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[GOVERNOR FUNDS LOGO]
ANNUAL REPORT
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JUNE 30, 1999
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www.governorfunds.com
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Governor Funds
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Dear Governor Fund Shareholder:
We are pleased to present this annual report for the Governor Funds, a mutual
fund family comprised of twelve funds designed to provide investment solutions
to everyday investors. The Governor Funds include eight funds converted from the
KeyPremier Funds--a proprietary fund group previously advised by a Keystone
Financial affiliate--and four new funds. The report covers the 12-month period
ended June 30, 1999.
Global financial markets were volatile during the period. Early on, economic
setbacks in Asia, Russia and Latin America led to fears of a U.S. economic
slowdown and global liquidity problems. Those concerns eased after a series of
interest rate cuts by the Federal Reserve Board (the Fed). Early in 1999, some
investors worried about the potential for inflation. Those fears led to rising
interest rates. The Fed addressed those concerns in late June by raising the
federal funds rate.
The period also witnessed some remarkable turnarounds in various markets and
sectors. Late in the period, small-company shares, cyclicals and other value
stocks performed well. The red-hot Internet sector cooled down considerably.
European markets lost steam, but the depressed Japanese stock market rebounded.
The Governor Funds continued to pursue long-term values consistent with their
investment goals. That approach led to strong returns for funds such as the
Emerging Growth Fund, which returned 20.74% from its inception on July 1, 1998.
Meanwhile, changes in the financial markets once again highlighted the
importance of diversification. Four new Governor Funds will help investors
pursue that goal. The International Equity Fund invests in a diversified
portfolio of non-U.S. equity securities, offering investors exposure to some of
the world's best investment opportunities.
Three new Lifestyle Funds provide investors with the opportunity to assemble a
diversified portfolio appropriate for their investment objectives and risk
tolerance. Each Lifestyle Fund invests its assets in other Governor Funds. For
example, the Lifestyle Conservative Growth Fund currently invests up to 30% of
its assets in money market funds, 30% to 60% in fixed-income funds and 10% to
40% in equity funds. The Lifestyle Moderate Growth Fund takes a more aggressive
approach, and the Lifestyle Growth Fund is more aggressive still.
The following pages include remarks from the portfolio managers of the Governor
Funds. Robert Andres and William Martindale, managing principals of Martindale
Andres & Company, Inc., and Thomas McGarrity, executive director of Brinson
Partners, Inc., offer overviews of the economic and financial factors that
influenced their investment decisions during the past year. In addition,
portfolio managers of each fund offer their perspectives on the Fund's
strategies and performances. Finally, you will find a schedule of each Fund's
holdings, with financial highlights and statements. The information should help
you to understand the role each Fund can play in your investment portfolio.
Thank you for your investment in the Governor Funds. Please feel free to contact
the Funds at (800) 766-3960 or your investment representative with questions or
comments.
Sincerely,
/s/ Robert E. Leech
Robert E. Leech
Chairman of the Governor Funds
This material is authorized for distribution only when preceded or accompanied
by a prospectus. Governors Group Advisors, Inc., a Keystone Financial affiliate,
serves as the investment advisor. Martindale Andres & Company, Inc. is the
sub-advisor for all the funds, except the International Equity Fund, which is
sub-advised by Brinson Partners, Inc. The Funds are distributed by BISYS Fund
Services Limited Partnership. Mutual funds are NOT FDIC INSURED and are not
insured by any other government agency or by the U.S. Government. Shares of the
Funds are not bank deposits or obligations of or guaranteed by Keystone Bank,
its parent company or its affiliates. The Funds are subject to investment risks,
including possible loss of principal, and there can be no assurance that the
money market funds will be able to maintain a stable net asset value of $1.00
per share. There is no bank guarantee, and shares of the Funds may lose value.
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MESSAGE FROM THE SUB-ADVISORS Governor Funds
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Dear Governor Fund Shareholder:
We are pleased to send you this annual report for the year ended June 30, 1999.
The period was marked by strong performance by the U.S. stock market, mixed
results from foreign markets and currencies, and volatility in the bond market.
The U.S. economy continued to grow at a moderate pace; corporations posted
healthy earnings; and inflation and interest rates remained low.
Large-company stocks, as measured by the Standard & Poor's 500 Index,(1) gained
22.76% during the period, while the Morgan Stanley Capital International Europe,
Australia and Far East (MSCI EAFE) Index(2) gained 7.42%. The Russell 2000
Index(3) of small-company shares posted a 1.50% return. However, those gains did
not come without risk. Stocks suffered losses early in the period as investors
worried that the spreading effects of the Asian financial crisis would create a
global credit crunch and hurt U.S. corporate profits. The S&P 500 Index fell by
roughly 10% in the third quarter of 1998; the MSCI EAFE Index dropped nearly
15%; and the Russell 2000 Index declined 20%.
Investors were reassured during the fourth quarter of 1998 by evidence that
global market problems had not affected the U.S. economy significantly. The Fed
also added liquidity to the market by cutting short-term interest rates three
times. The S&P 500 and the Russell 2000 posted strong gains during the fourth
quarter, gaining 21.40% and 16.30%, respectively.
New concerns surfaced in the second half of the 12-month period. Specifically,
investors worried that stronger-than-expected economic growth would lead to
higher inflation and force the Fed to raise rates (in fact, the Fed eventually
did raise rates late in the period). Investors initially favored shares of
large, blue-chip companies in that environment: The S&P 500 gained 4.98% during
the first quarter of 1999, versus a 5.4% loss for the Russell 2000.
However, investors began to look beyond the largest firms during the second
quarter of 1999, resulting in strong performance for small- and mid-cap shares,
as well as for value-oriented, cyclical stocks. The second quarter of 1999
marked the first time since the third quarter of 1997 that small-company
shares--which gained 15.50%--outperformed large-company stocks. We believe that
this "broadening out" of the market resulted from several factors. For one,
signs of robust economic growth with low inflation increased investor confidence
in the earning power of "value" companies, which include many cyclical firms.
Also, several large growth companies, including Gillette and Coca-Cola, posted
disappointing earnings. That, in turn, caused investors to worry about the high
valuations attached to large-cap growth stocks.
Many of the same themes played out in the major foreign equity markets as in the
United States. Fears about the possible global credit crunch brought stock
prices down considerably during the third quarter of 1998. Concerns were eased
by the Fed's actions, and stock markets around the world rallied 30% to 40% over
the subsequent three quarters. Growth stocks led the way in 1998, while value
stocks have outperformed so far in 1999. The currency markets were strong in the
second half of 1998, driven by Euro euphoria leading into the EMU currency
conversion on January 1, 1999, and Japanese economic stimulus announcements
causing upward-moving Japanese interest rates and an extremely strong yen as a
result. The reverse has been true so far in 1999 as weak economic results in
Europe have turned Euro euphoria to depression. The yen has weakened and
Japanese interest rates have fallen somewhat.
Sentiment in the fixed-income market went from extreme bullishness to
bearishness during the period. Yields on Treasury bonds (which move in the
opposite direction of bond prices) fell early in the period, as global
uncertainty and possible signs of deflation caused investors to flock to the
safety and liquidity of Treasuries. During the fourth quarter of 1998, long-
term rates fell to their lowest level in 30 years.
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MESSAGE FROM THE SUB-ADVISORS Governor Funds
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However, yields rose during the second half of the period, as continued strong
economic growth caused investors to worry that the Fed would raise rates to
prevent a spike in inflation. The Fed finally raised the federal funds rate by
25 basis points (0.25%) at the end of June.
As equity markets continue to post record gains, it is important that investors
maintain reasonable long-term expectations. The stock market's long-term annual
gains have been around 8% to 10% during 1998 and 1999, significantly lower than
the returns we have experienced in recent years.
Uncertainty regarding inflation has caused some volatility in the fixed-income
markets. However, we believe that interest rates will be fairly stable during
the coming months. After five months of price erosion, bonds are somewhat
undervalued at current levels, and most sectors of the investment-grade bond
market offer attractive values.
Finally, the recent strong showing by value stocks and small-company shares
reminds us that it is extremely difficult to predict which asset classes will
perform well during a given period. Fortunately, it's not necessary to do so.
Instead, investors can build and maintain well-diversified portfolios that offer
exposure to large- and small-company shares, international investments, bonds
and cash. Such a mix will rarely, if ever, match the returns of the market's
hottest sectors, but it will sharply reduce investment risk while allowing
investors to pursue their financial goals.
Sincerely,
/s/ Robert P. Andres
Robert P. Andres
Managing Principal, Fixed Income Investments
Martindale Andres & Company
/s/ William C. Martindale Jr.
William C. Martindale
Managing Principal, Equity Investments
Martindale Andres & Company
/s/ Thomas C. McGarity
Thomas C. McGarrity
Executive Director
Brinson Partners, Inc.
(1)The Standard & Poor's 500 Index is an unmanaged index that is generally
representative of the performance of the large-capitalization equity market.
The index does not reflect the deduction of fees associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
(2)The Morgan Stanley Capital International Europe, Australia and Far East (MSCI
EAFE) Index is an unmanaged index that is generally composed of 20 European
and Pacific Basin countries and weighted by market capitalization. The index
does not reflect the deduction of fees associated with a mutual fund, such as
investment management and fund accounting fees. The Fund's performance
reflects the deduction of fees for these value-added services.
(3)The Russell 2000 Index is an unmanaged index that is generally representative
of 2,000 small-capitalization stocks in the U.S. stock market. The index does
not reflect the deduction of fees associated with a mutual fund, such as
investment management and fund accounting fees. The Fund's performance
reflects the deduction of fees for these value-added services.
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MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR ESTABLISHED GROWTH FUND(+)
Q. HOW DID THE ESTABLISHED GROWTH FUND PERFORM RELATIVE TO ITS BENCHMARK INDEX
DURING THE 12 MONTHS ENDING JUNE 30, 1999?
A. The Established Growth Fund was up 16.20% (without sales load)+ for the
period, versus a 22.76% return for the Standard & Poor's 500 Index.
Investors were concerned about economic troubles in Asia, Latin America and
Eastern Europe and therefore fled to shares of high-quality companies.
Consequently, a handful of the largest securities that constitute the S&P
500 had big gains, while the average stock underperformed on a relative
basis. Since the Fund focuses on the smaller companies within the large
capitalization universe, this trend adversely impacted performance.
Q. HOW DID THE STOCK MARKET ENVIRONMENT AFFECT THE FUND'S PERFORMANCE DURING THE
PERIOD?
A. The American economy stayed strong during the Asian and Latin American
financial crises late last summer, but most securities were very volatile.
Toward the end of 1998 and into the first quarter of 1999, stocks of large-
capitalization companies did much better than those of small-cap firms. The
market subsequently broadened somewhat, and small-company stocks
outperformed shares of larger firms. The severity of the autumn 1998
downturn provided opportunities to accumulate a variety of good stocks at
relatively low prices.
Q. IN WHAT KINDS OF STOCKS OR SECTORS DID YOU FIND OPPORTUNITIES?
A. Many stocks contributed positively to the Fund's performance. Such shares
included technology stocks such as Sun Microsystems (2.6% of the portfolio)
and America Online (1.7%). During the period we dramatically reduced the
Fund's large position in AOL because its valuation seemed unduly high.
Consumer stocks such as Gap Stores (2.9% of the portfolio) and
telecommunications firms such as Sprint (3.5%) and Motorola (1.8%) also were
strong contributors to the Fund's gains. Some individual stocks disappointed
us: Unifi Corp. (2.0% of the portfolio), Compaq (0.9%) and pharmaceutical
firm AstraZeneca (0.4%) negatively impacted the Fund's relative performance.
Although we reduced our holdings in these stocks, we did not eliminate them
entirely from the portfolio in part because their lower prices greatly
reduced risk. We established new positions in Centocor (1.3% of the
portfolio), a developer of biotechnology-related health care products, and
Nortel Networks (1.0%), which provides services for networking.*
Q. WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET, AND HOW WILL YOU MANAGE THE FUND
WITH THAT IN MIND?
A. We think the stock market will continue to do well in a benign inflationary
environment as long as economies around the world stabilize and begin to
record modest growth. We do not expect the returns of large-cap shares to
rival those of last year. As a result, we are optimistic about prospects for
small- and mid-cap shares. And, we will continue to seek out well-managed
growth companies that can be purchased at reasonable valuations.
(+)Small-capitalization funds typically carry additional risks, since smaller
companies generally have a higher risk of failure and by definition, are not
as well established as "blue-chip" companies. Historically, smaller
companies' stocks have experienced a greater degree of market volatility than
average.
*The Fund's portfolio composition is subject to change.
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MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR ESTABLISHED GROWTH FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1999
------------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
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<S> <C> <C>
One Year 16.20% 10.99%
Two Years 21.92% 19.17%
Three Years 23.80% 21.93%
Life of Fund (Inception 1/1/95) 26.94% 25.64%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
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[Established Growth Fund Performance Graph]
<TABLE>
<CAPTION>
THE GOVERNOR ESTABLISHED STANDARD & POOR'S COMPOSITE
GROWTH FUND+ INDEX OF 500 STOCKS
------------------------ ---------------------------
<S> <C> <C>
1/1/95 9550 10000
6/30/95 11605 12015
6/30/96 14699 15144
6/30/97 18763 20393
6/30/98 24002 26553
6/30/99 27890 32596
</TABLE>
The Fund's performance is compared to the Standard & Poor's 500 Index, which is
an unmanaged index that is generally representative of the performance of the
large-capitalization equity market. The index does not reflect the deduction of
fees associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for these
value-added services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
INVESTMENT RETURN AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
(+)The quoted performance of the Governor Established Growth Fund includes
performance of certain collective trust fund ("Commingled") accounts advised
by Martindale Andres & Company, Inc., for periods dating back to 1/1/95 and
prior to the Established Growth Fund's commencement of operations on 12/2/96,
as adjusted to reflect the expenses associated with the Fund. The Commingled
accounts were not registered with the Securities and Exchange Commission and,
therefore, were not subject to the investment restrictions imposed by law on
registered mutual funds. If the Commingled accounts had been registered, the
Commingled accounts' performance may have been adversely affected. The
performance shown reflects the deduction of fees for value-added services
associated with a mutual fund, such as investment management and fund
accounting fees. The performance also reflects reinvestment of all dividends
and capital-gains distributions.
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<PAGE> 7
MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR AGGRESSIVE GROWTH FUND(+)
Q. HOW DID THE AGGRESSIVE GROWTH FUND PERFORM FOR THE 12 MONTHS ENDED JUNE 30,
1999?
A. The Aggressive Growth Fund delivered a return of 9.24% (without sales
load)(1) for the period. Its benchmark, the Russell 2000 Index, returned
1.50% for the same period.
Q. WHAT WERE THE MARKET CONDITIONS FOR SMALL-COMPANY STOCKS?
A. The liquidity crisis of 1998 greatly dampened returns for small- and mid-cap
stocks in the first half of the period. That underperformance created a
significant valuation gap between large- and small-company shares. As the
economy showed signs of sustainable uninterrupted growth for fiscal 1999,
investors were less willing to pay premiums for large capitalization growth
companies. As a result, the market broadened, and small-company,
value-oriented stocks enjoyed a rally in the second half of this year, when
investors sought to take advantage of the large valuation gap. Despite that
rally, however, small- and mid-cap stocks underperformed large-cap stocks
for the year.
Q. WHAT WAS YOUR STRATEGY IN THAT ENVIRONMENT? IN WHAT STOCKS OR SECTORS DID YOU
FIND OPPORTUNITIES?
A. We typically maintain a fully invested portfolio. No less than 94.8% of the
Fund's assets were invested at any given time despite the turmoil in the
small-cap market. That said, we kept a little more cash than normal for
portions of the period, which helped the Fund's performance. We took
advantage of this valuation disparity by targeting small capitalization
companies that not only have excellent growth prospects in 1999, but are
also well positioned to sustain high rates of growth into the next decade.*
The Fund benefited from investments in technology shares such as VISX (3.6%
of the portfolio), which makes laser vision-correction equipment. Affiliated
Computer (3.6%), a provider of technology services to private sector firms
and government departments, was another strong contributor.*
We liquidated the Fund's holdings in FingerHut, the discount retailer, in
part because its valuation increased. We eliminated the Fund's holdings in
Netscape (later bought by America Online); it simply became too large a
stock for a small- to mid-cap fund. We sold the Fund's holdings in
Integrated Circuits, and we reduced the Fund's significant weighting in
Compuware (4.6%). We established holdings in Transaction Network (1.9%), a
communications company that specializes in transaction-oriented data
services, and Security Dynamics Technologies (0.8% at the end of the
period), a firm that provides products and services for e-commerce
security.*
Q. WHAT IS YOUR OUTLOOK FOR THE SMALL-CAP MARKET, AND HOW WILL YOU MANAGE THE
FUND WITH THAT IN MIND?
A. Looking ahead, if the economic and interest rate environment are relatively
stable, we believe investors will continue to focus on companies with strong
earnings prospects without regard to market capitalization. As a result, we
will continue to pursue growth at a reasonable price. Also, we will seek to
keep turnover low, while maintaining adequate diversification among shares
of strong companies. In our opinion, small- and mid-cap stocks are
significantly undervalued relative to large-company shares. Now that
liquidity fears have subsided, that significant valuation gap should narrow.
As a result, we expect the market will continue to broaden, resulting in
better valuations for small-to mid-cap companies.
(+)Small-capitalization funds typically carry additional risks, since smaller
companies generally have a higher risk of failure and, by definition, are not
as well established as "blue-chip" companies. Historically, smaller
companies' stocks have experienced a greater degree of market volatility than
average.
*The Fund's portfolio composition is subject to change.
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MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR AGGRESSIVE GROWTH FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1999
------------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
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<S> <C> <C>
One Year 9.24% 4.31%
Two Years 10.97% 8.46%
Three Years 12.49% 10.77%
Life of Fund (Inception 7/1/94) 16.68% 15.59%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
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[Aggressive Growth Fund Performance Graph]
<TABLE>
<CAPTION>
THE GOVERNOR AGGRESSIVE
GROWTH FUND(1) THE RUSSELL 2000 INDEX
----------------------- ----------------------
<S> <C> <C>
7/1/94 9550 10000
6/30/95 11520 12007
6/30/96 14493 14875
6/30/97 16752 17304
6/30/98 18884 20160
6/30/99 20629 20462
</TABLE>
The Fund's performance is compared to the Russell 2000 Index, which is an
unmanaged index that is generally representative of 2,000 small-capitalization
stocks in the U.S. stock market. The index does not reflect the deduction of
fees associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for these
value-added services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
INVESTMENT RETURN AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
(1)The quoted performance of the Governor Aggressive Growth Fund includes
performance of certain collective trust fund ("Commingled") accounts advised
by Martindale Andres & Company, Inc. for periods dating back to 7/1/94 and
prior to the Aggressive Growth Fund's commencement of operations on 2/3/97,
as adjusted to reflect the expenses associated with the Fund. The Commingled
accounts were not registered with the Securities and Exchange Commission and,
therefore, were not subject to the investment restrictions imposed by law on
registered mutual funds. If the Commingled accounts had been registered, the
Commingled accounts' performance may have been adversely affected. The
performance shown reflects the deduction of fees for value-added services
associated with a mutual fund, such as investment management and fund
accounting fees. The performance also reflects reinvestment of all dividends
and capital-gains distributions.
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<PAGE> 9
MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR EMERGING GROWTH FUND(+)
Q. HOW DID THE EMERGING GROWTH FUND PERFORM RELATIVE TO ITS INDEX DURING THE 12-
MONTH PERIOD BETWEEN JULY 1, 1998, AND JUNE 30, 1999?
A. The Fund performed exceptionally well during its first year of operation.
The Fund returned 20.74% (without sales load), while its benchmark, the
Russell 2000 Index, returned 1.50% for the period.
Q. WHAT WAS THE ENVIRONMENT FOR MICRO-CAP STOCKS?
A. While small-caps enjoyed a rally in October, large-cap growth stocks
outperformed other stocks for much of the period. But the market broadened
during the second quarter of 1999, as many investors began to shy away from
expensive large-cap growth stocks and increased their exposure to micro-,
small- and mid-caps. This trend, which was accompanied by increased emphasis
on investment fundamentals, positively affected the Fund, which invests in
companies with market capitalizations of $30 million to $50 million.
Q. WHAT WAS YOUR STRATEGY IN THAT ENVIRONMENT?
A. Consistent with past practices, we maintained a well-diversified portfolio
of well-managed companies with attractive long-term growth prospects. We
avoided overpriced shares of Internet stocks with high price-to-earnings
multiples. We were slightly overweight in the health-care sector, where
reimbursement concerns drove down stock prices and created some bargains.
For example, we invested in Syncor (3.6% of the portfolio), a firm that
provides radiopharmaceuticals, to hospitals and managed-care facilities. We
were also overweight in the capital goods sector, which was inexpensive
despite strong long-term growth prospects. For example, our purchase of
A.S.V. Inc. (4.6%), a firm that produces specialty construction vehicles,
proved to be a prudent purchase.*
Q. WHAT OTHER MOVES DID YOU MAKE TO HELP BOOST THE FUND'S RETURNS?
A. We pared back on holdings of companies that had either reached our price or
valuation targets and whose fundamentals failed to meet our criteria. For
example, we sold the Fund's holdings in JAKKS Pacific (a toy manufacturer)
when its shares reached a price target of $28, up from $14.*
When micro-caps fell from favor during the first quarter of 1999, we took
advantage of that opportunity to establish holdings in companies in which we
have a high degree of confidence. For example, we increased our position in
Transaction Network Service Inc. (4.6%), when its stock was depressed.
Q. WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET, AND HOW WILL YOU MANAGE THE FUND
WITH THAT IN MIND?
A. We are cautiously optimistic. We think micro-cap stocks will continue to
gain favor among investors, who seem increasingly inclined to follow
fundamentals instead of trends. This type of market should provide a
favorable environment for the Fund.
(+)Small-capitalization funds typically carry additional risks, since smaller
companies generally have a higher risk of failure and, by definition, are not
as well established as "blue-chip" companies. Historically, smaller
companies' stocks have experienced a greater degree of market volatility than
average.
*The Fund's portfolio composition is subject to change.
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<PAGE> 10
MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR EMERGING GROWTH FUND
AGGREGATE TOTAL RETURNS AS OF JUNE 30, 1999
-------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- --------------------------------------------------
<S> <C> <C>
Life of Fund (Inception 7/1/98) 20.74% 15.32%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE GOVERNOR EMERGING GROWTH
FUND THE RUSSELL 2000 INDEX
---------------------------- ----------------------
<S> <C> <C>
7/1/98 9550 10000
7/31/98 9351 9191
8/31/98 8567 7406
9/30/98 8701 7985
10/31/98 9150 8311
11/30/98 9885 8747
12/31/98 10540 9288
1/31/99 10348 9411
2/28/99 9799 8649
3/31/99 9558 8784
4/30/99 10271 9571
5/31/99 10800 9711
6/30/99 11532 10150
</TABLE>
The Fund's performance is compared to the Russell 2000 Index, which is an
unmanaged index that is generally representative of 2,000 small-capitalization
stocks in the U.S. stock market. The index does not reflect the deduction of
fees associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for these
value-added services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
INVESTMENT RETURN AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
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<PAGE> 11
MESSAGE FROM THE SUB-ADVISORS Governor Funds
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THE GOVERNOR INTERNATIONAL EQUITY FUND(+)
Q. HOW DID THE INTERNATIONAL EQUITY FUND PERFORM RELATIVE TO ITS INDEX FROM ITS
INCEPTION ON FEBRUARY 9, 1999, TO JUNE 30, 1999?
A. The Fund returned 5.90% (without sales load), from its inception on 2/9/99.
That compares to a 4.39% return for its benchmark, the Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East Index.
Q. WHAT WERE THE MARKET CONDITIONS FOR INTERNATIONAL STOCKS DURING THE PERIOD,
AND HOW DID THAT ENVIRONMENT AFFECT THE FUND'S PERFORMANCE?
A. Fears that the Fed would raise interest rates in the United States in
response to inflationary concerns dampened performance in many overseas
markets early this year. But those concerns faded late in the period after
the Fed raised the federal funds rate by a modest 0.25%. Meanwhile, economic
weakness has plagued most of Continental Europe, particularly Germany and
the United Kingdom. European markets had mixed results, but Japan's stock
market rebounded smartly during the period.
Q. WHAT WAS YOUR STRATEGY IN THAT ENVIRONMENT?
A. We invested in countries with the best relative value. During the recent
period, Japan was attractive relative to Europe; as a result, we increased
our weighting in Japan from underweight to neutral: The Fund held 24% of its
assets in Japan at the end of the period. That decision helped boost the
Fund's performance, due to the climb in Japan's stock market during the
period.*
We reduced our exposure in Europe from overweight to neutral. We favored the
Northern European countries, such as Germany, Belgium and the Netherlands,
over Southern European countries. Unfortunately, German markets, which had
been bid up on expectations of strong performance, did not perform as well
as expected. We also had 22.5% of the Fund's assets in the United Kingdom.*
Q. IN WHAT KINDS OF STOCKS OR SECTORS DID YOU FIND OPPORTUNITIES?
A. Value stocks were relatively inexpensive because they have lagged growth
stocks throughout the world's markets for the past few years. We favored
value stocks in industries such as metal and chemicals over stocks in
relatively expensive sectors such as pharmaceuticals, telecommunications and
consumer goods. That strategy paid off when the market broadened during the
second quarter.
Q. WHAT OTHER MOVES DID YOU MAKE TO HELP BOOST THE FUND'S RETURNS?
A. The Fund moved early in the period from an underweighting to a neutral
weighting in Australia and New Zealand. We found many opportunities to buy
inexpensive shares of good companies in those markets, which did well during
the last quarter.
Q. WHAT IS YOUR OUTLOOK FOR INTERNATIONAL MARKETS GOING FORWARD? HOW WILL YOU
MANAGE THE FUND WITH THAT IN MIND?
A. We are cautiously optimistic. We expect to continue to keep the Fund's
weighting neutral in Europe, where we anticipate some gradual improvement in
economic conditions. We will also remain neutral in Japan. We expect further
economic growth there as well, but the country still needs to make
structural and economic reforms to support its stock market. Southeast Asia
is still unsettled, but we may see a slow rebound in the region. If that
happens, we will consider a move to a neutral weighting.
(+)International investing involves increased risk and volatility.
*The Fund's portfolio composition is subject to change.
- --------------------------------------------------------------------------------
-10-
<PAGE> 12
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR INTERNATIONAL EQUITY FUND
AGGREGATE TOTAL RETURNS AS OF JUNE 30, 1999
-------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- --------------------------------------------------
<S> <C> <C>
Life of Fund (2/9/99) 5.90% 1.15%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
[The International Equity Fund Perform. Graph]
<TABLE>
<CAPTION>
THE INTERNATIONAL EQUITY FUND THE MSCI EAFE INDEX
----------------------------- -------------------
<S> <C> <C>
2/9/99 9550.00 10000.00
2/99 9570.00 9764.00
3/99 9838.00 10174.00
4/99 10248.00 10588.00
5/99 9742.00 10046.00
6/99 10115.00 10439.00
</TABLE>
The Fund's performance is compared to the Morgan Stanley Capital International
(MSCI) Europe, Australia and Far East Index, which is an unmanaged index
composed of 20 European and Pacific Basin countries and weighted by market
capitalization. The index does not reflect the deduction of fees associated with
a mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN
AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
- --------------------------------------------------------------------------------
-11-
<PAGE> 13
[This page intentionally left blank]
- --------------------------------------------------------------------------------
-12-
<PAGE> 14
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR INTERMEDIATE TERM INCOME FUND
Q. HOW DID THE FUND PERFORM DURING THE 12 MONTHS ENDED JUNE 30, 1999?
A. The Fund posted a total return of 0.82% (without sales load) during the
period. That compares to a 3.15% total return for the Lehman Brothers
Aggregate Bond Index, and a return of 2.00% for the Lipper Intermediate
Investment Grade Debt Funds Average.
Q. WHAT WERE THE CONDITIONS IN THE TAXABLE BOND MARKET DURING THE PERIOD?
A. Conditions fluctuated considerably. Economic problems in Russia, Asia and
other foreign markets early in the period raised fears of a global credit
crisis and prompted the Fed to cut short-term interest rates three times.
During this time investors flocked to high-quality Treasury bonds, which
outperformed other types of bonds by wide margins in the fourth quarter of
1998. Corporate bonds, in particular, suffered from concerns about the
effects of the overseas economic crisis on corporate profits.
In the second half of the period, investors bid up prices of lower quality
corporate issues due to the relatively attractive yields on such securities.
Meanwhile, investor concerns that strong economic growth would force the Fed
to raise interest rates caused Treasury bonds and high-quality corporate
bonds to perform poorly during the first six months of 1999. The Fed
eventually did raise rates by 25 basis points late in the period.
Q. HOW DID YOU POSITION THE FUND IN THAT ENVIRONMENT?
A. The Fund's duration during the first half of the period was longer than that
of its benchmark, the Lehman Brothers Aggregate Bond Index. That approach
allowed the Fund to lock in additional yield available on longer-term bonds
as interest rates fell during this time period. Throughout the period, the
Fund's 30-day yield ranged from 6% to 6.25%. We reduced the Fund's duration
later in the period to a position slightly shorter than the Fund's
benchmark, as signs of stronger-than-expected economic growth and a tight
labor market fueled fears of inflation and raised expectations for higher
interest rates.
Q. HOW DID THE FUND'S ALLOCATION AMONG DIFFERENT SECTORS OF THE BOND MARKET
AFFECT PERFORMANCE?
A. The Fund was overweighted in high-quality corporate securities for most of
the period. That allocation hurt the Fund's performance during much of the
period. Investors flocked to the safety and liquidity of Treasury securities
during the overseas economic crisis. Our high-quality corporate holdings
also dampened performance during the second half of the period, when
corporate issues with lower credit quality attracted investors' interest.
The overall credit quality of the Fund's portfolio remained very high during
the period, at A+, consistent with the Fund's high-quality investment
approach.
At the end of June, we had reduced the corporate exposure to 17%,
representing a 5% underweighted position versus the index. The remaining
sector allocation of the Fund was as follows: mortgage-backed securities,
35% of net assets; Treasuries, 21%; government agencies, 14%; asset-backed
securities, 6%; and 7.0% in cash and cash equivalents.*
*The Fund's portfolio composition is subject to change.
- --------------------------------------------------------------------------------
-13-
<PAGE> 15
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
Q. WHAT IS YOUR OUTLOOK FOR THE BOND MARKET GOING FORWARD?
A. In our opinion, the U.S. economy will likely remain strong with consumer
spending robust and the labor market tight. These conditions will keep
inflationary concerns at the forefront of investor's minds. That said,
interest rates have already climbed considerably in 1999, and we are likely
to see a fairly stable interest rate environment in the months ahead. That
environment should benefit mortgage-backed securities, which have
underperformed in 1999 and currently offer attractive yields. We believe
that corporate bonds' performance will continue to lag the market's overall
performance due to investor concerns over rising inflation and year
2000-related issues. We view the agency sector as attractive given the
historically wide yield spreads to Treasuries and their high credit quality.
Q. HOW WILL YOU POSITION THE FUND TO ADDRESS THOSE CONDITIONS?
A. We will attempt to keep the Fund's duration close to that of the benchmark
for the near-term. We currently expect to emphasize government agency
securities and mortgage-backed securities, and de-emphasize corporates in
our sector allocation strategy.
- --------------------------------------------------------------------------------
-14-
<PAGE> 16
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR INTERMEDIATE TERM INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1999
------------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- --------------------------------------------------
<S> <C> <C>
One Year 0.82% -3.76%
Two Years 5.29% 2.89%
Life of Fund (Inception 12/2/96) 4.64% 2.79%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
[Intermediate Term Income Fund Performance Graph]
<TABLE>
<CAPTION>
THE GOVERNOR THE LIPPER INTERMEDIATE
INTERMEDIATE TERM THE LEHMAN AGGREGATE INVESTMENT GRADE DEBT
INCOME FUND BOND INDEX FUNDS AVERAGE(1)
----------------- -------------------- -----------------------
<S> <C> <C> <C>
12/2/96 9550 10000 10000
06/30/97 9684 10215 10188
06/30/98 10648 11292 11148
06/30/99 10735 11648 11371
</TABLE>
The Fund's performance is compared to the Lehman Brothers Aggregate Bond Index,
which is an unmanaged index that is comprised of the following Lehman indices:
the Lehman Brothers Government Corporate Bond Index, the Lehman Brothers
Mortgage-Backed Securities Index and the Lehman Brothers Asset-Backed Securities
Index. The index does not reflect the deduction of fees associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND NET ASSET
VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THE ORIGINAL COST.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
(1)The Lipper Intermediate Investment Grade Debt Funds Average is comprised of
managed funds that seek to invest at least 65% of their assets in investment
grade debt issues (rated in top four grades) with dollar-weighted average
maturities of five to ten years.
- --------------------------------------------------------------------------------
-15-
<PAGE> 17
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIMITED DURATION GOVERNMENT SECURITIES FUND
Q. HOW DID THE FUND PERFORM DURING THE 12-MONTH PERIOD ENDED JUNE 30, 1999?
A. The Fund's total return for the period was 4.25% (without sales load). That
compares to a 5.14% return for the Fund's benchmark, the Lehman Brothers
1-3-Year Government Bond Index.
Q. WHAT WERE THE CONDITIONS IN THE FIXED-INCOME MARKETS DURING THE PERIOD?
A. Yields were very volatile. Financial crises in Asia, Latin America and
Russia early in the period caused investors to seek liquidity and safety in
Treasury securities--especially in issues with short and intermediate
maturities. That trend caused a dramatic decline in yields on such
securities.
The Fed last fall lowered the federal funds rate three times to restore
liquidity to world markets, in each instance lowering rates by 25 basis
points. Investors subsequently worried that those rate cuts would cause the
economy to grow too quickly, perhaps leading to inflation and forcing the
Fed to raise rates. As a result, yields rose for the remainder of the
period. The Fed did raise interest rates in late June, but not as sharply as
many investors had feared.
Q. HOW DID YOU MANAGE THE FUND IN THAT ENVIRONMENT?
A. We shortened the Fund's average maturity early in the period, to protect
shareholders' principal in that highly volatile environment. We employed a
barbell strategy--that is, we invested the Fund's assets in a mixture of
securities with very short and relatively long maturities. We used that
strategy because intermediate-term securities had become increasingly
expensive. Our defensive barbell approach caused the Fund's performance to
lag while yields fell, but benefited shareholders when yields rose and
prices declined later in the period. We increased the Fund's allocation to
securities with intermediate maturities toward the end of the period, as
yields on those issues became more attractive.
Q. IN WHAT TYPES OF SECURITIES DID YOU FIND THE BEST OPPORTUNITIES DURING THE
PERIOD?
A. We increased the Fund's allocation to callable securities during the first
part of the period to take advantage of the higher yields those issues
offered. We subsequently liquidated the Fund's position in those securities
as yields on other issues rose and callable securities became less
attractive on a relative basis. Liquidity problems in world markets
concerned us early in the period, so we invested the Fund's assets in highly
liquid securities. We also traded actively during the period to take
advantage of investment opportunities provided by the volatile environment
and to protect principal.
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE BOND MARKETS?
A. The future performance of the economy and the bond markets will depend
largely on the effectiveness of Fed policy. Yields should fall if the Fed's
recent rate hike succeeds in slowing the economy and forestalling inflation.
Yields could rise, however, if inflation shows signs of increasing or if
deflation subsides in Asia. Regardless of the future environment, we will
continue to seek out the best investment opportunities to protect
shareholders' principal and provide attractive levels of income.
- --------------------------------------------------------------------------------
-16-
<PAGE> 18
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIMITED DURATION GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1999
------------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- ----------------------------------------------------
<S> <C> <C>
One Year 4.25% 1.10%
Two Years 4.82% 3.23%
Three Years 4.93% 3.88%
Life of Fund (Inception 10/31/95) 4.87% 3.99%
</TABLE>
*Reflects 3.00% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
[Lmtd. Duration Govnmt. Sec. Fund Performance]
<TABLE>
<CAPTION>
THE GOVERNOR LIMITED DURATION THE LEHMAN BROTHERS 1-3 YEAR
GOVERNMENT SECURITIES FUND GOVERNMENT BOND INDEX
----------------------------- ----------------------------
<S> <C> <C>
10/31/95 9700 10000
6/30/96 10303 10307
6/30/97 10834 10987
6/30/98 11070 11730
6/30/99 11540 12333
</TABLE>
The Fund's performance is compared to the Lehman Brothers 1-3-Year Government
Bond Index, which is an unmanaged index comprised of U.S. Treasury issues and
publicly issued debt of U.S. Government agencies with maturities of one to three
years. The index does not reflect the deduction of fees associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND NET ASSET
VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THE ORIGINAL COST.
The quoted performance of the Governor Limited Duration Government Securities
Fund includes performance of certain collective trust fund ("Commingled")
accounts advised by Martindale Andres & Company, Inc., for periods dating back
to 10/31/95 and prior to the Limited Duration Government Securities Fund's
commencement of operations on 7/1/97, as adjusted to reflect the expenses
associated with the Fund. The Commingled accounts were not registered with the
Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
Commingled accounts had been registered, the Commingled accounts' performance
may have been adversely affected. The performance shown reflects the deduction
of fees for services associated with a mutual fund, such as investment
management and fund accounting fees. The performance also reflects reinvestment
of all dividends and capital-gains distributions.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
- --------------------------------------------------------------------------------
-17-
<PAGE> 19
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
[This page intentionally left blank]
- --------------------------------------------------------------------------------
-18-
<PAGE> 20
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR PENNSYLVANIA MUNICIPAL BOND FUND(+)
Q. HOW DID THE FUND PERFORM DURING THE 12 MONTHS ENDED JUNE 30, 1999?
A. The Fund's total return during the period was 1.94% (without sales load).
That compares to a 3.10% for the Lehman Brothers Pennsylvania 1-12-Year
Municipal Bond Index and 1.63% total return for the Lipper Pennsylvania
Intermediate Municipal Debt Fund Average.(1)
Q. WHAT WERE THE CONDITIONS IN THE PENNSYLVANIA MUNICIPAL BOND MARKET DURING THE
RECENT PERIOD?
A. During the first half of the period, severe economic problems in foreign
markets boosted demand for U.S. Treasury bonds. Municipal bonds
underperformed during this time, however, as investors favored the safety
and liquidity of Treasury securities. The large supply of municipal issues
also dampened performance in the muni sector.
Yields rose steadily during the second half of the period, however as
investors worried that strong economic growth would force the Fed to raise
rates to avoid a spike in inflation. In fact, the Fed did raise short-term
rates by 25 basis points late in the period, but that was a smaller rate
hike than many investors expected. Municipal bonds outperformed Treasuries
in that rising-rate environment, and as a result, municipal yields as a
percentage of Treasury yields declined during the period. The supply of new
municipal issues also decreased significantly during the final six months of
the period, especially in the Pennsylvania municipal market, which benefited
muni bond performance.
Q. HOW DID YOU STRUCTURE THE FUND IN THAT ENVIRONMENT?
A. The Fund's duration began the period at 5.32 years, which benefited the Fund
as interest rates declined during the first half of the period. The
structure also provided shareholders with attractive levels of current
income. We reduced the Fund's duration to around 4.5 years late in December,
which helped Fund performance as interest rates began to rise. We increased
the Fund's duration to around 5.5 years as interest rates rose during the
first half of 1999 in an effort to capture attractive yield levels for
shareholders.
Q. WHAT OTHER STRATEGIES DID YOU EMPLOY TO REDUCE RISK OR BOOST RETURNS?
A. We kept the Fund's volatility low by improving the Fund's credit quality and
structure. The Fund's very high average credit rating of AAA helped to
minimize liquidity risk during the period. We also favored large, liquid
issues with strong name recognition. That strategy enabled us to adjust
duration without any negative impact on performance. In addition, Fund
management reduced the Fund's exposure to health-care issues due to problems
in that sector--especially in the hospital sector in Pennsylvania.
Q. WHAT IS YOUR OUTLOOK FOR THE PENNSYLVANIA MUNICIPAL BOND MARKET GOING
FORWARD?
A. We expect that the economy will remain strong, consumer spending will stay
robust, and the labor market will remain tight. Those conditions eventually
could boost inflation, but for now inflation's future direction is somewhat
unclear. Interest rates have risen considerably in 1999, and we think they
will be stable or rise slightly in the coming months. The supply of
municipal issues also should remain relatively light, and demand for muni
bonds could increase in the months ahead, especially if interest rates rise
further.
- --------------------------------------------------------------------------------
-19-
<PAGE> 21
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
Q. HOW WILL YOU MANAGE THE FUND IN THAT ENVIRONMENT?
A. We will attempt to maintain the Fund's high credit quality. The extra yield
on lower quality issues is not sufficient to compensate for the additional
risk in such securities. We will reduce the Fund's duration to a neutral
position until there are clearer signals about the strength of the U.S.
economy and the likely direction of inflation. If economic growth stays
moderate, inflation remains low and the Fed doesn't raise rates, we will
concentrate on increasing the Fund's distribution yield. If the Fed raises
rates, we will take a more defensive position.
(+)The Fund's income may be subject to certain state and local taxes and,
depending on your tax status, the federal alternative minimum tax.
- --------------------------------------------------------------------------------
-20-
<PAGE> 22
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR PENNSYLVANIA MUNICIPAL BOND FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1999
------------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- ----------------------------------------------------
<S> <C> <C>
One Year 1.94% -2.66%
Two Years 3.89% 1.55%
Life of Fund (Inception 10/1/96) 4.30% 2.56%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
Pennsylvania Municipal Bond Fnd.Perform.Graph
<TABLE>
<CAPTION>
THE GOVERNOR THE LIPPER INTERMEDIATE THE LEHMAN BROTHERS
PENNSYLVANIA MUNICIPAL PENNSYLVANIA MUNICIPAL PENNSYLVANIA 1-12-YEAR
BOND FUND FUNDS AVERAGE MUNICIPAL BOND INDEX
---------------------- ----------------------- ----------------------
<S> <C> <C> <C>
10/1/96 9550 10000 10000
6/30/97 9931 10527 10559
6/30/98 10516 11390 11382
6/30/99 10720 11535 11735
</TABLE>
The Fund's performance is compared to Lehman Brothers Pennsylvania 1-12-Year
Municipal Bond Index, which is an unmanaged index that consists of bonds issued
within the Commonwealth of Pennsylvania with a dated maturity of 1/1/91 or
later. Included are nominal maturities of 1-12 years with an issue size of $50
million and greater and maturity sizes of $3 million or more. The index does not
reflect the deduction of fees associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND NET ASSET VALUE WILL
FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST.
(1)The Lipper Intermediate Pennsylvania Municipal Debt Fund Average is comprised
of managed funds that seek to invest at least 65% of their assets in
municipal debt issues that are exempt from taxation in Pennsylvania, with
dollar-weighted average maturities of five to ten years.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
- --------------------------------------------------------------------------------
-21-
<PAGE> 23
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIFESTYLE CONSERVATIVE GROWTH FUND
Q. HOW DID THE FUND PERFORM SINCE ITS INCEPTION ON FEBRUARY 3, 1999?
A. The Fund invests in seven underlying Governor Funds, which in turn hold a
wide variety of assets, including stocks and fixed-income securities with a
range of maturities. The Fund's objective is capital appreciation, with
income as a secondary goal. It returned 2.21% (without sales load) from its
inception through June 30, 1999.
Q. WHAT WAS THE FUND'S ALLOCATION DURING THE PERIOD?
A. The Fund will strive to maintain a consistent allocation strategy, with
approximately 35% of its assets in equity funds and the remainder in
fixed-income funds. At times, the Fund may hold 1% to 5% in cash or money
market funds. As of June 30, 1999, the Fund's allocation was as follows: 37%
in stock funds, 58% in bond funds and 5% in money market funds.
Q. HOW DID ECONOMIC CONDITIONS DURING THE PERIOD AFFECT THE FUND'S PERFORMANCE?
A. The equity markets experienced a shift during the first half of 1999.
Valuations of large-company stocks were at record levels going into the
period, as seen in their price-to-earnings ratios and dividend yields. But
investors shifted cash to more attractively priced small-company stocks,
which outpaced shares of large-companies by a considerable margin. In the
bond markets, investor concerns about strong economic growth and the threat
of rising inflation pushed yields higher during most of the period. This
rising rate environment underestimated bond prices and served as a drag on
Fund performance during the second quarter.
Q. WHICH FUNDS HELPED THE PORTFOLIO'S PERFORMANCE DURING THE PERIOD?
A. Both the Established Growth Fund (20% of the Fund) and the Aggressive Growth
Fund (10% of the Fund) performed well. And while results in the bond markets
were mixed, the Limited Duration Government Securities Fund (35% of the
Fund) did well.*
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND HOW WILL YOU MANAGE THE FUND IN THAT
ENVIRONMENT?
A. We believe that the U.S. economy will remain strong with small and mid-cap
stocks continuing to perform well. That said, a negative episode--something
like the Russian debt default in 1998--could spur turmoil in international
markets, as well as the U.S. market. And since the market discounts future
expectations, we would expect to see a small drop in the market should
investors begin to fret about the Y2K phenomenon. Meanwhile, we don't expect
major swings in the bond market, given the prospects for moderate economic
growth and continued low inflation.
*Portfolio composition is subject to change.
- --------------------------------------------------------------------------------
-22-
<PAGE> 24
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIFESTYLE CONSERVATIVE GROWTH FUND
AGGREGATE TOTAL RETURNS AS OF JUNE 30, 1999
-------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- --------------------------------------------------
<S> <C> <C>
Life of Fund (2/3/99) 2.21% -2.38%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
[Lifestyle Conservative Growth Fund Perform.]
<TABLE>
<CAPTION>
THE THE
GOVERNOR LEHMAN THE
LIFESTYLE BROTHERS 1- LEHMAN THE
CONSERVATIVE 3 YEAR BROTHERS STANDARD & THE U.S.
GROWTH GOVERNMENT AGGREGATE THE MSCI POOR'S 500 THE 30-DAY
FUND - BOND BOND EAFE STOCK RUSSELL TREASURY
$9,762 INDEX INDEX INDEX INDEX 2000 INDEX BILL
------------ ----------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
2/3/99 9550 10000 10000 10000 10000 10000 10000
2/99 9417 9955 9825 9764 9689 9190 10035
3/99 9547 10023 9879 10174 10077 9334 10078
4/99 9700 10054 9911 10588 10467 10170 10116
5/99 9643 10047 9823 10046 10220 10319 10150
6/99 9762 10076 9792 10439 10787 10785 10190
</TABLE>
The Fund's performance is compared to the Lehman Brothers 1-3-year Government
Bond Index, which is generally representative of government bonds with
maturities between one and three years; The Lehman Brothers Aggregate Bond
Index, is comprised of the following Lehman indices: the Lehman Brothers
Government Corporate Bond Index, the Lehman Brothers Mortgage-Backed Securities
Index and the Lehman Brothers Asset-Backed Securities Index; the Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East Index, is composed
of 20 European and Pacific Basin countries and weighted by market
capitalization; the Standard & Poor's 500 Index, is generally representative of
the performance of the large-capitalization equity market; and the Russell 2000
Index, is generally representative of 2,000 small-capitalization stocks in the
U.S. stock market. These indices do not reflect the deduction of fees associated
with a mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN
AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
U.S. 30-Day T-Bills are represented by the U.S. Treasury Bill Total Return
Index. T-Bills are government guaranteed and offer a fixed rate of return.
Return and principal of stocks and bonds will vary with market conditions.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
- --------------------------------------------------------------------------------
-23-
<PAGE> 25
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIFESTYLE MODERATE GROWTH FUND(+,++)
Q. HOW DID THE FUND PERFORM FROM ITS INCEPTION ON FEBRUARY 4, 1999, THROUGH JUNE
30, 1999?
A. The Fund returned 6.02% (without sales load) from its inception through June
30, 1999.
Q. WHAT WAS THE FUND'S ALLOCATION DURING THE PERIOD?
A. We maintain a strategic asset allocation strategy based on the Fund's
objective--capital appreciation and income--and our analysis of 30 years of
history in the United States financial markets. Unless there is a change in
long-term capital market trends, there will be little change in the Fund's
allocation, which stood as follows on June 30, 1999: 59% in stock funds, 38%
in bond funds and 3% in money market funds.
Q. WHAT WERE THE ECONOMIC CONDITIONS DURING THE PERIOD, AND HOW DID THEY AFFECT
THE FUND'S PERFORMANCE?
A. The equity markets generally performed well, but experienced a shift from
large-company to small-company stocks and from growth to value. Shares of
many cyclical companies did especially well during the second quarter due to
strong economic growth in the United States. In the bond market,
inflationary fears caused yields to rise during much of the period,
undercutting bond prices toward quarter end.
Q. WHICH FUNDS IN THE PORTFOLIO PERFORMED WELL DURING THE PERIOD?
A. All three equity funds in the portfolio were strong performers during the
period: The Established Growth Fund (34% of the Fund), the Aggressive Growth
Fund (13% of the Fund) and the International Equity Fund (12% of the Fund).
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE FINANCIAL MARKETS, AND HOW WILL
YOU MANAGE THE FUND IN THAT ENVIRONMENT?
A. We believe that U.S. economic growth will be strong, with mid-to-small-cap
stocks continuing to perform well. That said, there are risks that could
influence the portfolio's performance. For example, an episode such as last
year's Russian debt default could spur turmoil in international markets, as
well as the U.S. market. As the year 2000 nears, we will monitor the effects
of the Y2K phenomenon on U.S. and international equity markets. Meanwhile,
we do not expect major swings in the bond market, given the prospects for
moderate economic growth and continued low inflation. Despite the prospects
of short-lived episodic set-backs like a Y2K-inspired sell off, we will
continue to draw from long-term capital market trends in formulating our
asset allocation strategy for the Fund. We believe this focus is the best
way to pursue shareholders' long term goals.
(+)Small-capitalization funds typically carry additional risks, since smaller
companies generally have a higher risk of failure and, by definition, are
not as well established as blue-chip companies. Historically, smaller
companies' stocks have experienced a greater degree of market volatility
than average.
(++)International investing involves increased risk and volatility.
- --------------------------------------------------------------------------------
-24-
<PAGE> 26
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIFESTYLE MODERATE GROWTH FUND
AGGREGATE TOTAL RETURNS AS OF JUNE 30, 1999
-------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- --------------------------------------------------
<S> <C> <C>
Life of Fund (2/4/99) 6.02% 1.26%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
[Lifestyle Moderate Growth Fund Perform.Graph]
<TABLE>
<CAPTION>
THE
GOVERNOR
LIFESTYLE THE LEHMAN
MODERATE BROTHERS 1-3 THE LEHMAN THE
GROWTH YEAR BROTHERS STANDARD &
FUND - GOVERNMENT AGGREGATE THE MSCI POOR'S 500 THE RUSSELL
$10,126 BOND INDEX BOND INDEX EAFE INDEX STOCK INDEX 2000 INDEX
--------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
2/4/99 9550 10000 10000 10000 10000 10000
2/99 9484 9955 9825 9764 9689 9190
3/99 9710 10023 9879 10174 10077 9334
4/99 9978 10054 9911 10588 10467 10170
5/99 9892 10047 9823 10046 10220 10319
6/99 10126 10076 9792 10439 10787 10785
<CAPTION>
THE U.S. 30-
DAY
TREASURY BILL
-------------
<S> <C>
2/4/99 10000
2/99 10035
3/99 10078
4/99 10116
5/99 10150
6/99 10190
</TABLE>
The Fund's performance is compared to the Lehman Brothers 1-3-Year Government
Bond Index, which is generally representative of government bonds with
maturities between one and three years; the Lehman Brothers Aggregate Bond
Index, is comprised of the following Lehman indices: the Lehman Brothers
Government Corporate Bond Index, the Lehman Brothers Mortgage-Backed Securities
Index and the Lehman Brothers Asset-Backed Securities Index; the Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East Index, is composed
of 20 European and Pacific Basin countries and weighted by market
capitalization; the Standard & Poor's 500 Index, is generally representative of
the performance of the large-capitalization equity market; and the Russell 2000
Index, is generally representative of 2,000 small-capitalization stocks in the
U.S. stock market. These indices do not reflect the deduction of fees associated
with a mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN
AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
U.S. 30-Day T-Bills are represented by the U.S. Treasury Bill Total Return
Index. T-Bills are government guaranteed and offer a fixed rate of return.
Return and principal of stocks and bonds will vary with market conditions.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
- --------------------------------------------------------------------------------
-25-
<PAGE> 27
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIFESTYLE GROWTH FUND(+,++)
Q. HOW DID THE FUND PERFORM FROM ITS INCEPTION ON FEBRUARY 18, 1999, THROUGH
JUNE 30, 1999?
A. The Fund returned 7.9% (without sales load) from its inception through June
30, 1999. It invests in seven underlying Governor funds, which in turn hold
a wide variety of assets, including stocks and fixed-income securities with
a range of maturities. The Fund's objective is capital appreciation.
Q. WHAT WAS THE FUND'S ALLOCATION DURING THE PERIOD?
A. The Lifestyle Growth Fund maintains an asset allocation strategy based upon
its objectives and our analysis of 30 years of history in the financial
markets. The Fund will normally hold about 75% of its assets in equity funds
and 25% in fixed-income funds. At times, the Fund may hold 1%-2% of its
assets in cash or money market funds. As of June 30, 1999, the Fund invested
its holdings as follows: 77% in stock funds, 21% in bond funds and 2% in
money market funds.
Q. WHAT WERE THE ECONOMIC CONDITIONS DURING THE PERIOD, AND HOW DID THEY AFFECT
THE FUND'S PERFORMANCE?
A. For the first time in almost half a dozen years, small-company stocks were
dominant in the domestic markets, outpacing large-company stocks by a
considerable margin. During the second quarter value stocks also rebounded,
with shares of many cyclical companies rising sharply. Investors also found
opportunities in micro-caps, which helped the Fund's holding in the Governor
Emerging Growth Fund. Bond prices during most of the period suffered from
rising interest rates, which reflected strong growth in the U.S. economy and
concerns that inflation would rise.
Q. WHICH FUNDS PERFORMED WELL DURING THE PERIOD?
A. All four equity funds posted strong gains. In particular, the Aggressive
Growth Fund (18% of the Fund) and the Emerging Growth Fund (8% of the Fund)
had impressive returns in the second quarter. The Established Growth Fund
(35% of the Fund) showed promising returns as well.
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY, AND HOW WILL YOU MANAGE THE FUND IN
THAT ENVIRONMENT?
A. We believe that the U.S. market will continue to broaden, and that
valuations are attractive in both small-company and some mid and large-cap
shares. U.S. and international markets may experience a slight downturn
during the last half of 1999, due to investor concerns about the Y2K
phenomenon. We will also keep an eye on conditions in Japan, China and the
Pacific Rim as the countries in that region continue to bounce back from
recession. Meanwhile, we don't expect major swings in the bond market, given
the prospects for moderate economic growth and continued low inflation. We
will maintain our asset allocation strategy in the Fund, with an eye toward
meeting shareholders' long-term goals.
(+)Small-capitalization funds typically carry additional risks, since smaller
companies generally have a higher risk of failure and, by definition, are
not as well established as blue-chip companies. Historically, smaller
companies' stocks have experienced a greater degree of market volatility
than average.
(++)International investing involves increased risk and volatility.
- --------------------------------------------------------------------------------
-26-
<PAGE> 28
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR LIFESTYLE GROWTH FUND
AGGREGATE TOTAL RETURNS AS OF JUNE 30, 1999
-------------------------------------------
<TABLE>
<CAPTION>
NO LOAD LOAD*
- --------------------------------------------------
<S> <C> <C>
Life of Fund (2/18/99) 7.87% 3.03%
</TABLE>
*Reflects 4.50% sales charge.
GROWTH OF $10,000 INVESTMENT COMPARISON
- --------------------------------------------------------------------------------
[Lifestyle Growth Fund Perform. Graph]
<TABLE>
<CAPTION>
THE
GOVERNOR THE LEHMAN
LIFESTYLE BROTHERS 1-3 THE LEHMAN THE
GROWTH YEAR BROTHERS STANDARD &
FUND - GOVERNMENT AGGREGATE THE MSCI POOR'S 500 THE RUSSELL
$10,303 BOND INDEX BOND INDEX EAFE INDEX STOCK INDEX 2000 INDEX
--------- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
2/18/99 9550 10000 10000 10000 10000 10000
2/99 9475 9955 9825 9764 9689 9190
3/99 9652 10023 9879 10174 10077 9334
4/99 10016 10054 9911 10588 10467 10170
5/99 9978 10047 9823 10046 10220 10319
6/99 10303 10076 9792 10439 10787 10785
<CAPTION>
THE U.S. 30-
DAY
TREASURY BILL
-------------
<S> <C>
2/18/99 10000
2/99 10035
3/99 10078
4/99 10116
5/99 10150
6/99 10190
</TABLE>
The Fund's performance is compared to the Lehman Brothers 1-3-Year Government
Bond Index, which is generally representative of government bonds with
maturities between one and three years; the Lehman Brothers Aggregate Bond
Index, is comprised of the following Lehman indices: the Lehman Brothers
Government Corporate Bond Index, the Lehman Brothers Mortgage-Backed Securities
Index and the Lehman Brothers Asset-Backed Securities Index; the Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East Index, is composed
of 20 European and Pacific Basin countries and weighted by market
capitalization; the Standard & Poor's 500 Index, is generally representative of
the performance of the large-capitalization equity market; and the Russell 2000
Index, is generally representative of 2,000 small-capitalization stocks in the
U.S. stock market. These indices do not reflect the deduction of fees associated
with a mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN
AND NET ASSET VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
U.S. 30-Day T-Bills are represented by the U.S. Treasury Bill Total Return
Index. T-Bills are government guaranteed and offer a fixed rate of return.
Return and principal of stocks and bonds will vary with market conditions.
The total return set forth may reflect the waiver of a portion of the Fund's
advisory or administrative fees for certain periods since the inception date. In
such instances, and without waiver of fees, total return would have been lower.
- --------------------------------------------------------------------------------
-27-
<PAGE> 29
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR U.S. TREASURY OBLIGATIONS MONEY MARKET FUND(+)
Q. HOW DID THE FUND PERFORM DURING THE 12-MONTH PERIOD ENDED JUNE 30, 1999?
A. The Fund's seven-day and seven-day effective yields were 3.90%(1) and
3.98%,(1) respectively, as of June 30, 1999. The Fund's total return for the
period was 4.28%, compared to a 4.39% return for the Lipper U.S. Treasury
Money Market Fund Index.(2)
Q. WHAT WERE THE CONDITIONS IN THE U.S. TREASURY MARKETS DURING THE PERIOD?
A. Treasury yields were very volatile. Early in the period financial crises in
Asia, Russia and South America caused investors to seek safety and liquidity
in short-term Treasury securities. That demand caused a precipitous decline
in yields during the first four months of the period. To shore up world
financial markets, the Federal Reserve last fall lowered the federal funds
rate three times, each time by 25 basis points. Investors subsequently
became concerned that strong economic growth would produce inflation and
cause the Fed to raise rates. Those fears caused yields on Treasury
securities to rise for the remainder of the period. However, yields on the
very short-term securities in which the Fund invests rose less than yields
on other Treasury issues. The Fed did raise interest rates in late June, but
not as much as many investors had feared.
Q. HOW DID YOU POSITION THE FUND IN THAT ENVIRONMENT?
A. During the period we employed a barbell strategy--that is, we primarily
bought securities with very short or relatively long maturities. The
short-term issues provided stability and good cash flow, allowing us to
invest in attractive opportunities as they presented themselves. The
longer-term issues provided relatively high yields for shareholders. In
particular, we invested in government-guaranteed Private Export Funding
Corporation bonds with one-year maturities, which offered excellent yields.
The Fund began the period with an average maturity of 58 days and ended the
period with an average maturity of 78 days, which is slightly longer than
the average maturity of the Fund's benchmark.
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE FUND?
A. The drivers of our economic expansion appear to have shifted from investment
and productivity increases to higher consumer demand. Such demand-driven
economic expansion can presage inflation. If the Fed's recent action to
restrict monetary supply forestalls inflation, yields should fall. Yields
could rise, however, if we see signs of inflation and the Fed does not act
quickly enough to dampen it. We will watch for any signs of inflation or
shifts in Fed policy. We also will continue to look for the best values
available in the short-term Treasury market, investing the majority of the
Fund's assets in very short-term securities. That policy should provide
shareholders with stability of principal and allow us take advantage of
investment opportunities as they develop.
(+)Shares of the Fund is not insured or guaranteed by the FDIC or any other
government agency, and are not bank deposits or obligations of or guaranteed
by Keystone Bank, its parent company or its affiliates. There is no assurance
that the Fund will be able to maintain a stable net asset value of $1.00 per
share. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
(1)The 7-Day yield quoted is as of 6/30/99, and reflects fee waivers. Had fees
not been waived, performance would be reduced. The yield quotation more
closely reflects the current earnings of the Fund than the total return
quotation. Total return figures include reinvestment of dividends and capital
gains. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
(2)The Lipper U.S. Treasury Money Market Fund Index is a managed index of funds
that seek to invest principally in U.S. Treasury obligations and that
maintain dollar-weighted average maturities of less than 90 days.
- --------------------------------------------------------------------------------
-28-
<PAGE> 30
MESSAGE FROM THE SUB-ADVISORS Governor Funds
- --------------------------------------------------------------------------------
THE GOVERNOR PRIME MONEY MARKET FUND(+)
Q. HOW DID THE FUND PERFORM DURING THE 12-MONTH PERIOD ENDED JUNE 30, 1999?
A. The Fund's seven-day and seven-day effective yields as of June 30, 1999 were
4.48%(1) and 4.58%(1), respectively. The Fund posted a total return of 4.80%
during the period, compared to a 4.77% total return for the Lipper Money
Market Fund Index.(2)
Q. WHAT WERE THE CONDITIONS IN THE MONEY MARKETS DURING THE PERIOD?
A. The money markets were characterized by a great deal of volatility during
the period. Financial crises last summer in South America, Asia and Russia
caused investors to seek safety and liquidity in Treasury securities,
pushing yields down on those issues. Yields on corporate issues relative to
Treasuries rose during the first part of the period.
The Federal Reserve then lowered the federal funds rate three times last
fall to provide liquidity to world markets, each time lowering rates by 25
basis points. Investors subsequently became concerned that the economy's
fast growth would lead to inflation and force the Fed to raise interest
rates. Those fears caused investors to sell bonds, pushing up yields on
corporate and Treasury issues.
Q. HOW DID YOU MANAGE THE FUND IN THAT ENVIRONMENT?
A. We maintained a short average maturity compared to the Fund's benchmark,
since the yield offered by longer-term securities was not sufficient to
justify their additional risk. Moreover, a short average maturity provided
the Fund with strong cash flow as issues matured, allowing us to invest in
attractive opportunities without having to sell holdings. We kept the
average maturity especially short during the last quarter, in order to
position the Fund to take advantage of higher yields after the Fed raised
interest rates. The Fund began the period with an average maturity of 29
days and ended the period with an average maturity of 26 days.
Q. IN WHAT SECTORS OF THE MARKET DID YOU FIND ATTRACTIVE OPPORTUNITIES?
A. Commercial paper constituted the largest percentage of the Fund's holdings
during the period. We invested in very safe corporate issues with relatively
high yields. We also bought high-grade floating rate securities when they
were available at attractive prices.
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE MONEY MARKETS?
A. Yields could fall if the Fed's recent 25 basis point rate increase prevents
higher inflation, making further rate hikes unnecessary. Yields could rise
further, however, if inflation rises and the Fed is forced to raise rates
again. We think the Fed may raise rates one more time.
We will maintain the Fund's relatively short average maturity to provide
stability of principal for shareholders and to provide the Fund with cash to
invest as opportunities develop. If the Fed raises interest rates again we
will likely extend the Fund's average maturity somewhat to lock in higher
yields for shareholders.
(+)Shares of the Fund is not insured or guaranteed by the FDIC or any other
government agency, and are not bank deposits or obligations of or guaranteed
by Keystone Bank, its parent company or its affiliates. There is no assurance
that the Fund will be able to maintain a stable net asset value of $1.00 per
share. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
(1)The 7-Day yield quoted is as of 6/30/99, and reflects fee waivers. Had fees
not been waived, performance would be reduced. The yield quotation more
closely reflects the current earnings of the Fund than the total return
quotation. Total return figures include reinvestment of dividends and capital
gains. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
(2)The Lipper Money Market Fund Index is a managed index of funds that seek to
invest in high quality financial instruments rated in top two grades and that
maintain dollar-weighted average maturities of less than 90 days.
- --------------------------------------------------------------------------------
-29-
<PAGE> 31
TABLE OF CONTENTS
Statements of Assets and Liabilities
PAGE 31
Statements of Operations
PAGE 34
Statements of Changes in Net Assets
PAGE 37
Schedules of Portfolio Investments
PAGE 43
Notes to Financial Statements
PAGE 66
Financial Highlights
PAGE 77
-30-
<PAGE> 32
GOVERNOR FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1999
<TABLE>
<CAPTION>
ESTABLISHED AGGRESSIVE EMERGING INTERNATIONAL
GROWTH GROWTH GROWTH EQUITY
FUND FUND FUND FUND
------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost $112,144,232;
$92,844,012; $8,359,009; $37,543,425,
respectively)............................ $260,693,849 $139,958,330 $9,602,618 $39,256,821
Foreign currency (cost $--; $--; $--;
$219,851, respectively).................. -- -- -- 220,693
Interest and dividends receivable.......... 185,719 108,387 2,479 68,978
Receivable for investments sold............ -- -- 304,534 --
Receivable for capital shares issued....... 63,165 34,457 953 --
Unamortized organization costs............. 16,051 2,302 -- --
Foreign tax reclaims receivable............ 23,773 -- -- 58,851
Prepaid expenses and other assets.......... 5,916 3,210 16,519 1,990
------------ ------------ ---------- -----------
Total Assets............................. 260,988,473 140,106,686 9,927,103 39,607,333
------------ ------------ ---------- -----------
LIABILITIES:
Dividends payable.......................... 245,295 -- -- --
Payable for investment purchased........... 197,800 351,975 -- --
Payable for capital shares redeemed........ 8,886 183,455 -- --
Net depreciation on forward foreign
currency contracts....................... -- -- -- 77,464
Accrued expenses and other payables:
Investment advisory fees payables........ 12,517 7,885 396 1,307
Administration fees payables............. 2,399 1,296 91 376
Administrative services fees payables.... 24,693 13,988 -- --
Other Liabilities........................ 59,813 36,478 -- 22,606
------------ ------------ ---------- -----------
Total Liabilities........................ 551,403 595,077 487 101,753
------------ ------------ ---------- -----------
NET ASSETS:
Capital.................................... 87,741,596 83,804,876 8,269,990 37,397,172
Accumulated undistributed (distributions in
excess of) net investment income......... 2,510 (1,834) -- 478,730
Accumulated undistributed net realized
gains on investments..................... 24,143,347 8,594,249 413,017 (4,743)
Net unrealized appreciation from
investments and translation of assets and
liabilities in foreign currencies........ 148,549,617 47,114,318 1,243,609 1,634,421
------------ ------------ ---------- -----------
Net Assets............................. $260,437,070 $139,511,609 $9,926,616 $39,505,580
============ ============ ========== ===========
Outstanding units of beneficial interest
(shares)............................... 16,404,423 11,609,707 828,496 3,729,264
============ ============ ========== ===========
Net asset value -- redemption price per
share.................................. $ 15.88 $ 12.02 $ 11.98 $ 10.59
============ ============ ========== ===========
Maximum Sales Charge..................... 4.50% 4.50% 4.50% 4.50%
============ ============ ========== ===========
Maximum Offering Price
(100%/(100%-Maximum Sales Charge) of
net asset value adjusted to nearest
cent) per share........................ $ 16.63 $ 12.59 $ 12.54 $ 11.09
============ ============ ========== ===========
</TABLE>
See notes to financial statements.
-31-
<PAGE> 33
GOVERNOR FUNDS
STATEMENTS OF ASSETS AND LIABILITIES, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
LIMITED DURATION PENNSYLVANIA LIFESTYLE
INTERMEDIATE GOVERNMENT MUNICIPAL CONSERVATIVE
TERM INCOME SECURITIES BOND GROWTH
FUND FUND FUND FUND
------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost
$312,560,526; $40,142,819;
$114,306,939; $--, respectively)..... $304,684,128 $39,914,639 $112,855,108 $ --
Investments in affiliates, at value
(cost $--; $--; $--; $149,987,
respectively)........................ -- -- -- 151,236
Repurchase agreements at amortized
cost................................. -- 11,843,000 -- --
------------ ----------- ------------ --------
Total Investments.................... 304,684,128 51,757,639 112,855,108 151,236
Interest and dividends receivable...... 3,683,555 562,702 1,445,074 500
Receivable from affiliates............. -- -- -- 9,267
Receivable for investments sold........ 4,514,450 -- -- --
Receivable for capital shares issued... 284,913 -- -- --
Unamortized organization costs......... 23,183 5,239 11,306 --
Prepaid expenses and other assets...... 7,286 1,457 2,529 --
------------ ----------- ------------ --------
Total Assets......................... 313,197,515 52,327,037 114,314,017 161,003
------------ ----------- ------------ --------
LIABILITIES:
Payable to custodian................... -- -- -- 730
Dividends payable...................... 1,747,176 260,362 437,859 510
Payable for investment purchased....... 5,392,500 -- 1,949,688 --
Payable for capital shares redeemed.... 246 -- -- --
Accrued expenses and other payables:
Investment advisory fees payables.... 7,526 1,287 2,763 3
Administration fees payables......... 2,885 493 1,059 --
Administrative services fees
payables........................... 8,746 -- 4,262 --
12b-1 fees payable................... -- -- -- 118
Other Liabilities.................... 57,911 24,048 25,545 9,523
------------ ----------- ------------ --------
Total Liabilities.................... 7,216,990 286,190 2,421,176 10,884
------------ ----------- ------------ --------
NET ASSETS:
Capital................................ 320,159,521 52,892,804 113,256,073 148,855
Accumulated undistributed
(distributions in excess of) net
investment income.................... 7,600 (73) (113) 9
Accumulated undistributed net realized
gains (losses) on investments........ (6,310,198) (623,704) 88,712 6
Net unrealized appreciation
(depreciation) of investments........ (7,876,398) (228,180) (1,451,831) 1,249
------------ ----------- ------------ --------
Net Assets........................... $305,980,525 $52,040,847 $111,892,841 $150,119
============ =========== ============ ========
Outstanding units of beneficial
interest (shares).................. 32,227,950 5,295,247 11,133,794 14,783
============ =========== ============ ========
Net asset value -- redemption price
per share.......................... $ 9.49 $ 9.83 $ 10.05 $ 10.15
============ =========== ============ ========
Maximum Sales Charge................. 4.50% 3.00% 4.50% 4.50%
============ =========== ============ ========
Maximum Offering Price (100%/(100%-
Maximum Sales Charge) of net asset
value adjusted to nearest cent) per
share.............................. $ 9.94 $ 10.13 $ 10.52 $ 10.63
============ =========== ============ ========
</TABLE>
See notes to financial statements.
-32-
<PAGE> 34
GOVERNOR FUNDS
STATEMENTS OF ASSETS AND LIABILITIES, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
LIFESTYLE U.S. TREASURY
MODERATE LIFESTYLE OBLIGATIONS PRIME
GROWTH GROWTH MONEY MARKET MONEY MARKET
FUND FUND FUND FUND
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost $--; $--; $14,090,955;
$157,968,584, respectively)............................. $ -- $ -- $ 14,090,955 $157,968,584
Investments in affiliates, at value (cost $277,270;
$207,506; $--; $--, respectively)....................... 285,732 218,185 -- --
Repurchase agreements at amortized cost................... -- -- 5,376,000 104,872,000
-------- -------- ------------ ------------
Total Investments....................................... 285,732 218,185 19,466,955 262,840,584
Interest and dividends receivable......................... 679 327 196,247 405,832
Receivable from affiliates................................ 9,414 9,280 -- --
Receivable for capital shares issued...................... -- -- -- 86,700
Unamortized organization costs............................ -- -- 5,268 11,602
Prepaid expenses and other assets......................... -- -- 1,260 8,660
-------- -------- ------------ ------------
Total Assets............................................ 295,825 227,792 19,669,730 263,353,378
-------- -------- ------------ ------------
LIABILITIES:
Dividends payable......................................... 407 -- 65,384 991,707
Payable for capital shares redeemed....................... -- -- -- 88
Accrued expenses and other payables:
Investment advisory fees payables....................... -- 1 331 4,367
Administration fees payables............................ -- -- 191 2,511
Administrative services fees payables................... -- -- -- 9,815
12b-1 fees payable...................................... 311 215 -- --
Other Liabilities....................................... 10,065 9,764 28,881 98,683
-------- -------- ------------ ------------
Total Liabilities....................................... 10,783 9,980 94,787 1,107,171
-------- -------- ------------ ------------
NET ASSETS:
Capital................................................... 276,338 207,133 19,573,672 262,243,616
Accumulated undistributed (distributions in excess of) net
investment income....................................... 50 -- 1,890 3,531
Accumulated undistributed net realized gains (losses) on
investments............................................. 192 -- (619) (940)
Net unrealized appreciation of investments................ 8,462 10,679 -- --
-------- -------- ------------ ------------
Net Assets.............................................. $285,042 $217,812 $ 19,574,943 $262,246,207
======== ======== ============ ============
Net Assets................................................ 285,042 217,812 19,574,943
Investor Shares......................................... 261,561,130
S Shares................................................ 685,077
-------- -------- ------------ ------------
Total Net Assets........................................ 285,042 217,812 19,574,943 262,246,207
======== ======== ============ ============
Outstanding units of beneficial interest (shares)......... 26,985 20,215 19,575,562
Investor Shares......................................... 261,561,528
S Shares................................................ 685,077
-------- -------- ------------ ------------
Total Shares............................................ 26,985 20,215 19,575,562 262,246,605
======== ======== ============ ============
Net asset value Net asset value -- redemption price per
share................................................... $ 10.56 $ 10.77 $ 1.00
======== ======== ============
Offering and redemption price per share -- Investor
Shares................................................ $ 1.00
============
Offering and redemption price per share -- S Shares..... $ 1.00
============
Maximum Sales Charge.................................... 4.50% 4.50% -- --
======== ======== ============ ============
Maximum Offering Price (100%/(100%-Maximum Sales Charge)
of net asset value adjusted to nearest cent) per
share................................................. $ 11.06 $ 11.28 $ 1.00(a) $ 1.00(a)
======== ======== ============ ============
</TABLE>
- ---------------
(a) Maximum offering price and redemption price are the same for the U.S.
Treasury Obligations Money Market Fund and the Prime Money Market Fund.
See notes to financial statements.
-33-
<PAGE> 35
GOVERNOR FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ESTABLISHED AGGRESSIVE EMERGING INTERNATIONAL
GROWTH GROWTH GROWTH EQUITY
FUND FUND FUND* FUND*
----------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income............................ $ 888 $ 35,826 $ 54,865 $ 35,128
Dividend income (net of foreign withholding
tax of $21,892; $750; $--; $32,818,
respectively)........................... 3,294,477 1,191,173 60,277 511,851
----------- ----------- ---------- -----------
Total Income............................ 3,295,365 1,226,999 115,142 546,979
----------- ----------- ---------- -----------
EXPENSES:
Investment advisory fees................... 1,854,418 1,241,231 103,488 179,833
Administration fees........................ 321,042 160,926 10,811 21,580
Administrative services fees............... 506,028 254,347 12,219 --
Accounting fees............................ 78,219 41,519 33,059 26,017
Legal & audit fees......................... 36,637 19,096 23,337 13,308
Transfer agent fees........................ 67,353 58,616 11,955 9,614
Custodian fees............................. 32,926 22,025 4,934 4,501
Printing fees.............................. 26,686 8,900 11,027 3,686
Other expenses............................. 32,380 14,549 4,784 10,309
----------- ----------- ---------- -----------
Total Expenses............................. 2,955,689 1,821,209 215,614 268,848
Less: Expenses voluntarily reduced...... (694,485) (536,109) (98,573) (127,322)
----------- ----------- ---------- -----------
Net Expenses............................... 2,261,204 1,285,100 117,041 141,526
----------- ----------- ---------- -----------
Net Investment Income (Loss)............... 1,034,161 (58,101) (1,899) 405,453
----------- ----------- ---------- -----------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment and
foreign currency transactions........... 24,578,381 10,181,975 484,120 68,534
Net change in unrealized appreciation of
investments and translation of assets
and liabilities in foreign currencies... 12,590,276 1,881,793 1,243,609 1,634,421
----------- ----------- ---------- -----------
Net realized/unrealized gains on
investments and foreign currency........ 37,168,657 12,063,768 1,727,729 1,702,955
----------- ----------- ---------- -----------
Change in net assets resulting from
operations.............................. $38,202,818 $12,005,667 $1,725,830 $ 2,108,408
=========== =========== ========== ===========
</TABLE>
- ---------------
* Commencement of operations of the Emerging Growth Fund and the International
Equity Fund was July 1, 1998 and February 9, 1999, respectively.
See notes to financial statements.
-34-
<PAGE> 36
GOVERNOR FUNDS
STATEMENTS OF OPERATIONS, CONTINUED
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
INTERMEDIATE LIMITED DURATION PENNSYLVANIA LIFESTYLE
TERM INCOME GOVERNMENT MUNICIPAL CONSERVATIVE
FUND SECURITIES FUND BOND FUND GROWTH FUND*
------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income........................ $ 18,822,291 $ 2,519,847 $ 5,676,536 $ --
Dividend income........................ 551,808 18,846 125,055 1,050
------------ ----------- ----------- -----------
Total Income........................ 19,374,099 2,538,693 5,801,591 1,050
------------ ----------- ----------- -----------
EXPENSES:
Investment advisory fees............... 1,780,672 249,439 691,568 59
Administration fees.................... 386,279 55,421 149,744 --
Administrative services fees........... 450,763 49,563 176,948 59
12b-1 fees............................. -- -- -- 118
Accounting fees........................ 93,623 32,985 43,384 12,500
Legal & audit fees..................... 40,770 3,884 16,170 --
Transfer agent fees.................... 37,289 23,607 30,342 9,024
Custodian fees......................... 32,536 12,443 19,927 --
Printing fees.......................... 33,907 1,812 14,464 --
Other expenses......................... 41,428 -- 16,325 500
------------ ----------- ----------- -----------
Total Expenses......................... 2,897,267 429,154 1,158,872 22,260
Less: Expenses voluntarily
reduced........................... (1,243,542) (181,894) (483,019) (21,829)
------------ ----------- ----------- -----------
Net Expenses........................... 1,653,725 247,260 675,853 431
------------ ----------- ----------- -----------
Net Investment Income.................. 17,720,374 2,291,433 5,125,738 619
------------ ----------- ----------- -----------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on
investment transactions............. (3,585,583) (623,703) 472,648 6
Net change in unrealized appreciation
of investments...................... (12,283,842) (150,654) (3,417,082) 1,249
------------ ----------- ----------- -----------
Net realized/unrealized gains (losses)
on investments...................... (15,869,425) (774,357) (2,944,434) 1,255
------------ ----------- ----------- -----------
Change in net assets resulting from
operations.......................... $ 1,850,949 $ 1,517,076 $ 2,181,304 $ 1,874
============ =========== =========== ===========
</TABLE>
- ---------------
* Commencement of operations of the Lifestyle Conservative Growth Fund was
February 3, 1999.
See notes to financial statements.
-35-
<PAGE> 37
GOVERNOR FUNDS
STATEMENTS OF OPERATIONS, CONTINUED
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
LIFESTYLE U.S. TREASURY
MODERATE LIFESTYLE OBLIGATIONS
GROWTH GROWTH MONEY MARKET PRIME MONEY
FUND* FUND* FUND MARKET FUND
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income............................ $ -- $ -- $1,057,380 $13,063,245
Dividend income............................ 1,846 834 14,543 20,677
---------- ---------- ---------- -----------
Total Income............................ 1,846 834 1,071,923 13,083,922
---------- ---------- ---------- -----------
EXPENSES:
Investment advisory fees................... 156 108 86,867 1,012,098
Administration fees........................ -- -- 28,212 330,250
Administrative services fees............... 156 108 29,325 358,734
12b-1 fees................................. 311 215 -- --
Accounting fees............................ 12,500 12,500 31,233 77,899
Legal & audit fees......................... -- -- 9,266 34,224
Transfer agent fees........................ 9,566 9,264 23,285 40,958
Custodian fees............................. -- -- 13,613 42,336
Printing fees.............................. -- -- 3,229 81,176
Other expenses............................. 500 500 3,913 34,857
---------- ---------- ---------- -----------
Total Expenses............................. 23,189 22,695 228,943 2,012,532
Less: Expenses voluntarily reduced...... (22,082) (21,893) (71,904) (768,794)
---------- ---------- ---------- -----------
Net Expenses............................... 1,107 802 157,039 1,243,738
---------- ---------- ---------- -----------
Net Investment Income...................... 739 32 914,884 11,840,184
---------- ---------- ---------- -----------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on investment
transactions............................ 192 12 (25) (940)
Net change in unrealized appreciation of
investments............................. 8,462 10,679 -- --
---------- ---------- ---------- -----------
Net realized/unrealized gains (losses) on
investments............................. 8,654 10,691 (25) (940)
---------- ---------- ---------- -----------
Change in net assets resulting from
operations.............................. $ 9,393 $ 10,723 $ 914,859 $11,839,244
========== ========== ========== ===========
</TABLE>
- ---------------
* Commencement of operations of the Lifestyle Moderate Growth Fund and the
Lifestyle Growth Fund was February 4, 1999 and February 18, 1999,
respectively.
See notes to financial statements.
-36-
<PAGE> 38
GOVERNOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ESTABLISHED AGGRESSIVE
GROWTH FUND GROWTH FUND
--------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income (loss)............... $ 1,034,161 $ 1,725,318 $ (58,101) $ (115,475)
Net realized gains on investment
transactions............................. 24,578,381 6,257,171 10,181,975 3,491,283
Net change in unrealized appreciation of
investments.............................. 12,590,276 47,023,379 1,881,793 10,372,778
------------ ------------ ------------ ------------
Net increase in net assets resulting from
operations............................... 38,202,818 55,005,868 12,005,667 13,748,586
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................. (1,032,871) (1,728,426) -- --
In excess of net investment income......... -- -- (105,843) (9,326)
From net realized gains on investments..... (6,183,277) (1,060,223) (4,572,481) (1,333,135)
------------ ------------ ------------ ------------
Change in net assets from shareholder
distributions............................ (7,216,148) (2,788,649) (4,678,324) (1,342,461)
CAPITAL TRANSACTIONS:
Proceeds from shares issued................ 29,313,640 50,547,690 26,556,930 35,793,962
Dividends reinvested....................... 1,760,051 90,582 1,516,422 58,474
Cost of shares redeemed.................... (60,435,568) (34,957,454) (31,500,681) (17,904,786)
------------ ------------ ------------ ------------
Change in net assets from capital
transactions............................. (29,361,877) 15,680,818 (3,427,329) 17,947,650
------------ ------------ ------------ ------------
Change in net assets....................... 1,624,793 67,898,037 3,900,014 30,353,775
NET ASSETS:
Beginning of period........................ 258,812,277 190,914,240 135,611,595 105,257,820
------------ ------------ ------------ ------------
End of period.............................. $260,437,070 $258,812,277 $139,511,609 $135,611,595
============ ============ ============ ============
SHARE TRANSACTIONS:
Issued..................................... 2,116,552 4,017,497 2,621,388 3,165,205
Reinvested................................. 127,638 7,397 147,909 5,580
Redeemed................................... (4,248,252) (2,769,238) (3,042,992) (1,567,686)
------------ ------------ ------------ ------------
Change in shares............................. (2,004,062) 1,255,656 (273,695) 1,603,099
============ ============ ============ ============
</TABLE>
See notes to financial statements.
-37-
<PAGE> 39
GOVERNOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
INTERNATIONAL
EMERGING EQUITY FUND
GROWTH FUND -------------
------------ FOR THE
FOR THE PERIOD
YEAR ENDED ENDED
JUNE 30, JUNE 30,
1999* 1999*
------------ -------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income (loss).............................. $ (1,899) $ 405,453
Net realized gains on investment and foreign currency
transactions............................................ 484,120 68,534
Net change in unrealized appreciation of investments and
translation of assets and liabilities in foreign
currencies.............................................. 1,243,609 1,634,421
---------- -----------
Net increase in net assets resulting from operations...... 1,725,830 2,108,408
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (46,465) --
From net realized gains on investments.................... (22,739) --
---------- -----------
Change in net assets from shareholder distributions....... (69,204) --
CAPITAL TRANSACTIONS:
Proceeds from shares issued............................... 8,975,061 40,525,924
Dividends reinvested...................................... 14,626 --
Cost of shares redeemed................................... (719,697) (3,128,752)
---------- -----------
Change in net assets from capital transactions............ 8,269,990 37,397,172
---------- -----------
Change in net assets...................................... 9,926,616 39,505,580
NET ASSETS:
Beginning of period....................................... -- --
---------- -----------
End of period............................................. $9,926,616 $39,505,580
========== ===========
SHARE TRANSACTIONS:
Issued.................................................... 896,222 4,030,322
Reinvested................................................ 1,360 --
Redeemed.................................................. (69,086) (301,058)
---------- -----------
Change in shares............................................ 828,496 3,729,264
========== ===========
</TABLE>
- ---------------
* Commencement of operations of the Emerging Growth Fund and the International
Equity Fund was July 1, 1998 and February 9, 1999, respectively.
See notes to financial statements.
-38-
<PAGE> 40
GOVERNOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
LIMITED DURATION
INTERMEDIATE TERM GOVERNMENT
INCOME FUND SECURITIES FUND
--------------------------- --------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998*
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income........................ $ 17,720,374 $ 14,971,224 $ 2,291,433 $ 1,847,275
Net realized gains (losses) on investment
transactions............................... (3,585,583) 3,610,376 (623,703) 30,849
Net change in unrealized appreciation of
investments................................ (12,283,842) 3,699,969 (150,654) (113,342)
------------ ------------ ----------- -----------
Net increase in net assets resulting from
operations................................. 1,850,949 22,281,569 1,517,076 1,764,782
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................... (17,714,534) (14,851,779) (2,296,318) (1,846,910)
From net realized gains on investments....... (3,274,801) -- (13,860) (14,793)
------------ ------------ ----------- -----------
Change in net assets from shareholder
distributions.............................. (20,989,335) (14,851,779) (2,310,178) (1,861,703)
CAPITAL TRANSACTIONS:
Proceeds from shares issued.................. 88,095,203 90,900,761 37,267,026 46,256,425
Dividends reinvested......................... 2,942,950 214,237 149,304 8,280
Cost of shares redeemed...................... (41,483,981) (30,838,931) (13,942,370) (16,807,795)
------------ ------------ ----------- -----------
Change in net assets from capital
transactions............................... 49,554,172 60,276,067 23,473,960 29,456,910
------------ ------------ ----------- -----------
Change in net assets......................... 30,415,786 67,705,857 22,680,858 29,359,989
NET ASSETS:
Beginning of period.......................... 275,564,739 207,858,882 29,359,989 --
------------ ------------ ----------- -----------
End of period................................ $305,980,525 $275,564,739 $52,040,847 $29,359,989
============ ============ =========== ===========
SHARE TRANSACTIONS:
Issued....................................... 8,809,597 9,078,840 3,734,444 4,624,486
Reinvested................................... 296,108 21,445 15,031 829
Redeemed..................................... (4,165,244) (3,082,354) (1,400,696) (1,678,847)
------------ ------------ ----------- -----------
Change in shares............................... 4,940,461 6,017,931 2,348,779 2,946,468
============ ============ =========== ===========
</TABLE>
- ---------------
* Commencement of operations of the Limited Duration Government Securities Fund
was July 1, 1997.
See notes to financial statements.
-39-
<PAGE> 41
GOVERNOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
LIFESTYLE
PENNSYLVANIA MUNICIPAL CONSERVATIVE
BOND FUND GROWTH FUND
--------------------------- ------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999*
------------ ------------ ------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income..................................... $ 5,125,738 $ 5,539,010 $ 619
Net realized gains on investment transactions............. 472,648 859,782 6
Net change in unrealized appreciation of investments...... (3,417,082) 465,494 1,249
------------ ------------ --------
Net increase in net assets resulting from operations...... 2,181,304 6,864,286 1,874
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (5,259,960) (5,661,569) (610)
From net realized gains on investments.................... (735,831) -- --
------------ ------------ --------
Change in net assets from shareholder distributions....... (5,995,791) (5,661,569) (610)
CAPITAL TRANSACTIONS:
Proceeds from shares issued............................... 31,772,680 15,598,673 148,755
Dividends reinvested...................................... 117,634 98,698 100
Cost of shares redeemed................................... (34,868,136) (21,409,397) --
------------ ------------ --------
Change in net assets from capital transactions............ (2,977,822) (5,712,026) 148,855
------------ ------------ --------
Change in net assets...................................... (6,792,309) (4,509,309) 150,119
NET ASSETS:
Beginning of period....................................... 118,685,150 123,194,459 --
------------ ------------ --------
End of period............................................. $111,892,841 $118,685,150 $150,119
============ ============ ========
SHARE TRANSACTIONS:
Issued.................................................... 3,054,131 1,499,902 14,773
Reinvested................................................ 11,314 9,497 10
Redeemed.................................................. (3,354,136) (2,061,340) --
------------ ------------ --------
Change in shares............................................ (288,691) (551,941) 14,783
============ ============ ========
</TABLE>
- ---------------
* Commencement of operations of the Lifestyle Conservative Growth Fund was
February 3, 1999.
See notes to financial statements.
-40-
<PAGE> 42
GOVERNOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
LIFESTYLE LIFESTYLE
MODERATE GROWTH
GROWTH FUND FUND
------------ ------------
FOR THE FOR THE
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
1999* 1999*
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income..................................... $ 739 $ 32
Net realized gains on investment transactions............. 192 12
Net change in unrealized appreciation of investments...... 8,462 10,679
---------- -----------
Net increase in net assets resulting from operations...... 9,393 10,723
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (689) (95)
From net realized gains on investments.................... -- --
---------- -----------
Change in net assets from shareholder distributions....... (689) (95)
CAPITAL TRANSACTIONS:
Proceeds from shares issued............................... 285,686 207,387
Dividends reinvested...................................... 258 95
Cost of shares redeemed................................... (9,606) (298)
---------- -----------
Change in net assets from capital transactions............ 276,338 207,184
---------- -----------
Change in net assets...................................... 285,042 217,812
NET ASSETS:
Beginning of period....................................... -- --
---------- -----------
End of period............................................. $ 285,042 $ 217,812
========== ===========
SHARE TRANSACTIONS:
Issued.................................................... 27,887 20,235
Reinvested................................................ 26 9
Redeemed.................................................. (928) (29)
---------- -----------
Change in shares............................................ 26,985 20,215
========== ===========
</TABLE>
- ---------------
* Commencement of operations of the Lifestyle Moderate Growth Fund and the
Lifestyle Growth Fund was February 4, 1999 and February 18, 1999,
respectively.
See notes to financial statements.
-41-
<PAGE> 43
GOVERNOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS PRIME MONEY
MONEY MARKET FUND MARKET FUND
--------------------------- -----------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998* 1999** 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.................... $ 914,884 $ 1,139,900 $ 11,840,184 $ 8,016,985
Net realized gains (losses) on investment
transactions........................... (25) (594) (940) 447
------------ ------------ ------------- -------------
Net increase in net assets resulting from
operations............................. 914,859 1,139,306 11,839,244 8,017,432
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............... (914,884) (1,139,900) -- (8,016,985)
Investor Shares........................ -- -- (11,837,016) --
S Shares............................... -- -- (3,168) --
------------ ------------ ------------- -------------
Change in net assets from shareholder
distributions.......................... (914,884) (1,139,900) (11,840,164) (8,016,985)
CAPITAL TRANSACTIONS:
Proceeds from shares issued.............. 38,220,231 67,930,284 539,505,448 394,707,150
Dividends reinvested..................... 215,526 226,366 1,410,478 919,724
Cost of shares redeemed.................. (42,380,450) (44,636,395) (496,529,603) (273,616,855)
------------ ------------ ------------- -------------
Change in net assets from capital
transactions........................... (3,944,693) 23,520,255 44,386,323 122,010,019
------------ ------------ ------------- -------------
Change in net assets..................... (3,944,718) 23,519,661 44,385,383 122,010,466
NET ASSETS:
Beginning of period...................... 23,519,661 -- 217,860,824 95,850,358
------------ ------------ ------------- -------------
End of period............................ $ 19,574,943 $ 23,519,661 $ 262,246,207 $ 217,860,824
============ ============ ============= =============
SHARE TRANSACTIONS:
Issued................................... 38,220,231 67,930,284 539,505,448 394,707,185
Reinvested............................... 215,526 226,366 1,410,478 919,745
Redeemed................................. (42,380,450) (44,636,395) (496,529,603) (273,616,855)
------------ ------------ ------------- -------------
Change in shares........................... (3,944,693) 23,520,255 44,386,323 122,010,075
============ ============ ============= =============
</TABLE>
- ---------------
* Commencement of operations of the U.S. Treasury Obligations Money Market Fund
was July 1, 1997.
** Effective April 19, 1999, the Fund designated the existing shares as Investor
Shares and commenced the offering of S Shares.
See notes to financial statements.
-42-
<PAGE> 44
GOVERNOR FUNDS
ESTABLISHED GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS (97.8%):
Aerospace/Defense--Equipment (2.9%):
110,000 Loral Space & Communications
Ltd. (b).................... $ 1,980,000
60,000 Textron, Inc.................. 4,938,750
9,200 United Technologies Corp...... 659,525
------------
7,578,275
------------
Agriculture (0.5%):
30,000 Monsanto Corp................. 1,183,125
------------
Automotive (2.5%):
70,000 AutoNation, Inc. (b).......... 1,246,875
58,000 DaimlerChrysler AG............ 5,154,750
------------
6,401,625
------------
Automotive Parts (2.0%):
34,000 Autoliv, Inc.................. 1,028,500
45,000 Dana Corp..................... 2,072,813
22,000 Eaton Corp.................... 2,024,000
------------
5,125,313
------------
Banks (3.9%):
21,000 Allied Irish Banks PLC, ADR... 572,250
50,000 First Union Corp.............. 2,350,000
125,000 Fleet Financial Group, Inc.... 5,546,875
40,000 Wells Fargo Co................ 1,710,000
------------
10,179,125
------------
Beverages (2.4%):
100,000 Coca-Cola Co.................. 6,250,000
------------
Biotechnology (1.3%):
70,000 Centocor, Inc. (b)............ 3,263,750
------------
Chemicals (1.5%):
60,000 Hercules, Inc................. 2,358,750
36,878 Rohm and Haas Co.............. 1,581,127
------------
3,939,877
------------
Computer Networks (3.7%):
50,000 Seagate Technology, Inc.
(b)......................... 1,281,250
90,000 Silicon Graphics, Inc. (b).... 1,473,750
100,000 Sun Microsystems, Inc. (b).... 6,887,500
------------
9,642,500
------------
Computer Software (7.8%):
40,000 America Online, Inc. (b)...... 4,420,000
160,000 Automatic Data Processing,
Inc......................... 7,040,000
160,000 Computer Associates
International, Inc.......... 8,800,000
------------
20,260,000
------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS, CONTINUED:
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
Computers--Main & Mini (0.9%):
100,000 Compaq Computer Corp.......... $ 2,368,750
------------
Cosmetics/Personal Care (3.1%):
90,000 Procter & Gamble Co........... 8,032,500
------------
Diversified/Conglomerate (4.3%):
100,000 General Electric Co........... 11,300,000
------------
Electronic Components (3.6%):
50,000 Micron Technology, Inc. (b)... 2,015,625
50,000 Motorola, Inc................. 4,737,500
30,000 Nortel Networks Corp.......... 2,604,375
------------
9,357,500
------------
Financial Services (10.2%):
174,000 Capital One Financial Corp.... 9,689,625
100,000 Fannie Mae.................... 6,837,500
100,000 Morgan Stanley Dean Witter
Discover & Co............... 10,249,999
------------
26,777,124
------------
Food Processing & Packaging (1.5%):
150,000 ConAgra, Inc.................. 3,993,750
------------
Furniture & Furnishings (2.6%):
50,000 Armstrong World Industries,
Inc......................... 2,890,625
112,500 Lancaster Colony Corp......... 3,881,250
------------
6,771,875
------------
Manufacturing (0.1%):
4,000 Minnesota Mining and
Manufacturing Co............ 347,750
------------
Medical--Hospital Management Services
(0.3%):
230,000 Genesis Health Ventures, Inc.
(b)......................... 690,000
------------
Medical Instruments (4.2%):
140,000 Medtronic, Inc................ 10,902,500
------------
Medical Health Management Organization
(1.9%):
80,000 UnitedHealth Group............ 5,010,000
------------
Mining (1.5%):
75,000 Potash Corp. of Saskatchewan,
Inc......................... 3,881,250
------------
Oil & Gas (4.8%):
140,000 Coastal Corp.................. 5,600,000
5,000 Exxon Corp.................... 385,625
65,000 Mobil Corp.................... 6,435,000
------------
12,420,625
------------
</TABLE>
Continued
-43-
<PAGE> 45
GOVERNOR FUNDS
ESTABLISHED GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Pharmaceuticals (9.0%):
56,000 American Home Products
Corp........................ $ 3,220,000
25,225 AstraZeneca PLC, ADR.......... 988,505
36,000 Johnson & Johnson............. 3,528,000
16,000 Merck & Co., Inc.............. 1,184,000
250,000 Schering-Plough Corp.......... 13,250,000
21,000 Warner Lambert Co............. 1,456,875
------------
23,627,380
------------
Restaurants (1.6%):
150,000 Wendy's International, Inc.... 4,246,875
------------
Retail--Apparel (2.9%):
150,000 Gap, Inc...................... 7,556,250
------------
Telecommunications (3.5%):
140,000 Sprint Corp. FON Group........ 7,393,750
30,000 Sprint Corp. PCS Group (b).... 1,713,750
------------
9,107,500
------------
Textile (2.0%):
240,000 Unifi, Inc. (b)............... 5,100,000
------------
Tools (4.0%):
180,000 Danaher Corp.................. 10,462,500
------------
Transportation (0.2%):
15,000 Burlington Northern Santa Fe
Corp........................ 465,000
------------
Transportation & Shipping (0.4%):
25,000 CNF Transportation, Inc....... 959,375
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Utilities Electric (2.6%):
85,000 Consolidated Edison, Inc...... $ 3,846,250
100,000 Constellation Energy Group.... 2,962,500
------------
6,808,750
------------
Utilities Gas & Pipeline (4.1%):
75,000 Sonat, Inc.................... 2,484,375
190,000 Williams Cos., Inc............ 8,086,875
------------
10,571,250
------------
Total Common Stocks................. 254,582,094
------------
INVESTMENT COMPANY SECURITIES (2.3%):
2,053,228 Federated Government
Obligation Fund............. 2,053,228
4,058,265 Federated Prime Obligation
Fund........................ 4,058,265
------------
Total Investment Company
Securities............................ 6,111,493
------------
DAILY SWEEP VEHICLE (0.0%):
262 Bank of New York Cash Sweep... 262
------------
Total Daily Sweep Vehicle........... 262
------------
Total Investments
(Cost $112,144,232)(a)--100.1%.... 260,693,849
Liabilities in excess of other
assets--(0.1)%........................ (256,779)
------------
TOTAL NET ASSETS--100.0%............ $260,437,070
============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $157,155,905
Unrealized depreciation......................... (8,606,288)
------------
Net unrealized appreciation..................... $148,549,617
============
</TABLE>
(b) Represents non-income producing securities.
<TABLE>
<S> <C>
ADR -- American Depository Receipt
AG -- Company (Austria, Germany, Switzerland)
</TABLE>
See notes to financial statements.
-44-
<PAGE> 46
GOVERNOR FUNDS
AGGRESSIVE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS (94.8%):
Aerospace/Defense--Equipment (4.3%):
75,000 Cordant Technologies, Inc..... $ 3,389,063
40,000 Northrop Grumman Corp......... 2,652,500
------------
6,041,563
------------
Automotive Parts (3.5%):
110,000 Gentex Corp. (b).............. 3,080,000
110,000 MascoTech, Inc................ 1,863,125
------------
4,943,125
------------
Banks (2.0%):
66,000 First American
Corp.--Tennessee............ 2,743,125
------------
Biotechnology (0.2%):
80,000 Interneuron Pharmaceuticals,
Inc. (b).................... 220,000
------------
Capital Goods (0.6%):
70,000 Lydall, Inc. (b).............. 805,000
------------
Chemicals (4.0%):
130,000 Airgas, Inc. (b).............. 1,592,500
90,000 Lesco, Inc.................... 1,721,250
60,000 Valspar Corp.................. 2,280,000
------------
5,593,750
------------
Communication--Equipment (0.1%):
100,000 Transcrypt International, Inc.
(b)......................... 137,500
------------
Computer Networks (4.4%):
215,000 Computer Network Tech Corp.
(b)......................... 4,649,375
60,000 Seagate Technology, Inc.
(b)......................... 1,537,500
------------
6,186,875
------------
Computer Software (15.0%):
100,000 Affiliated Computer Services,
Inc. (b).................... 5,062,500
60,000 Ansys, Inc. (b)............... 596,250
50,000 Applied Graphics Technologies,
Inc. (b).................... 631,250
40,000 AXENT Technologies, Inc.
(b)......................... 445,000
200,000 Compuware Corp. (b)........... 6,362,499
65,000 Dialogic Corp. (b)............ 2,851,875
84,000 Drexler Technology Corp.
(b)......................... 798,000
30,000 Engineering Animation, Inc.
(b)......................... 635,625
100,000 Epicor Software Corp. (b)..... 743,750
100,000 Mosaix, Inc. (b).............. 1,281,250
50,000 Security Dynamics
Technologies, Inc. (b)...... 1,062,500
40,000 Systems & Computer Technology
Corp. (b)................... 582,500
------------
21,052,999
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Computers (3.6%):
45,000 Computer Horizons Corp. (b)... $ 621,563
150,000 Hutchinson Technology, Inc.
(b)......................... 4,162,500
5,000 RadiSys Corp. (b)............. 194,375
------------
4,978,438
------------
Educational Services (2.6%):
160,000 DeVry, Inc. (b)............... 3,580,000
------------
Electrical Equipment (2.6%):
94,000 C-Cube Microsystems, Inc.
(b)......................... 2,978,625
70,000 Cirrus Logic, Inc. (b)........ 621,250
------------
3,599,875
------------
Electronic Components (0.8%):
36,000 ATMI, Inc. (b)................ 1,071,000
------------
Financial Services (1.7%):
50,000 Financial Federal Corp. (b)... 1,100,000
80,000 Willis Lease Finance Corp.
(b)......................... 1,305,000
------------
2,405,000
------------
Financial-Securities Brokers (4.3%):
120,000 Legg Mason, Inc............... 4,620,000
60,000 United Asset Management
Corp........................ 1,365,000
------------
5,985,000
------------
Food & Related (3.3%):
50,000 U.S. Foodservice (b).......... 2,131,250
50,000 Whole Foods Market, Inc.
(b)......................... 2,403,125
------------
4,534,375
------------
Furniture & Furnishings (3.0%):
90,000 Bush Industries, Inc.......... 1,451,250
100,000 Leggett & Platt, Inc.......... 2,781,250
------------
4,232,500
------------
Homebuilders--Mobile Homes (2.2%):
50,000 Fleetwood Enterprises, Inc.... 1,321,875
75,000 Winnebago Industries, Inc..... 1,687,500
------------
3,009,375
------------
Household Products (1.8%):
40,000 Premark International, Inc.... 1,500,000
40,000 Tupperware Corp............... 1,020,000
------------
2,520,000
------------
Insurance (1.2%):
35,000 Arthur J. Gallagher &
Company..................... 1,732,500
------------
Machinery & Equipment (2.3%):
120,000 Flow International Corp.
(b)......................... 1,297,500
200,000 PSC, Inc. (b)................. 1,962,500
------------
3,260,000
------------
</TABLE>
Continued
-45-
<PAGE> 47
GOVERNOR FUNDS
AGGRESSIVE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Medical--Biotechnology (1.7%):
40,000 Incyte Pharmaceuticals, Inc.
(b)......................... $ 1,057,500
200,000 Integra Lifesciences Corp.
(b)......................... 1,287,500
------------
2,345,000
------------
Medical--Hospital Management Services (1.2%):
50,000 Cerner Corp. (b).............. 1,048,438
200,000 Genesis Health Ventures, Inc.
(b)......................... 600,000
------------
1,648,438
------------
Medical Equipment & Supplies (12.7%):
57,000 Alkermes, Inc. (b)............ 1,318,125
140,000 Mentor Corp. Minnesota........ 2,607,500
60,000 Respironics, Inc. (b)......... 907,500
70,000 St. Jude Medical, Inc. (b).... 2,493,750
140,000 Syncor International Corp.
(b)......................... 5,040,000
10,000 TECHNE Corp. (b).............. 253,750
64,000 Visx, Inc. (b)................ 5,068,000
------------
17,688,625
------------
Medical--Health Management Organization (1.3%):
30,000 UnitedHealth Group............ 1,878,750
------------
Oil & Gas (1.5%):
50,000 Forest Oil Corp. (b).......... 628,125
100,000 Patina Oil & Gas Corp......... 631,250
130,000 Range Resources Corp.......... 796,250
------------
2,055,625
------------
Real Estate Investment Trust (0.4%):
39,999 Meditrust Corp................ 522,487
------------
Technology Equipment (3.2%):
75,000 CFM Technologies, Inc. (b).... 750,000
100,000 Credence Systems Corp. (b).... 3,712,500
------------
4,462,500
------------
Telecommunication--Equipment (2.5%):
150,000 Digi International, Inc.
(b)......................... 1,565,625
60,000 ECI Telecommunications,
Ltd......................... 1,991,250
------------
3,556,875
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Telecommunications--Services and Equipment (2.2%):
50,000 PictureTel Corp. (b).......... $ 400,000
92,000 Transaction Network Services,
Inc. (b).................... 2,691,000
------------
3,091,000
------------
Textile (2.3%):
150,000 Unifi, Inc. (b)............... 3,187,500
------------
Utilities--Electric (1.5%):
110,000 Trigen Energy Corp............ 2,090,000
------------
Wholesale--Food Products (0.8%):
65,000 Worthington Foods, Inc........ 1,072,500
------------
Total Common Stocks................. 132,231,300
------------
INVESTMENT COMPANY SECURITIES (5.5%):
610,394 Federated Government
Obligation Fund............. 610,394
6,000,477 Federated Prime Obligation
Fund........................ 6,000,476
557,241 Governor Prime Money Market
Fund........................ 557,241
558,533 Governor U.S. Treasury
Obligations Money Market
Fund........................ 558,533
------------
Total Investment Company
Securities............................ 7,726,644
------------
DAILY SWEEP VEHICLE (0.0%):
386 Bank of New York Cash Sweep... 386
------------
Total Daily Sweep Vehicle........... 386
------------
Total Investments
(Cost $92,844,012) (a)--100.3%.... 139,958,330
Liabilities in excess of other
assets -(0.3)% (446,721)
------------
TOTAL NET ASSETS--100.0% $139,511,609
============
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $45,626. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 58,461,879
Unrealized depreciation......................... (11,393,187)
------------
Net unrealized appreciation..................... $ 47,068,692
============
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
-46-
<PAGE> 48
GOVERNOR FUNDS
EMERGING GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS (94.7%):
Automotive Parts (5.6%):
20,000 Impco Technologies, Inc.
(b)......................... $ 255,000
9,000 Strattec Security Corp. (b)... 303,750
------------
558,750
------------
Banks (0.6%):
5,000 Colorado Business Bankshares
(b)......................... 57,500
------------
Computer Software (7.4%):
23,500 Advanced Communications
Systems, Inc. (b)........... 321,656
7,500 SPSS, Inc. (b)................ 192,656
15,000 Systems & Computer Technology
Corp. (b)................... 218,438
------------
732,750
------------
Construction Materials (3.5%):
10,500 Dayton Superior Corp. (b)..... 194,906
6,500 LSI Industries, Inc........... 156,813
------------
351,719
------------
Containers (1.5%):
7,500 Mobile Mini, Inc. (b)......... 146,719
------------
Educational Services (3.1%):
29,000 Quest Education Corp. (b)..... 306,313
------------
Electronic Components (2.6%):
5,000 Aavid Thermal Technologies,
Inc. (b).................... 113,125
5,000 ATMI, Inc. (b)................ 148,750
------------
261,875
------------
Financial Services (8.0%):
17,500 Financial Federal Corp. (b)... 384,999
11,500 Linc Capital, Inc. (b)........ 102,063
5,000 Medallion Financial Corp...... 95,313
13,000 Willis Lease Finance Corp.
(b)......................... 212,062
------------
794,437
------------
Furniture & Furnishings (3.9%):
6,000 American Woodmark Corp........ 211,500
10,000 CompX International, Inc.
(b)......................... 178,750
------------
390,250
------------
Insurance (1.8%):
30,000 Gainsco, Inc.................. 176,250
------------
Leisure (1.1%):
6,000 Brass Eagle, Inc. (b)......... 112,500
------------
Machinery & Equipment (6.1%):
20,000 A.S.V., Inc. (b).............. 452,500
18,700 Lancer Corp. (b).............. 156,613
------------
609,113
------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS, CONTINUED:
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
Manufacturing (3.4%):
12,700 Koala Corp. (b)............... $ 339,725
------------
Medical--Biotechnology (2.1%):
20,000 Neose Technologies, Inc.
(b)......................... 203,750
------------
Medical Equipment & Supplies (16.6%):
7,500 Colorado Medtech, Inc. (b).... 164,531
30,000 Endocardial Solutions, Inc.
(b)......................... 283,125
22,000 ICU Medical, Inc. (b)......... 389,124
10,000 Merdian Diagnostics, Inc...... 71,250
16,000 Sterile Recoveries, Inc.
(b)......................... 185,000
12,000 Surmodics, Inc. (b)........... 196,500
10,000 Syncor International Corp.
(b)......................... 360,000
------------
1,649,530
------------
Medical Services (2.6%):
12,500 Hooper Holmes, Inc............ 254,688
------------
Medical--Health Management Organization (3.4%):
22,000 America Service Group, Inc.
(b)......................... 335,500
------------
Metal Fabricate/Hardware (1.8%):
20,000 Sun Hydraulics Corp........... 175,000
------------
Oil & Gas (4.4%):
10,000 Evergreen Resources, Inc.
(b)......................... 251,875
14,000 Patina Oil & Gas Corp......... 88,375
15,000 Range Resources Corp.......... 91,875
------------
432,125
------------
Pharmaceuticals (0.6%):
2,500 D & K Healthcare Resources,
Inc. (b).................... 59,688
------------
Real Estate Investment Trust (1.5%):
15,000 ElderTrust.................... 152,813
------------
Recreational Vehicles (2.5%):
10,000 National RV Holdings, Inc.
(b)......................... 245,625
------------
Retail--Special Line (1.3%):
6,000 Hibbett Sporting Goods, Inc.
(b)......................... 132,000
------------
Telecommunications--Services and Equipment (7.6%):
20,000 Tollgrade Communications, Inc.
(b)......................... 305,000
15,500 Transaction Network Services,
Inc. (b).................... 453,374
------------
758,374
------------
Wholesale--Food Products (1.7%):
10,000 Worthington Foods, Inc........ 165,000
------------
Total Common Stocks............... 9,401,994
------------
</TABLE>
Continued
-47-
<PAGE> 49
GOVERNOR FUNDS
EMERGING GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES (2.0%):
628 Federated Government
Obligation Fund............. $ 628
169,069 Federated Prime Obligation
Fund........................ 169,069
24,880 Governor Prime Money Market
Fund........................ 24,880
4,200 Governor U.S. Treasury
Obligations Money Market
Fund........................ 4,200
------------
Total Investment Company
Securities............................ 198,777
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
DAILY SWEEP VEHICLE (0.0%):
1,847 Bank of New York Cash Sweep... $ 1,847
------------
Total Daily Sweep Vehicle........... 1,847
------------
Total Investments
(Cost $8,359,009) (a)--96.7%...... 9,602,618
Other assets in excess of
liabilities--3.3%..................... 323,998
------------
TOTAL NET ASSETS--100.0%............ $ 9,926,616
============
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $43,250. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 1,704,254
Unrealized depreciation......................... (503,895)
------------
Net unrealized appreciation..................... $ 1,200,359
============
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
-48-
<PAGE> 50
GOVERNOR FUNDS
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS (95.7%):
AUSTRALIA (5.4%):
Airlines (0.3%):
37,300 Qantas Airways Ltd............ $ 123,201
------------
Banks (1.3%):
17,700 National Australia Bank
Ltd......................... 292,901
28,500 Westpac Banking Corp., Ltd.... 184,875
------------
477,776
------------
Broadcasting & Publishing (0.6%):
27,400 News Corp., Ltd............... 233,781
------------
Building Products (0.2%):
25,400 CSR Ltd....................... 72,631
------------
Commercial Services (0.2%):
3,700 Brambles Industries Ltd....... 97,475
------------
Diversified Products (0.1%):
4,800 Orica Ltd..................... 26,215
------------
Financial Services (0.2%):
6,000 Lend Lease Corp., Ltd......... 82,381
------------
Insurance (0.4%):
8,800 AMP Ltd....................... 96,204
17,000 QBE Insurance Group Ltd....... 64,703
------------
160,907
------------
Metals (0.3%):
7,300 RIO Tinto Ltd................. 119,699
------------
Mining (0.7%):
19,000 Broken Hill Proprietary Co.,
Ltd......................... 220,090
12,500 WMC Ltd....................... 53,698
------------
273,788
------------
Oil & Gas (0.1%):
17,700 Santos Ltd.................... 57,994
------------
Packaging and Containers (0.1%):
7,300 Amcor Ltd..................... 40,579
------------
Retail--Specialty Stores (0.2%):
26,400 David Jones Ltd............... 25,863
14,400 Woolworths Ltd................ 47,896
------------
73,759
------------
Telecommunications (0.7%):
48,200 Telstra Corp., Ltd............ 276,199
------------
2,116,385
------------
AUSTRIA (0.2%):
Tobacco (0.2%):
1,100 Austria Tabakwerke AG......... 64,094
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
BELGIUM (1.3%):
Banks (0.3%):
2,130 KBC Bancassurance Holding..... $ 126,305
------------
Insurance--Multiline (1.0%):
12,460 Fortis AG..................... 391,273
------------
517,578
------------
DENMARK (0.4%):
Telecommunications (0.4%):
3,000 Tele Danmark A/S.............. 147,669
------------
FINLAND (1.9%):
Banks (0.4%):
27,300 Merita Ltd., Class A.......... 155,127
------------
Paper Products (0.6%):
7,800 UPM-Kymmene Oyj............... 241,318
------------
Telecommunication--Equipment (0.9%):
4,100 Nokia Oyj..................... 359,399
------------
755,844
------------
FRANCE (9.3%):
Aerospace/Defense (0.3%):
5,260 Aerospatiale-Matra............ 121,238
------------
Airlines (0.4%):
8,120 Groupe Air France (b)......... 144,869
------------
Auto Parts (0.3%):
2,480 Michelin (C.G.D.E.), Class
B........................... 101,458
------------
Banks (0.9%):
2,380 Banque Nationale de Paris..... 198,318
1,000 Societe Generale.............. 176,245
------------
374,563
------------
Building Products (0.4%):
930 Compagnie de Saint Gobain..... 148,179
------------
Chemicals--Specialty (0.5%):
1,350 L'Air Liquide................. 212,313
------------
Diversified Products (1.1%):
1,380 Lyonnaise des Eaux SA......... 248,910
2,336 Vivendi....................... 189,231
------------
438,141
------------
Electrical and Electronics (0.7%):
8,250 Thomson CSF................... 286,720
------------
Food & Related (0.6%):
990 Groupe Danone................. 255,240
------------
Food Products & Services (0.4%):
1,200 Carrefour Supermarche SA...... 176,348
------------
</TABLE>
Continued
-49-
<PAGE> 51
GOVERNOR FUNDS
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
FRANCE, CONTINUED:
Oil & Gas (1.6%):
2,280 Elf Aquitaine SA.............. $ 334,590
1,850 Total Fina SA, Class B........ 238,673
------------
573,263
------------
Pharmaceuticals (0.4%):
3,730 Rhone-Poulenc SA.............. 170,445
------------
Telecommunications (0.7%):
3,770 France Telecom SA............. 284,789
------------
Tobacco (1.0%):
7,000 SEITA......................... 404,259
------------
3,691,825
------------
GERMANY (10.8%):
Auto Parts (0.4%):
7,350 Continental AG................ 174,337
------------
Automotive (1.2%):
4,000 DaimlerChrysler AG (b)........ 346,508
1,850 Volkswagen AG................. 118,478
------------
464,986
------------
Banks (1.7%):
7,122 Deutsche Bank AG.............. 434,441
7,250 Dresdner Bank AG.............. 283,368
------------
717,809
------------
Chemicals (1.3):
12,050 Bayer AG...................... 502,045
------------
Computer Software (0.3%):
300 SAP AG........................ 101,477
------------
Diversified Products (1.7%):
11,550 Veba AG....................... 678,939
------------
Insurance (0.9%):
1,252 Allianz AG.................... 347,320
------------
Machinery & Equipment (1.1%):
2,850 Mannesmann AG................. 425,292
------------
Multiple Industry (1.3%):
6,500 Siemens AG.................... 501,405
------------
Telecommunications (0.9%):
8,050 Deutsche Telekom AG........... 337,881
------------
4,251,491
------------
ITALY (2.7%):
Banks (0.4%):
12,000 San Paolo-IMI SpA............. 163,354
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
ITALY, CONTINUED:
Chemicals (0.3%):
70,200 Montedison SpA................ $ 114,385
------------
Food Products & Services (0.3%):
16,000 La Rinascente SpA............. 121,113
------------
Insurance (0.7%):
8,000 Assicurazioni Generali........ 277,206
------------
Oil & Gas (1.0%):
65,000 ENI SpA....................... 388,119
------------
1,064,177
------------
JAPAN (24.1%):
Auto Parts (0.9%):
6,000 Bridgestone Corp.............. 181,433
9,000 Denso Corp.................... 182,921
------------
364,354
------------
Automotive (1.6%):
8,000 Honda Motor Co., Ltd.......... 339,073
10,000 Toyota Motor Corp............. 316,434
------------
655,507
------------
Banks (1.4%):
18,000 Bank of Tokyo-Mitsubishi
Ltd......................... 256,238
12,000 Sanwa Bank Ltd................ 118,080
13,000 Sumitomo Bank Ltd............. 161,216
------------
535,534
------------
Brewery (0.4%):
12,000 Kirin Brewery Co., Ltd........ 143,759
------------
Building Products (1.2%):
21,000 Daikin........................ 243,770
18,000 Obayashi Corp................. 90,568
12,000 Sekisui House Ltd............. 129,482
------------
463,820
------------
Chemicals (0.8%):
11,000 Kaneka Corp................... 103,605
2,000 Shin-Etsu Chemical Co......... 66,922
28,000 Sumitomo Chemical Co., Ltd.... 128,392
------------
298,919
------------
Computers (0.9%):
18,000 Fujitsu Ltd................... 362,123
------------
Construction (0.1%):
5,000 Daiwa House Industry Co.,
Ltd......................... 52,588
------------
Consumer Goods and Services (0.5%):
7,000 KAO Corp...................... 196,635
------------
</TABLE>
See notes to financial statements.
-50-
<PAGE> 52
GOVERNOR FUNDS
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
JAPAN, CONTINUED:
Electrical and Electronics (4.3%):
4,300 Fanuc Co., Ltd................ $ 230,923
13,000 Matsushita Electric Industrial
Co., Ltd.................... 252,404
17,000 NGK Insulators Ltd............ 177,534
3,000 Secom Co., Ltd................ 312,302
2,400 Sony Corp..................... 258,765
12,000 Sumitomo Electric Inds........ 136,422
2,000 TDK Corp...................... 182,921
26,000 Toshiba Corp.................. 185,383
------------
1,736,654
------------
Financial Services (1.0%):
2,100 Acom Co., Ltd................. 181,309
18,000 Nomura Securities Co., Ltd.... 210,731
------------
392,040
------------
Food & Related (0.3%):
8,000 Nippon Meat Packers, Inc...... 104,432
------------
Insurance (0.3%):
10,000 Tokio Marine & Fire Insurance
Co.......................... 108,645
------------
Machinery & Equipment (0.2%):
11,000 Amada Co., Ltd................ 77,704
------------
Medical Equipment & Supplies (0.3%):
2,000 Hoya Corp..................... 112,859
------------
Office Equipment & Services (0.7%):
9,000 Canon, Inc.................... 258,766
------------
Office Furnishings (0.1%):
3,000 Kokuyo Co..................... 48,333
------------
Pharmaceuticals (1.6%):
9,000 Dai-Ichi Pharmaceutical
Corp........................ 139,644
8,000 Sankyo Co., Ltd............... 201,593
7,000 Takeda Chemical Industries.... 324,448
------------
665,685
------------
Photographic Equipment (0.3%):
3,000 Fuji Photo Film Co., Ltd...... 113,520
------------
Printing & Publishing (0.4%):
10,000 Dai Nippon Printing Co.,
Ltd......................... 159,870
------------
Real Estate (0.5%):
20,000 Mitsubishi Estate Co., Ltd.... 195,148
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
JAPAN, CONTINUED:
Retail (1.3%):
10,000 Citizen Watch Co., Ltd........ $ 86,751
5,000 Ito-Yokado Co, Ltd............ 334,611
6,000 Marui Co., Ltd................ 99,144
------------
520,506
------------
Steel (0.4%):
73,000 Nippon Steel Corp............. 169,478
------------
Textile (0.4%):
13,000 Kuraray Co., Ltd.............. 156,383
------------
Toys (0.5%):
1,200 Nintendo Co., Ltd............. 168,644
1,400 Sega Enterprises.............. 18,518
------------
187,162
------------
Transportation (0.7%):
31 East Japan Railway Co......... 166,479
6,000 Yamato Transport Co., Ltd..... 104,597
------------
271,076
------------
Utilities--Electric (0.6%):
11,000 Tokyo Electric Power.......... 232,203
------------
Utilities--Gas & Pipeline (0.4%):
49,000 Osaka Gas Co., Ltd............ 166,388
------------
Utilities--Telephone (1.4%):
46 Nippon Telegraph & Telephone
Corp........................ 535,873
------------
Wholesale Distribution (0.6%):
35,000 Mitsubishi Corp............... 237,119
------------
9,523,083
------------
NETHERLANDS (4.8%):
Banks (1.5%):
10,900 ING Groep NV.................. 590,147
------------
Beverages and Tobacco (0.3%):
2,000 Heineken NV................... 102,405
------------
Broadcasting & Publishing (0.7%):
24,000 Elsevier NV................... 278,444
------------
Food Products & Services (0.6%):
3,342 Unilever NV CVA............... 225,230
------------
Oil & Gas (0.9%):
6,400 Royal Dutch Petroleum Co...... 374,888
------------
Telecommunications (0.8%):
6,903 Royal KPN NV.................. 323,909
------------
1,895,023
------------
</TABLE>
See notes to financial statements.
-51-
<PAGE> 53
GOVERNOR FUNDS
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
NEW ZEALAND (1.0%):
Beverages and Tobacco (0.1%):
18,400 Lion Nathan Ltd............... $ 44,072
------------
Business & Public Services (0.1%):
14,700 Auckland International Airport
Ltd......................... 22,590
------------
Paper Products (0.1%):
25,200 Carter Holt Harvey Ltd........ 30,180
31,700 Fletcher Challenge Paper...... 23,686
------------
53,866
------------
Telecommunications (0.7%):
59,700 Telecom Corp. of New Zealand
Ltd......................... 256,254
------------
376,782
------------
NORWAY (0.3%):
Diversified Products (0.1%):
1,400 Norsk Hydro ASA............... 52,819
Paper Products (0.2%):
2,000 Norske Skogindustrier ASA..... 73,676
------------
126,495
------------
PORTUGAL (0.4%):
Utilities--Electric (0.4%):
9,500 Electricidade de Portugal
SA.......................... 171,057
------------
SINGAPORE (0.8%):
Banks (0.2%):
14,000 United Overseas Bank Ltd...... 97,858
------------
Broadcasting & Publishing (0.6%):
13,000 Singapore Press Holdings...... 221,443
------------
319,301
------------
SPAIN (2.2%):
Banks (1.0%):
1,905 Banco Popular Espanol SA...... 137,029
25,880 Banco Santander Central
Hispano SA.................. 269,567
------------
406,596
------------
Telecommunications (0.7%):
5,681 Telefonica de Espana (b)...... 273,658
------------
Utilities--Electric (0.5%):
8,362 Endesa SA..................... 178,334
------------
858,588
------------
SWEDEN (2.5%):
Banks (0.3%):
18,380 Nordbanken Holding AB......... 107,447
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
SWEDEN, CONTINUED:
Financial Services (0.4%):
13,960 Investor AB................... $ 155,992
------------
Furniture & Furnishings (0.7%):
14,740 Electrolux AB, Series B....... 308,609
------------
Telecommunication--Equipment (0.6%):
7,410 Telefonaktiebolaget LM
Ericsson, Class B........... 237,507
------------
Tobacco (0.5%):
53,040 Swedish Match AB.............. 189,033
------------
998,588
------------
SWITZERLAND (5.1%):
Building Products (0.4%):
134 Holderbank Financiere Glarus
AG.......................... 158,170
------------
Commercial Services (0.1%):
95 Adecco SA, Registered (b)..... 50,904
------------
Food & Related (1.3%):
295 Nestle SA, Registered......... 531,520
------------
Insurance (0.2%):
40 Schweizerische
Rueckversicherungs-
Gesellschaft............... 76,162
------------
Pharmaceuticals (2.3%):
333 Novartis AG, Registered....... 486,244
39 Roche Holding AG.............. 400,891
------------
887,135
------------
Telecommunications (0.8%):
868 Swisscom AG, Registered....... 326,633
------------
2,030,524
------------
UNITED KINGDOM (22.5%):
Airlines (0.4%):
23,000 British Airways PLC........... 158,706
------------
Banks (2.0%):
9,000 Barclays PLC.................. 261,886
38,000 Lloyds TSB Group PLC.......... 515,135
------------
777,021
------------
Beverages and Tobacco (0.7%):
25,000 Diageo PLC.................... 261,075
------------
Broadcasting & Publishing (1.1%):
26,000 Reed International PLC........ 173,464
27,000 United News & Media PLC....... 259,617
------------
433,081
------------
</TABLE>
See notes to financial statements.
-52-
<PAGE> 54
GOVERNOR FUNDS
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
UNITED KINGDOM, CONTINUED:
Chemicals (1.1%):
23,000 BOC Group PLC................. $ 449,561
------------
Coal (0.1%):
29,000 RJB Mining PLC................ 23,999
------------
Consumer Goods and Services (0.4%):
14,000 Reckitt & Colman PLC.......... 145,981
------------
Food Products & Services (1.5%):
8,000 J Sainsbury PLC............... 50,442
139,000 Tesco PLC..................... 357,690
19,000 Unilever PLC.................. 169,066
------------
577,198
------------
Industrial Goods and Services (0.6%):
43,000 Charter PLC................... 252,145
------------
Insurance (1.8%):
17,000 Allied Zurich PLC............. 213,707
29,000 Prudential Corp. PLC.......... 426,957
10,000 Royal & Sun Alliance Insurance
Group PLC................... 89,691
------------
730,355
------------
Manufacturing (1.9%):
93,000 FKI PLC....................... 288,882
46,000 General Electric Co., PLC..... 469,138
------------
758,020
------------
Medical Equipment & Supplies (0.5%):
30,000 Nycomed Amersham PLC.......... 208,544
------------
Mining (1.1%):
25,000 RIO Tinto PLC................. 419,099
------------
Oil & Gas (1.7%):
38,000 BP Amoco PLC.................. 681,056
------------
Pharmaceuticals (1.8%):
5,115 AstraZeneca PLC............... 199,143
18,000 Glaxo Wellcome PLC............ 500,223
------------
699,366
------------
Restaurants (0.3%):
24,400 Greenalls Group PLC........... 136,539
------------
Retail--General Merchandise (1.8%):
15,000 Boots Co., PLC................ 178,161
44,000 House of Fraser PLC........... 60,688
85,000 Marks & Spencer PLC........... 491,727
------------
730,576
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- --------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
UNITED KINGDOM, CONTINUED:
Telecommunication--Equipment (0.6%):
15,000 British Telecom PLC........... $ 251,341
------------
Textile (0.2%):
79,000 Coats Viyella PLC............. 63,509
------------
Transportation (0.4%):
10,000 Peninsular & Orient Steam
Navigation Co............... 150,143
------------
Utilities--Electric (1.6%):
36,000 National Power PLC............ 262,170
38,000 Scottish & Southern Energy
PLC......................... 388,747
------------
650,917
------------
Utilities--Water (0.9%):
12,000 Thames Water PLC.............. 190,291
21,000 Yorkshire Water PLC........... 145,981
------------
336,272
------------
8,894,504
------------
Total Common Stocks
(Cost $36,097,433)................ 37,803,008
------------
PREFERRED STOCKS (0.2%):
AUSTRALIA (0.2%):
Broadcasting & Publishing (0.2%):
9,100 News Corp., Ltd............... 69,330
------------
Total Preferred Stocks
(Cost $61,509).................... 69,330
------------
DAILY SWEEP VEHICLE (3.5%):
1,384,483 Bank of New York Cash Sweep... 1,384,483
------------
Total Daily Sweep Vehicle
(Cost $1,384,483)................. 1,384,483
------------
Total Investments
(Cost $37,543,425) (a)--99.4%..... 39,256,821
Other assets in excess of
liabilities--0.6%..................... 248,759
------------
TOTAL NET ASSETS--100.0%............ 39,505,580
============
</TABLE>
See notes to financial statements.
-53-
<PAGE> 55
GOVERNOR FUNDS
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
- ---------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $56,232. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 3,215,418
Unrealized depreciation......................... (1,511,665)
------------
Net Unrealized appreciation..................... $ 1,703,753
============
</TABLE>
(b) Represents non-income producing securities.
At June 30, 1999, the Fund's open forward foreign currency contracts were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
DELIVERY CONTRACT MARKET APPRECIATION/
CURRENCY DATE VALUE VALUE (DEPRECIATION)
- -------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
SHORT CONTRACTS:
British Pound............................................... 8/12/99 $4,129,142 $4,021,706 $ 107,436
Euro Dollar................................................. 8/12/99 547,600 517,180 30,420
Japanese Yen................................................ 8/12/99 3,285,025 3,185,152 99,873
---------- ---------- ----------
TOTAL SHORT CONTRACTS....................................... $7,961,767 $7,724,038 $ 237,729
---------- ---------- ----------
LONG CONTRACTS:
Australian Dollar........................................... 8/12/99 $1,954,545 $1,984,411 $ 29,866
British Pound............................................... 8/12/99 241,680 236,571 (5,109)
Euro Dollar................................................. 8/12/99 3,844,620 3,620,261 (224,359)
Swedish Krona............................................... 8/12/99 1,434,929 1,347,622 (87,307)
Swiss Franc................................................. 8/12/99 480,773 452,489 (28,284)
---------- ---------- ----------
TOTAL LONG CONTRACTS........................................ $7,956,547 $7,641,354 ($ 315,193)
========== ========== ==========
</TABLE>
See notes to financial statements.
-54-
<PAGE> 56
GOVERNOR FUNDS
INTERMEDIATE TERM INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
ASSET BACKED SECURITIES (6.1%):
Banks (3.8%):
$ 7,000,000 Case Equipment Loan Trust,
5.77%, 8/15/05, Series
1999-A, Class A4............ $ 6,908,125
5,000,000 Mellon Bank, 6.02%, 11/25/13,
Series 1999-1, Class A-2.... 4,930,950
------------
11,839,075
------------
Financial Services (2.3%):
7,000,000 Discover Card Master Trust I,
5.90%, 10/15/04............. 6,920,200
------------
Total Asset Backed Securities......... 18,759,275
------------
CORPORATE BONDS (17.0%):
Banks (2.0%):
6,000,000 First of America Bank, 7.75%,
7/15/04..................... 6,307,500
------------
Broadcasting/Cable (1.8%):
6,000,000 Comcast Cable, 6.20%,
11/15/08.................... 5,610,000
------------
Financial Services (8.2%):
5,000,000 Ford Motor Credit Co., 5.80%,
1/12/09..................... 4,568,750
8,000,000 Household Financial Corp.,
6.00%, 5/1/04............... 7,760,000
8,000,000 Lehman Brothers Holding Co.,
7.25%, 10/15/03............. 8,000,000
5,000,000 Merrill Lynch & Co., 5.71%,
1/15/02, MTN................ 4,931,250
------------
25,260,000
------------
Industrials (2.0%):
6,000,000 Coca-Cola Put Asset Trust,
6.00%, 3/15/01(b)........... 5,970,000
------------
Retail (1.5%):
5,000,000 Lowes Companies, Inc., 6.50%,
3/15/29(b).................. 4,475,000
------------
Transportation & Shipping (1.5%):
5,000,000 CSX Corp., 6.80%, 12/1/28,
MTN......................... 4,500,000
------------
Total Corporate Bonds................. 52,122,500
------------
U.S. GOVERNMENT AGENCY SECURITIES (14.1%):
Federal Home Loan Bank (5.4%):
12,000,000 5.125%, 4/17/01............... 11,878,800
5,000,000 6.30%, 6/3/09................. 4,905,900
------------
16,784,700
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
U.S. GOVERNMENT AGENCY SECURITIES, CONTINUED:
Freddie Mac (3.9%):
$ 5,000,000 5.50%, 5/15/02................ $ 4,948,750
7,000,000 5.75%, 7/15/03................ 6,918,100
------------
11,866,850
------------
Fannie Mae (4.8%):
7,000,000 6.00% 1/14/05, MTN............ 6,890,100
5,000,000 6.23%, 7/21/08, MTN........... 4,806,100
3,000,000 6.25%, 5/15/29................ 2,846,250
------------
14,542,450
------------
Total U.S. Government Agency
Securities.......................... 43,194,000
------------
U.S. GOVERNMENT AGENCY/MORTGAGE BACKED SECURITIES
(23.2%):
Fannie Mae (13.8%):
7,197,774 7.00%, 12/1/11, Pool
#313224..................... 7,221,382
9,907,900 6.50%, 4/1/19, Pool #
252386...................... 9,615,518
6,725,846 6.50%, 7/1/28, Pool #437799... 6,498,580
9,680,848 6.50%, 1/1/29, Pool #456669... 9,352,184
9,332,960 7.00%, 2/1/29, Pool #481890... 9,231,977
------------
41,919,641
------------
Freddie Mac (9.4%):
9,957,653 5.50%, 4/1/14, Gold, Pool #
E76204...................... 9,428,205
10,000,000 6.00%, 5/15/21, Class PD,
Series 2104................. 9,768,100
10,000,000 6.00%, 1/15/24, Class PE,
Series 2137................. 9,499,000
------------
28,695,305
------------
Total U.S. Government Agency/Mortgage
Backed Securities................. 70,614,946
------------
U.S. GOVERNMENT GUARANTEED/MORTGAGE BACKED SECURITIES
(12.2%):
Government National Mortgage Association (12.2%):
6,753,034 6.25%, 3/20/22, Class B,
Series 1998-7............... 6,631,817
5,123,609 7.50%, 2/20/28, Pool #2549.... 5,151,481
4,147,637 6.75%, 5/15/28, Pool
#474256..................... 4,044,319
6,182,784 7.00%, 7/20/28, Pool #2616.... 6,085,405
7,625,586 6.50%, 8/20/28, Pool #2630.... 7,314,157
</TABLE>
Continued
-55-
<PAGE> 57
GOVERNOR FUNDS
INTERMEDIATE TERM INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
U.S. GOVERNMENT GUARANTEED/MORTGAGE BACKED SECURITIES,
CONTINUED:
Government National Mortgage Association, Continued:
$ 15,071 6.25%, 10/15/28, Pool
#484545..................... $ 14,298
8,232,587 7.00%, 12/15/28, Pool
#426720..................... 8,129,269
------------
Total U.S. Government Guaranteed/
Mortgage Backed Securities........ 37,370,746
------------
U.S. TREASURY SECURITIES (20.5%):
U.S. Treasury Bonds (12.0%):
10,000,000 11.625%, 11/15/02............. 11,752,900
5,000,000 8.125%, 5/15/21............... 6,071,650
8,000,000 6.125%, 11/15/27.............. 7,935,680
12,000,000 5.25%, 2/15/29................ 10,767,000
------------
36,527,230
------------
U.S. Treasury Notes (8.5%):
10,000,000 7.75%, 2/15/01................ 10,351,900
5,000,000 5.75%, 8/15/03................ 4,987,400
5,000,000 5.25%, 5/15/04................ 4,916,500
6,000,000 5.50%, 5/15/09................ 5,870,700
------------
26,126,500
------------
Total U.S. Treasury Securities 62,653,730
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES (6.5%):
5,448,252 Federated Government
Obligation Fund............. $ 5,448,252
14,090,375 Federated Prime Obligation
Fund........................ 14,090,375
429,103 Federated Treasury Fund....... 429,103
173 Governor Prime Money Market
Fund........................ 173
895 Governor U.S. Treasury
Obligations Money Market
Fund........................ 895
------------
Total Investment Company Securities 19,968,798
------------
DAILY SWEEP VEHICLE (0.0%):
133 Bank of New York Cash Sweep... 133
------------
Total Daily Sweep Vehicle 133
------------
Total Investments
(Cost $312,560,526)(a)--99.6%....... 304,684,128
Other assets in excess of
liabilities -- 0.4%....................... 1,296,397
------------
TOTAL NET ASSETS -- 100.0%............ $305,980,525
============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 228,778
Unrealized depreciation......................... (8,105,176)
-----------
Net unrealized depreciation..................... $(7,876,398)
===========
</TABLE>
(b) Represents a restricted security, purchased under Rule 144A, which is exempt
from registration under the Securities Act of 1933, as amended.
<TABLE>
<S> <C>
MTN -- Medium Term Note
</TABLE>
See notes to financial statements.
-56-
<PAGE> 58
GOVERNOR FUNDS
LIMITED DURATION GOVERNMENT SECURITIES FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------ -----------
<C> <S> <C>
U.S. TREASURY SECURITIES (56.2%):
U.S. Treasury Notes (56.2%):
$9,000,000 5.38%, 1/31/00................ $ 9,017,190
10,000,000 7.50%, 11/15/01............... 10,404,401
10,000,000 5.25%, 5/15/04................ 9,833,000
-----------
Total U.S. Treasury Securities....... 29,254,591
-----------
U.S. GOVERNMENT GUARANTEED SECURITIES (9.8%):
Private Export Funding Company (9.8%):
4,000,000 7.90%, 3/31/00................ 4,055,000
1,000,000 8.40%, 7/31/01................ 1,046,250
-----------
Total U.S. Government Guaranteed
Securities....................... 5,101,250
-----------
U.S. GOVERNMENT AGENCY/MORTGAGE BACKED SECURITIES
(4.5%):
Fannie Mae (0.0%):
12 10.00%, 10/1/00............... 13
-----------
Freddie Mac (4.5%):
2,177,613 9.00%, 4/1/16................. 2,325,277
-----------
Total U.S. Government Agency/Mortgage
Backed Securities................ 2,325,290
-----------
U.S. GOVERNMENT AGENCY SECURITIES (3.9%):
Fannie Mae (3.9%):
2,000,000 8.55%, 8/30/99................ 2,009,820
-----------
Total U.S. Government Agency
Securities....................... 2,009,820
-----------
U.S. GOVERNMENT GUARANTEED/MORTGAGE BACKED SECURITIES
(2.1%):
Government National Mortgage Association (2.1%):
112,653 8.50%, 2/15/17, Pool
#203632..................... 118,812
37,860 8.50%, 4/15/17, Pool
#189291..................... 39,942
348,544 8.50%, 7/15/21, Pool
#307983..................... 367,714
228,915 8.50%, 7/15/21, Pool
#306066..................... 241,505
332,577 8.50%, 1/15/23, Pool
#341948..................... 350,453
-----------
Total U.S. Government
Guaranteed/Mortgage
Backed Securities................
1,118,426
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------ -----------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES (0.2%):
105,262 Federated Government
Obligation Fund............. 105,262
-----------
Total Investment Company
Securities....................... 105,262
-----------
REPURCHASE AGREEMENTS (22.8%):
$8,749,000 Lehman Brothers, dated
6/30/99, 4.83%, matures
7/1/99, Proceeds at maturity
$8,750,174 (Collateralized
by $9,345,000 Freddie Mac,
6.50%, 1/15/28, Market Value
= $8,926,775)............... 8,749,000
3,094,000 Merrill Lynch Securities,
Inc., dated 6/30/99, 4.70%,
matures 7/1/99, Proceeds at
maturity $3,094,404
(Collateralized by
18,130,000 Freddie Mac,
0.00%, 12/11/25, Market
Value = $3,156,614)......... 3,094,000
-----------
Total Repurchase Agreements.......... 11,843,000
-----------
Total Investments
(Cost $51,985,819)(a)--99.5%....... 51,757,639
Other assets in excess of
liabilities--0.5%...................... 283,208
-----------
TOTAL NET ASSETS--100.0%............. $52,040,847
===========
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 71,032
Unrealized depreciation......................... (299,212)
------------
Net unrealized depreciation..................... $ (228,180)
============
</TABLE>
See notes to financial statements.
-57-
<PAGE> 59
GOVERNOR FUNDS
PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------------------------------------ ------------
<C> <S> <C>
MUNICIPAL BONDS (92.3%):
Pennsylvania (92.3%):
$1,330,000 Berks County, Pennsylvania Municipal Authority, 7.10%,
5/15/22, Prerefunded 5/15/04 @ 100, FGIC.................. $ 1,479,625
1,000,000 Bethlehem, Pennsylvania Area School District, Series A,
6.50%, 9/1/00, AMBAC...................................... 1,031,250
2,065,000 Bethlehem, Pennsylvania Water Authority, Series A, 6.30%,
11/15/15, Prerefunded 11/15/02 @ 100, MBIA................ 2,194,063
2,080,000 Blair County, Pennsylvania Hospital Health Care Bond, 5.30%,
8/15/17, Callable 8/15/07 @ 102, MBIA..................... 2,061,800
4,815,000 Central Dauphin, Pennsylvania School District, 5.13%,
12/1/14, MBIA............................................. 4,754,813
1,900,000 Central Dauphin, Pennsylvania School District, 6.00%,
6/1/01.................................................... 1,964,125
2,010,000 Crawford Central School District, 5.00%, 2/15/13, Callable
2/15/2009 @ 100, FGIC..................................... 1,959,750
250,000 Dauphin County, Pennsylvania General Authority Health
Center, Tressler Lutheran Services, Series A, 5.90%,
1/1/00.................................................... 252,250
1,000,000 Hempfield, Pennsylvania School District, Lancaster County,
6.40%, 8/15/05, Prerefunded 8/15/02 @ 100, FGIC........... 1,058,750
3,780,000 Lancaster County, Pennsylvania Solid Waste Management
Authority, 5.25%, 12/15/07, AMBAC......................... 3,850,875
4,085,000 Lower Merion Township, Pennsylvania Area School District,
5.125%, 5/15/13, Callable 5/15/08 @ 100................... 4,069,681
4,000,000 Lycoming County, Pennsylvania College Revenue Authority,
Pennsylvania College of Technology, 5.40%, 11/1/08,
Callable 5/1/03 @ 100, AMBAC.............................. 4,065,000
500,000 Lycoming County, Pennsylvania Hospital Authority, Series B,
7.40%, 7/1/99............................................. 500,000
1,000,000 Northampton County, Pennsylvania Higher Education Authority,
Lehigh University, 6.00%, 9/1/01.......................... 1,032,500
2,155,000 Northampton County, Pennsylvania Higher Education Authority,
Lehigh University, 6.90%, 10/15/06, Callable 10/15/01 @
102, MBIA................................................. 2,324,706
3,000,000 Pennsylvania Intergovernmental Cooperation Authority, 5.00%,
6/15/09, FGIC............................................. 2,996,250
4,000,000 Pennsylvania Intergovernmental Cooperation Authority, 5.25%,
6/15/10, FGIC............................................. 4,060,000
1,375,000 Pennsylvania State Higher Education Assistance Agency,
Student Loan Revenue, Series A, 6.80%, 12/1/00, FGIC...... 1,428,281
575,000 Pennsylvania State Higher Education Facilities Authority,
5.90%, 8/15/00, MBIA...................................... 588,656
1,000,000 Pennsylvania State Higher Education Facilities Authority,
Drexel University, 7.00%, 5/1/02, Prerefunded 5/1/00 @
100, MBIA................................................. 1,027,960
3,775,000 Pennsylvania State Higher Education Facilities Authority,
Series A, 5.35%, 1/1/08, Callable 1/1/06 @ 101............ 3,779,719
145,000 Pennsylvania State Higher Education Facilities Authority,
Thomas Jefferson University, Series A, 6.875%, 7/1/99,
MBIA...................................................... 145,000
1,425,000 Pennsylvania State Higher Education Facilities Authority,
Thomas Jefferson University, Series A, 5.90%, 8/15/00..... 1,457,063
2,000,000 Pennsylvania State Higher Education, Duquesne University,
Series A, 7.00%, 4/1/10, Callable 4/1/01 @ 100, MBIA...... 2,077,500
1,500,000 Pennsylvania State Industrial Development Authority Revenue,
Economic Development, 5.00%, 7/1/00, AMBAC................ 1,522,350
1,250,000 Pennsylvania State Industrial Development Authority Revenue,
Economic Development, Series A, 7.00%, 1/1/11, Prerefunded
7/1/01 @ 102.............................................. 1,342,188
1,655,000 Pennsylvania State Public School Building Authority Revenue,
School District of York, Series A, 4.75%, 2/15/14,
Callable 2/15/08 @ 100, FGIC.............................. 1,566,044
1,735,000 Pennsylvania State Public School Building Authority Revenue,
School District of York, Series A, 4.80%, 2/15/15,
Callable 2/15/08 @ 100, FGIC.............................. 1,637,406
</TABLE>
Continued
-58-
<PAGE> 60
GOVERNOR FUNDS
PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------------------------------------ ------------
<C> <S> <C>
MUNICIPAL BONDS, CONTINUED:
Pennsylvania, Continued:
$1,820,000 Pennsylvania State Public School Building Authority Revenue,
School District of York, Series A, 4.85%, 2/15/16,
Callable 2/15/08 @ 100, FGIC.............................. $ 1,717,625
5,000,000 Pennsylvania State Turnpike Common Oil Franchise Tax
Revenue, Series A, 5.50%, 12/1/12, Prerefunded 12/1/04 @
102, AMBAC................................................ 5,318,750
5,000,000 Pennsylvania State Turnpike Common Oil Franchise Tax
Revenue, Series B, 5.25%, 12/1/14, Callable 12/1/08 @ 101,
AMBAC..................................................... 4,975,000
1,000,000 Pennsylvania State Turnpike, Series J, 6.40%, 12/1/00,...... 1,036,250
1,000,000 Pennsylvania State, Second Series, 5.00%, 11/15/02, AMBAC... 1,023,750
1,000,000 Philadelphia, Pennsylvania Gas Works, 14th Series, 5.50%,
7/1/04, FSA............................................... 1,042,500
7,160,000 Philadelphia, Pennsylvania Hospitals & Higher Education
Facilities Authority Revenue, Series A, 5.00%, 5/15/11,
Callable 5/15/08 @ 101.................................... 6,900,449
1,000,000 Philadelphia, Pennsylvania Hospitals & Higher Education
Facilities Authority, Children's Hospital, Series A,
6.50%, 2/15/21, Prerefunded 2/15/02 @ 102................. 1,072,500
1,520,000 Philadelphia, Pennsylvania School District, Series B, 5.50%,
9/1/15, Prerefunded 9/1/05 @ 102, AMBAC................... 1,615,000
5,480,000 Philadelphia, Pennsylvania School District, Series B, 5.50%,
9/1/15, AMBAC............................................. 5,562,200
2,000,000 Philadelphia, Pennsylvania Water & Wastewater Revenue,
5.00%, 6/15/02, FSA....................................... 2,037,500
1,000,000 Philadelphia, Pennsylvania Water & Wastewater Revenue,
6.25%, 8/1/02, MBIA....................................... 1,055,000
3,500,000 Philadelphia, Pennsylvania Water & Wastewater Revenue,
Series A, 5.00%, 8/1/13, Callable 8/1/7 @ 102, AMBAC...... 3,412,500
1,000,000 Philadelphia, Pennsylvania, 5.00%, 5/15/02, FGIC............ 1,018,750
5,310,000 Pittsburgh, Pennsylvania, Series A, 5.50%, 9/1/14, AMBAC.... 5,462,663
1,700,000 Sayre, Pennsylvania Health Care Facilities Authority, Series
A, 6.60%, 3/1/01, AMBAC................................... 1,763,750
1,850,000 York County, Pennsylvania Industrial Development Authority,
6.25%, 7/1/02............................................. 1,933,250
------------
103,175,042
------------
Total Municipal Bonds................................................ 103,175,042
------------
U.S. GOVERNMENT AGENCY SECURITIES (4.6%):
Fannie Mae (4.6%):
5,000,000 6.80%, 1/10/03.............................................. 5,118,900
------------
Total U.S. Government Agency Securities.............................. 5,118,900
------------
</TABLE>
Continued
-59-
<PAGE> 61
GOVERNOR FUNDS
PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------------------------------------ ------------
<C> <S> <C>
U.S. TREASURY SECURITIES (1.7%):
U.S. Treasury Note (1.7%):
$2,000,000 5.50%, 5/15/09.............................................. $ 1,956,900
------------
Total U.S. Treasury Securities....................................... 1,956,900
------------
INVESTMENT COMPANY SECURITIES (2.3%):
2,604,266 Federated Pennsylvania Municipal Cash Fund.................. 2,604,266
------------
Total Investment Company Securities.................................. 2,604,266
------------
Total Investments (Cost $114,306,939) (a)--100.9%.................... 112,855,108
Liabilities in excess of other assets--(0.9)%........................ (962,267)
------------
TOTAL NET ASSETS--100.0%............................................. $111,892,841
============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 734,721
Unrealized depreciation......................... (2,186,552)
------------
Net unrealized depreciation..................... $ (1,451,831)
============
</TABLE>
<TABLE>
<S> <C>
AMBAC -- AMBAC Indemnity Corp.
FGIC -- Insured by the Financial Guaranty Insurance Corp.
MBIA -- Insured by the Municipal Bond Insurance Assoc.
FSA -- Financial Security Assurance Corp.
</TABLE>
See notes to financial statements.
-60-
<PAGE> 62
GOVERNOR FUNDS
LIFESTYLE CONSERVATIVE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ------ ------------------------------------------------------------ --------
<C> <S> <C>
AFFILIATED MUTUAL FUNDS (100.7%)
EQUITY FUNDS (37.5%)
1,245 Governor Aggressive Growth Fund............................. $ 14,964
1,932 Governor Established Growth Fund............................ 30,688
1,002 Governor International Equity Fund.......................... 10,606
--------
56,258
--------
FIXED INCOME FUNDS (58.2%)
3,717 Governor Intermediate Term Income Fund...................... 35,273
5,311 Governor Limited Duration Government Securities Fund........ 52,210
--------
87,483
--------
MONEY MARKET FUNDS (5.0%)
7,495 Governor U.S. Treasury Obligations Money Market Fund........ 7,495
--------
Total Affiliated Mutual Funds...................................... 151,236
--------
Total Investments (Cost $149,987)(a)--100.7%....................... 151,236
Liabilities in excess of other assets--(0.7)%...................... (1,117)
--------
TOTAL NET ASSETS--100.0%........................................... $150,119
========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $ 2,443
Unrealized depreciation............................. (1,194)
-------
Net Unrealized appreciation......................... $ 1,249
=======
</TABLE>
See notes to financial statements
-61-
<PAGE> 63
GOVERNOR FUNDS
LIFESTYLE MODERATE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ------ ------------------------------------------------------------ --------
<C> <S> <C>
AFFILIATED MUTUAL FUNDS (100.2%)
EQUITY FUNDS (59.0%)
3,221 Governor Aggressive Growth Fund............................. $ 38,716
6,033 Governor Established Growth Fund............................ 95,805
3,180 Governor International Equity Fund.......................... 33,680
--------
168,201
--------
FIXED INCOME FUNDS (38.3%)
5,696 Governor Intermediate Term Income Fund...................... 54,059
5,610 Governor Limited Duration Government Securities Fund........ 55,148
--------
109,207
--------
MONEY MARKET FUNDS (2.9%)
8,324 Governor U.S. Treasury Obligations Money Market Fund........ 8,324
--------
Total Affiliated Mutual Funds...................................... 285,732
--------
Total Investments (Cost $277,270)(a)--100.2%....................... 285,732
Liabilities in excess of other assets--(0.2)%...................... (690)
--------
TOTAL NET ASSETS--100.0%........................................... $285,042
========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................ $ 10,697
Unrealized depreciation............................ (2,235)
--------
Net Unrealized appreciation........................ $ 8,462
========
</TABLE>
See notes to financial statements.
-62-
<PAGE> 64
GOVERNOR FUNDS
LIFESTYLE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ------ ------------------------------------------------------------ --------
<C> <S> <C>
AFFILIATED MUTUAL FUNDS (100.2%)
EQUITY FUNDS (76.7%)
3,244 Governor Aggressive Growth Fund............................. $ 38,996
1,410 Governor Emerging Growth Fund............................... 16,894
4,759 Governor Established Growth Fund............................ 75,580
3,361 Governor International Equity Fund.......................... 35,593
--------
167,063
--------
FIXED INCOME FUNDS (21.6%)
2,771 Governor Intermediate Term Income Fund...................... 26,300
2,102 Governor Limited Duration Government Securities Fund........ 20,661
--------
46,961
--------
MONEY MARKET FUNDS (1.9%)
4,161 Governor U.S. Treasury Obligations Money Market Fund........ 4,161
--------
Total Affiliated Mutual Funds...................................... 218,185
--------
Total Investments (Cost $207,506)(a)--100.2%....................... 218,185
Liabilities in excess of other assets--(0.2)%...................... (373)
--------
TOTAL NET ASSETS--100.0%........................................... $217,812
========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................ $ 11,792
Unrealized depreciation............................ (1,113)
--------
Net Unrealized appreciation........................ $ 10,679
========
</TABLE>
See notes to financial statements.
-63-
<PAGE> 65
GOVERNOR FUNDS
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ---------- ------------------------------------------------------------ -----------
<C> <S> <C>
U.S. TREASURY SECURITIES (51.0%):
U.S. Treasury Bill (25.5%):
$5,000,000 4.12%, 7/15/99.............................................. $ 4,991,989
-----------
U.S. Treasury Note (25.5%):
5,000,000 6.875%, 8/31/99............................................. 5,016,711
-----------
Total U.S. Treasury Securities......................................... 10,008,700
-----------
U.S. GOVERNMENT GUARANTEED SECURITIES (20.9%):
Private Export Funding Company (20.9%):
4,000,000 7.90%, 3/31/00.............................................. 4,081,635
-----------
Total U.S. Government Guaranteed Securities............................ 4,081,635
-----------
INVESTMENT COMPANY SECURITIES (0.0%):
620 Federated Treasury Fund..................................... 620
-----------
Total Investment Company Securities.................................... 620
-----------
U.S. TREASURY SECURITY COLLATERALIZED REPURCHASE AGREEMENTS (27.5%):
376,000 Lehman Brothers, dated 6/30/99, 4.70%, matures 7/1/99,
Proceeds at maturity $376,049 (Collateralized by $390,000
U.S. Treasury Bond, 6.125%, 11/15/27, Market Value =
$386,040)................................................. 376,000
5,000,000 Merrill Lynch Securities, Inc., dated 6/30/99, 4.70%,
matures 7/1/99, Proceeds at maturity $5,000,653
(Collateralized by $5,110,000 U.S. Treasury Note, 4.50%,
9/30/00, Market Value = $5,103,613)....................... 5,000,000
-----------
Total U.S. Treasury Security Collateralized Repurchase Agreements...... 5,376,000
-----------
Total Investments (Amortized Cost $19,466,955)(a)--99.4%............... 19,466,955
Other assets in excess of liabilities--0.6%............................ 107,988
-----------
TOTAL NET ASSETS--100.0%............................................... $19,574,943
===========
</TABLE>
- ---------------
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements.
-64-
<PAGE> 66
GOVERNOR FUNDS
PRIME MONEY MARKET FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ----------- ---------------------------- ------------
<C> <S> <C>
COMMERCIAL PAPER (39.6%):
Agriculture (4.6%):
$12,000,000 Cargil, 4.82%, 7/8/99....... $ 11,988,753
------------
Banks (9.1%):
12,000,000 Allied Signal, 4.84%,
7/13/99................... 11,980,641
12,000,000 Zions Bancorp, 5.05%,
7/15/99................... 11,976,433
------------
23,957,074
------------
Entertainment (3.8%):
10,000,000 Walt Disney Corp., 5.00%,
7/13/99................... 9,983,333
------------
Financial Services (3.8%):
10,000,000 Cooper River Fund, 5.15%,
7/14/99................... 9,981,403
------------
Oil & Gas (4.6%):
12,000,000 Motiva Enterprises, 4.89%,
7/21/99................... 11,967,400
------------
Photography (4.6%):
12,000,000 Eastman Kodak, 4.78%,
7/16/99................... 11,976,100
------------
Telecommunications (9.1%):
12,000,000 Bellsouth
Telecommunications, 4.83%,
7/13/99................... 11,980,680
------------
12,000,000 Lucent Technologies, 4.95%,
7/27/99................... 11,957,100
------------
23,937,780
------------
Total Commercial Paper.................. 103,791,843
------------
CORPORATE BONDS (18.7%):
Banking & Financial Services (8.4%):
10,000,000 Goldman Sachs & Co.*,
5.125%, 7/14/99........... 10,011,214
12,000,000 JP Morgan Co.*, 4.9%,
7/6/99.................... 11,997,923
------------
22,009,137
------------
Banks (3.8%):
10,000,000 American Express Corp.*,
4.95%, 7/27/99............ 10,000,000
------------
Beverages (3.8%):
10,000,000 Anheuser Busch, Inc.*,
4.90%, 6/16/00............ 9,994,323
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ----------- ---------------------------- ------------
<C> <S> <C>
CORPORATE BONDS, CONTINUED:
Retail (2.7%):
$ 7,000,000 Lowe's Companies, Inc.,
6.95%, 2/15/00............ $ 7,073,448
------------
Total Corporate Bonds................... 49,076,908
------------
U.S. GOVERNMENT AGENCY SECURITIES (1.9%):
Student Loan Marketing Association
(Sallie Mae) (1.9%):
5,000,000 Sallie Mae*, 5.01%,
7/12/99................... 5,000,000
------------
Total U.S. Government Agency
Securities................................ 5,000,000
------------
INVESTMENT COMPANY SECURITIES (0.0%):
99,833 Federated Treasury Fund..... 99,833
------------
Total Investment Company Securities..... 99,833
------------
U.S. GOVERNMENT AGENCY SECURITY COLLATERALIZED
REPURCHASE AGREEMENTS (40.0%):
63,860,000 Lehman Brothers, dated
6/30/99, 4.88%, matures
7/1/99, Proceeds at
maturity $63,868,657
(Collateralized by
$139,829,250 U.S.
Government Agencies, 0.00%
- 3.29%, 7/25/26 -
5/16/29, Market Value =
$65,137,442).............. 63,860,000
41,012,000 Merrill Lynch Securities,
Inc., dated 6/30/99,
4.70%, matures 7/1/99,
Proceed at maturity
$41,017,354
(Collateralized by
$142,195,000 Freddie Mac,
0.00%, 11/24/14 - 1/26/18,
Market Value =
$41,833,361).............. 41,012,000
------------
Total U.S. Government Agency Security
Collateralized Repurchase
Agreements................................ 104,872,000
------------
Total Investments (Amortized Cost
$262,840,584)(a)--100.2%.............. 262,840,584
Liabilities in excess of other
assets--(0.2)%............................ (594,377)
------------
TOTAL NET ASSETS--100.0%................ $262,246,207
============
</TABLE>
- ---------------
(a) Cost for federal income tax and financial reporting purposes are the same.
* Denotes variable rate security. Rate presented represents rate in effect on
June 30, 1999. Maturity date reflects next rate change date.
See notes to financial statements.
-65-
<PAGE> 67
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
1. ORGANIZATION:
The Governor Funds (the "Trust") was organized on September 3, 1998 as a
successor to the KeyPremier Funds of The Sessions Group which was organized
as an Ohio business trust on April 25, 1988. The Trust is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company established as a Delaware business
trust. The Trust is authorized to issue an unlimited number of shares that
are units of beneficial interest, without par value. The Trust offers
shares of the following series for which Governors Group Advisors, Inc., a
wholly owned subsidiary of Keystone Financial, Inc., serves as investment
advisor: the Established Growth Fund, the Aggressive Growth Fund, the
Emerging Growth Fund, the International Equity Fund, the Intermediate Term
Income Fund, the Limited Duration Government Securities Fund, the
Pennsylvania Municipal Bond Fund, the Lifestyle Conservative Growth Fund,
the Lifestyle Moderate Growth Fund, the Lifestyle Growth Fund, the U.S.
Treasury Obligations Money Market Fund, and the Prime Money Market Fund
(collectively, the "Funds" and individually, a "Fund").
The Prime Money Market Fund is authorized to issue two classes of shares:
Investor Shares and S Shares. Each class of shares has substantially
identical rights and privileges except with respect to fees paid under
shareholder servicing or distribution plans, expenses allocable exclusively
to each class of shares, voting rights on matters affecting a single class
of shares, and the exchange privilege of each class of shares.
The Funds' investment objectives are as follows:
<TABLE>
<CAPTION>
FUND OBJECTIVE
---- ---------
<S> <C>
Established Growth Fund Growth of capital with some current
income as a secondary objective
Aggressive Growth Fund Growth of capital
Emerging Growth Fund Long-term growth of capital
International Equity Fund Capital appreciation
Intermediate Term Income Fund Current income with long-term growth of
capital as a secondary objective
Limited Duration Government Securities Fund Current income with preservation of
capital as a secondary objective
Pennsylvania Municipal Bond Fund Income which is exempt from federal
income tax and Pennsylvania state income
tax and preservation of capital
Lifestyle Conservative Growth Fund Capital appreciation and income
Lifestyle Moderate Growth Fund Capital appreciation with income as a
secondary objective
Lifestyle Growth Fund Capital appreciation
</TABLE>
Continued
-66-
<PAGE> 68
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
FUND OBJECTIVE
---- ---------
<S> <C>
U.S. Treasury Obligations Money Market Fund Current income with liquidity and
stability of principal
Prime Money Market Fund Current income with liquidity and
stability of principal
</TABLE>
2. REORGANIZATION:
The Trust entered an Agreement and Plan of Reorganization whereby each
KeyPremier Fund (each a series of the Sessions Group) was reorganized as a
separate series of the Governor Funds, a Delaware business trust registered
as an investment company under the 1940 Act. As part of the reorganization,
on January 30, 1999, the KeyPremier Established Growth Fund, KeyPremier
Aggressive Growth Fund, KeyPremier Emerging Growth Fund, KeyPremier
Intermediate Term Income Fund, KeyPremier Limited Duration Government
Securities Fund, KeyPremier Pennsylvania Municipal Bond Fund, KeyPremier
U.S. Treasury Obligations Money Market Fund and KeyPremier Prime Money
Market Fund transferred all of their assets and liabilities with
approximate values of $261,937,433, $129,317,216, $8,985,038, $309,362,173,
$48,422,386, $115,922,921, $22,055,955 and $ 239,003,116, respectively, in
exchange for an equal number of shares of the Governor Established Growth
Fund, Governor Aggressive Growth Fund, Governor Emerging Growth Fund,
Governor Intermediate Term Income Fund, Governor Limited Duration
Government Securities Fund, Governor Pennsylvania Municipal Bond Fund,
Governor U.S. Treasury Obligations Money Market Fund and Governor Prime
Money Market Fund, respectively. Net unrealized appreciation/(depreciation)
on investment securities included in the above amounts were $144,262,288,
$39,572,737, $647,274, $3,565,552, ($12,570), $3,064,957, $0 and $0,
respectively. The accompanying statements of operations, statements of
changes in net assets and financial highlights for these funds represent
the historical operations of the KeyPremier Funds for periods prior to
January 30, 1999.
3. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Trust in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of income
and expenses for the period. Actual results could differ from those
estimates.
SECURITIES VALUATION:
Investments of the U.S. Treasury Obligations Money Market Fund and Prime
Money Market Fund (collectively, "the money market funds"), are valued
at amortized cost, which approximates market value. Under the amortized
cost method, discount or premium is amortized on a constant basis to the
maturity of the security. In addition, each of the money market funds
may not a) purchase any
Continued
-67-
<PAGE> 69
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
instrument with a remaining maturity greater than 397 calendar days
unless such investment is subject to a demand feature, or b) maintain a
dollar-weighted average portfolio maturity which exceeds 90 days.
Investments in common and preferred stocks, corporate bonds, commercial
paper, municipal securities and U.S. Government securities of the
Established Growth Fund, Aggressive Growth Fund, Emerging Growth Fund,
International Equity Fund, Intermediate Term Income Fund, Limited
Duration Government Securities Fund, and Pennsylvania Municipal Bond
Fund (collectively, "the variable net asset value funds"), are valued
based upon the current available prices in the principal market in which
such securities are normally traded. Investments in investment companies
are valued at their net asset values as reported by such companies.
Other securities for which quotations are not readily available are
valued at their fair value under procedures established by the Trust's
Board of Trustees, including the use of approved independent pricing
services. The differences between the cost and market values of
investments held by the variable net asset value funds are reflected as
either unrealized appreciation or depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the amortization of
premium or discount. Dividend income is recorded on the ex-dividend
date. Gains or losses realized on sales of securities are determined by
comparing the identified cost of the security lot sold with the net
sales proceeds.
REPURCHASE AGREEMENTS:
The Funds may acquire repurchase agreements from financial institutions
such as banks and broker-dealers which Governors Group Advisors, Inc. or
the Funds' sub-advisors, Martindale Andres & Company, Inc. and Brinson
Partners, Inc., deem creditworthy under guidelines approved by the Board
of Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase
price generally equals the price paid by each Fund plus interest
negotiated on the basis of current short-term rates, which may be more
or less than the rate on the underlying portfolio securities. The
seller, under a repurchase agreement, is required to maintain the value
of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). Securities subject to
repurchase agreements are held by the Funds' custodian or another
qualified custodian or in the Federal Reserve/Treasury book-entry
system.
FOREIGN CURRENCY TRANSLATION:
The accounting records of the Trust are maintained in U.S. dollars.
Investment securities and other assets and liabilities of the
International Equity Fund denominated in a foreign currency are
translated into U.S. dollars at current exchange rates. Purchases and
sales of securities, income receipts and expense payments are translated
into U.S. dollars at the exchange rate on the dates of the transactions.
Continued
-68-
<PAGE> 70
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
The portion of realized gains or losses and unrealized appreciation or
depreciation from investments due to fluctuations in foreign currency
exchange rates is not separately disclosed. Such fluctuations are
included with the net realized and unrealized gain or loss from
investments.
Realized foreign exchange gains or losses arise from sales and
maturities of securities, sales of foreign currencies, currency exchange
fluctuations between the trade and settlement dates of securities
transactions, and the difference between the amount of assets and
liabilities recorded and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities,
including investments in securities, resulting from changes in currency
exchange rates.
FUTURES CONTRACTS:
The Established Growth Fund, Aggressive Growth Fund, Emerging Growth
Fund, International Equity Fund, Intermediate Term Income Fund and
Pennsylvania Municipal Bond Fund (the Portfolios) may invest in long or
short futures contracts for hedging purposes, to increase total return
(i.e. for speculative purposes) or to maintain liquidity. The Portfolios
bear the risk arising from changes in the value of these financial
instruments. At the time a Portfolio enters into a futures contract it
is required to make a margin deposit with the custodian of the specified
amount of liquid assets. Subsequently, as the market price of the
futures contract fluctuates, gains or losses are recorded and payments
are made, on a daily basis, between the portfolio and the broker. The
Statements of Operations reflect gains and losses as realized for closed
futures contracts and as unrealized for open futures contracts. The
Portfolios did not have any open futures contracts for the year ended
June 30, 1999.
FORWARD CURRENCY CONTRACTS:
A forward currency contract ("forward") is an agreement between two
parties to buy and sell a currency at a set price on a future date. The
market value of the forward fluctuates with changes in currency exchange
rates. The forward is marked-to-market daily and the change in market
value is recorded by a Fund as unrealized appreciation or depreciation.
When the forward is closed, the Fund records a realized gain or loss
equal to the fluctuation in value during the period the forward was
open. A Fund could be exposed to risk if a counterparty is unable to
meet the terms of a forward or if the value of the currency changes
unfavorably. Activity in forward currency contracts during the year
ended June 30, 1999 was primarily for purposes of hedging exposure to
foreign currency fluctuations between trade date and settlement date
related to security transactions.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid monthly
and distributable net realized capital gains, if any, are declared and
distributed at least annually for the money market funds. Dividends from
net investment income are declared and paid monthly and distributable
net realized capital gains, if any, are declared and distributed
annually for the Intermediate Term Income, Limited Duration Government
Securities, and Pennsylvania Municipal Bond Funds.
Continued
-69-
<PAGE> 71
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
Dividends from net investment income are declared and paid quarterly and
distributable net realized capital gains, if any, are declared and
distributed annually for the Established Growth, Aggressive Growth,
Lifestyle Conservative Growth, Lifestyle Moderate Growth, and Lifestyle
Growth Funds. Dividends from net investment income are declared and paid
semi-annually and distributable net realized capital gains, if any, are
declared and distributed annually for the Emerging Growth Fund.
Dividends from net investment income are declared and paid annually and
distributable net realized capital gains, if any, are declared and
distributed annually for the International Equity Fund.
The amounts of dividends from net investment income and distributions
from net realized gains are determined in accordance with federal income
tax regulations, which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary
or permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the components of net
assets based on their federal tax-basis treatment; temporary differences
do not require reclassification. Dividends and distributions to
shareholders which exceed net investment income and realized capital
gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or
distributions in excess of net realized gains. To the extent they exceed
net investment income and net realized gains for tax purposes, they are
reported as distributions of capital. Net investment losses incurred by
a Fund are reclassified as an offset to capital in the accompanying
statements of assets and liabilities.
As of June 30, 1999, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to
paid-in-capital:
<TABLE>
<CAPTION>
ACCUMULATED UNDISTRIBUTED ACCUMULATED NET REALIZED
NET INVESTMENT INCOME GAIN/(LOSS) ON INVESTMENTS
------------------------- --------------------------
<S> <C> <C>
Established Growth Fund......... $ (12) $ 12
Aggressive Growth Fund.......... 163,944 (245,328)
Emerging Growth Fund............ 48,364 (48,364)
International Equity Fund....... 73,277 (73,277)
Intermediate Term Income Fund... 26 (26)
Limited Duration Government
Securities Fund............... 3 (3)
Lifestyle Growth Fund........... 63 (12)
</TABLE>
FEDERAL INCOME TAXES:
It is the policy of each Fund to qualify or continue to qualify as a
regulated investment company by complying with the provisions available
to certain investments companies, as defined in applicable sections of
the Internal Revenue Code, and to make distributions of net investment
income and net realized capital gains sufficient to relieve it from all,
or substantially all, federal income taxes.
Continued
-70-
<PAGE> 72
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following
fiscal year. The following Funds had deferred losses, which will be
treated as arising on the first day of the fiscal year ending June 30,
2000:
<TABLE>
<CAPTION>
CAPITAL LOSS
FUND DEFERRED
---- ------------
<S> <C>
Intermediate Term Income Fund.......................... $6,310,198
Limited Duration Government Securities Fund............ 555,902
U.S. Treasury Obligations Money Market Fund............ 25
Prime Money Market Fund................................ 451
</TABLE>
ORGANIZATION COSTS:
All expenses incurred in connection with each Fund's organization and
registration under the 1940 Act and the Securities Act of 1933 were paid
by that Fund, except for the Emerging Growth Fund. Such expenses, except
those of the Emerging Growth Fund, are amortized over a period of five
years commencing with the date of the initial public offering.
On June 30, 1998 the Trust adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." Under the provisions of
SOP 98-5, costs associated with organizing a fund which commences
operating subsequent to June 30, 1998, must be expensed as incurred and
may not be amortized over future periods.
Accordingly, costs incurred in connection with the organization of the
Emerging Growth Fund, International Equity Fund, Lifestyle Conservative
Growth Fund, Lifestyle Moderate Growth Fund and Lifestyle Growth Fund
were expensed as incurred and are included in "Other Expenses" in the
accompanying Statements of Operations.
OTHER:
The Funds may maintain a cash balance with their custodian and receive a
reduction of their custody fees and expenses for the amount of interest
earned on such uninvested cash balances. For financial reporting
purposes for the year ended June 30, 1999, custodian fees and expenses
and expenses paid by third parties were increased by the following
amount for the following Funds:
<TABLE>
<S> <C>
Aggressive Growth Fund................................. $ 392
Limited Duration Government Securities Fund............ 1,573
U.S. Treasury Obligations Money Market Fund............ 1,369
Prime Money Market Fund................................ 3,634
</TABLE>
There was no effect on net investment income. The Funds could have
invested such cash amounts in an income-producing asset if they had not
agreed to a reduction of fees or expenses under the expense offset
arrangement with their custodian.
Continued
-71-
<PAGE> 73
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
4. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of portfolio securities (excluding short-term
securities) for the variable net asset value funds for the period ended
June 30, 1999, are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Established Growth Fund......................... $ 5,148,702 $ 38,321,277
Aggressive Growth Fund.......................... 20,629,200 29,056,500
Emerging Growth Fund............................ 11,114,579 3,440,314
International Equity Fund....................... 42,297,028 6,131,406
Intermediate Term Income Fund................... 434,080,788 417,436,255
Limited Duration Government Securities Fund..... 142,830,598 132,401,455
Pennsylvania Municipal Bond Fund................ 105,038,920 99,358,550
Lifestyle Conservative Growth Fund.............. 143,321 835
Lifestyle Moderate Growth Fund.................. 276,862 8,108
Lifestyle Growth Fund........................... 203,633 299
</TABLE>
5. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Funds by Governors Group
Advisors, Inc. (the "Advisor"), a wholly owned subsidiary of Keystone
Financial, Inc. The Advisor entered into a Sub-Advisory Agreement with
Martindale Andres & Company, Inc., also a wholly owned subsidiary of
Keystone Financial, Inc., for each of the Funds other than the
International Equity Fund. The Advisor has also entered into a Sub-Advisory
Agreement with Brinson Partners, Inc., a wholly owned subsidiary of UBS AG,
for the International Equity Fund. Under the terms of the investment
advisory agreement, Governors Group Advisors, Inc. is entitled to receive
fees from the Funds based on a percentage of the average net assets of each
Fund. Fees payable under the Sub-Advisory Agreements are borne by the
Advisor, and not by the Funds.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS",
or the "Distributor"), an Ohio limited partnership, BISYS Fund Services
Ohio, Inc. ("BISYS Ohio") and BISYS Fund Services, Inc. ("BISYS Services")
are subsidiaries of The BISYS Group, Inc.
Governors Group Advisors, Inc. serves the Funds as co-administrator, and
BISYS Ohio and BISYS serve the Funds as co-administrator and distributor,
respectively. Pursuant to the management and administration agreement, the
Funds pay BISYS and Governors Group Advisors, Inc. a monthly fee for their
services at an annual rate of 0.15% of the aggregate average daily net
assets of the Funds except for the Lifestyle Funds. BISYS Services serves
the Funds as transfer agent and mutual fund accountant. BISYS Services
voluntarily waived or reimbursed the Lifestyle Conservative Growth Fund,
Lifestyle Moderate Growth Fund and Lifestyle Growth Fund $21,767, $21,914
and $21,781, respectively.
The Trust has adopted an Administrative Services Plan, pursuant to which
each Fund is authorized to pay compensation to banks and other financial
institutions (each a "Service Organization"), which may include Martindale
Andres & Company, Inc., and its correspondent and affiliated banks and
BISYS, for providing ministerial, recordkeeping and/or administrative
support services to their customers who are the
Continued
-72-
<PAGE> 74
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
beneficial or record owners of a Fund. The compensation, which is paid
monthly, under the Administrative Services Plan is a fee computed daily at
an annual rate of up to 0.25% of the average daily net asset value of each
of the Funds.
The Trust has adopted a Distribution Plan under Rule 12b-1 under the 1940
Act (the "12b-1 Plan") pursuant to which the Lifestyle Conservative Growth
Fund, Lifestyle Moderate Growth Fund and Lifestyle Growth Fund
(collectively, the "Lifestyle Funds") are authorized to reimburse the
Distributor. Amounts paid to the Distributor under the 12b-1 Plan may be
used by the Distributor to pay securities broker-dealers or other financial
intermediaries for providing personal services to shareholders of the
Lifestyle Funds, including responding to inquiries, providing information
to shareholders about their Lifestyle Fund accounts, establishing and
maintaining accounts and records, processing dividend and distribution
payments, arranging for bank wires, assisting in transactions, and changing
account information. Under the 12b-1 Plan, each Lifestyle Fund may
reimburse the Distributor at an annual rate of up to 0.50% of the average
daily net assets of each Lifestyle Fund.
BISYS is also entitled to receive commissions on sales of shares of the
variable net asset value funds. For the year ended June 30, 1999, BISYS
received $227,912 from commissions earned on sales of shares of the
variable net asset value funds, of which $4,249 was reallowed to
broker-dealers affiliated with Keystone Financial, Inc.
Certain officers and trustees of the Trust are affiliated with BISYS and
the Advisor. The Funds make no direct payments to these affiliated officers
and trustees.
Expenses for the Trust include legal fees paid to Drinker Biddle & Reath
LLP. A partner of that firm serves as secretary of the Trust.
Fees may be voluntarily reduced to assist the Funds in maintaining
competitive expense ratios.
Information regarding these transactions is as follows for the year ended
June 30, 1999:
<TABLE>
<CAPTION>
INTERMEDIATE
ESTABLISHED AGGRESSIVE EMERGING INTERNATIONAL TERM
GROWTH GROWTH GROWTH EQUITY INCOME
FUND FUND FUND FUND FUND
----------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of average
net assets)........................ 0.75% 1.00% 1.25% 0.75% 0.60%
Voluntary fee reductions............. $513,293 $444,537 $85,064 $122,287 $890,336
ADMINISTRATION FEES:
Annual fee before voluntary fee
reductions (percentage of average
net assets)........................ 0.15% 0.15% 0.15% 0.15% 0.15%
Voluntary fee reductions............. $ 36,696 $ 18,184 $ 1,290 $ 5,035 $ 44,983
ADMINISTRATIVE SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of average
net assets)........................ 0.25% 0.25% 0.25% 0.25% 0.25%
Voluntary fee reductions............. $144,496 $ 73,388 $12,219 $ -- $308,223
</TABLE>
Continued
-73-
<PAGE> 75
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
<TABLE>
<CAPTION>
LIMITED DURATION PENNSYLVANIA LIFESTYLE LIFESTYLE
GOVERNMENT MUNICIPAL CONSERVATIVE MODERATE LIFESTYLE
SECURITIES BOND GROWTH GROWTH GROWTH
FUND FUND FUND FUND FUND
---------------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)........... 0.60% 0.60% 0.25% 0.25% 0.25%
Voluntary fee reductions........ $124,719 $345,784 $ 3 $ 12 $ 4
ADMINISTRATION FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)........... 0.15% 0.15% -- -- --
Voluntary fee reductions........ $ 7,612 $ 17,193 $ -- $ -- $ --
ADMINISTRATIVE SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)........... 0.25% 0.25% 0.25% 0.25% 0.25%
Voluntary fee reductions........ $ 49,563 $120,042 $ 59 $ 156 $ 108
12B-1 FEES:
Annual fee before voluntary fee
reductions (percentage of
average net assets)........... -- -- 0.50% 0.50% 0.50%
Voluntary fee reductions........ $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY
OBLIGATIONS PRIME
MONEY MARKET MONEY MARKET
FUND FUND
------------- ------------
<S> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee reductions (percentage of
average net assets)...................................... 0.40% 0.40%
Voluntary fee reductions................................... $43,582 $506,054
ADMINISTRATION FEES:
Annual fee before voluntary fee reductions (percentage of
average net assets)...................................... 0.15% 0.15%
Voluntary fee reductions................................... $ 3,152 $ 39,270
ADMINISTRATIVE SERVICES FEES:
Annual fee before voluntary fee reductions (percentage of
average net assets)...................................... 0.25% 0.25%
Voluntary fee reductions................................... $25,170 $223,470
</TABLE>
Continued
-74-
<PAGE> 76
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
6. CAPITAL SHARE TRANSACTIONS:
Capital share transactions for those Funds with multiple share classes were
as follows:
<TABLE>
<CAPTION>
PRIME MONEY MARKET FUND
------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
CAPITAL AND SHARE TRANSACTIONS:
Investor Shares:
Proceeds from shares issued............................. 538,446,396 394,707,150
Dividends reinvested.................................... 1,410,478 919,724
Cost of shares redeemed................................. (496,155,628) (273,616,855)
------------ ------------
Total................................................... 43,701,246 122,010,019
------------ ------------
S Shares:
Proceeds from shares issued............................. 1,059,052 --
Dividends reinvested.................................... -- --
Cost of shares redeemed................................. (373,975) --
------------ ------------
Total................................................... 685,077 --
------------ ------------
</TABLE>
7. FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the taxable year ended June 30, 1999, a portion of income dividends
paid by the following funds qualify for the dividends received deduction
available to corporations:
<TABLE>
<CAPTION>
QUALIFIED DIVIDEND INCOME
-------------------------
<S> <C>
Established Growth Fund..................................... 95.95%
Aggressive Growth Fund...................................... 22.60%
Exempt-interest dividends are as follows for the year ended
June 30, 1999:
Pennsylvania Municipal Bond Fund............................ $5,264,358
</TABLE>
During the year ended June 30, 1999, the following Funds paid long-term
capital gain distributions (amounts in thousands):
<TABLE>
<S> <C>
Established Growth Fund..................................... $6,180,780
Aggressive Growth Fund...................................... 4,572,481
Intermediate Term Income Fund............................... 1,695,260
Limited Duration Government Securities Fund................. 13,862
Pennsylvania Municipal Bond Fund............................ 735,831
</TABLE>
As of June 30, 1999, for federal income tax purposes, the following funds
have capital loss carryforwards available to offset future capital gains,
if any (amounts in thousands):
<TABLE>
<CAPTION>
AMOUNT EXPIRES
------- -------
<S> <C> <C>
Limited Duration Government Securities Fund................. $67,802 2007
U.S. Treasury Obligations Money Market Fund................. 594 2007
Prime Money Market Fund..................................... 489 2007
</TABLE>
-75-
<PAGE> 77
GOVERNOR FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999
8. CONCENTRATION OF CREDIT RISK:
The Pennsylvania Municipal Bond Fund invests substantially all of its
assets in a non-diversified portfolio of tax-exempt debt obligations issued
by the state of Pennsylvania and its authorities and agencies. The issuers'
abilities to meet their obligations may be affected by economic or
political developments in the state of Pennsylvania.
The Pennsylvania Municipal Bond Fund had the following concentrations by
sector at June 30, 1999 (as a percentage of total investments): Insured
60.4%, Prerefunded 16.5%, Revenue 12.8%, General Obligation 1.7%, U.S.
Government Agency 4.5%, U.S. Treasury 1.7%, Investment Company/Cash 2.3%.
9. VOTING RESULTS OF A SPECIAL MEETING OF THE KEYPREMIER FUND SHAREHOLDERS
(UNAUDITED):
A Special Meeting of Shareholders of the KeyPremier Funds (the "Meeting")
was held on January 15, 1999 to approve an Agreement and Plan of
Reorganization whereby each KeyPremier Fund (each a series of The Sessions
Group) would be reorganized as a separate series of Governor Funds, a
Delaware business trust registered as an investment company under the 1940
Act ("Governor"). The proposal was approved by the following votes:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED
- --------- -------------- ------------- ---------------
<S> <C> <C> <C>
Aggressive Growth Fund......................... 10,740,106 49,955 181,040
Established Growth Fund........................ 16,035,088 218,433 211,058
Emerging Growth Fund........................... 750,220 0 50
Intermediate Term Income Fund.................. 25,006,728 172,350 606,529
Pennsylvania Municipal Bond Fund............... 9,788,163 235,535 28,342
Limited Duration Government Securities Fund.... 2,946,938 14,608 207,577
U.S. Treasury Obligations Money Market Fund.... 16,060,901 270,580 0
Prime Money Market Fund........................ 200,985,032 1,479,020 4,699,301
</TABLE>
As of January 30, 1999, the assets and liabilities of the KeyPremier Funds
were acquired by Governor in exchange for investor shares of the acquiring
series of Governor, which shares were constructively distributed to
KeyPremier Fund shareholders.
-76-
<PAGE> 78
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ESTABLISHED GROWTH FUND
----------------------------------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
---------- ---------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................ $ 14.06 $ 11.13 $ 10.00
-------- -------- --------
INVESTMENT ACTIVITIES:
Net investment income............................. 0.06 0.10 0.08
Net realized and unrealized gain on investments... 2.16 2.99 1.13
-------- -------- --------
Total from Investment Activities............... 2.22 3.09 1.21
-------- -------- --------
DISTRIBUTIONS FROM:
Net investment income............................. (0.06) (0.10) (0.08)
Net realized gains................................ (0.34) (0.06) --
-------- -------- --------
Total Distributions............................ (0.40) (0.16) (0.08)
-------- -------- --------
Net change in net asset value per share........... 1.82 2.93 1.13
-------- -------- --------
NET ASSET VALUE, END OF PERIOD...................... $ 15.88 $ 14.06 $ 11.13
======== ======== ========
Total Return (excluding sales charge)............... 16.20% 27.92% 12.20%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)......... $260,437 $258,812 $190,914
Ratio of expenses to average net assets............. 0.91% 0.71% 0.44%(c)
Ratio of net investment income to average net
assets............................................ 0.42% 0.77% 1.39%(c)
Ratio of expenses to average net assets*............ 1.19% 1.06% 1.01%(c)
Ratio of net investment income to average net
assets*........................................... 0.14% 0.42% 0.82%(c)
Portfolio Turnover.................................. 2% 6% 1%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was December 2, 1996.
(b) Not annualized.
(c) Annualized.
-77-
<PAGE> 79
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH FUND
------------------------------------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
---------- ---------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............. $ 11.41 $ 10.24 $ 10.00
-------- -------- --------
INVESTMENT ACTIVITIES:
Net investment income (loss)................... (0.01) (0.01) 0.01
Net realized and unrealized gain on
investments................................. 1.00 1.30 0.24
-------- -------- --------
Total from Investment Activities............ 0.99 1.29 0.25
-------- -------- --------
DISTRIBUTIONS FROM:
Net investment income.......................... -- -- (0.01)
In excess of net investment income............. (0.01) -- --
Net realized gains............................. (0.37) (0.12) --
-------- -------- --------
Total Distributions......................... (0.38) (0.12) (0.01)
-------- -------- --------
Net change in net asset value per share........ 0.61 1.17 0.24
-------- -------- --------
NET ASSET VALUE, END OF PERIOD................... $ 12.02 $ 11.41 $ 10.24
======== ======== ========
Total Return (excluding sales charge)............ 9.24% 12.72% 2.52%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)...... $139,512 $135,612 $105,258
Ratio of expenses to average net assets.......... 1.04% 0.83% 0.66%(c)
Ratio of net investment income (loss) to average
net assets..................................... (0.05%) (0.09%) 0.28%(c)
Ratio of expenses to average net assets*......... 1.47% 1.33% 1.35%(c)
Ratio of net investment income (loss) to average
net assets*.................................... (0.48%) (0.59%) (0.41%)(c)
Portfolio Turnover............................... 18% 8% 2%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/ or reimbursed.
If such voluntary fee reductions and/ or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 3, 1997.
(b) Not annualized.
(c) Annualized.
-78-
<PAGE> 80
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EMERGING GROWTH FUND
--------------------
FOR THE
YEAR ENDED
JUNE 30,
1999(a)
--------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
------
INVESTMENT ACTIVITIES:
Net investment income..................................... --
Net realized and unrealized gain on investments........... 2.07
------
Total from Investment Activities....................... 2.07
------
DISTRIBUTIONS FROM:
Net investment income..................................... (0.06)
Net realized gains........................................ (0.03)
------
Total Distributions.................................... (0.09)
------
Net change in net asset value per share................... 1.98
------
NET ASSET VALUE, END OF PERIOD.............................. $11.98
======
Total Return (excluding sales charge)....................... 20.74%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)................. $9,927
Ratio of expenses to average net assets..................... 1.41%
Ratio of net investment income (loss) to average net
assets.................................................... (0.02%)
Ratio of expenses to average net assets*.................... 2.60%
Ratio of net investment income (loss) to average net
assets*................................................... (1.21%)
Portfolio Turnover.......................................... 53%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was July 1, 1998.
-79-
<PAGE> 81
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FUND
----------------------
FOR THE
PERIOD ENDED
JUNE 30,
1999(a)
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
INVESTMENT ACTIVITIES:
Net investment income..................................... 0.11
Net realized and unrealized gain on investments........... 0.48
-------
Total from Investment Activities..................... 0.59
-------
DISTRIBUTIONS FROM:
Net investment income..................................... --
Net realized gains........................................ --
-------
Total Distributions.................................. --
-------
Net change in net asset value per share................... 0.59
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.59
=======
Total Return (excluding sales charge)....................... 5.90%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)................. $39,506
Ratio of expenses to average net assets..................... 0.98%(c)
Ratio of net investment income to average net assets........ 2.80%(c)
Ratio of expenses to average net assets*.................... 1.86%(c)
Ratio of net investment income to average net assets*....... 1.92%(c)
Portfolio Turnover.......................................... 17%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/ or reimbursed.
If such voluntary fee reductions and/ or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 9, 1999.
(b) Not annualized.
(c) Annualized.
-80-
<PAGE> 82
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INTERMEDIATE TERM INCOME FUND
----------------------------------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
---------- ---------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 10.10 $ 9.77 $ 10.00
-------- -------- --------
INVESTMENT ACTIVITIES:
Net investment income............................... 0.59 0.62 0.36
Net realized and unrealized gain (loss) on
investments...................................... (0.50) 0.33 (0.23)
-------- -------- --------
Total from Investment Activities................. 0.09 0.95 0.13
-------- -------- --------
DISTRIBUTIONS FROM:
Net investment income............................... (0.59) (0.62) (0.36)
Net realized gains.................................. (0.11) -- --
-------- -------- --------
Total Distributions.............................. (0.70) (0.62) (0.36)
-------- -------- --------
Net change in net asset value per share............. (0.61) 0.33 (0.23)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD........................ $ 9.49 $ 10.10 $ 9.77
======== ======== ========
Total Return (excluding sales charge)................. 0.82% 9.95% 1.40%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in thousands)............. $305,981 $275,565 $207,859
Ratio of expenses to average net assets............... 0.56% 0.57% 0.37%(c)
Ratio of net investment income to average net
assets.............................................. 5.97% 6.27% 6.45%(c)
Ratio of expenses to average net assets*.............. 0.98% 0.92% 0.84%(c)
Ratio of net investment income to average net
assets*............................................. 5.55% 5.92% 5.98%(c)
Portfolio Turnover.................................... 149% 218% 329%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was December 2, 1996.
(b) Not annualized.
(c) Annualized.
-81-
<PAGE> 83
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LIMITED DURATION
GOVERNMENT SECURITIES FUND
--------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1999 1998(a)
------------ ----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 9.96 $ 10.00
------- -------
INVESTMENT ACTIVITIES:
Net investment income..................................... 0.54 0.56
Net realized and unrealized gain (loss) on investments.... (0.13) (0.04)
------- -------
Total from Investment Activities..................... 0.41 0.52
------- -------
DISTRIBUTIONS FROM:
Net investment income..................................... (0.54) (0.56)
Net realized gains........................................ -- --
------- -------
Total Distributions.................................. (0.54) (0.56)
------- -------
Net change in net asset value per share................... (0.13) (0.04)
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.83 $ 9.96
======= =======
Total Return (excluding sales charge)....................... 4.25% 5.39%
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in thousands)................... $52,041 $29,360
Ratio of expenses to average net assets..................... 0.59% 0.65%
Ratio of net investment income to average net assets........ 5.51% 5.58%
Ratio of expenses to average net assets*.................... 1.03% 1.18%
Ratio of net investment income to average net assets*....... 5.07% 5.05%
Portfolio Turnover.......................................... 519% 482%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(a) Commencement of operations of the Fund was July 1, 1997.
-82-
<PAGE> 84
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PENNSYLVANIA MUNICIPAL BOND FUND
----------------------------------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
---------- ---------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 10.39 $ 10.29 $ 10.21
-------- -------- --------
INVESTMENT ACTIVITIES:
Net investment income............................... 0.47 0.49 0.34
Net realized and unrealized gain (loss) on
investments...................................... (0.26) 0.11 0.06
-------- -------- --------
Total from Investment Activities................. 0.21 0.60 0.40
-------- -------- --------
DISTRIBUTIONS FROM:
Net investment income............................... (0.48) (0.50) (0.32)
Net realized gains.................................. (0.07) -- --
-------- -------- --------
Total Distributions.............................. (0.55) (0.50) (0.32)
-------- -------- --------
Net change in net asset value per share............. (0.34) 0.10 0.08
-------- -------- --------
NET ASSET VALUE, END OF PERIOD........................ $ 10.05 $ 10.39 $ 10.29
======== ======== ========
Total Return (excluding sales charge)................. 1.94% 5.89% 3.98%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in thousands)............. $111,893 $118,685 $123,194
Ratio of expenses to average net assets............... 0.59% 0.58% 0.37%(c)
Ratio of net investment income to average net
assets.............................................. 4.45% 4.65% 4.46%(c)
Ratio of expenses to average net assets*.............. 1.00% 0.92% 0.86%(c)
Ratio of net investment income to average net
assets*............................................. 4.04% 4.31% 3.97%(c)
Portfolio Turnover.................................... 90% 62% 98%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was October 1, 1996.
(b) Not annualized.
(c) Annualized.
-83-
<PAGE> 85
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LIFESTYLE CONSERVATIVE
GROWTH FUND
----------------------
FOR THE
PERIOD ENDED
JUNE 30,
1999(a)
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
INVESTMENT ACTIVITIES:
Net investment income..................................... 0.07
-------
Net realized and unrealized gain on investments........... 0.15
-------
Total from Investment Activities..................... 0.22
-------
DISTRIBUTIONS FROM:
Net investment income..................................... (0.07)
Net realized gains........................................ --
-------
Total Distributions.................................. (0.07)
-------
Net change in net asset value per share................... 0.15
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.15
=======
Total Return (excluding sales charge)....................... 2.21%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)................. $ 150
Ratio of expenses to average net assets..................... 1.79%(c)
Ratio of net investment income to average net assets........ 2.57%(c)
Ratio of expenses to average net assets*.................... 92.41%(c)
Ratio of net investment income (loss) to average net
assets*................................................... (88.05%)(c)
Portfolio Turnover.......................................... 2%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 3, 1999.
(b) Not annualized.
(c) Annualized.
-84-
<PAGE> 86
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LIFESTYLE MODERATE
GROWTH FUND
----------------------
FOR THE
PERIOD ENDED
JUNE 30,
1999(a)
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
INVESTMENT ACTIVITIES:
Net investment income..................................... 0.04
Net realized and unrealized gain on investments........... 0.56
-------
Total from Investment Activities..................... 0.60
-------
DISTRIBUTIONS FROM:
Net investment income..................................... (0.04)
Net realized gains........................................ --
-------
Total Distributions.................................. (0.04)
-------
Net change in net asset value per share..................... 0.56
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.56
=======
Total Return (excluding sales charge)....................... 6.02%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)................. $ 285
Ratio of expenses to average net assets..................... 1.76%(c)
Ratio of net investment income to average net assets........ 1.17%(c)
Ratio of expenses to average net assets*.................... 36.79%(c)
Ratio of net investment income (loss) to average net
assets*................................................... (33.86%)(c)
Portfolio Turnover.......................................... 6%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 4, 1999.
(b) Not annualized.
(c) Annualized.
-85-
<PAGE> 87
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LIFESTYLE GROWTH FUND
----------------------
FOR THE
PERIOD ENDED
JUNE 30,
1999(a)
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
INVESTMENT ACTIVITIES:
Net investment income..................................... 0.02
Net realized and unrealized gain on investments........... 0.77
-------
Total from Investment Activities..................... 0.79
-------
DISTRIBUTIONS FROM:
Net investment income..................................... (0.02)
Net realized gains........................................ --
-------
Total Distributions.................................. (0.02)
-------
Net change in net asset value per share................... 0.77
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.77
=======
Total Return (excluding sales charge)....................... 7.87%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)................. $ 218
Ratio of expenses to average net assets..................... 1.81%(c)
Ratio of net investment income to average net assets........ 0.07%(c)
Ratio of expenses to average net assets*.................... 51.10%(c)
Ratio of net investment income (loss) to average net
assets*................................................... (49.22%)(c)
Portfolio Turnover.......................................... 0%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 18, 1999.
(b) Not annualized.
(c) Annualized.
-86-
<PAGE> 88
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS
MONEY MARKET FUND
--------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1999 1998(a)
------------ ----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.000 $ 1.000
------- -------
INVESTMENT ACTIVITIES:
Net investment income..................................... 0.042 0.047
Net realized and unrealized gain on investments........... -- --
------- -------
Total from Investment Activities..................... 0.042 0.047
------- -------
DISTRIBUTIONS FROM:
Net investment income..................................... (0.042) (0.047)
Net realized gains........................................ -- --
------- -------
Total Distributions.................................. (0.042) (0.047)
------- -------
Net change in net asset value per share................... -- --
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 1.000 $ 1.000
======= =======
Total Return (excluding sales charge)....................... 4.28% 4.78%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands)................. $19,575 $23,520
Ratio of expenses to average net assets..................... 0.72% 0.71%
Ratio of net investment income to average net assets........ 4.20% 4.64%
Ratio of expenses to average net assets*.................... 1.05% 1.07%
Ratio of net investment income to average net assets*....... 3.87% 4.28%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was July 1, 1997.
-87-
<PAGE> 89
GOVERNOR FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PRIME MONEY MARKET FUND
-------------------------------------------------------------
INVESTOR SHARES S SHARES
--------------- ------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999(b) 1999(b) 1998 1997(a)
--------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------
INVESTMENT ACTIVITIES:
Net investment income............... 0.047 0.008 0.051 0.037
Net realized and unrealized gain on
investments...................... -- -- -- --
-------- -------- -------- -------
Total from Investment Activities.... 0.047 0.008 0.051 0.037
-------- -------- -------- -------
DISTRIBUTIONS FROM:
Net investment income............... (0.047) (0.008) (0.051) (0.037)
Net realized gains.................. -- -- -- --
-------- -------- -------- -------
Total Distributions................. (0.047) (0.008) (0.051) (0.037)
-------- -------- -------- -------
Net change in net asset value per
share............................ -- -- -- --
-------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD........ $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== =======
Total Return (excluding sales
charge)............................. 4.80% 0.85%(c) 5.19% 3.73%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in
thousands).......................... $261,561 $ 685 $217,861 $95,850
Ratio of expenses to average net
assets.............................. 0.49% 0.68%(d) 0.48% 0.36%(d)
Ratio of net investment income to
average net assets.................. 4.68% 4.23%(d) 5.14% 5.02%(d)
Ratio of expenses to average net
assets*............................. 0.80% 0.91%(d) 0.76% 0.70%(d)
Ratio of net investment income to
average net assets*................. 4.37% 4.00%(d) 4.86% 4.68%(d)
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was October 7, 1996.
(b) Effective April 19, 1999, the Fund designated the existing shares as
Investor Shares and commenced the offering of S Shares.
(c) Not annualized.
(d) Annualized.
-88-
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Shareholders and Board of Trustees of
the Governor Funds:
We have audited the accompanying statements of assets and liabilities of the
Governor Funds comprised of the Established Growth Fund, Aggressive Growth Fund,
Emerging Growth Fund, International Equity Fund, Intermediate Term Income Fund,
Limited Duration Government Securities Fund, Pennsylvania Municipal Bond Fund,
Lifestyle Conservative Growth Fund, Lifestyle Moderate Growth Fund, Lifestyle
Growth Fund, U.S. Treasury Obligations Money Market Fund, and Prime Money Market
Fund (collectively, the Funds), including the schedules of portfolio
investments, as of June 30, 1999, and the related statements of operations,
statements of changes in net assets and the financial highlights for each of the
periods indicated herein. These financial statements and the financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of June
30, 1999, by examination, correspondence with brokers and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned Funds comprising the Governor Funds as of June 30, 1999,
the results of their operations, the changes in their net assets and the
financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
August 13, 1999
<PAGE> 91
[This page intentionally left blank]
<PAGE> 92
INVESTMENT ADVISOR
Governors Group Advisors, Inc.
23 Front Street
Harrisburg, PA 17101
SUB-ADVISORS
Martindale Andres & Company, Inc.
Four Falls Corporate Center, Suite 200
West Conshohocken, PA 19428
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, IL 60604
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
FOR ADDITIONAL INFORMATION CALL:
1-800-766-3960
8/99
