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MARKETVEST GROUP OF FUNDS
COMBINED PROSPECTUS
Marketvest Funds, Inc. which currently consists of three diversified investment
portfolios, and Marketvest Funds, which currently consists of one
non-diversified investment portfolio (each portfolio individually referred to as
a "Fund" and collectively as the "Funds") are open-end, management investment
companies (mutual funds). This combined prospectus offers investors interests in
the following four Funds, each having a distinct investment objective and
policies:
- Marketvest Equity Fund;
- Marketvest Pennsylvania Intermediate Municipal Bond Fund;
- Marketvest Short-Term Bond Fund; and
- Marketvest Intermediate U.S. Government Bond Fund.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This combined prospectus contains the information you should read and know
before you invest in any of the Funds. Keep this prospectus for future
reference.
The Funds have also filed a Combined Statement of Additional Information dated
January 5, 1996, with the Securities and Exchange Commission. The information
contained in the Combined Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Combined Statement
of Additional Information free of charge, obtain other information, or make
inquiries about any of the Funds by writing to or calling the Funds at
1-800-MKT-VEST (1-800-658-8378).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 5, 1996
TABLE OF CONTENTS
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SYNOPSIS 1
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Risk Factors 1
SUMMARY OF FUND EXPENSES 3
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INVESTMENT OBJECTIVE AND POLICIES OF
EACH FUND 5
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Equity Fund 5
Pennsylvania Intermediate Municipal
Bond Fund 6
Short-Term Bond Fund 9
Intermediate U.S. Government
Bond Fund 9
PORTFOLIO INVESTMENTS AND STRATEGIES 10
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MARKETVEST GROUP OF FUNDS INFORMATION 17
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Management of the Marketvest Group
of Funds 17
Distribution of Shares of the Funds 19
Administration of the Funds 20
Brokerage Transactions 21
Expenses of the Funds 21
NET ASSET VALUE 21
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INVESTING IN THE FUNDS 22
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Share Purchases 22
Minimum Investment Required 22
What Shares Cost 23
Reducing the Sales Charge 24
Systematic Investment Program 25
Certificates and Confirmations 25
Dividends and Capital Gains 25
EXCHANGE PRIVILEGE 26
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Exchange by Telephone 26
Written Exchange 27
REDEEMING SHARES 27
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Systematic Withdrawal Program 28
Accounts with Low Balances 29
SHAREHOLDER INFORMATION 29
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Marketvest Funds, Inc. 29
Marketvest Funds 29
EFFECT OF BANKING LAWS 30
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TAX INFORMATION 30
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Federal Income Tax 30
Additional Tax Information for
Pennsylvania Intermediate
Municipal Bond Fund 31
PERFORMANCE INFORMATION 32
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Performance Information for Predecessor
Common and Collective Investment
Funds 33
FINANCIAL STATEMENTS 36
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 38
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ADDRESSES 39
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SYNOPSIS
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Marketvest Funds, Inc. (formerly named Court Street Funds, Inc.) was
incorporated under the laws of the State of Maryland on October 25, 1995.
Marketvest Funds (formerly named Court Street Funds) was established as a
Massachusetts business trust under a Declaration of Trust dated September 1,
1995, as amended. Both the Articles of Incorporation and the Declaration of
Trust permit the Funds to offer separate series of shares of common stock and
beneficial interests, respectively, representing interests in separate
portfolios of securities. The shares in any one portfolio may be (but are not
currently) offered in separate classes. The Funds are designed for individuals
and institutions as a convenient means of accumulating interests in
professionally managed portfolios.
As of the date of this prospectus, Marketvest Funds, Inc. is comprised of the
following three portfolios:
- Marketvest Equity Fund ("Equity Fund")--seeks to provide growth of
principal by investing primarily in the equity securities of high quality
companies;
- Marketvest Short-Term Bond Fund ("Short-Term Bond Fund")--seeks to
provide current income by investing primarily in investment grade debt
securities, U.S. government securities, and mortgage-backed and
asset-backed securities while maintaining a dollar-weighted average
portfolio maturity of between one to three years; and
- Marketvest Intermediate U.S. Government Bond Fund ("Intermediate U.S.
Government Bond Fund")--seeks to provide current income by investing
primarily in securities which are issued or guaranteed as to payment of
principal and interest by the U.S. government or U.S. government agencies
or instrumentalities while maintaining a dollar-weighted average
portfolio maturity of between three to ten years.
In addition, as of the date of this prospectus, Marketvest Funds is comprised of
the following portfolio:
- Marketvest Pennsylvania Intermediate Municipal Bond Fund ("Pennsylvania
Intermediate Municipal Bond Fund")--seeks to provide current income which
is exempt from federal regular income tax and the personal and corporate
income taxes imposed by the Commonwealth of Pennsylvania by investing
primarily in Pennsylvania municipal securities while maintaining a
dollar-weighted average portfolio maturity of between three to ten years.
The Fund may not be a suitable investment for non-Pennsylvania taxpayers
or retirement plans since it intends to invest in Pennsylvania municipal
securities.
For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." A minimum initial investment of $1,000 is required for
each Fund. Subsequent investments must be in amounts of at least $50. Shares of
each Fund are sold at net asset value plus any applicable sales charge, and are
redeemed at net asset value. Information on redeeming shares may be found under
"Redeeming Shares." The Funds are advised by Dauphin Deposit Bank and Trust
Company ("Dauphin Deposit" or the "Adviser").
RISK FACTORS
Investors should be aware of the following general considerations: the market
value of fixed-income securities, which constitute a major part of the
investments of some of the Funds, may vary inversely in
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response to changes in prevailing interest rates. The foreign securities in
which some Funds may invest may be subject to certain risks in addition to those
inherent in U.S. investments. One or more Funds may make certain investments and
employ certain investment techniques that involve other risks, including
entering into repurchase agreements, lending portfolio securities and entering
into futures contracts and related options as hedges. These risks and those
associated with investing in mortgage-backed securities, when-issued securities,
options and variable rate securities are described under "Investment Objective
and Policies of Each Fund" and "Portfolio Investments and Strategies."
SUMMARY OF FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERMEDIATE
MUNICIPAL
EQUITY FUND BOND FUND
----------- ------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)... 4.75% 3.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)......................................... None None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)...................................... None None
Redemption Fees (as a percentage of amount redeemed, if applicable)........... None None
Exchange Fee.................................................................. None None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fees (after waiver)(1)............................................. 0.80% 0.60%
12b-1 Fees (after waiver)(2).................................................. 0.00% 0.00%
Total Other Expenses.......................................................... 0.20% 0.21%
Total Fund Operating Expenses (after waivers)(3).......................... 1.00% 0.81%
</TABLE>
(1) The estimated management fees for the Equity Fund and the Pennsylvania
Intermediate Municipal Bond Fund have been reduced to reflect the anticipated
voluntary waiver of the management fee by the investment adviser. The adviser
can terminate this voluntary waiver at any time at its sole discretion. With
respect to the Equity Fund and the Pennsylvania Intermediate Municipal Bond
Fund, the maximum management fees are 1.00% and 0.75%, respectively.
(2) As of the date of this prospectus, the Funds are not paying or accruing
12b-1 fees. The Funds can pay up to 0.25% as a 12b-1 fee to the distributor.
Certain trust clients of Dauphin Deposit Bank and Trust Company will not be
affected by the distribution plan because the distribution plan will not be
activated unless and until a separate class of shares of the Funds (which would
not have a Rule 12b-1 plan) are created and such clients' investments in the
Funds are converted to such class.
(3) The Total Fund Operating Expenses are estimated to be 1.45% and 1.21% for
the Equity Fund and the Pennsylvania Intermediate Municipal Bond Fund,
respectively, had the Funds paid 12b-1 fees and absent the voluntary waiver
described in Note 1.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending November 30, 1996. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Marketvest Group of Funds Information" and "Investing in the
Funds." Wire-transferred redemptions may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (a) 5% annual return
and (b) redemption at the end of each time period.
Equity Fund............................................................................. $ 57 $78
Pennsylvania Intermediate Municipal Bond Fund........................................... $ 43 $60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING NOVEMBER 30, 1996.
SUMMARY OF FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
INTERMEDIATE
SHORT-TERM U.S. GOVERNMENT
BOND FUND BOND FUND
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<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................... 3.50% 3.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................................... None None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................... None None
Redemption Fees (as a percentage of amount redeemed, if applicable)...... None None
Exchange Fee............................................................. None None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fees (after waiver) (1)....................................... 0.60% 0.60%
12b-1 Fees (after waiver) (2)............................................ 0.00% 0.00%
Total Other Expenses..................................................... 0.22% 0.22%
Total Fund Operating Expenses (after waivers) (3).................... 0.82% 0.82%
</TABLE>
(1) The estimated management fees for the Short-Term Bond Fund and the
Intermediate U.S. Government Bond Fund have been reduced to reflect the
anticipated voluntary waiver of the management fee by the investment adviser.
The adviser can terminate this voluntary waiver at any time at its sole
discretion. With respect to the Short-Term Bond Fund and the Intermediate U.S.
Government Bond Fund, the maximum management fees are 0.75% and 0.75%,
respectively.
(2) As of the date of this prospectus, the Funds are not paying or accruing
12b-1 fees. The Funds can pay up to 0.25% as a 12b-1 fee to the distributor.
Certain trust clients of Dauphin Deposit Bank and Trust Company will not be
affected by the distribution plan because the distribution plan will not be
activated unless and until a separate class of shares of the Funds (which would
not have a Rule 12b-1 plan) are created and such clients' investments in the
Funds are converted to such class.
(3) The Total Fund Operating Expenses are estimated to be 1.22% and 1.22% for
the Short-Term Bond Fund and the Intermediate U.S. Government Bond Fund,
respectively, had the Funds paid 12b-1 fees and absent the voluntary waiver
described in Note 1.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending November 30, 1996. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Marketvest Group of Funds Information" and "Investing in the
Funds." Wire-transferred redemptions may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (a) 5% annual return
and (b) redemption at the end of each time period.
Short-Term Bond Fund.................................................................. $ 43 $60
Intermediate U.S. Government Bond Fund................................................ $ 43 $60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING NOVEMBER 30, 1996.
INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND
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The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of the shareholders
of such Fund. While there is no assurance that a Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
Unless indicated otherwise, the investment policies of a Fund may be changed by
the Board of Trustees or the Board of Directors (hereinafter referred to as
"Board Members") without the approval of the shareholders of such Fund.
Shareholders will be notified before any material change in these policies
becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appears in
the "Portfolio Investments and Strategies" section of this prospectus and in the
Combined Statement of Additional Information.
EQUITY FUND
The investment objective of the Equity Fund is to provide growth of principal.
The Fund pursues its objective by investing primarily in the equity securities
of high quality companies. Emphasis is placed on stocks where the market price
of the stock appears low when compared to present earnings. The Fund's
investment approach is based on the conviction that, over the long term, the
economy will continue to expand and develop and that this economic growth will
be reflected in the growth of the revenues and earnings of publicly-held
corporations. Under normal market conditions, the Fund intends to invest at
least 65% of its total assets in equity securities of U.S. companies. In most
market conditions, the stocks comprising the Fund's assets will exhibit
traditional value characteristics, such as higher than average sales growth,
higher than average return on equity, low debt to equity ratios, and stocks of
companies with high return on their invested capital.
ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:
- Common Stocks. The Fund invests primarily in common stocks of companies
selected by the Adviser on the basis of traditional research techniques,
including assessment of earnings and dividend growth prospects of the
companies. In addition, the Fund may invest in preferred stocks of these
companies. Most often, these companies will be classified as large or mid
cap companies. Factors such as, but not limited to, product position,
market share, potential earnings growth, asset values, and revenues may be
considered by the Adviser in evaluating common stocks;
- Convertible Securities. Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined number
of the issuer's underlying common stock at the option of the holder during
a specified time period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to
be employed for different investment objectives;
- Securities of Foreign Issuers. The Fund may invest in securities of
foreign issuers traded on the New York or American Stock Exchanges or in
the over-the-counter market, including American Depositary Receipts
("ADRs"). ADRs are receipts typically issued by an American bank or trust
company that evidences ownership of underlying securities issued by a
foreign issuer. ADRs may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are designed for use in U.S. securities markets
(see "Securities of Foreign Issuers" below);
- Options and Futures. The Fund may purchase and sell financial and stock
index futures contracts and purchase and sell options on such futures
contracts and on its portfolio securities;
- U.S. Government Securities (as defined under "Portfolio Investments and
Strategies");
- Corporate Obligations (as defined under "Portfolio Investments and
Strategies");
- Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies"); and
- Money Market Instruments (as defined under "Portfolio Investments and
Strategies").
SECURITIES OF FOREIGN ISSUERS. There may be certain risks associated with
investing in foreign securities. These include risks of adverse political and
economic developments (including possible governmental seizure or
nationalization of assets), the possible imposition of exchange controls or
other governmental restrictions, less uniformity in accounting and reporting
requirements than applied to U.S. companies, and the possibility that there will
be less information on such securities and their issuers available to the
public. In addition, there are restrictions on foreign investments in other
jurisdictions and there tends to be difficulty in obtaining judgments from
abroad and effecting repatriation of capital invested abroad. Delays could occur
in settlement of foreign transactions, which could adversely affect shareholder
equity. Foreign securities may be subject to foreign taxes, which reduce yield,
and may be less marketable than comparable United States securities. As a matter
of practice, the Fund will not invest in the securities of a foreign issuer if
any risk identified above appears to the Adviser to be substantial.
PENNSYLVANIA INTERMEDIATE MUNICIPAL BOND FUND
The investment objective of the Pennsylvania Intermediate Municipal Bond Fund is
to provide current income which is exempt from federal regular income tax and
the personal and corporate income taxes imposed by the Commonwealth of
Pennsylvania. (Federal regular income tax does not include the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations.) In addition, shares of the Fund are exempt from personal property
taxes imposed by counties in Pennsylvania to the extent that the Fund invests in
obligations that are exempt from such taxes. The Fund pursues its investment
objective by investing primarily in Pennsylvania municipal securities. Interest
income of the Fund that is exempt from federal regular income tax and
Pennsylvania state personal and corporate income tax retains its tax-free status
when distributed to the Fund's shareholders. However, income distributed by the
Fund may not necessarily be exempt from state or municipal taxes in states other
than Pennsylvania. Thus, the Fund may not be a suitable investment for non-
Pennsylvania taxpayers or retirement plans. As a matter of investment policy,
which may not be changed without shareholder approval, under normal market
conditions at least 80% of the value of the Fund's net assets will be invested
in Pennsylvania municipal securities. In addition, as a matter of investment
policy that may be changed without shareholder approval, the Fund will invest
its assets so
that, under normal circumstances, at least 65% of the value of its total assets
will be invested in securities of Pennsylvania issuers. Up to 20% of the
Pennsylvania municipal securities invested in by the Fund may generate income
that is subject to the federal alternative minimum tax. The Fund will attempt to
maintain a dollar-weighted average portfolio maturity of between three to ten
years.
ACCEPTABLE INVESTMENTS. The municipal securities in which the Fund invests
include the following:
- obligations issued by or on behalf of the Commonwealth of Pennsylvania,
its political subdivisions, agencies, or instrumentalities (i.e.,
authorities);
- debt obligations of any state, territory, or possession of the United
States, including the District of Columbia, or any political subdivision
of any of these;
- variable rate demand notes; and
- participation, trust, and partnership interests, as described below, in
any of the above obligations;
the interest from which is, in the opinion of bond counsel for the issuers or in
the judgment of the Adviser to the Fund, exempt from both federal regular income
tax and the personal and corporate income taxes imposed by the Commonwealth of
Pennsylvania. It is likely that shareholders who are subject to alternative
minimum tax will be required to include interest from a portion of the municipal
securities owned by the Fund in calculating the federal individual alternative
minimum tax or the federal alternative minimum tax for corporations.
CHARACTERISTICS. The municipal securities in which the Fund invests are:
- rated, at the time of purchase, within the four highest ratings for
municipal securities by a nationally recognized statistical rating
organization ("NRSRO"), such as Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A, or Baa), Standard & Poor's Ratings Group ("S&P")
(AAA, AA, A, or BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA,
A, or BBB); or
- guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest; or
- fully collateralized by an escrow of U.S. government securities or other
securities acceptable to the Adviser; or
- rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1) or Moody's highest municipal commercial
paper rating (PRIME-1) or S&P's highest municipal commercial paper rating
(SP-1); or
- unrated if, at the time of purchase, other municipal securities of that
issuer are rated investment grade by an NRSRO (i.e., Baa or BBB or better
by Moody's, S&P, or Fitch); or
- unrated if determined to be of equivalent quality to one of the foregoing
rating categories by the Adviser.
PARTICIPATION INTERESTS. The Fund may purchase interests in municipal
securities from financial institutions such as commercial and investment banks,
savings associations, and insurance companies. These interests may take the form
of participations, beneficial interests in a trust, partnership interests or any
other form of indirect ownership that allows the Fund to treat the income from
the investment as exempt from federal income tax. The Fund invests in these
participation interests in order to obtain
credit enhancement or demand features that would not be available through direct
ownership of the underlying municipal securities.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may take the form of a lease, an installment purchase contract,
or a conditional sales contract.
TEMPORARY INVESTMENTS. The Fund normally invests at least 80% of its net assets
in Pennsylvania municipal securities, as described above. Although the Fund is
permitted to invest up to 20% of its net assets in taxable, temporary
investments under normal market conditions, there is no current intention of
generating income subject to federal regular income tax or Pennsylvania state
personal income tax. In addition, from time to time, when the Adviser determines
that market conditions call for a temporary defensive posture, the Fund may
invest up to 100% of its total assets in short-term tax-exempt or taxable
temporary investments. These temporary investments include: notes issued by or
on behalf of municipal or corporate issuers; obligations issued or guaranteed by
the U.S. government, its agencies, or instrumentalities; other debt securities;
commercial paper; certificates of deposit of banks; shares of other investment
companies; and repurchase agreements.
There are no rating requirements applicable to temporary investments. However,
the Adviser will limit temporary investments to those it considers to be of
comparable quality to the Fund's acceptable investments.
PENNSYLVANIA MUNICIPAL SECURITIES. Pennsylvania municipal securities are
generally issued to finance public works, such as airports, bridges, housing,
hospitals, mass transportation projects, schools, streets, and water and sewer
works. They are also issued to repay outstanding obligations, to raise funds for
general operating expenses, and to make loans to other public institutions and
facilities. Pennsylvania municipal securities include industrial development
bonds issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct and equip facilities for privately or publicly owned
corporations. The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases local
employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds do not represent a pledge of credit or
create any debt of or charge against the general revenues of a municipality or
public authority. Interest on and principal of revenue bonds are payable only
from the revenue generated by the facility financed by the bond or other
specified sources of revenue. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS. Yields on municipal securities depend on a variety of
factors, including, but not limited to: the general conditions of the municipal
bond market; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. Further, any adverse economic
conditions or developments affecting the Commonwealth of Pennsylvania or its
municipalities could impact the Fund's portfolio. The ability of the Fund to
achieve its investment objective also depends on the continuing ability of the
issuers of Pennsylvania municipal securities and participation interests, or the
guarantors of either, to meet their obligations for the payment of interest and
principal when due. Investing in Pennsylvania municipal securities which meet
the Fund's quality standards may not be
possible if the Commonwealth of Pennsylvania or its municipalities do not
maintain their current credit ratings. In addition, any Pennsylvania
constitutional amendments, legislative measures, executive orders,
administrative regulations, or voter initiatives could result in adverse
consequences affecting Pennsylvania municipal securities.
NON-DIVERSIFICATION. The Fund is a non-diversified investment portfolio. As
such, there is no limit on the percentage of assets which can be invested in any
single issuer, except as noted below. An investment in the Fund, therefore, will
entail greater risk than would exist in a diversified portfolio of securities
because the higher percentage of investment among fewer issuers may result in
greater fluctuation in the total market value of the Fund's portfolio. Any
economic, political, or regulatory developments affecting the value of the
securities in the Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio was diversified among
more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code. This
undertaking requires that at the end of each quarter of the taxable year, with
regard to at least 50% of the Fund's total assets, no more than 5% of its total
assets are invested in the securities of a single issuer; and beyond that, no
more than 25% of its total assets are invested in the securities of a single
issuer.
SHORT-TERM BOND FUND
The investment objective of the Short-Term Bond Fund is to provide current
income. The Fund will invest primarily in investment grade debt securities, U.S.
government securities, and mortgage-backed and asset-backed securities. In
addition, the Fund may invest in taxable municipal obligations. Under normal
market conditions, the Fund will invest at least 65% of its assets in bonds. The
Fund will attempt to maintain a dollar-weighted average portfolio maturity of
between one to three years.
ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:
- U.S. Government Securities (as defined under "Portfolio Investments and
Strategies");
- Corporate Obligations (as defined under "Portfolio Investments and
Strategies");
- Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies"); and
- Money Market Instruments (as defined under "Portfolio Investments and
Strategies").
INTERMEDIATE U.S. GOVERNMENT BOND FUND
The investment objective of the Intermediate U.S. Government Bond Fund is to
provide current income. Under normal market conditions, the Fund will invest at
least 65% of the value of its total assets in securities which are issued or
guaranteed as to payment of principal and interest by the U.S. government or
U.S. government agencies or instrumentalities. For purposes of this 65% policy,
the Fund will consider CMOs (as defined under "Portfolio Investments and
Strategies") issued by U.S. government agencies or instrumentalities to be U.S.
government securities. The remaining 35% of the Fund's assets may be invested in
any of the securities discussed below. In addition, the Fund may invest in
taxable municipal obligations. The Fund will attempt to maintain a
dollar-weighted average portfolio maturity of between three to ten years.
ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:
- U.S. Government Securities (as defined under "Portfolio Investments and
Strategies");
- Mortgage-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Asset-Backed Securities (as defined under "Portfolio Investments and
Strategies");
- Corporate Obligations (as defined under "Portfolio Investments and
Strategies"); and
- Money Market Instruments (as defined under "Portfolio Investments and
Strategies").
PORTFOLIO INVESTMENTS AND STRATEGIES
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U.S. GOVERNMENT SECURITIES. The Funds may invest in U.S. government securities,
which generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations (including mortgage-backed
securities, bonds, notes and discount notes) issued or guaranteed by the
following U.S. government agencies or instrumentalities: Farm Credit System,
including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation ("Freddie Mac"); Federal National Mortgage Association
("Fannie Mae"); Government National Mortgage Association ("Ginnie Mae"); and
Student Loan Marketing Association. These securities are backed by: the full
faith and credit of the U.S. Treasury; the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities securities of which are permissible
investments but may not always receive financial support from the U.S.
government are: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Federal Home Loan
Banks; Fannie Mae; Student Loan Marketing Association; and Freddie Mac.
MORTGAGE-BACKED SECURITIES. The Equity Fund, the Short-Term Bond Fund, and the
Intermediate U.S. Government Bond Fund may invest in mortgage-backed securities
rated at the time of purchase investment grade (BBB or Baa or better) by an
NRSRO, or which are of comparable quality in the judgment of the Adviser.
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property. There are currently four basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Ginnie Mae, Fannie Mae, and Freddie Mac; (ii) those
issued by private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; (iii) those issued by private issuers that
represent an interest in or are collateralized by whole loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by a Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). The Equity Fund, the
Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund may
invest in ARMS. ARMS are pass-through mortgage-backed securities with
adjustable rather than fixed interest rates. The ARMS in which a Fund
invests are issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued
by Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie
Mae or Freddie Mac are typically conventional residential mortgages
conforming to strict underwriting size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Equity Fund, the
Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund may
invest in CMOs. CMOs are debt obligations collateralized by mortgage loans
or mortgage pass-through securities. Typically, CMOs are collateralized by
Ginnie Mae, Fannie Mae or Freddie Mac certificates, but may be
collateralized by whole loans or private pass-through securities. CMOs may
have fixed or floating rates of interest.
A Fund will invest only in CMOs that are rated at the time of purchase
investment grade (BBB or Baa or better) by an NRSRO. A Fund may also invest
in certain CMOs which are issued by private entities such as investment
banking firms and companies related to the construction industry. The CMOs
in which a Fund may invest may be: (i) securities which are collateralized
by pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S.
government; (ii) securities which are collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and
such guarantee is collateralized by U.S. government securities; (iii)
collateralized by pools of mortgages in which payment of principal and
interest is dependent upon the underlying pool of mortgages with no U.S.
government guarantee; or (iv) other securities in which the proceeds of the
issuance are invested in mortgage-backed securities and payment of the
principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). The Equity Fund, the
Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund may
invest in REMICs. REMICs are offerings of multiple class mortgage-backed
securities which qualify and elect treatment as such under provisions of
the Internal Revenue Code. Issuers of REMICs may take several forms, such
as trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and a
single class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
ASSET-BACKED SECURITIES. The Short-Term Bond Fund and the Intermediate U.S.
Government Bond Fund may invest in asset-backed securities. Asset-backed
securities have structural characteristics similar to mortgage-backed securities
but have underlying assets that generally are not mortgage loans or interests in
mortgage loans. The Funds may invest in asset-backed securities rated at the
time of purchase investment grade (BBB or Baa or better) by an NRSRO including,
but not limited to, interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables, equipment leases,
manufactured housing (mobile home) leases, or home equity loans. These
securities may be in the form of pass-through instruments or asset-backed bonds.
The securities are issued by non-governmental entities and carry no direct or
indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time a Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Mortgage-backed
and asset-backed securities are subject to higher prepayment risks than
most other types of debt instruments with prepayment risks because the
underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages to
take advantage of the more favorable rates. Prepayments on mortgage-backed
securities are also affected by other factors, such as the frequency with
which people sell their homes or elect to make unscheduled payments on
their mortgages. Although asset-backed securities generally are less likely
to experience substantial prepayments than are mortgage-backed securities,
certain factors that affect the rate of prepayments on mortgage-backed
securities also affect the rate of prepayments on asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of the
premium paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain possession of
the underlying obligations. If the servicer sells these obligations to
another party, there is a risk that the purchaser would acquire an
interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle
in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.
CORPORATE OBLIGATIONS. The Equity Fund, the Short-Term Bond Fund, and the
Intermediate U.S. Government Bond Fund may invest in corporate obligations
including preferred stocks and corporate bonds, notes, and debentures, which may
have floating or fixed rates of interest. Corporate debt obligations will
normally be rated at the time of purchase investment grade (BBB or Baa or
better) by an NRSRO.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Equity Fund, the Short-Term
Bond Fund, and the Intermediate U.S. Government Bond Fund expect to invest
in floating rate corporate debt obligations, including increasing rate
securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Equity Fund, the Short-Term
Bond Fund, and the Intermediate U.S. Government Bond Fund will also invest
in fixed rate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject
to periodic adjustments based on a designated interest rate index. Fixed
rate securities pay a fixed rate of interest and are more sensitive to
fluctuating interest rates. In periods of rising interest rates, the value
of a fixed rate security is likely to fall. Fixed rate securities with
short-term characteristics are not subject to the same price volatility as
fixed rate securities without such characteristics. Therefore, they behave
more like floating rate securities with respect to price volatility.
BANK INSTRUMENTS. The Funds only invest in Bank Instruments either issued by an
institution that has capital, surplus and undivided profits over $100 million or
is insured by the Bank Insurance Fund or the Savings Association Insurance Fund.
The Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund may purchase foreign Bank Instruments which include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs")
and Eurodollar Time Deposits ("ETDs"). The banks issuing these instruments are
not necessarily subject to the same regulatory requirements that apply to
domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as a Fund) payable upon demand by
either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. A Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require a
Fund to make a pro rata share of all loans extended to the borrower and entitles
the Fund to a pro rata share of all payments made by the borrower. Demand notes
and revolving credit facilities usually provide for floating or variable rates
of interest.
CREDIT ENHANCEMENT. Certain of the acceptable investments of the Equity Fund,
the Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund may
have been credit enhanced by a guaranty, letter of credit or insurance. Any
bankruptcy, receivership or default of the party providing the credit
enhancement will adversely affect the quality and marketability of the
underlying security.
CREDIT RATINGS. Each Fund may invest in unrated securities if they are
determined to be of comparable quality to the Fund's acceptable rated
investments. If a security is subsequently downgraded below the permissible
investment category for a Fund, the Adviser will determine whether it continues
to be an acceptable investment; if not, the security will be sold. Bonds rated
BBB by S&P or Fitch or Baa by Moody's are investment grade, but have more
speculative characteristics than A-rated bonds. Changes in economic conditions
or other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. A description of the
rating categories is contained in the Appendix to the Combined Statement of
Additional Information.
VARIABLE RATE DEMAND NOTES. Each Fund may purchase variable rate demand notes.
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Funds with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to
annually), and is normally based on a published interest rate or interest rate
index. Many variable rate demand notes allow a Fund to demand the repurchase of
the security on not more than seven days prior notice. Other notes only permit a
Fund to tender the security at the time of each interest rate adjustment or at
other fixed intervals. See "Demand Features." Each Fund treats variable rate
demand notes as maturing on the later of the date of the next interest rate
adjustment or the date on which a Fund may next tender the security for
repurchase.
DEMAND FEATURES. Each Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by a Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. A Fund uses these arrangements to provide the Fund with liquidity and
not to protect against changes in the market value of the underlying securities.
The bankruptcy, receivership or default by the issuer of the demand feature, or
a default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of total
assets) and to maintain liquidity (up to 35% of total assets), the Equity Fund,
the Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund may
invest in U.S. and foreign short-term money market instruments, including:
- commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch, and Europaper (dollar-denominated commercial
paper issued outside the United States) rated A-1, A-2, Prime-1, or
Prime-2;
- instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured by the Bank Insurance Fund, which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund, which is also administered by the FDIC. These
instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time
Deposits ("ETDs");
- obligations of the U.S. government or its agencies or instrumentalities;
- repurchase agreements;
- securities of other investment companies; and
- other short-term instruments which are not rated but are determined by
the Adviser to be of comparable quality to the other obligations in which
a Fund may invest.
REPURCHASE AGREEMENTS. The securities in which each Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does
not repurchase the securities from a Fund, the Fund could receive less than the
repurchase price on any sale of such securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
the securities of other investment companies, but will not own more than 3% of
the total outstanding voting stock of any investment company, invest more than
5% of its total assets in any one investment company, or invest more than 10% of
its total assets in investment companies in general. The Funds will invest in
other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by a Fund in shares of another investment
company would be subject to such duplicate expenses. The Adviser will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which a Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause a Fund to miss a price or yield considered to be advantageous.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. Accordingly, a Fund may pay more or less than the market value of the
securities on the settlement date.
A Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, a Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. A Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, each
Fund may lend portfolio securities on a short-term or long-term basis, to
broker/dealers, banks, or other institutional borrowers of securities. A Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Board Members and will receive collateral in the form of cash
or U.S. government securities equal to at least 100% of the value of the
securities loaned at all times. This policy cannot be changed without the
approval of holders of a majority of a Fund's shares.
There is the risk that when lending portfolio securities, the securities may not
be available to a Fund on a timely basis and a Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
RESTRICTED AND ILLIQUID SECURITIES. The Funds may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objective and policies but which are
subject to restrictions on resale under federal securities law. However, each
Fund will limit investments in illiquid securities, including (where applicable)
restricted securities not determined by the Board Members to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of its net assets.
BORROWING MONEY. The Funds will not borrow money directly or through reverse
repurchase agreements (arrangements in which a Fund sells a portfolio instrument
for a percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, a Fund may
borrow up to one-third of the value of its total assets and pledge assets as
necessary to secure such borrowings. This policy cannot be changed without the
approval of holders of a majority of a Fund's shares.
DIVERSIFICATION. With respect to 75% of the value of total assets, the Equity
Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund
will not invest more than 5% in securities of any one issuer, other than cash,
cash items or securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities and repurchase agreements
collateralized by U.S. government securities or acquire more than 10% of the
outstanding voting securities of any one issuer. This policy cannot be changed
without the approval of holders of a majority of a Fund's shares.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including, futures, forward, option and swap
contracts) that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities that
incorporate the performance characteristics of these contracts are also referred
to as "derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Funds will only
use derivative contracts for the purposes disclosed above in this prospectus
section and in the section entitled "Investment Objective and Policies of Each
Fund." To the extent that the Funds invest in securities that could be
characterized as derivatives (such as convertible securities, options, futures
contracts, and mortgage- and asset-backed securities), they will only do so in a
manner consistent with their investment objectives, policies and limitations.
MARKETVEST GROUP OF FUNDS INFORMATION
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MANAGEMENT OF THE MARKETVEST GROUP OF FUNDS
BOARD MEMBERS. Marketvest Funds, Inc. is managed by a Board of Directors.
Marketvest Funds is managed by a Board of Trustees. The Board Members are
responsible for managing each Fund's business affairs and for exercising all of
the powers of the Funds except those reserved for the shareholders.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with both
Marketvest Funds, Inc. and Marketvest Funds, investment decisions for the Funds
are made by Dauphin Deposit Bank and Trust Company ("Dauphin Deposit"), the
Funds' investment adviser, subject to direction by the Board Members. The
Adviser continually conducts investment research and supervision for each Fund
and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual advisory fee from the assets of each Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee at
annual rates equal to percentages of the relevant Fund's average net assets
as follows: the Equity Fund--1.00% and the Pennsylvania Intermediate
Municipal Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S.
Government Bond Fund--0.75%. The fee paid by each of the Funds, while
higher than the advisory fee paid generally by other mutual funds, is
comparable to the advisory fees paid by other mutual funds with similar
objectives and policies. The Adviser has undertaken to reimburse each Fund,
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Funds for certain
operating expenses, but reserves the right to terminate such waiver or
reimbursement at any time at its sole discretion.
ADVISER'S BACKGROUND. Dauphin Deposit is a wholly-owned subsidiary of
Dauphin Deposit Corporation (the "Corporation"), a bank holding company.
Through its subsidiaries and affiliates, the Corporation provides a
comprehensive range of financial services to the public. The headquarters
of both the Corporation and Dauphin Deposit are located at 213 Market
Street, Harrisburg, PA 17105.
Dauphin Deposit, and its divisions, Bank of Pennsylvania, Valleybank, and
Farmers Bank, provide banking services through over 100 branch offices
located in a nine county area in south central Pennsylvania with regional
headquarters in Harrisburg, Hanover, and Reading, Pennsylvania. Among the
services offered to clients are commercial and consumer lending, time and
regular savings and demand deposits, cash management, credit cards, and
personal, corporate, and pension trust services. Mortgage lending is
provided through its affiliate, Eastern Mortgage Services, Inc. As of June
30, 1995, Dauphin Deposit had assets in excess of $5 billion.
Dauphin Deposit's Trust and Financial Services Group provides individuals,
businesses, and municipalities with investment, custodial, and trust
services. As of June 30, 1995, Trust and Financial Services had in excess
of $2 billion under active management. Although Dauphin Deposit has not
previously served as an investment adviser to a mutual fund, it has
managed, on behalf of its trust clients, eight common and collective
investment funds having a market value in excess of $800 million.
Hopper Soliday and Co., Inc. ("Hopper Soliday"), headquartered in
Lancaster, Pennsylvania, is a wholly-owned subsidiary of the Corporation.
Hopper Soliday's services include municipal finance, investment banking,
securities underwriting, market making, institutional sales, retail
brokerage, and other general securities businesses permitted for bank
holding companies and their non-bank subsidiaries. Hopper Soliday is a
registered broker/dealer and an affiliate of the Adviser. As such, the
Adviser is permitted under certain limited circumstances (as described
further under "Brokerage Transactions") to use Hopper Soliday as a broker
to execute portfolio transactions on behalf of the Funds.
As part of its regular banking operations, Dauphin Deposit may make loans
to public companies and municipalities. Thus, it may be possible, from time
to time, for the Fund to hold or acquire the securities of issuers which
are also lending clients of Dauphin Deposit. Because of the internal
controls maintained by Dauphin Deposit to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of
Dauphin Deposit's or its affiliates' lending relationships with an issuer;
therefore, the lending relationship will not be a factor in the selection
of securities.
PORTFOLIO MANAGERS' BACKGROUND. Samuel E. Long is an Equity Specialist and
Vice President of Dauphin Deposit. Mr. Long joined Dauphin Deposit in
November 1985 as Senior Equity Manager. From 1979 to 1985, Mr. Long was
Resident Manager and Vice President of the Harrisburg branch office of W.H.
Newbold's Son and Company, Inc. In this capacity, Mr. Long achieved the
designations of Registered Options Principal, General Sales Supervisor, as
well as Series III-Commodities Representative, and Series IV-General
Securities Representative. From 1974 to 1979, Mr. Long managed an equity
fund as well as employee benefit accounts for Commonwealth National Bank.
From 1969 to 1974, he was a Registered Investment Representative with
Walston and Co. Mr. Long has been the portfolio manager for the Equity Fund
since its inception.
Daryl B. Girton is a Fixed Income Specialist and Vice President of Dauphin
Deposit. He has been the Portfolio Manager of Dauphin Deposit's Employee
Benefit Short Term Bond Fund and Personal Trust U.S. Government Fund since
September of 1994. From 1989 to 1994, Mr. Girton managed personal trust
common funds for Fulton Bank, including a government income fund, a common
stock fund, and an equity income fund. Mr. Girton graduated from Thiel
College with a B.A. in Business Administration and received an M.B.A. from
Shippensburg University. Mr. Girton is a Chartered Financial Analyst and a
member of the Philadelphia Financial Analysts Society. Mr. Girton has been
the portfolio manager for the Short-Term Bond Fund since its inception.
Cathleen S. Saylor is a Fixed Income Specialist and Vice President of
Dauphin Deposit. Ms. Saylor has been the Manager of Dauphin Deposit's
Personal Trust Municipal Bond Fund (since 1987), Dauphin Deposit's Employee
Benefit Fixed Income Fund (since 1985), and Dauphin Deposit's Personal
Trust Fixed Income Fund (since 1985). She had previously managed Dauphin
Deposit's Employee Benefit Short Term Bond Fund from 1987 to 1994. Ms.
Saylor joined Dauphin Deposit in 1974 and is a former supervisor in the
Trust Operations Securities Processing Department. She attended Harrisburg
Area Community College for Business Administration and is a graduate of the
Pennsylvania Bankers' Association Central Atlantic School of Trust. Ms.
Saylor is a Chartered Financial Analyst and a member of the Baltimore
Security Analysts Society. Ms. Saylor has been the portfolio manager for
the Pennsylvania Intermediate Municipal Bond Fund and the Intermediate U.S.
Government Bond Fund since their inception.
DISTRIBUTION OF SHARES OF THE FUNDS
Edgewood Services, Inc. is the principal distributor for shares of the Funds. It
is a New York corporation organized on October 26, 1993, and is the principal
distributor for a number of investment companies. Edgewood Services, Inc. is a
subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), each Fund
may pay to Edgewood Services, Inc., the distributor, an amount computed at an
annual rate of up to one quarter of 1% of the average daily net asset value of
that Fund's shares to finance any activity which is principally intended to
result in the sale of that Fund's shares subject to the Plan. Certain trust
clients of Dauphin Deposit will not be
affected by the Plan because the Plan will not be activated unless and until a
separate class of shares of the Funds (which would not have a Rule 12b-1 plan)
is created and such trust clients' investments in the Funds are converted to
such class.
The distributor may, from time to time, and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Funds, voluntarily declare to be
effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and support services as agents for their clients or customers who
beneficially own shares. Financial institutions will receive fees from the
distributor based upon shares owned by their clients or customers. The schedules
of such fees and the basis upon which such fees will be paid will be determined
from time to time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings association) from being an underwriter or distributor of
certain securities, including shares of registered open-end mutual fund
companies. The Glass-Steagall Act does not prohibit such a depository
institution from acting as investment adviser or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of their customer. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the advisory or custodial
capacities described above or should Congress relax current restrictions on
depository institutions, the Board Members will consider appropriate changes in
the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as broker/dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS. The distributor may also pay financial
institutions as directed by the Adviser a fee based upon the average daily net
asset value of shares of their customers invested in each Fund for providing
administrative services. This fee is in addition to the amounts paid under the
Distribution Plan for administrative services, and, if paid, will be reimbursed
by the Adviser and not a Fund.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services ("FAS"), Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with the
administrative personnel and services necessary to operate each Fund. Such
services include certain legal and accounting services. FAS receives an annual
administrative fee equal to .15 of 1% of the Funds' average aggregate daily net
assets.
The administrative fee received during any fiscal year shall aggregate at least
$75,000 per Fund. FAS may voluntarily choose to waive a portion of its fee at
any time.
CUSTODIAN. Dauphin Deposit Bank and Trust Company, Harrisburg, Pennsylvania, is
custodian for the securities and cash of the Funds.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of a Fund. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board Members.
Notwithstanding the foregoing, to the extent consistent with applicable
provisions of the Investment Company Act of 1940, Rule 17e-1, and other rules
and exemptions adopted by the Securities and Exchange Commission (the "SEC")
under that Act, the Board Members have determined that all orders for
transactions in securities or options on behalf of the Equity Fund will be
placed by Dauphin Deposit with broker/dealers selected by Dauphin Deposit,
including Hopper Soliday and other affiliated brokers. The Equity Fund may use a
Hopper Soliday affiliated broker in a portfolio transaction when Dauphin Deposit
believes that the affiliated broker's charge for the transaction does not exceed
usual and customary levels and is likely to result in price and execution at
least as favorable as those of other qualified broker/dealers.
EXPENSES OF THE FUNDS
The Funds pay all of their own expenses and their allocable shares of Marketvest
Funds, Inc.'s and Marketvest Funds' expenses. The expenses of each Fund include,
but are not limited to, the cost of: organizing the Funds and continuing their
existence; Board Members' fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders; registering the
Funds and shares of the Funds; taxes and commissions; issuing, purchasing,
repurchasing, and redeeming shares; fees for custodians, transfer agents,
dividend disbursing agents, shareholder servicing agents, and registrars;
printing, mailing, auditing, accounting, and legal expenses; reports to
shareholders and governmental agencies; meetings of Board Members and
shareholders and proxy solicitations therefor; distribution fees; insurance
premiums; association membership dues; and such nonrecurring and extraordinary
items as may arise. However, the Adviser may voluntarily reimburse the Funds the
amount, up to the amount of the advisory fee, by which operating expenses exceed
limitations imposed by certain states.
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business except on Martin Luther King
Day, Columbus Day, and Veterans' Day. Shares of the Funds may be purchased
through Hopper Soliday or Dauphin Deposit. In connection with the sale of shares
of the Funds, the distributor may from time to time offer certain items of
nominal value to any shareholder or investor. The Funds reserve the right to
reject any purchase request.
To purchase shares of the Funds through Hopper Soliday, call toll free
1-800-MKT-VEST (1-800-658-8378). Trust and institutional investors should
contact their account officer to make purchase requests through Dauphin Deposit.
Texas residents must purchase shares of the Funds through Edgewood Services,
Inc. at 1-800-618-3573. The order will be placed by Hopper Soliday when payment
is received. Payment for shares purchased through Dauphin Deposit must be
received on the next business day after placing the order.
BY CHECK. Purchases of shares by check must be made payable to the Fund and
sent to Hopper Soliday, 1703 Oregon Pike, P.O. Box 4548, Lancaster, PA
17604-4548.
BY WIRE. Shares of the Funds cannot be purchased by Federal Reserve Wire on
Martin Luther King Day, Columbus Day, or Veterans' Day. To purchase shares by
wire, Dauphin Deposit trust and institutional investors should contact their
account officer. All other shareholders should contact Hopper Soliday.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in a Fund by an investor is $1,000. Subsequent
investments must be in amounts of at least $50. These minimums may be waived for
purchases by the Trust and Financial Services Group of Dauphin Deposit and its
affiliates for fiduciary or custodial accounts. An institutional investor's
minimum investment will be calculated by combining all accounts it maintains
with the Funds.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge, as follows:
Equity Fund:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------- --------------------- -------------------
<S> <C> <C>
Less than $50,000 4.75% 4.99%
- ----------------------------------------------
$50,000 but less than $100,000 4.50% 4.71%
- ----------------------------------------------
$100,000 but less than $250,000 4.00% 4.17%
- ----------------------------------------------
$250,000 but less than $500,000 3.50% 3.63%
- ----------------------------------------------
$500,000 or more 3.00% 3.09%
- ----------------------------------------------
</TABLE>
Pennsylvania Intermediate Municipal Bond Fund, Short-Term Bond Fund, and
Intermediate U.S. Government Bond Fund:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------- --------------------- -------------------
<S> <C> <C>
Less than $100,000 3.50% 3.63%
- ----------------------------------------------
$100,000 but less than $250,000 3.00% 3.09%
- ----------------------------------------------
$250,000 but less than $500,000 2.50% 2.56%
- ----------------------------------------------
$500,000 or more 2.00% 2.04%
- ----------------------------------------------
</TABLE>
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and
Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Funds may be purchased at net asset
value, without a sales charge, by the Trust and Financial Services Division of
Dauphin Deposit and their affiliates for accounts in which the Trust and
Financial Services Division holds or manages assets, by trust companies, trust
departments of other financial institutions, and by banks and savings and loans
for their own accounts. Board Members, emeritus trustees, employees and retired
employees of Marketvest Funds, Inc. and Marketvest Funds, Dauphin Deposit
Corporation and its subsidiaries, including Dauphin Deposit and Hopper Soliday,
or Edgewood Services, Inc. or their affiliates, or any bank or investment dealer
who has a sales agreement with Edgewood Services, Inc. with regard to the Funds,
and their spouses and children under 21, may also buy shares at net asset value,
without a sales charge.
SALES CHARGE REALLOWANCE. For sales of shares of a Fund, a dealer will normally
receive up to 85% of the applicable sales charge. For shares sold with a sales
charge, Hopper Soliday will receive 85% of the applicable sales charge for
purchases of shares of the Funds made directly through Hopper Soliday.
The sales charge for shares sold other than through Hopper Soliday or registered
broker/dealers will be retained by the distributor. However, the distributor
will, periodically, uniformly offer to pay to dealers additional amounts in the
form of cash or promotional incentives, such as reimbursement of certain
expenses of qualified employees and their spouses to attend informational
meetings about the Funds or other special events at recreational-type
facilities, or items of material value. Such payments, all or a portion of which
may be paid from the sales charge the distributor normally retains or any other
source available to it, will be predicated upon the amount of shares of the
Funds that are sold by the dealer.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Funds will combine purchases
made on the same day by the investor, the investor's spouse, and the investor's
children under age 21 when it calculates the sales charge.
If an additional purchase of shares of a Fund is made, each Fund will consider
the previous purchases still invested in any of the Funds. For example, if a
shareholder of the Equity Fund already owns shares having a current value at the
public offering price of $30,000 and purchases $20,000 more at the current
public offering price, the sales charge on the additional purchase according to
the schedule now in effect would be 4.50%, not 4.75%.
To receive the sales charge reduction, Hopper Soliday or the distributor must be
notified by the shareholder in writing or by the shareholder's financial
institution at the time the purchase is made that Fund shares are already owned
or that purchases are being combined. Each Fund will reduce the sales charge
after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $50,000 of
shares in the Equity Fund or $100,000 of shares in the Pennsylvania Intermediate
Municipal Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S.
Government Bond Fund over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
up to 4.75% (for the Equity Fund) or 3.50% (for the Pennsylvania Intermediate
Municipal Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S.
Government Bond Fund) of the total amount intended to be purchased in escrow (in
shares of the Funds) until such purchase is completed.
The shares held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does so, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days; however, these previous purchases will not receive the reduced sales
charge.
REINVESTMENT PRIVILEGE. If shares in the Funds have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge. Hopper
Soliday or the distributor must be notified by the shareholder in writing or by
the shareholder's financial institution of the reinvestment in order to
eliminate a sales charge. If the shareholder redeems his or her shares in a
Fund, there may be tax consequences. Shareholders contemplating such
transactions should consult their own tax advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
Funds in Marketvest Group of Funds, the purchase price of which includes a sales
charge. For example, if a shareholder concurrently invested $30,000 in shares of
the Equity Fund with a sales charge, and $20,000 in shares of another Fund with
a sales charge, the sales charge would be reduced on both purchases.
To receive this sales charge reduction, Hopper Soliday or the distributor must
be notified by the shareholder in writing or by their financial institution at
the time the concurrent purchases are made. The Funds will reduce the sales
charge after they confirm the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $50. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by a Fund, plus the applicable sales charge. A shareholder may apply
for participation in this program through Hopper Soliday.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder. Share certificates will not be issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. In addition, monthly confirmations are sent to report dividends
paid during that month.
DIVIDENDS AND CAPITAL GAINS
With respect to the Equity Fund, dividends are declared and paid monthly. With
respect to the Pennsylvania Intermediate Municipal Bond Fund, Short-Term Bond
Fund, and Intermediate U.S. Government Bond Fund, dividends are declared daily
and paid monthly. Dividends are declared just prior to determining net asset
value. If an order for shares is placed on the preceding business day, shares
purchased by wire begin earning dividends on the business day wire payment is
received by a
Fund. If the order for shares and payment by wire are received on the same day,
shares begin earning dividends on the next business day. Shares purchased by
check begin earning dividends on the business day after the check is converted
into federal funds. Capital gains realized by a Fund, if any, will be
distributed at least once every 12 months. Dividends and capital gains will be
automatically reinvested in additional shares on payment dates at the
ex-dividend date net asset value without a sales charge, unless cash payments
are requested by writing to the Fund.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares of one Fund for shares of any of the other
Funds in the Marketvest Group of Funds at net asset value, subject to certain
conditions. In addition, shares of a Fund may be exchanged for shares of the
following funds distributed by Federated Securities Corp.:
- Federated Liberty U.S. Government Money Market Trust--a U.S. government
money market fund; and
- Pennsylvania Municipal Cash Trust (Institutional Service Shares)--a
Pennsylvania municipal money market fund.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Exchanges are made at net asset value, plus the difference between a Fund's
sales charge already paid and any applicable sales charge on shares of the fund
to be acquired in the exchange.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the next
determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend, and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares by Mail.")
Exercise of this privilege is treated as a redemption and a new purchase for
federal income tax purposes and, depending on the circumstances, a short or
long-term capital gain or loss may be realized. The Funds reserve the right to
modify or terminate the exchange privilege at any time. Shareholders would be
notified prior to any modification or termination. Shareholders may obtain
further information on the exchange privilege by calling their Hopper Soliday
representative or an authorized broker.
EXCHANGE BY TELEPHONE
Shareholders may provide instructions for exchanges between participating funds
by calling Hopper Soliday toll-free at 1-800-MKT-VEST (1-800-658-8378). In
addition, investors may exchange shares by calling their authorized broker
directly.
An authorization form permitting the Funds to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Hopper Soliday representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Telephone exchange instructions may be recorded. If
reasonable procedures are not followed by a Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
Telephone exchange instructions must be received by Hopper Soliday or an
authorized broker and transmitted to Federated Services Company before 3:00 p.m.
(Eastern time) for shares to be exchanged the same day. Shareholders who
exchange into shares of the Funds will not receive a dividend from a Fund on the
date of the exchange.
Shareholders of the Funds may have difficulty in making exchanges by telephone
through banks, brokers, and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Hopper Soliday
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery.
WRITTEN EXCHANGE
An investor may exchange shares by sending a written request to Hopper Soliday,
1703 Oregon Pike, P.O. Box 4548, Lancaster, PA 17604-4548. In addition, trust
and institutional investors of Dauphin Deposit wishing to make an exchange by
written request may do so by sending it to their trust officer, c/o Dauphin
Deposit Bank and Trust Company, 213 Market Street, Harrisburg, PA 17101.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Each Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes its net asset value. Telephone or written requests for redemptions
must be received in proper form and can be made through Hopper Soliday or
Dauphin Deposit.
BY TELEPHONE. To redeem shares of a Fund through Hopper Soliday, call toll-free
1-800-MKT-VEST (1-800-658-8378). Trust and institutional investors of Dauphin
Deposit should contact their account officer to make redemption requests. Shares
of a Fund will be redeemed at the net asset value next determined after a Fund
receives the redemption request from Hopper Soliday or Dauphin Deposit.
A redemption request must be received by Hopper Soliday or Dauphin Deposit
before 4:00 p.m. (Eastern time) in order for shares of a Fund to be redeemed at
that day's net asset value. Redemption requests through registered
broker/dealers must be received by Hopper Soliday before 3:00 p.m. (Eastern
time) in order for shares to be redeemed at that day's net asset value. Hopper
Soliday and Dauphin Deposit are responsible for promptly submitting redemption
requests and providing proper written redemption instructions to a Fund.
Registered broker/dealers may charge customary fees and commissions for this
service. In no event will proceeds be sent more than seven days after a proper
request for redemption has been received.
An authorization form permitting a Fund to accept telephone requests must first
be completed. Authorization forms and information on this service are available
from Hopper Soliday or Dauphin Deposit. Telephone redemption instructions may be
recorded. If reasonable procedures are not followed by a Fund, it may be liable
for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be utilized, such as a written request to Hopper
Soliday or Dauphin Deposit.
If, at any time, a Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
BY MAIL. Any shareholder may redeem shares of a Fund by sending a written
request to Hopper Soliday. Trust and institutional investors should send a
written request to Dauphin Deposit. The written request should include the
shareholder's name, the Fund name, the account number, and the share or dollar
amount requested. Shareholders should call Hopper Soliday or Dauphin Deposit for
assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with a Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and their transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are members
of a signature guarantee program. The Funds and their transfer agent reserve the
right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, the
amount of dividends paid and capital gains distributions with respect to Fund
shares, and the fluctuation of the net asset value of Fund shares redeemed under
this program, redemptions may reduce, and eventually deplete, the shareholder's
investment in a Fund. For this
reason, payments under this program should not be considered as yield or income
on the shareholder's investment in a Fund. To be eligible to participate in this
program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through Hopper Soliday.
Due to the fact that shares are sold with a sales charge, it is not advisable
for shareholders to be purchasing shares while participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,000 because of changes in a Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
There is a remote possibility that one Fund may become liable for any
misstatement, inaccuracy or incomplete disclosure in the prospectus about
another Fund.
MARKETVEST FUNDS, INC.
VOTING RIGHTS. Each share of a Fund gives the shareholder one vote in Board
Member elections and other matters submitted to shareholders for vote. All
shares of each Fund in Marketvest Funds, Inc. have equal voting rights, except
that in matters affecting only a particular Fund, only shares of that Fund are
entitled to vote.
As a Maryland corporation, Marketvest Funds, Inc. is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the operation of Marketvest Funds, Inc. or a Fund and for the
election of Board Members under certain circumstances.
Board Members may be removed by the Board Members or by shareholders at a
special meeting. A special meeting of shareholders shall be called by the Board
Members upon the written request of shareholders owning at least 10% of the
outstanding shares of all series of Marketvest Funds, Inc. entitled to vote.
MARKETVEST FUNDS
VOTING RIGHTS. Each share of a Fund gives the shareholder one vote in Board
Member elections and other matters submitted to shareholders for vote.
As a Massachusetts business trust, Marketvest Funds is not required to hold
annual shareholder meetings. Shareholder approval will be sought only for
certain changes in the operation of Marketvest Funds or a Fund and for the
election of Board Members under certain circumstances.
Board Members may be removed by the Board Members or by shareholders at a
special meeting. A special meeting of the shareholders for this purpose shall be
called by the Board Members upon the
written request of shareholders owning at least 10% of the outstanding shares of
all series of Marketvest Funds entitled to vote.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling, or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting, or distributing certain types of securities such as
shares of a registered open-end investment company. Such laws and regulations do
not prohibit such a holding company or bank or non-bank affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
their customer. The Funds' Adviser, Dauphin Deposit, is subject to such banking
laws and regulations. In addition, Dauphin Deposit may enter into brokerage
transactions with Hopper Soliday, which is an affiliate of Dauphin Deposit (see
"Brokerage Transactions").
Dauphin Deposit believes, based on the advice of its counsel, that it may
perform the investment advisory services for any Fund contemplated by its
advisory agreements with the Funds without violating the Glass-Steagall Act or
other applicable banking laws or regulations. Such counsel has pointed out,
however, that changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
Dauphin Deposit from continuing to perform all or a part of the above services
for its customers and/or a Fund. In such event, changes in the operation of a
Fund may occur, including the possible alteration or termination of any
automatic or other Fund share investment and redemption services then being
provided by Dauphin Deposit, and the Board Members would consider alternative
investment advisers and other means of continuing available investment services.
It is not expected that Fund shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Dauphin Deposit is
found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Funds expect to pay no federal income tax because each Fund intends to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.
With respect to the Equity Fund, the Short-Term Bond Fund, and the Intermediate
U.S. Government Bond Fund, unless otherwise exempt, shareholders are required to
pay federal income tax on any
dividends and other distributions received. This applies whether dividends and
distributions are received in cash or as additional shares. Each Fund will
provide detailed tax information for reporting purposes.
PENNSYLVANIA PERSONAL PROPERTY TAXES. With respect to the Equity Fund, the
Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund, shares are
exempt from personal property taxes imposed by counties and school districts in
Pennsylvania. Shares of the Pennsylvania Intermediate Municipal Bond Fund are
exempt from personal property taxes imposed by counties and school districts in
Pennsylvania to the extent that the Fund invests in obligations that are exempt
from such taxes. Shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local tax laws.
ADDITIONAL TAX INFORMATION FOR PENNSYLVANIA INTERMEDIATE MUNICIPAL BOND FUND
Shareholders are not required to pay the federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest income earned on some municipal bonds may be included
in calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986 as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds will become subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's "adjusted current earnings" over the taxpayer's
alternative minimum taxable income as a tax preference item. "Adjusted current
earnings" is based upon the concept of a corporation's "earnings and profits."
Since "earnings and profits" generally includes the full amount of any Fund
dividend, and alternative minimum taxable income does not include the portion of
the Fund's dividend attributable to municipal bonds which are not private
activity bonds, the difference will be included in the calculation of the
corporation's alternative minimum tax.
Shareholders should consult with their tax advisers to determine whether they
are subject to the alternative minimum tax or the corporate alternative minimum
tax and, if so, the tax treatment of dividends paid by the Fund.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
Distributions representing net long-term capital gains realized by the Fund, if
any, will be taxable as long-term capital gains regardless of the length of time
shareholders have held their shares.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
PENNSYLVANIA TAXES. Under existing Pennsylvania laws, distributions made by the
Fund will not be subject to Pennsylvania income taxes to the extent that such
distributions qualify as exempt-interest dividends under the Internal Revenue
Code and represent (i) interest from obligations of the Commonwealth of
Pennsylvania, or of any municipal corporation, or political subdivision thereof;
or (ii) interest from obligations of the United States or its possessions.
Conversely, to the extent that distributions made by the Fund are attributable
to other types of obligations, such distributions will be subject to
Pennsylvania income taxes.
OTHER STATE AND LOCAL TAXES. Income from the Fund is not necessarily free from
taxes in states other than Pennsylvania. State laws differ on this issue, and
shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Funds may advertise total return and yield. In addition,
the Pennsylvania Intermediate Municipal Bond Fund may advertise tax-equivalent
yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of each Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by each Fund
over a thirty-day period by the maximum offering price per share of a Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
each Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The tax-equivalent yield of the Pennsylvania Intermediate Municipal Bond Fund is
calculated similarly to the yield, but is adjusted to reflect the taxable yield
that the Fund would have had to earn to equal its actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by the Fund and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
The performance information normally reflects the effect of the maximum sales
load which, if excluded, would increase the total return and yield.
From time to time, advertisements for the Funds may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Funds' performance to certain indices.
PERFORMANCE INFORMATION FOR PREDECESSOR COMMON AND COLLECTIVE
INVESTMENT FUNDS
The Equity Fund, the Pennsylvania Intermediate Municipal Bond Fund, the
Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund emanate
from common and collective investment funds currently managed by the Adviser
(the "Common and Collective Fund(s)"). It is anticipated that the assets from
each Common (subject to resolution of tax issues) and Collective Fund will be
transferred to the corresponding Fund in connection with each Fund's
commencement of operations.
Set forth below are certain performance data for the Common and Collective Funds
currently managed by the Funds' Adviser. This information is deemed relevant
because the Common and Collective Funds were managed using substantially the
same investment objective, policies, and limitations as those used by each of
the corresponding Funds. However, the past performance data shown below is not
necessarily indicative of each Fund's future performance. Each Fund is actively
managed, and its investments will vary from time to time. Each Fund's
investments are not identical to the past portfolio investments of the Common
and Collective Funds. Moreover, the Common and Collective Funds did not incur
expenses that correspond to the advisory, administrative, and other fees to
which each Fund is subject. Accordingly, the performance information shown below
has been adjusted to reflect the anticipated total expense ratios for each Fund.
This adjustment has the effect of lessening the actual performance for the
Common and Collective Funds. Because a sales load was not imposed on the Common
and Collective Funds, the performance figures shown below have been adjusted to
reflect the effect of the maximum sales load (i.e., 4.75% on the Equity Fund and
3.50% on the Pennsylvania Intermediate Municipal Bond Fund, the Short-Term Bond
Fund, and the Intermediate U.S. Government Bond Fund, respectively) applicable
to certain purchasers of each Fund. This adjustment further reduces the actual
performance of the Common and Collective Funds. Corresponding performance
figures which do not reflect the sales load are also provided.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIOD ENDING DECEMBER 31, 1995*
--------------------------------------------
REFLECTING LOAD
PREDECESSOR COMMON FUNDS --------------------------------------------
(CORRESPONDING MARKETVEST FUNDS) 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
- ------------------------------------------------- ------ ------- ------- ---------------
<S> <C> <C> <C> <C>
Personal Trust Equity Fund
Inception: October 1978
(MARKETVEST EQUITY FUND) 26.88% 12.68% 13.49% 12.81%
- -------------------------------------------------
Equity Fund for Tax-Exempt Organizations
Inception: March 1984
(MARKETVEST EQUITY FUND) 27.22% 12.44% 14.28% 13.52%
- -------------------------------------------------
Personal Trust Municipal Bond Fund
Inception: August 1981
(MARKETVEST PENNSYLVANIA INTERMEDIATE MUNICIPAL
BOND FUND) 4.90% 3.09% 4.96% 6.89%
- -------------------------------------------------
U.S. Government Fixed Income Fund
Inception: July 1989
(MARKETVEST SHORT-TERM BOND FUND) 5.38% 3.22% 4.82% 5.35%
- -------------------------------------------------
Personal Trust Fixed Income Fund
Inception: October 1978
(MARKETVEST INTERMEDIATE U.S. GOVERNMENT BOND
FUND) 9.85% 4.64% 7.06% 9.11%
- -------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITHOUT LOAD
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
- ------------------------------------------------- ------ ------- ------- ---------------
<S> <C> <C> <C> <C>
Personal Trust Equity Fund
Inception: October 1978
(MARKETVEST EQUITY FUND) 33.22% 14.52% 14.60% 13.16%
- -------------------------------------------------
Equity Fund for Tax-Exempt Organizations
Inception: March 1984
(MARKETVEST EQUITY FUND) 33.59% 14.29% 15.40% 14.05%
- -------------------------------------------------
Personal Trust Municipal Bond Fund
Inception: August 1981
(MARKETVEST PENNSYLVANIA INTERMEDIATE MUNICIPAL
BOND FUND) 8.76% 4.33% 5.71% 7.18%
- -------------------------------------------------
U.S. Government Fixed Income Fund
Inception: July 1989
(MARKETVEST SHORT-TERM BOND FUND) 9.21% 4.46% 5.55% 5.95%
- -------------------------------------------------
Personal Trust Fixed Income Fund
Inception: October 1978
(MARKETVEST INTERMEDIATE U.S. GOVERNMENT BOND
FUND) 13.83% 5.91% 7.83% 9.37%
- -------------------------------------------------
</TABLE>
* The Average Annual Total Return for each Common Fund has been adjusted to
reflect each corresponding Fund's anticipated expenses, net of voluntary
waivers.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIOD ENDING DECEMBER 31, 1995*
--------------------------------------------
REFLECTING LOAD
PREDECESSOR COLLECTIVE FUNDS --------------------------------------------
(CORRESPONDING MARKETVEST FUNDS) 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
- ------------------------------------------------- ------ ------- ------- ---------------
<S> <C> <C> <C> <C>
Employee Benefit Equity Fund
Inception: August 1981
(MARKETVEST EQUITY FUND) 27.34% 12.94% 14.89% 15.31%
- -------------------------------------------------
Employee Benefit Short-Term Fixed Income Fund
Inception: April 1984
(MARKETVEST SHORT-TERM BOND FUND) 5.91% 3.73% 5.23% 7.38%
- -------------------------------------------------
Employee Benefit Fixed Income Fund
Inception: August 1981
(MARKETVEST INTERMEDIATE U.S. GOVERNMENT BOND
FUND) 9.15% 4.24% 6.79% 10.00%
- -------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITHOUT LOAD
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
- ------------------------------------------------- ------ ------- ------- ---------------
<S> <C> <C> <C> <C>
Employee Benefit Equity Fund
Inception: August 1981
(MARKETVEST EQUITY FUND) 33.69% 14.79% 16.02% 15.44%
- -------------------------------------------------
Employee Benefit Short-Term Fixed Income Fund
Inception: April 1984
(MARKETVEST SHORT-TERM BOND FUND) 9.72% 4.97% 5.97% 7.08%
- -------------------------------------------------
Employee Benefit Fixed Income Fund
Inception: August 1981
(MARKETVEST INTERMEDIATE U.S. GOVERNMENT BOND
FUND) 13.11% 5.48% 7.56% 10.37%
- -------------------------------------------------
</TABLE>
* The Average Annual Total Return for each Collective Fund has been adjusted to
reflect each corresponding Fund's anticipated expenses, net of voluntary
waivers.
MARKETVEST PENNSYLVANIA INTERMEDIATE MUNICIPAL
BOND FUND
(A PORTFOLIO OF MARKETVEST FUNDS)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 27, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Cash $100,000
- ---------------------------------------------------------------------------------- --------
LIABILITIES:
- ----------------------------------------------------------------------------------
Net Assets for 10,000 shares of beneficial interest outstanding $100,000
- ---------------------------------------------------------------------------------- --------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
($100,000 / 10,000 shares of beneficial interest outstanding) $ 10.00
- ---------------------------------------------------------------------------------- --------
</TABLE>
NOTES:
(1) The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated September 1, 1995, and has had no operations
since that date other than those relating to organizational matters,
including the issuance on December 27, 1995, of 10,000 shares at $10.00 per
share to Federated Administrative Services, the Administrator of the Trust.
Organizational expenses estimated at $32,675, were borne initially by the
Administrator. The Fund has agreed to reimburse the Administrator for the
organizational expenses during the five year period following the date the
Fund's registration statement first became effective.
(2) Reference is made to "Management of the Marketvest Group of Funds" (on pages
17, 18, and 19), "Administration of the Funds" (on pages 20 and 21), and
"Tax Information" (on pages 30, 31, and 32) in this prospectus for a
description of the investment advisory fee, administrative and other
services, and federal tax aspects of the Fund.
MARKETVEST INTERMEDIATE U.S. GOVERNMENT BOND FUND
(A PORTFOLIO OF MARKETVEST FUNDS, INC.)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 27, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Cash $100,000
- ---------------------------------------------------------------------------------- --------
LIABILITIES:
- ----------------------------------------------------------------------------------
Net Assets for 10,000 shares of common stock outstanding $100,000
- ---------------------------------------------------------------------------------- --------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
($100,000 / 10,000 shares of common stock outstanding) $ 10.00
- ---------------------------------------------------------------------------------- --------
</TABLE>
NOTES:
(1) The Corporation was incorporated under the laws of the State of Maryland on
October 25, 1995, and has had no operations since that date other than
those relating to organizational matters, including the issuance on
December 27, 1995, of 10,000 shares at $10.00 per share to Federated
Administrative Services, the Administrator of the Corporation.
Organizational expenses estimated at $32,675, were borne initially by the
Administrator. The Fund has agreed to reimburse the Administrator for the
organizational expenses during the five year period following the date the
Fund's registration statement first became effective.
(2) Reference is made to "Management of the Marketvest Group of Funds" (on pages
17, 18, and 19), "Administration of the Funds" (on pages 20 and 21), and
"Tax Information" (on pages 30, 31, and 32) in this prospectus for a
description of the investment advisory fee, administrative and other
services, and federal tax aspects of the Fund.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors, Trustees and Shareholders of
MARKETVEST GROUP OF FUNDS:
We have audited the accompanying statements of assets and liabilities of
Marketvest Intermediate U.S. Government Bond Fund (a portfolio of Marketvest
Funds, Inc.) and Marketvest Pennsylvania Intermediate Municipal Bond Fund (a
portfolio of Marketvest Funds) as of December 27, 1995. These statements of
assets and liabilities are the responsibility of the Fund's management,
respectively. Our responsibility is to express an opinion on these statements of
assets and liabilities based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of assets and liabilities are
free of material misstatements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statements of asset and liabilities presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities present fairly, in all
material respects, the net assets of Marketvest Intermediate U.S. Government
Bond Fund and Marketvest Pennsylvania Intermediate Municipal Bond Fund as of
December 27, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 27, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Marketvest Equity Fund
Marketvest Pennsylvania Intermediate Municipal Bond Fund
Marketvest Short-Term Bond Fund
Marketvest Intermediate U.S. Government Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Distributor
Edgewood Services, Inc. Clearing Operations
P.O. Box 897
Pittsburgh, Pennsylvania 15230-0897
- -----------------------------------------------------------------------------------------------
Investment Adviser
Dauphin Deposit Bank and Trust Company 213 Market Street
Harrisburg, Pennsylvania 17101
- -----------------------------------------------------------------------------------------------
Custodian
Dauphin Deposit Bank and Trust Company 213 Market Street
Harrisburg, Pennsylvania 17101
- -----------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKETVEST GROUP
OF FUNDS
COMBINED PROSPECTUS
Marketvest Funds, Inc.
Marketvest Funds
Open-End Management
Investment Companies
January 5, 1996
EDGEWOOD SERVICES, INC.
(LOGO)
- ---------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
CUSIP 57061E 105
57061E 204
57061E 303
57061D 107
G01560-01 (1/96)
Dauphin Deposit Bank and Trust Company
Investment Adviser
MARKETVEST GROUP OF FUNDS
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information relates to the following
four portfolios (individually, the "Fund," or collectively, the "Funds")
comprising the Marketvest Group of Funds:
o Marketvest Equity Fund;
o Marketvest Pennsylvania Intermediate Municipal Bond Fund;
o Marketvest Short-Term Bond Fund; and
o Marketvest Intermediate U.S. Government Bond Fund.
This Combined Statement of Additional Information should be read with
the combined prospectus of the Funds dated January 5, 1996. This Statement
is not a prospectus itself. To receive a copy of the prospectus, write to
the Funds or call Hopper Soliday and Co., Inc. at 1-800-MKT-VEST (1-800-
658-8378). Terms used but not defined herein, which are defined in the
prospectus, are used herein as defined in the prospectus.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 5, 1996
EDGEWOOD SERVICES, INC.
Distributor Dauphin Deposit Bank and
Trust Company
A subsidiary of FEDERATED INVESTORS Investment Adviser
INVESTMENT OBJECTIVE AND POLICIES
OF THE FUNDS 5
CONVERTIBLE SECURITIES 5
WARRANTS 6
FUTURES AND OPTIONS TRANSACTIONS7
FUTURES CONTRACTS 7
"MARGIN" IN FUTURES TRANSACTIONS8
PUT OPTIONS ON FUTURES CONTRACTS9
STOCK INDEX OPTIONS 10
CALL OPTIONS ON FINANCIAL AND STOCK INDEX
FUTURES CONTRACTS 10
PURCHASING PUT AND CALL OPTIONS ON
PORTFOLIO SECURITIES 12
WRITING COVERED PUT AND CALL OPTIONS ON
PORTFOLIO SECURITIES 12
OVER-THE-COUNTER OPTIONS 12
RISKS 13
PENNSYLVANIA MUNICIPAL SECURITIES 14
PARTICIPATION INTERESTS 15
VARIABLE RATE MUNICIPAL SECURITIES 15
MUNICIPAL LEASES 16
WEIGHTED AVERAGE PORTFOLIO MATURITY 17
ADJUSTABLE RATE MORTGAGE SECURITIES
("ARMS") 17
COLLATERALIZED MORTGAGE OBLIGATIONS
("CMOS") 18
REAL ESTATE MORTGAGE INVESTMENT CONDUITS
("REMICS") 19
PRIVATELY ISSUED MORTGAGE-RELATED
SECURITIES 20
RESETS OF INTEREST 20
CAPS AND FLOORS 21
FOREIGN BANK INSTRUMENTS 21
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 22
REPURCHASE AGREEMENTS 22
CREDIT ENHANCEMENT 23
RESTRICTED AND ILLIQUID SECURITIES 23
REVERSE REPURCHASE AGREEMENTS 24
LENDING OF PORTFOLIO SECURITIES25
PORTFOLIO TURNOVER 25
PENNSYLVANIA INVESTMENT RISKS 26
INVESTMENT LIMITATIONS 27
MARKETVEST FUNDS, INC. MANAGEMENT
MARKETVEST FUNDS MANAGEMENT 34
OFFICERS AND BOARD MEMBERS 34
FUND OWNERSHIP 36
DIRECTORS' COMPENSATION TABLE--MARKETVEST
FUNDS, INC. (THE "CORPORATION")36
TRUSTEES' COMPENSATION TABLE--MARKETVEST
FUNDS (THE "TRUST") 37
TRUSTEE LIABILITY 38
INVESTMENT ADVISORY SERVICES 39
ADVISER TO THE FUNDS 39
ADVISORY FEES 39
OTHER SERVICES 40
ADMINISTRATION OF THE FUNDS 40
CUSTODIAN 40
TRANSFER AGENT, DIVIDEND DISBURSING
AGENT, AND PORTFOLIO ACCOUNTING SERVICES
40
INDEPENDENT AUDITORS 40
BROKERAGE TRANSACTIONS 41
PURCHASING SHARES 42
DISTRIBUTION PLAN 43
ADMINISTRATIVE ARRANGEMENTS 43
CONVERSION TO FEDERAL FUNDS 43
DETERMINING NET ASSET VALUE 44
DETERMINING MARKET VALUE OF SECURITIES 44
VALUING MUNICIPAL BONDS 45
EXCHANGE PRIVILEGE 45
REDEEMING SHARES 45
REDEMPTION IN KIND 46
MASSACHUSETTS PARTNERSHIP LAW 18
TAX STATUS 47
THE FUNDS' TAX STATUS 47
SHAREHOLDERS' TAX STATUS 47
TOTAL RETURN 20
YIELD 49
TAX-EQUIVALENT YIELD 49
TAX-EQUIVALENCY TABLE 50
PERFORMANCE COMPARISONS 51
APPENDIX 55
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The combined prospectus discusses the objective of each Fund and the policies
employed to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the combined prospectus.
The Funds' respective investment objectives cannot be changed without the
approval of that Fund's shareholders. Unless otherwise indicated, the
investment policies described below may be changed by the Board of Trustees or
the Board of Directors (hereinafter referred to as "Board Members") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
CONVERTIBLE SECURITIES
The Equity Fund may invest in convertible securities. Convertible bonds and
convertible preferred stocks are fixed income securities that generally retain
the investment characteristics of fixed income securities until they have been
converted but also react to movements in the underlying equity securities. The
holder is entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used, in
whole or in part, customarily at full face value, in lieu of cash to purchase
the issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible bonds,
except that the warrants generally will expire before the bond's maturity.
Convertible securities are senior to equity securities and, therefore, have a
claim to assets of the corporation prior to the holders of common stock in the
case of liquidation. However, convertible securities are generally subordinated
to similar nonconvertible securities of the same company. The interest income
and dividends from convertible bonds and preferred stocks provide a stable
stream of income with generally higher yields than common stocks, but lower than
non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's management
capability and practices.
WARRANTS
The Equity Fund may invest in warrants. Warrants provide an option to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
underlying common stock. The Fund will not invest more than 5% of its net
assets in warrants. No more than 2% of the Fund's net assets, to be included
within the overall 5% limit on investments in warrants, may be warrants which
are not listed on the New York Stock Exchange or the American Stock Exchange.
Warrants acquired in units or attached to securities may be deemed to be without
value for purposes of this policy.
FUTURES AND OPTIONS TRANSACTIONS
The Equity Fund may engage in futures and options transactions as described
below. As a means of reducing fluctuations in the net asset value of shares of
the Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial and stock index futures contracts, buying put and
call options on portfolio securities and put options on financial futures
contracts, and writing call options on futures contracts. The Fund may also
write covered put and call options on portfolio securities to attempt to
increase its current income or to hedge a portion of its portfolio investments.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position on futures contracts may be closed
out over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series. The Fund purchases and writes
options only with investment dealers and other financial institutions (such as
commercial banks or savings associations) deemed creditworthy by the Adviser.
FUTURES CONTRACTS
The Equity Fund may purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without necessarily
buying or selling the securities. The Fund also may purchase and sell stock
index futures to hedge against changes in prices. The Fund will not engage in
futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future. For example, in the fixed income
securities market, prices move inversely to interest rates. A rise in rates
means a drop in price. Conversely, a drop in rates means a rise in price. In
order to hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the possibility
that the prices of its fixed income securities may decline during the Fund's
anticipated holding period. The Fund would "go long" (agree to purchase
securities in the future at a predetermined price) to hedge against a decline in
market interest rates.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Equity Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the Fund
is required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that of margin in
securities transactions in that initial margin in futures transactions does not
involve the borrowing of funds by the Fund to finance the transactions. Initial
margin is in the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by the Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the Fund will
mark to market its open futures positions. The Fund is also required to deposit
and maintain margin when it writes call options on futures contracts.
PUT OPTIONS ON FUTURES CONTRACTS
The Equity Fund may purchase listed put options on financial futures contracts
to protect portfolio securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates. Unlike entering
directly into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at a specified price, the purchase of a put
option on a futures contract entitles (but does not obligate) its purchaser to
decide on or before a future date whether to assume a short position at the
specified price.
Generally, if the hedged portfolio securities decrease in value during the term
of an option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally close
out its option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the position.
To do so, it would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in return
for payment of the strike price. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
STOCK INDEX OPTIONS
The Equity Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market to protect against
decreases in stock prices. A stock index fluctuates with changes in the market
values of the stocks included in the index.
The effectiveness of purchasing stock index options will depend upon the extent
to which price movements in the Fund's portfolio correlate with price movements
of the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject to the
ability of the Adviser to predict correctly movements in the directions of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Equity Fund may write
(sell) listed and over-the-counter call options on financial and stock index
futures contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in stock
prices. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures position (selling a
futures contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall or market interest rates
rise, causing the prices of futures to go down, the Fund's obligation under a
call option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase. In other
words, as the underlying futures price goes down below the strike price, the
buyer of the option has no reason to exercise the call, so that the Fund keeps
the premium received for the option. This premium can substantially offset the
drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by the
buyer, the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium income of the Fund
will then substantially offset the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the value
of the open positions (marked to market) exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Equity Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right (but not the
obligation) to sell the underlying security to the writer (seller) at a
specified price during the term of the option. A call option gives the Fund, in
return for a premium, the right (but not the obligation) to buy the underlying
securities from the seller at a specified price during the term of the option.
WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Equity Fund may also write covered put and call options to generate income
and thereby protect against price movements in particular securities in the
Fund's portfolio. As the writer of a call option, the Fund has the obligation
upon exercise of the option during the option period to deliver the underlying
security upon payment of the exercise price. When the Fund writes a put option
on a futures contract, it is undertaking to buy a particular futures contract at
a fixed price at any time during a specified period if the option is exercised.
The Fund may only write call options either on securities held in its portfolio
or on securities which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any additional
consideration). In the case of put options, the Fund will segregate cash or U.S.
Treasury obligations with a value equal to or greater than the exercise price of
the underlying securities.
OVER-THE-COUNTER OPTIONS
The Equity Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
when options on the portfolio securities held by the Fund are not traded on an
exchange. Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Fund will
not buy call options or write put options, other than to close out open option
positions, without further notification to shareholders.
RISKS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio securities to market changes. In addition, the Adviser could
be incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser will consider
liquidity before entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the custodian (or the broker, if
legally permitted) to collateralize the position and thereby insure that the use
of such futures contracts are unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the underlying future
or security, or will make deposits to collateralize the position as discussed
above.
PENNSYLVANIA MUNICIPAL SECURITIES
The Pennsylvania Intermediate Municipal Bond Fund may invest in
Pennsylvania municipal securities which have the characteristics set forth
in the prospectus.
A Pennsylvania municipal security will be determined by the Fund's Adviser
to meet the quality standards established by the Board Members if it is of
comparable quality to municipal securities within the Fund's rating
requirements. The Board Members consider the creditworthiness of the
issuer of a municipal security, the issuer of a participation interest if
the Fund has the right to demand payment from the issuer of the interest,
or the guarantor of payment by either of those issuers. The Fund is not
required to sell a municipal security if the security's rating is reduced
below the required minimum subsequent to its purchase by the Fund. The
Adviser considers this event, however, in its determination of whether the
Fund should continue to hold the security in its portfolio. If Moody's
Investors Service, Inc., Standard & Poor's Ratings Group or Fitch Investors
Service, Inc. ratings change because of changes in those organizations or
in their rating systems, the Fund will try to use comparable ratings as
standards in accordance with the investment policies described in the
Fund's prospectus.
Examples of Pennsylvania municipal securities are:
o municipal notes and municipal commercial paper;
o serial bonds sold with differing maturity dates;
o tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
o bond anticipation notes sold prior to the issuance of longer-term bonds;
o pre-refunded municipal bonds; and
o general obligation bonds secured by a municipality pledge of taxation.
PARTICIPATION INTERESTS
The Pennsylvania Intermediate Municipal Bond Fund may invest in participation
interests. The financial institutions from which the Fund purchases
participation interests frequently provide or secure from other financial
institutions irrevocable letters of credit or guarantees and give the Fund the
right to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days). The
municipal securities subject to the participation interests are not limited to
the Fund's maximum maturity requirements so long as the participation interests
include the right to demand payment from the issuers of those interests. By
purchasing these participation interests, the Fund is buying a security meeting
the maturity and quality requirements of the Fund and also is receiving the tax-
free benefits of the underlying securities.
VARIABLE RATE MUNICIPAL SECURITIES
The Pennsylvania Intermediate Municipal Bond Fund may invest in variable rate
municipal securities. Variable interest rates generally reduce changes in the
market value of municipal securities from their original purchase prices.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable interest rate municipal
securities than for fixed income obligations. The terms of these variable rate
demand instruments require payment of principal and accrued interest from the
issuer of the municipal obligations, the issuer of the participation interests,
or a guarantor of either issuer.
MUNICIPAL LEASES
The Pennsylvania Intermediate Municipal Bond Fund may invest up to 5% of its net
assets in municipal leases. The Fund may purchase municipal securities in the
form of participation interests which represent undivided proportional interests
in lease payments by a governmental or non-profit entity. The lease payments
and other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the Fund's Adviser,
under the authority delegated by the Board Members, will base its determination
on the following factors: (a) whether the lease can be terminated by the
lessee: (b) the potential recovery, if any, from a sale of the leased property
upon termination of the lease; (c) the lessee's general credit strength (e.g.,
its debt, administrative, economic, and financial characteristics and
prospects); (d) the likelihood that the lessee will discontinue appropriating
funding for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of non-
appropriation"); and (e) any credit enhancement or legal recourse provided upon
an event of non-appropriation or other termination of the lease.
If the Fund purchases unrated municipal leases, the Board Members will be
responsible for determining, on an ongoing basis, the credit quality of such
leases and the likelihood that such leases will not be cancelled.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The Pennsylvania Intermediate Municipal Bond Fund, the Short-Term Bond Fund, and
the Intermediate U.S. Government Bond Fund will determine their dollar-weighted
average portfolio maturity by assigning a "weight" to each portfolio security
based upon the pro rata market value of such portfolio security in comparison to
the market value of the entire portfolio. The remaining maturity of each
portfolio security is then multiplied by its weight, and the results are added
together to determine the weighted average maturity of the portfolio. For
purposes of calculating its dollar-weighted average portfolio maturity, each
Fund will treat variable and floating rate instruments as having a remaining
maturity commensurate with the period remaining until the next scheduled
adjustment to the instrument's interest rate.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
The ARMS in which the Equity Fund, the Short-Term Bond Fund, and the
Intermediate U.S. Government Bond Fund invests will be issued by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. Unlike conventional bonds, ARMS pay back
principal over the life of the ARMS rather than at maturity. Thus, a holder of
the ARMS, such as a Fund, would receive monthly scheduled payments of principal
and interest, and may receive unscheduled principal payments representing
prepayments on the underlying mortgages. At the time that a holder of the ARMS
reinvests the payments and any unscheduled prepayments of principal that it
receives, the holder may receive a rate of interest which is actually lower than
the rate of interest paid on the existing ARMS. As a consequence, ARMS may be a
less effective means of "locking in" long-term interest rates than other types
of U.S. government securities.
Like other U.S. government securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market value of
ARMS generally declines when interest rates rise and generally rises when
interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs. Most of the CMOs in which the Equity Fund, the Short-Term Bond
Fund, and the Intermediate U.S. Government Bond Fund invests use the same basic
structure:
(1) several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities. The
first three (A, B, and C bonds) pay interest at their stated rates beginning
with the issue date, and the final class (Z bond) typically receives any excess
income from the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the shorter
maturity classes have been retired, but then receives all remaining principal
and interest payments;
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities; and
(3) The classes of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity class (or A bond). When those
securities are completely retired, all principal payments are then directed to
the next shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro rata, as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. The interest portion of
these payments is distributed by a Fund as income, and the capital portion is
reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
The Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund may invest in REMICs. REMICs are offerings of multiple class
mortgage-backed securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs may take several
forms, such as trusts, partnerships, corporations, associations, or segregated
pools of mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the entity
and is taxed to the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests," some of
which may offer adjustable rates of interest, and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the entity
must be in assets directly or indirectly secured principally by real property.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
The Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund may invest in privately issued mortgage-related securities. Privately
issued mortgage-related securities generally represent an ownership interest in
federal agency mortgage pass-through securities such as those issued by
Government National Mortgage Association as well as those issued by non-
government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes government-
related and non-government related pools highly liquid.
RESETS OF INTEREST
The interest rates paid on the ARMS, CMOs, and REMICs in which the Equity Fund,
the Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMS which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which a Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which a Fund invests to be shorter than the
maturities stated in the underlying mortgages.
FOREIGN BANK INSTRUMENTS
The Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund may invest in foreign bank instruments. Eurodollar Certificates of
Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs"), Yankee Certificates of
Deposit ("Yankee CDs"), and Europaper are subject to somewhat different risks
than domestic obligations of domestic issuers. Examples of these risks include
international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and the possible
impact of interruptions of the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping and the public
availability of information. These factors will be carefully considered by a
Fund's Adviser in selecting investments for a Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may engage in when-issued and delayed delivery transactions. These
transactions are made to secure what is considered to be an advantageous price
or yield for a Fund. No fees or other expenses, other than normal transaction
costs, are incurred. However, liquid assets of a Fund sufficient to make
payment for the securities to be purchased are segregated on a Fund`s records at
the trade date. These assets are marked to market daily and are maintained
until the transaction has been settled. The Funds do not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Funds require their custodian to take possession of the securities subject
to repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities from a
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
a Fund and allow retention or disposition of such securities. A Fund will only
enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by a Fund's Adviser to be
creditworthy pursuant to guidelines established by the Board Members.
CREDIT ENHANCEMENT
A Fund typically evaluates the credit quality and ratings of credit enhanced
securities based upon the financial condition and ratings of the party providing
the credit enhancement (the "credit enhancer"), rather than the issuer. However,
credit-enhanced securities will not be treated as having been issued by the
credit enhancer for diversification purposes, unless a Fund has invested more
than 10% of its assets in securities issued, guaranteed or otherwise credit
enhanced by the credit enhancer, in which case the securities will be treated as
having been issued by both the issuer and the credit enhancer. A Fund may have
more than 25% of its total assets invested in securities credit enhanced by
banks.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 and
treats such commercial paper as liquid. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is generally sold
to institutional investors, such as a Fund, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Funds through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity.
The ability of the Board Members to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange Commission
("SEC") staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe-harbor
for certain secondary market transactions involving resales of otherwise
restricted securities to qualified institutional buyers without registration of
securities under the Securities Act of 1933. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule. The Funds believe that the staff of the SEC has left the
question of determining the liquidity of all restricted securities to the Board
Members. The Board Members may consider the following criteria in determining
the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, a Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund in a
dollar amount sufficient to make payment for the obligations to be purchased are
segregated at the trade date. These securities are marked to market daily and
are maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when a Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays a Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of a Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
A Fund would not have the right to vote securities on loan, but would terminate
the loan and regain the right to vote if that were considered important with
respect to the investment.
PORTFOLIO TURNOVER
The Funds will not attempt to set or meet portfolio turnover rates since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Funds' investment objectives. It is not anticipated that the portfolio
trading engaged in by the Equity Fund, the Pennsylvania Intermediate Municipal
Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government Bond
Fund will result in its annual rates of portfolio turnover exceeding 75%, 50%,
90%, and 90%, respectively.
PENNSYLVANIA INVESTMENT RISKS
The Pennsylvania Intermediate Municipal Bond Fund invests in obligations of the
Commonwealth of Pennsylvania (the "State") and obligations of its political
subdivisions, agencies, or instrumentalities which results in the Fund's
performance being subject to risks associated with the overall conditions
present within the State. The following information is a general summary of the
State's financial condition and a brief summary of the prevailing economic
conditions. This information is based on official statements relating to
securities issued by the State that are believed to be reliable but should not
be considered as a complete description of all relevant information.
Fiscal operations improved gradually since the $1.1 billion deficit in 1991.
The deficit was nearly eliminated in 1992 with the addition of increased taxes.
During fiscal 1993, Pennsylvania focused on expenditure reductions while
revenues were stabilized and reserves were increased by $24 million. Fiscal
1994 saw further improvement in revenues and ended with a surplus of $336
million. Revenues are expected to increase slightly in fiscal 1995, but the
State has budgeted an increase in appropriations which will decrease the Budget
Stabilization Fund to $4.1 million due to the projected operating deficit of
$297 million. Also, it should be noted that due to the length and severity of
the 1991 recession, coupled with the structural changes in the industrial
landscape, several municipalities have undergone severe financial stress and are
still vulnerable to further economic cycles.
Historically, the State's economy was largely composed of heavy industry that
was concentrated in steel production, coal and railroads. The reliance on these
industries, especially the steel sector, has declined and the economy has
diversified into services and trade sectors. Presently, services and trade
compose over 50% of the economy. Unemployment in the State over the past two
years has surpassed the national average and population growth, as in many of
the industrial states, has been motionless.
The debt ratings further demonstrate the overall condition of the State. The
State maintains an A1 rating by Moody's that has been in effect since 1986.
Standard & Poor's Ratings Group rates the State AA- since 1985.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of the
State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the State; and the underlying fiscal condition of the State,
its counties, and its municipalities.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. With respect to
the Equity Fund, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options transactions
is not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Funds will not issue senior securities, except that each Fund may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets, including the amount
borrowed and except to the extent that the Equity Fund may enter into
futures contracts and options. The Funds will not borrow money or engage
in reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate management
of its portfolio by enabling a Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. A Fund will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges (where applicable): margin
deposits for the purchase and sale of financial futures contracts and
related options and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a when-
issued basis.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
each Fund (with the exception of the Pennsylvania Intermediate Municipal
Bond Fund) will not purchase securities issued by any one issuer (other
than cash, cash items, or securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities) if, as a result, more than 5% of the
value of its total assets would be invested in the securities of that
issuer, and will not acquire more than 10% of the outstanding voting
securities of any one issuer.
UNDERWRITING
The Funds will not underwrite any issue of securities, except as a Fund may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Funds will not purchase or sell real estate, including limited
partnership interests, although the Funds may invest in the securities of
issuers whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Equity Fund may
engage in transactions involving financial and stock index futures
contracts or options on such futures contracts.
LENDING CASH OR SECURITIES
The Funds will not lend any of their assets, except portfolio securities up
to one-third of the value of their total assets. This shall not prevent a
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted by
a Fund's investment objective, policies, and limitations or Declaration of
Trust or Articles of Incorporation, as applicable.
The Pennsylvania Intermediate Municipal Bond Fund may, however, acquire
publicly or non-publicly issued municipal securities or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or its Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S.
Government Bond Fund will not invest 25% or more of the value of their
respective total assets in any one industry (other than securities issued
by the U.S. government, its agencies or instrumentalities).
The Pennsylvania Intermediate Municipal Bond Fund will not purchase
securities if, as a result of such purchase, 25% or more of the value of
its total assets would be invested in any one industry or in industrial
development bonds or other securities, the interest upon which is paid from
revenues of similar types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its assets in cash or
cash items.
The above investment limitations cannot be changed with respect to a Fund
without shareholder approval of a majority of that Fund's shares. The following
investment limitations may be changed by the Board Members without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.
INVESTING IN NEW ISSUERS
The Equity Fund, the Short-Term Bond Fund, and the Intermediate U.S.
Government Bond Fund will not invest more than 5% of the value of their
respective total assets in securities of issuers with records of less than
three years of continuous operations, including the operation of any
predecessor.
The Pennsylvania Intermediate Municipal Bond Fund will not invest more than
5% of the value of its total assets in industrial development bonds where
the principal and interest are the responsibility of companies (or
guarantors, where applicable) with less than three years of continuous
operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND BOARD OF
DIRECTORS OF THE MARKETVEST FUNDS, INC.
A Fund will not purchase or retain the securities of any issuer if the
officers and Board of Directors of Marketvest Funds, Inc. or its investment
adviser, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND BOARD OF
TRUSTEES OF THE MARKETVEST FUNDS
A Fund will not purchase or retain the securities of any issuer if the
officers and Board of Trustees of Marketvest Funds or its investment
adviser, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Funds will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
INVESTING IN RESTRICTED SECURITIES
The Funds will not invest more than 10% (5% for the Equity Fund) of the
value of its total assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other restricted
securities which meet the criteria for liquidity as established by the
Board Members.
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 15% of the value of their net assets in
illiquid securities, including, (where applicable), repurchase agreements
providing for settlement in more than seven days after notice, over-the-
counter options, non-negotiable fixed time deposits with maturities over
seven days, and certain restricted securities not determined by the Board
Members to be liquid.
INVESTING IN MINERALS
A Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although they may invest in
the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
A Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Equity Fund will not invest more than 5% of its net assets in warrants.
No more than 2% of the Fund's net assets, to be included within the overall
5% limit on investments in warrants, may be warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange.
ARBITRAGE TRANSACTIONS
The Equity Fund will not enter into transactions for the purpose of
engaging in arbitrage.
INVESTING IN PUT OPTIONS
The Equity Fund will not purchase put options on securities other than put
options on stock indices, unless the securities are held in the Fund's
portfolio and not more than 5% of the value of the Fund's total assets
would be invested in premiums on open put option positions.
WRITING COVERED CALL OPTIONS
The Equity Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is entitled
to them in deliverable form without further payment or after segregating
cash in the amount of any further payment.
Except with respect to the Funds' policy of 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.
The Funds do not expect to borrow money or pledge securities in excess of 5% of
the value of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the Funds consider certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings associations having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
To comply with registration requirements in certain states, the Equity Fund
(1) will limit the aggregate value of the assets underlying covered call options
or put options written by the Fund to not more than 25% of its net assets,
(2) will limit the premiums paid for options purchased by the Fund to 5% of its
net assets, (3) will limit the margin deposits on futures contracts entered into
by the Fund to 5% of its net assets, and (4) does not intend to invest more than
5% of its total assets in puts, calls, straddles, spreads, or any combination
thereof. (If state requirements change, these restrictions may be revised
without shareholder notification.)
MARKETVEST FUNDS, INC. MANAGEMENT
MARKETVEST FUNDS MANAGEMENT
OFFICERS AND BOARD MEMBERS
Officers and Directors/Trustees are listed with their addresses, birthdates,
present positions with Marketvest Funds, Inc. and Marketvest Funds and principal
occupations.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: October 22, 1930
Chairman, President, Treasurer, and Director of Marketvest Funds, Inc.
Chairman, President, Treasurer, and Trustee of Marketvest Funds
Vice President, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of certain investment companies distributed,
organized, or advised by Federated Investors and its affiliates (Federated
Funds); Executive Vice President, President, or Trustee of the Federated Funds.
George D. McKeon
107 Marlin Drive
Duck, North Carolina
Birthdate: January 11, 1924
Director of Marketvest Funds, Inc.
Trustee of Marketvest Funds
Formerly, Head of Trust and Financial Services, Dauphin Deposit Bank and Trust
Company (retired February 1990).
Gary Mozenter
1180 Gantt Drive
Huntingdon Valley, Pennsylvania
Birthdate: August 30, 1934
Director of Marketvest Funds, Inc.
Trustee of Marketvest Funds
Formerly, Vice Chairman and Partner, Coopers & Lybrand, Philadelphia office
(retired 1994).
Richard Seidel
770 Hedges Lane
Strafford, Pennsylvania
Birthdate: April 20, 1941
Director of Marketvest Funds, Inc.
Trustee of Marketvest Funds
President and Director of Girard Partners, Ltd. (1994 to present); President and
Director of The Fairfield Group, Inc. (1983-1993).
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: February 5, 1947
Vice President and Assistant Treasurer of Marketvest Funds, Inc. and Marketvest
Funds
Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of some of the Federated Funds.
Victor R. Siclari
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: November 17, 1961
Secretary of Marketvest Funds, Inc. and Marketvest Funds
Corporate Counsel, Federated Investors; Associate of Morrison & Foerster, a law
firm, from 1990 to 1992.
* This Director/Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940, as amended.
FUND OWNERSHIP
Officers and Board Members own less than 1% of the outstanding shares of each
Fund.
DIRECTORS' COMPENSATION TABLE--MARKETVEST FUNDS, INC. (THE "CORPORATION")
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
THE CORPORATION THE CORPORATION*# FROM FUND COMPLEX +
Edward C. Gonzales
Chairman, President,
Treasurer, and Director $ 0 $ 0 for the Corporation and
1 other investment company in the Fund Complex
George D. McKeon
Director $5,250 $7,000 for the Corporation and
1 other investment company in the Fund Complex
Gary Mozenter
Director $5,250 $7,000 for the Corporation and
1 other investment company in the Fund Complex
Richard Seidel
Director $5,250 $7,000 for the Corporation and
1 other investment company in the Fund Complex
*Information is estimated for the period from October 27, 1995, the date of the
organizational meeting of the Board of Directors of the Corporation, to November
30, 1996.
#The aggregate compensation is provided for the Corporation which is comprised
of three portfolios.
+The information is provided for the upcoming calendar year.
TRUSTEES' COMPENSATION TABLE--MARKETVEST FUNDS (THE "TRUST")
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
THE TRUST THE TRUST*# FROM FUND COMPLEX +
Edward C. Gonzales
Chairman, President,
Treasurer, and Trustee $ 0 $ 0 for the Trust and
1 other investment company in the Fund Complex
George D. McKeon
Trustee $1,750 $7,000 for the Trust and
1 other investment company in the Fund Complex
Gary Mozenter
Trustee $1,750 $7,000 for the Trust and
1 other investment company in the Fund Complex
Richard Seidel
Trustee $1,750 $7,000 for the Trust and
1 other investment company in the Fund Complex
*Information is estimated for the period from September 22, 1995, the date of
the organizational meeting of the Board of Trustees of the Trust, to November
30, 1996.
#The aggregate compensation is provided for the Trust which is comprised of one
portfolio.
+The information is provided for the upcoming calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Board Members will only be
liable for their own willful defaults. If reasonable care has been exercised in
the selection of officers, agents, employees, or investment advisers, a Trustee
shall not be liable for any neglect or wrongdoing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUNDS
The Funds' investment adviser is Dauphin Deposit Bank and Trust Company
("Dauphin Deposit" or the "Adviser"). It is a wholly-owned subsidiary of
Dauphin Deposit Corporation.
The adviser shall not be liable to Marketvest Funds, Inc., Marketvest Funds, a
Fund, or any shareholder of any of the Funds for any losses that may be
sustained in the purchase, holding, or sale of any security, or for anything
done or omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed upon it
by its contract with the Funds.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If a Fund's normal operating expenses
(including the investment advisory fee, but not including brokerage
commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2% per
year of the first $30 million of average net assets, 2% per year of the
next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, the Adviser will reimburse a Fund for its
expenses over the limitation.
If a Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount
of the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
OTHER SERVICES
ADMINISTRATION OF THE FUNDS
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for a fee as described in the
prospectus.
CUSTODIAN
Under the custodian agreement, Dauphin Deposit Bank and Trust Company holds each
Fund's portfolio securities and keeps all necessary records and documents
relating to its duties. Dauphin Deposit's fees for custody services are based
upon the market value of Fund securities held in custody plus certain securities
transaction charges.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent and dividend disbursing agent for the Funds. It
also provides certain accounting and recordkeeping services with respect to each
Fund's portfolio investments.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services provided by brokers and dealers may be used by the Adviser in advising
the Funds and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser might otherwise have paid, it would tend
to reduce its expenses. The Adviser exercises reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided. Although investment decisions for a Fund are made
independently from those of the other accounts managed by the Adviser,
investments of the type a Fund may make may also be made by those other
accounts. When a Fund and one or more other accounts managed by the Adviser are
prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Funds.
The Board Members have determined that portfolio transactions for the Equity
Fund may be executed through Hopper Soliday and other affiliated broker/dealers
if, in the judgment of Dauphin Deposit, the use of Hopper Soliday or an
affiliated broker is likely to result in prices and execution at least as
favorable as those of other qualified broker/dealers and if, in such
transactions, the affiliated broker/dealer charges the Equity Fund a rate
consistent with that charged to comparable unaffiliated customers in similar
transactions. Hopper Soliday will not participate in commissions from brokerage
given by the Equity Fund to other brokers or dealers. In addition, pursuant to
an exemption granted by the SEC, the Equity Fund may engage in transactions
involving certain money market instruments with Hopper Soliday or particular
affiliates acting as principal. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.
Under rules adopted by the SEC, Hopper Soliday may not execute transactions for
the Equity Fund on the floor of any national securities exchange, but may effect
transactions for the Equity Fund by transmitting orders for execution, providing
for clearance and settlement, and arranging for the performance of those
functions by members of the exchange not associated with Hopper Soliday. Hopper
Soliday will be required to pay fees charged by those persons performing the
floor brokerage elements out of the brokerage compensation it receives from the
Equity Fund. The Equity Fund has been advised by Hopper Soliday that on most
transactions, the floor brokerage generally constitutes from between three-
quarters of a cent and one cent per share, which may be as high as 20% of the
total commissions paid.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of the
Funds are sold at their net asset value plus a sales charge, if any, on days the
New York Stock Exchange and the Federal Reserve Wire System are open for
business. The procedure for purchasing shares of the Funds is explained in the
prospectus under "Investing in the Funds."
DISTRIBUTION PLAN
With respect to the Funds, Marketvest Funds, Inc. and Marketvest Funds have each
adopted a Plan pursuant to Rule 12b-1 which was promulgated by the Securities
and Exchange Commission pursuant to the Investment Company Act of 1940, as
amended (the "Plan"). Each Plan provides for payment of fees to the distributor
to finance any activity which is principally intended to result in the sale of a
Fund's shares subject to the Plan. Such activities may include the advertising
and marketing of shares of a Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating each Plan. Pursuant to each
Plan, the distributor may pay fees to brokers and others for such services.
The Board Members expect that the adoption of a Plan will assist a Fund in
selling a sufficient number of shares so as to allow a Fund to achieve economic
viability. It is also anticipated that an increase in the size of a Fund will
facilitate more efficient portfolio management and thereby assist a Fund in
seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding a Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as a Fund may reasonably request.
CONVERSION TO FEDERAL FUNDS
It is the Funds' policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Funds are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Equity Fund, the Short-Term Bond Fund, and the
Intermediate U.S. Government Bond Fund's portfolio securities, other than
options, are determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by the
Board Members.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Equity Fund will value futures contracts, options and put options on
financial futures at their market values established by the exchanges at the
close of options trading on such exchanges unless the Board Members determine in
good faith that another method of valuing option positions is necessary.
VALUING MUNICIPAL BONDS
With respect to the Pennsylvania Intermediate Municipal Bond Fund, the Board
Members use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities, and does not rely exclusively on quoted
prices. In addition, the Pennsylvania Intermediate Municipal Bond Fund values
short-term obligations according to the mean between the bid and asked prices as
furnished by an independent pricing service, or for short-term obligations with
remaining maturities of 60 days or less at the time of purchase, at amortized
cost.
EXCHANGE PRIVILEGE
Shareholders of a Fund may exchange shares of that Fund for shares of other
Funds advised by Dauphin Deposit subject to certain conditions. Exchange
procedures are explained in the prospectus under "Exchange Privilege."
REDEEMING SHARES
Each Fund redeems shares at the next computed net asset value after a Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted.
REDEMPTION IN KIND
Although the Funds intend to redeem shares in cash, they reserve the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio. To the extent available,
such securities will be readily marketable.
Marketvest Funds, Inc. and Marketvest Funds have elected to be governed by Rule
18f-1 of the Investment Company Act of 1940, under which the Funds are obligated
to redeem Shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of a Fund's net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Board Members
determine that payments should be in kind. In such a case, a Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as a Fund determines net asset value. The portfolio instruments
will be selected in a manner that the Board Members deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders of Marketvest Funds may be held
personally liable as partners under Massachusetts law for acts or obligations of
the Marketvest Funds. To protect shareholders, Marketvest Funds has filed legal
documents with Massachusetts that expressly disclaim the liability of
shareholders of a Fund for such acts or obligations of Marketvest Funds. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument Marketvest Funds or its Board Members enter into or
sign on behalf of a Fund.
In the unlikely event a shareholder of a Fund is held personally liable for
Marketvest Funds' obligations, Marketvest Funds is required by the Declaration
of Trust to use its property to indemnify, protect or compensate the
shareholder. On request, Marketvest Funds will defend any claim made and pay
any judgment against a shareholder of a Fund for any act or obligation of
Marketvest Funds. Therefore, financial loss resulting from liability as a
shareholder of a Fund will occur only if Marketvest Funds cannot meet its
obligations to indemnify shareholders and pay judgments against them from the
assets of a Fund.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because each Fund expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
The dividends received deduction for corporations will apply to ordinary income
distributions to the extent the distribution represents amounts that would
qualify for the dividends received deduction to the Equity Fund if the Equity
Fund were a regular corporation, and to the extent designated by the Equity Fund
as so qualifying. Otherwise, these dividends and any short-term capital gains
are taxable as ordinary income. No portion of any income dividends paid by the
other Funds is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
With respect to the Equity Fund, the Short-Term Bond Fund, and the
Intermediate U.S. Government Bond Fund, long-term capital gains distributed
to shareholders will be treated as long-term capital gains regardless of
how long shareholders have held shares.
With respect to the Pennsylvania Intermediate Municipal Bond Fund, capital
gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held
to maturity. Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the shares.
TOTAL RETURN
The average annual total return for each Fund 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 net asset value 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 applicable sales load, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
YIELD
The yield for each Fund is determined by dividing the net investment income per
share (as defined by the SEC) earned by each Fund over a thirty-day period by
the maximum offering price per share of each Fund on the last day of the period.
This value 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 twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by a Fund
because of certain adjustments required by the SEC and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
The tax-equivalent yield for the Pennsylvania Intermediate Municipal Bond Fund
is calculated similarly to the yield, but is adjusted to reflect the taxable
yield that the Fund would have had to earn to equal its actual yield, assuming
the maximum effective federal tax rate for individuals, and also assuming that
income is 100% tax-exempt. The Fund will use the "actual earned" method for
determining the percentage of dividend distributions that is tax-exempt. This
information will be provided in connection with year-end shareholder tax
reporting.
TAX-EQUIVALENCY TABLE
The Pennsylvania Intermediate Municipal Bond Fund may also use a tax-equivalency
table in advertising and sales literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains free from federal regular income
tax,* and is often free from state and local taxes as well. As the table below
indicates, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between "tax-free" and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1995
STATE OF PENNSYLVANIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
17.80% 30.80% 33.80% 38.80% 42.40%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
SINGLE $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.82% 2.17% 2.27% 2.45% 2.60%
2.00% 2.43% 2.89% 3.02% 3.27% 3.47%
2.50% 3.04% 3.61% 3.78% 4.08% 4.34%
3.00% 3.65% 4.34% 4.53% 4.90% 5.21%
3.50% 4.26% 5.06% 5.29% 5.72% 6.08%
4.00% 4.87% 5.78% 6.04% 6.54% 6.94%
4.50% 5.47% 6.50% 6.80% 7.35% 7.81%
5.00% 6.08% 7.23% 7.55% 8.17% 8.68%
5.50% 6.69% 7.95% 8.31% 8.99% 9.55%
6.00% 7.30% 8.67% 9.06% 9.80% 10.42%
Note: The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent. Furthermore, additional state and local taxes paid
on comparable taxable investments were not used to increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.
*Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
Each Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in each Fund's expenses; and
o various other factors.
Each Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of a Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which a Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all income dividends and capital gains distributions,
if any. From time to time, the Fund will quote its Lipper ranking in the
applicable funds category in advertising and sales literature.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in Standard & Poor's figures.
o THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES are unmanaged
indices of all industrial, utilities, transportation, and finance stocks
listed on the New York Stock Exchange.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
large capitalization, well-established blue-chip industrial corporations as
well as public utility and transportation companies. The DJIA indicates
daily changes in the average price of stocks in any of its categories. It
also reports total sales for each group of industries.
o 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.
o MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking short-
term U.S. government securities between 1 and 2.99 years. The index is
produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is comprised
of 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. The average maturity of these bonds is between 1 and 9.9
years.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX is comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or
any agency thereof, or any quasi-federal corporation. The index also
includes corporate debt guaranteed by the U.S. government. Only notes and
bonds with a minimum outstanding principal of $1 million and a minimum
maturity of one year and maximum maturity of 9.9 years are included.
o LEHMAN BROTHERS GENERAL OBLIGATION MUNICIPAL BOND INDEX is comprised of
state general obligation debt issues. These bonds are rated A or better
and represent a variety of coupon ranges. Index figures are total return
calculated for one, three, and twelve month periods as well as year-to-
date.
o LEHMAN BROTHERS FIVE-YEAR STATE GENERAL OBLIGATION BONDS is an index
comprised of all state general obligation debt issues with maturities
between four and six years. These bonds are rated A or better and
represent a variety of coupon ranges. Index figures are total returns
calculated for one, three, and twelve month periods as well as year-to-
date. Total returns are also calculated as of the index inception,
December 31, 1979.
o LEHMAN BROTHERS TEN-YEAR STATE GENERAL OBLIGATION BONDS is an index
comprised on the same issues noted above except that the maturities range
between nine and eleven years. Index figures are total returns calculated
as of the index inception, December 31, 1979.
O LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX is comprised of all publicly
issued, non-convertible domestic debt of the U.S. government, or any agency
thereof, or any quasi-federal corporation. The index also includes
corporate debt guaranteed by the U.S. government. Only notes and bonds
with a minimum maturity of one year and maximum maturity of 2.9 years are
included.
Advertisements and other sales literature for the Funds 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 the Funds based
on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL/CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
Ratings Group does not rate a particular type of obligation as a matter of
policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., MUNICIPAL/CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
NR--Not rated by Moody's Investors Service, Inc.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATING DEFINITIONS
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 reasonably foreseeable events.
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,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
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.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore, impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
NR--NR indicates that Fitch Investors Service, Inc. does not rate the specific
issue.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATING DEFINITIONS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) 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 appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATING DEFINITIONS
F-1+--(Exceptionally Strong Credit Quality). Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--(Very Strong Credit Quality). Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated F-
1+.
F-2--(Good Credit Quality). Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
Cusip 57061E 10 5
57061E 20 4
57061E 30 3
57061D 10 7
