.com;
o From your Morgan Keegan Financial Advisor or by calling Morgan Keegan
toll-free at 800-222-8866;
o From your Regions Morgan Keegan Trust Administrator or by calling
Regions Morgan Keegan Trust toll-free at 877-757-7424;
o By writing to Morgan Keegan at the address noted below; or
o By accessing the EDGAR Database on the SEC's website at www.sec.gov.
Reports and other information about the funds are available on the EDGAR
database on the SEC's website at www.sec.gov. Information about the funds
(including shareholder reports and the SAI) can also be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. You may obtain copies of
this information, after you pay a duplicating fee, by e-mail request at
publicinfo@sec.gov, or by writing the SEC's Public Reference Room, Washington,
D.C. 20549-0102. Call 202-942-8090 for information on the Public Reference
Room's operations and copying fees.
Requests for other information about the funds and all shareholder inquiries can
be made by contacting Morgan Keegan at the address or toll-free telephone number
listed below:
Morgan Keegan & Company, Inc.
50 North Front Street
Memphis, TN 38103
800-366-7426
www.morgankeegan.com
[LOGO Regions Morgan Keegan Select Funds]
Investment Company Act File No. 811-6511
96
REGIONS MORGAN KEEGAN SELECT FUNDS
Class A Shares, Class C Shares and Class I Shares
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Core Equity Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
Regions Morgan Keegan Select Balanced Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Limited Maturity Fixed Income Fund
Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
Class A Shares and Class I Shares
Regions Morgan Keegan Select Treasury Money Market Fund
Regions Morgan Keegan Select Money Market Fund
COMBINED STATEMENT OF ADDITIONAL INFORMATION
April 1, 2008
This Statement of Additional Information ("SAI") is not a Prospectus. It should
be read in conjunction with the Prospectus of Regions Morgan Keegan Select Funds
(the "Trust"), dated April 1, 2008, which has been filed with the Securities and
Exchange Commission ("SEC"). Unless otherwise defined herein, capitalized terms
have the meanings given to them in the Prospectus. The Trust's financial
statements, the notes thereto and the report of its independent registered
public accounting firm are incorporated by reference into this SAI from the
Trust's Annual Report to shareholders. Copies of the Prospectus and Annual
Report are available without charge from Morgan Keegan & Company, Inc. ("Morgan
Keegan"), the Trust's distributor, by writing to the below address, by calling
toll-free 1-800-366-7426 or by visiting the Trust's website at www.rmkfunds.com.
REGIONS MORGAN KEEGAN SELECT FUNDS
Morgan Keegan Tower
50 North Front Street
Memphis, Tennessee 38103
1-800-366-7426
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION............................................................1
INVESTMENT LIMITATIONS AND POLICIES...........................................2
INVESTMENT INSTRUMENTS AND STRATEGIES..........................................6
ADDITIONAL TAX INFORMATION....................................................31
General.....................................................................31
Dividends and Other Distributions...........................................32
Redemptions.................................................................32
Intermediate Tax Exempt Bond Fund...........................................33
Income from Foreign Securities..............................................33
Hedging Strategies..........................................................34
Original Issue Discount Securities..........................................35
VALUATION OF SHARES...........................................................37
Calculating Share Price.....................................................37
Amortized Cost Method (Money Market Funds Only).............................37
Market Values (All Other Funds).............................................38
ADDITIONAL PURCHASE INFORMATION...............................................40
Class A Shares..............................................................40
Letter of Intent............................................................40
Sales Charge Waivers........................................................40
Class C Shares..............................................................41
Class I Shares..............................................................41
ADDITIONAL INFORMATION ON REDEMPTIONS.........................................42
TAX-DEFERRED RETIREMENT ACCOUNTS AND PLANS....................................43
Individual Retirement Accounts ("IRAs").....................................43
Self-Employed Individual Retirement Plans - Keogh Plans.....................43
Simplified Employee Pension Plans ("SEPPS") and.............................43
Savings Incentive Match Plans for Employees ("SIMPLES").....................43
TRUSTEES AND OFFICERS.........................................................44
Committees of the Board.....................................................50
Compensation of Independent Trustees........................................51
Director Ownership of Equity Securities.....................................51
PRINCIPAL SHAREHOLDERS........................................................53
INVESTMENT ADVISER............................................................56
Subadviser to Mid Cap Value Fund............................................57
PORTFOLIO MANAGERS............................................................58
Managing Conflicts of Interest..............................................58
Channing Capital Management LLC, Subadviser to Mid Cap Value Fund...........59
Managing CCM's Conflicts of Interest........................................59
Portfolio Managers..........................................................61
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................64
Portfolio Turnover..........................................................65
Code of Ethics Restrictions on Personal Trading.............................65
DISTRIBUTOR...................................................................67
Shareholder Service Fees - Class A Shares and Class C Shares................69
PROXY VOTING POLICIES AND PROCEDURES..........................................71
PORTFOLIO HOLDINGS INFORMATION................................................72
DESCRIPTION OF THE FUNDS' SHARES..............................................74
Massachusetts Partnership Law...............................................74
ADMINISTRATOR, SUB-ADMINISTRATOR, TRANSFER AGENT, PORTFOLIO ACCOUNTING SERVICE
AGENT & CUSTODIAN.............................................................75
LEGAL COUNSEL & INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................77
MEASURE OF FUND PERFORMANCE...................................................78
Total Return................................................................78
Yield.......................................................................78
PERFORMANCE COMPARISONS.......................................................79
ECONOMIC AND MARKET INFORMATION...............................................84
APPENDIX......................................................................85
Short-Term Debt Ratings.....................................................85
Corporate and Municipal Long-Term Debt Ratings..............................86
Municipal Note Ratings......................................................88
SERVICE PROVIDERS.............................................................90
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust is an open-end investment management company organized as a
Massachusetts business trust under a Declaration of Trust dated October 15,
1991, under the name "First Priority Funds." Effective May 15, 1998, the Trust
changed its name to "Regions Funds," and effective December 1, 2001, it changed
its name to "Regions Morgan Keegan Select Funds." The Trust consists of eleven
separate series (each a "fund," and together, the "funds"): Regions Morgan
Keegan Select Mid Cap Growth Fund ("Mid Cap Growth Fund"), Regions Morgan Keegan
Select Growth Fund ("Growth Fund"), Regions Morgan Keegan Select Core Equity
Fund ("Core Equity Fund"), Regions Morgan Keegan Select Mid Cap Value Fund ("Mid
Cap Value Fund"), Regions Morgan Keegan Select Value Fund ("Value Fund"),
Regions Morgan Keegan Select Balanced Fund ("Balanced Fund"), Regions Morgan
Keegan Select Fixed Income Fund ("Fixed Income Fund"), Regions Morgan Keegan
Select Limited Maturity Fixed Income Fund ("Limited Maturity Fixed Income
Fund"), Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
("Intermediate Tax Exempt Bond Fund"), Regions Morgan Keegan Select Treasury
Money Market Fund ("Treasury Money Market Fund") and Regions Morgan Keegan
Select Money Market Fund ("Money Market Fund"). Each fund has its own
investment objective and policies as described in the Prospectus. Mid Cap
Growth Fund, Growth Fund, Core Equity Fund, Mid Cap Value Fund, Value Fund,
Balanced Fund, Fixed Income Fund, Limited Maturity Fixed Income Fund and
Intermediate Tax Exempt Bond Fund offer three classes of shares: Class A Shares,
Class C Shares and Class I Shares. Treasury Money Market Fund and Money Market
Fund (together, the "Money Market Funds") offer only Class A Shares and Class I
Shares. This SAI relates to shares of all classes of the funds (individually
and collectively referred to as "shares," as the context may require).
-1-
INVESTMENT LIMITATIONS AND POLICIES
- --------------------------------------------------------------------------------
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality or rating
standards, such standards or percentage limitation will be determined at the
time of a fund's acquisition of such security or other asset. Accordingly, any
subsequent change in ratings, values, net assets or other circumstances will not
be considered when determining whether the investment complies with a fund's
investment policies and limitations.
Each fund's fundamental investment policies and limitations cannot be changed
without approval by a "majority of the outstanding voting securities" of the
fund. A majority of the outstanding voting securities of a fund is defined
under the Investment Company Act of 1940, as amended ("1940 Act"), as the lesser
of (i) 67% or more of the fund's shares present at a meeting if more than 50% of
the outstanding shares of the fund are present and represented by proxy, or (ii)
more than 50% of the outstanding shares of the fund. However, except for the
fundamental investment limitations listed below, the investment policies and
limitations described in this SAI are not fundamental and may be changed without
shareholder approval.
FUNDAMENTAL INVESTMENT LIMITATIONS
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The funds, except for Core Equity Fund and Money Market Fund, may borrow money,
directly or indirectly, and issue senior securities to the maximum extent
permitted under the 1940 Act. Core Equity Fund may not borrow money in excess
of 10% of its total assets (taken at cost) or 5% of its total assets (taken at
current value), whichever is lower, nor borrow any money except as a temporary
measure for extraordinary or emergency purposes. Money Market Fund may not
borrow money, except as a temporary measure for extraordinary or emergency
purposes (but not for the purpose of investment), in excess of 10% of its total
assets (taken at cost) or 5% of such total assets (taken at current value),
whichever is lower. Core Equity Fund and Money Market Fund may not issue senior
securities. (With respect to Core Equity Fund and Money Market Fund, for the
purpose of this restriction none of the following is deemed to be a senior
security: any pledge or other encumbrance of assets; any borrowing permitted by
the respective fund's investment limitation on borrowing contained herein; any
collateral arrangements with respect to options, futures contracts and options
on futures contracts and with respect to initial and variation margin; and the
purchase or sale of options, forward contracts, futures contracts or options on
futures contracts.)
LENDING CASH OR SECURITIES
The funds, except for Core Equity Fund and Money Market Fund, may not make
loans, provided that this restriction does not prevent the funds from purchasing
debt obligations, entering into repurchase agreements, lending their assets to
broker-dealers or institutional investors and investing in loans, including
assignments and participation interests. Core Equity Fund and Money Market Fund
may not make loans, provided that for purposes of this investment restriction,
the following will not be considered the making of a loan: (a) entering into
repurchase agreements, (b) purchasing bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are a part of an
issue to the public or a type commonly purchased by financial
institutions, and (c) lending portfolio securities.
INVESTING IN COMMODITIES
The funds, except for Core Equity Fund and Money Market Fund, may not purchase
or sell physical commodities, provided that the funds may purchase securities of
companies that deal in commodities. As a non-fundamental policy, for purposes
of this restriction, investments in transactions involving futures contracts and
options, forward currency contracts, swap transactions and other financial
contracts that settle by payment of cash are not deemed to be investments in
commodities. Core Equity Fund and Money Market Fund may not invest in oil, gas
or other mineral leases, rights or royalty contracts or commodities or commodity
-2-
contracts. (With respect to Core Equity Fund, this restriction does not prevent
the fund from investing in issuers that invest or deal in the foregoing types of
assets. With respect to Money Market Fund, this restriction does not prevent
the fund from purchasing securities of companies which are not principally
engaged in the business of buying or selling such leases, rights or contracts.)
INVESTING IN REAL ESTATE
The funds may not purchase or sell real estate, provided that this restriction
does not prevent the funds from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The funds may exercise their rights under agreements relating to such
securities, including the right to enforce security interests and to hold real
estate acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner. Core Equity Fund and Money Market Fund may not
invest in real estate. (With respect to Core Equity Fund, this restriction does
not prevent the fund from investing in issuers that invest or deal in real
estate or purchasing securities that are secured by real estate. With respect
to Money Market Fund, this restriction does not prevent the fund from purchasing
securities of companies investing in real estate or of companies which are not
principally engaged in the business of buying or selling such leases, rights or
contracts.)
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets, 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
such U.S. government securities; and securities of other investment companies)
if, as a result, more than 5% of the value of their total assets would be
invested in securities of that issuer, or the funds would own more than 10% of
the outstanding voting securities of that issuer.
CONCENTRATION OF INVESTMENTS
The funds will not make investments that will result in the concentration of
their investments in the securities of issuers primarily engaged in the same
industry. Government securities, municipal securities and bank instruments will
not be deemed to constitute an industry. To conform to the current view of the
Securities & Exchange Commission ("SEC") staff that only domestic bank
instruments may be excluded from industry concentration limitations, as a matter
of non-fundamental policy, the funds will not exclude foreign bank instruments
from industry concentration tests so long as the policy of the SEC remains in
effect. Core Equity Fund may not purchase any security (other than U.S.
government securities) if, as a result, 25% or more of the fund's total assets
(taken at current value) would be invested in any one industry (in the utilities
category, gas, electric, water and telephone companies will be considered as
being in separate industries). Money Market Fund may not purchase any security
if, as a result, more than 25% of the fund's total assets (taken at current
value) would be invested in any one industry. (With respect to Money Market
Fund, this restriction does not apply to U.S. government securities and bank
obligations. For purposes of this restriction, telephone, gas and electric
public utilities are each regarded as separate industries and finance companies
whose financing activities are related primarily to the activities of their
parent companies are classified in the industry of their parents.) As a non-
fundamental operating policy, the funds, other than Core Equity Fund and Money
Market Fund, will consider concentration to be the investment of more than 25%
of the value of their total assets in any one industry.
UNDERWRITING
The funds, except for Core Equity Fund and Money Market Fund, may not underwrite
the securities of other issuers, except that the funds may engage in
transactions involving the acquisition, disposition or resale of their portfolio
securities, under circumstances where they may be considered to be underwriters
under the Securities Act of 1933. Core Equity Fund and Money Market Fund may
not act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
-3-
BUYING ON MARGIN
Core Equity Fund may not purchase securities on margin (except such short term
credits as are necessary for clearance of transactions); or make short sales
(except where, by virtue of ownership of other securities, it has the right to
obtain, without payment of additional consideration, securities equivalent in
kind and amount to those sold). Money Market Fund may not purchase securities
on margin (but it may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities); or make short sales except
where, by virtue of ownership of other securities, it has the right to obtain,
without payment of further consideration, securities equivalent in kind and
amount to those sold, and the fund will not deposit or pledge more than 10% of
its total assets (taken at current value) as collateral for such sales.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of 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
restriction. For purposes of their policies and limitations, the funds consider
instruments (such as certificates of deposit and demand and time deposits)
issued by a U.S. branch of a domestic bank or savings and loan having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be cash items.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS
The following investment limitations are not fundamental and may be changed by
the Trust's Board of Trustees ("Board") without shareholder approval.
Shareholders will be notified before any material change in these limitations
becomes effective.
BUYING ON MARGIN
Limited Maturity Fixed Income Fund and Treasury Money Market Fund will not
purchase securities on margin, provided that these funds may obtain short-term
credits necessary for the clearance of purchases and sales of securities.
Growth Fund, Value Fund, Balanced Fund, Fixed Income Fund and Intermediate Tax
Exempt Bond Fund will not purchase securities on margin, provided that these
funds may obtain short-term credits necessary for the clearance of purchases and
sales of securities, and further provided that these funds may make margin
deposits in connection with their use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
INVESTING IN ILLIQUID SECURITIES
The Money Market Funds will not purchase securities for which there is no
readily available market, or enter in to repurchase agreements or purchase time
deposits maturing in more than seven days, if immediately after and as a result,
the value of such securities would exceed, in the aggregate, 10% of the fund's
net assets.
Mid Cap Growth Fund, Growth Fund, Core Equity Fund, Mid Cap Value Fund, Value
Fund, Balanced Fund, Fixed Income Fund, Limited Maturity Fixed Income Fund and
Intermediate Tax Exempt Bond Fund will not purchase securities for which there
is no readily available market, or enter into repurchase agreements or purchase
time deposits maturing in more than seven days, if immediately after and as a
result, the value of such securities would exceed, in the aggregate, 15% of the
funds' net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The funds may invest their assets in securities of other investment companies.
REVERSE REPURCHASE AGREEMENTS
The funds may engage in reverse repurchase agreements. Reverse repurchase
agreements are repurchase agreements in which a fund is the seller (rather than
the buyer) of the securities, and agrees to repurchase them at an agreed upon
time and price. A reverse repurchase agreement may be viewed as a type of
borrowing by a fund. Reverse repurchase agreements are subject to credit risks.
-4-
In addition, reverse repurchase agreements create leverage risks because a fund
must repurchase the underlying security at a higher price, regardless of the
market value of the security at the time of repurchase.
CONCENTRATION OF INVESTMENTS
In applying the funds' concentration restriction: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry (clause (a)
categories are separately addressed for Core Equity Fund and Money Market Fund
under "Fundamental Investment Limitations-Concentration of Investments" above);
(b) financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (c) asset-backed
securities will be classified according to the underlying assets securing such
securities.
REGULATORY COMPLIANCE
The Money Market Funds may follow non-fundamental operational policies that are
more restrictive than their fundamental investment limitations, as set forth in
the Prospectus and this SAI, in order to comply with applicable laws and
regulations. In particular, the Money Market Funds will comply with the various
requirements of Rule 2a-7 under the 1940 Act, which regulates money market
mutual funds. For example, Rule 2a-7 generally prohibits the investment of more
than 5% of the Money Market Funds' total assets in the securities of any one
issuer, although the Money Market Funds' fundamental investment limitations only
require such 5% diversification with respect to 75% of their assets. The Money
Market Funds will also determine the effective maturity of their investments, as
well as their ability to consider a security as having received the requisite
short-term ratings by nationally recognized statistical rating organizations
("NRSROs"), according to Rule 2a-7. The Money Market Funds may change these
operational policies to reflect changes in the laws and regulations without
shareholder approval.
PERCENTAGE LIMITATIONS
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of 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
restriction. For purposes of their policies and limitations, the funds consider
instruments (such as certificates of deposit and demand and time deposits)
issued by a U.S. branch of a domestic bank or savings and loan having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be cash items.
-5-
INVESTMENT INSTRUMENTS AND STRATEGIES
- --------------------------------------------------------------------------------
The following tables provide general guidelines on the types of securities in
which the funds may invest, subject to the investment strategies, policies and
limitations described in the Prospectus and elsewhere in this SAI. The
following tables indicate which types of securities are an acceptable investment
of a fund or not an acceptable investment of a fund.
SECURITIES AND STRATEGIES MID CAP GROWTH GROWTH CORE EQUITY MID CAP VALUE VALUE FUND BALANCED FUND
FUND FUND FUND FUND
AGENCY SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES N N A N N A
- ------------------------------------------------------------------------------------------------------------------------------------
BANK OBLIGATIONS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
BELOW INVESTMENT GRADE BONDS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED BOND OBLIGATIONS N N N N N N
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES N N A N A A
- ------------------------------------------------------------------------------------------------------------------------------------
CREDIT ENHANCEMENT A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
DEMAND INSTRUMENTS N N A N A A
- ------------------------------------------------------------------------------------------------------------------------------------
DEPOSITARY RECEIPTS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
EXCHANGE TRADED FUNDS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURES AND OPTIONS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
ILLIQUID AND RESTRICTED SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
INDEXED SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT GRADE BONDS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
LENDING OF PORTFOLIO SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
LEVERAGE A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES N N N N N A
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS N N A N N A
- ------------------------------------------------------------------------------------------------------------------------------------
OID AND PAYMENT-IN-KIND SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES OF OTHER INVESTMENT COMPANIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
STRIPPED DEBT SECURITIES N N N N N A
- ------------------------------------------------------------------------------------------------------------------------------------
SUBORDINATED SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
UTILITY COMPANY SECURITIES A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
WARRANTS A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED, DELAYED DELIVERY AND TBA A A A A A A
- ------------------------------------------------------------------------------------------------------------------------------------
TRANSACTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
A = ACCEPTABLE INVESTMENT OF A FUND.
N = NOT AN ACCEPTABLE INVESTMENT OF A FUND.
-6-
LIMITED
SECURITIES AND STRATEGIES FIXED INCOME MATURITY FIXED INTERMEDIATE TAX TREASURY MONEY MONEY MARKET
FUND INCOME FUND EXEMPT BOND FUND MARKET FUND FUND
AGENCY SECURITIES A A A N A
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES A A N N N
- ------------------------------------------------------------------------------------------------------------------------------------
BANK OBLIGATIONS A A A N A
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BELOW INVESTMENT GRADE BONDS A A N N N
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COLLATERALIZED BOND OBLIGATIONS A A N N N
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COMMERCIAL PAPER A A A N A
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COMMON STOCKS N N N N N
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CONVERTIBLE SECURITIES A A N N N
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CORPORATE DEBT SECURITIES A A N N A
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CREDIT ENHANCEMENT A A A N A
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DEMAND INSTRUMENTS A A A N A
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DEPOSITARY RECEIPTS N N N N N
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EXCHANGE TRADED FUNDS A A N N N
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FOREIGN SECURITIES A A N N A
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FUTURES AND OPTIONS A A N N Futures - N
Options - N
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ILLIQUID AND RESTRICTED SECURITIES A A A N N
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INDEXED SECURITIES A A N N N
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INVESTMENT GRADE BONDS A A A N A
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LENDING OF PORTFOLIO SECURITIES A A A A A
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LEVERAGE A A A A A
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MORTGAGE-BACKED SECURITIES A A N N A
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MUNICIPAL OBLIGATIONS A A A N A
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OID AND PAYMENT-IN-KIND SECURITIES A N A N N
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PREFERRED STOCKS A A N N N
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REAL ESTATE INVESTMENT TRUSTS A A N N N
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REPURCHASE AGREEMENTS A A A A A
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REVERSE REPURCHASE AGREEMENTS A A N N N
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SECURITIES OF OTHER INVESTMENT COMPANIES A A A A A
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STRIPPED DEBT SECURITIES A A A N N
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SUBORDINATED SECURITIES A A A N N
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U.S. TREASURY SECURITIES A A A A A
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UTILITY COMPANY SECURITIES A A A N A
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WARRANTS A N N N N
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WHEN-ISSUED, DELAYED DELIVERY AND TBA A A A A A
TRANSACTIONS
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A = ACCEPTABLE INVESTMENT OF A FUND.
N = NOT AN ACCEPTABLE INVESTMENT OF A FUND.
The following pages contain more detailed information about the types of
securities in which some or all of the funds may invest and the investment
techniques some or all of the funds may use. Please refer to the descriptions
in the Prospectus of each fund's principal investment strategies and the tables
immediately above to determine which of the securities or investment techniques
described below may be permissible for a fund. The principal risks of each
fund's principal investment strategies are discussed in the Prospectus. The
funds may not invest in all of the types of securities or use all of the
investment techniques that are described.
EQUITY SECURITIES
Equity securities are the fundamental unit of ownership in a company. They
represent a share of the issuer's earnings and assets, after the issuer pays its
liabilities. Generally, issuers have discretion as to the payment of any
dividends or other distributions. As a result, investors cannot predict the
income they will receive from equity securities. However, equity securities
offer greater potential for appreciation than many other types of securities
because their value increases directly with the value of the issuer's business.
The following describes certain types of equity securities.
-7-
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common
stock typically entitles the owner to vote on the election of directors
and other important matters as well as to receive dividends and other
distributions on such stock. In the event an issuer is liquidated or
declares bankruptcy, the claims of owners of bonds, other debt holders,
and owners of preferred stock take precedence over the claims of those who
own common stock.
PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or other
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and other distributions
paid on common stock. Preferred stocks may also permit the issuer to
redeem the stock. The funds may also treat such redeemable preferred
stock as a debt security.
DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by
a foreign company. Depositary receipts are not traded in the same market
as the underlying security. American Depositary Receipts ("ADRs") are
certificates that represent an interest in the shares of a foreign-based
corporation that are held in trust by a bank. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in
overseas markets. ADRs are also traded in U.S. dollars, eliminating the
need for foreign exchange transactions. The foreign securities underlying
European Depositary Receipts, Global Depositary Receipts and International
Depositary Receipts, are traded globally or outside the United States.
Depositary receipts involve many of the same risks of investing directly
in foreign securities, including currency risks and risks of foreign
investing.
INTERESTS IN OTHER COMPANIES
Entities such as limited partnerships, limited liability companies,
business trusts, as well as companies organized outside the United States
may issue securities comparable to common or preferred stock.
DEBT SECURITIES
A debt security is a security consisting of a certificate or other evidence of a
debt (secured or unsecured) on which the issuing company or governmental body
promises to pay the holder thereof a fixed, variable, or floating rate of
interest for a specified length of time, and to repay the debt on the specified
maturity date. Some debt securities, such as zero coupon bonds, do not make
regular interest payments but are issued at a discount to their principal or
maturity value. Debt securities include a variety of obligations, including,
but not limited to, corporate bonds, government securities, agency securities,
municipal obligations, convertible securities, mortgage-backed securities, and
asset-backed securities. Debt securities include investment grade securities,
below investment grade securities, and unrated securities. Debt securities are
subject to a variety of risks, such as interest rate risk, income risk,
call/prepayment risk, inflation risk, credit risk, and (in the case of foreign
securities) country risk and currency risk. The reorganization of an issuer
under the federal bankruptcy laws may result in the issuer's debt securities
being cancelled without repayment, repaid only through an exchange thereof for
any combination of cash, debt securities, convertible securities, equity
securities, or other instruments or rights in respect of the same issuer or a
related entity. The following describes certain types of debt securities.
FIXED INCOME SECURITIES
Fixed income securities pay interest at a specified rate. In addition,
the issuer of a fixed income security must repay the principal amount of
the security, normally within a specified time. Debt securities provide
more regular income than equity securities. However, the returns on debt
securities are limited and normally do not increase with the issuer's
earnings. This limits the potential appreciation of debt securities as
compared to equity securities. Debt securities generally compensate for
greater credit risk by paying interest at a higher rate. The difference
between the yield of a security and the yield of a U.S. Treasury security
-8-
with a comparable maturity (the spread) measures the additional interest
paid for risk. Spreads may increase generally in response to adverse
economic or market conditions. A security's spread may also increase if
the security's rating is lowered, or the security is perceived to have an
increased credit risk. An increase in the spread will cause the price of
the security to decline.
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for periodic adjustments in
the interest rate paid on the security. Variable rate securities provide
for a specified periodic adjustment in the interest rate, while floating
rate securities have interest rates that change whenever there is a change
in a designated benchmark rate. Some variable or floating rate securities
are structured with put features that permit holders to demand payment of
the unpaid principal balance plus accrued interest from the issuers or
certain financial intermediaries.
ZERO COUPON BONDS, STEP-UP BONDS, OTHER OID SECURITIES AND PAYMENT-IN-KIND
SECURITIES
Zero coupon bonds are debt obligations that do not entitle the holders to
any periodic payments of interest either for the entire life of the
obligations or for an initial period after the issuance of the
obligations. Like zero coupon bonds, "step up" bonds ("step-ups") pay no
interest initially but eventually begin to pay a coupon rate prior to
maturity, which rate may increase at stated intervals during the life of
the security. Certain other debt securities may also be treated as debt
securities that were originally issued at a discount. Very generally,
original issue discount ("OID") is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Payment-in-kind securities ("PIKs") are debt obligations that
pay "interest" in the form of other debt obligations of the issuer,
instead of in cash. Each of these instruments is typically issued and
traded at a discount from its face amount. The amount of the discount
varies depending on such factors as the time remaining until maturity of
the securities, prevailing interest rates, the liquidity of the security
and the perceived credit quality of the issuer. The market prices of zero
coupon bonds, step-ups, other OID securities and PIKs generally are more
volatile than the market prices of securities that pay interest currently
in cash and are likely to respond to changes in interest rates to a
greater degree than do other types of securities having similar maturities
and credit quality.
To be treated as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"), a fund must distribute each
taxable year at least 90% of its investment company taxable income,
including the OID accrued on zero coupon bonds, step-ups and other OID
securities and the "interest" on PIKs. Because a fund will not receive
cash payments from the issuer in respect of accrued OID and "interest" on
PIKs on a current basis, it may have to distribute cash obtained from
other sources in order to satisfy the distribution requirement. Such cash
might be obtained from selling other portfolio holdings of the fund. In
some circumstances, such sales might be necessary even though investment
considerations might otherwise make it undesirable for the fund to sell
such securities at such time. A fund may purchase some debt securities at
a discount that exceeds the OID on such securities, if any. This
additional discount represents market discount for federal income tax
purposes. See "Additional Tax Information." Under many market conditions,
investments in zero coupon bonds, step-ups, other OID securities and PIKs
may be illiquid, making it difficult for a fund to dispose of them or
determine their current value.
INVESTMENT GRADE BONDS
Many debt securities receive credit ratings from services such as Standard
& Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
Moody's Investors Service, Inc. ("Moody's"). These services assign
ratings to securities by assessing the likelihood of issuer default. Debt
securities rated BBB- and higher by S&P, Baa3 or higher by Moody's, or
comparably rated by another NRSRO are considered investment grade
securities, but securities rated BBB or Baa are somewhat riskier than
higher rated obligations because they are regarded as having only an
adequate capacity to pay principal and interest, and are considered to
lack outstanding investment characteristics. This means that changes in
economic conditions or other circumstances are more likely to lead to a
-9-
weakened capacity to make principal and interest payments than is the case
for higher rated debt securities.
BELOW INVESTMENT GRADE BONDS
Debt securities rated BB+ or lower by S&P, Ba1 or lower by Moody's, or
comparably rated by another NRSRO are considered below investment grade
securities. Below investment grade bonds have poor protection with
respect to the payment of interest and repayment of principal, or may be
in default. These securities are often considered to be speculative and
involve greater risk of loss or price changes due to changes in the
issuer's capacity to pay. The market prices of below investment grade
bonds may fluctuate more than those of higher-quality debt securities and
may decline significantly in periods of general economic difficulty, which
may follow periods of rising interest rates.
While the market for below investment grade bonds has been in existence
for many years and has weathered previous economic downturns, the 1980s
brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of the below
investment grade bond market, especially during periods of economic
recession.
The market for below investment grade bonds may be thinner and less active
than that for higher-quality debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not
available, below investment grade bonds will be valued in accordance with
procedures established by the Board, including the use of outside pricing
services. Judgment plays a greater role in valuing below investment grade
bonds than is the case for securities for which more external sources for
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the liquidity of below investment
grade bonds and the ability of outside pricing services to value below
investment grade bonds.
Since the risk of default is higher for below investment grade bonds, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type. The Adviser will attempt to identify
those issuers of below investment grade bonds whose financial condition is
adequate to meet future obligations, has improved, or is expected to
improve in the future. The Adviser's analysis focuses on relative values
based on such factors as interest or dividend coverage, asset coverage,
earnings prospects, and the experience and managerial strength of the
issuer.
The ratings of a rating agency represent its opinion as to the credit
quality of the debt securities it undertakes to rate and do not evaluate
market risk. Ratings are not absolute standards of credit quality;
consequently, debt securities with the same maturity, duration, coupon,
and rating may have different yields. Rating agencies may fail to make
timely changes in credit ratings and an issuer's current financial
condition may be better or worse than a rating indicates. The Appendix to
the Statement of Additional Information describes the various ratings
assigned to debt securities by Moody's, S&P and Fitch Ratings.
If a security satisfies the fund's minimum rating criteria at the time of
purchase and is subsequently downgraded below such rating, the fund will
not be required to dispose of such security. If a downgrade occurs, the
Adviser will consider what action, including the sale of such security, is
in the best interest of the fund and its stockholders.
EFFECTIVE MATURITY
Effective maturity is the calculated maturity based on analytical factors
that estimate the actual expected return of principal rather than the
stated final maturity date. For example, a mortgage-backed bond may have
a 30-year stated final maturity. However, given the expected periodic
principal prepayments of that bond, the effective maturity may be 10 years
rather than the stated 30 years. The average effective maturity is the
dollar-weighted average of effective maturities of the securities in the
fund's portfolio.
-10-
U.S. GOVERNMENT SECURITIES
U.S. government securities include a variety of securities that are issued
or guaranteed by the U.S. government, its agencies or instrumentalities
and repurchase agreements secured thereby. These securities include
securities issued and guaranteed by the full faith and credit of the U.S.
government, such as Treasury bills, Treasury notes and Treasury bonds;
obligations supported by the right of the issuer to borrow from the U.S.
Treasury, such as those of the Federal Home Loan Banks; and obligations
supported only by the credit of the issuer, such as those of the Federal
Intermediate Credit Banks. Other U.S. government agencies, authorities
and instrumentalities, may include, among others, the Federal National
Mortgage Association ("Fannie Mae"), the Government National Mortgage
Association ("Ginnie Mae"), the Federal Home Loan Mortgage Corporation
("Freddie Mac"), the Federal Housing Administration, the Resolution
Funding Corporation, the Federal Farm Credit Banks, the Tennessee Valley
Authority, the Student Loan Marketing Association and the Small Business
Administration.
U.S. government securities do not involve the level of credit risk
associated with investments in other types of debt securities, although,
as a result, the yields available from U.S. government securities are
generally lower than the yields available from corporate debt securities.
Like other debt securities, however, the values of U.S. government
securities change as interest rates fluctuate. Fluctuations in the value
of portfolio securities will not affect interest income on existing
portfolio securities but will be reflected in a fund's net asset value
("NAV"). A description of securities issued by Fannie Mae, Ginnie Mae and
Freddie Mac is contained under "-Mortgaged-Backed Securities" in this
section.
Stripped government securities are created by separating the income and
principal components of a U.S. government security and selling them
separately. STRIPS (Separate Trading of Registered Interest and Principal
of Securities) are created when the coupon payments and the principal
payment are stripped from an outstanding U.S. Treasury security by a
Federal Reserve Bank. Privately stripped government securities are
created when a dealer deposits a U.S. Treasury security or other U.S.
government security with a custodian for safekeeping. The custodian
issues separate receipts for the coupon payments and the principal
payment, which the dealer then sells.
Below are some of the categories of U.S. government securities.
U.S. TREASURY BILLS
U.S. Treasury Bills are direct obligations of the U.S. Treasury that
are issued in maturities of one year or less. No interest is paid
on Treasury bills; instead, they are issued at a discount and repaid
at full face value when they mature. They are backed by the full
faith and credit of the U.S. government.
U.S. TREASURY NOTES AND BONDS
U.S. Treasury Notes and Bonds are direct obligations of the U.S.
Treasury issued in maturities that vary between one and forty years,
with interest normally payable every six months. They are backed by
the full faith and credit of the U.S. government.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored enterprises ("GSE") acting under federal authority.
Some GSE securities are supported by the full faith and credit of the U.S.
government. These include the Ginnie Mae, Small Business Administration,
Farm Credit System Financial Assistance Corporation, Farmer's Home
Administration, Federal Financing Bank, General Services Administration,
Department of Housing and Urban Development, Export-Import Bank, Overseas
Private Investment Corporation and Washington Metropolitan Area Transit
Authority Bonds.
Other GSE securities receive support through federal subsidies, loans or
other benefits. For example, the U.S. Treasury is authorized to purchase
specified amounts of securities issued by (or otherwise make funds
-11-
available to) the Federal Home Loan Bank System, Freddie Mac, Fannie Mae,
Student Loan Marketing Association and Tennessee Valley Authority in
support of such obligations.
A few GSE securities have no explicit financial support but are regarded
as having implied support because the federal government sponsors their
activities. These include the Farm Credit System, Financing Corporation
and Resolution Funding Corporation.
Investors regard agency securities as having low credit risks, but not as
low as U.S. Treasury securities. A fund treats mortgage-backed securities
guaranteed by a GSE as if issued or guaranteed by a federal agency.
Although such a guarantee protects against credit risks, it does not
reduce market and prepayment risks. A description of securities issued by
Fannie Mae, Ginnie Mae and Freddie Mac is contained under "-Mortgaged-
Backed Securities" in this section.
CORPORATE DEBT SECURITIES
Corporate debt securities are issued by businesses. Notes, bonds,
debentures and commercial paper are the most common types of corporate
debt securities, but interests in bank loans to companies may also be
considered corporate debt securities.
The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based
on its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust
preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies
issue securities known as surplus notes that permit the insurance company
to defer any payment that would reduce its capital below regulatory
requirements.
COMMERCIAL PAPER
Commercial paper is an issuer's debt obligation with a maturity of
less than nine months. Companies typically issue commercial paper
to pay for current expenditures. Most issuers constantly reissue
their commercial paper and use the proceeds (or bank loans) to repay
maturing paper. If the issuer cannot continue to obtain liquidity
in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit
risks as compared to other debt securities of the same issuer.
Asset-backed commercial paper is a debt obligation generally issued
by a corporate-sponsored special purpose entity to which the
corporation has contributed cash-flowing receivables like credit
card receivables, auto and equipment leases, and other receivables.
Investment in asset-backed commercial paper is subject to the risk
that insufficient proceeds from the projected cash flows of the
contributed receivables are available to repay the commercial paper.
DEMAND INSTRUMENTS
Demand instruments are corporate debt securities that the issuer
must repay upon demand. Other demand instruments require a third
party, such as a dealer or bank, to repurchase the security for its
face value upon demand. The funds treat demand instruments as
short-term securities, even though their stated maturity may extend
beyond one year.
MUNICIPAL OBLIGATIONS
Municipal obligations are issued by state and local governments to acquire
land, equipment and facilities. Although the interest on many municipal
obligations is exempt from federal income tax, the funds may invest in
taxable municipal obligations. Municipal obligations are not always fully
backed by the municipality's credit and risk of loss to a fund exists if a
-12-
municipality does not appropriate money to service its debts and defaults
on its obligations. The following describes the types of municipal
obligations.
GENERAL OBLIGATION BONDS
General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power. The issuer must impose and collect
taxes sufficient to pay principal and interest on the bonds.
However, the issuer's authority to impose additional taxes may be
limited by its charter or state law.
REVENUE BONDS
Revenue bonds are payable solely from specific revenues received by
the issuer, such as specific taxes, assessments, tolls or fees.
Bondholders may not collect from the municipality's general taxes or
revenues. For example, a municipality may issue bonds to build a
toll road and pledge the tolls to repay the bonds. Therefore, a
shortfall in the tolls could result in a default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance
privately operated facilities. For example, a municipality may
issue bonds to finance a new factory to improve its local economy.
The municipality would lend the proceeds from its bonds to the
company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable
solely from the company's loan payments, not from any other revenues
of the municipality. Therefore, any default on the loan normally
would result in a default on the bonds. The credit quality of
private activity bonds is usually directly related to the credit
standing of the corporate user of the facilities. Other types of
private activity bonds may be issued by or on behalf of public
authorities to finance various privately operated facilities,
including certain pollution control facilities, convention or trade
show facilities, and airport, mass transit, port or parking
facilities. The interest on many types of private activity bonds is
a tax preference item for purposes of the federal alternative
minimum tax.
ASSET-BACKED SECURITIES
Asset-backed securities represent direct or indirect participations in, or
are secured by and payable from, pools of assets such as, among other
things, motor vehicle retail installment sales contracts, installment loan
contracts, leases of various types of real and personal property, and
receivables from revolving consumer credit (credit card) agreements, or a
combination of the foregoing. These assets are securitized through the
use of trusts and special purpose corporations. Credit enhancements, such
as various forms of cash collateral accounts or letters of credit, may
support payments of principal and interest on asset-backed securities.
Although these securities may be supported by letters of credit or other
credit enhancements, payment of interest and principal ultimately depends
upon individuals paying the underlying loans, which may be affected
adversely by general downturns in the economy. Asset-backed securities
are subject to the same risk of prepayment described with respect to
mortgage-backed securities. The risk that recovery on repossessed
collateral might be unavailable or inadequate to support payments,
however, is greater for asset-backed securities than for mortgage-backed
securities.
Certificates for Automobile ReceivablesSM ("CARSSM") represent undivided
fractional interests in a trust whose assets consist of a pool of motor
vehicle retail installment sales contracts and security interests in the
vehicles securing those contracts. Payments of principal and interest on
the underlying contracts are passed through monthly to certificate holders
and are generally guaranteed for a specified time period and amount by a
letter of credit issued by a financial institution unaffiliated with the
trustee or originator of the trust. Underlying installment sales
contracts are subject to prepayment, which may reduce the overall return
to certificate holders. Certificate holders also may experience delays in
payment or losses on CARSSM if the trust does not realize the full amounts
due on underlying installment sales contracts because of unanticipated
-13-
legal or administrative costs of enforcing the contract; depreciation,
damage, or loss of the vehicles securing the contract; or other factors.
Credit card receivable securities are backed by receivables from revolving
credit card agreements ("Accounts"). Credit balances on Accounts are
generally paid down more rapidly than automobile contracts. Most of the
credit card receivable securities issued publicly to date have been pass-
through certificates. In order to lengthen their maturity or duration,
most such securities provide for a fixed period during which only interest
payments on the underlying Accounts are passed through to the security
holder. Principal payments on the Accounts are used to fund the transfer
of additional credit card charges made on the Accounts to the pool of
assets supporting the securities. Usually, the initial fixed period may
be shortened if specified events occur which signal a potential
deterioration in the quality of the assets backing the security, such as
the imposition of a cap on interest rates. An issuer's ability to extend
the life of an issue of credit card receivable securities thus depends on
the continued generation and repayment of principal amounts in the
underlying Accounts and the non-occurrence of the specified events. The
non-deductibility of consumer interest, as well as competitive and general
economic factors, could adversely affect the rate at which new receivables
are created in an Account and conveyed to an issuer, thereby shortening
the expected weighted average life of the related security and reducing
its yield. An acceleration in cardholders' payment rates or any other
event that shortens the period during which additional credit card charges
on an Account may be transferred to the pool of assets supporting the
related security could have a similar effect on its weighted average life
and yield.
Credit cardholders are entitled to the protection of state and federal
consumer credit laws. Many of those laws give a holder the right to set
off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike the collateral for
most other asset-backed securities, Accounts are unsecured obligations of
the cardholder.
A fund may invest in trust-preferred securities, which are a type of
asset-backed security. Trust preferred securities represent interests in
a trust formed by a parent company to finance its operations. The trust
sells preferred shares and invests the proceeds in debt securities of the
parent. This debt may be subordinated and unsecured. Dividend payments
on the trust preferred securities match the interest payments on the debt
securities; if no interest is paid on the debt securities, the trust will
not make current payments on its preferred securities. Unlike typical
asset-backed securities, which have many underlying payers and are usually
over-collateralized, trust preferred securities have only one underlying
payer and are not over-collateralized. Issuers of trust preferred
securities and their parents currently enjoy favorable tax treatment. If
the tax characterization of trust preferred securities were to change,
they could be redeemed by the issuers, which could result in a loss to
each holder.
Collateralized loan obligations ("CLOs") are asset-backed securities
issued by a trust or other entity that are collateralized by a pool of
loans, which may include, among others, domestic and foreign senior
secured loans, senior unsecured loans and subordinated corporate loans,
including loans that may be rated below investment grade or equivalent
unrated loans. The Adviser does not select borrowers of the underlying
loans that comprise the CLO pool (a "CLO borrower"). Like the underlying
loans, CLOs are subject to credit risk. CLOs are also subject to
prepayment risk, which is the risk that the underlying loans may be
prepaid, generally during a period of falling interest rates, which could
adversely affect the yield to maturity and could require a fund to
reinvest in lower yielding securities. In addition, the collection of
collateral on a defaulted loan, if achieved, may be subject to significant
delays. Further, a fund may be subject to the credit risk of the
institution that creates the CLO. A fund may have limited or no rights to
enforce the terms of any loan agreement with a CLO borrower, right to set-
off against the CLO borrower or right to object to amendments to the
lending agreement with the CLO borrower.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property and include single- and multi-class pass-through securities and
collateralized mortgage obligations. Mortgage-backed securities come in a
variety of forms. Many have extremely complicated terms. The U.S.
government mortgage-backed securities include mortgage-backed securities
-14-
issued or guaranteed as to the payment of principal and interest (but not
as to market value) by Ginnie Mae, Fannie Mae or Freddie Mac or other
government-sponsored enterprises. Other mortgage-backed securities are
issued by private issuers, generally originators of and investors in
mortgage loans, including savings associations, mortgage bankers,
commercial banks, investment bankers and special purpose entities
(collectively "Private Mortgage Lenders"). Payments of principal and
interest (but not the market value) of such private mortgage-backed
securities may be supported by pools of mortgage loans or other mortgage-
backed securities that are guaranteed, directly or indirectly, by the U.S.
government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets
but with some form of non-government credit enhancement.
GINNIE MAE CERTIFICATES
Ginnie Mae guarantees certain mortgage pass-through certificates
("Ginnie Mae certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools
of residential mortgage loans. These securities are designed to
provide monthly payments of interest and principal to the investor.
Timely payment of interest and principal is backed by the full faith
and credit of the U.S. government. Each mortgagor's monthly payment
to his lending institution on his residential mortgage is "passed
through" to certificate holders such as the funds. Mortgage pools
consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally
uniform within a pool but may vary among pools. Lending
institutions that originate mortgages for the pools are subject to
certain standards, including credit and other underwriting criteria
for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES
Fannie Mae facilitates a national secondary market in residential
mortgage loans insured or guaranteed by U.S. government agencies and
in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or
"conventional loans") through its mortgage purchase and mortgage-
backed securities sales activities. Fannie Mae issues guaranteed
mortgage pass-through certificates ("Fannie Mae certificates"),
which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae
guarantees timely payment of interest and principal on Fannie Mae
certificates. The Fannie Mae guarantee is not backed by the full
faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES
Freddie Mac also facilitates a national secondary market for
conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales
activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). Each PC represents a pro
rata share of all interest and principal payments made and owed on
the underlying pool. Freddie Mac generally guarantees timely
monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees
timely payment of both principal and interest. GMCs also represent
a pro rata interest in a pool of mortgages. These instruments,
however, pay interest semi-annually and return principal once a year
in guaranteed minimum payments. The Freddie Mac guarantee is not
backed by the full faith and credit of the U.S. government.
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial mortgage-backed securities generally are multi-class debt
or pass-through certificates secured by mortgage loans on commercial
properties. The market for commercial mortgage-backed securities
developed more recently, and in terms of total outstanding principal
amount of issues, is relatively small, compared to the market for
residential single-family mortgage-backed securities. In addition,
commercial lending generally is viewed as exposing the lender to a
greater risk of loss than one- to four-family residential lending.
-15-
Commercial lending, for example, typically involves larger loans to
single borrowers or groups of related borrowers than residential
one- to four-family mortgage loans. In addition, the repayment of
loans secured by income producing properties typically is dependent
upon the successful operation of the related real estate project and
the cash flow generated therefrom. Consequently, adverse changes in
economic conditions and circumstances are more likely to have an
adverse impact on mortgage-backed securities secured by loans on
commercial properties than on those secured by loans on residential
properties.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities are created by segregating the
cash flows from underlying mortgage loans or mortgage securities to
create two or more new securities, each with a specified percentage
of the underlying security's principal or interest payments.
Mortgage securities may be partially stripped so that each investor
class receives some interest and some principal. When securities
are completely stripped, however, all of the interest is distributed
to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders
of another type of security known as a principal-only security, or
PO. Strips can be created in a pass-through structure or as
tranches of a CMO. The yields to maturity on IOs and POs are very
sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets. If the underlying
mortgage assets experience greater than anticipated prepayments of
principal, neither fund may fully recoup its initial investment in
IOs. Conversely, if the underlying mortgage assets experience less
than anticipated prepayments of principal, the yield on POs could be
materially and adversely affected.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-
THROUGHS
CMOs are debt obligations that are collateralized by mortgage loans
or mortgage pass-through securities (such collateral collectively
being called "Mortgage Assets"). CMOs may be issued by Private
Mortgage Lenders or by government entities such as Fannie Mae or
Freddie Mac. Multi-class mortgage pass-through securities are
interests in trusts that are comprised of Mortgage Assets and that
have multiple classes similar to those in CMOs. Unless the context
indicates otherwise, references herein to CMOs include multi-class,
mortgage pass-through securities. Payments of principal of, and
interest on, the Mortgage Assets (and in the case of CMOs, any
reinvestment income thereon) provide the funds to pay debt service
on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, also referred to as a "tranche," is
issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause CMOs to be retired substantially earlier
than their stated maturities or final distribution dates. Interest
is paid or accrued on all classes of a CMO (other than any
principal-only class) on a monthly, quarterly or semi-annual basis.
The principal and interest on the Mortgage Assets may be allocated
among the several classes of a CMO in many ways. In one structure,
payments of principal, including any principal prepayments, on the
Mortgage Assets are applied to the classes of a CMO in the order of
their respective stated maturities or final distribution dates so
that no payment of principal will be made on any class of the CMO
until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures,
all or a portion of the interest attributable to one or more of the
CMO classes may be added to the principal amounts attributable to
such classes, rather than passed through to certificate holders on a
current basis, until other classes of the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
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Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or
fraction of the change in a specified interest rate index, so as to
pay at a rate that will be attractive in certain interest rate
environments but not in others. For example, an inverse floating
rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as
market interest rates-i.e., the yield may increase as rates increase
and decrease as rates decrease-but may do so more rapidly or to a
greater degree. The market value of such securities generally is
more volatile than that of a fixed rate obligation. Such interest
rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an inverse interest-only class on which
the holders are entitled to receive no payments of principal and are
entitled to receive interest at a rate that will vary inversely with
a specified index or a multiple thereof.
ARMS AND FLOATING RATE MORTGAGE-BACKED SECURITIES
Adjustable rate mortgage-backed securities (sometimes referred to as
"ARM securities") are mortgage-backed securities that represent a
right to receive interest payments at a rate that is adjusted to
reflect the interest earned on a pool of mortgage loans bearing
variable or adjustable rates of interest (such mortgage loans are
referred to as "ARMs"). Floating rate mortgage-backed securities
are classes of mortgage-backed securities that have been structured
to represent the right to receive interest payments at rates that
fluctuate in accordance with an index but that generally are
supported by pools comprised of fixed-rate mortgage loans. Because
the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market
index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities.
As a result, during periods of rising interest rates, such
securities generally do not decrease in value as much as fixed-rate
securities. Conversely, during periods of declining rates, such
securities generally do not increase in value as much as fixed-rate
securities.
ARM securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of
ARMs. ARMs generally specify that the borrower's mortgage interest
rate may not be adjusted above a specified lifetime maximum rate or,
in some cases, below a minimum lifetime rate. In addition, certain
ARMs specify limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. ARMs
also may limit changes in the maximum amount by which the borrower's
monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest
accruing on the ARM, any such excess interest is added to the
mortgage loan ("negative amortization"), which is repaid through
future payments. If the monthly payment exceeds the sum of the
interest accrued at the applicable mortgage interest rate and the
principal payment that would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan,
the excess reduces the principal balance of the ARM. Borrowers
under ARMs experiencing negative amortization may take longer to
build up their equity in the underlying property and may be more
likely to default.
ARMs also may be subject to a greater rate of prepayments in a
declining interest rate environment. For example, during a period
of declining interest rates, prepayments on ARMs could increase
because the availability of fixed mortgage loans at competitive
interest rates may encourage mortgagors to "lock-in" at a lower
interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments
with respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and, therefore, on
certain ARM securities, are based on indices, such as the one-year
constant maturity Treasury rate, that reflect changes in market
interest rates. Others are based on indices, such as the 11th
District Federal Home Loan Bank Cost of Funds Index, that tend to
lag behind changes in market interest rates. The values of ARM
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securities supported by ARMs that adjust based on lagging indices
tend to be somewhat more sensitive to interest rate fluctuations
than those reflecting current interest rate levels, although the
values of such ARM securities still tend to be less sensitive to
interest rate fluctuations than fixed-rate securities.
ARM securities frequently permit the holder to demand payment of the
obligations' principal and accrued interest at any time or at
specified intervals not exceeding one year. The demand feature
usually is backed by a credit instrument (i.e., a bank letter of
credit) from a creditworthy issuer and sometimes by insurance from a
creditworthy insurer. Without these credit enhancements, some ARM
securities might not meet a fund's quality standards. Accordingly,
in purchasing these securities, a fund relies primarily on the
creditworthiness of the credit instrument issuer or the insurer. A
fund can also buy fixed-rate securities accompanied by a demand
feature or by a put option, which permits the fund to sell the
security to the issuer or third party at a specified price. A fund
may rely on the creditworthiness of issuers of the credit
enhancements in purchasing these securities.
Floating rate mortgage-backed securities are classes of mortgage-
backed securities that have been structured to represent the right
to receive interest payments at rates that fluctuate in accordance
with an index but that generally are supported by pools comprised of
fixed-rate mortgage loans. As with ARM securities, interest rate
adjustments on floating rate mortgage-backed securities may be based
on indices that lag behind market interest rates. Interest rates on
floating rate mortgage-backed securities generally are adjusted
monthly. Floating rate mortgage-backed securities are subject to
lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates
or monthly payments.
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on the underlying assets to
make payments, mortgage-backed and asset-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses
resulting after default by an obligor on the underlying assets and
collection of all amounts recoverable directly from the obligor and
through liquidation of the collateral. Liquidity protection is the
provision of advances, generally by the entity administering the pool of
assets (usually the bank, savings association or mortgage banker that
transferred the underlying loans to the issuer of the security), to ensure
that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting after default and
liquidation ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by
the issuer or sponsor, from third parties, through various means of
structuring the transaction or through a combination of such approaches.
No fund will pay any additional fees for such credit enhancement, although
the existence of credit enhancement may increase the price of a security.
Credit enhancements do not provide protection against changes in the
market value of the security. Examples of credit enhancement arising out
of the structure of the transaction include "senior-subordinated
securities" (multiple class securities with one or more classes
subordinate to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying assets
are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held
in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets
exceed that required to make payment of the securities and pay any
servicing or other fees). The degree of credit enhancement provided for
each issue generally is based on historical information regarding the
level of credit risk associated with the underlying assets. Delinquency
or loss in excess of that anticipated could adversely affect the return on
an investment in such a security.
INVESTMENTS IN SUBORDINATED SECURITIES
Subordinated classes of senior-subordinated securities ("Subordinated
Securities") have no governmental guarantee, and are subordinated in some
manner as to the payment of principal and/or interest to the holders of
-18-
more senior mortgage-backed or asset-backed securities arising out of the
same pool of assets. The holders of Subordinated Securities typically are
compensated with a higher stated yield than are the holders of more senior
securities. On the other hand, Subordinated Securities typically subject
the holder to greater risk than senior securities and tend to be rated in
a lower rating category (frequently a substantially lower rating category)
than the senior securities issued in respect of the same pool of assets.
Subordinated Securities generally are likely to be more sensitive to
changes in prepayment and interest rates, and the market for such
securities may be less liquid than is the case for traditional debt
securities and senior mortgage-backed or asset-backed securities.
SPECIAL CHARACTERISTICS OF ASSET-BACKED AND MORTGAGE-BACKED SECURITIES
The yield characteristics of mortgage-backed and asset-backed securities
differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other obligations generally may
be prepaid at any time. Prepayments on a pool of mortgage loans are
influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Similar factors apply
to prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus less
likely to experience substantial prepayments. Such securities, however,
often provide that for a specified time period the issuers will replace
receivables in the pool that are repaid with comparable obligations. If
the issuer is unable to do so, repayment of principal on the asset-backed
securities may commence at an earlier date. Mortgage-backed and asset-
backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other debt securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due
to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and to any guarantor, and
due to any yield retained by the issuer. Actual yield to the holder may
vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the
issuer receives mortgage payments from the servicer and the time the
issuer makes the payments on the mortgage-backed securities, and this
delay reduces the effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments
and the associated average life assumption. The average life of pass-
through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of
principal on the underlying mortgages. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. In the past, a common industry
practice was to assume that prepayments on pools of fixed rate 30-year
mortgages would result in a 12-year average life for the pool. At
present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of declining interest
rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of a pool of mortgage-backed securities. Conversely,
in periods of rising interest rates, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the pool.
However, these effects may not be present, or may differ in degree, if the
mortgage loans in the pools have adjustable interest rates or other
special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ
from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of a fund.
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COLLATERALIZED BOND OBLIGATIONS
Collateralized bond obligations ("CBOs") are structured securities backed
by a diversified pool of high yield, public or private debt securities.
These may be fixed pools or may be "market value" (or managed) pools of
collateral. The pool of high yield securities is typically separated into
tranches representing different degrees of credit quality. The top
tranche of CBOs, which represents the highest credit quality in the pool,
has the greatest collateralization and pays the lowest interest rate.
Lower CBO tranches represent lower degrees of credit quality and pay
higher interest rates that are intended to compensate for the attendant
risks. The bottom tranche specifically receives the residual interest
payments (i.e., money that is left over after the higher tranches have
been paid) rather than a fixed interest rate. The return on the lower
tranches of CBOs is especially sensitive to the rate of defaults in the
collateral pool.
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks or
other securities that may be converted or exchanged (by the holder or by
the issuer) into shares of the underlying common stock (or cash or
securities of equivalent value) at a stated exchange ratio. A convertible
security may also be called for redemption or conversion by the issuer
after a particular date and under certain circumstances (including a
specified price) established upon issue. If a convertible security held
by a fund is called for redemption or conversion, the fund could be
required to tender it for redemption, convert it into the underlying
common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher
than the underlying common stocks, but generally lower than compatible
non-convertible debt securities. Because of this higher yield,
convertible securities generally sell at prices above their "conversion
value," which is the current market value of the stock to be received upon
conversion. The difference between this conversion value and the price of
convertible securities will vary over time depending on changes in the
value of the underlying common stocks and interest rates. When the
underlying common stocks decline in value, convertible securities will
tend not to decline to the same extent because of the interest or dividend
payments and the repayment of principal at maturity for certain types of
convertible securities. However, securities that are convertible other
than at the option of the holder generally do not limit the potential for
loss to the same extent as securities convertible at the option of the
holder. When the underlying common stocks rise in value, the value of
convertible securities may also be expected to increase. At the same
time, however, the difference between the market value of convertible
securities and their conversion value will narrow, which means that the
value of convertible securities will generally not increase to the same
extent as the value of the underlying common stocks. Because convertible
securities may also be interest rate sensitive, their value may increase
as interest rates fall and decrease as interest rates rise. Convertible
securities are also subject to credit risk, and are often lower-quality
securities.
The Funds treat convertible securities as both debt equity securities for
purposes of their investment policies and limitations, because of those
securities' unique characteristics.
BANK OBLIGATIONS
Bank obligations include certificates of deposit ("CDs"), bankers'
acceptances, fixed time deposits and other short-term and long-term debt
obligations issued by commercial banks. A CD is a short-term negotiable
certificate issued by a commercial bank against funds deposited in the
bank and is either interest-bearing or purchased on a discount basis. A
bankers' acceptance is a short-term draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Fixed time deposits are obligations of branches of U.S.
banks or foreign banks that are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a
market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. Deposit notes are
notes issued by commercial banks that generally bear fixed rates of
interest and typically have original maturities ranging from eighteen
months to five years. Yankee instruments are denominated in U.S. dollars
-20-
and issued by U.S. branches of foreign banks. Eurodollar instruments are
denominated in U.S. dollars and issued by non-U.S. branches of U.S. or
foreign banks.
REAL ESTATE INVESTMENT TRUSTS
Real estate investment trusts ("REITs") are companies that invest primarily in
income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or hybrid REITs (a
combination of equity and mortgage REITs). Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive income primarily from
interest payments. A REIT is not taxed on net income and gains it distributes
to its shareholders, provided it complies with the applicable requirements of
the Code.
A fund will indirectly bear its proportionate share of any management and other
expenses paid by REITs in which it invests in addition to the expenses the fund
pays directly. Debt securities issued by REITs are, for the most part, general
and unsecured obligations and are subject to risks associated with REITs.
Investing in REITs involves certain unique risks in addition to the risks
associated with investing in the real estate industry in general. An equity
REIT may be affected by changes in the value of the underlying properties it
owns, by changes in economic conditions generally, and by changes in the broader
stock market. A mortgage REIT may be affected by changes in interest rates and
the ability of the obligors on its portfolio mortgages to repay their
obligations. REITs depend on the skills of their managers and are not
diversified. REITs generally depend on maintaining cash flows to repay
borrowings and to make distributions to stockholders and are subject to the risk
of default by lessees or borrowers. REITs whose underlying assets are
concentrated in properties used by a particular industry, such as health care,
are also subject to risks associated with such industry.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. If a REIT invests in adjustable-rate mortgages, the interest rates on
which are reset periodically, yields on the REIT's investments in such loans
will gradually align themselves to reflect changes in market interest rates.
This causes the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
REITs may have limited financial resources and may trade less frequently and in
a more limited volume than larger company securities.
FOREIGN SECURITIES
Foreign securities include securities issued or guaranteed by companies
organized under the laws of countries other than the United States and
securities issued or guaranteed by foreign governments, their agencies or
instrumentalities and supra-national governmental entities, such as the World
Bank. Foreign securities also include U.S. dollar-denominated debt obligations,
such as "Yankee Dollar" obligations, of foreign issuers and of supra-national
government entities. Yankee Dollar obligations are U.S. dollar-denominated
obligations issued in the U.S. capital markets by foreign corporations, banks
and governments.
Foreign investments involve risks relating to local political, economic,
regulatory or social instability, military action or unrest or adverse
diplomatic developments, and may be affected by actions of foreign governments
adverse to the interests of U.S. investors. Such actions may include
expropriation or nationalization of assets, confiscatory taxation, restrictions
on U.S. investment or on the ability to repatriate assets or convert currency
into U.S. dollars or other government intervention. There is no assurance that
the Adviser will be able to anticipate these potential events or counter their
effects. In addition, the value of securities denominated in foreign currencies
and of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar.
-21-
It is anticipated that in most cases the best available market for foreign
securities will be on an exchange or in over-the-counter ("OTC") markets located
outside of the United States. Foreign markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement where fund
assets may be released prior to receipt of payment) are often less developed
than those in U.S. markets, and may result in increased risk or substantial
delays in the event of a failed trade or the insolvency of, or breach of duty
by, a foreign broker-dealer, securities depository or foreign subcustodian. In
addition, the costs associated with foreign investments, including withholding
taxes, brokerage commissions and custodial costs, are generally higher than with
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers are generally not bound by uniform accounting, auditing,
financial reporting requirements and standards of practice comparable to those
applicable to U.S. issuers. Adequate public information on foreign issuers may
not be available, and it may be difficult to secure dividends and information
regarding corporate actions on a timely basis. In general, there is less
overall governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. OTC markets tend to be
less regulated than stock exchange markets and, in certain countries, may be
totally unregulated. Regulatory enforcement may be influenced by economic or
political concerns, and investors may have difficulty enforcing their legal
rights in foreign countries.
Some foreign securities impose restrictions on transfer within the United States
or to U.S. persons. Although securities subject to such transfer restrictions
may be marketable abroad, they may be less liquid than foreign securities of the
same class that are not subject to such restrictions.
The risks of foreign investing may be magnified for investments in developing or
emerging markets. Security prices in emerging markets can be significantly more
volatile than those in more developed markets, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, may present the risks of nationalization of businesses,
restrictions on foreign ownership and prohibitions on the repatriation of
assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of holdings difficult or
impossible at times.
INDEXED SECURITIES
Indexed securities are instruments whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic.
Mortgage-indexed securities, for example, could be structured to replicate the
performance of mortgage securities and the characteristics of direct ownership.
Gold-indexed securities typically provide for a maturity value that depends on
the price of gold, resulting in a security whose price tends to rise and fall
together with gold prices. Currency-indexed securities typically are short-term
to intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities.
Currency-indexed securities may be positively or negatively indexed; that is,
their maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also have
prices that depend on the values of a number of different foreign currencies
relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. Indexed securities may be more volatile than the underlying
instruments. Indexed securities are also subject to the credit risks associated
-22-
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates.
SECURITIES OF OTHER INVESTMENT COMPANIES
A fund may invest in the securities of other investment companies, including
money market funds, to the extent that such investments are consistent with the
fund's investment objective and policies and permissible under the 1940 Act.
Under the 1940 Act, no fund may acquire the securities of other domestic or non-
U.S. investment companies if, as a result, (i) more than 10% of the fund's total
assets would be invested in securities of other investment companies, (ii) such
purchase would result in more than 3% of the total outstanding voting securities
of any one investment company being held by the fund, or (iii) more than 5% of
the fund's total assets would be invested in any one investment company. These
limitations do not apply to the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or acquisition of
substantially all the assets of another investment company.
A fund, as a holder of the securities of other investment companies, will bear
its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
fund's own operations.
EXCHANGE-TRADED FUNDS.
An Exchange-Traded Fund ("ETF") tracks an index, a commodity or a basket of
assets like an index fund, but trades like a stock on an exchange, thus
experiencing price changes throughout the day as it is bought and sold.
Many ETFs are investment companies. Therefore, a fund's purchases of ETF shares
that are organized as investment companies generally are subject to the
limitations on a fund's investments in other investment companies, which are
described above under "Securities of Other Investment Companies."
An investment in an ETF generally presents the same primary risks as an
investment in a conventional mutual fund (i.e., one that is not exchange traded)
that has the same investment objective, strategies, and policies. The price of
an ETF can fluctuate within a wide range, and a fund could lose money investing
in an ETF if the prices of the securities owned by the ETF go down. In
addition, ETFs are subject to the following risks that do not apply to
conventional mutual funds: (1) the market price of the ETF's shares may trade at
a discount to their NAV; (2) an active trading market for an ETF's shares may
not develop or be maintained; or (3) trading of an ETF's shares may be halted if
the listing exchange's officials deem such action appropriate, the shares are
de-listed from the exchange, or the activation of market-wide "circuit breakers"
(which are tied to large decreases in stock prices) halts stock trading
generally.
UTILITY COMPANY SECURITIES
Utility companies in the United States are generally subject to substantial
regulation intended to ensure appropriate standards of review and adequate
capacity to meet public demand. Utility rates generally are subject to review
and limitation by state public utilities commissions and tend to fluctuate with
marginal financing costs. Rate changes, however, tend to lag changes in
financing costs. Therefore, rate changes can favorably or unfavorably affect
the earnings or dividend payouts on utilities securities, depending upon whether
rates are increasing or decreasing. The nature of regulation in the U.S.
utilities industry continues to evolve. Although certain companies may profit
from regulatory changes, others may become less profitable. Some public
utilities companies are facing increased competition due to deregulation, which
may reduce these companies' profits. All of these factors are subject to rapid
changes which may affect utilities companies independent from other market
factors.
WARRANTS
Warrants give a fund the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the expiration
date). A fund may buy the designated securities by paying the exercise price
before the expiration date. Warrants may become worthless if the price of the
stock does not rise above the exercise price by the expiration date. This
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increases the market risks of warrants as compared to the underlying security.
Rights are the same as warrants, except companies typically issue rights to
existing stockholders.
FUTURES AND OPTIONS TRANSACTIONS
The following paragraphs pertain to futures and options transactions: Asset
Coverage for Futures and Options Positions, Purchasing Put and Call Options,
Writing Put and Call Options, OTC Options, Futures Contracts, Futures Margin
Payments and Limitations on the Use of Options and Futures Portfolio Securities.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
The funds will comply with guidelines established by the SEC with respect
to coverage of options and futures strategies by mutual funds and, if the
guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in
a segregated account cannot be sold while the futures or option strategy
is outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of a
fund's assets could impede portfolio management or the fund's ability to
meet redemption requests or other current obligations.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the purchaser obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike
price. In return for this right, the purchaser pays the current market
price for the option (known as the option premium). Options have various
types of underlying instruments, including specific securities, indices of
securities prices, and futures contracts. The purchaser may terminate its
position in a put option by allowing it to expire or by exercising the
option. If the option is allowed to expire, the purchaser will lose the
entire premium. If the option is exercised, the purchaser completes the
sale of the underlying instrument at the strike price. A purchaser may
also terminate a put option position by closing it out in the secondary
market at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price
does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's
strike price. A call buyer typically attempts to participate in potential
price increases of the underlying instrument with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option.
WRITING PUT AND CALL OPTIONS
The writer of a put or call option takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the
premium, the writer assumes the obligation to, in the case of a put
option, purchase the underlying security or, in the case of a call option,
sell the underlying security, in either case for a price equal to the
strike price for the option's underlying instrument if the other party to
the option chooses to exercise it. The writer may seek to terminate a
position in a put or call option before exercise by closing out the option
in the secondary market at its current price. If the secondary market is
not liquid for an option, however, the writer must continue to be prepared
to pay the strike price while the option is outstanding, in the case of a
put option, or deliver the underlying security in exchange for the strike
price in the case of a call option, regardless of price changes, and must
continue to set aside assets to cover its position. When writing an
option on a futures contract, a fund will be required to make margin
payments to a futures commission merchant ("FCM") as described below for
futures contracts.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that
the writer will also profit, because it should be able to close out the
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option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from
purchasing the underlying instrument directly, however, because the
premium received for writing the option should mitigate the effects of the
decline.
Writing a call option obligates the writer to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to
those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of
the option premium, a call writer mitigates the effects of a price
decline. At the same time, because a call writer must be prepared to
deliver the underlying instrument in return for the strike price, even if
its current value is greater, a call writer gives up some ability to
participate in security price increases.
Combined positions involve purchasing and writing options in combination
with each other, or in combination with futures or forward contracts, to
adjust the risk and return characteristics of the overall position. For
example, purchasing a put option and writing a call option on the same
underlying instrument would construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one
strike price and buying a call option at a lower price, to reduce the risk
of the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.
OTC OPTIONS
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size, and strike price,
the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option
contract. While this type of arrangement allows the purchaser or writer
greater flexibility to tailor an option to its needs, OTC options
generally involve greater credit risk than exchange-traded options, which
are guaranteed by the clearing organization of the exchanges where they
are traded.
FUTURES CONTRACTS
In purchasing a futures contract, the buyer agrees to purchase a specified
underlying instrument at a specified future date. In selling a futures
contract, the seller agrees to sell a specified underlying instrument at a
specified future date. The price at which the purchase and sale will take
place is fixed when the buyer and seller enter into the contract. Some
currently available futures contracts are based on specific securities,
such as U.S. Treasury bonds or notes, and some are based on indices of
securities prices, such as the Standard & Poor's 500 Composite Stock
Index. Futures can be held until their delivery dates, or can be closed
out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase a fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it
had purchased the underlying instrument directly. When a fund sells a
futures contract, by contrast, the value of its futures position will tend
to move in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price
changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to deliver
or pay for the underlying instrument unless the contract is held until the
delivery date. However, both the purchaser and seller are required to
deposit "initial margin" with an FCM when the contract is entered into.
Initial margin deposits are typically equal to a percentage of the
contract's value. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain
may be entitled to receive all or a portion of this amount. Initial and
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variation margin payments do not constitute purchasing securities on
margin for purposes of a fund's investment limitations. In the event of
the bankruptcy of an FCM that holds margin on behalf of a fund, the fund
may be entitled to return of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in
losses to the fund.
Certain funds have filed notices of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity
Futures Trading Commission ("CFTC") and the National Futures Association,
which regulate trading in the futures markets. These funds intend to
comply with Rule 4.5 under the Commodity Exchange Act, which limits the
extent to which the funds can commit assets to initial margin deposits and
option premiums.
LIMITATIONS ON THE USE OF OPTIONS AND FUTURES PORTFOLIO STRATEGIES
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available
will not match a fund's current or anticipated investments exactly. A
fund may invest in options and futures contracts based on securities with
different issuers, maturities, or other characteristics from the
securities in which the fund typically invests, which involves a risk that
the options or futures position will not track the performance of the
fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the
fund's investments well. Options and futures prices are affected by such
factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same
way. Imperfect correlation may also result from differing levels of
demand in the options and futures markets and the securities markets, from
structural differences in how options, futures and securities are traded,
or from imposition of daily price fluctuation limits or trading halts. A
fund may purchase or sell options and futures contracts with a greater or
lesser value than the securities it wishes to hedge or intends to purchase
in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in
all cases. If price changes in a fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to
produce anticipated gains or result in losses that are not offset by gains
in other investments.
It is impossible to predict the amount of trading interest that may exist
in various types of options or futures. Therefore no assurance can be
given that a fund will be able to utilize these instruments effectively
for the purposes set forth above. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the
underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures
contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed,
it may be impossible to enter into new positions or close out existing
positions. The lack of liquidity in the secondary market for a contract
due to price fluctuation limits could prevent prompt liquidation of
unfavorable positions, and potentially could require a fund to continue to
hold a position until delivery or expiration regardless of changes in its
value. OTC options generally carry greater liquidity risk than exchange-
traded options. A fund's access to other assets held to cover its options
or futures positions could also be impaired. Furthermore, a fund's
ability to engage in options and futures transactions may be limited by
tax considerations and transaction costs.
ILLIQUID AND RESTRICTED SECURITIES
Illiquid investments are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board, the Adviser determines the
liquidity of a fund's investments and, through reports from the Adviser, the
Board monitors investments in illiquid instruments. In determining the
liquidity of a fund's investments, the Adviser may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the fund's rights and obligations relating to the
investment). Investments currently considered by the Adviser to be illiquid
-26-
include repurchase agreements not entitling the holder to repayment of principal
and payment of interest within seven days, non-government stripped fixed-rate
mortgage-backed securities, and OTC options. Also, the Adviser may determine
some restricted securities, government-stripped fixed-rate mortgage-backed
securities, emerging market securities, and swap agreements to be illiquid.
However, with respect to OTC options that the funds write, all or a portion of
the value of the underlying instrument may be illiquid depending on the assets
held to cover the option and the nature and terms of any agreement the funds may
have to close out the option before expiration. In the absence of market
quotations, illiquid investments are priced at fair value as determined in good
faith by the Adviser's Valuation Committee.
Illiquid securities may be difficult to dispose of at a fair price at the times
when a fund believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that a fund pays for or recovers upon the sale of
illiquid securities. Illiquid securities are also more difficult to value and
thus the Adviser's judgment plays a greater role in the valuation process.
Investment of a fund's assets in illiquid securities may restrict the fund's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which a fund's
operations require cash and could result in the fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. The Adviser has the ability to deem restricted
securities as liquid. Where registration is required, a fund may be obligated
to pay all or part of the registration expense and a considerable period may
elapse between the time it decides to seek registration and the time it may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible securities held
by a fund, however, could affect adversely the marketability of such portfolio
securities and a fund might be unable to dispose of such securities promptly or
at reasonable prices.
OTHER TRANSACTIONS
REPURCHASE AGREEMENTS
A fund may purchase instruments from financial institutions, such as banks
and broker-dealers, subject to the seller's agreement to repurchase them
at an agreed upon time and price. A fund may invest in repurchase
agreements with institutions that are deemed by the Adviser to be of good
standing and creditworthy pursuant to the guidelines established by the
Board. A third party custodian bank takes possession of the underlying
securities of a repurchase agreement, the value of which is at all times
at least equal to the principal amount of the repurchase transaction,
including accrued interest. In the event of counterparty default on the
obligation to repurchase, a fund has the right to liquidate the collateral
and apply the proceeds in satisfaction of the obligation. However, there
could be potential losses to a fund in the event of default or bankruptcy
by the counterparty to the agreement and the fund is delayed or prevented
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from exercising its rights to dispose of the collateral, including the
risk of possible decline in the value of the collateral during the period
while the fund seek to assert its rights.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, a fund sells a security to another
party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase that security at an agreed-upon price and time. While a
reverse repurchase agreement is outstanding, a fund will maintain
appropriate liquid assets in a segregated custodial account to cover their
obligation under the agreement. A fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser. Such transactions may increase
fluctuations in the market value of fund assets and may be viewed as a
form of leverage.
DELAYED-DELIVERY TRANSACTIONS
Securities may be bought and sold on a delayed-delivery or when-issued
basis. These transactions involve a commitment to purchase or sell
specific securities at a predetermined price or yield, with payment and
delivery taking place after the customary settlement period for that type
of security. Typically, no interest accrues to the purchaser until the
security is delivered. The funds may receive fees or price concessions
for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of price
and yield fluctuations and the risk that the security will not be issued
as anticipated. Because payment for the securities is not required until
the delivery date, these risks are in addition to the risks associated
with a fund's investments. If a fund remains substantially fully invested
at a time when delayed-delivery purchases are outstanding, the delayed-
delivery purchases may result in a form of leverage. When delayed-
delivery purchases are outstanding, a fund will set aside appropriate
liquid assets in a segregated custodial account to cover the purchase
obligations. When a fund has sold a security on a delayed-delivery basis,
the fund does not participate in further gains or losses with respect to
the security. If the other party to a delayed-delivery transaction fails
to deliver or pay for the securities, the fund could miss a favorable
price or yield opportunity or suffer a loss.
A fund may re-negotiate a delayed delivery transaction and may sell the
underlying securities before delivery, which may result in capital gains
or losses for the fund.
WHEN-ISSUED SECURITIES
A fund may enter into agreements with banks or broker-dealers for the
purchase or sale of securities at an agreed-upon price on a specified
future date. Such agreements might be entered into, for example, when a
fund that invests in debt securities anticipates a decline in interest
rates and is able to obtain a more advantageous yield by committing
currently to purchase securities to be issued later. When a fund
purchases securities in this manner (on a when-issued or delayed-delivery
basis), it is required to create a segregated account with the Trust's
custodian and to maintain in that account cash, U.S. government securities
or other liquid securities in an amount equal to or greater than, on a
daily basis, the amount of the fund's when-issued or delayed-delivery
commitments. No income is generally earned on these securities until
after delivery. The fund will make commitments to purchase on a when-
issued or delayed-delivery basis only securities meeting the fund's
investment criteria. The fund may take delivery of these securities or,
if it is deemed advisable as a matter of investment strategy, the fund may
sell these securities before the settlement date. When the time comes to
pay for when-issued or delayed-delivery securities, the fund will meet its
obligations from then available cash flow or the sale of securities, or
from the sale of the when-issued or delayed-delivery securities themselves
(which may have a value greater or less than the fund's payment
obligation).
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TO BE ANNOUNCED SECURITIES ("TBAS")
As with other when-issued transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the
particular securities to be delivered. Instead, a fund agrees to accept
any security that meets specified terms. For example, in a TBA mortgage-
backed transaction, a fund and the seller would agree upon the issuer,
interest rate and terms of the underlying mortgages. However, the seller
would not identify the specific underlying mortgages until it issues the
security. TBA mortgage-backed securities increase market risks because
the underlying mortgages may be less favorable than anticipated by a fund.
LENDING OF PORTFOLIO SECURITIES
A fund may lend its portfolio securities to parties such as broker-dealers
or institutional investors; provided, that no fund may have outstanding at
any time loans with respect to portfolio securities having a value in
excess of 33 - 1/3% of the market value of the fund's total assets.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may
be delays in the recovery of loaned securities, or even a loss of rights
in collateral supplied should the borrower fail financially, loans will be
made only to counterparties approved by the Board. Furthermore, loans of
securities will only be made if, in the Adviser's judgment, the
consideration to be earned from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC staff that
a fund may engage in loan transactions only under the following
conditions: (1) the fund must receive 100% collateral in the form of cash
or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower
plus any accrued interest; (2) the borrower must increase the collateral
whenever the market value of the securities loaned (determined on a daily
basis) rises above the value of the collateral; (3) after giving notice,
the fund must be able to terminate the loan at any time; (4) the fund must
receive reasonable interest on the loan or a flat fee from the borrower,
as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market
value; (5) the fund may pay only reasonable custodian fees in connection
with the loan; and (6) the Board must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Cash received through loan transactions may be invested in other eligible
securities. Investing this cash subjects that investment, as well as the
security loaned, to market forces (i.e., capital appreciation or
depreciation).
LEVERAGE
The use of leverage by a fund creates an opportunity for increased net
income and capital growth for the fund, but, at the same time, creates
special risks, and there can be no assurance that a leveraging strategy
will be successful during any period in which it is employed. A fund may
utilize leverage to provide shareholders with a potentially higher return.
Leverage creates risks for a fund including the likelihood of greater
volatility of NAV and market price of the shares and the risk that
fluctuations in interest rates on borrowings and short-term debt or in the
dividend rates on any preferred shares may affect the return to a fund.
To the extent the income or capital growth derived from securities
purchased with funds received from leverage exceeds the cost of leverage,
a fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital growth from the securities purchased
with such funds is not sufficient to cover the cost of leverage, the
return to a fund will be less than if leverage had not been used, and
therefore the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case,
the Adviser in its best judgment nevertheless may determine to maintain a
fund's leveraged position if it deems such action to be appropriate under
the circumstances. Certain types of borrowings by a fund may result in
its being subject to covenants in credit agreements, including those
relating to asset coverage and portfolio composition requirements. A fund
may be subject to certain restrictions on investments imposed by
guidelines of one or more NRSROs, which may issue ratings for the
corporate debt securities or preferred shares purchased by a fund. These
guidelines may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the 1940 Act. It is not
-29-
anticipated that these covenants or guidelines will impede a fund in
managing its portfolio in accordance with its investment objective and
policies.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary purposes and to maintain liquidity, a fund may temporarily
depart from its principal investment strategies by investing up to 100% of
the fund's assets in cash and cash equivalents, including short-term bank
obligations, repurchase agreements and other money market instruments and
securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities. This
may cause a fund to temporarily fail to meet its goal and forego greater
investment returns for the safety of principal.
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ADDITIONAL TAX INFORMATION
- --------------------------------------------------------------------------------
The following discussion is a general summary of certain federal income and
excise tax considerations affecting each fund and its shareholders. This
discussion does not purport to be complete or to deal with all aspects of such
taxation that may be relevant to shareholders in light of their particular
circumstances. It is based on provisions of the Code, the regulations
promulgated thereunder, judicial decisions and administrative pronouncements in
effect on the date of this SAI, all of which are subject to change, some of
which may be retroactive. Prospective investors are urged to consult their own
tax advisers for more detailed information and for information regarding other
federal tax considerations and any state, local or foreign taxes that may apply
to them.
GENERAL
Each fund (which is treated as a separate corporation for federal tax purposes)
intends to continue to qualify for treatment as a regulated investment company
under Subchapter M of Chapter 1 of the Code ("RIC"). To qualify for that
treatment, a fund must distribute annually to its shareholders at least 90% of
its investment company taxable income (generally, net investment income, the
excess of net short-term capital gain over net long-term capital loss ("short-
term capital gain") and net gains from certain foreign currency transactions,
all determined without regard to any deduction for dividends paid) - in the case
of Intermediate Tax Exempt Bond Fund, at least 90% of the sum of that income
plus its net interest income excludable from gross income under section 103(a)
of the Code - ("Distribution Requirement") and must meet several additional
requirements. For each fund, these requirements include the following: (1) at
least 90% of the fund's gross income each taxable year must be derived from
(a) dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies, and (b)
net income from an interest in a "qualified publicly traded partnership"
("QPTP") ("Income Requirement"); (2) at the close of each quarter of the fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. government securities, securities of other RICs and
other securities, with these other securities limited, with respect to any one
issuer, to an amount that does not exceed 5% of the value of the fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities (equity securities of QPTPs being considered voting securities
for those purposes); and (3) at the close of each quarter of the fund's taxable
year, not more than 25% of the value of its total assets may be invested in
(i) the securities (other than U.S. government securities or securities of other
RICs) of any one issuer, (ii) the securities (other than securities of other
RICs) of any two issuers the fund controls that are determined to be engaged in
the same, similar or related trades or businesses or (iii) the securities of one
or more QPTPs.
If a fund failed to qualify for treatment as a RIC for any taxable year, (1) it
would be taxed as an ordinary corporation on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (2) the shareholders would treat all those distributions,
including distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss) and "exempt-interest dividends" (as
described below), as dividends to the extent of the fund's earnings and profits,
taxable as ordinary income (except that, for individual shareholders, the part
thereof that is "qualified dividend income" would be taxable at the rate for net
capital gain - a maximum of 15%). In addition, the fund could be required to
recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions before requalifying for RIC treatment.
Each fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary (taxable) income for that year and capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts.
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DIVIDENDS AND OTHER DISTRIBUTIONS
A portion (not expected to be substantial for Fixed Income Fund, Limited
Maturity Fixed Income Fund, Intermediate Tax Exempt Bond Fund and the Money
Market Funds) of the dividends from a fund's investment company taxable income
(whether paid in cash or reinvested in additional fund shares) may be eligible
for (1) the 15% maximum federal income tax rate applicable to "qualified
dividend income" that individuals receive through 2010 and (2) the dividends-
received deduction allowed to corporate shareholders. The eligible portion for
a fund may not exceed the aggregate dividends it receives from most domestic
corporations and, for purposes of the 15% rate, certain foreign corporations.
In addition, the availability of that rate and the dividends-received deduction
is subject to certain holding period and other restrictions imposed on a fund
with respect to the shares it holds on which the dividends were paid. Dividends
a corporate shareholder deducts pursuant to the dividends-received deduction are
subject indirectly to the federal alternative minimum tax. Distributions by a
fund of net capital gain do not qualify for the dividends-received deduction
but, as described in the Prospectus, are generally taxable to individual
shareholders at the 15% maximum rate.
Dividends and other distributions a fund declares in December of any year that
are payable to shareholders of record on a date in that month will be deemed to
have been paid by the fund and received by the shareholders on December 31 if
the fund pays them during the following January. Accordingly, those
distributions will be taxed to (or, in the case of exempt-interest dividends,
reportable by) the shareholders for the year in which that December 31 falls.
A dividend or capital gain distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to federal
taxation. Accordingly, an investor should not purchase fund shares shortly
before a dividend or capital gain distribution record date solely for the
purpose of receiving the dividend or distribution.
Dividends a fund pays to a foreign shareholder, other than (1) dividends paid to
a foreign shareholder whose ownership of shares is effectively connected with a
U.S. trade or business the shareholder carries on and (2) capital gain
distributions paid to a nonresident alien individual who is physically present
in the United States for no more than 182 days during the taxable year,
generally will be subject to a federal withholding tax of 30% (or lower treaty
rate). However, two categories of dividends, "interest-related dividends" and
"short-term capital gain dividends," if properly designated by a fund, will be
exempt from that tax. "Interest-related dividends" are dividends that are
attributable to "qualified net interest income" (i.e., "qualified interest
income," which generally consists of certain OID, interest on obligations "in
registered form," and interest on deposits less allocable deductions). "Short-
term capital gain dividends" are dividends that are attributable to short-term
capital gain, computed with certain adjustments. The exemption from withholding
tax will apply to interest-related dividends and short-term capital gain
dividends a fund pays to foreign investors, with certain exceptions, only with
respect to its current taxable year, unless extended by legislation introduced
last year.
REDEMPTIONS
A redemption of a fund's shares (other than shares of the Money Market Funds)
will result in a taxable gain or loss to the redeeming shareholder, depending on
whether the redemption proceeds are more or less than the shareholder's adjusted
basis in the redeemed shares (which normally includes any sales load paid on
Class A Shares). An exchange of shares of a fund for shares of another fund in
the Regions Morgan Keegan Select family of funds ("Regions Morgan Keegan Fund"),
including the other funds described in this SAI, generally will have similar tax
consequences. Special rules apply when a shareholder disposes of Class A Shares
of a fund through a redemption or exchange within 60 days after purchase thereof
and subsequently reacquires Class A Shares of that fund or acquires Class A
Shares of another Regions Morgan Keegan Fund, including such other funds,
without paying a sales charge due to the reinstatement privilege or exchange
privilege. In these cases, any gain on the disposition of the original Class A
Shares will be increased, or any loss decreased, by the amount of the sales
charge paid when the shareholder acquired those shares, and that amount will
increase the basis in the shares subsequently acquired. In addition, if a
shareholder purchases shares of a fund (whether pursuant to the reinstatement
privilege or otherwise) within 30 days before or after redeeming at a loss other
shares of that fund (regardless of class), all or part of that loss will not be
deductible and instead will increase the basis in the newly purchased shares.
If fund shares are redeemed at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
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INTERMEDIATE TAX EXEMPT BOND FUND
The part of the dividends (excluding capital gain distributions) Intermediate
Tax Exempt Bond Fund pays equal to the excess of its excludable interest income
over certain amounts disallowed as deductions will qualify as "exempt-interest
dividends," and thus will be excludable from its shareholders' gross income for
federal income tax purposes, if the fund satisfies the requirement that, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of securities the interest on which is excludable from
gross income under Code section 103(a); the fund intends to continue to satisfy
this requirement. The aggregate dividends the fund designates as exempt-
interest dividends for any taxable year may not exceed its net tax-exempt income
for the year. Shareholders' treatment of dividends from the fund under state
and local income tax laws may differ from the treatment thereof under the Code.
Investors should consult their tax advisers concerning this matter.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry Intermediate Tax Exempt Bond Fund shares is not deductible for federal
income tax purposes. Entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by private
activity bonds should consult their tax advisers before purchasing fund shares
because, for users of certain of these facilities, the interest on those bonds
is not exempt from federal income tax. For these purposes, "substantial user"
is defined to include a "non-exempt person" who regularly uses in a trade or
business a part of a facility financed from the proceeds of those bonds.
Up to 85% of social security and railroad retirement benefits may be included in
taxable income for a taxable year for recipients whose modified adjusted gross
income (including income from tax-exempt sources such as Intermediate Tax Exempt
Bond Fund) plus 50% of their benefits for the year exceeds certain base amounts.
Exempt-interest dividends from the fund still would be tax-exempt to the extent
described above; they would only be included in the calculation of whether a
recipient's income exceeded the established amounts.
If Intermediate Tax Exempt Bond Fund shares are sold at a loss after being held
for six months or less, the loss will be disallowed to the extent of any exempt-
interest dividends received on those shares, and any loss not disallowed will be
treated as long-term, instead of short-term, capital loss to the extent of any
capital gain distributions received thereon.
Intermediate Tax Exempt Bond Fund may acquire zero coupon or other municipal
securities issued with OID. As a holder of those securities, the fund must take
into account the OID that accrues on them during the taxable year, even if it
receives no corresponding payment on them during the year. Because the fund
annually must distribute substantially all of its investment company taxable
income and net tax-exempt income, including any tax-exempt OID, to satisfy the
Distribution Requirement, it may be required in a particular taxable year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from its cash assets or
from the proceeds of sales of its portfolio securities, if necessary. The fund
may realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain.
If Intermediate Tax Exempt Bond Fund invests in instruments that generate
taxable interest income, under the circumstances described in the Prospectus and
in the discussion of market discount bonds under "Discount Securities" below,
the portion of any fund dividend attributable to the interest earned thereon
will be taxable to its shareholders as ordinary income to the extent of its
earnings and profits, and only the remaining portion will qualify as an exempt-
interest dividend. Moreover, if the fund realizes capital gain as a result of
market transactions, any distributions of the gain will be taxable to its
shareholders.
INCOME FROM FOREIGN SECURITIES
Dividends and interest a fund receives on foreign securities, and gains it
realizes thereon, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions that would reduce the yield and/or
total return on its securities. Tax conventions between certain countries and
the United States may reduce or eliminate those taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
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A fund may invest in the stock of "passive foreign investment companies"
("PFICs") if that is a permissible investment for it. A PFIC is any foreign
corporation (with certain exceptions) that, in general, meets either of the
following tests: (1) at least 75% of its gross income for the taxable year is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, a fund will be
subject to federal income tax on a portion of any "excess distribution" it
receives on the stock of a PFIC or of any gain on disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders. A fund's distributions
attributable to PFIC income will not be eligible for the 15% maximum federal
income tax rate on "qualified dividend income" mentioned above.
If a fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain - which it
most likely would have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax - even if the QEF did not distribute those
earnings and gain to the fund. In most instances it will be very difficult, if
not impossible, to make this election because of certain requirements thereof.
A fund may elect to "mark-to-market" its stock in any PFIC. "Marking-to-
market," in this context, means including in gross income each taxable year (and
treating as ordinary income) the excess, if any, of the fair market value of a
PFIC's stock over the fund's adjusted basis therein as of the end of that year.
Pursuant to the election, a fund also would be allowed to deduct (as an
ordinary, not capital loss) the excess, if any, of its adjusted basis in PFIC
stock over the fair market value thereof as of the taxable year-end, but only to
the extent of any net mark-to-market gains with respect to that stock the fund
included in income for prior taxable years. A fund's adjusted basis in each
PFIC's stock with respect to which it makes this election will be adjusted to
reflect the amounts of income included and deductions taken under the election.
Investors should be aware that a fund may not be able, at the time it acquires a
foreign corporation's shares, to ascertain whether the corporation is a PFIC and
that a foreign corporation may become a PFIC after a fund acquires shares
therein. While each fund generally will seek to avoid investing in PFIC shares
to avoid the tax consequences detailed above, there are no guarantees that it
will be able to do so.
Gains or losses (1) from the disposition of foreign currencies, (2) from the
disposition of debt securities denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
dates of acquisition and disposition of the securities and (3) that are
attributable to fluctuations in exchange rates that occur between the time a
fund accrues dividends, interest or other receivables, or accrues expenses or
other liabilities, denominated in a foreign currency and the time the fund
actually collects the receivables, or pays the liabilities, generally will be
treated as ordinary income or loss. These gains or losses may increase or
decrease the amount of a fund's investment company taxable income to be
distributed to its shareholders as ordinary income, rather than affecting the
amount of its net capital gain. If these losses exceed other investment company
taxable income for a taxable year, a fund would not be able to distribute any
dividends, and any distributions it made during that year before it realized the
losses would be recharacterized as a return of capital to shareholders, rather
than as a dividend, thereby reducing each shareholder's basis in his or her fund
shares.
HEDGING STRATEGIES
The use of hedging strategies, such as selling (writing) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses a fund realizes in connection
therewith. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward contracts a fund derives with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement.
Certain futures, foreign currency contracts and "nonequity" options (i.e.,
certain listed options, such as those on a "broad-based" securities index) in
which a fund may invest may be "section 1256 contracts." Section 1256 contracts
a fund holds at the end of each taxable year, other than section 1256 contracts
that are part of a "mixed straddle" with respect to which it has made an
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election not to have the following rules apply, must be "marked-to-market" (that
is, treated as sold for their fair market value) for federal income tax
purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 1256 contracts also may be marked-to-market for purposes of the Excise
Tax. These rules may operate to increase the amount that a fund must distribute
to satisfy the Distribution Requirement, which will be taxable to its
shareholders as ordinary income, and to increase the net capital gain a fund
recognizes, without in either case increasing the cash available to the fund.
Code section 1092 (dealing with straddles) also may affect the taxation of
options, futures and forward contracts in which a fund may invest. That section
defines a "straddle" as offsetting positions with respect to actively traded
personal property; for these purposes, options, futures and forward contracts
are personal property. Under that section, any loss from the disposition of a
position in a straddle may be deducted only to the extent the loss exceeds the
unrealized gain on the offsetting position(s) of the straddle. The regulations
under section 1092 also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. If a fund makes certain elections, the amount, character and timing
of the recognition of gains and losses from the affected straddle positions
would be determined under rules that vary according to the elections made.
Because only a few of the regulations implementing the straddle rules have been
promulgated, the tax consequences to a fund of straddle transactions are not
entirely clear.
If a fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis -
and enters into a "constructive sale" of the position, the fund will be treated
as having made an actual sale thereof, with the result that it will recognize
gain at that time. A constructive sale generally consists of a short sale, an
offsetting notional principal contract or futures or forward contract a fund or
a related person enters into with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction of a fund during any taxable year that
otherwise would be treated as a constructive sale if the transaction is closed
within 30 days after the end of that year and the fund holds the appreciated
financial position unhedged for 60 days after that closing (i.e., at no time
during that 60-day period is the fund's risk of loss regarding that position
reduced by reason of certain specified transactions with respect to
substantially identical or related property, such as having an option to sell,
being contractually obligated to sell, making a short sale or granting an option
to buy substantially identical stock or securities).
DISCOUNT SECURITIES
A fund may acquire zero coupon or other securities issued with OID. As a holder
of those securities, a fund must include in its income the OID that accrues on
them during the taxable year, even if it receives no corresponding payment on
them during the year. Similarly, a fund must include in its gross income
securities it receives as "interest" on PIKs. Because a fund annually must
distribute substantially all of its investment company taxable income, including
any accrued OID and other non-cash income, to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, a fund may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made
from a fund's cash assets or from the proceeds of sales of securities, if
necessary. A fund may realize capital gains or losses from those sales, which
would increase or decrease its investment company taxable income and/or net
capital gain.
A fund may invest in bonds that are purchased, generally not on their original
issue, with "market discount" (that is, at a price less than the stated
redemption price of the bond at maturity adjusted for accrued OID, if any)
("market discount bonds"). Market discount less than the product of (1) 0.25%
of the redemption price at maturity times (2) the number of complete years to
maturity after a fund acquired the bond is disregarded. Market discount on a
bond generally is accrued ratably, on a daily basis, over the period from the
acquisition date thereof to the date of its maturity. Gain on the disposition
of a market discount bond (other than a bond with a fixed maturity date within
one year from its issuance) generally is treated as ordinary (taxable, in the
case of Intermediate Tax Exempt Bond Fund) income, rather than capital gain, to
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the extent of the bond's accrued market discount at the time of disposition. In
lieu of treating the disposition gain as above, a fund may elect to include
market discount in its gross income currently, for each taxable year to which it
is attributable.
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VALUATION OF SHARES
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CALCULATING SHARE PRICE
The Money Market Funds attempt to stabilize the NAV of their shares at $1.00 by
valuing their portfolio securities using the amortized cost method. Shares of
the other funds are sold at their NAV plus any applicable front-end sales charge
(applies to Class A Shares of all funds except the Money Market Funds) and
redeemed at NAV less any applicable contingent deferred sales charge ("CDSC")
(applies to Class A Shares and Class C Shares of all funds except the Money
Market Funds) on days on which the New York Stock Exchange ("NYSE") is open for
trading. Each fund calculates its NAV as of the close of regular trading
(approximately 4:00 p.m. Eastern Time, or any earlier NYSE closing time that
day) on each day that NYSE is open for trading. The NYSE is not open for
trading on weekends and on certain days relating to the following holidays: New
Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NAV may be calculated and purchase and redemption orders accepted on any
such day if the funds determine it is in the shareholders' interest to do so.
Your order will be priced at the next calculated NAV plus any applicable front-
end sales charge after your order is received in proper form (as described in
the Prospectus). The NAV for each class of a fund's shares is computed by
subtracting the liabilities from the total assets attributable to each class of
shares and dividing the result by the number of shares outstanding.
AMORTIZED COST METHOD (MONEY MARKET FUNDS ONLY)
The Board decided that the best method for determining the value of portfolio
instruments for the Money Market Funds is amortized cost. Under this method,
portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
The Money Market Funds use of the amortized cost method of valuing portfolio
instruments depends on their compliance with the provisions of Rule 2a-7 (the
"Rule") promulgated by the SEC under the 1940 Act. Under the Rule, the Board
must establish procedures reasonably designed to stabilize the NAV per share, as
computed for purposes of distribution and redemption, at $1.00 per share, taking
into account current market conditions and a fund's investment objective.
Under the Rule, the Money Market Funds are permitted to purchase instruments
which are subject to demand features or standby commitments. As defined by the
Rule, a demand feature entitles each fund to receive the principal amount of the
instrument from the issuer or a third party on (1) no more than 30 days' notice
or (2) at specified intervals not exceeding 397 days on no more than 30 days'
notice. A standby commitment entitles each fund to achieve same-day settlement
and to receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
The Money Market Funds acquire instruments subject to demand features and
standby commitments to enhance the instrument's liquidity. Each fund treats
demand features and standby commitments as part of the underlying instruments,
because the funds do not acquire them for speculative purposes and cannot
transfer them separately from the underlying instruments. Therefore, although
each fund defines demand features and standby commitments as puts, the funds do
not consider them to be corporate investments for purposes of their investment
policies.
MONITORING PROCEDURES
The Board's procedures include monitoring the relationship between the
amortized cost value per share and the NAV per share based upon available
indications of market value. The Board will decide what, if any, steps
should be taken if there is a difference of more than 0.5 of 1% between
the two values. The Board will take any steps they consider appropriate
(such as redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising from
differences between the two methods of determining NAV.
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INVESTMENT RESTRICTIONS
The Rule requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Board, present minimal credit
risks and have received the requisite rating from one or more NRSROs. If
the instruments are not rated, the Board must determine that they are of
comparable quality. The Rule also requires each fund to maintain a
dollar-weighted average portfolio maturity (not more than 90 days)
appropriate to the objective of maintaining a stable NAV of $1.00 per
share. In addition, no instrument with a remaining maturity of more than
397 days can be purchased by either fund.
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days for either fund, the
affected fund will invest its available cash to reduce the average
maturity to 90 days or less as soon as possible. Shares of investment
companies purchased by each fund will meet these same criteria and will
have investment policies consistent with Rule 2a-7.
Under the amortized cost method of valuation, neither the amount of daily income
nor the NAV is affected by any unrealized appreciation or depreciation of the
portfolio. In periods of declining interest rates, the indicated daily yield on
shares of the Money Market Funds, computed based upon amortized cost valuation,
may tend to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates. In periods of rising interest
rates, the indicated daily yield on shares of each fund computed the same way
may tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
VALUATION OF PORTFOLIO INVESTMENTS (ALL OTHER FUNDS)
Investments in securities listed or traded on a securities exchange are valued
at the last quoted sales price on the exchange where the security is primarily
traded as of the close of business on the NYSE, usually 4:00 p.m., Eastern Time,
on the valuation date. Equity securities traded on the Nasdaq Stock Market are
valued at the Nasdaq Official Closing Price ("NOCP") provided by Nasdaq each
business day. The NOCP is the most recently reported price as of 4:00:02 p.m.,
Eastern Time, unless that price is outside the range of the "inside" bid and
asked price (i.e., the bid and asked prices that dealers quote to each other
when trading for their own accounts); in that case, Nasdaq will adjust the price
to equal the inside bid or asked price, whichever is closer. Because of delays
in reporting trades, the NOCP may not be based on the price of the last trade to
occur before the market closes. Securities traded in the over-the-counter
market and listed securities for which no sales were reported for that date are
valued at the last- quoted bid price. Equity and debt securities issued in
private placements are valued on the bid side by a primary market dealer. Long-
term debt securities, including U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted securities
and private placement securities, are generally valued at the latest price
furnished by an independent pricing service or primary market dealer. Short-
term debt securities with remaining maturities of more than 60 days for which
market quotations are readily available are valued by an independent pricing
service or primary market dealer. Short-term debt securities with remaining
maturities of 60 days or less are valued at cost with interest accrued or
discount accreted to the date of maturity, unless such valuation, in the
judgment of the Adviser's Valuation Committee, does not represent market value.
Futures contracts and options are valued on the basis of market quotations, if
available. Premiums received on the sale of call options are included in a
fund's net asset value, and the current market value of options sold by the fund
will be subtracted from net assets. Investments in open-end registered
investment companies are valued at NAV as reported by those investment
companies.
Foreign securities are valued based on prices furnished by independent brokers
or quotation services that express the value of securities in their local
currency. Securities which are valued in accordance herewith in a currency
other than U.S. dollars shall be converted to U.S. dollar equivalents at a rate
obtained from a recognized bank, dealer or independent service on the valuation
date. Because foreign markets may be open on days when U.S. markets are closed,
the value of foreign securities could change on days when shares of a fund
cannot be bought or sold. Any changes in the value of forward contracts due to
exchange rate fluctuations and days to maturity are included in the calculation
of the net asset value. If an extraordinary event that is expected to
materially affect the value of a portfolio security occurs after the close of
trading in that market, then that security will be valued as determined in good
faith by the Adviser's Valuation Committee.
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When price quotations for certain securities are not readily available or if the
available quotations are not believed to be reflective of market value, those
securities will be valued at "fair value" as determined in good faith by the
Adviser's Valuation Committee using procedures established by and under the
supervision of the Board. There can be no assurance that a fund could purchase
or sell a portfolio security at the price used to calculate the fund's NAV.
A fund may use the fair value of a security to calculate its NAV when, for
example, (1) a portfolio security is not traded in a public market or the
principal market in which the security trades is closed, (2) trading in a
portfolio security is suspended and not resumed prior to the normal market
close, (3) a portfolio security is not traded in significant volume for a
substantial period, or (4) the Adviser determines that the quotation or price
for a portfolio security provided by a broker-dealer or independent pricing
services is inaccurate. The funds may also use the fair value of securities
that trade in a foreign market, especially if significant events that appear
likely to affect the value of those securities occur between the time that
foreign market closes and the time the exchange closes. Significant events may
include (1) those impacting a single issuer, (2) governmental actions that
affect securities in one sector or country, (3) natural disasters or armed
conflicts affecting a country or region, or (4) significant domestic or foreign
market fluctuations.
The "fair value" of securities may be difficult to determine and thus judgment
plays a greater role in the valuation process. Among the factors that may be
considered by the Valuation Committee in determining the fair value of a
security are: (1) the fundamental analytical data relating to the investment;
(2) the nature and duration of restrictions on disposition of the securities;
(3) an evaluation of the forces that influence the market in which the
securities are purchased and sold; (4) type of security; (5) financial
statements of the issuer; (6) cost at date of purchase (generally used for
initial valuation); (7) size of the fund's holding; (8) for restricted
securities, any discount from market value of unrestricted securities of the
same class at the time of purchase; (9) the existence of a shelf registration
for restricted securities; (10) information as to any transactions or offers
with respect to the security; (11) special reports prepared by analysts; (12)
the existence of merger proposals, tender offers or similar events affecting the
security; and (13) the price and extent of public trading in similar securities
of the issuer or comparable companies. The degree of judgment involved in
determining the fair value of an investment security is dependent upon the
availability of quoted market prices or observable market parameters. When
observable market prices and parameters do not exist, the valuation process may
rely more heavily on consideration of factors such as interest rate changes,
movements in credit spreads, default rate assumptions, prepayment assumptions,
type and quality of collateral, security seasoning and market dislocation.
The values assigned to fair valued investments are based on available
information and do not necessarily represent amounts that might ultimately be
realized, since such amounts depend on future developments inherent in long-term
investments. Changes in the fair valuation of portfolio securities may be less
frequent and of greater magnitude than changes in the price of portfolio
securities valued at their last sale price, by an independent pricing service,
or based on market quotations. Imprecision in estimating fair value can also
impact the amount of unrealized appreciation or depreciation recorded for a
particular portfolio security and differences in the assumptions used could
result in a different determination of fair value, and those differences could
be material.
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ADDITIONAL PURCHASE INFORMATION
- --------------------------------------------------------------------------------
CLASS A SHARES
Class A Shares are offered on a continuous basis at a price equal to their NAV
plus the applicable "initial sales charge" described in the Prospectus.
Proceeds from the initial sales charge are paid to Morgan Keegan and are used by
Morgan Keegan to defray expenses related to providing distribution-related
services to the funds in connection with sales of Class A Shares, such as
payment of compensation to Morgan Keegan brokers for selling Class A Shares. No
initial sales charge is imposed on Class A Shares issued as a result of the
automatic reinvestment of dividends or capital gain distributions. An initial
sales charge is not imposed on purchases of $1,000,000 or more of Class A
Shares; however, if those shares are redeemed within one year from the date of
purchase, a 1.00% CDSC will be imposed at the time of redemption. The charge
will be assessed on an amount equal to the lesser of the purchase price of the
shares or their NAV at the time of redemption. Accordingly, no CDSC will be
imposed on increases in NAV above the initial purchase price. In addition, no
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gain distributions. Proceeds from the CDSC are paid to Morgan Keegan to
defray the expenses Morgan Keegan incurs in providing distribution-related
services to the Class A Shares.
LETTER OF INTENT
Any investor may execute a Letter of Intent ("Letter) covering purchases of
Class A Shares of $50,000 or more to be made within a period of 13 months.
Under a Letter, purchases of shares of a fund or a series of Morgan Keegan
Select Fund, Inc., which are sold with a sales charge made within a 13-month
period starting with the first purchase pursuant to a Letter will be aggregated
for purposes of calculating the applicable sales charges. To qualify under a
Letter, purchases must be made for a single account; and purchases made for
related accounts may not be aggregated under a single Letter. Investors may
obtain a form of a Letter from their Morgan Keegan financial adviser or Regions
Morgan Keegan trust administrator. The Letter is not a binding obligation to
purchase any amount of shares, but its execution will result in paying a reduced
sales charge for the anticipated amount of the purchase. If the total amount of
shares purchased does not equal the amount stated in the Letter, the investor
will be notified and must pay, within 20 days of the expiration of the Letter,
the difference between the sales charge on the shares purchased at the reduced
rate and the sales charge applicable to the shares actually purchased under the
Letter. Shares equal to 5% of the intended amount will be held in escrow during
the 13-month period (while remaining registered in the name of the purchaser)
for this purpose.
SALES CHARGE WAIVERS
The sales charge is waived on Class A Shares of each fund purchased by officers,
Trustees and full-time employees (and their immediate families, which includes
their legal spouse and children under the age of 18) of Regions Financial
Corporation ("Regions") (or its direct or indirect subsidiaries), or by Trustees
or officers (and their immediate families, which includes their legal spouse and
children under the age of 18) of the funds. Also, shares of each fund may be
acquired without a sales charge if the purchase is made through a Morgan Keegan
broker who formerly was employed as a broker with another firm registered as a
broker-dealer with the SEC, if the following conditions are met: (i) the
purchaser was a client of the investment representative at the other firm for
which the investment representative previously served as a broker; (ii) within
90 days of the purchase of the fund's shares, the purchaser redeemed shares of
one or more mutual funds for which that other firm or its affiliates served as
principal underwriter, provided that either the purchaser had paid a sales
charge in connection with investment in such funds or a CDSC upon redeeming
shares in such funds; and (iii) the aggregate amount of the fund's shares
purchased pursuant to this sales charge waiver does not exceed the amount of the
purchaser's redemption proceeds from the shares of the mutual fund(s) for which
the other firm or its affiliates served as principal underwriter. Investors
seeking to avail themselves of this waiver will be required to provide
satisfactory evidence that all the above-noted conditions are met and should
contact their Morgan Keegan broker for more information.
-40-
CLASS C SHARES
Class C Shares are offered on a continuous basis at a price equal to their NAV.
Class C Shares that are redeemed within one year of purchase are subject to a
CDSC of 1.00% of the redemption amount. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in NAV
above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gain distributions.
Proceeds from the CDSC are paid to Morgan Keegan to defray the expenses Morgan
Keegan incurs in providing distribution-related services to the Class C Shares.
CLASS I SHARES
Class I Shares are offered on a continuous basis at a price equal to their NAV,
without an initial sales charge or a CDSC. Class I Shares are available only to
a limited group of investors. If you are investing through a special program,
such as an employer-sponsored retirement plan, advisory accounts of the Adviser
or certain programs available through brokers, like wrap accounts, you may be
eligible to purchase Class I Shares.
-41-
ADDITIONAL INFORMATION ON REDEMPTIONS
- --------------------------------------------------------------------------------
The right of investors to redeem their shares, and the date of payment for
redemptions, may be suspended or postponed (1) for any periods when the NYSE is
closed (other than customary weekend and holiday closings); (2) when trading is
restricted in markets normally utilized by a fund or when an emergency, as
defined by the rules and regulations of the SEC exists, making disposal of a
fund's investments or determination of its NAV not reasonably practicable; or
(3) for such other periods as the SEC by order may permit for protection of the
funds' shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the NAV next
determined after the suspension is lifted.
Each fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part by securities valued in the same way as they would be valued for
purposes of computing the fund's per share NAV. However, each fund has
committed itself to pay in cash all requests for redemption by any shareholder
of record, limited in amount with respect to each shareholder during any ninety-
day period to the lesser of (1) $250,000, or (2) 1% of the NAV of the fund at
the beginning of such period. If payment is made in securities, a shareholder
will incur brokerage or transactional expenses in converting those securities
into cash and will be subject to fluctuation in the market price of those
securities until they are sold.
-42-
TAX-DEFERRED RETIREMENT ACCOUNTS AND PLANS
- --------------------------------------------------------------------------------
An investment in certain fund shares, other than share of Intermediate Tax
Exempt Bond Fund, may be appropriate for various types of tax-deferred
retirement accounts and plans. In general, income earned through the investment
of assets of such an account or plan is not taxed to the beneficiaries until the
income is distributed to them. Investors who are considering establishing such
an account or plan may wish to consult their attorneys or other tax advisers
with respect to individual tax questions. Additional information with respect
to these accounts and plans is available upon request from any Morgan Keegan
Financial Adviser or Regions Morgan Keegan Trust Administrator.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
If you have earned income from employment (including self-employment), you can
contribute each year to an IRA up to the lesser of (1) $4,000 ($5,000 for
taxable years beginning in 2008 and thereafter) for yourself or twice that
amount for you and your spouse, regardless of whether your spouse is employed
(which amounts are increased by $1,000 for each spouse who has attained age 50
by the end of the calendar year for which the contribution is made), or (2) 100%
of compensation. Some individuals may be able to take an income tax deduction
for the contribution. Regular contributions may not be made for the year you
become 70 1/2 or thereafter. You also may be able to make a nondeductible
contribution to a "Roth IRA," distributions from which are not taxable under
certain circumstances.
An investment in fund shares through IRA contributions may be advantageous,
regardless of whether the contributions are deductible by you for tax purposes,
because all dividends and capital gain distributions on your fund shares are not
immediately taxable to you or the IRA; they become taxable (as ordinary income)
only when distributed to you from the IRA. To avoid penalties, your interest in
an IRA must be distributed, or start to be distributed, to you not later than
April 1 following the calendar year in which you attain age 70 1/2.
Distributions made before age 59 1/2, in addition to being taxable, generally
are subject to a penalty equal to 10% of the distribution, except in the case of
death or disability, where the distribution is rolled over into another
qualified plan or in certain other situations.
SELF-EMPLOYED INDIVIDUAL RETIREMENT PLANS - KEOGH PLANS
Morgan Keegan will assist self-employed individuals to set up retirement plans
through which fund shares may be purchased. Morgan Keegan generally arranges
for a bank to serve as trustee for the plan and performs custodian services for
the trustee and the plan by holding and handling securities. However, you have
the right to use a bank of your choice to provide these services at your cost.
There are penalties for distributions from a Keogh Plan prior to age 59 1/2,
except in the case of death or disability.
SIMPLIFIED EMPLOYEE PENSION PLANS ("SEPs") AND
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES ("SIMPLEs")
Morgan Keegan also will make available to corporate and other employers a SEP or
SIMPLE for investment in fund shares.
-43-
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The officers of the Trust are responsible for the operation of the funds under
the direction of the Board. The Trustees and officers of the Trust and their
principal occupations during the past five years are set forth in the tables
below. An asterisk (*) indicates Trustees and/or officers who are "interested
persons" of the Trust as defined by the 1940 Act by virtue of their positions
with Morgan Keegan or the Adviser.
POSITION(S) HELD NUMBER OF
WITH FUNDS, TERM PORTFOLIOS IN OTHER
OF OFFICE(2) AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS(1) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND AGE SERVED DURING PAST FIVE YEARS TRUSTEE TRUSTEE
Interested Trustees
- -------------------
J. Kenneth Alderman* Chairman (Since 2008) Mr. Alderman has been President of Regions 18 None
Age 55 and Trustee (Since Morgan Keegan Trust and Vice Chairman and
2003) Chief Executive Officer of Morgan Asset
Management, Inc. since 2002. He has been
Executive Vice President of Regions Financial
Corporation since 2000. He is a Certified
Public Accountant and he holds the Chartered
Financial Analyst designation.
Independent Trustees
- --------------------
-44-
POSITION(S) HELD NUMBER OF
WITH FUNDS, TERM PORTFOLIOS IN OTHER
OF OFFICE(2) AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS(1) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND AGE SERVED DURING PAST FIVE YEARS TRUSTEE TRUSTEE
Albert C. Johnson Trustee (Since 2005) Mr. Johnson has been an independent financial 18 Hibbett Sports,
Age 63 consultant since 1998. He also has served as Inc. since 2008.
a Director of Hibbett Sports since 2008 and Books-A-Million,
Books-A- Million, Inc. since 2005. He was Inc. since 2005.
Senior Vice President and Chief Financial
Officer of Dunn Investment Company
(construction) from 1994 to 1998. He also was
with Arthur Andersen LLP from 1965 to 1994,
retiring as the Managing Partner of the
firm's Birmingham Office.
-45-
POSITION(S) HELD NUMBER OF
WITH FUNDS, TERM PORTFOLIOS IN OTHER
OF OFFICE(2) AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS(1) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND AGE SERVED DURING PAST FIVE YEARS TRUSTEE TRUSTEE
W. Randall Pittman Trustee (Since 2003) Mr. Pittman has been Chief Financial Officer 18 None
Age 54 of Emageon, Inc. (healthcare information
systems) since 2002. From 1999 to 2002, he
was Chief Financial Officer of BioCryst
Pharmaceuticals, Inc. (biotechnology). From
1998 to 1999, he was Chief Financial Officer
of ScandiPharm, Inc. (pharmaceuticals). From
1995 to 1998, he served as Senior Vice
President - Finance of CaremarkRx (pharmacy
benefit management). From 1983 to 1995, he
held various positions with AmSouth
Bancorporation (bank holding company),
including Executive Vice President and
Controller.
James Stillman R. Trustee (Since Mr. McFadden has been Chief Manager 18 None
McFadden(3) 2003) of McFadden Communications, LLC
Age 50 (commercial printing) since 2002.
He also has served as a Director for
several private companies since 1997.
Mary S. Stone Trustee (Since Ms. Stone has been a professor at the 18 None
Age 57 2003) University of Alabama, Culverhouse
School of Accountancy since 1981 and
held the Hugh Culverhouse Endowed Chair
of Accountancy since 2002. She has
served as Director of the Culverhouse
School of Accountancy since 2004. She
is also a former member of Financial
Accounting Standards Advisory Council,
AICPA, Accounting Standards Executive
Committee and AACSB International
Accounting Accreditation Committee. She
is a Certified Public Accountant.
Archie W. Willis, III Trustee (Since 2003) Mr. Willis has been President of Community 18 Memphis Telecom,
Age 50 Capital (financial advisory and real estate LLC since 2001.
development) since 1999 and Vice President of Member of the
Community Realty Company (real estate Advisory Board
brokerage) since 1999. He was a First Vice of Tri-State
President of Morgan Keegan & Company, Inc. Bank of Memphis
from 1991 to 1999. since 2006.
-46-
POSITION(S) HELD NUMBER OF
WITH FUNDS, TERM PORTFOLIOS IN OTHER
OF OFFICE(2) AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS(1) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND AGE SERVED DURING PAST FIVE YEARS TRUSTEE TRUSTEE
Officers
- --------
Brian B. Sullivan* President (Since Mr. Sullivan has served as President and N/A N/A
Age 52 2006) Chief Investment Officer of Morgan Asset
Management, Inc. since 2006. From 1999 to
2002 and from 2005 to 2007, Mr. Sullivan
served as President of AmSouth Asset
Management, Inc., which merged into Morgan
Asset Management, Inc. in late 2007. From
1996 to 1999 and from 2002 to 2005, Mr.
Sullivan served as Vice President of AmSouth
Asset Management, Inc. Since joining AmSouth
Bank in 1982 through 1996, Mr. Sullivan
served in various capacities including Equity
Research Analyst and Chief Fixed Income
Officer and was responsible for Employee
Benefits Portfolio Management and Regional
Trust Investments. He holds the Chartered
Financial Analyst designation.
Thomas R. Gamble* Vice-President Mr. Gamble has been an executive at Regions N/A N/A
Age 65 (Since 2003) Financial Corporation since 1981. He was a
Corporate IRA Manager from 2000 to 2001 and a
Senior Vice President and Manager of Employee
Benefits at the Birmingham Trust Department
of Regions Bank from 1981 to 2000.
-47-
POSITION(S) HELD NUMBER OF
WITH FUNDS, TERM PORTFOLIOS IN OTHER
OF OFFICE(2) AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS(1) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND AGE SERVED DURING PAST FIVE YEARS TRUSTEE TRUSTEE
J. Thompson Weller* Treasurer (Since Mr. Weller has been a Managing Director and N/A N/A
Age 42 2006) and Assistant Controller of Morgan Keegan & Company, Inc.
Secretary (Since since 2001. He was Senior Vice President and
2003) Controller of Morgan Keegan & Company, Inc.
from 1998 to 2001, Controller and First Vice
President from 1997 to 1998, Controller and
Vice President from 1995 to 1997 and
Assistant Controller from 1992 to 1995. Mr.
Weller also served as a Business Systems
Analyst in the Investment Information
Division of Metropolitan Life Insurance Co.
from 1991 to 1992. Mr. Weller was also with
Arthur Andersen & Co. in 1988 and Andersen
Consulting from 1989 to 1991.
-48-
POSITION(S) HELD NUMBER OF
WITH FUNDS, TERM PORTFOLIOS IN OTHER
OF OFFICE(2) AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS(1) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND AGE SERVED DURING PAST FIVE YEARS TRUSTEE TRUSTEE
Charles D. Maxwell* Secretary and Mr. Maxwell has been Executive Managing N/A N/A
Age 53 Assistant Treasurer Director, Chief Financial Officer, Treasurer
(Since 2003) and Secretary of Morgan Keegan & Company,
Inc. since 2006. Mr. Maxwell previously
served as Managing Director of Morgan Keegan
& Company, Inc. from 1998 to 2006 and
Assistant Treasurer and Assistant Secretary
of Morgan Keegan & Company, Inc. from 1994 to
2006. Mr. Maxwell has been Secretary and
Treasurer of Morgan Asset Management, Inc.
since 1993. He was Senior Vice President of
Morgan Keegan & Company, Inc. from 1995 to
1997. Mr. Maxwell was with the accounting
firm of Ernst & Young LLP from 1976 to 1986
and served as a senior manager from 1984 to
1986.
Michele F. Wood* Chief Compliance Ms. Wood has been the Chief Compliance N/A N/A
Age 38 Officer (Since 2006) Officer of Morgan Asset Management, Inc.
since 2006 and is also a Senior Vice
President of Morgan Keegan & Co., Inc. She
was a Senior Attorney and First Vice
President of Morgan Keegan & Company, Inc.
from 2002 to 2006. She was a Staff Attorney
with FedEx Corporation from 2001 and 2002
specializing in employment litigation. She
was an Associate with Ford & Harrison LLP
from 1997 to 2001.
-49-
(1) THE ADDRESS OF EACH TRUSTEE IS C/O THE TRUST, 50 NORTH FRONT STREET, 21ST
FLOOR, MEMPHIS, TENNESSEE 38103. THE ADDRESS OF MESSRS. WELLER AND MAXWELL
AND MS. WOOD IS 50 NORTH FRONT STREET, 21ST FLOOR, MEMPHIS, TENNESSEE
38103. THE ADDRESS OF MESSRS. SULLIVAN AND GAMBLE IS 1901 6TH AVENUE NORTH,
4TH FLOOR, BIRMINGHAM, ALABAMA 35203.
(2) EACH TRUSTEE SERVES UNTIL HIS OR HER RESIGNATION, RETIREMENT OR AS
OTHERWISE SPECIFIED IN THE TRUST'S CHARTER DOCUMENTS. OFFICERS OF THE TRUST
ARE ELECTED AND APPOINTED ANNUALLY BY THE BOARD AND HOLD OFFICE UNTIL THEY
RESIGN, ARE REMOVED, OR OTHERWISE DISQUALIFIED TO SERVE.
(3) MCFADDEN COMMUNICATIONS, LLC ("MCFADDEN COMMUNICATIONS"), A COMPANY OF
WHICH MR. MCFADDEN IS A MAJORITY OWNER, COMMENCED A COMMERCIAL BANKING
RELATIONSHIP WITH UNION PLANTERS BANK IN AUGUST 2003 PURSUANT TO WHICH THE
BANK EXTENDED TO THE COMPANY, IN THE ORDINARY COURSE OF BUSINESS, SECURED
LOANS AND A LINE OF CREDIT. THIS RELATIONSHIP CONTINUED WITH REGIONS BANK
SUBSEQUENT TO THE JUNE 30, 2004 MERGER OF UNION PLANTERS CORPORATION
("UNION PLANTERS") AND REGIONS. SINCE JANUARY 1, 2005, THE LARGEST
AGGREGATE AMOUNT OF DEBT OUTSTANDING ON THE LINE OF CREDIT AND LOANS WAS
APPROXIMATELY $2.4 MILLION. AS OF DECEMBER 31, 2007, THE APPROXIMATE
AGGREGATE AMOUNT OF DEBT OUTSTANDING WAS $2.0 MILLION, A PORTION OF WHICH
WAS BORROWED AT PRIME RATE AND THE OTHER PORTION OF WHICH WAS BORROWED AT
6.35%. MOREOVER, MCFADDEN COMMUNICATIONS HAS A TEN YEAR LEASE WITH REGIONS
BANK FOR CERTAIN EQUIPMENT AT A COST OF APPROXIMATELY $272,000 ANNUALLY,
WHICH LEASE WAS NEGOTIATED IN THE MARKET (AND REFLECTS FAIR MARKET TERMS
AND CONDITIONS). PRIOR TO THE MERGER OF UNION PLANTERS AND REGIONS,
MCFADDEN COMMUNICATIONS ALSO PERFORMED PRINTING SERVICES FOR UNION PLANTERS
AND ONE OR MORE OF ITS SUBSIDIARIES ON A JOB-BY-JOB BASIS COMPETING WITH
OTHER PRINTING COMPANIES. SINCE JULY 1, 2004, THE COMPANY HAS PERFORMED
SIMILAR SERVICES ON THE SAME BASIS FOR REGIONS AND ONE OR MORE OF ITS
SUBSIDIARIES (COLLECTIVELY, THE "REGIONS ENTITIES"). FOR THE PERIOD FROM
JANUARY 1, 2005 THROUGH DECEMBER 31, 2007, TOTAL REVENUES FROM SERVICES
PROVIDED TO THE REGIONS ENTITIES AMOUNTED TO APPROXIMATELY $3.9 MILLION
REPRESENTING APPROXIMATELY 6.5% OF THE COMPANY'S REVENUE OVER THAT SAME
PERIOD OF TIME.
COMMITTEES OF THE BOARD
The Board has three standing committees - the Audit Committee, the Independent
Trustees Committee and the Qualified Legal Compliance Committee. The standing
Audit Committee consists of all the Trustees of the funds who are not
"interested persons" of the Trust, as that term is defined in the 1940 Act
("Independent Trustees"). The Audit Committee's function is to recommend to the
Board the appointment of the independent registered public accountants to
conduct the annual audit of the funds' financial statements; review with the
independent registered public accountants the outline, scope and results of this
annual audit and review the performance and fees charged by the independent
registered public accountants for professional services. In addition, the Audit
Committee meets with the independent registered public accountants and
representatives of management to review accounting activities and areas of
financial reporting and control. For the fiscal year ended November 30, 2007,
the Board's Audit Committee held 4 meetings.
The Board also has a standing Independent Trustees Committee consisting of all
the Independent Trustees. The Independent Trustees Committee must determine at
least annually whether the funds' advisory, underwriting, Rule 12b-1 and other
arrangements should be approved for continuance for the following year. The
Independent Trustees Committee is also responsible for evaluating and
recommending the selection and nomination of candidates for Independent Trustee,
assessing whether Trustees should be added or removed from the Board and
recommending to the Board policies concerning Independent Trustee compensation,
investment in the funds and resources. The Independent Trustees Committee
considers prospective candidates from shareholders and any source it deems
appropriate. The Committee initially evaluates prospective candidates on the
basis of the information it receives, considered in light of the criteria
discussed below. The Committee must receive at least the following information
regarding a candidate: (1) name; (2) date of birth; (3) education; (4) business,
professional or other relevant experience and areas of expertise; (5) current
business and home addresses and contact information; (6) other board positions
or prior experience; and (7) any knowledge and experience relating to investment
companies and investment company governance. Those prospective candidates that
appear likely to be able to fill a significant need of the Board are contacted
by a Committee member by telephone to discuss the position; if there appears to
be sufficient interest, an in-person meeting with one or more Committee members
would be arranged. If the Committee member(s), based on the results of these
contacts, believes it has identified a viable candidate, it would consult with
the full Committee for input. Any request by management to meet with the
prospective candidate would be given appropriate consideration. Shareholders
who would like to submit candidate names must submit them to the funds'
Secretary, who will forward such recommendation to the Independent Trustees
Committee Chair. Shareholders may send other written communications to the
Board or to an individual Trustee by mailing such correspondence to the funds'
Secretary (Address: 50 North Front Street, 21st Floor, Memphis, Tennessee
38103). Such communications must be signed by the shareholder and identify the
class and number of shares held by the shareholder. Properly submitted
shareholder communications will, as appropriate, be forwarded to the entire
Board or to the individual Trustee. For the fiscal year ended November 30,
2007, the Board's Independent Trustees Committee held 5 meetings.
-50-
In addition, the Board has a Qualified Legal Compliance Committee ("QLCC") that
consists of all of the Independent Trustees. The QLCC receives, reviews and
takes appropriate action with respect to any report made or referred to the QLCC
by an attorney of evidence of a material violation of applicable U.S. federal or
state securities law, material breach of fiduciary duty under U.S. federal or
state law or a similar material violation by the funds or by an officer,
Trustee, employee or agent of the funds. For the fiscal year ended November 30,
2007, the Board's QLCC held no meetings.
COMPENSATION OF INDEPENDENT TRUSTEES
Officers and Trustees of the Trust who are interested persons of the Trust
receive no salary or fees from the funds. Each Independent Trustee receives
from the funds a total annual retainer of $4,000 and a fee of $1,000 per
quarterly meeting with reimbursement for related expenses for each meeting of
the Board he or she attends. Each Chairperson of the Independent Trustees
Committee and Audit Committee receives annual compensation of $500 from the
funds. An additional $1,500 is paid to the Independent Trustees for attending
special meetings in person, and an additional $500 is paid for attending special
meetings by telephone. No officer or Trustee is entitled to receive pension or
retirement benefits from the funds.
The table below sets forth the compensation paid to the Trustees for the fiscal
year ended November 30, 2007.
PENSION OR TOTAL
AGGREGATE RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED ANNUAL FROM FUNDS AND
NAME AND POSITION FROM THE AS PART OF FUND BENEFITS UPON FUND COMPLEX
WITH THE FUNDS FUNDS EXPENSES RETIREMENT PAID TO TRUSTEE
INTERESTED TRUSTEES
- --------------------------------------------------------------------------------------------------------------------
J. Kenneth Alderman $- N/A N/A $-
- --------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- --------------------------------------------------------------------------------------------------------------------
Albert C. Johnson $8,250 N/A N/A $59,000
- --------------------------------------------------------------------------------------------------------------------
James Stillman R. McFadden $8,750 N/A N/A $62,500
- --------------------------------------------------------------------------------------------------------------------
Mary S. Stone $8,750 N/A N/A $62,500
- --------------------------------------------------------------------------------------------------------------------
W. Randall Pittman $8,250 N/A N/A $59,000
- --------------------------------------------------------------------------------------------------------------------
Archie W. Willis, III $8,250 N/A N/A $59,000
- --------------------------------------------------------------------------------------------------------------------
DIRECTOR OWNERSHIP OF EQUITY SECURITIES
The following table sets forth the dollar range of equity securities
beneficially owned by each Trustee in the funds and in all registered investment
companies overseen by the Trustee in the fund complex as of February 29, 2008.
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
DOLLAR RANGE OF EQUITY INVESTMENT COMPANIES OVERSEEN
NAME OF TRUSTEE SECURITIES IN THE FUNDS BY TRUSTEE IN FUND COMPLEX
INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------
J. Kenneth Alderman Over $100,000 Over $100,000
- ---------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- ---------------------------------------------------------------------------------------------
Albert C. Johnson $50,001 - $100,000 $50,001 - $100,000
- ---------------------------------------------------------------------------------------------
James Stillman R. McFadden Over $100,000 Over $100,000
- ---------------------------------------------------------------------------------------------
Mary S. Stone $10,001 - $50,000 $10,001 - $50,000
- ---------------------------------------------------------------------------------------------
W. Randall Pittman None $10,001 - $50,000
- ---------------------------------------------------------------------------------------------
Archie W. Willis, III $10,001 - $50,000 $10,001 - $50,000
- ---------------------------------------------------------------------------------------------
-51-
As of February 29, 2008, no Independent Trustee or their immediate family
members owned beneficially or of record any securities of, or had any direct or
indirect material interest in, the Adviser or Morgan Keegan or any person
controlling, controlled by or under common control with such persons.
-52-
PRINCIPAL SHAREHOLDERS
- --------------------------------------------------------------------------------
As of February 29, 2008, the following shareholders were shown in the Trust's
records as owning of record and/or beneficially owning more than 5% of any class
of a fund's shares:
PERCENTAGE OF SHARES OWNED
FUND OF RECORD
NAME SHAREHOLDER NAME AND ADDRESS(1) AS OF FEBRUARY 29, 2008
Mid Cap Growth Fund, Class A Shares
Regions Morgan Keegan Trust(2) 33.16%
Regions Morgan Keegan Trust 23.30%
Regions Morgan Keegan Trust 12.37%
Mid Cap Growth Fund, Class C Shares
Regions Morgan Keegan Trust 39.44%
Regions Morgan Keegan Trust 6.36%
Mid Cap Growth Fund, Class I Shares
Regions Morgan Keegan Trust 52.25%
Regions Morgan Keegan Trust 32.46%
Regions Morgan Keegan Trust 12.45%
Growth Fund, Class A Shares
Regions Morgan Keegan Trust 43.42%
Regions Morgan Keegan Trust 30.36%
Regions Morgan Keegan Trust 8.62%
Growth Fund, Class C Shares
Regions Morgan Keegan Trust 42.65%
Regions Morgan Keegan Trust 40.57%
Growth Fund, Class I Shares
Regions Morgan Keegan Trust 53.22%
Regions Morgan Keegan Trust 35.07%
Regions Morgan Keegan Trust 11.55%
Core Equity Fund, Class A Shares
Regions Morgan Keegan Trust 14.74%
Core Equity Fund, Class C Shares
Morgan Properties, LLC 100.00%
Core Equity Fund, Class I Shares
Regions Morgan Keegan Trust 58.38%
Regions Morgan Keegan Trust 18.95%
Regions Morgan Keegan Trust 18.23%
Mid Cap Value Fund, Class A Shares
Regions Morgan Keegan Trust 45.90%
Regions Morgan Keegan Trust 40.37%
Mid Cap Value Fund, Class C Shares
Regions Morgan Keegan Trust 70.62%
Regions Morgan Keegan Trust 9.45%
Ben H. Rowan, II 6.76%
Mid Cap Value Fund, Class I Shares
Regions Morgan Keegan Trust 46.39%
Regions Morgan Keegan Trust 40.12%
Regions Morgan Keegan Trust 13.49%
Value Fund, Class A Shares
Regions Morgan Keegan Trust 48.54%
Regions Morgan Keegan Trust 30.83%
-53-
PERCENTAGE OF SHARES OWNED
FUND OF RECORD
NAME SHAREHOLDER NAME AND ADDRESS(1) AS OF FEBRUARY 29, 2008
Regions Morgan Keegan Trust 7.77%
Value Fund, Class C Shares
Regions Morgan Keegan Trust 27.35%
Regions Morgan Keegan Trust 18.32%
Value Fund, Class I Shares
Regions Morgan Keegan Trust 76.69%
Regions Morgan Keegan Trust 15.67%
Regions Morgan Keegan Trust 7.21%
Balanced Fund, Class A Shares
Regions Morgan Keegan Trust 90.86%
Balanced Fund, Class C Shares
Regions Morgan Keegan Trust 9.91%
Balanced Fund, Class I Shares
Lynda F. Creed Revocable Trust 52.76%
Regions Morgan Keegan Trust 34.97%
Regions Morgan Keegan Trust 12.17%
Fixed Income Fund, Class A Shares
Regions Morgan Keegan Trust 67.82%
Regions Morgan Keegan Trust 17.68%
Regions Morgan Keegan Trust 7.61%
Fixed Income Fund, Class C Shares
Regions Morgan Keegan Trust 46.93%
Regions Morgan Keegan Trust 26.11%
William H. Brown 5.35%
Fixed Income Fund, Class I Shares
Regions Morgan Keegan Trust 69.77%
Regions Morgan Keegan Trust 25.67%
Limited Maturity Fixed Income Fund, Class A Shares
Regions Morgan Keegan Trust 65.46%
Regions Morgan Keegan Trust 26.03%
Limited Maturity Fixed Income Fund, Class C Shares
Regions Morgan Keegan Trust 14.57%
James Thomas Gary and Lloyd E. Gary 8.50%
John M. Shanahan and Phyllis H. Shanahan 7.92%
William T. Cox and Kathy D. Cox 7.74%
Ronald W. Metts and Rebecca L. Metts 5.40%
Bill Whittle 5.30%
Limited Maturity Fixed Income Fund, Class I Shares
Morgan Properties, LLC 100.00%
Intermediate Tax Exempt Bond Fund, Class A Shares
Regions Morgan Keegan Trust 85.09%
Regions Morgan Keegan Trust 7.60%
Intermediate Tax Exempt Bond Fund, Class C Shares
Carol B. Denny 17.99%
Joe B. Devane 10.18%
Frantz Marine Corp Inc 6.25%
Rita Jo N. Dedek Living Trust 5.36%
Intermediate Tax Exempt Bond Fund, Class I Shares
Regions Morgan Keegan Trust 76.67%
Regions Morgan Keegan Trust 17.91%
Treasury Money Market Fund, Class A Shares
Regions Morgan Keegan Trust 73.53%
Regions Morgan Keegan Trust 14.06%
-54-
PERCENTAGE OF SHARES OWNED
FUND OF RECORD
NAME SHAREHOLDER NAME AND ADDRESS(1) AS OF FEBRUARY 29, 2008
Regions Morgan Keegan Trust 9.33%
Treasury Money Market Fund, Class I Shares
Regions Morgan Keegan Trust 97.06%
Money Market Fund, Class A Shares
Regions Morgan Keegan Trust 61.93%
Regions Morgan Keegan Trust 34.35%
Money Market Fund, Class I Shares
Regions Morgan Keegan Trust 97.90%
(1) The shareholders listed may be contacted c/o Regions Morgan Keegan Select
Funds, 50 North Front Street, Memphis, Tennessee 38103.
(2) Regions Morgan Keegan Trust is a trade name used by Regions Bank's Trust
Division.
As of February 29, 2008, the Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of any class of any fund of the Trust.
-55-
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Morgan Asset Management, Inc., 1901 6th Avenue North, 4th Floor, Birmingham,
Alabama 35203, a registered investment adviser, is a wholly owned subsidiary of
MK Holding, Inc. and serves as the funds' investment adviser under two Advisory
Agreements ("Advisory Agreement(s)"). MK Holding, Inc. is a wholly owned
subsidiary of Regions. The Adviser is also an affiliate of Morgan Keegan, the
funds' distributor, and Regions Morgan Keegan Trust, a division of Regions Bank,
an affiliate of the funds by virtue of its record ownership (on behalf of its
clients) of more than 5% of the outstanding shares of certain funds, each a
wholly owned subsidiary of Regions. The Advisory Agreement with respect to the
funds (other than Core Equity Fund and Money Market Fund) became effective as of
August 8, 2003. The Advisory Agreement with respect to Core Equity Fund and
Money Market Fund became effective as of February 18, 2005. The Advisory
Agreements provide that, subject to oversight by the Board, the Adviser manages
the investment and other affairs of the funds. The Adviser is responsible for
managing the funds' portfolio securities and for making purchases and sales of
portfolio securities consistent with the funds' investment objective, policies
and limitations described in the Prospectus and this SAI. The Adviser is
obligated to furnish the funds with office space as well as with executive and
other personnel necessary for the operation of the funds. In addition, the
Adviser is obligated to supply the Board and officers of the Trust with certain
statistical information and reports, to oversee the maintenance of various books
and records and to arrange for the preservation of records in accordance with
applicable federal law and regulations. The Adviser and its affiliates also are
responsible for the compensation of Trustees and officers of the Trust who are
employees of the Adviser and/or its affiliates.
The funds bear separately all of their other expenses that are not assumed by
the Adviser. These expenses include, among others: legal and audit expense;
organizational expenses; interest; taxes; governmental fees; membership fees for
investment company organizations; the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the funds and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents; distribution fees; expenses relating to the
redemption of the funds' shares; expenses of registering and qualifying fund
shares for sale under applicable federal and state laws and maintaining such
registrations and qualifications; expenses of preparing, setting in print,
printing and distributing prospectuses, proxy statements, reports, notices and
dividends to the funds' shareholders; costs of stationery; costs of shareholders
and other meetings of the funds; compensation and expenses of the Independent
Trustees; and insurance covering each fund and its respective Trustees and
officers. The funds also are liable for such nonrecurring expenses as may
arise, including litigation to which the Funds may be party. Each fund also may
have an obligation to indemnify its Trustees and officers with respect to any
such litigation.
The funds pay the Adviser an annual investment advisory fee equal to a
percentage of each fund's average daily net assets as follows:
ANNUALIZED FEE
FUND (AS A PERCENTAGE OF ASSETS)
Mid Cap Growth Fund 0.75%
- ----------------------------------------------------------------
Growth Fund 0.75%
- ----------------------------------------------------------------
Core Equity Fund 0.75%
- ----------------------------------------------------------------
Mid Cap Value Fund 0.75%
- ----------------------------------------------------------------
Value Fund 0.75%
- ----------------------------------------------------------------
Balanced Fund 0.75%
- ----------------------------------------------------------------
Fixed Income Fund 0.50%
- ----------------------------------------------------------------
Limited Maturity Fixed Income Fund 0.40%(1)
- ----------------------------------------------------------------
Intermediate Tax Exempt Bond Fund 0.25%
- ----------------------------------------------------------------
Treasury Money Market Fund 0.20%
- ----------------------------------------------------------------
Money Market Fund 0.25%
- ----------------------------------------------------------------
-56-
(1) EFFECTIVE JULY 1, 2006, THE ADVISER AGREED TO VOLUNTARILY WAIVE A PORTION
OF ITS CONTRACTUAL INVESTMENT ADVISORY FEE. THE INVESTMENT ADVISORY FEE TO
BE PAID BY LIMITED MATURITY FIXED INCOME FUND AFTER THE WAIVER WILL BE
0.25%. THE WAIVER IS VOLUNTARY AND THE ADVISER MAY TERMINATE THE WAIVER AT
ANY TIME.
For the fiscal years ended November 30, 2007, 2006 and 2006, the funds paid the
Adviser the following amounts under the Advisory Agreements:
2007 2006 2005
----------------------------- ----------------------------- -----------------------------
FUND ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAID WAIVED PAID WAIVED PAID WAIVED
Mid Cap Growth Fund $2,773,449 $ - $2,702,704 $ - $2,238,556 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Growth Fund 3,434,672 - 3,117,059 - 3,195,413 199,714
- ---------------------------------------------------------------------------------------------------------------------------------
Core Equity Fund(1) 548,025 - 824,579 - 228,577 -
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund 593,595 - 593,856 - 776,336 48,521
- ---------------------------------------------------------------------------------------------------------------------------------
Value Fund 1,819,818 - 1,857,435 - 1,439,118 89,945
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Fund 1,281,353 - 1,332,192 - 980,389 61,274
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income Fund 1,108,461 - 1,444,594 - 1,896,424 632,141
- ---------------------------------------------------------------------------------------------------------------------------------
Limited Maturity Fixed Income 144,759 54,285 239,564 35,241 607,740 260,460
Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate Tax Exempt Bond 128,024 - 139,358 - 303,022 184,575
Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Treasury Money Market Fund 2,431,613 - 1,743,419 191,410 4,226,057 2,535,645
- ---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund(1) 281,154 - 221,760 - 86,482 32,431
- ---------------------------------------------------------------------------------------------------------------------------------
(1) FOR THE FISCAL YEARS ENDED NOVEMBER 30, 2007 AND 2006 AND THE PERIOD SEPTEMBER 1, 2005 TO NOVEMBER 30, 2005, RESPECTIVELY.
After their initial terms, the Advisory Agreements will remain in effect from
year to year, provided such continuance is approved by a majority of the Board
or by vote of the holders of a majority of the outstanding voting securities of
each fund. Additionally, the Advisory Agreements must be approved annually by
vote of a majority of the Trustees who are not parties to the Agreement or
"interested persons" of such parties as that term is defined in the 1940 Act.
Each Advisory Agreement may be terminated by the Adviser or the funds, without
penalty, on sixty (60) days' written notice to the other, and will terminate
automatically in the event of its assignment.
Under the Advisory Agreements, the funds will have the non-exclusive right to
use the name "Morgan Keegan" or "Regions Morgan Keegan" until the Advisory
Agreements are terminated, or until the right is withdrawn in writing by the
Adviser.
A discussion regarding the Board's basis for approving the Advisory Agreements
is available in the funds' annual report to shareholders for the fiscal year
ended November 30, 2007.
SUBADVISER TO MID CAP VALUE FUND
Channing Capital Management, LLC ("CCM"), 10 South LaSalle Street, Suite 2650,
Chicago, IL, 60603, is an investment adviser that is registered with the SEC
under the Investment Advisers Act of 1940. CCM serves as the subadviser to the
Mid Cap Value Fund pursuant to an investment advisory agreement with the Adviser
and the fund. Under the sub-advisory agreement, CCM manages the fund, selects
investments, and places orders for purchases and sales of securities subject to
the oversight of the Board and the Adviser in accordance with the fund's
investment objective, policies and restrictions.
Eric T. McKissack and Herenton Capital Partners, LLC, each own more than 25% of
the outstanding shares of CCM.
A discussion regarding the Board's basis for approving the sub-advisory
agreement is available in the funds' annual report to shareholders for the
fiscal year ended November 30, 2007.
-57-
PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
The Adviser seeks to maintain a compensation program that is competitively
positioned to attract and retain high-caliber investment professionals.
Portfolio managers receive a base salary, an incentive bonus opportunity, an
equity compensation opportunity and a benefits package. Portfolio manager
compensation is reviewed and may be modified each year as appropriate to reflect
changes in the market, as well as to adjust the factors used to determine
bonuses to promote good sustained fund performance. The Adviser evaluates
competitive market compensation by reviewing compensation survey results
conducted by an independent third party of investment industry compensation.
Each portfolio manager's compensation consists of the following elements:
BASE SALARY
Each portfolio manager is paid a base salary. In setting the base salary,
the Adviser's intention is to be competitive in light of the particular
portfolio manager's experience and responsibilities.
ANNUAL BONUS
Each portfolio manager is eligible to receive an annual cash bonus that
may be equal to as much as 50% of his/her annual base salary. A portion
of this bonus is determined by the portfolio manager's investment
management results measured against the relevant peer group or index and
the remaining portion of this bonus is discretionary, which takes into
consideration such factors as the portfolio manager's support of the
firm's policies and procedures, the portfolio manager's acquisition of new
business and the portfolio manager's service to existing clients.
EQUITY-BASED COMPENSATION
Portfolio managers may be awarded options to purchase common shares and/or
granted restricted shares of Regions' stock from pools determined from
time to time by the Remuneration Committee of the Regions' Board of
Directors. Awards of equity-based compensation typically vest over time,
so as to create incentives to retain key talent.
MANAGING CONFLICTS OF INTEREST
Actual or apparent conflicts of interest may arise when a portfolio manager has
day-to-day management responsibilities with respect to more than one fund or
other account. More specifically, portfolio managers who manage multiple funds
and/or other accounts are presented with the following potential conflicts:
o The management of multiple funds and/or other accounts may result in a
portfolio manager devoting unequal time and attention to the management of
each fund and/or other account. The Adviser seeks to manage such competing
interests for the time and attention of a portfolio manager by having the
portfolio manager focus on a particular investment discipline.
o If a portfolio manager identifies a limited investment opportunity which
may be suitable for more than one fund or other account, a fund may not be
able to take full advantage of that opportunity because demand is larger
than supply. In this instance, available opportunities are allocated. To
deal with these situations, the Adviser and the funds have adopted
procedures for allocating portfolio transactions across multiple accounts.
o With respect to securities transactions for the funds, the Adviser
determines which broker to use to execute each order, consistent with its
duty to seek best execution of the transaction. However, with respect to
certain other accounts (such as mutual funds for which the Adviser or an
affiliate acts as subadviser, other pooled investment vehicles that are
not registered mutual funds, and other accounts managed for organizations
-58-
and individuals), the Adviser may be limited by the client with respect to
the selection of brokers or may be instructed to direct trades through a
particular broker. In these cases, the Adviser or its affiliates may place
separate, non-simultaneous, transactions for a fund and another account
which may temporarily affect the market price of the security or the
execution of the transaction, or both, to the detriment of the fund or the
other account.
o Finally, the appearance of a conflict of interest may arise where the
Adviser has an incentive, such as a performance-based management fee,
which relates to the management of one fund or account but not all funds
and accounts with respect to which a portfolio manager has day-to-day
management responsibilities.
The Adviser and the funds have adopted certain compliance procedures which are
designed to address these types of conflicts. However, there is no guarantee
that such procedures will detect each and every situation in which a conflict
arises.
CHANNING CAPITAL MANAGEMENT LLC, SUBADVISER TO MID CAP VALUE FUND
CCM seeks to maintain a compensation program that is competitively positioned to
attract and retain high-caliber investment professionals. Portfolio managers
receive a base salary, an incentive bonus opportunity, an equity compensation
opportunity and a benefits package. Portfolio manager compensation is reviewed
and may be modified each year as appropriate to reflect changes in the market,
as well as to adjust the factors used to determine bonuses to promote good
sustained fund performance. CCM evaluates competitive market compensation by
reviewing compensation survey results conducted by an independent third party of
investment industry compensation. Each portfolio manager's compensation
consists of the following elements:
BASE SALARY
Each portfolio manager is paid a base salary. In setting the base salary,
CCM's intention is to be competitive in light of the particular portfolio
manager's experience and responsibilities.
ANNUAL BONUS
Each portfolio manager is eligible to receive an annual cash bonus based
upon peer group managers' performance as well as overall firm performance.
The annual bonus is another tool to provide competitive compensation for
portfolio managers.
EQUITY-BASED COMPENSATION
Portfolio managers may be awarded grants or options to purchase common
shares of Channing Capital Management, LLC's closely held stock. Awards
of equity-based compensation typically vest over time, so as to create
incentives to retain key talent.
MANAGING CCM'S CONFLICTS OF INTEREST
Actual or apparent conflicts of interest may arise when a portfolio manager has
day-to-day management responsibilities with respect to more than one mutual fund
or other account. More specifically, portfolio managers who manage multiple
mutual funds and/or other accounts are presented with the following potential
conflicts:
o The management of multiple mutual funds and/or other accounts may result
in a portfolio manager devoting unequal time and attention to the
management of each such fund and/or other account. CCM seeks to manage
such competing interests for the time and attention of a portfolio manager
by having the portfolio manager focus on a particular investment
discipline. Most other accounts managed by a portfolio manager are managed
using the same investment models that are used in connection with the
management of mutual funds.
o If a portfolio manager identifies a limited investment opportunity which
may be suitable for more than one mutual fund or other account, a mutual
fund may not be able to take full advantage of that opportunity due to an
-59-
allocation of filled purchase or sale orders across all eligible mutual
funds and other accounts. To deal with these situations, CCM and Mid Cap
Value Fund have adopted procedures for allocating portfolio transactions
across multiple accounts.
o With respect to securities transactions for the mutual funds, CCM
determines which broker to use to execute each order, consistent with its
duty to seek best execution of the transaction. However, with respect to
certain other accounts (such as mutual funds for which CCM or an affiliate
acts as subadviser, other pooled investment vehicles that are not
registered mutual funds, and other accounts managed for organizations and
individuals), CCM may be limited by the client with respect to the
selection of brokers or may be instructed to direct trades through a
particular broker. In these cases, CCM or its affiliates may place
separate, non-simultaneous, transactions for a mutual fund and another
account which may temporarily affect the market price of the security or
the execution of the transaction, or both, to the detriment of the mutual
fund or the other account.
o Finally, the appearance of a conflict of interest may arise where CCM has
an incentive, such as a performance-based management fee, which relates to
the management of one mutual fund or account but not all mutual funds and
accounts with respect to which a portfolio manager has day-to-day
management responsibilities.
CCM and Mid Cap Value Fund have adopted certain compliance procedures which are
designed to address these types of conflicts. However, there is no guarantee
that such procedures will detect each and every situation in which a conflict
arises.
-60-
PORTFOLIO MANAGERS
The following tables provide information about the accounts managed by each
portfolio manager as of February 29, 2008:
SCOTT M. FLURRY, PORTFOLIO MANAGER FOR FIXED INCOME FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 1 - 58
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $159,972,134 $- $1,803,596,038
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
- ------------------------------------------------------------------------------------------------------------
Advisory Fees $- $- $-
The dollar range of shares of the funds managed by Mr. Flurry and beneficially
owned by him as of February 29, 2008 was:
Fixed Income Fund: None
WALTER A. HELLWIG, PORTFOLIO MANAGER FOR CORE EQUITY FUND AND VALUE FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 2 - 18
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $284,808,638 $- $309,188,171
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the funds managed by Mr. Hellwig and beneficially
owned by him as of February 29, 2008 was:
Core Equity Fund: $1 - $10,000
Value Fund: $10,001 - $50,000
GEORGE R. MCCURDY, IV, PORTFOLIO MANAGER FOR THE MONEY MARKET FUNDS:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 2 - 23
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $1,337,974,676 $- $249,632,189
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the funds managed by Mr. McCurdy and beneficially
owned by him as of February 29, 2008 was:
Treasury Money Market Fund: None
Money Market Fund: None
-61-
DAVID P. MCGRATH, PORTFOLIO MANAGER FOR MID CAP GROWTH FUND AND GROWTH FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 2 - 222
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $796,800,365 $- $125,294,808
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the funds managed by Mr. McGrath and beneficially
owned by him as of February 29, 2008 was:
Mid Cap Growth Fund: $50,001 - $100,000
Growth Fund: Over $100,000
ERIC T. MCKISSACK, PORTFOLIO MANAGER FOR MID CAP VALUE FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 2 3 21
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $107,414,836 $35,867,314 $379,139,420
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the fund managed by Mr. McKissack and beneficially
owned by him as of February 29, 2008 was:
Mid Cap Value Fund: $10,001 - $50,000
CHARLES A. MURRAY, PORTFOLIO MANAGER FOR MID CAP GROWTH FUND, GROWTH FUND AND
BALANCED FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 3 - 86
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $963,766,194 - $201,204,284
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the funds managed by Mr. Murray and beneficially
owned by him as of February 29, 2008 was:
Mid Cap Growth Fund: $108,471
Growth Fund: $50,891
Balanced Fund: $71,475
-62-
JOHN B. RUSSELL, PORTFOLIO MANAGER FOR CORE EQUITY FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 1 - 186
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $53,749,255 $- $168,810,243
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the fund managed by Mr. Russell and beneficially
owned by him as of February 29, 2008 was:
Core Equity Fund: $1 - $10,000
MICHAEL L. SMITH, PORTFOLIO MANAGER FOR FIXED INCOME FUND AND LIMITED MATURITY
FIXED INCOME FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 2 - 17
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $179,339,957 $- $197,000,000
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the funds managed by Mr. Smith and beneficially
owned him as of February 29, 2008 was:
Fixed Income Fund: $10,000 - $50,000
Limited Maturity Fixed Income Fund: $0 - $10,000
DOROTHY E. THOMAS, PORTFOLIO MANAGER FOR INTERMEDIATE TAX EXEMPT BOND FUND:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
Number of Accounts Managed 1 - 19
- ------------------------------------------------------------------------------------------------------------
Number of Accounts Managed with
Performance-Based Advisory Fees - - -
- ------------------------------------------------------------------------------------------------------------
Assets Managed $41,056,777 $- $276,842,970
- ------------------------------------------------------------------------------------------------------------
Assets Managed with Performance-Based
Advisory Fees $- $- $-
- ------------------------------------------------------------------------------------------------------------
The dollar range of shares of the fund managed by Ms. Thomas and beneficially
owned by her as of February 29, 2008 was:
Intermediate Tax Exempt Bond Fund: None
-63-
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Under the Advisory Agreements, the Adviser is responsible for the execution of
the funds' portfolio transactions and must seek the most favorable price and
execution for such transactions, subject to the possible payment, as described
below, of higher commissions to brokers who provide research and analysis. The
funds may not always pay the lowest commission or spread available. Rather, the
funds also will take into account such factors as size of the order, difficulty
of execution, efficiency of the executing broker's facilities (including the
services described below) and any risk assumed by the executing broker.
For the fiscal years ended November 30, 2007, 2006 and 2005, the funds paid
brokerage commissions as follows:
FUND 2007 2006 2005
Mid Cap Growth Fund $429,602 $601,035 $656,625
- ----------------------------------------------------------------------
Growth Fund 303,672 304,717 565,013
- ----------------------------------------------------------------------
Core Equity Fund(1) 204,184 395,232 32,257
- ----------------------------------------------------------------------
Mid Cap Value Fund 123,054 95,641 214,290
- ----------------------------------------------------------------------
Value Fund 392,510 405,375 293,147
- ----------------------------------------------------------------------
Balanced Fund 60,959 114,964 75,923
- ----------------------------------------------------------------------
Fixed Income Fund N/A N/A N/A
- ----------------------------------------------------------------------
Limited Maturity Fixed Income Fund N/A N/A N/A
- ----------------------------------------------------------------------
Intermediate Tax Exempt Bond Fund N/A N/A N/A
- ----------------------------------------------------------------------
Treasury Money Market Fund N/A N/A N/A
- ----------------------------------------------------------------------
Money Market Fund(1) N/A N/A N/A
- ----------------------------------------------------------------------
N/A NOT APPLICABLE.
(1) FOR THE FISCAL YEARS ENDED NOVEMBER 30, 2007 AND 2006 AND THE PERIOD
SEPTEMBER 1, 2005 TO NOVEMBER 30, 2005, RESPECTIVELY.
The Adviser may give consideration to research, statistical and other services
furnished by broker-dealers to the Adviser for its use, may place orders with
broker-dealers who provide supplemental investment and market research and
securities and economic analysis, and may pay to those brokers a higher
brokerage commission or spread than may be charged by other brokers. Such
research and analysis may be useful to the Adviser in connection with services
to clients other than the funds. The Adviser's fee is not reduced by reason of
its receipt of such brokerage and research services.
From time to time the funds may use Morgan Keegan as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. The Adviser
will not cause the funds to pay Morgan Keegan any commission for effecting a
securities transaction for the funds in excess of the usual and customary amount
other broker-dealers would have charged for the transaction. Rule 17e-1 under
the 1940 Act defines "usual and customary" commissions to include amounts which
are "reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time." Section 11(a) of the Securities Exchange Act of
1934 prohibits Morgan Keegan from executing transactions on an exchange for the
funds unless an exception applies. Rule 11a2-2(T) provides members of national
securities exchanges, like Morgan Keegan, with an exemption, in addition to the
exceptions delineated in the statute. Under the rule Morgan Keegan, subject to
certain conditions, may perform functions other than execution in connection
with a securities transaction for the funds on that exchange only if the funds
expressly consent by written contract. For the fiscal years ended November 30,
2007, 2006 and 2005, none of the funds paid brokerage commissions to Morgan
Keegan.
-64-
The funds may not buy securities from, or sell securities to, Morgan Keegan as
principal. The funds' Board has adopted procedures in conformity with Rule 10f-
3 under the 1940 Act whereby the funds may purchase securities that are offered
in underwritings in which Morgan Keegan is a participant.
Investment decisions for the funds are made independently from those of other
accounts advised by the Adviser. However, the same security may be held in the
portfolios of more than one account. When two or more accounts simultaneously
engage in the purchase or sale of the same security, the prices and amounts will
be equitably allocated among the accounts. In some cases, this procedure may
adversely affect the price or quantity of the security available to a particular
account. In other cases, however, an account's ability to participate in large
volume transactions may produce better executions and prices.
PORTFOLIO TURNOVER
Each fund's annual portfolio turnover rates may vary greatly from year to year,
but they will not be a limiting factor when management deems portfolio changes
appropriate. The portfolio turnover rate is calculated by dividing the lesser of
a fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year. For the fiscal years ended November 30, 2007 and
2006, the funds' portfolio turnover rates were as follows:
FUND 2007 2006
Mid Cap Growth Fund 52% 67%
- --------------------------------------------------
Growth Fund 41% 27%
- --------------------------------------------------
Core Equity Fund 113% 120%
- --------------------------------------------------
Mid Cap Value Fund 66% 33%
- --------------------------------------------------
Value Fund 89% 72%
- --------------------------------------------------
Balanced Fund 34% 29%
- --------------------------------------------------
Fixed Income Fund 58% 44%
- --------------------------------------------------
Limited Maturity Fixed Income Fund 19% 83%
- --------------------------------------------------
Intermediate Tax Exempt Bond Fund 15% 11%
- --------------------------------------------------
Treasury Money Market Fund N/A N/A
- --------------------------------------------------
Money Market Fund N/A N/A
- --------------------------------------------------
N/A NOT APPLICABLE.
A fund may sell a portfolio investment soon after its acquisition if the Adviser
believes that such a disposition is consistent with the fund's investment
objective. Portfolio investments may be sold for a variety of reasons, such as
a more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. As a result of a fund's
investment policies, its portfolio turnover rate may change from year to year
due to a variety of factors, including general market conditions, and may be
higher than that of other mutual funds. A portfolio turnover rate of 100% or
more is considered high. High portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs, which will be borne
by the fund, thereby decreasing its total return. High turnover rates may also
result in a higher level of net capital gains that, when distributed to a fund's
shareholders, are taxable to them.
CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING
The Trust, its Adviser and Morgan Keegan have each adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act. Subject to certain limitations, the
Codes of Ethics permits persons subject to the Codes to invest in securities,
including securities that may be purchased or held by the funds. The Codes of
Ethics describe the fiduciary duty owed to shareholders by covered persons and
establishes procedures for personal investing and restricts certain
transactions. For example, personal trading in most securities requires pre-
clearance. In addition, the Codes of Ethics place restrictions on the timing of
personal investing in relation to trades by the funds.
-65-
The Codes of Ethics may be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-202-551-8090. The Codes of Ethics
are also available on the EDGAR database on the SEC's Internet site at
www.sec.gov. Copies are also available (subject to a duplicating fee) at the
following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
-66-
DISTRIBUTOR
- --------------------------------------------------------------------------------
Morgan Keegan, 50 North Front Street, Memphis, Tennessee 38103, serves as
distributor of the funds' shares pursuant to an Underwriting Agreement between
the Trust, with respect to the funds other than Core Equity Fund and Money
Market Fund, and Morgan Keegan dated August 23, 2004 and an Underwriting
Agreement between the Trust, with respect to Core Equity Fund and Money Market
Fund, and Morgan Keegan, dated as of February 18, 2005 ("Underwriting
Agreement(s)"). Morgan Keegan, a wholly owned subsidiary of Regions and an
affiliate of the Adviser, is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended, and is a member of the Financial Industry
Regulatory Authority ("FINRA"). Morgan Keegan provides personalized investment
services to its clients through more than 300 offices in 18 states.
The funds' shares are offered continuously. The Underwriting Agreements
obligate Morgan Keegan to provide certain services and to bear certain expenses
in connection with the offering of each fund's shares, including, but not
limited to: printing and distribution of prospectuses and reports to prospective
shareholders; preparation and distribution of sales literature and advertising;
administrative and overhead cost of distribution such as the allocable costs of
executive office time expended on developing, managing and operating the
distribution program; operating expenses of branch offices, sales training
expenses, and telephone and other communication expenses. Morgan Keegan
compensates financial advisers of Morgan Keegan and other persons who engage in
or support distribution of shares and shareholder service based on the sales for
which they are responsible and the average daily NAV of each fund's shares in
accounts of their clients. Morgan Keegan also pays special additional
compensation and promotional incentives from time to time, to financial advisers
for sales of fund shares.
Each fund, except the Money Market Funds, has adopted a Distribution Plan with
respect to the Class C Shares (the "Plan") pursuant to Rule 12b-1 under the 1940
Act. Under the Plan, each fund pays a distribution fee at an aggregate annual
rate of 0.75% of the fund's average daily net assets attributable to Class C
Shares. Distribution fees paid by the Funds to Morgan Keegan under the Plan may
exceed Morgan Keegan's expenses thereunder.
The Board, however, takes into account such expenditures for purposes of
reviewing operations under the Plan and in connection with their annual
consideration of the Plan's renewal. Morgan Keegan's expenditures include,
without limitation: compensation to investment executives or other employees of
Morgan Keegan, and independent dealers; compensation to and expenses, including
overhead and telephone expenses, of employees who engage in or support
distribution of shares; printing of prospectuses, statements of additional
information and reports for other than existing shareholders; and preparation,
printing and distribution of sales literature and advertising materials. The
Board reviews quarterly a written report identifying the amounts expended on
behalf of a fund under the Plan and the purposes for which such expenditures
were made. Class A Shares and Class I Shares are not subject to a distribution
fee.
-67-
For the fiscal year ended November 30, 2007, each fund paid distribution fees to
Morgan Keegan pursuant to its Plan as follows:
FUND DISTRIBUTION FEES
CLASS C SHARES
MID CAP GROWTH FUND $70,728
- ------------------------------------------------------
GROWTH FUND 35,631
- ------------------------------------------------------
CORE EQUITY FUND 1
- ------------------------------------------------------
MID CAP VALUE FUND 11,537
- ------------------------------------------------------
VALUE FUND 22,150
- ------------------------------------------------------
BALANCED FUND 11,908
- ------------------------------------------------------
FIXED INCOME FUND 20,364
- ------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND 6,372
- ------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND 7,153
- ------------------------------------------------------
TREASURY MONEY MARKET FUND N/A
- ------------------------------------------------------
MONEY MARKET FUND N/A
- ------------------------------------------------------
N/A NOT APPLICABLE.
For the fiscal year ended November 30, 2007, Morgan Keegan paid expenses for
services rendered under the Plan for the Funds in the following amounts:
COMMISSIONS
AND OTHER PRINTING PROMOTIONAL
FUND COMPENSATION AND MAILING MATERIALS OTHER
MID CAP GROWTH FUND $87,835 $146 $450 $1,952
- -----------------------------------------------------------------------------------------------
GROWTH FUND 52,570 80 245 887
- -----------------------------------------------------------------------------------------------
CORE EQUITY FUND 1 - - -
- -----------------------------------------------------------------------------------------------
MID CAP VALUE FUND 15,305 24 74 1,285
- -----------------------------------------------------------------------------------------------
VALUE FUND 27,481 47 145 881
- -----------------------------------------------------------------------------------------------
BALANCED FUND 12,383 17 49 411
- -----------------------------------------------------------------------------------------------
FIXED INCOME FUND 28,560 40 125 912
- -----------------------------------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND 6,352 6 18 842
- -----------------------------------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND 5,724 6 17 418
- -----------------------------------------------------------------------------------------------
In approving the Plan, in accordance with the requirements of Rule 12b-1, the
Board determined that the distribution fees were reasonable and that there was a
reasonable likelihood that the Plan would benefit each fund and its
shareholders. This determination was based, in part, on the belief that the
Plan enables the funds to have Morgan Keegan financial advisers available to
promote and sell the funds, thereby assisting the funds to attract assets.
Growth of assets is expected to benefit the funds and the Adviser. The funds
are expected to benefit from the potential for flexibility in portfolio
management resulting from a net inflow of assets, as opposed to net redemptions.
Shareholders of the funds are expected to benefit from continuing services
provided by financial advisers and other staff members of Morgan Keegan as
distributor. The Adviser and Morgan Keegan are expected to benefit from the
fact that their advisory, service and distribution fees, which are based on a
percentage of assets, increase as fund assets grow and that their brokerage
commissions and transfer fees will also increase as assets grow. The Board
acknowledged, however, that there is no assurance that benefits to the funds
will be realized as a result of the Plan. No interested person of the funds or
Independent Trustee had a direct or indirect interest in the Plan or related
agreements.
The Plan may be terminated by either a vote of a majority of both (a) the Board
and (b) the Independent Trustees, and have no direct or indirect financial
interest in the operation of the Plan or any agreements related to it
("Qualified Trustees") or by a vote of a majority of each fund's outstanding
Class C Shares voting securities. Termination of the Plan terminates any
obligation of the funds to pay distribution fees to Morgan Keegan, other than
distribution fees that may have accrued but that have not been paid as of the
date of termination. Any change in the Plan that would materially increase the
service and distribution costs to the funds requires shareholder approval;
-68-
otherwise the Plan may be amended by the Trustees, including a majority of the
Qualified Trustees, as described above.
The Plan, as currently in effect, will continue for successive one-year periods,
provided that each such continuance specifically is approved by (1) the vote of
a majority of the Qualified Trustees and (2) the vote of a majority of the
entire Board.
The Underwriting Agreements are subject to the same provisions for annual
renewal as the Plan. In addition, the Underwriting Agreements will terminate
upon assignment or upon sixty (60) days' notice from Morgan Keegan. Each fund
may terminate the Underwriting Agreements, without penalty, upon sixty (60)
days' notice, by a majority vote of either its Board, the Qualified Trustees, or
the outstanding voting securities of each fund.
Under the Underwriting Agreements between the Trust and Morgan Keegan and the
prior underwriting agreement between the Trust and Federated for the fiscal
years set forth below, Morgan Keegan and Federated earned and retained the
following approximate amounts of front-end sales charges for distribution of
Class A Shares:
FRONT-END SALES CHARGE FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
CLASS A SHARES NOVEMBER 30, 2007 NOVEMBER 30, 2006 NOVEMBER 30, 2005
MID CAP GROWTH FUND $85,852 $133,643 $67,087
- ---------------------------------------------------------------------------------------------
GROWTH FUND 6,032 8,394 88,300
- ---------------------------------------------------------------------------------------------
CORE EQUITY FUND(1) 4,367 2,649 1,404
- ---------------------------------------------------------------------------------------------
MID CAP VALUE FUND 20,099 3,331 10,650
- ---------------------------------------------------------------------------------------------
VALUE FUND 20,783 36,333 11,955
- ---------------------------------------------------------------------------------------------
BALANCED FUND 7,579 10,564 2,488
- ---------------------------------------------------------------------------------------------
FIXED INCOME FUND 7,762 289 1,248
- ---------------------------------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND 185 - -
- ---------------------------------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND 1,000 1,987 -
- ---------------------------------------------------------------------------------------------
(1) FOR THE FISCAL YEARS ENDED NOVEMBER 30, 2007 AND 2006 AND THE PERIOD SEPTEMBER 1, 2005 TO
NOVEMBER 30, 2005, RESPECTIVELY.
Morgan Keegan earned and retained the following CDSCs paid upon certain
redemptions of shares for the fiscal year ended November 30, 2007:
CDSC FISCAL YEAR ENDED NOVEMBER 30, 2007
MID CAP GROWTH FUND $12,869
- -----------------------------------------------------------------------
GROWTH FUND 19
- -----------------------------------------------------------------------
CORE EQUITY FUND 1,912
- -----------------------------------------------------------------------
MID CAP VALUE FUND 2,247
- -----------------------------------------------------------------------
VALUE FUND 937
- -----------------------------------------------------------------------
BALANCED FUND -
- -----------------------------------------------------------------------
FIXED INCOME FUND -
- -----------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND -
- -----------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND 1,710
- -----------------------------------------------------------------------
SHAREHOLDER SERVICE FEES - CLASS A SHARES AND CLASS C SHARES
Morgan Keegan is the shareholder servicing agent for the funds. The funds pay
fees of 0.25% of each fund's Class A Shares' and Class C Shares' average daily
net assets ("Service Fees") to investment professionals or to Morgan Keegan, for
providing services to shareholders and maintaining shareholder accounts. Under
the shareholder servicing agreement, Morgan Keegan may perform or subcontract
for the performance of services to shareholders of the funds and/or the
maintenance of shareholder accounts. Under certain agreements, rather than
paying investment professionals directly, the funds may pay Service Fees to
Morgan Keegan and Morgan Keegan will use the fees to compensate investment
professionals.
-69-
FUND SHAREHOLDER SERVICE FEES
----------------------------------
CLASS A SHARES CLASS C SHARES
----------------------------------
MID CAP GROWTH FUND $803,708 $23,576
- --------------------------------------------------------------------
GROWTH FUND 968,078 11,877
- --------------------------------------------------------------------
CORE EQUITY FUND 12,646 -
- --------------------------------------------------------------------
MID CAP VALUE FUND 178,697 3,846
- --------------------------------------------------------------------
VALUE FUND 570,023 7,383
- --------------------------------------------------------------------
BALANCED FUND 422,398 3,970
- --------------------------------------------------------------------
FIXED INCOME FUND 411,598 6,788
- --------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND 88,009 2,124
- --------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND 112,399 2,385
- --------------------------------------------------------------------
TREASURY MONEY MARKET FUND 2,994,085 N/A
- --------------------------------------------------------------------
MONEY MARKET FUND 262,905 N/A
- --------------------------------------------------------------------
N/A NOT APPLICABLE.
-70-
PROXY VOTING POLICIES AND PROCEDURES
- --------------------------------------------------------------------------------
The Board has delegated to the Adviser the responsibility to vote proxies
related to the securities held in the funds' portfolios. Under this authority,
the Adviser is required to vote proxies related to portfolio securities in the
best interests of each fund and its shareholders. The Board permits the Adviser
to contract with a third party to obtain proxy voting and related services,
including research of current issues.
The Adviser has implemented written Proxy Voting Policies and Procedures ("Proxy
Voting Policy") that are designed to reasonably ensure that the Adviser votes
proxies prudently and in the best interest of its clients for whom the Adviser
has voting authority, including the funds. The Proxy Voting Policy also
describes how the Adviser addresses any conflicts that may arise between its
interests and those of its clients with respect to proxy voting.
The Adviser's Compliance Committee is responsible for developing, authorizing,
implementing and updating the Proxy Voting Policy, overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as
voting delegate to review, monitor and/or vote proxies. In order to apply the
Proxy Voting Policy noted above in a timely and consistent manner, the Adviser
utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies in
accordance with the Adviser's voting guidelines.
The Adviser's guidelines adopt the voting recommendations of ISS. The Adviser
retains final authority and fiduciary responsibility for proxy voting. The
Adviser believes that this process is reasonably designed to address material
conflicts of interest that may arise between the Adviser and a client as to how
proxies are voted.
In the event that an investment professional at the Adviser believes that it is
in the best interests of a client or clients to vote proxies in a manner
inconsistent with the Adviser's proxy voting guidelines or in a manner
inconsistent with ISS recommendations, the Compliance Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between the Adviser and the client with respect
to the voting of the proxy in that manner.
If the Compliance Committee determines that the voting of a proxy as recommended
by the investment professional presents a material conflict of interest between
the Adviser and the client or clients with respect to the voting of the proxy,
the Compliance Committee shall: (i) take no further action, in which case ISS
shall vote such proxy in accordance with the proxy voting guidelines or as ISS
recommends; (ii) disclose such conflict to the client or clients and obtain
written direction from the client as to how to vote the proxy; (iii) suggest
that the client or clients engage another party to determine how to vote the
proxy; or (iv) engage another independent third party to determine how to vote
the proxy.
Information regarding how the Adviser voted proxies relating to the funds'
portfolio securities during the most recent 12-month period ended June 30 is
available without charge by calling 877-757-7424 (toll-free) or visiting the SEC
website at www.sec.gov. You may also view the proxy voting activity for each
fund by visiting the funds' website at www.rmkfunds.com
-71-
PORTFOLIO HOLDINGS INFORMATION
- --------------------------------------------------------------------------------
A fund's portfolio holdings are publicly available: (1) at the time such
information is filed with the SEC in a publicly available filing; or (2) the day
next following the day such information is posted on the funds' website at
www.rmkfunds.com. A fund's publicly available portfolio holdings, which may be
provided to third parties without prior approval, are: (1) complete portfolio
holdings disclosed in the fund's semi-annual or annual reports and filed with
the SEC on Form N-CSR; (2) complete portfolio holdings disclosed in the fund's
first and third fiscal quarter reports that are filed with the SEC on Form N-Q;
and (3) up to the top ten portfolio holdings disclosed in the fund's quarterly
profiles and posted on the funds' website at www.rmkfunds.com approximately 25
days after the calendar quarter-end.
NON-PUBLIC PORTFOLIO HOLDINGS
Disclosure of a fund's non-public portfolio holdings provides the recipient with
information more current than the most recent publicly available portfolio
holdings. Pursuant to these policies and procedures, the disclosure of non-
public portfolio holdings may be considered permissible and within a fund's
legitimate business purposes with respect to: (1) certain service providers; (2)
rating and ranking organizations; and (3) certain other recipients. These
policies and procedures must be followed when disclosing a fund's portfolio
holdings to any party when such disclosure would provide information more
current than the fund's most recent publicly available portfolio holdings. In
addition, neither a fund, the Adviser or any other party is permitted to receive
compensation or other consideration from or on behalf of the recipient in
connection with disclosure to the recipient of the fund's non-public portfolio
holdings.
SERVICE PROVIDERS
A service provider or other third party that receives information about a fund's
non-public portfolio holdings where necessary to enable the provider to perform
its contractual services for the fund (e.g., Adviser, auditors, custodian,
administrator, sub-administrator, transfer agent, counsel to the funds or the
independent Trustees, pricing services, broker-dealer, financial printers or
proxy voting services) may receive non-public portfolio holdings without
limitation on the condition that the non-public portfolio holdings will be used
solely for the purpose of servicing the fund and subject to, either by written
agreement or by virtue of their duties to the funds, a duty of confidentiality
and a duty not to use the information for trading.
RATING AND RANKING ORGANIZATIONS
Any fund officer may provide a fund's non-public portfolio holdings to a rating
and ranking organization, without limitation on the condition that the non-
public portfolio holdings will be used solely for the purposes of developing a
rating and subject to an agreement requiring confidentiality and prohibiting the
use of the information for trading. The funds currently have ongoing
arrangements with Lipper and Morningstar by which their third parties receive
portfolio holdings information routinely.
OTHER RECIPIENTS
A fund's partial or complete portfolio holdings may be disclosed to certain
other recipients, including current and prospective shareholders of the fund,
provided that: (1) the recipient makes a specific request to an authorized
person by writing to the RMK Funds at 50 North Front Street, 15th Floor,
Memphis, Tennessee 38103; (2) the authorized person determines that the fund has
a legitimate business purpose for disclosing non-public portfolio holdings
information to the recipient; (3) the authorized person obtains prior approval
from the fund's Chief Compliance Officer; and (4) the recipient signs a
confidentiality agreement that provides that the non-public portfolio holdings
will be kept confidential, may not be used to trade and may not be disseminated
or used for any purpose other than the purpose approved by the authorized
person.
-72-
MEDIA
Non-public portfolio holdings may not be disclosed to members of the media.
WAIVERS OF RESTRICTIONS
The funds' policy may not be waived, or exceptions made, without the consent of
the funds' Chief Compliance Officer. All waivers and exceptions will be
disclosed to the Board no later than its next regularly scheduled quarterly
meeting.
CONFLICTS OF INTEREST
If the disclosure of non-public portfolio holdings presents a conflict of
interest between the interests of the funds' shareholders and the interests of
the funds' service providers or other third parties or affiliates thereof, then
the conflict of interest will be presented to the Board for review prior to the
dissemination of the portfolio holdings information.
BOARD REVIEW
As part of the annual review of the compliance policies and procedures of the
funds, the Chief Compliance Officer will discuss the operation and effectiveness
of this Policy and any changes to the Policy that have been made or recommended
with the Board.
-73-
DESCRIPTION OF THE FUNDS' SHARES
- --------------------------------------------------------------------------------
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated October 15, 1991. The Trust is an open-end, management investment
company registered under the 1940 Act. Restatement and Amendment No. 9 to the
Declaration of Trust, dated as of May 19, 2000, as amended (the "Declaration of
Trust"), permits the Board the right to issue an unlimited number of shares,
without par value. Under the Declaration of Trust, the Trustees have the
authority to establish series of the Trust and may issue shares of a series in
one or more classes. If the Trustees have authorized the issuance of shares of
a series in two or more classes, then the classes may have such variations as to
dividend, redemption, voting rights, NAVs, expenses borne by the classes and
other matters as the Trustees have authorized provided that each share of a
class shall represent an equal proportionate interest in the assets and
liabilities of the class with each other share of the same class. The Trustees
also have the authority to divide or combine the shares of any series or class
into a greater or lesser number without thereby changing the proportionate
beneficial interest in the series or class. Shares have no preemptive or other
right to subscribe to any additional shares or other securities of the Trust.
As of the date of this SAI, the Trustees have authorized eleven series of the
Trust and have also authorized the issuance of three classes of shares,
designated as Class A Shares, Class C Shares and Class I Shares, for each of Mid
Cap Growth Fund, Growth Fund, Core Equity Fund, Mid Cap Value Fund, Value Fund,
Balanced Fund, Fixed Income Fund, Limited Maturity Fixed Income Fund and
Intermediate Tax Exempt Bond Fund; and two classes of shares, designated as
Class A Shares and Class I Shares, for each of the Money Market Funds.
All dividends and other distributions on shares of a particular series or class
shall be distributed pro rata to the holders of that series or class in
proportion to the number of shares of that series or class held by such holders.
Only shareholders of a particular series or class shall be entitled to vote on
any matters affecting such series or class. On all other matters as to which
such series or class is entitled to vote, all of the shares of each series or
class shall vote with other series or classes together. Except as otherwise
provided in the Declaration of Trust, the By-Laws of the Trust or as required by
the provisions of the 1940 Act or applicable state law, a plurality of the votes
cast shall elect a Trustee, and all other matters shall be decided by a majority
of the votes cast and entitled to vote thereon. To constitute a quorum for the
transaction of business at any meeting of shareholders, there must be present in
person or by proxy, holders of more than fifty percent of the total number of
outstanding shares of all series and classes entitled to vote at such meeting.
When any one or more series or classes is entitled to vote as a single series or
class, more than fifty percent of the shares of each such series or class
entitled to vote shall constitute a quorum at a shareholders' meeting of that
series or class.
Unless otherwise required by the 1940 Act or the Declaration of Trust, the Trust
has no intention of holding annual meetings of shareholders. Any Trustee may be
removed by the Trustees or by shareholders at a special meeting. A special
meeting of shareholders will be called by the Trustees upon the written request
of shareholders who own at least 10% of the Trust's outstanding shares of all
series and classes entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them.
-74-
ADMINISTRATOR, SUB-ADMINISTRATOR, TRANSFER AGENT, PORTFOLIO ACCOUNTING SERVICE
AGENT & CUSTODIAN
- --------------------------------------------------------------------------------
ADMINISTRATOR & SUB-ADMINISTRATOR
Morgan Keegan, as Administrator performs (or supervises the performance by
others) and provides facilities, equipment and personnel to carry out the
following administrative services: (i) furnishes without cost to the Trust, or
pay the cost of, necessary office space, office equipment and office facilities;
(ii) provides, without cost to the Trust, services of individuals competent to
perform all of the executive, administrative and clerical functions of the Trust
that are not performed by employees or other agents engaged by the Trust or by
the Administrator acting in some other capacity pursuant to a separate agreement
or arrangement with the Trust; (iii) assists the Trust in selecting and
coordinating the activities of the other agents engaged by the Trust; (iv)
authorizes and permits the Administrator's directors, officers or employees who
may be elected or appointed as Trustees or officers of the Trust to serve in
such capacities, without cost to the Trust; (v) assures that all financial,
accounting and other records required to be maintained and preserved by the
Trust are maintained and preserved by it or on its behalf in accordance with
applicable laws and regulations; (vi) assists in the preparation of all periodic
reports by the Trust to shareholders and all reports and filings to meet other
regulatory or tax requirements applicable to the Trust or the shares of the
Trust, under federal and state securities and tax laws; (vii) responds to
telephonic and in-person inquiries from existing shareholders or their
representatives requesting information, handles shareholder complaints and
correspondence directed to or brought to the attention of the Administrator, and
generates or develops and distributes special data, notices, reports, programs
and literature as necessary; and (viii) provides such other services required by
the Trust as the parties may from time to time agree.
Morgan Keegan receives a fee for its services at an annual rate of 0.065% of
each fund's average daily net assets. Regions Bank provides sub-administrative
services to the funds for a fee at an annual rate of 0.025% of each fund's
average daily net assets. Until November 30, 2007 Citi Fund Services Ohio, Inc.
("Citi"), formerly BISYS Fund Services Ohio, Inc., provided sub-administrative
services to the Money Market Funds. Morgan Keegan paid Citi monthly
compensation at an annual rate of 0.06% of the average daily net assets of the
Money Market Funds.
For the fiscal years ended November 30, 2007, 2006 and 2005, the funds paid
Morgan Keegan the following amounts in administrative fees:
2007 2006 2005
----------------------- ----------------------- -----------------------
ADMINISTRATIVE FEE PAID ADMINISTRATIVE FEE PAID ADMINISTRATIVE FEE PAID
----------------------- ----------------------- -----------------------
MID CAP GROWTH FUND $332,813 $324,324 $268,620
- ------------------------------------------------------------------------------------------------------------
GROWTH FUND 412,160 374,047 359,475
- ------------------------------------------------------------------------------------------------------------
CORE EQUITY FUND(1) 65,763 98,949 36,753
- ------------------------------------------------------------------------------------------------------------
MID CAP VALUE FUND 71,231 71,263 87,336
- ------------------------------------------------------------------------------------------------------------
VALUE FUND 218,378 222,892 161,897
- ------------------------------------------------------------------------------------------------------------
BALANCED FUND 153,762 159,863 110,291
- ------------------------------------------------------------------------------------------------------------
FIXED INCOME FUND 199,523 260,026 227,566
- ------------------------------------------------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME FUND 32,571 53,902 78,136
- ------------------------------------------------------------------------------------------------------------
INTERMEDIATE TAX EXEMPT BOND FUND 46,088 50,169 54,543
- ------------------------------------------------------------------------------------------------------------
TREASURY MONEY MARKET FUND 1,077,887 800,831 760,660
- ------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND(1) 108,324 81,098 25,945
- ------------------------------------------------------------------------------------------------------------
(1) FOR THE FISCAL YEARS ENDED NOVEMBER 30, 2007 AND 2006 AND THE PERIOD SEPTEMBER 1, 2005 TO NOVEMBER 30,
2005, RESPECTIVELY.
-75-
TRANSFER AGENT
Morgan Keegan serves as the transfer agent and dividend disbursing agent for
each fund. Services provided by Morgan Keegan include the issuance,
cancellation and transfer of each fund's shares, and the maintenance of records
regarding the ownership of such shares. For its services, Morgan Keegan
receives a fee based on the size, type and number of accounts and transactions
made by shareholders plus out-of-pocket expenses.
PORTFOLIO ACCOUNTING SERVICE AGENT
Morgan Keegan also provides portfolio accounting services to each fund. Prior
to December 1, 2007 Citi provided portfolio accounting services to the Money
Market Funds for a fee of 0.03% of its average daily net assets. These services
include portfolio accounting, expense accrual and payment, fund valuation and
financial reporting, tax accounting and compliance control services. Each fund
pays Morgan Keegan 0.03% of its average daily net assets for portfolio
accounting services.
Regions Bank, an affiliate of the Adviser, and other unaffiliated financial
institutions may receive fees for sub-accounting, administrative or transaction
processing services related to the maintenance of accounts for retirement and
benefit plans and other omnibus accounts. These fees ($10.00 per participant
account, per year) paid by the funds are equal to or less than the fees the
funds would pay to the fund's transfer agent for similar services.
The funds reserve the right, upon sixty (60) days' written notice, to make other
charges to investors to cover administrative costs.
CUSTODIAN
Regions Bank, 1901 6th Avenue North, Birmingham, Alabama 35203, serves as the
custodian for the funds' cash and investment securities. The custodian is also
responsible for, among other things, receipt and delivery of each fund's
investment securities in accordance with procedures and conditions specified in
the custody agreement with the Trust. Regions Bank's fees for custody services
are based upon the market value of each fund's investment securities held in
custody plus certain securities transaction charges.
-76-
LEGAL COUNSEL &
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Kirkpatrick & Lockhart Preston Gates Ellis LLP, 1601 K Street, N.W., Washington,
DC 20006, serves as counsel to each fund and has passed upon certain matters in
connection with this offering.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP ("PwC"), One North Wacker, Chicago, Illinois, 60606,
was the Trust's independent registered public firm for the fiscal year ended
November 30, 2007. The financial information under the caption "Financial
Highlights" in the Prospectus has been derived from the funds' financial
statements contained in the funds' Annual Report to shareholders for the fiscal
year ended November 30, 2007 ("Annual Report"). Those financial statements have
been examined by PwC whose report thereon also appears in the Annual Report and
have been incorporated by reference in this Statement of Additional Information.
PwC performed an audit of the funds' financial statements and will review the
funds' federal and state income tax returns.
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MEASURE OF FUND PERFORMANCE
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The funds may advertise each fund's share performance by using the SEC's
standard method for calculating performance applicable to all mutual funds. The
SEC also permits this standard performance information to be accompanied by non-
standard performance information.
Unless otherwise stated, any quoted share performance reflects the effect of
non-recurring charges, such as maximum sales charges, which, if excluded, would
increase the total return and yield. The performance of shares depends upon
such variables as: portfolio quality; average portfolio maturity; type and value
of portfolio securities; changes in interest rates; changes or differences in a
fund's or any class of shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings and
offering price per share fluctuate daily. Both net earnings and offering price
per share are factors in the computation of yield and total return.
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
shares over a specific period of time, and includes the investment of dividends
and capital gain distributions.
The average annual total return for a fund's shares is the average compounded
rate of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable value
is computed by multiplying the number of shares owned at the end of the period
by the NAV per share at the end of the period. The number of shares owned at
the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any CDSC, adjusted over the period by
any additional shares, assuming the quarterly reinvestment of any dividends and
other distributions.
When shares of a fund are in existence for less than a year, the fund may
advertise cumulative total return for that period of time, rather than
annualizing the total return.
To the extent that financial institutions and broker-dealers charge fees in
connection with services provided in conjunction with an investment in a fund's
shares, the fund's shares performance is lower for shareholders paying those
fees.
YIELD
The Money Market Funds calculate the yield for their respective classes of
shares daily, based upon the seven days ending on the day of the calculation,
called the base period. This yield is computed by: (1) determining the net
change in the value of a hypothetical account with a balance of one share at the
beginning of the base period, with the net change excluding capital changes but
including the value of any additional shares purchased with dividends earned
from the original one share and all dividends declared on the original and any
purchased shares; (2) dividing the net change in the account's value by the
value of the account at the beginning of the base period to determine the base
period return; and (3) multiplying the base period return by 365/7.
The yield for the other funds' shares is calculated by dividing: (1) the net
investment income per share earned by a fund's shares over a thirty-day period;
by (2) the maximum offering price per share of the fund on the last day of the
period. This number is then 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.
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PERFORMANCE COMPARISONS
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Advertising and sales literature may include: (1) references to ratings,
rankings and financial publications and/or performance comparisons of the funds'
shares to certain indices; (2) charts, graphs and illustrations using the funds'
returns, or returns in general, that demonstrate investment concepts such as
tax-deferred compounding, dollar-cost averaging and systematic investment; (3)
discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the funds; and (4) information about the mutual fund
industry from sources such as the Investment Company Institute.
A fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and U.S. Treasury bills. The funds may quote information from reliable sources
regarding individual countries and regions, world stock exchanges, and economic
and demographic statistics.
You may use financial publications and/or indices to obtain a more complete view
of share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price.
The financial publications which the funds' may use in advertising include:
LIPPER, INC. ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of
all capital gain distributions and income dividends and takes into account
any change in NAV over a specific period of time. From time to time, a
fund will quote its Lipper ranking in the appropriate category in
advertising and sales literature.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
Nasdaq-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
The indexes which the funds may use in advertising include:
MID CAP GROWTH FUND:
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RUSSELL MIDCAP GROWTH INDEX tracks equity securities of medium-sized
companies whose market capitalization falls with the $1.3 billion to about
$20.7 billion range. The stocks are also members of the Russell 1000
Growth Index.
STANDARD & POOR'S 500 COMPOSITE STOCK INDEX ("Standard & Poor's 500
Index") is an unmanaged capitalization-weighted index of 500 stocks
designed to measure the performance of the broad domestic economy through
changes in the aggregate market value of 500 stocks representing all major
industries.
STANDARD & POOR'S MIDCAP 400/CITIGROUP GROWTH INDEX is a capitalization-
weighted index of common stocks representing all major industries in the
mid-range of the U.S. stock market having growth characteristics based on
a series of ratios. The index is maintained by Standard & Poor's in
conjunction with Citigroup.
LIPPER MIDCAP GROWTH FUNDS INDEX is the average return for the 30 largest
Midcap growth funds. Funds in the index are rebalanced quarterly.
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GROWTH FUND:
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STANDARD & POOR'S 500 INDEX is an unmanaged capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic
economy through changes in the aggregated market value of 500 stocks
representing all major industries.
DOW JONES INDUSTRIAL AVERAGE is an unmanaged index representing share
prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is
cited as a principal indicator of market conditions.
STANDARD & POOR'S/CITIGROUP GROWTH INDEX is a sub-index of the Standard &
Poor's 500 Index representing approximately 50% of the Standard & Poor's
500 market capitalization and is comprised of those companies with growth
characteristics based on a series of ratios (one distinction associated
with "growth stocks"). The index is maintained by Standard & Poor's in
conjunction with Citigroup.
CORE EQUITY FUND:
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STANDARD & POOR'S 500 INDEX is an unmanaged capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic
economy through changes in the aggregated market value of 500 stocks
representing all major industries.
LIPPER LARGE CAP CORE FUNDS INDEX consists of managed mutual funds that,
by portfolio practice, invest at least 75% of their equity assets in
companies with market capitalizations (on a three-year weighted basis) of
greater than 33% of the dollar-weighted median market capitalization of
the Standard & Poor's MidCap 400 Index.
MID CAP VALUE FUND:
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RUSSELL MIDCAP VALUE INDEX tracks equity securities of medium-sized
companies whose market capitalization falls within the $863 million to
$20.5 billion range. The stocks are also members of the Russell 1000
Value index.
STANDARD & POOR'S MIDCAP 400/CITIGROUP VALUE INDEX is a market
capitalization-weighted sub-index of the stocks in the Standard & Poor's
Midcap 400 Index ("Standard & Poor's 400") having value characteristics
based on a series of ratios. The index consists of approximately half of
the Standard & Poor's 400 on a market capitalization basis. The index is
maintained by Standard & Poor's in conjunction with Citigroup.
VALUE FUND:
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STANDARD & POOR'S 500/CITIGROUP VALUE INDEX is a sub-index of the Standard
& Poor's 500 Index representing 50% of the Standard & Poor's 500 market
capitalization and is comprised of those companies with value
characteristics based on a series of ratios. The index is maintained by
Standard & Poor's in conjunction with Citigroup.
STANDARD & POOR'S 500 INDEX is an unmanaged capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic
economy through changes in the aggregated market value of 500 stocks
representing all major industries.
BALANCED FUND:
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STANDARD & POOR'S 500 INDEX is an unmanaged capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic
economy through changes in the aggregated market value of 500 stocks
representing all major industries.
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LEHMAN BROTHERS GOVERNMENT/CORPORATE TOTAL INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly
issued, fixed-rate, non-convertible domestic bonds of companies in
industry, public utilities, and finance. Tracked by Lehman Brothers, the
index has an average maturity of nine years. It calculates total return
for one-month, three-month, twelve-month, and ten-year periods, and year-
to-date.
MERRILL LYNCH 1-10 YEAR GOVERNMENT/CORPORATE A RATED AND ABOVE INDEX is an
unmanaged index comprised of publicly placed, non-convertible, coupon-
bearing domestic debt with maturities between 1 and 9.99 years, rated "A"
or better. The index is produced by Merrill Lynch, Pierce, Fenner & Smith,
Inc.
STANDARD & POOR'S 500 INDEX/MERRILL LYNCH 1-10 YEAR GOVERNMENT/CORPORATE A
RATED AND ABOVE INDEX is a 50%/50% weight between the two indexes. It is
sometimes used as a standard market mix to measure a balanced fund's
performance against market indexes. This is the mid-point of the asset
allocation allowed by the Prospectus, which is between 75% equity
securities and 25% fixed income securities to 25% equity securities and
75% fixed income securities.
STANDARD & POOR'S 500 INDEX/LEHMAN BROTHERS GOVERNMENT/CORPORATE (WEIGHTED
INDEX) AND THE STANDARD & POOR'S 500 INDEX/LEHMAN GOVERNMENT (WEIGHTED
INDEX) combine the components of a stock-oriented index and a bond-
oriented index to obtain results which can be compared to the performance
of a managed fund. The indices' total returns will be assigned various
weights depending upon the Fund's current asset allocation.
MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index comprised
of U.S. government securities with maturities between 1 and 10 years.
Index returns are calculated as total returns for periods of one, six and
twelve months, as well as year-to-date. The index is produced by Merrill
Lynch, Pierce, Fenner & Smith, Inc.
LIPPER BALANCED INDEX is the average return of the 30 largest balanced
mutual funds. Funds in the index are rebalanced quarterly.
FIXED INCOME FUND:
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MERRILL LYNCH DOMESTIC MASTER INDEX is composed of U.S. dollar denominated
SEC-registered investment grade public corporate and government debt.
Treasuries, mortgage-backed securities, global bonds (debt issued
simultaneously in the Eurobond and U.S. domestic bond markets) and some
Yankee Bonds (debt of foreign issuers issued in the U.S. domestic market)
are included in the index.
MERRILL LYNCH 1-10 YEAR GOVERNMENT/CORPORATE A RATED AND ABOVE INDEX is an
unmanaged index comprised of publicly placed, non-convertible, coupon-
bearing domestic debt with maturities between 1 and 9.99 years, rated "A"
or better. The index is produced by Merrill Lynch, Pierce, Fenner &
Smith, Inc.
MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index comprised
of U.S. government securities with maturities between 1 and 10 years.
Index returns are calculated as total returns for periods of one, three,
six and twelve months as well as year-to-date. The index is produced by
Merrill Lynch, Pierce, Fenner & Smith, Inc.
LEHMAN BROTHERS INTERMEDIATE U.S. AGGREGATE INDEX covers securities in the
intermediate maturity range of the Lehman Brothers Aggregate Index. The
Aggregate Index represents securities that are U.S. domestic, taxable and
dollar denominated. The Index covers the U.S. investment grade fixed rate
bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed securities.
LEHMAN BROTHERS GOVERNMENT/CORPORATE TOTAL INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly
issued, fixed-rate, non-convertible domestic bonds of maturity of nine
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years. It calculates total return for one month, three month, twelve
month, and ten year periods, and year-to-date.
MERRILL LYNCH GOVERNMENT/CORPORATE INDEX is comprised of approximately
4,800 issues which include publicly placed, non-convertible coupon-bearing
domestic debt carrying a term to maturity of at least one year, with par
amounts outstanding at no less than $10 million at the start and close of
the performance measurement period, and which must be rated by S&P or
Moody's as investment grade issues (i.e., BBB/Baa or better). The index is
produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
LIMITED MATURITY FIXED INCOME FUND:
- ----------------------------------
MERRILL LYNCH 1-3 YEAR GOVERNMENT/CORPORATE A RATED AND ABOVE INDEX is an
unmanaged index composed of U.S. government and U.S. dollar denominated
SEC registered corporate bonds with an investment grade rating of "A" or
higher and maturities between 1 and 3 years.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking
short-term U.S. government securities with maturities between 1 and 2.99
years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith,
Inc.
MERRILL LYNCH 2-YEAR TREASURY CURVE INDEX is comprised of the most
recently issued 2-year U.S. Treasury notes. Index returns are calculated
as total returns for periods of one, three, six, and twelve months as well
as year-to-date.
2-YEAR TREASURY NOTE-SOURCE: Wall Street Journal, Bloomberg Financial
Markets, and Telerate.
MERRILL LYNCH CORPORATE AND GOVERNMENT INDEX includes issues which must be
in the form of publicly placed, non-convertible, coupon-bearing domestic
debt with maturities between 1 and 4.99 years. Par amounts outstanding
must be no less than $10 million at the start and at the close of the
performance measurement period. Corporate instruments must be rated by
S&P or by Moody's as investment grade issues (i.e., BBB/Baa or better).
INTERMEDIATE TAX EXEMPT BOND FUND:
- ---------------------------------
MERRILL LYNCH 3-7 YEAR MUNICIPAL INDEX is a total performance benchmark
for the intermediate-term municipal bond market.
LEHMAN BROTHERS MUNICIPAL INDEX/3-YEAR is an unmanaged index of municipal
bonds issued after January 1, 1991 with a minimum credit rating of at
least Baa, been issued as part of a deal of at least $50 million, have a
maturity value of at least $5 million and a maturity range of 1-5 years.
As of January 1996, the index also includes zero coupon bonds and bonds
subject to the Alternative Minimum Tax.
LEHMAN BROTHERS MUNICIPAL INDEX/7-YEAR is an unmanaged index of municipal
bonds issued after January 1, 1991 with a minimum credit rating of at
least Baa, been issued as part of a deal of at least $50 million, have a
maturity value of at least $5 million and a maturity range of 6-8 years.
As of January 1996 the index also includes zero coupon bonds and bonds
subject to the Alternative Minimum Tax.
MONEY MARKET FUNDS:
- ------------------
iMONEYNET 100% TREASURY INDEX is a total performance benchmark for SEC
Registered Rule 2a-7 Money Market Funds that invest solely in U.S.
Treasury securities.
SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
LEHMAN BROTHERS TREASURY BOND INDEX is comprised entirely of U.S. Treasury
obligations. Foreign issues are excluded.
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iMONEYNET, INC. iMONEYNET'S MONEY FUND REPORT publishes annualized yields
of money market funds weekly, iMoneyNet's Money Market Insight publication
reports monthly and 12-month-to-date investment results for the same money
funds.
Advertisements and other sales literature for a fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in either class of
shares based on quarterly reinvestment of dividends over a specified period of
time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the funds' returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding, dollar-
cost averaging and systematic investment. In addition, the funds can compare
their performance, or performance for the types of securities.
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ECONOMIC AND MARKET INFORMATION
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Advertising and sales literature for a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect a Fund. In addition, advertising and sales literature may quote
statistics and give general information about mutual fund industry, including
the growth of the industry, from sources such as the Investment Company
Institute (ICI).
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APPENDIX
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SHORT-TERM DEBT RATINGS
An S&P short-term debt rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market (in the U.S.
these are obligations with an original maturity of no more than 365 days,
including commercial paper). The following summarizes the rating categories
used by S&P for short-term debt:
A-1 Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
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A-2 Issue's capacity for timely payment is satisfactory. It is,
however, somewhat more vulnerable to the adverse effects of
changes in circumstances and economic conditions than issues
designated "A-1."
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A-3 Issue has an adequate capacity for timely payment. However,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity for timely payments.
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B Issue has significant speculative characteristics. Issue
currently has the capacity for timely payments but faces major
ongoing uncertainties which could lead to its inadequate
capacity to make timely payments. Ratings of "B-1," "B-2," and
"B-3" may be used to indicate the finer distinctions within
the "B" category.
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C Issue is currently vulnerable to nonpayment and is dependent
upon favorable business, financial and economic conditions to
make timely payments.
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D Issue is in payment default. This rating is used when interest
payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace
period. The "D" rating is also used upon the filing of a
bankruptcy petition or the taking of a similar action if debt
service payments are jeopardized.
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Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
12 months. The following summarizes the rating categories used by Moody's for
short-term debt:
PRIME-1 Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well
established access to a range of financial markets and assured
sources of alternate liquidity.
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PRIME-2 Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still
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appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
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PRIME-3 Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition
may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is
maintained.
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NOT PRIME Issuer does not fall within any of the Prime rating
categories.
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Fitch Ratings ("Fitch") short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
F-1+ Securities possess the highest credit quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
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F-1 Securities possess the highest credit quality. Issues assigned
this rating reflect an assurance of timely payment only
slightly less in degree than issues rated "F-1+."
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F-2 Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the
"F-1+" and "F-1" categories.
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F-3 Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term
adverse changes could cause these securities to be rated below
investment grade.
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B Securities possess a speculative quality. Issues assigned this
rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
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C Securities possess high default risk. Issues assigned this
rating have a real possibility of default.
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D Securities are in actual or imminent payment default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The issue rating definitions for S&P pertain to senior obligations of an entity.
Junior obligations are typically rated lower than senior obligations, to reflect
the lower priority in bankruptcy. S&P ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories. The following summarizes the ratings used by
S&P for corporate and municipal debt:
AAA This designation represents the highest rating assigned by S&P
to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
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AA Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only
in small degree.
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A Debt is considered to have a strong capacity to pay interest
and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher-rated categories.
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BBB Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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.
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BB, B, Debt is regarded, on balance, as having significantly
CCC, CC, C speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
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BB Debt has less vulnerability to nonpayment than other
speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to
make timely interest and principal payments.
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B Debt has a greater vulnerability to nonpayment than
obligations rated "BB" but currently has the capacity to make
interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
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CCC Debt has a current vulnerability to nonpayment, and is
dependent upon favorable business, financial and economic
conditions to make timely payment of interest and repayment of
principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to
pay interest and repay principal.
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CC Debt is currently highly vulnerable to nonpayment.
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C Debt is subordinated or preferred stock and highly vulnerable
to nonpayment. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued. A "C" rating may also be assigned to a
preferred stock issue in arrears on dividends or sinking fund
payments, but that is currently paying.
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D Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace
period. The "D" rating is also used upon the filing of a
bankruptcy petition or the taking of a similar action if debt
service payments are jeopardized.
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Moody's applies numerical modifiers 1, 2 and 3 to each generic rating
classification from "Aa" through "Caa" with 1 indicating a rank at the higher
end, 2 indicating a rank in the mid-range and 3 indicating a rank at the lower
end of the generic rating classification. The following summarizes the ratings
used by Moody's for corporate and municipal long-term debt:
Aaa Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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Aa Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group, they comprise what are
generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective
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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.
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A Bonds possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered
adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
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Baa Bonds considered 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.
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Ba, B, Bonds that possess one of these ratings provide questionable
Caa, Ca, C protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a
poor standing; "Ca" represents obligations which are
speculative in a high degree; and "C" represents the lowest
rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
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To provide more detailed indications of credit quality, the Fitch ratings from
and including "AA" to "CCC" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
The following summarizes the highest four ratings used by Fitch for corporate
and municipal bonds:
AAA Bonds 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 foreseeable events.
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AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong and is not significantly
vulnerable to foreseeable events, although not quite as strong
as bonds rated "AAA."
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A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
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BBB Bonds considered to be investment grade and of good 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 an adverse impact on these bonds, and
therefore, impair timely payment. This is the lowest
investment grade category.
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BB, B, CCC, Bonds that possess one of these ratings are considered by
CC, C, DDD, Fitch to be speculative investments. The ratings "BB" to "C"
DD, D denote Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted
bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation.
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MUNICIPAL NOTE RATINGS
An S&P municipal note rating reflects the liquidity concerns and market access
risks unique to notes due in three years or less. The following summarizes the
ratings used by S&P for municipal notes:
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SP-1 The issuers of these municipal notes exhibit strong capacity
to pay principal and interest. Those issues determined to
possess very strong safety characteristics are given a plus
(+) designation.
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SP-2 The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
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SP-3 The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
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Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
MIG-1/VMIG-1 Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
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MIG-2/VMIG-2 Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the
preceding group.
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MIG-3/VMIG-3 Loans bearing this designation are of favorable quality, with
all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
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MIG-4/VMIG-4 Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or
predominantly speculative.
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SG Loans bearing this designation are of speculative quality and
lack margins of protection.
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Fitch uses the short-term ratings described under Short-Term Debt Ratings for
municipal notes.
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SERVICE PROVIDERS
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SUB-ADVISER TO REGIONS MORGAN
INVESTMENT ADVISER KEEGAN SELECT MID CAP VALUE FUND
Morgan Asset Management, Inc. Channing Capital Management, LLC
1901 6th Avenue North 10 South LaSalle Street, Suite 2650
Birmingham, Alabama 35203 Chicago, Illinois 60603
DISTRIBUTOR, ADMINISTRATOR, LEGAL COUNSEL
SHAREHOLDER SERVICING AGENT & Kirkpatrick & Lockhart Preston Gates Ellis LLP
TRANSFER AGENT 1601 K Street, N.W.
Morgan Keegan & Company, Inc. Washington, D.C. 20006
Morgan Keegan Tower
50 North Front Street
Memphis, Tennessee 38103
INDEPENDENT REGISTERED PUBLIC
CUSTODIAN ACCOUNTING FIRM
Regions Bank PricewaterhouseCoopers LLP
1901 6th Avenue North One North Wacker
Birmingham, Alabama 35203 Chicago, Illinois 60606
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