MARKETVEST GROUP OF FUNDS
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information relates to the
following five portfolios (individually, the ``Fund,''or collectively,
the ``Funds') comprising the Marketvest Group of Funds:
o Marketvest Equity Fund;
o Marketvest International 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 Marketvest Equity Fund, Marketvest
Pennsylvania Intermediate Municipal Bond Fund, Marketvest Short-Term
Bond Fund and Marketvest Intermediate U.S. Government Bond Fund dated
January 5, 1996 (Revised September 30, 1996) and the prospectus of the
International Equity Fund dated March 16, 1997. This Statement is not a
prospectus itself. To receive a copy of either 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
prospectuses, are used herein as defined in the prospectuses.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated March 16, 1997
Edgewood Services, Inc.
DISTRIBUTOR
DAUPHIN DEPOSIT BANK AND TRUST COMPANY
A SUBSIDIARY OF FEDERATED INVESTORS
INVESTMENT ADVISER
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 1
Convertible Securities 2
Warrants 4
Futures and Options Transactions 4
Futures Contracts 5
``Margin''in Futures Transactions 6
Put Options on Futures Contracts 7
Stock Index Options 8
Call Options on Financial and Stock Index Futures Contracts 9
Purchasing Put and Call Options on Portfolio Securities 10
Writing Covered Put and Call Options on Portfolio Securities 10
Over-the-Counter Options 11
Risks 4
Foreign Securities 5
Foreign Currency Hedging Transactions 5
Pennsylvania Municipal Securities 17
Participation Interests 18
Variable Rate Municipal Securities 18
Municipal Leases 6
Weighted Average Portfolio Maturity 20
Adjustable Rate Mortgage Securities ("ARMS") 20
Collateralized Mortgage Obligations ("CMOs") 7
Real Estate Mortgage Investment Conduits ("REMICs") 22
Privately Issued Mortgage-Related Securities 23
Resets of Interest 23
Caps and Floors 24
Swap Agreements 9
Credit Facilities 9
Foreign Bank Instruments 27
When-Issued and Delayed Delivery Transactions 28
Repurchase Agreements 28
Credit Enhancement 29
Restricted and Illiquid Securities 30
Reverse Repurchase Agreements 31
Lending of Portfolio Securities 31
Portfolio Turnover 32
PENNSYLVANIA INVESTMENT RISKS 32
INVESTMENT LIMITATIONS 34
MARKETVEST FUNDS, INC. MANAGEMENT
MARKETVEST FUNDS MANAGEMENT 39
Officers and Board Members 39
Fund Ownership 16
Directors' Compensation Table--Marketvest Funds, Inc.
(the ``Corporation'') 16
Trustees' Compensation Table--Marketvest Funds (the ``Trust') 17
Trustee Liability 47
INVESTMENT ADVISORY SERVICES 47
Adviser to the Funds 47
Advisory Fees 18
OTHER SERVICES 48
Administration of the Funds 48
Custodian 49
Transfer Agent, Dividend Disbursing Agent, and Portfolio
Accounting Services 49
Independent Auditors 49
BROKERAGE TRANSACTIONS 49
PURCHASING SHARES 53
Distribution Plan 53
Administrative Arrangements 54
Conversion to Federal Funds 54
Exchanging Securities for Fund Shares 20
DETERMINING NET ASSET VALUE 55
Determining Market Value of Securities 55
Trading in Foreign Securities 55
Valuing Municipal Bonds 21
EXCHANGE PRIVILEGE 58
REDEEMING SHARES 58
Redemption in Kind 58
MASSACHUSETTS PARTNERSHIP LAW 22
TAX STATUS 22
The Funds' Tax Status 59
Shareholders' Tax Status 23
TOTAL RETURN 24
YIELD 24
TAX-EQUIVALENT YIELD 24
Tax-Equivalency Table 24
PERFORMANCE COMPARISONS 67
ECONOMIC AND MARKET INFORMATION 27
FINANCIAL STATEMENTS 27
APPENDIX 28
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The Funds' prospectuses discuss the Funds' investment objectives and the
policies employed to achieve those objectives. The following discussion
supplements the description of the Funds' investment policies in the
prospectuses.
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.
The International Equity Fund seeks to achieve its investment objective by
investing primarily in shares of other investment companies (the
`underlying funds''). To the extent that the International Equity Fund's
assets are invested in underlying funds, its investment experience will
correspond directly with that of its proportionate investment in those
funds. The International Equity Fund may also invest directly in the
securities held by the underlying funds. Because the International Equity
Fund and the underlying funds will have substantially similar investment
experiences and incur similar risks, all further references to the
International Equity Fund hereinafter include the underlying funds unless
otherwise indicated. Although many of the underlying funds have the same or
similar investment policies as the International Equity Fund, they are not
required to do so.
CONVERTIBLE SECURITIES
The Equity Fund and the International 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 Funds will exchange or convert the convertible securities held in their
respective portfolios 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 a Fund in
achieving its investment objective. Otherwise, the Funds will hold or trade
the convertible securities. In selecting convertible securities for a 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.
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
entitle the holder to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bonds'
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 Funds will exchange or convert the convertible securities held in their
respective portfolios into shares of the underlying common stocks when, in
the Adviser's opinion, the investment characteristics of the underlying
common shares will assist the Funds in achieving their investment
objectives. Otherwise, the Funds will hold or trade the convertible
securities. In selecting convertible securities for the Funds, 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 and the International 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.
FUTURES AND OPTIONS TRANSACTIONS
The Equity Fund and the International Equity Fund may engage in futures and
options transactions as described below. As a means of reducing
fluctuations in the net asset value of their shares, the Funds may attempt
to hedge all or a portion of their respective portfolios 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 Funds may
also write covered put and call options on portfolio securities to attempt
to increase their current income or to hedge a portion of their portfolio
investments. The Funds will maintain their 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 Funds
purchase and write 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 and the International 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 Funds also may purchase and sell stock index futures to hedge against
changes in prices. The Funds do not intend to engage in futures
transactions for speculative purposes, but may do so to a limited extent as
permitted by exclusions under the Commodities Exchange Act (`Act'').
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 Funds could enter
into contracts to deliver securities at a predetermined price (i.e., `go
short') to protect themselves against the possibility that the prices of
their fixed income securities may decline during the Funds' anticipated
holding period. A 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 and the
International Equity Fund do not pay or receive money upon the purchase or
sale of a futures contract. Rather, the Funds are required to deposit an
amount of `initial margin'' in cash or U.S. Treasury bills with their
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 a 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 a Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied.
A futures contract held by a 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 a
Fund but is instead settlement between a Fund and the broker of the amount
one would owe the other if the futures contract expired. In computing its
daily net asset value, a Fund will mark to market its open futures
positions. A 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 and the International Equity Fund may purchase listed put
options on financial and stock index 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, a Fund will
normally close out its option by selling an identical option. If the hedge
is successful, the proceeds received by a 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, a 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 a 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 and the International 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 a 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 a 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 a 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 and the
International 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 their respective portfolios against
an increase in market interest rates or a decrease in stock prices. When a
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, a 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
a Fund keeps the premium received for the option. This premium can offset,
in whole or part, the drop in value of a Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or exercise of it by
the buyer, a 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 a Fund for the initial option. The net premium
income of a Fund will then offset, in whole or part, the decrease in value
of the hedged securities.
A 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, a 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 and the International Equity Fund may purchase put and call
options on portfolio securities and on stock indices to protect against
price movements in particular securities in their respective portfolios. A
put option gives a 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 a 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 and the International Equity Fund may write covered put and
call options on their portfolio securities to generate income and thereby
protect against price movements in particular securities in their
respective portfolios. As the writer of a call option, a 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 a 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.
A 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, a Fund will
segregate cash, U.S. Treasury obligations or other liquid securities with a
value equal to or greater than the exercise price of the underlying
securities.
OVER-THE-COUNTER OPTIONS
The Equity Fund and the International 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 a 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 Funds
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 Equity Fund and the International Equity Fund use 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 their respective portfolios. 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, a 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.
A Fund's ability to establish and close out futures and options positions
depends on this secondary market.
The Funds will engage in futures contracts and related options in
conformity with the requirements of the Act, which entitles the Funds to an
exclusion from regulation provided that, among other representations, the
Funds use futures contracts and related options contracts solely for `bona
fide hedging purposes''within the meaning and intent of the Act, and with
respect to positions in futures contracts and related option contracts that
are not for bona fide hedging purposes, the Funds limit the aggregate
initial margin and premiums required to establish such positions to no more
than five percent of the liquidation value of their respective net assets,
after taking into account unrealized profits and unrealized losses on any
such contracts they have entered into and excluding the value of any
options that are `in-the-money'' at the time of purchase. When the Funds
purchase 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 Funds sell futures contracts, they 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.
FOREIGN SECURITIES
If the International Equity Fund maintains its assets abroad, the Board
Members must consider at least annually whether maintaining the
International Equity Fund's assets with custodians in foreign countries is
consistent with the best interests of the Fund and its shareholders. The
Board Members also must consider the degree of risk involved through the
holding of portfolio securities in domestic and foreign securities
depositories. However, in the absence of willful misfeasance, bad faith or
gross negligence, any losses resulting from the holding of the Funds'
portfolio securities in foreign countries and/or with foreign custodians or
securities depositories will be at the risk of shareholders, unless the
losses are insured. No assurance can be given that the Board Members'
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
Securities that are acquired by the International Equity Fund outside the
United States and that are publicly traded in the United States on a
foreign securities exchange or in a foreign securities market are not
considered by the Fund to be illiquid assets provided that: (i) the Fund
acquires and holds the securities with the intention of reselling the
securities in the foreign trading market, (ii) the Fund reasonably believes
it can readily dispose of the securities in the foreign trading market or
for cash in the United States, or (iii) foreign market and current market
quotations are readily available. Investments may be in securities of
foreign issuers, whether located in developed or undeveloped countries.
Investments in foreign securities where delivery takes place outside the
United States will have to be made in compliance with any applicable U.S.
and foreign currency restrictions and tax laws (including laws imposing
withholding taxes on any dividend or interest income) and laws limiting the
amount and types of foreign investments. Changes of government
administrations or economic or monetary policies in the United States or
abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for the Fund.
FOREIGN CURRENCY HEDGING TRANSACTIONS
In order to hedge against foreign currency exchange rate risks, the
International Equity Fund may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase put
or call options on foreign currencies, as described below. The Fund may
also conduct its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market.
The International Equity Fund may enter into forward foreign currency
exchange contracts (`forward contracts'') to attempt to minimize the risk
to the Fund from adverse changes in the relationship between the U.S.
dollar and foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date
which is individually negotiated and privately traded by currency traders
and their customers. The Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to `lock in'' the U.S.
dollar price of the security. In addition, for example, when the Fund
believes that a foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a forward contract to sell an amount of
that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency, or when the Fund
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a forward contract to buy that foreign
currency for a fixed dollar amount. This second investment practice is
generally referred to as `cross-hedging.'' Because in connection with the
Fund's forward foreign currency transactions an amount of the Fund's assets
equal to the amount of the purchase will be held aside or segregated to be
used to pay for the commitment, the Fund will always have cash, cash items
or high quality debt securities available sufficient to cover any
commitments under these contracts or to limit any potential risk. The
segregated account will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodities Futures Trading
Commission (`CFTC''), the CFTC may in the future assert authority to
regulate forward contracts. In such event, the Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the
Fund than if it had not engaged in such contracts.
The International Equity Fund may purchase and write put and call options
on foreign currencies for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against increases in the
dollar cost of foreign securities to be acquired. As is the case with other
kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium
received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuation in exchange rates, although, in the event of rate
movements adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S.
and foreign exchanges or over-the-counter.
The International Equity Fund may enter into exchange-traded contracts for
the purchase or sale for future delivery of foreign currencies (`foreign
currency futures'). This investment technique will be used only to hedge
against anticipated future changes in exchange rates which otherwise might
adversely affect the value of the Fund's portfolio securities or adversely
affect the prices of securities that the Fund intends to purchase at a
later date. The successful use of foreign currency futures will usually
depend on the ability of the adviser to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner,
the Fund may not achieve the anticipated benefits of foreign currency
futures or may realize losses.
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 canceled.
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 International Equity Fund, the
Short-Term Bond Fund, and the Intermediate U.S. Government Bond Fund invest
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
International 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 International 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 International 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 nongovernment
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 International 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 International 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.
SWAP AGREEMENTS
Among the hedging strategies into which the International Equity Fund may
enter are interest rate, currency and index swaps and the purchase or sale
of related caps, floors, and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a
later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal. A
currency swap is an agreement to exchange cash flows on a notional amount
of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional
amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent
that a specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
The International Equity Fund will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, and collars are entered into for
good faith hedging purposes, the Adviser and the Fund believe such
obligations do not constitute senior securities under the 1940 Act, and,
accordingly, will not treat them as being subject to its borrowing
restrictions. There is no minimal acceptable rating for a swap, cap, floor,
or collar to be purchased or held in the Fund's portfolio. If there is a
default by the counterparty, the Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
CREDIT FACILITIES
The Funds may purchase demand notes, which are borrowing arrangements
between a corporation and an institutional lender (such as the Funds)
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 the 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.
FOREIGN BANK INSTRUMENTS
The Equity Fund, the International 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.
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. Any bankruptcy,
receivership or default of the party providing the credit enhancement will
adversely affect the quality and marketability of the underlying security.
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 International 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%, 90%, 50%, 90%, and
90%, respectively. However, the underlying funds purchased by the
International Equity Fund may experience much higher portfolio turnover
rates resulting in higher brokerage commissions, and taxable gains or
losses. For the period from April 1, 1996 (date of initial public
investment) to August 31, 1996, the portfolio turnover rates for the Equity
Fund, the Pennsylvania Intermediate Municipal Bond Fund, the Short-Term
Bond Fund, and the Intermediate U.S. Government Bond Fund were 18%, 40%,
71%, and 54%, 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
The following is a list of the Funds' investment limitations. The
underlying funds purchased by the International Equity Fund may be subject
to different 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 and the International
Equity Fund, the deposit or payment by the Funds 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 and
the International 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 International Equity Fund
and 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.
With respect to securities comprising 75% of the value of its total
assets, the International Equity Fund will not invest more than 5% in
securities of any one issuer (other than cash, cash items, securities
of investment companies or securities issued or guaranteed by the
government of the United States or 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 (with
respect to all Funds except the International Equity Fund) 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 and the International Equity Fund may engage in transactions
involving financial and stock index futures contracts or options on
such futures contracts, and the International Equity Fund may engage
in foreign currency transactions, invest in options and futures on
foreign currencies, and purchase or sell forward contracts with
respect to foreign currencies and related options.
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 International 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 International Equity Fund may,
however, invest in investment companies that concentrate their assets
within one industry.
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 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.
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.''
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.
Martin B. Ebbert, Jr.
2301 Hollywood Parkway
York, PA 17403
Birthdate: June 13, 1939
Director of Marketvest Funds, Inc.
Trustee of Marketvest Funds
Retired since December 1995; prior thereto, Senior Vice President,
CoreStates Bank Trust Division; Director of Client Services, CoreStates
Hamilton Bank Trust Division (1990-1995); currently, Director of the York
Country Academy.
Clyde M. McGeary*
248 Willow Avenue
Camp Hill, PA 17011
Birthdate: October 31, 1930
Director of Marketvest Funds, Inc.
Trustee of Marketvest Funds
Retired from service to Commonwealth of Pennsylvania; formerly, Chief,
Division of Arts and Sciences, Pennsylvania Department of Education;
Partner, MCG, McGeary Consulting Group (1987-1992).
George A. Ominski
453 Haverhill Road
Lancaster, PA 17601
Birthdate: August 8, 1938
Director of Marketvest Funds, Inc.
Trustee of Marketvest Funds
President and Managing Director, Capital Advisors, Inc. (investment
advisory firm) (1982-Present).
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 and Vice President, Federated Administrative Services;
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.
As of December 16, 1996, the following shareholders of record owned 5% or
more of the outstanding shares of the Equity Fund: Donald & Co., nominee
account for Dauphin Deposit Bank & Trust Company, Harrisburg, Pennsylvania,
owned approximately 22,740,263.95 shares (49.79%); Greenco, nominee account
for Dauphin Deposit Bank & Trust Company, Harrisburg, Pennsylvania, owned
approximately 22,678,441.54 shares (49.66%).
As of December 16, 1996, the following shareholder of record owned 5% or
more of the outstanding shares of the Pennsylvania Intermediate Municipal
Bond Fund: Donald & Company, nominee account for Dauphin Bank & Trust
Company, Harrisburg, Pennsylvania, owned approximately 22,068,798.66 shares
(99.84%).
As of December 16, 1996, the following shareholders of record owned 5% or
more of the outstanding shares of the Short-Term Bond Fund: Donald & Co.,
nominee account for Dauphin Bank & Trust Company, Harrisburg, Pennsylvania,
owned approximately 6,860,392.55 shares (46.68%); Greenco, nominee account
for Dauphin Deposit Bank & Trust Company, Harrisburg, Pennsylvania, owned
approximately 7,792,606.82 shares (53.02%).
As of December 16, 1996, the following shareholders of record owned
approximately 5% or more of the outstanding shares of the Intermediate U.S.
Government Bond Fund: Donald & Co., nominee account for Dauphin Deposit
Bank & Trust Company, Harrisburg, Pennsylvania, owned approximately
18,148,683.34 shares (71.22%); Greenco, nominee account for Dauphin Deposit
Bank & Trust Company, Harrisburg, Pennsylvania, owned approximately
7,298,078.58 shares (28.64%).
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
Martin B. Ebbert, Jr.+ $375 $500 for the Corporation and
1 other investment company in the Fund Complex
George D. McKeon+
Director $3937.50 $5,250 for the Corporation and
1 other investment company in the Fund Complex
George A. Ominski+ $375$500 for the Corporation and
Director1 other investment company in the Fund Complex
Richard Seidel
Director $5,625 $7,500 for the Corporation and
1 other investment company in the Fund Complex
Clyde M. McGeary+ $5,625 $7,500 for the Corporation and
Director 1 other investment company in the Fund Complex
*Information is for the fiscal year ended February 28, 1997.
#The aggregate compensation is provided for the Corporation which is
comprised of three portfolios.
the date of the organizational meeting of the Board of Directors of the
Corporation, until his death on October 29, 1996. Mr. McGeary was elected
as a Director effective March 19, 1996. Messrs. Ebbert and Ominski became
Directors on December 16, 1996.
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
Martin B. Ebbert, Jr.+ $125
$500 for the Trust and
Trustee 1 other investment company in the Fund
Complex
George D. McKeon+
Trustee $1,325.50 $5,250 for the Trust and
1 other investment company in the Fund
Complex
George A. Ominski+ $125 $500 for the Trust and
Trustee 1 other investment company in the Fund
Complex
Richard Seidel
Trustee $1,875 $7,500 for the Trust and
1 other investment company in the Fund
Complex
Clyde M. McGeary+ $1,875 $7,500 for the Trust and
Trustee 1 other investment company in the Fund
Complex
*Information is for the fiscal year ended February 28, 1997.
#The aggregate compensation is provided for the Trust which is comprised of
two portfolios.
the date of the organizational meeting of the Board of Trustees of the
Trust, until his death on October 29, 1996. Mr. McGeary was elected as a
Trustee effective March 19, 1996. Messrs. Ebbert and Ominski became
Trustees on December 16, 1996.
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.
For the period from April 1, 1996 (date of initial public investment) to
August 31, 1996, the Fund's Adviser earned fees from the Equity Fund, the
Pennsylvania Intermediate Municipal Bond Fund, the Short-Term Bond Fund,
and the Intermediate U.S. Government Bond Fund in the amounts of
$1,490,546, $711,883, $349,666, and $638,837, respectively, of which
$298,109, $142,376, $69,933, and $127,767, respectively, were voluntarily
waived.
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.
For the period from April 1, 1996 (date of initial public investment) to
August 31, 1996, Federated Administrative Services received fees from the
Equity Fund, the Pennsylvania Intermediate Municipal Bond Fund, the Short-
Term Bond Fund, and the Intermediate U.S. Government Bond Fund in the
amounts of $170,141, $109,280, $50,827, and $96,643, respectively.
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, through its
registered transfer agent, Federated Shareholder Services Company, is
transfer agent for shares of the Funds and dividend disbursing agent for
the Funds. Federated Services Company 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 Funds
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 Funds 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 or the International Equity Fund to
other brokers or dealers. In addition, pursuant to an exemption granted by
the SEC, the Funds 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 or the International Equity Fund on the floor of any
national securities exchange, but may effect transactions for the Equity
Fund or the International 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 and the International Equity
Fund. The Equity Fund and the International Equity Fund have 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.
INTERNATIONAL EQUITY FUND ONLY
The distributor may assist in the execution of the International Equity
Fund's portfolio transactions to purchase underlying fund shares for which
it may receive distribution payments from the underlying funds or their
underwriters in accordance with the distribution plans of those funds. In
providing execution assistance, the distributor receives orders from the
Adviser; places them with the underlying fund's distributor, transfer agent
or other person, as appropriate; confirms the trade, price and number of
shares purchased; and assures prompt payment by the Fund and proper
completion of the order.
With respect to purchases of load fund shares, the Adviser may direct
substantially all of the International Equity Fund's orders to the
distributor, which may, in its discretion, direct the order to other
broker-dealers in consideration of sales of the Fund's shares.
The distributor may retain brokerage commissions on portfolio transactions
of mutual funds held in the Fund's portfolio, including funds which have a
policy of considering sales of their shares in selecting broker-dealers for
the execution of their portfolio transactions. Payment of brokerage
commissions to the distributor is not a factor considered by the Adviser in
selecting an underlying fund for investment.
Under certain circumstances, a sales charge incurred by the International
Equity Fund in acquiring shares of an underlying fund may not be taken into
account in determining the gain or loss on the disposition of the shares
acquired. If shares are disposed of within 90 days from the date they were
purchased and if shares of a new underlying fund are subsequently acquired
without imposition of a sales charge or imposition of a reduced sales
charge pursuant to a right granted to the Fund to acquire shares without
payment of a sales charge or with the payment of a reduced charge, then the
sales charge paid upon the purchase of the initial shares will be treated
as paid in connection with the acquisition of the new underlying fund's
shares rather than the initial shares.
For the period from April 1, 1996 (date of initial public investment) to
August 31, 1996, the Equity Fund, the Pennsylvania Intermediate Municipal
Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund paid total brokerage commissions of $156,049, $0, $0, and $0,
respectively.
For the period from April 1, 1996 (date of initial public investment) to
August 31, 1996, the Equity Fund paid $3,590 in brokerage commissions to
Hopper Soliday. These brokerage commissions represent 2.3% of the aggregate
brokerage commissions paid by the Equity Fund, and 3.2% of the aggregate
dollar amount of transactions involving the payment of brokerage
commissions.
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.
For the period from April 1, 1996 (date of initial public investment) to
August 31, 1996, the Equity Fund, the Pennsylvania Intermediate Municipal
Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund paid no fees pursuant to the Distribution Plan.
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.
EXCHANGING SECURITIES FOR FUND SHARES
The Funds may accept securities in exchange for Fund shares. A Fund will
allow such exchanges only upon prior approval of a Fund and a determination
by a Fund and the Adviser that the securities to be exchanged are
acceptable.
Any securities exchanged must meet the investment objective and policies of
a Fund, must have a readily ascertainable market value, and must not be
subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least
$25,000.
Securities accepted by a Fund will be valued in the same manner as a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of a
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription
or other rights attached to the securities become the property of a Fund,
along with the securities.
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.
With respect to International Equity Fund, dividend income is recorded on
the ex-dividend date, except certain dividends from foreign securities
where the ex-dividend date may have passed, are recorded as soon as the
Fund is informed of the ex-dividend date.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Equity Fund, the International 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 and the International 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.
The underlying funds in which the International Equity Fund may invest
value securities in their portfolios for which market quotations are
readily available at their current market value (generally the last
reported sale price) and all other securities and assets at fair value
pursuant to methods established in good faith by the board of
directors/trustees of the underlying fund.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the International Equity Fund values foreign securities at the latest
closing price on the exchange on which they are traded immediately prior to
the closing of the New York Stock Exchange. Certain foreign currency
exchange rates may also be determined at the latest rate prior to the
closing of the New York Stock Exchange. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchanges rates may occur
between the times at which they are determined and the closing of the New
York Stock Exchange. If such events materially affect the value of
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Board Members, although the actual
calculation may be done by others.
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.
These requirements may restrict the degree to which a Fund may engage in
short-term trading and certain hedging transactions and may limit the range
of a Fund's investments.
If permitted by its investment policies, a Fund's transactions in futures
contracts, forward contracts, foreign currency transactions, options and
certain other investment and hedging activities are subject to special tax
rules. In a given case, these rules may accelerate income to the Fund,
defer its losses, cause adjustments in the holding periods of the Fund's
assets, convert short-term capital losses into long-term capital losses or
otherwise affect the character of the Fund's income. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. A Fund will endeavor to make any available elections
pertaining to these transactions in a manner believed to be in the best
interest of the Fund and its shareholders.
Any dividends declared by the Fund in October, November or December to
shareholders of record during those months and paid during the following
January are treated, for tax purposes, as if they were received by each
shareholder on December 31 of the year in which they were declared.
INTERNATIONAL EQUITY FUND
Income the International Equity Fund receives from sources within various
foreign countries may be subject to foreign income taxes withheld at the
source. If the Fund has at least 50% of its assets invested in foreign
securities at the end of its taxable year, it may elect to pass through the
foreign tax credit to its shareholders. It is expected that the
International Equity Fund will not have more than 50% of the value of its
total assets at the close of its taxable year invested in foreign
securities, and therefore will not be permitted to make this election and
`pass through'' to its shareholders. Each shareholder's respective pro
rata share of foreign taxes the Fund pays will, therefore, be netted
against their share of the Fund's gross income.
The International Equity Fund may invest in any non-U.S. corporations
which could be treated as passive foreign investment companies ("PFICs").
This could result in adverse tax consequences upon the disposition of, or
the receipt of "excess distributions" with respect to, such equity
investments. To the extent the International Equity Fund does invest in
PFICs, it may adopt certain tax strategies to reduce or eliminate the
adverse effects of certain federal tax provisions governing PFIC
investments. Many non-U.S. banks and insurance companies may not be treated
as PFICs if they satisfy certain technical requirements under the Code. To
the extent that the International Equity Fund does invest in foreign
securities which are determined to be PFIC securities and is required to
pay a tax on such investments, a credit for this tax would not be allowed
to be passed through to its shareholders. Therefore, the payment of this
tax would reduce the International Equity Fund's economic return from its
PFIC shares, and excess distributions received with respect to such shares
are treated as ordinary income rather than capital gains.
An underlying fund may inadvertently invest in non-U.S. corporations which
would be treated as Passive Foreign Investment Companies ("PFICs") or
become a PFIC under the Code. This could result in adverse tax consequences
upon the disposition of, or the receipt of "excess distributions" with
respect to, such equity investments. To the extent an underlying fund does
invest in PFICs, it may elect to treat the PFIC as a "qualified electing
fund" or mark-to-market its investments in PFICs annually. In either case,
the underlying fund may be required to distribute amounts in excess of its
realized income and gains. To the extent that the underlying fund itself is
required to pay a tax on income or gain from investment in PFICs, the
payment of this tax would reduce the International Equity Fund's economic
return.
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 or
the International Equity Fund, if either Fund were a regular corporation,
and to the extent designated by the 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, the
International Equity 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
For the period from April 1, 1996 (date of initial public investment) to
August 31, 1996, the cumulative total returns for the Equity Fund, the
Pennsylvania Intermediate Municipal Bond Fund, the Short-Term Bond Fund,
and the Intermediate U.S. Government Bond Fund were (3.09%), (1.93%),
(2.26%), and (2.96%), respectively.
Cumulative total return reflects a Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of
the maximum sales charge. Each Fund's total return is representative of
only five months of investment activity since the Funds' date of initial
public investment.
The average annual total return for a 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 yields for the Equity Fund, the Pennsylvania Intermediate Municipal
Bond Fund, the Short-Term Bond Fund, and the Intermediate U.S. Government
Bond Fund for the 30-day period ended August 31, 1996 were 1.50%, 3.80%,
5.49%, and 5.82%, respectively.
The yield for a 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 Pennsylvania Intermediate Municipal Bond Fund's tax-equivalent yield
for the thirty-day period ended
August 31, 1996 was 6.60%.
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 42.4% combined federal and state 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 on the next page 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 1996
STATE OF PENNSYLVANIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
17.80% 30.80% 33.80% 38.80% 42.40%
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750
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.
O MORGAN STANLEY EUROPE, AUSTRALIA, AND FAR EAST (EAFE) Index is a
market capitalization weighted foreign securities index, which is
widely used to measure the performance of European, Australian, New
Zealand and Far Eastern stock markets. The index covers approximately
1,020 companies drawn from 18 countries in the above regions. The
index values its securities daily in both U.S. dollars and local
currency and calculates total returns monthly. EAFE U.S. dollar total
return is a net dividend figure less Luxembourg withholding tax. The
EAFE is monitored by Capital International, S.A., Geneva, Switzerland.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Funds' returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Funds can
compare their performance, or performance for the types of securities in
which they invest, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Funds may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Funds' portfolio managers and their views and
analysis on how such developments could affect the Funds. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute (`ICI'').
For example, according to the ICI, twenty-seven percent of American
households are pursuing their financial goals through mutual funds. These
investors, as well as businesses and institutions, have entrusted over $3
trillion to the more than 5,500 funds available.
FINANCIAL STATEMENTS
The Financial Statements for Marketvest Equity Fund, Marketvest
Pennsylvania Intermediate Municipal Bond Fund, Marketvest Short-Term Bond
Fund, and Marketvest Intermediate U.S. Government Bond Fund are contained
in their Combined Semi-Annual Report for the period ended August 31, 1996
and are incorporated herein by reference. (File No. 811-7383).
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 57061D107
Cusip 57061E105
Cusip 57061E204
Cusip 57061E303
Cusip 57061D206
G01560-02 (3/97)
