<PAGE> 1
As filed with the Securities and Exchange Commission on August 30, 1999
Registration No. 333-65213
811-9029
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 1 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 2 |_|
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GOVERNOR FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (614) 470-8000
Lana V. Burkhardt
Governor Funds
23 North Front Street
Harrisburg, Pennsylvania 17105
(Name and Address of Agent for Service)
copies to:
Michael P. Malloy, Esq.
Drinker Biddle & Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, Pennsylvania 19103
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on February 28, 1999 pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
<PAGE> 2
GOVERNOR FUNDS
================================================================================
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PROSPECTUS
----------
________, 1999
INVESTOR SHARES OF
PRIME MONEY MARKET FUND
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
S SHARES OF
PRIME MONEY MARKET FUND
MANAGED BY GOVERNORS GROUP ADVISORS, INC., AND
SUBADVISED BY MARTINDALE ANDRES & COMPANY, INC.
- ----------------------------------
QUESTIONS?
CALL 1-800-766-3960
OR YOUR INVESTMENT REPRESENTATIVE.
- ----------------------------------
THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED THE SHARES DESCRIBED IN
THIS PROSPECTUS OR DETERMINED WHETHER
THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
================================================================================
<PAGE> 3
TABLE OF CONTENTS
================================================================================
REVIEW THIS SECTION FOR A SUMMARY OF EACH FUND'S INVESTMENTS, RISKS, PAST
PERFORMANCE, AND FEES.
RISK/RETURN SUMMARY AND FUND EXPENSES
3-13 PRIME MONEY MARKET FUND
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
---------------------------------------------------------------------------
REVIEW THIS SECTION FOR INFORMATION ON INVESTMENT STRATEGIES AND THEIR RISKS.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
14-17 PRIME MONEY MARKET FUND
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
---------------------------------------------------------------------------
REVIEW THIS SECTION FOR DETAILS ON THE PEOPLE AND ORGANIZATIONS WHO OVERSEE THE
FUNDS.
FUND MANAGEMENT
18 THE INVESTMENT ADVISOR AND SUB-ADVISOR
18 THE ADMINISTRATORS AND DISTRIBUTOR
---------------------------------------------------------------------------
REVIEW THIS SECTION FOR DETAILS ON HOW SHARES ARE VALUED, HOW TO PURCHASE, SELL
AND EXCHANGE SHARES, RELATED CHARGES AND PAYMENTS OF DIVIDENDS AND
DISTRIBUTIONS.
SHAREHOLDER INFORMATION
19 PRICING OF FUND SHARES
20 PURCHASING AND ADDING TO YOUR SHARES
22 SELLING YOUR SHARES
23 GENERAL POLICIES ON SELLING SHARES
24 EXCHANGING YOUR SHARES
24 DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
25
- --------------------------------------------------------------------------------
BACK COVER
26 WHERE TO LEARN MORE ABOUT GOVERNOR FUNDS
2
<PAGE> 4
RISK/RETURN SUMMARY AND FUND EXPENSES
- --------------------------------------------------------------------------------
The following is a summary of certain key information about the Prime Money
Market and U.S. Treasury Obligations Money Market Funds of Governor Funds. You
will find additional information about the Funds, including a detailed
description of the risks of an investment in the Funds, after this summary.
Other important things for you to note:
- An investment in the Funds is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency.
- Although the Funds seek to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in
the Funds.
RISK/RETURN SUMMARY OF THE PRIME MONEY MARKET FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks current income with liquidity and
stability of principal.
PRINCIPAL INVESTMENT STRATEGIES The Fund is a "money market fund" that seeks to maintain a
stable net asset value of $1.00 per share. The Fund
invests primarily in bank certificates of deposit,
bankers' acceptances, prime commercial paper, corporate
obligations, municipal obligations, securities issued or
guaranteed by the U.S. government or its agencies and
repurchase agreements backed by such obligations.
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will change daily based
on many factors, including the quality of the instruments
in the Fund's investment portfolio, national and
international economic conditions and general market
conditions. Changes in the interest rate will affect the
yield or value of the Fund's investments in debt
securities.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you:
ARE SEEKING PRESERVATION OF CAPITAL
HAVE A LOW RISK TOLERANCE
ARE WILLING TO ACCEPT LOWER POTENTIAL RETURNS IN
EXCHANGE FOR A HIGHER DEGREE OF SAFETY
ARE INVESTING SHORT-TERM RESERVES
This Fund will not be appropriate for anyone:
SEEKING HIGH TOTAL RETURNS
PURSUING A LONG-TERM GOAL OR INVESTING FOR
RETIREMENT
</TABLE>
3
<PAGE> 5
RISK/RETURN SUMMARY OF THE PRIME MONEY MARKET FUND
The chart and table on this page show how the Investor Shares of the Prime Money
Market Fund has performed for the last two years and how its performance has
varied from year to year. The S Shares commenced operations on April 19, 1999.
Because these shares have less than one year's performance, no performance is
shown for that class in this section. The bar chart shows changes in the Fund's
yearly performance since inception to demonstrate that the Fund has gained and
lost value at differing times. Past performance is not indicative of future
results.
- ---------------------------------------------------------------------------
Best quarter: Q___ 19_______ +/-_______%
Worst quarter: Q___ 19_______ +/-_______%
- ---------------------------------------------------------------------------
Year-to-date total return for the period ended September 30, 1999: _____%
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
Past Year Since inception
(October 7, 1996)
- -------------------------------------------------------------------
PRIME MONEY MARKET FUND
-----% -----%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
*As of December 31, 1998 the 7-day yield (Investor Shares) was _____%. Without
expense limitations, the Fund's yield would have been _____% for this time
period. For current yield information on the Fund, call 1-800-766-3960. The
Prime Money Market Fund's yield appears in the Wall Street Journal each
Thursday.
4
<PAGE> 6
RISK/RETURN SUMMARY OF THE PRIME MONEY MARKET FUND
FEES AND EXPENSES
As an investor in the Prime Money
Market Fund, you will pay the
following fees and expenses.
Shareholder transaction fees are paid
from your account. Annual Fund
Operating Expenses are paid out of
Fund assets, and are reflected in the
Fund's yield.
SHAREHOLDER FEES Investor S
(fees paid directly from your investment) Shares Shares
------ ------
Maximum sales charge (load) imposed on purchases None None
- ----------------------------------------------------------------------------
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
- ----------------------------------------------------------------------------
Management fees .40% .40%
- ----------------------------------------------------------------------------
Distribution (12b-1) fees None None
- ----------------------------------------------------------------------------
Other expenses(1) .32% .56%
- ----------------------------------------------------------------------------
Total Annual Fund Operating Expenses .72% .96%(2)
- ----------------------------------------------------------------------------
Fee Waivers(3) .24% .24%
- ----------------------------------------------------------------------------
Net Annual Fund Operating Expenses(4) .48% .72%
- ----------------------------------------------------------------------------
1 Other Expenses include administration fees, transfer agency fees, and all
other ordinary operating expenses not listed above, and the payment of a
servicing fee to institutions under an Administrative Services Plan up to an
annual rate of .25% of the daily net asset value of the Fund shares owned by the
shareholders with whom the Service Organization has a servicing relationship.
2 The Annual Fund Operating Expenses for S Shares are based on the Fund's
operating expenses for the fiscal year ended June 30, 1999, but have been
restated to reflect the estimated expenses expected to be incurred if S Shares
had been in existence throughout the fiscal year ended June 30, 1999. The
offering of S Shares commenced on April 19, 1999.
3 These fees have been waived by the Advisor and administrators for the current
fiscal year as part of a contractual arrangement with the Fund.
4 The Annual Fund Operating Expenses for Investor Shares are based on the Fund's
operating expenses for the fiscal year ended June 30, 1999.
5
<PAGE> 7
EXAMPLE
Use the example below to compare fees and expenses with those of other Funds. It
illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
1 3 5 10
PRIME MONEY MARKET FUND Year Years Years Years
- -----------------------
$---- $---- $---- $----
- --------------------------------------------------------------------------------
6
<PAGE> 8
RISK/RETURN SUMMARY AND FUND EXPENSES
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY OF THE U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Fund seeks current income with liquidity and
stability of principal.
PRINCIPAL INVESTMENT STRATEGIES The Fund is a "money market fund" that seeks to maintain a
stable net asset value of $1.00 per share. The Fund
invests primarily (at least 65% of its total assets) in
securities issued by the U.S. Treasury, such as bills,
notes and bonds, issues backed by the full faith and
credit of the U.S. Government, and repurchase agreements
backed by such securities.
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will change daily based
on many factors, including the quality of the instruments
in the Fund's investment portfolio, national and
international economic conditions and general market
conditions. Changes in the interest rate will affect the
yield or value of the Fund's investments in debt
securities.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you:
ARE SEEKING PRESERVATION OF CAPITAL
HAVE A LOW RISK TOLERANCE
ARE WILLING TO ACCEPT LOWER POTENTIAL RETURNS IN
EXCHANGE FOR A HIGHER DEGREE OF SAFETY
ARE INVESTING SHORT-TERM RESERVES
This Fund will not be appropriate for anyone:
SEEKING HIGH TOTAL RETURNS
PURSUING A LONG-TERM GOAL OR INVESTING FOR
RETIREMENT
</TABLE>
7
<PAGE> 9
RISK/RETURN SUMMARY OF THE U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
The chart and table on this page show how the U.S. Treasury Obligations Money
Market Fund has performed during its first full calendar year. Past performance
is not indicative of future results.
---------------------------------------------------------------------------
Best quarter: Q___ 19_______ +/-_______%
Worst quarter: Q___ 19_______ +/-_______%
---------------------------------------------------------------------------
Year-to-date total return for the period ended September 30, 1999: ____%
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
Past Year Since inception
(July 1, 1997)
- ----------------------------------------------------------------
U.S. TREASURY OBLIGATIONS
MONEY MARKET FUND
-----% -----%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
*As of December 31, 1998 the 7-day yield was _____%. Without expense
limitations, the Fund's yield would have been _____% for this time period. For
current yield information on the Fund, call 1-800-766-3960. The U.S. Treasury
Obligations Money Market Fund's yield appears in the Wall Street Journal each
Thursday.
8
<PAGE> 10
RISK/RETURN SUMMARY OF THE U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
FEES AND EXPENSES
As an investor in the U.S. Treasury Obligations Money Market Fund, you will pay
the following fees and expenses. Shareholder transaction fees are paid from your
account. Annual Fund Operating Expenses are paid out of Fund assets, and are
reflected in the Fund's yield.
SHAREHOLDER FEES Investor
(fees paid directly from your investment) Shares
------
Maximum sales charge (load) imposed on None
purchases
- -------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -------------------------------------------------------------
Management fees .40%
- -------------------------------------------------------------
Distribution (12b-1) fees None
- -------------------------------------------------------------
Other expenses(1) .57%
- -------------------------------------------------------------
Total Annual Fund Operating Expenses .97%
- -------------------------------------------------------------
Fee Waivers(2) .24%
- -------------------------------------------------------------
Net Annual Fund Operating Expenses(3) .73%
- -------------------------------------------------------------
1 Other Expenses include administration fees, transfer agency fees, and all
other ordinary operating expenses not listed above, and the payment of a
servicing fee to institutions under an Administrative Services Plan up to an
annual rate of .25% of the daily net asset value of the Fund shares owned by the
shareholders with whom the Service Organization has a servicing relationship.
2 These fees have been waived by the Advisor and administrators for the current
fiscal year as part of a contractual arrangement with the Fund.
3 The Annual Fund Operating Expenses for Investor Shares are based on the Fund's
operating expenses for the fiscal year ended June 30, 1999.
EXAMPLE
Use the example below to compare fees and expenses with those of other Funds. It
illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
9
<PAGE> 11
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND 1 3 5 10
- -------------------------------------------
Year Years Years Years
<S> <C> <C> <C> <C>
$---- $---- $---- $----
- -----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
================================================================================
As a money market fund, each Fund must meet the requirements of the Securities
and Exchange Commission's Rule 2a-7. This Rule imposes requirements on the
investment quality, maturity, and diversification of the Fund's investments.
Under Rule 2a-7, each Fund's investments must have a remaining maturity (as
defined under the Rule) of no more than 397 days and its investments must
maintain an average weighted maturity that does not exceed 90 days. Each Fund
will only buy a money market instrument if it or its issuer or guarantor has
short-term ratings in the two highest categories from at least two nationally
recognized statistical rating organizations, such as Standard & Poor's Ratings
Group or Moody's Investors Service, Inc., or only one such rating if only one
organization has rated the instrument. Or, if the money market instrument is not
rated, the Advisor must determine that it is of comparable quality to eligible
rated instruments. U.S. government securities and shares of other money market
funds are not subject to these rating requirements.
The investment objectives of both Funds and their related policies and
activities are not fundamental and may be changed without approval of Fund
shareholders. If there is a change in the investment objective of a Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs.
PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek current income with liquidity
and stability of principal.
INVESTMENT POLICIES AND STRATEGY
The Fund pursues its objective by maintaining a portfolio of high-quality,
U.S. dollar-denominated money market instruments. The Fund may invest in:
- marketable debt obligations issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities;
- certificates of deposit and bankers' acceptances issued or
guaranteed by, or time deposits maintained at, banks (including
foreign branches of U.S. banks or U.S. or foreign branches of
foreign banks) and savings and loan associations;
- high-quality domestic and foreign commercial paper and other
high-quality short-term debt obligations, such as floating, variable
rate or variable amount U.S. dollar-denominated demand notes and
bonds;
- obligations issued or guaranteed by one or more foreign governments
or one of their agencies or instrumentalities, including obligations
of supranational entities;
- Domestic or foreign bank obligations (up to 20%);
- securities of money market mutual funds;
- when-issued or delayed-delivery securities;
11
<PAGE> 13
- asset-backed securities; and
- repurchase agreements collateralized by the types of securities
listed above.
The Fund buys and sells securities based on its objective of seeking
current income with liquidity and stability of principal. The Fund will attempt
to increase its yield by trading to take advantage of short-term market
variations. The Fund's Advisor evaluates investments based on credit analysis
and the Advisor's interest rate outlook.
12
<PAGE> 14
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
================================================================================
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek current income with liquidity
and stability of principal.
INVESTMENT POLICIES AND STRATEGY
The Fund pursues its objective by investing at least 65% of its total
assets in short term obligations issued or guaranteed by the U.S. Treasury and
repurchase agreements with respect to these types of obligations.
The Fund may invest in:
- issues of the U.S. Treasury, such as bills, notes, bonds and
variable and floating rate securities;
- securities of money market mutual funds;
- when-issued or delayed delivery securities.
The Fund may also invest in issues of U.S. Government agencies and
instrumentalities established under the authority of an Act of Congress,
including obligations supported by the "full faith and credit" of the United
States (e.g., obligations guaranteed by the Export-Import Bank of the United
States, and Private Export Funding Corporation, among others) and repurchase
agreements with respect to these types of obligations.
The Fund buys and sells securities based on its objective of seeking
current income with liquidity and stability of principal. The Fund will attempt
to increase its yield by trading to take advantage of short-term market
variations. The Fund's Advisor evaluates investments based on credit analysis
and the Advisor's interest rate outlook.
13
<PAGE> 15
INVESTMENT RISKS
GENERAL RISK FACTORS: BOTH MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
The Funds expect to maintain a net asset value of $1.00 per share, but
there is no assurance that the Funds will be able to do so on a continuous
basis. The Funds' performance per share will change daily based on many factors,
including fluctuation in interest rates, the quality of the instruments in each
Fund's investment portfolio, national and international economic conditions and
general market conditions.
An investment in the Funds is neither insured nor guaranteed by the
U.S. Government. Shares of a Fund are not deposits or obligations of, or
guaranteed or endorsed by, the Advisor or any bank, and the shares are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other agency.
There can be no assurance that the investment objective of each Fund
will be achieved. In addition, each Fund's investment policies, as well as the
relatively short maturity of obligations purchased by the Funds, may result in
frequent changes in each Fund's portfolio, which may give rise to taxable gains.
To the extent the Funds invest in mutual funds, a pro rata portion of the
other mutual funds' expenses will be borne by the Fund.
The Funds may also be subject to credit risks. The Funds could lose
money if the issuer of a security is unable to meet its financial obligations.
As with other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Advisor, Sub-Advisor and the Funds' other service
providers don't properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the "Year 2000" or
"Y2K" problem. The Advisor and Sub-Advisor are taking steps to address the Y2K
problem with respect to the computer systems that they use and to obtain
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on a Fund. The Y2K problem
could have a negative impact on the issuers of securities in which the Funds
invest, which could hurt the Funds' investment returns.
SPECIFIC RISK FACTORS: PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
Foreign investments subject the Fund to investment risks different from
those associated with domestic investments. Foreign investments may be riskier
than U.S. investments because of unstable international political and economic
conditions, foreign controls on investment and currency exchange, withholding
taxes, or a lack of adequate company information, and lack of government
regulation.
14
<PAGE> 16
FUND MANAGEMENT
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISORS
Governors Group Advisors, Inc. is the investment advisor of each Fund.
The Advisor is a wholly-owned subsidiary of Keystone Financial, Inc.
("Keystone"), 1 Keystone Plaza, Harrisburg, Pennsylvania 17101. The Advisor was
organized in 1998 and had not previously served as the investment advisor to a
registered open-end management investment company. Subject to the general
supervision of the Board of Trustees of the Funds and in accordance with the
investment objective and restrictions of each Fund, the Advisor has agreed to
manage each Fund, make decisions with respect to and place orders for all
purchases and sales of its portfolio securities, and maintain each Fund's
records relating to such purchases and sales.
For these advisory services, the Funds paid as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------- ------------------------------------
- --------------------------------------------------------------------------------- ------------------------------------
PERCENTAGE OF AVERAGE NET ASSETS
AS OF 6/30/99
- --------------------------------------------------------------------------------- ------------------------------------
<S> <C>
Prime Money Market Fund .20%*
- --------------------------------------------------------------------------------- ------------------------------------
U.S. Treasury Obligations Money Market Fund .20%*
- --------------------------------------------------------------------------------- ------------------------------------
</TABLE>
* The Advisor waived a portion of its contractual fees with regard to these
Funds for the most recent fiscal year. Contractual fees (without waivers)
are .40% for each Fund.
The Advisor has entered into a Sub-Advisory Agreement with Martindale
Andres & Company, Inc. (the "Sub-Advisor"), Four Falls Corporate Center, Suite
200, West Conshohocken, Pennsylvania 19428. The Sub-Advisor is also a
wholly-owned subsidiary of Keystone. The Sub-Advisor was organized in 1989 and
was acquired by Keystone in December 1995. Subject to the supervision of the
Advisor and the Board of Trustees of the Trust and in accordance with the
investment objective and restrictions of each Fund, the Sub-Advisor manages each
Fund, makes decisions with respect to and places orders for all purchases and
sales of its portfolio securities, and maintains each Fund's records relating to
such purchases and sales. For its services, the Sub-Advisor receives from the
Advisor a fee based on a percentage of each Fund's average daily net assets.
THE DISTRIBUTOR AND ADMINISTRATORS
The Advisor and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), whose address is
3435 Stelzer Road, Columbus, Ohio 43219-3035, serve as each Fund's
administrators.
BISYS Fund Services ("BISYS") serves as the distributor of the Funds' shares.
BISYS may provide financial assistance in connection with pre-approved seminars,
conferences and advertising to the extent permitted by applicable state or
self-regulatory agencies, such as the National Association of Securities
Dealers, Inc.
15
<PAGE> 17
The Statement of Additional Information has more detailed information
about the Advisor and other service providers.
16
<PAGE> 18
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
PRICING OF FUND SHARES
- ----------------------
Each Fund's net asset value, or NAV, is expected to be constant at $1.00 per
share, although this value is not guaranteed. The NAV is determined at 12 noon
Eastern time and the close of regular trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each Business Day of that Fund. The Funds
value their securities at their amortized cost. This method involves valuing an
instrument at its cost and thereafter applying a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument.
HOW NAV IS CALCULATED
The NAV is calculated by adding the total value of the Fund's investments and
other assets, subtracting its liabilities and then dividing that figure by the
number of outstanding shares of the Fund:
NAV =
TOTAL ASSETS - LIABILITIES
--------------------------
Number of Shares
Outstanding
Business Day Defined - a Business Day of a Fund is a day on which the New York
Stock Exchange is open for trading and any other day (other than a day on which
no shares of that Fund are tendered for redemption and no order to purchase any
shares of that Fund is received) during which there is sufficient trading in
portfolio instruments such that the Fund's net asset value per share might be
materially affected. The New York Stock Exchange will not be open in observance
of the following holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
NAV is calculated separately for the Prime Money Market Fund's Investor Shares
and S Shares.
17
<PAGE> 19
PURCHASING AND ADDING TO YOUR INVESTOR SHARES
- ---------------------------------------------
PURCHASE OF INVESTOR SHARES
You may purchase Investor Shares of the Funds through the Distributor or through
banks, brokers and other investment representatives, which may charge additional
fees and may require higher minimum investments or impose other limitations on
buying and selling shares. If you purchase shares through an investment
representative, that party is responsible for transmitting orders by close of
business and may have an earlier cut-off time for purchase and sale requests.
Consult your investment representative or institution for specific information.
ACCOUNT TYPE MINIMUM MINIMUM
INITIAL INVESTMENT SUBSEQUENT
INVESTMENT
Regular $ 1,000
(non-retirement) $ 25
Retirement (IRA) $ 1,000 $ 25
Automatic
Investment Plan $ 250 $ 25
If you are an employee of the Advisor, Sub-Advisor, Keystone, or any of their
affiliates, the initial minimum investment amount is reduced to $250.
- - All purchases must be in U.S. dollars, although payment for Fund shares may
be made in the form of securities that are permissible investments for the
particular Fund at the discretion of the Advisor.
- - A fee will be charged for any checks that do not clear.
- - Third-party checks are not accepted.
A Fund may waive its minimum purchase requirement and the Distributor may reject
a purchase order if it considers it in the best interest of the Fund and its
shareholders.
- --------------------------------------------------------------------------------
Avoid 31% Tax Withholding
The Funds are required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided a Fund
with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- --------------------------------------------------------------------------------
18
<PAGE> 20
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT - INVESTOR SHARES
BY REGULAR MAIL OR OVERNIGHT SERVICE:
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
All investments made by regular mail or express delivery, whether initial or
subsequent, should be sent to:
By regular mail: By Express Mail:
Governor Funds Governor Funds
PO Box 182707 c/o BISYS Fund Services
Columbus, OH 43218-2707 Attn: T.A. Operations
3435 Stelzer Road
Columbus, OH 43219
For Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to the appropriate Fund.
3. Mail or deliver application and payment to the address above.
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT - CONTINUED
For Subsequent Investments:
1. Use the investment slip attached to your account statement. Or, if
unavailable, provide the following information:
- Fund name
- Amount invested
- Account name and number
2. Make check, bank draft or money order payable to the appropriate Fund.
3. Mail or deliver investment slip and payment to the address above.
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call
1-800-766-3960. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-766-3960 to arrange a transfer from your bank account.
19
<PAGE> 21
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR INVESTOR SHARES
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial institutions to send
funds to each other, almost instantaneously. With an
electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may
take up to eight days to clear. There is generally no
fee for ACH transactions.
-----------------------------------------------------
BY WIRE TRANSFER
For Initial Investment:
Call 1-800-766-3960 to obtain a new account number and instructions for
returning your completed application to the address shown above for mail
purchases; and
For All Investments:
Instruct your bank to wire transfer your investment to:
The Bank of New York
-------------------------------
Routing Number: ABA # 021000018
-----------
DDA#
---------------------------
Include: your name
your confirmation number
After instructing your bank to wire the funds, call 1-800-766-3960 to advise us
of the amount being transferred and the name of your bank.
NOTE: YOUR BANK MAY CHARGE A WIRE TRANSFER FEE.
- --------------------------------------------------------------------------------
You can add to your account by using the convenient options described below. The
Fund reserves the right to change or eliminate these privileges at any time with
60 days' notice.
- --------------------------------------------------------------------------------
20
<PAGE> 22
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR INVESTOR SHARES - CONTINUED
AUTOMATIC INVEST PLAN
You can make automatic investments in the Funds from your bank By selecting the
appropriate account, through payroll deduction or from your federal box in the
Account Application, employment, Social Security or other regular government you
can elect to receive your checks. Automatic investments can be as little as $25,
once distributions in cash (check) you've invested the $250 minimum required to
open the account.
To invest regularly from your bank account:
- Complete the Automatic Invest Plan portion on your Account Application.
Make sure you note:
* Your bank name, address and account number
* The amount you wish to invest automatically (minimum $25)
* How often you want to invest (every month, 4 times a year, twice a
year or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-766-3960 for an enrollment form.
DIRECTED DIVIDEND OPTION
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in another Governor Fund without a sales charge. You
must maintain the minimum balance in each Fund into which you plan to reinvest
dividends or the reinvestment will be suspended and your dividends paid to you.
The Funds may modify or terminate this reinvestment option without notice. You
can change or terminate your participation in the reinvestment option at any
time.
- --------------------------------------------------------------------------------
21
<PAGE> 23
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions will be automatically reinvested unless you
request otherwise.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE, SOME
OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A DISTRIBUTION.
PURCHASE OF S SHARES
S Shares are offered to customers through cash management services,
such as a sweep account ("Sweep Account") offered by Keystone, any of its
banking affiliates, and Service Organizations. A Sweep Account combines a
deposit account (the "Transaction Account") with a daily sweep of balances to or
from the Prime Money Market Fund's S Shares. Keystone, its banking affiliates or
Service Organizations, as applicable, are responsible for providing persons
investing in S Shares through a Sweep Account with Sweep Account materials (the
"Sweep Materials") describing the various features and operations of the Sweep
Account. The Sweep Materials should be reviewed in conjunction with this
Prospectus. Investors may open a Sweep Account by completing and signing the
appropriate Sweep Materials.
S Shares may be purchased on any Business Day by making a deposit into
your Transaction Account and, provided Keystone, any of its banking affiliates
or a Service Organization is open for business, Keystone, any of its banking
affiliates or a Service Organization computes the net amount of all deposits,
withdrawals, charges and credits made to and from a Transaction Account in
accordance with their Sweep Account procedures (the "Net Sweep Amount"). If
deposits and credits exceed withdrawals and charges, you authorize Keystone, any
of its banking affiliates or a Service Organization, on your behalf, to transmit
a purchase order to the Prime Money Market Fund in your Sweep Account in the
amount of that day's Net Sweep Amount in accordance with the Sweep Account
procedures of Keystone, any of its banking affiliates or a Service Organization.
Your purchase order will be made effective and full and fractional S Shares will
be purchased at the net asset value per Share next determined after receipt by
the Trust. It is the responsibility of Keystone, any of its banking affiliates
or a Service Organization to transmit orders for the purchases of S Shares by
its customers to the transfer agent and deliver required funds on a timely
basis, in accordance with the procedures stated above. Share purchases and
redemptions executed through Keystone, any of its banking affiliates or a
Service Organization are executed only on days when the New York Stock Exchange
and Keystone, any of its banking affiliates or a Service Organization are open
for business. Contact Keystone, any of its banking affiliates or your Service
Organization for additional information about Keystone's, any of its banking
affiliates', or the Service Organizations' Sweep Account procedures.
----------------------------------
QUESTIONS?
CALL 1-800-766-3960
OR YOUR INVESTMENT REPRESENTATIVE.
----------------------------------
22
<PAGE> 24
SHAREHOLDER INFORMATION
- -----------------------
SELLING YOUR INVESTOR SHARES
- ----------------------------
You may sell your shares at any time. Your sales price will be the next NAV
after your sell order is received by the Fund, its transfer agent, or your
investment representative. Normally you will receive your proceeds within a week
after your request is received. See section on "General Policies on Selling
Shares" below.
- --------------------------------------------------------------------------------
WITHDRAWING MONEY FROM YOUR
FUND INVESTMENT
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
- --------------------------------------------------------------------------------
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through you financial advisor or broker, ask him or her
for redemption procedures. Your advisor and/or broker may have transaction
minimums and/or transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
<TABLE>
<S> <C>
By telephone 1. Call 1-800-766-3960 with instructions as to how you wish to
(unless you have declined receive your funds (mail, wire, electronic transfer). (See
telephone sales privileges) "General Policies on Selling Shares--Verifying Telephone
Redemptions" below)
- -----------------------------------------------------------------------------------------------------------
By mail or overnight service 1. Call 1-800-766-3960 to request redemption forms or write a
(See "General Policies on letter of instruction indicating:
Selling Shares--Redemptions in - your Fund and account number
Writing Required" below) - amount you wish to redeem
- address where your check should be sent
- account owner signature
2. Mail to:
(if by regular mail)
Governor Funds
P.O. Box 182707
Columbus, OH 43218-2707
(if by overnight service)
Governor Funds
c/o BISYS Fund Services
Attn: T.A. Operations
3435 Stelzer Road
Columbus, Ohio 43219
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C>
Wire transfer Call 1-800-766-3960 to request a wire transfer.
You must indicate this option
on your account application. If you call by 4 p.m. Eastern time, your payment will normally
be wired to your bank on the next business day. Otherwise, it
The Fund may charge a wire will normally be wired on the second business day after your
transfer fee. call.
NOTE: Your financial
institution may also charge a
separate fee.
- -----------------------------------------------------------------------------------------------------------
Electronic Redemptions Call 1-800-766-3960 to request an electronic redemption.
Your bank must participate in If you call by 4 p.m. Eastern time, the NAV of your shares
the Automated Clearing House will normally be determined on the same day and the proceeds
(ACH) and must be a U.S. bank. will be credited within 8 days.
Your bank may charge for this
service.
</TABLE>
AUTO WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum monthly withdrawal is $50. To activate
this feature:
- - Make sure you've checked the appropriate box on the Account Application. Or
call 1-800-766-3960.
- - Include a voided personal check.
- - Your account must have a value of $5,000 or more to start withdrawals.
- - If the value of your account falls below $1,000 ($250 if you are an
employee of the Advisor, Sub-Advisor or one of their affiliates), you may be
asked to add sufficient funds to bring the account back to $1,000 (or $250),
or the Fund may close your account and mail the proceeds to you.
----------------------------------
QUESTIONS?
CALL 1-800-766-3960
OR YOUR INVESTMENT REPRESENTATIVE.
----------------------------------
24
<PAGE> 26
REDEMPTION BY CHECK WRITING
You may write checks to make payments to any person or business on your account
(in any amount not less than $500). To obtain checks, complete the check writing
section of the Account Application or contact the Funds to obtain a signature
card. Dividends and distributions will continue to be paid up to the day the
check is presented for payment. You must maintain the minimum required account
balance of $1,000 per Fund and you may not close your account by writing a
check.
GENERAL POLICIES ON SELLING SHARES
- ----------------------------------
REDEMPTIONS IN WRITING REQUIRED
Redemption requests may require a signature guarantee. The signature guarantee
requirement will be waived if the following conditions apply:
- the redemption check is payable to the shareholder(s) of record.
- the redemption check is mailed to the shareholder(s) at the
address of record or mailed or wired to a commercial bank account
previously designated on the Account Registration Form.
To change the address to which a redemption check is to be mailed, a
written request therefor must be received by the Transfer Agent. In connection
with such request, the Transfer Agent will require a signature guarantee by an
eligible guarantor institution. For purposes of this policy, the term "eligible
guarantor institution" shall include banks, brokers, dealers, credit unions,
securities exchanges and associations, clearing agencies and savings
associations as those terms are defined in the Securities Exchange Act of 1934.
The Transfer Agent reserves the right to reject any signature guarantee if (1)
it has reason to believe that the signature is not genuine, (2) it has reason to
believe that the transaction would otherwise be improper, or (3) the guarantor
institution is a broker or dealer that is neither a member of a clearing
corporation nor maintains net capital of at least $100,000.
VERIFYING TELEPHONE REDEMPTIONS
The Funds make efforts to ensure that telephone redemptions are only made by
authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, you may be responsible for any
fraudulent telephone orders. If appropriate precautions have not been taken by
the Transfer Agent, the Transfer Agent may be liable for losses due to
unauthorized transactions.
REDEMPTIONS WITHIN 10 DAYS OF INVESTMENT
When you have made an investment by check, you cannot redeem any portion of it
until the Transfer Agent is satisfied that the check has cleared (which may
require up to 10 business days). You can avoid this delay by purchasing shares
with a certified check.
25
<PAGE> 27
REDEMPTION IN KIND
The Funds reserve the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund operations
(for example, more than 1% of a Fund's net assets). If a Fund deems it advisable
for the benefit of all shareholders, redemption in kind will consist of
securities equal in market value to your shares. When you convert these
securities to cash, you will pay brokerage charges.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining shareholders.
CLOSING OF SMALL ACCOUNTS
If your account falls below $1,000 ($250 if you are an employee of the Advisor,
Sub-Advisor or one of its affiliates), a Fund may ask you to increase your
balance. If it is still below $1,000 (or $250) after 60 days, the Fund may close
your account and send you the proceeds.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that remain
uncashed for six months will be canceled and the money reinvested in the
appropriate Fund.
GENERAL POLICY ON REDEMPTION OF S SHARES
- ----------------------------------------
If, on any Business Day that Keystone, any of its banking affiliates
and the particular Service Organization are open for business, withdrawals and
charges to your Sweep Account, including without limitation check transactions,
exceed deposits and credits, Keystone, any of its banking affiliates or the
particular Service Organization, as applicable, will transmit a redemption order
on your behalf to the Prime Money Market Fund in the dollar amount of that day's
Net Sweep Amount. If your Sweep Account with Keystone, any of its banking
affiliates or the particular Service Organization, as applicable, is closed as
described in the Sweep Materials, Keystone, any of its banking affiliates or the
particular Service Organization, as applicable, will normally transmit a
redemption request on your behalf to the Prime Money Market Fund for the balance
of the S Shares of the Prime Money Market Fund held through your Sweep Account.
Redemptions are effected on a Business Day at the net asset value per share next
determined after receipt of the redemption order. It is the responsibility of
Keystone, any of its banking affiliates or the particular Service Organization
to transmit the redemption order and credit its customer's Transaction Account
with the redemption proceeds on a timely basis. Keystone, any of its banking
affiliates or the Service Organization may withhold redemption proceeds pending
check collection or processing or other reasons all as set forth more fully in
the Sweep Materials.
26
<PAGE> 28
EXCHANGING YOUR SHARES
INSTRUCTIONS FOR EXCHANGING SHARES
- --------------------------------------------------------------------------------
Exchanges may be made by sending a written request to:
Governor Funds or by calling 1-800-766-3960
PO Box 182707
Columbus, OH 43218-2707
You can exchange your shares in one Fund for shares of another Fund of Governor
Funds. No transaction fees are charged for exchanges; however, your exchange may
be subject to sales charges.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from one Fund to another are taxable.
Please provide the following information:
- Your name and telephone number
- The exact name on your account and account number
- Taxpayer identification number (usually your Social Security number)
- Dollar value or number of shares to be exchanged
- The name of the Fund from which the exchange is to be made
- The name of the Fund into which the exchange is being made
See "General Policies on Selling your Shares" for important information about
telephone transactions.
NOTES ON EXCHANGES
When exchanging from a Fund that has no sales charge to a Fund with a sales
charge, you will pay the difference.
The Exchange Privilege may be changed or eliminated at any time.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
The exchange privilege is available only in states where shares of the new Fund
may be sold.
All exchanges are based on the relative net asset value next determined after
the exchange order is received by the Funds.
27
<PAGE> 29
SERVICE ORGANIZATIONS
Various banks, trust companies, broker-dealers (other than the Distributor) and
other financial organizations ("Service Organization(s)") may provide certain
administrative services for its customers who invest in the Funds through
accounts maintained at that Service Organization. The Funds, under servicing
agreements with the Service Organization, will pay the Service Organization an
annual rate up to .25% of the Fund's average daily net assets for these
services, which include:
- receiving and processing shareholder orders
- performing the accounting for customers' sub-accounts
- answering questions and handling correspondence for customer
accounts
- acting as the shareholder of record for customer accounts
- issuing shareholder reports and transaction confirmations
- processing dividend and distribution payments from the Funds on
behalf of customers
- providing customers with a service that invests the assets of their
accounts in shares of the Funds pursuant to specific or
pre-authorized instructions
- maintaining and supporting systems to support cash management
services such as sweep accounts for S Shares
Investors who purchase, sell or exchange shares of the Funds through a customer
account maintained at a Service Organization may be charged extra for other
services which are not specified in the servicing agreement with the Fund but
are covered under separate fee schedules provided by the Service Organization to
their customers. Customers with accounts at Service Organizations should consult
their Service Organization for information concerning their sub-accounts. The
Advisor or administrators also may pay Service Organizations for rendering
services to customers' sub-accounts.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- ----------------------------------
Any income a Fund receives in the form of interest is paid out, less expenses,
to its shareholders as dividends. Each Fund declares dividends from net
investment income on every business day. Dividends on the Funds are paid
monthly. Capital gains if any, for the Funds are distributed at least annually.
Dividends on each Share of a Fund are determined in the same manner and are paid
in the same amounts irrespective of class, except that the Investor Shares and
the S Shares of the Prime Money Market Fund each bear all expenses of its
Administrative Services Plan.
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income. Each Fund expects that all or substantially all of its
distributions will consist of ordinary income. You will be subject to income tax
on Fund distributions regardless whether they are paid in cash or reinvested in
additional Shares. You will be notified annually of the tax status of
distributions to you.
28
<PAGE> 30
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, Shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
Shareowners may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/or foreign tax consequences relevant to your specific situation.
29
<PAGE> 31
FINANCIAL HIGHLIGHTS
================================================================================
INSERT
FINANCIAL HIGHLIGHTS
FROM ANNUAL REPORT.
PRIME MONEY MARKET FUND FINANCIAL HIGHLIGHTS
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND FINANCIAL HIGHLIGHTS
30
<PAGE> 32
For more information about Governor Funds, the following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS (REPORTS):
The Funds' annual and semi-annual reports to shareholders contain detailed
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
- --------------------------------------------------------------------------------
YOU CAN GET FREE COPIES OF REPORTS AND THE SAI, AND PROSPECTUSES OF OTHER
GOVERNOR FUNDS, OR REQUEST OTHER INFORMATION AND DISCUSS YOUR QUESTIONS ABOUT
THE FUNDS BY CONTACTING A BROKER OR BANK THAT SELLS THE FUNDS. OR CONTACT THE
FUNDS AT:
GOVERNOR FUNDS
PO BOX 182707
COLUMBUS, OH 43218-2707
TELEPHONE: 1-800-766-3960
WWW.GOVERNORFUNDS.COM
- --------------------------------------------------------------------------------
You can review the Funds' reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
- For a fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
- Free from the Commission's Website at http://www.sec.gov.
(Investment Company Act file no. 811-09029)
================================================================================
31
<PAGE> 33
PROSPECTUS
GOVERNOR FUNDS
___________________, 1999
===============================================================================
EQUITY FUNDS
------------
ESTABLISHED GROWTH FUND
AGGRESSIVE GROWTH FUND
EMERGING GROWTH FUND
INTERNATIONAL EQUITY FUND
BOND FUNDS
----------
INTERMEDIATE TERM INCOME FUND
LIMITED DURATION GOVERNMENT SECURITIES FUND
MUNICIPAL BOND FUND
-------------------
PENNSYLVANIA MUNICIPAL BOND FUND
ASSET ALLOCATION FUNDS
----------------------
LIFESTYLE CONSERVATIVE GROWTH FUND
LIFESTYLE MODERATE GROWTH FUND
LIFESTYLE GROWTH FUND
THE SECURITIES AND EXCHANGE COMMISSION
QUESTIONS? HAS NOT APPROVED THE SHARES DESCRIBED IN
CALL 1-800-766-3960 THIS PROSPECTUS OR DETERMINED WHETHER
OR YOUR INVESTMENT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
REPRESENTATIVE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
===============================================================================
1
<PAGE> 34
TABLE OF CONTENTS
===============================================================================
RISK/RETURN SUMMARY AND FUND EXPENSES
-----------------------------------------------------
REVIEW THIS IMPORTANT __ SUMMARY OF PRINCIPAL RISKS
SECTION, WHICH
SUMMARIZES EACH EQUITY FUNDS
FUND'S INVESTMENTS, __ ESTABLISHED GROWTH FUND
RISKS, PAST __ AGGRESSIVE GROWTH FUND
PERFORMANCE, AND FEES. __ EMERGING GROWTH FUND
__ INTERNATIONAL EQUITY FUND
BOND FUNDS
__ INTERMEDIATE TERM INCOME FUND
__ LIMITED DURATION GOVERNMENT SECURITIES FUND
MUNICIPAL BOND FUND
__ PENNSYLVANIA MUNICIPAL BOND FUND
ASSET ALLOCATION FUNDS
__ LIFESTYLE CONSERVATIVE GROWTH FUND
__ LIFESTYLE MODERATE GROWTH FUND
__ LIFESTYLE GROWTH FUND
FUND EXPENSES
__ EQUITY FUNDS
__ BOND FUNDS
__ ASSET ALLOCATION FUNDS
ADDITIONAL INFORMATION
__ PORTFOLIO TURNOVER
__ TEMPORARY DEFENSIVE POSITIONS
__ OTHER TYPES OF INVESTMENTS
__ YEAR 2000
FUND MANAGEMENT
- -------------------------------------------------------------------------------
2
<PAGE> 35
REVIEW THIS SECTION FOR __ THE INVESTMENT ADVISOR AND SUB-ADVISORS
DETAILS ON THE PEOPLE __ PORTFOLIO MANAGERS
AND ORGANIZATIONS WHO __ THE ADMINISTRATORS AND DISTRIBUTOR
OVERSEE THE FUNDS.
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
REVIEW THIS SECTION FOR __ PRICING OF FUND SHARES
DETAILS ON HOW SHARES ARE __ PURCHASING, SELLING YOUR SHARES
VALUED, HOW TO PURCHASE, __ GENERAL POLICIES ON SELLING SHARES
SELL AND EXCHANGE SHARES, __ DISTRIBUTIONS ARRANGEMENTS/SALES CHARGES
RELATED CHARGES AND __ EXCHANGING YOUR SHARES
PAYMENTS OF DIVIDENDS __ DIVIDENDS, DISTRIBUTIONS AND TAXES
AND DISTRIBUTIONS.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
__
BACK COVER
- -------------------------------------------------------------------------------
__ WHERE TO LEARN MORE ABOUT THE GOVERNOR FUNDS
3
<PAGE> 36
RISK/RETURN SUMMARY AND FUND EXPENSES
OVERVIEW
This prospectus describes the following funds offered by the Governor Funds (the
"Funds"). On the following pages, you will find important information about each
Fund, including:
- - the investment objective
- - principal investment strategy
- - performance information
- - fees and expenses, and
- - principal risks associated with each Fund
The Funds are managed by Governors Group Advisors, Inc. (the "Advisor").
Martindale Andres & Company, Inc. (the "Sub-Advisor"), subadvises each Fund
except the International Equity Fund, which is subadvised by Brinson Partners,
Inc. (the "International Equity Fund Sub-Advisor" and collectively with the
Sub-Advisor, the "Sub-Advisors").
EQUITY FUNDS RISK/RETURN PROFILE OF MUTUAL FUNDS
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
Established Growth Fund
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund
BOND FUNDS
- ----------
Intermediate Term Income Fund
Limited Duration Government Securities Fund
MUNICIPAL BOND FUND
- -------------------
Pennsylvania Municipal Bond Fund
ASSET ALLOCATION FUNDS
- ----------------------
Lifestyle Conservative Growth Fund
Lifestyle Moderate Growth Fund
Lifestyle Growth Fund
4
<PAGE> 37
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
MARKET MANAGEMENT FOREIGN INTEREST CREDIT CONCENTRATION
RISK RISK INVESTMENT RATE RISK RISK RISK
RISK
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ESTABLISHED GROWTH FUND X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
AGGRESSIVE GROWTH FUND X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
EMERGING GROWTH FUND X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
INTERNATIONAL EQUITY FUND X X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
INTERMEDIATE TERM INCOME FUND X X X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
LIMITED DURATION GOVERNMENT X X X X
SECURITIES FUND
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
PENNSYLVANIA MUNICIPAL BOND FUND X X X X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
LIFESTYLE CONSERVATIVE GROWTH FUND X X X X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
LIFESTYLE MODERATE GROWTH FUND X X X X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
LIFESTYLE GROWTH FUND X X X X X
- ---------------------------------------- ----------- --------------- --------------- ------------- ----------- -----------------
<CAPTION>
- ---------------------------------------- ---------------- ----------------- ----------------
SMALL MICRO AFFILIATED
CAPITALIZATION CAPITALIZATION PERSONS RISK
STOCK RISK STOCK RISK
- ---------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
ESTABLISHED GROWTH FUND
- ---------------------------------------- ---------------- ----------------- ----------------
AGGRESSIVE GROWTH FUND X
- ---------------------------------------- ---------------- ----------------- ----------------
EMERGING GROWTH FUND X
- ---------------------------------------- ---------------- ----------------- ----------------
INTERNATIONAL EQUITY FUND
- ---------------------------------------- ---------------- ----------------- ----------------
INTERMEDIATE TERM INCOME FUND
- ---------------------------------------- ---------------- ----------------- ----------------
LIMITED DURATION GOVERNMENT
SECURITIES FUND
- ---------------------------------------- ---------------- ----------------- ----------------
PENNSYLVANIA MUNICIPAL BOND FUND
- ---------------------------------------- ---------------- ----------------- ----------------
LIFESTYLE CONSERVATIVE GROWTH FUND X X
- ---------------------------------------- ---------------- ----------------- ----------------
LIFESTYLE MODERATE GROWTH FUND X X
- ---------------------------------------- ---------------- ----------------- ----------------
LIFESTYLE GROWTH FUND X X X
- ---------------------------------------- ---------------- ----------------- ----------------
</TABLE>
A description of these and other risks can be found in the individual profiles
for each Fund.
5
<PAGE> 38
RISK/RETURN SUMMARY OF THE ESTABLISHED GROWTH FUND
INVESTMENT OBJECTIVES The Established Growth Fund seeks growth
of capital with some current income as a
secondary objective.
PRINCIPAL INVESTMENT STRATEGIES The Fund will invest substantially all,
but under normal market conditions no
MARKET CAPITALIZATION is a less than 65%, of its total assets in
common measure of the size common stocks and securities convertible
of a company. It is the into common stocks of companies with
market price of a share of market capitalizations at the time of
the company's stock purchase of at least $1 billion. The Fund
multiplied by the number of intends to invest 90% or more of its
outstanding shares. assets in common stocks under normal
market conditions. The Sub-Advisor
selects investments based on a number of
factors related to historical and
projected earnings and the price/earnings
relationships, as well as company growth
and asset value, consistency of earnings
growth and earnings quality. Stocks
purchased for the Fund generally will be
traded on established U.S. markets and
exchanges.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the
Fund are market risk and management risk.
Market risk is the risk that the value of
the securities in which a Fund invests
may go up or down in response to the
prospects of individual companies and/or
general economic conditions. Price
changes may be temporary or last for
extended periods. Management risk is the
risk that a strategy which the Advisor or
Sub-Advisor uses may fail to produce the
intended results. The particular
securities and types of securities a Fund
holds may underperform other securities
and types of securities. There can be no
assurance the Fund will achieve its
investment objective.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you
are:
INVESTING FOR LONG-TERM GOALS, SUCH AS
RETIREMENT
SEEKING CAPITAL APPRECIATION WITHOUT THE
HIGHER VOLATILITY OF SMALL OR MID
CAPITALIZATION STOCKS.
This Fund will not be appropriate for
anyone:
SEEKING REGULAR INCOME
INVESTING FOR SHORT-TERM GOALS
SEEKING STABILITY OF PRINCIPAL
6
<PAGE> 39
RISK/RETURN SUMMARY OF THE ESTABLISHED GROWTH FUND
The bar chart and table on this page show how the Established Growth Fund has
performed and how its performance has varied from year to year. The bar chart
shows changes in the Fund's yearly performance over the last three years to
demonstrate that the Fund's value varied at different times. The table below the
bar chart compares the Fund's performance over time to that of the S&P 500
Index, an unmanaged index comprised of 500 widely held common stocks listed on
the New York Stock Exchange, the American Stock Exchange and NASDAQ.
For the period from January 1, 1995 to December 2, 1996, the Fund offered to
investors shares with neither a sales charge nor a service fee. The average
annual total return calculation in the table reflects a maximum initial sales
charge of 4.50%, but for periods prior to December 2, 1996, performance does not
reflect service organization fees. If service organization fees had been
reflected, performance would be reduced.
PERFORMANCE BAR CHART AND TABLE(1)
Year-by-Year Total Returns as of 12/31
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 0% 0% 0%
</TABLE>
(1) The bar chart does not reflect the impact of any applicable sales
charges. If sales charges were reflected, performance would be reduced.
7
<PAGE> 40
Past performance does not indicate how the Fund will perform in the future. Both
charts assume reinvestment of dividends and distributions. Fund performance in
both charts reflects the impact of fee waivers; without fee waivers returns for
the Fund would have been lower.
- ----------------------------------------------------------------------------
Best quarter: Q _ 199_ ____%
Worst quarter: Q _ 199_ ____%
- ----------------------------------------------------------------------------
Year-to-date return for the period ended September 30, 1999: ____%
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
<TABLE>
<CAPTION>
Fund Since
Inception Past Year Inception
-----------------------------------------------------------
<S> <C> <C> <C>
ESTABLISHED GROWTH FUND 1/1/95 ____% ____%
-----------------------------------------------------------
S&P 500 INDEX ____% ____%
- --------------------------------------------------------------------------------------------------
</TABLE>
* For current performance information call 1-800-766-3960.
8
<PAGE> 41
RISK/RETURN SUMMARY OF THE AGGRESSIVE GROWTH FUND
INVESTMENT OBJECTIVES The Aggressive Growth Fund seeks growth of
capital.
PRINCIPAL INVESTMENT STRATEGIES The Fund will invest substantially all, but
under normal market conditions no less than
MARKET CAPITALIZATION is a 65%, of its total assets in common stocks
common measure of the size and securities convertible into common
of a company. It is the stocks of companies with market
market price of a share of capitalizations at the time of purchase
the company's stock ranging between $100 million and $5 billion.
multiplied by the number The Fund intends to invest 90% or more of
of outstanding shares. its assets in common stocks and securities
convertible to common stocks under normal
market conditions. Stocks purchased by the
Fund generally will be traded on established
U.S. markets and exchanges.
The Fund attempts to invest in high quality
small to mid capitalization companies that
its Sub-Advisor believes have demonstrated
one or more of the following
characteristics: strong growth, solid
management, innovative products, and a
steady revenue and earnings history. The
Sub-Advisor emphasizes company specific
factors rather than industry factors when
deciding to buy or sell securities.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund
are market risk, management risk and small
capitalization stock risk. Market risk is
the risk that the value of the securities in
which a Fund invests may go up or down in
response to the prospects of individual
companies and/or general economic
conditions. Price changes may be temporary
or last for extended periods. Management
risk is the risk that a strategy which the
Advisor or Sub-Advisor uses may fail to
produce the intended results. The particular
securities and types of securities a Fund
holds may underperform other securities and
types of securities. There can be no
assurance a Fund will achieve its investment
objective. Small capitalization stocks tend
to carry greater risk and exhibit greater
price volatility than larger capitalization
stocks because their businesses may not be
well-established. Small capitalization
companies generally have limited product
lines, markets and financial resources and
may be dependent on one-person management;
also, such securities may have limited
marketability and, as a result, be difficult
to sell.
9
<PAGE> 42
<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are an
individual:
INVESTING FOR LONG-TERM GOALS, SUCH AS RETIREMENT
SEEKING TO ADD A GROWTH COMPONENT TO YOUR
PORTFOLIO
WILLING TO ACCEPT THE HIGHER RISKS ASSOCIATED
WITH INVESTING IN SMALL CAPITALIZATION
STOCKS IN RETURN FOR HIGHER POTENTIAL
RETURNS
This Fund will not be appropriate for anyone:
SEEKING REGULAR INCOME
SEEKING STABILITY OF PRINCIPAL
INVESTING FOR SHORT-TERM GOALS
</TABLE>
10
<PAGE> 43
RISK/RETURN SUMMARY OF THE AGGRESSIVE GROWTH FUND
The bar chart and table on this page show how the Aggressive Growth Fund has
performed and how its performance has varied from year to year. The bar chart
shows changes in the Fund's yearly performance over the last four years to
demonstrate that the Fund's value varied at different times. The table below the
bar chart compares the Fund's performance over time to that of the Russell 2000
Index, an unmanaged index comprised of the 2,000 smallest companies of the 3,000
largest U.S. companies based on market capitalization.
For the period from July 1, 1994 to February 3, 1997, the Fund offered to
investors shares with neither a sales charge nor a service fee. The average
annual total return calculation in the table reflects a maximum initial sales
charge of 4.50%, but for periods prior to February 3, 1997, performance does not
reflect service organization fees. If service organization fees had been
reflected, performance would be reduced.
PERFORMANCE BAR CHART AND TABLE(1)
Year-by-Year Total Returns as of 12/31
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 0% 0% 0%
</TABLE>
(1) The bar chart does not reflect the impact of any applicable sales
charges. If sales charges were reflected, performance would be reduced.
11
<PAGE> 44
Past performance does not indicate how the Fund will perform in the future. Both
charts assume reinvestment of dividends and distributions. Fund performance in
both charts reflects the impact of fee waivers; without fee waivers returns for
the Fund would have been lower.
- ------------------------------------------------------------------------------
Best quarter: Q _ 199_ ____%
Worst quarter: Q _ 199_ ____%
- ------------------------------------------------------------------------------
Year-to-date return for the period ended September 30, 1999: ____%
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
<TABLE>
<CAPTION>
Fund Inception Past Year Since Inception
--------------------------------------------------------------
<S> <C> <C> <C>
AGGRESSIVE GROWTH FUND 7/1/94 ____ ____%
--------------------------------------------------------------
RUSSELL 2000 INDEX ____% ____%
--------------------------------------------------------------
</TABLE>
*For current performance information call 1-800-766-3960.
12
<PAGE> 45
RISK/RETURN SUMMARY OF THE EMERGING GROWTH FUND
INVESTMENT OBJECTIVE The Emerging Growth Fund seeks long-term
growth of capital.
PRINCIPAL INVESTMENT STRATEGIES The Fund will invest substantially all, but
under normal market conditions no less than
MARKET CAPITALIZATION is a 65%, of its total assets in common stocks
common measure of the size and securities convertible into common
of a company. It is the stocks of growth-oriented companies with
market price of a share of equity market capitalizations, at the time
the company's stock of purchase, of between $30 million and $350
multiplied by the number million. The Fund may invest a portion of
of outstanding stocks. its assets in larger companies.
The Sub-Advisor will purchase and maintain
positions in securities of companies that
the Sub-Advisor believes have demonstrated
one or more of the following
characteristics: strong entrepreneurial
management team with a substantial ownership
interest in the business, solid long-term
revenue and earnings outlook, unique
position in the company's targeted market,
sustainable competitive advantage in the
company's targeted market, and solid balance
sheet. In addition, the Sub-Advisor attempts
to invest in companies that are selling at
earnings multiples which the Sub-Advisor
believes to be less than their projected
three to five year earnings growth rate.
This growth at a discount management style
relies on a combination of quantitative and
fundamental analysis of historical and
projected data to determine a stock's
expected return. The Sub-Advisor will seek
to minimize micro capitalization stock risk
by diversifying the Fund's holdings over a
number of companies and industry groups.
13
<PAGE> 46
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the
Fund are market risk, management risk,
and micro capitalization stock risk.
Market risk is the risk that the value of
the securities in which a Fund invests
may go up or down in response to the
prospects of individual companies and/or
general economic conditions. Price
changes may be temporary or last for
extended periods. Management risk is the
risk that a strategy which the Advisor or
Sub-Advisor uses may fail to produce the
intended results. The particular
securities and types of securities a Fund
holds may underperform other securities
and types of securities. There can be no
assurance a Fund will achieve its
investment objective. Micro
capitalization stocks may fail to reach
their apparent value at the time of
investment or may even fail as a
business. Micro capitalization companies
may lack resources to take advantage of a
valuable product or favorable market
position or may be unable to withstand
the competitive pressures of larger, more
established competitors.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you
are:
INVESTING FOR LONG-TERM GOALS, SUCH AS
RETIREMENT
SEEKING TO ADD A GROWTH COMPONENT TO
YOUR PORTFOLIO
WILLING TO ACCEPT THE HIGHER RISKS
ASSOCIATED WITH INVESTING IN MICRO
CAPITALIZATION STOCKS IN RETURN FOR
HIGHER POTENTIAL RETURNS
This Fund will not be appropriate for
anyone:
SEEKING REGULAR INCOME
SEEKING STABILITY OF PRINCIPAL
INVESTING FOR SHORT-TERM GOALS
PERFORMANCE INFORMATION This is a new Fund for which performance
information is not yet available.
14
<PAGE> 47
RISK/RETURN SUMMARY OF THE INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE The International Equity Fund seeks
long-term capital appreciation, primarily
through a diversified portfolio of
non-U.S. equity securities.
PRINCIPAL INVESTMENT STRATEGIES The Fund will invest substantially all,
but under normal market conditions in no
A FORWARD FOREIGN CURRENCY event less than 65%, of its total assets
CONTRACT is a commitment to in equity or convertible securities in at
purchase or sell a foreign least eight countries other than the
currency at a future date at United States. Although it may invest
a negotiated forward rate. anywhere in the world, the Fund invests
primarily in the equity markets listed in
the Morgan Stanley Capital International
European, Australian, Far East ("MSCI
EAFE") Index(R), the benchmark against
which the Fund measures its portfolio.
The Fund may also invest in foreign
forward currency contracts to achieve
allocation strategies.
The International Equity Fund
Sub-Advisor's investment perspective for
the Fund is to invest in the equity
securities of non-U.S. markets and
companies which are believed to be
undervalued based upon internal research
and proprietary valuation systems.
15
<PAGE> 48
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the
Fund are market risk, management risk,
and foreign risk. Market risk is the risk
that the value of the securities in which
a Fund invests may go up or down in
response to the prospects of individual
companies and/or general economic
conditions. Price changes may be
temporary or last for extended periods.
Management risk is the risk that a
strategy which the Advisor or
International Equity Fund Sub-Advisor
uses may fail to produce the intended
results. The particular securities and
types of securities a Fund holds may
underperform other securities and types
of securities. There can be no assurance
a Fund will achieve its investment
objective. Foreign risk is the risk of
investments in issuers located in foreign
countries, which may have greater price
volatility and less liquidity.
Investments in foreign securities also
are subject to political, regulatory, and
diplomatic risks. Changes in currency
rates are an additional risk of
investments in foreign securities. Risks
associated with forward foreign currency
contracts include movement in the value
of the foreign currency relative to the
U.S. dollar and the ability of the
counterparty to perform.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you
are:
INVESTING FOR LONG-TERM GOALS, SUCH AS
RETIREMENT
SEEKING TO ADD A GROWTH COMPONENT TO YOUR
PORTFOLIO
WILLING TO ACCEPT THE HIGHER RISKS
ASSOCIATED WITH INVESTING IN FOREIGN
MARKETS
SEEKING TO DIVERSIFY YOUR PORTFOLIO BY
INVESTING IN MARKETS OUTSIDE THE U.S.
This Fund will not be appropriate for
anyone:
SEEKING REGULAR INCOME
SEEKING STABILITY OF PRINCIPAL
INVESTING FOR SHORT-TERM GOALS
PERFORMANCE INFORMATION This is a new Fund for which performance
information is not yet available.
16
<PAGE> 49
RISK/RETURN SUMMARY OF THE INTERMEDIATE TERM INCOME FUND
INVESTMENT OBJECTIVES The Intermediate Term Income Fund seeks
current income with long-term growth of
capital as a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests substantially all,
but under normal market conditions no less
INVESTMENT GRADE DEBT than 65%, of its total assets in fixed
SECURITIES are those of income securities. These include bonds,
medium credit quality or debentures, notes, mortgage-backed and
better as determined by a asset-backed securities, state, municipal or
national rating agency, industrial revenue bonds, variable and
such as Standard & Poor's floating rate securities, variable master
Ratings Group (debt demand notes, obligations issued or
securities rated in the supported as to principal and interest by
four highest rating the U.S. Government or its agencies or
categories, i.e. BBB or instrumentalities and debt securities
higher) and Moody's convertible into, or exchangeable for,
Investors Service, Inc. common stocks. The Fund invests only in
(debt securities rated in investment grade debt securities. Unrated
the four highest rating obligations will be purchased only if they
categories, i.e. Baa or are determined by the Sub-Advisor to be at
higher). The higher the least comparable in quality at the time of
credit rating, the less purchase to eligible rated securities. The
likely it is that the Fund will have a dollar-weighted average
issuer of the securities maturity of 3 to 10 years.
will default on its
principal and interest
payments. The Sub-Advisor selects securities based
on current yield, maturity, yield to
DOLLAR-WEIGHTED AVERAGE maturity, anticipated changes in interest
MATURITY gives you the rates, and the overall quality of the
average time until all investment.
debt securities in a Fund
come due or mature. It is
calculated by averaging
the time to maturity of
all debt securities held
by a Fund with each
maturity "weighted"
according to the
percentage of assets it
represents.
MORTGAGE-BACKED SECURITIES
are certificates
representing ownership
interests in a pool of
mortgage loans, and
include those issued by
the Government National
Mortgage Association
("Ginnie Maes") the
Federal National Mortgage
Association ("Fannie
Maes") and the Federal
Home Loan Mortgage
Corporation ("Freddie
Macs").
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund
are credit risk, interest rate risk, and
management risk. Credit risk is the risk
that an issuer of fixed income securities
may default on its obligation to pay
interest and repay principal. Interest rate
risk is the risk that, when interest rates
increase, fixed income securities will
decline in value. Changes in interest rates
also may cause certain debt securities held
by the Fund to be paid off much sooner than
expected. In the event that a security is
paid off sooner than expected because of a
decline in interest rates, the Fund may be
unable to recoup all of its initial
investment and may also suffer from having
to reinvest in lower-yielding securities. In
the event of a later than expected payment
because of a rise in interest rates, the
17
<PAGE> 50
value of the obligation will decrease, and
the Fund may suffer from the inability to
invest in higher-yielding securities.
Management risk is the risk that a strategy
which the Advisor or Sub-Advisor uses may
fail to produce the intended results. The
particular securities and types of
securities a Fund holds may underperform
other securities and types of securities.
There can be no assurance a Fund will
achieve its investment objective.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
SEEKING TO ADD AN INCOME COMPONENT TO YOUR
PORTFOLIO
SEEKING HIGHER POTENTIAL RETURNS THAN
PROVIDED BY MONEY MARKET FUNDS
WILLING TO ACCEPT THE RISKS OF PRICE AND
DIVIDEND FLUCTUATIONS
WANTING TO ADD STABILITY TO A PORTFOLIO
INVESTED PRIMARILY IN STOCKS
This Fund will not be appropriate for
anyone:
INVESTING FOR LONG-TERM CAPITAL APPRECIATION
INVESTING EMERGENCY RESERVES
SEEKING A STABLE SHARE PRICE
18
<PAGE> 51
RISK/RETURN SUMMARY OF THE INTERMEDIATE TERM INCOME FUND
The bar chart and table on this page show how the Intermediate Term Income Fund
has performed and how its performance has varied from year to year. The bar
chart shows changes in the Fund's yearly performance over the last two years to
demonstrate that the Fund's value varied at different times. The table below the
bar chart compares the Fund's performance over time to that of the Lehman
Brothers Aggregate Bond Index, an unmanaged index comprised of Lehman Brothers'
Government/Corporate Bond Index, its Mortgage Backed Securities Index and its
Asset Backed Securities Index, and the Lipper Intermediate Investment Grade Debt
Fund Index, which is comprised of the 30 largest funds that invest at least 65%
of their assets in investment grade debt issues rated in the four highest rating
categories with dollar-weighted average maturities of five to ten years. Past
performance does not indicate how the Fund will perform in the future. Both
charts assume reinvestment of dividends and distributions. Fund performance in
both charts reflects the impact of fee waivers; without fee waivers returns for
the Fund would have been lower.
PERFORMANCE BAR CHART AND TABLE(1)
Year-by-Year Total Returns as of 12/31
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 0% 0% 0%
</TABLE>
(1) The bar chart does not reflect the impact of any applicable sales
charges. If sales charges were reflected, performance would be reduced.
- -----------------------------------------------------------------------------
Best quarter: Q _ 199_ ____%
Worst quarter: Q _ 199_ ____%
- -----------------------------------------------------------------------------
Year-to-date return for the period ended September 30, 1999: ____%
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
19
<PAGE> 52
<TABLE>
<CAPTION>
Fund Since
Inception Past Year Inception
------------------------------------------------------------
<S> <C> <C> <C>
INTERMEDIATE TERM INCOME 12/2/96 ____% ____%
FUND
------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE BOND INDEX ____% ____%
------------------------------------------------------------
LIPPER INTERMEDIATE INVESTMENT GRADE
BOND INDEX ----% ----%
------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
* For current performance information call 1-800-766-3960.
20
<PAGE> 53
RISK/RETURN SUMMARY OF THE LIMITED DURATION GOVERNMENT SECURITIES FUND
INVESTMENT OBJECTIVES The Limited Duration Government Securities
Fund seeks current income, with preservation
of capital as a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests substantially all,
but under normal market conditions no less
DURATION DEFINED: than 65%, of its total assets in obligations
"Duration" is the average issued or supported as to principal and
time it takes to receive interest by the U.S. Government or its
expected cash flows agencies and instrumentalities including
(discounted to their mortgage-backed securities, variable and
present value) on a floating rate securities and zero coupon
particular fixed-income securities, and in repurchase agreements
instrument or a portfolio backed by such securities. The Fund expects
of instruments. Duration to maintain a duration of less than three
usually defines the effect years under normal market conditions.
of interest rate changes
on bond prices. However,
for large interest rate
changes (generally changes
of 1% or more) this
measure does not
completely explain the
interest rate sensitivity
of a bond.
REPURCHASE AGREEMENTS are
transactions in which a
Fund buys securities from
a seller (usually a bank
or broker-dealer) who
agrees to buy them back
from the Fund on a certain
date and at a certain
price.
MORTGAGE-BACKED SECURITIES
are certificates
representing ownership
interests in a pool of
mortgage loans, and
include those issued by
the Government National
Mortgage Association
("Ginnie Maes"), the
Federal National Mortgage
Association ("Fannie
Maes") and the Federal
Home Loan Mortgage
Corporation ("Freddie
Macs").
21
<PAGE> 54
PRINCIPAL
INVESTMENT RISKS The principal risks of investing in the Fund
are credit risk, interest rate risk and
management risk. Credit risk is the risk
that an issuer of fixed income securities
may default on its obligation to pay
interest and repay principal. Interest rate
risk is the risk that, when interest rates
increase, fixed income securities will
decline in value. Changes in interest rates
may also cause certain debt securities held
by the Fund, including mortgage-backed
securities, to be paid off much sooner or
later than expected. In the event that a
security is paid off sooner than expected
because of a decline in interest rates, the
Fund may be unable to recoup all of its
initial investment. In the event of a later
than expected payment because of a rise in
interest rates, the value of the obligation
will decrease, and the Fund may suffer from
the inability to invest in higher-yielding
securities. Repurchase agreements carry the
risk that the other party may not fulfill
its obligations under the agreement.
Management risk is the risk that a strategy
which the Advisor or Sub-Advisor uses may
fail to produce the intended results. The
particular securities and types of
securities a Fund holds may underperform
other securities and types of securities.
There can be no assurance a Fund will
achieve its investment objective.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
SEEKING TO ADD AN INCOME COMPONENT TO YOUR
PORTFOLIO
SEEKING HIGHER POTENTIAL RETURNS THAN
PROVIDED BY MONEY MARKET FUNDS
WILLING TO ACCEPT THE RISKS OF PRICE AND
DIVIDEND FLUCTUATIONS
LOOKING TO BALANCE MORE AGGRESSIVE
INVESTMENTS, SUCH AS COMMON STOCKS
This Fund will not be appropriate for
anyone:
INVESTING FOR LONG-TERM CAPITAL APPRECIATION
INVESTING EMERGENCY RESERVES
SEEKING A STABLE SHARE PRICE
22
<PAGE> 55
RISK/RETURN SUMMARY OF THE LIMITED DURATION GOVERNMENT SECURITIES FUND
The bar chart and table on this page show how the Limited Duration Government
Securities Fund has performed and how its performance has varied from year to
year. The bar chart shows changes in the Fund's yearly performance over the last
four years to demonstrate that the Fund's value varied at different times. The
table below the bar chart compares the Fund's performance over time to that of
the Lehman Brothers 1-3 Year Government Bond Index, an unmanaged index which
tracks the performance of short-term U.S. government and corporate bonds.
For the period from October 31, 1995 to July 1, 1997, the Fund offered to
investors shares with neither a sales charge nor a service fee. The average
annual total return calculation in the table reflects a maximum initial sales
charge of 4.50%, but for periods prior to July 1, 1997, performance does not
reflect service organization fees. If service organization fees had been
reflected, performance would be reduced.
Past performance does not indicate how the Fund will perform in the future. Both
charts assume reinvestment of dividends and distributions. Fund performance in
both charts reflects the impact of fee waivers; without fee waivers returns for
the Fund would have been lower.
PERFORMANCE BAR CHART AND TABLE(1)
Year-by-Year Total Returns as of 12/31
(1) The bar chart does not reflect the impact of any applicable sales
charges. If sales charges were reflected, performance would be reduced.
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 0% 0% 0%
</TABLE>
- -----------------------------------------------------------------------------
Best quarter: Q _ 199_ ____%
Worst quarter: Q _ 199_ ____%
- -----------------------------------------------------------------------------
Year-to-date return for the period ended September 30, 1999: ____%
23
<PAGE> 56
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
<TABLE>
<CAPTION>
Fund Inception Past Year Since Inception
-----------------------------------------------------------
<S> <C> <C> <C>
LIMITED DURATION GOVERNMENT 1/1/95 ____% ____%
SECURITIES FUND
-----------------------------------------------------------
LEHMAN BROTHERS 1-3 YEAR GOVERNMENT ____% ____%
BOND INDEX
- -----------------------------------------------------------------------------------------------------
</TABLE>
* For current performance information call 1-800-766-3960.
24
<PAGE> 57
RISK/RETURN SUMMARY OF THE PENNSYLVANIA MUNICIPAL BOND FUND
INVESTMENT OBJECTIVES The Pennsylvania Municipal Bond Fund seeks
income exempt from both Federal and
Pennsylvania state income taxes, and
preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES The Fund primarily invests in municipal
securities issued by Pennsylvania and its
WHAT ARE MUNICIPAL SECURITIES? local governments (Pennsylvania municipal
securities), and in debt obligations issued
State and local by the government of Puerto Rico and other
governments issue governmental entities whose debt obligations
municipal securities to provide interest income exempt from Federal
raise money to finance and Pennsylvania state income taxes. The
public works, to repay Fund is nondiversified, which means that it
outstanding obligations, can invest a large percentage of its assets
to raise funds for general in a small number of issuers. The Fund
operating expenses and to expects that the dollar- weighted average
make loans to other public maturity of its investments will be 3 to 10
institutions. Some years. The Fund invests in investment grade
municipal securities, municipal securities.
known as private activity
bonds, are backed by
private entities and are During normal market conditions the Fund
used to finance various normally will invest at least:
non-public projects.
Municipal securities,
which can be issued as - 65% of its total assets in Pennsylvania
bonds, notes or commercial municipal securities; and
paper, usually have fixed
interest rates, although - 80% of its net assets in securities paying
some have interest rates interest that is exempt from Federal income
that change from time to tax but may be subject to the Federal
time. alternative minimum tax when received by
certain shareholders.
DOLLAR-WEIGHTED AVERAGE
MATURITY gives you the
average time until all
debt obligations,
including municipal
securities, in a Fund come
due or mature. It is
calculated by averaging
the time to maturity of
all debt obligations held
by a Fund with each
maturity "weighted"
according to the
percentage of assets which
it represents.
25
<PAGE> 58
INVESTMENT GRADE BONDS are
those of medium credit
quality or better, as
determined by a national
rating agency such as
Standard & Poor's Ratings
Group (bonds rated BBB or
higher) and Moody's
Investors Service, Inc.
(bonds rated Baa or
higher). The higher the
credit rating, the less
likely it is that the bond
issuer will default on its
principal and interest
payments.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund
are credit risk, interest rate risk,
management risk and concentration risk.
Credit risk is the risk that an issuer of
fixed income securities may default on its
obligation to pay interest and repay
principal. Interest rate risk is the risk
that, when interest rates increase, fixed
income securities will decline in value.
Changes in interest rates also may cause
certain municipal securities held by the
Fund to be paid off much sooner or later
than expected. In the event that a security
is paid off sooner than expected because of
a decline in interest rates, the Fund may be
unable to recoup all of its initial
investment and may also suffer from having
to reinvest in lower-yielding securities. In
the event of a later than expected payment
because of a rise in interest rates, the
value of the obligation will decrease, and
the Fund may suffer from the inability to
invest in higher-yielding securities.
Management risk is the risk that a strategy
which the Advisor or Sub-Advisor uses may
fail to produce the intended results. The
particular securities and types of
securities a Fund holds may underperform
other securities and types of securities.
There can be no assurance a Fund will
achieve its investment objective. Because
the Fund is non-diversified and is subject
to concentration risk, a change in value of
any one investment held by the Fund may
affect the overall value of the Fund more
than it would affect a diversified Fund.
Because the Fund invests in municipal
securities, it has the risk that special
factors may adversely affect the value of
municipal securities, such as political or
legislative changes or uncertainties related
to the tax status of municipal securities.
Since the Fund invests primarily in
Pennsylvania municipal securities, factors
adversely affecting that state, such as
economic or political conditions, could have
a more significant effect on the Fund's net
asset value.
26
<PAGE> 59
"NON DIVERSIFIED" means
that the Fund may invest a
large percentage of its
assets in a small number
of issuers.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- LOOKING TO POTENTIALLY REDUCE OR ELIMINATE
TAXES ON INVESTMENT INCOME
- SEEKING REGULAR MONTHLY DIVIDENDS
- LOOKING TO BALANCE MORE AGGRESSIVE INVESTMENTS,
SUCH AS COMMON STOCKS
- WILLING TO RECEIVE DIVIDEND DISTRIBUTIONS, A
PORTION OF WHICH MAY BE SUBJECT TO THE
FEDERAL ALTERNATIVE MINIMUM TAX.
This Fund will not be appropriate for anyone:
- INVESTING THROUGH A TAX-EXEMPT RETIREMENT PLAN
- TAX-EXEMPT INSTITUTIONS THAT ARE UNABLE TO
BENEFIT FROM THE RECEIPT OF TAX-EXEMPT
DIVIDENDS
- PURSUING AN AGGRESSIVE HIGH GROWTH INVESTMENT
STRATEGY
- SEEKING A STABLE SHARE PRICE
- INVESTING EMERGENCY RESERVES
27
<PAGE> 60
RISK/RETURN SUMMARY OF THE PENNSYLVANIA MUNICIPAL BOND FUND
The bar chart and table on this page show how the Pennsylvania Municipal Bond
Fund has performed and how its performance has varied from year to year. The bar
chart shows changes in the Fund's yearly performance over the last two years to
demonstrate that the Fund's value varied at different times. The table below the
bar chart compares the Fund's performance over time to that of the Lehman
Brothers Pennsylvania 1-12 Year Municipal Bond Index which consists of bonds
issued within the Commonwealth of Pennsylvania with a date of January 1, 1991 or
later, including nominal maturities of 1-12 years with an issue size of $50
million and greater and maturity sizes of $3 million or more. Past performance
does not indicate how the Fund will perform in the future. Both charts assume
reinvestment of dividends and distributions.
PERFORMANCE BAR CHART AND TABLE(1)
Year-by-Year Total Returns as of 12/31
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 0% 0% 0%
</TABLE>
(1) The bar chart does not reflect the impact of any applicable sales
charges. If sales charges were reflected, performance would be reduced.
- -----------------------------------------------------------------------------
Best quarter: Q _ 199_ ____%
Worst quarter: Q _ 199_ ____%
- -----------------------------------------------------------------------------
Year-to-date return for the quarter ended September 30, 1999: ____%
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)*
<TABLE>
<CAPTION>
Fund Inception Past Year Since Inception
---------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA MUNICIPAL BOND 10/1/96 ____% ____%
FUND
---------------------------------------------------------
LEHMAN BROTHERS PENNSYLVANIA
1-12 YEAR MUNICIPAL BOND INDEX ____% ____%
- -------------------------------------------------------------------------------------------------
* For current performance information call 1-800-766-3960.
</TABLE>
28
<PAGE> 61
RISK/RETURN SUMMARY OF THE LIFESTYLE FUNDS
INVESTMENT OBJECTIVES The Lifestyle Conservative Growth Fund seeks
capital appreciation and income. The
Lifestyle Moderate Growth Fund seeks capital
appreciation and, secondarily, income. The
Lifestyle Growth Fund seeks capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES Each Lifestyle Fund seeks to achieve its
objective by investing in a combination of
underlying funds managed by the Advisor. The
table below illustrates the underlying fund
allocation and ranges for each Lifestyle
Fund, which may be changed without
shareholder approval at the discretion of
the portfolio manager.
Each Lifestyle Fund may invest in Governor
Funds' Prime Money Market and U.S. Treasury
Obligations Money Market Funds. Both the
Prime Money Market and U.S. Treasury
Obligations Money Market Funds seek current
income with liquidity and stability of
principal by investing in high quality money
market instruments. The Prime Money Market
Fund and the U.S. Treasury Obligations Money
Market Fund seek to maintain a constant net
asset value of $1.00 per share for purchases
and redemptions.
MONEY MARKET INSTRUMENTS
are short-term obligations
issued by banks,
corporations, the U.S.
Government and state and
local governments. Money
market instruments
purchased by the Prime
Money Market and U.S.
Treasury Obligations Money
Market Funds must meet
strict requirements as to
investment quality,
maturity and
diversification. The Prime
Money Market and U.S.
Treasury Obligations Money
Market Funds generally do
not invest in securities
with maturities of more
than 397 days and the
average maturity of all
securities held by either
the Prime Money Market and
U.S. Treasury Obligations
Money Market Funds must be
90 days or less. Prior to
purchasing a money market
instrument for either the
Prime
29
<PAGE> 62
Money Market and U.S.
Treasury Obligations Money
Market Funds, the
Sub-Advisor must determine
that the instrument
carries minimal credit
risk.
<TABLE>
<CAPTION>
RANGES (PERCENTAGE OF EACH FUND'S NET ASSETS)
NAME OF FUND RANGE
------------ -----
Lifestyle Conservative Growth Fund
----------------------------------
<S> <C>
Governor Funds Prime Money Market Fund 0 - 30%
Governor Funds U.S. Treasury
Obligations Money Market Fund
Limited Duration Government Securities Fund 30 - 60%
Intermediate Term Income Fund
Established Growth Fund 10 - 40%
Aggressive Growth Fund
International Equity Fund
Lifestyle Moderate Growth Fund
------------------------------
Governor Funds Prime Money Market Fund 0 - 20%
Governor Funds U.S. Treasury Obligations
Money Market Fund
Limited Duration Government Securities Fund 20 - 50%
Intermediate Term Income Fund
Established Growth Fund 30 - 60%
Aggressive Growth Fund
International Equity Fund
Lifestyle Growth Fund
---------------------
Governor Funds Prime Money Market Fund 0 - 10%
Governor Funds U.S. Treasury Obligations
Money Market Fund
Limited Duration Government Securities Fund 10 - 40%
Intermediate Term Income Fund
Established Growth Fund 50 - 80%
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund
</TABLE>
30
<PAGE> 63
PRINCIPAL INVESTMENT RISKS The principal risks of
investing in the Funds are
the risks of the
underlying funds and that
the underlying funds will
not achieve their
investment objectives. See
the risk return summaries
above, the chart on page
___ and the box at left
for the risks of the
underlying funds held by
your Lifestyle Fund.
Each Lifestyle Fund is
also subject to affiliated
persons risk. In managing
the Lifestyle Funds, the
Advisor and Sub-Advisor
will have the authority to
select and substitute the
underlying funds in which
the Lifestyle Funds will
invest. The Advisor and
Sub-Advisor are subject to
conflicts of interest in
allocating Fund assets
among the various
underlying funds both
because the fees payable
to it and/or its
affiliates by some
underlying funds are
higher than the fees
payable by other
underlying funds and
because the Advisor and
Sub-Advisor and their
affiliates are also
responsible for managing
the underlying funds. The
Trustees and officers of
the Funds may also have
conflicting interests in
fulfilling their fiduciary
duties to both the Funds
and the underlying funds.
31
<PAGE> 64
MONEY MARKET FUND RISKS
- the Funds may not be able to maintain a net
asset value of $1.00 per share.
- An investment in the Funds is neither
insured nor guaranteed by the U.S.
Government. Shares of a Fund are not
deposits or obligations of, or guaranteed or
endorsed by, the Advisor or any bank, and
the Shares are not federally insured by the
Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency.
- There can be no assurance that the
investment objectives of each Fund will be
achieved. In addition, each Fund's
investment policies, as well as the
relatively short maturity of obligations
purchased by the Funds, may result in
frequent changes in each Fund's portfolio,
which may give rise to taxable gains.
- The Funds' performance per share will change
daily based on many factors, including the
quality of the instruments in the Funds'
investment portfolios, national and
international economic conditions and
general market conditions. Changes in the
interest rate will affect the yield or value
of each Fund's investments in debt
securities.
- The Funds may also be subject to credit
risks. The Funds could lose money if the
issuer of a security is unable to meet its
financial obligations.
- Foreign investments subject the Prime Money
Market Fund to investment risks different
from those associated with domestic
investments. Foreign investments may be
riskier than U.S. investments because of
unstable international political and
economic conditions, foreign controls on
investment and currency exchange,
withholding taxes, or a lack of adequate
company information, and lack of government
regulation.
WHO MAY WANT TO INVEST? Consider investing in the Lifestyle Funds
if you:
- ARE SEEKING A DIVERSIFIED INVESTMENT
These Funds will not be appropriate for
anyone:
- ALLOCATING THEIR OWN INVESTMENT
PORTFOLIO
- SEEKING REGULAR INCOME
RISK/RETURN SUMMARY AND FUND EXPENSES - EQUITY FUNDS
32
<PAGE> 65
FEES AND EXPENSES
- ------------------------------------------------------------------------------
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE ESTABLISHED GROWTH, AGGRESSIVE GROWTH, EMERGING GROWTH OR
INTERNATIONAL EQUITY FUNDS.
Annual Fund operating expenses are paid out of Fund assets, and are reflected in
the share price. Each Fund's fees and expenses are based upon the Fund's
operating expenses for the fiscal year or period ended June 30, 1999.
FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER FEES ESTABLISHED AGGRESSIVE EMERGING INTERNATIONAL
(FEES PAID DIRECTLY GROWTH FUND GROWTH FUND GROWTH FUND EQUITY FUND
FROM YOUR INVESTMENT)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases 4.50% 4.50% 4.50% 4.50%
---- ---- ---- ----
ANNUAL FUND OPERATING
EXPENSES (expenses
that are deducted
from Fund assets)
(as a percentage of
average net assets) .75% 1.00% 1.25% 1.25%
--- ---- ---- ----
Management fees
Distribution None None None None
(12b-1) fees
Other expenses(1) .41% .43% 1.13% 1.07%
--- ---- ---- ----
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.16% 1.43% 2.38% 2.32
---- ---- ---- ----
FEE WAIVERS(2) .19% .34% .79% .89%
--- --- --- ---
NET ANNUAL FUND
OPERATING EXPENSES .97% 1.09% 1.59% 1.43%
--- ---- ---- ----
</TABLE>
- --------
1 Other Expenses include administration fees, transfer agency
fees and all other ordinary operating expenses not listed
above, and the payment of a servicing fee to institutions
under an Administrative Services Plan (described below under
"Purchasing and Adding to Your Shares - Service
Organizations") up to an annual rate of 0.25% of the daily net
asset value of the Fund shares owned by the shareholders with
whom the Service Organization has a servicing relationship.
2 These fees have been waived by the Advisor and administrators for
the current fiscal year as part of a contractual arrangement with the
Fund.
33
<PAGE> 66
EXPENSE EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE FUNDS
WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS. THE EXAMPLE ASSUMES:
- $10,000 INVESTMENT
- 5% ANNUAL RETURN
- REDEMPTION AT THE END OF EACH PERIOD
- NO CHANGES IN THE FUND'S OPERATING EXPENSES
BECAUSE THIS EXAMPLE IS HYPOTHETICAL AND FOR COMPARISON ONLY, YOUR ACTUAL COSTS
WILL BE DIFFERENT.
<TABLE>
<CAPTION>
ESTABLISHED GROWTH FUND
--------------------------------
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
AGGRESSIVE GROWTH FUND
$---- $---- $---- $----
--------------------------------
1 Year 3 Years 5 Years 10 Years
EMERGING GROWTH FUND
$---- $---- $---- $----
--------------------------------
1 Year 3 Years 5 Years 10 Years
INTERNATIONAL EQUITY FUND
$---- $---- $---- $----
--------------------------------
</TABLE>
34
<PAGE> 67
RISK/RETURN SUMMARY AND FUND EXPENSES - BOND FUNDS
FEES AND EXPENSES
- -------------------------------------------------------------------------------
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE INTERMEDIATE TERM INCOME, LIMITED DURATION GOVERNMENT SECURITIES
OR PENNSYLVANIA MUNICIPAL BOND FUNDS.
Annual Fund operating expenses are paid out of Fund assets, and are reflected in
the share price. Each Fund's fees and expenses are based upon the Fund's
operating expenses for the period ended June 30, 1999.
FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER FEES INTERMEDIATE TERM LIMITED DURATION PENNSYLVANIA
(FEES PAID DIRECTLY INCOME FUND GOVERNMENT SECURITIES MUNICIPAL BOND FUND
FROM YOUR INVESTMENT) FUND
- ----------------------- ------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases 4.50% 3.00% 4.50%
---- ---- -----
ANNUAL FUND OPERATING
EXPENSES (EXPENSES
THAT ARE DEDUCTED
FROM FUND ASSETS)
(as a percentage of
average net assets) .60% .60% .60%
--- ---- ---
Management fees
Distrubution (12b-1) None None None
fees
Other expenses(1) .31% .39% .32%
--- --- ---
TOTAL ANNUAL FUND
OPERATING EXPENSES .91% .99% .92%
--- --- ---
FEE WAIVERS(2) .34% .34% .34%
--- ---- ---
NET ANNUAL FUND
OPERATING EXPENSES .57% .65% .58%
=== ==== ===
</TABLE>
- ------------------------------------
1 Other Expenses include administration fees, transfer agency fees and all
other ordinary operating expenses not listed above, and the payment of a
servicing fee to institutions under an Administrative Services Plan (described
below under "Purchasing and Adding to Your Shares - Service Organizations") up
to an annual rate of 0.25% of the daily net asset value of the Fund shares owned
by the shareholders with whom the Service Organization has a servicing
relationship.
2 These fees have been waived by the advisor and administrators for the
current fiscal year as part of a contractual arrangement with the Fund.
35
<PAGE> 68
EXPENSE EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE FUNDS
WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS. THE EXAMPLE ASSUMES:
- $10,000 INVESTMENT
- 5% ANNUAL RETURN
- REDEMPTION AT THE END OF EACH PERIOD
- NO CHANGES IN THE FUND'S OPERATING EXPENSES
BECAUSE THIS EXAMPLE IS HYPOTHETICAL AND FOR COMPARISON ONLY, YOUR ACTUAL COSTS
WILL BE DIFFERENT.
<TABLE>
<S> <C> <C> <C> <C>
INTERMEDIATE TERM INCOME FUND 1 Year 3 Years 5 Years 10 Years
$____ $____ $____ $____
--------------------------------
1 Year 3 Years 5 Years 10 Years
LIMITED DURATION GOVERNMENT
SECURITIES FUND $____ $____ $____ $____
--------------------------------
1 Year 3 Years 5 Years 10 Years
PENNSYLVANIA MUNICIPAL BOND
FUND $____ $____ $____ $____
--------------------------------
</TABLE>
36
<PAGE> 69
RISK/RETURN SUMMARY AND FUND EXPENSES - ASSET ALLOCATION FUNDS
FEES AND EXPENSES
- ------------------------------------------------------------------------------
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF ONE OF THE LIFESTYLE CONSERVATIVE GROWTH, LIFESTYLE MODERATE GROWTH OR
LIFESTYLE GROWTH FUNDS.
Annual Fund operating expenses are paid out of Fund assets, and are reflected in
the share price. Each Fund's fees and expenses are based upon the Fund's
operating expenses for the fiscal period ended June 30, 1999.
FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER FEES LIFESTYLE CONSERVATIVE LIFESTYLE MODERATE LIFESTYLE
(FEES PAID DIRECTLY GROWTH FUND GROWTH FUND GROWTH FUND
FROM YOUR INVESTMENT)
- ----------------------- ------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases 4.50% 4.50% 4.50%
---- ---- ----
ANNUAL FUND OPERATING
EXPENSES (expenses
that are deducted
from Fund assets)
(as a percentage of
average net assets) .25% .25% .25%
--- ---- ---
Management fees
Distribution (12b-1) fees (1) .50% .50% .50%
--- --- ---
Other expenses(2) 1.68% 1.67% 1.88%
---- ---- ----
TOTAL ANNUAL FUND
OPERATING EXPENSES 2.43% 2.42% 2.63%
---- ---- ----
FEE WAIVER(3) 0.78% 0.77% 0.98%
---- ---- ----
NET ANNUAL FUND
OPERATING EXPENSES 1.65% 1.65% 1.65%
==== ==== ====
</TABLE>
- ----------------------------------
1 Long-term shareholders of the Lifestyle Funds may pay more than the maximum
front-end sales charge permitted by the National Association of Securities
Dealers Regulation, Inc., due to the recurring nature of 12b-1 fees.
2 Other Expenses include administration fees, transfer agency fees, all other
ordinary operating expenses and expenses for the underlying funds. Expenses
for the underlying funds of each Lifestyle Fund are based upon the
strategic allocation of each Fund's investment in the underlying funds and
upon the actual total operating expenses of the underlying funds (including
any current waivers and expense limitations of the underlying funds).
Actual underlying fund expenses incurred by each Lifestyle Fund may vary
with changes in the allocation of each Lifestyle Fund's assets among the
underlying funds and with other events that directly affect the expenses of
the underlying funds.
3 These fees have been waived by the Advisor for the current fiscal year as
part of a contractual arrangement with the Fund.
37
<PAGE> 70
EXPENSE EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE FUNDS
WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS. THE EXAMPLE ASSUMES:
-$10,000 INVESTMENT
-5% ANNUAL RETURN
-REDEMPTION AT THE END OF EACH PERIOD
-NO CHANGES IN THE FUND'S OPERATING EXPENSES
BECAUSE THIS EXAMPLE IS HYPOTHETICAL AND FOR COMPARISON ONLY, YOUR ACTUAL COSTS
WILL BE DIFFERENT.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
LIFESTYLE CONSERVATIVE GROWTH
FUND $____ $____ $____ $____
--------------------------------
1 Year 3 Years 5 Years 10 Years
LIFESTYLE MODERATE GROWTH FUND
$____ $____ $____ $____
--------------------------------
1 Year 3 Years 5 Years 10 Years
LIFESTYLE GROWTH FUND
$____ $____ $____ $____
--------------------------------
</TABLE>
38
<PAGE> 71
OTHER CONSIDERATIONS
Portfolio Turnover. The portfolio turnover rate for each Fund is included in the
Financial Highlights section of this Prospectus. The Funds are actively managed
and, in some cases in response to market conditions, a Fund's portfolio turnover
will exceed 100%. A higher rate of portfolio turnover increases brokerage and
other expenses, which must be borne by the Fund and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains, which are taxable when distributed to shareholders.
Temporary Defensive Positions. Each Fund may temporarily hold investments that
are not part of its main investment strategy to try to avoid losses during
unfavorable market conditions. These investments may include cash (which will
not earn any income). In addition, each of the Established Growth, Emerging
Growth and Intermediate Term Income Funds may hold money market instruments,
including short-term debt securities issued or guaranteed by the U.S. Government
or its agencies and securities of money market funds, and the Pennsylvania
Municipal Bond Fund may hold taxable municipal obligations of other states, and
taxable obligations. These strategies could prevent a Fund from achieving its
investment objective and, if utilized by an equity fund, could reduce the Fund's
return and affect its performance during a market upswing.
Other Types of Investments. This prospectus describes each Fund's principal
investment strategies and the particular types of securities in which each Fund
principally invests. Each Fund may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional Information
("SAI"), which is referred to on the back cover of this prospectus.
Year 2000. As with other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Advisor, Sub-Advisors and the Funds' other service
providers don't properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the "Year 2000" or
"Y2K" problem. The Advisor and Sub-Advisors are taking steps to address the Y2K
problem with respect to the computer systems that they use and the Advisor is
taking steps to obtain assurances that comparable steps are being taken by the
Funds' other major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Funds. The Y2K problem could have a negative impact on the issuers of securities
in which the Funds invest, which could hurt the Funds' investment returns.
39
<PAGE> 72
FUND MANAGEMENT
- ------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
- ----------------------
Governors Group Advisors, Inc. is the investment advisor of each Fund.
The Advisor is a wholly-owned subsidiary of Keystone Financial, Inc.
("Keystone"), 1 Keystone Plaza, Harrisburg, Pennsylvania 17101. The Advisor was
organized in 1998 and had not previously served as the investment advisor to a
registered open-end management investment company. Subject to the general
supervision of the Board of Trustees of the Funds and in accordance with the
investment objective and restrictions of each Fund, the Advisor has agreed to
manage each Fund, make decisions with respect to and place orders for all
purchases and sales of its portfolio securities, and maintain each Fund's
records relating to such purchases and sales.
For these advisory services, the Funds paid the Advisor fees at the rates shown
below during their fiscal year ended June 30, 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------- --------------------------
PERCENTAGE OF AVERAGE
NET ASSETS FOR THE
PERIOD ENDED 6/30/99
--------------------------------------------------------------------- --------------------------
<S> <C>
Established Growth Fund .60%*
--------------------------------------------------------------------- --------------------------
Aggressive Growth Fund .70%*
--------------------------------------------------------------------- --------------------------
Emerging Growth Fund .50%*
--------------------------------------------------------------------- --------------------------
International Equity Fund .40%*+
--------------------------------------------------------------------- --------------------------
Intermediate Term Income Fund .30%*
--------------------------------------------------------------------- --------------------------
Limited Duration Government Securities Fund .30%*
--------------------------------------------------------------------- --------------------------
Pennsylvania Municipal Bond Fund .30%*
--------------------------------------------------------------------- --------------------------
Lifestyle Conservative Growth Fund .15%*+
--------------------------------------------------------------------- --------------------------
Lifestyle Moderate Growth Fund .15%*+
--------------------------------------------------------------------- --------------------------
Lifestyle Growth Fund .15%*+
--------------------------------------------------------------------- --------------------------
</TABLE>
* The Advisor waived a portion of its contractual fees with regard to these
Funds for the most recent fiscal year. Contractual fees (without waivers)
would be .75%, 1.00%, 1.25%, 1.25%, .60%, .60%, .60%, .25%, .25% and .25%,
respectively, for the Established Growth, Aggressive Growth, Emerging
Growth, International Equity, Intermediate Term Income, Limited Duration
Government Securities, Pennsylvania Municipal Bond, Lifestyle Conservative
Growth, Lifestyle Moderate Growth and Lifestyle Growth Funds.
+ These Funds have been in operation less than a full fiscal year, and the
fees shown are those which currently are in effect. The International
Equity Fund commenced operations on February 9, 1999; the Lifestyle
Conservative Growth Fund commenced operations on February 9, 1999; the
Lifestyle Moderate Growth Fund commenced operations on February 4, 1999;
and the Lifestyle Growth Fund commenced operations on February 18, 1999.
The Advisor has entered into a Sub-Advisory Agreement with Martindale
Andres & Company, Inc. (the "Sub-Advisor"), Four Falls Corporate Center, Suite
200, West Conshohocken, Pennsylvania 19428, which subadvises all the Funds
except the International Equity Fund. The Sub-Advisor is also a wholly-owned
subsidiary of Keystone. The Sub-Advisor was organized in 1989 and was acquired
by Keystone in December 1995. Subject to the supervision of the Advisor
40
<PAGE> 73
and the Board of Trustees and in accordance with the investment objective and
restrictions of each Fund, the Sub-Advisor manages each Fund other than the
International Equity Fund, makes decisions with respect to and places orders for
all purchases and sales of its portfolio securities, and maintains each such
Fund's records relating to such purchases and sales. For its services, the
Sub-Advisor receives from the Advisor a fee based on a percentage of each Fund's
(except for the International Equity Fund) average daily net assets.
The Advisor has entered into a Sub-Advisory agreement with Brinson
Partners, Inc., 209 South LaSalle Street, Chicago, Illinois 60604 (the
"International Equity Fund Sub-Advisor"), which subadvises the International
Equity Fund. The International Equity Fund Sub-Advisor is a wholly owned
subsidiary of UBS AG. The International Equity Fund Sub-Advisor was organized in
1989 and was acquired by Swiss Bank Corporation, a predecessor company of UBS
AG. Subject to the supervision of the Advisor and the Board of Trustees of the
Trust and in accordance with the investment objective and restrictions of the
International Equity Fund, the International Equity Fund Sub-Advisor manages the
International Equity Fund, makes decisions with respect to and places orders for
all purchases and sales of its portfolio securities, and maintains the records
relating to such purchases and sales. For its services, the International Equity
Fund Sub-Advisor receives a fee from the Advisor based on a percentage of the
International Equity Fund's net assets.
PORTFOLIO MANAGERS
Philip A. McMunigal, III, CFA is responsible for the day-to-day
management of the Established Growth Fund's portfolio. Mr. McMunigal joined the
Sub-Advisor in June 1999. Prior to joining the Sub-Advisor, Mr. McMunigal
managed U.S. equity and global balanced accounts for institutions and high net
worth individuals at Merrill Lynch Mercury Asset Management. Mr. McMunigal has
over 17 years of investment and capital markets experience.
William C. Martindale, Jr. is responsible for the day-to-day management
of the Aggressive Growth Fund's portfolio and has over 25 years of equity
investment experience. Mr. Martindale also managed the predecessor collective
investment fund and common trust fund to the Aggressive Growth Fund since July
1, 1994. Mr. Martindale co-founded the Sub-Advisor in 1989 and serves as its
Chief Investment Officer. Prior to 1989, Mr. Martindale served in various
investment-related capacities with Dean Witter Reynolds.
Robert M. Mitchell is responsible for the day-to-day management of the
Emerging Growth Fund's portfolio. Mr. Mitchell reports to and is supervised by
William C. Martindale, Jr. Mr. Mitchell is a portfolio manager/research analyst
specializing in small and emerging growth companies. Mr. Mitchell joined the
Sub-Advisor in July, 1995 after attaining his MBA degree from Indiana
University's Kelley School of Business. Prior to graduate school, Mr. Mitchell
worked at the U.S. Department of Justice, Antitrust Division, where he analyzed
the economic and financial characteristics of various industries and businesses.
Colleen M. Marsh is primarily responsible for the day-to-day management
of the Intermediate Term Income Fund's portfolio. Ms. Marsh is a senior
portfolio manager in the fixed income division of the Sub-Advisor. She has over
12 years of experience managing fixed income portfolios and funds for clients.
She spent the first 10 years of her investment management career
41
<PAGE> 74
with Keystone, and has managed the predecessor collective investment fund and
common trust fund to the Intermediate Term Income Fund for Keystone over this
time period.
James H. Somers is primarily responsible for the day-to-day management
of the Limited Duration Government Securities Fund's portfolio. Mr. Somers
joined the Sub-Advisor as a portfolio manager in September, 1995. From 1991 to
September, 1995, Mr. Somers was president and owner of his own money management
firm. Prior thereto and for five years he was a Vice President of Kidder Peabody
& Company in New York.
Robert Andres is primarily responsible for the day-to-day management of
the Pennsylvania Municipal Bond Fund's portfolio. Mr. Andres co-founded the
Sub-Advisor in 1989 and serves as its President and Chief Operating Officer.
Prior thereto, he served as President of Merrill Lynch Mortgage Capital
Corporation and manager of Merrill Lynch's secondary corporate bond trading
division. He has had more than 30 years of broad based experience with respect
to fixed-income securities, including more than 20 years in trading, sales and
investment management of municipal securities.
Mark Stevenson is primarily responsible for the day-to-day management
of the Lifestyle Funds' portfolios. Mr. Stevenson has been with the Sub-Advisor
since 1990, and for the past five years has managed retirement plan and personal
trust assets for the Sub-Advisor's clients.
The International Equity Fund Sub-Advisor's Global Equity Committee is
responsible for the day-to-day management of the International Equity Fund's
portfolio. The Global Equity Committee is co-chaired by Richard Carr, Managing
Director, who has more than 34 years experience in the investment industry, and
Jeff Diermeier, Managing Director, who has more than 24 years experience in the
investment industry.
The Statement of Additional Information or SAI has more detailed information
about the Advisor, Sub-Advisors and other service providers.
THE ADMINISTRATORS AND DISTRIBUTOR
- ----------------------------------
The Advisor and BISYS Fund Services Ohio ("BISYS Ohio"), whose address
is 3435 Stelzer Road, Columbus, Ohio 43219-3035, serve as Funds' administrators.
BISYS Fund Services Limited Partnership ("BISYS" or the "Distributor")
serves as the distributor of the Funds' shares. BISYS may provide financial
assistance in connection with pre-approved seminars, conferences and advertising
to the extent permitted by applicable state or self-regulatory agencies, such as
the National Association of Securities Dealers, Inc.
42
<PAGE> 75
SHAREHOLDER INFORMATION
- -----------------------
- --------------------------------------------------------------------------------
PRICING OF FUND SHARES
- ----------------------
HOW NAV IS CALCULATED
The NAV is calculated by adding the total value of a Fund's investments and
other assets, subtracting its liabilities and then dividing that figure by the
number of outstanding shares of the Fund:
NAV =
TOTAL ASSETS - LIABILITIES
--------------------------
Number of Shares
Outstanding
You can find most Funds' NAV daily in The Wall Street Journal and other
newspapers.
The per share NAV for each Fund is determined and its shares are priced at the
close of regular trading on the New York Stock Exchange, normally at 4:00 p.m.
Eastern time, on days the New York Stock Exchange is open for business.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is received in good order and accepted by the Fund
less any applicable sales charges as noted in the section on "Distribution
Arrangements/Sales Charges" on any day that both the New York Stock Exchange and
the Funds' custodian are open for business. For example: If you place a purchase
order to buy shares of the Established Growth Fund, it must be received by 4:00
p.m. Eastern time in order to receive the NAV calculated at 4:00 p.m. Eastern
time. If your order is received after 4:00 p.m. Eastern time, you will receive
the NAV calculated on the next day at 4:00 p.m. Eastern time.
The Funds' securities, other than short-term debt obligations, are generally
valued at current market prices unless market quotations are not available, in
which case securities will be valued by a method that the Board of Trustees
believes accurately reflects fair value. Debt obligations with remaining
maturities of 60 days or less are valued at amortized cost or based on their
acquisition cost.
After the pricing of a foreign security has been established, if an event occurs
which would likely cause the value to change, the value of the foreign security
may be priced at fair value as determined in good faith by or at the direction
of the Funds' Trustees. A Fund's foreign securities may trade on weekends or
other days when the Fund does not price its shares. Accordingly, the net asset
value per share of a Fund may change on days when shareholders will not be able
to purchase or redeem the Fund's shares.
43
<PAGE> 76
PURCHASING AND ADDING TO YOUR SHARES
- ------------------------------------
You may purchase the Funds through the Distributor or through banks, brokers and
other investment representatives, which may charge additional fees and may
require higher minimum investments or impose other limitations on buying and
selling shares. If you are a 401(k) plan participant, you should contact your
plan sponsor or broker for information about purchasing, selling and exchanging
shares of the Funds. If you purchase shares through an investment
representative, that party is responsible for transmitting orders by close of
business and may have an earlier cut-off time for purchase and sale requests.
Consult your investment representative or institution for specific information.
ACCOUNT TYPE MINIMUM MINIMUM
INITIAL INVESTMENT SUBSEQUENT
INVESTMENT
Regular
(non-retirement) $ 1,000 $ 25
Retirement (IRA) $ 1,000 $ 25
Automatic Invest
Plan
$ 250 $ 25
If you are an employee of the Advisor, Sub-Advisor, Keystone, or any of their
affiliates, the initial minimum investment amount is reduced to $250.
- - All purchases must be in U.S. dollars, although payment for Fund shares may be
made in the form of securities that are permissible investments for the
particular Fund at the discretion of the Advisor and Sub-Advisor.
- - A fee will be charged for any checks that do not clear.
- - Third-party checks are not accepted.
A Fund may waive its minimum purchase requirement and the Distributor may reject
a purchase order if it considers it in the best interest of the Fund and its
shareholders.
- --------------------------------------------------------------------------------
Avoid 31% Tax Withholding
Each Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- --------------------------------------------------------------------------------
44
<PAGE> 77
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL OR OVERNIGHT SERVICE:
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
All investments made by regular mail or express delivery, whether initial or
subsequent, should be sent to:
By regular mail: By Express Mail:
Governor Funds Governor Funds
PO Box 182707 c/o BISYS Fund Services
Columbus, OH 43218-2707 Attn: T.A. Operations
3435 Stelzer Road
Columbus, OH 43219
For Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to the appropriate Fund.
3. Mail or deliver application and payment to the address above.
45
<PAGE> 78
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT - CONTINUED
For Subsequent Investments:
1. Use the investment slip attached to your account statement. Or, if
unavailable, provide the following information:
- Fund name
- Amount invested
- Account name and number
2. Make check, bank draft or money order payable to the appropriate Fund.
3. Mail or deliver investment slip and payment to the address above.
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States bank. Your bank or broker may charge for this service.
Establish an electronic purchase option on your account application or call
1-800-766-3960. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-766-3960 to arrange a transfer from your bank account.
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR SHARES
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may take up to eight days to
clear. There is generally no fee for ACH transactions.
BY WIRE TRANSFER
For Initial Investment:
Call 1-800-766-3960 to obtain a new account number and a confirmation number.
Promptly mail the completed application to the address shown above for mail
purchases; and
For All Investments:
Call 1-800-766-3960 for a confirmation number
Instruct your bank to wire transfer your investment to:
The Bank of New York
Routing Number: ABA #021000018
DDA#________________
Include: Your name
Your confirmation number
After instructing your bank to wire the funds, please call 1-800-766-3960 to
advise us of the amount being wired.
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<PAGE> 79
NOTE: YOUR BANK MAY CHARGE A WIRE TRANSFER FEE.
- --------------------------------------------------------------------------------
You can add to your account by using the convenient options described below. The
Fund reserves the right to change or eliminate these privileges at any time with
60 days' notice.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR SHARES - CONTINUED
AUTOMATIC INVEST PLAN
You can make automatic investments in the Funds from your bank account, through
payroll deduction or from your federal employment, Social Security or other
regular government checks. Automatic investments can be as little as $25, once
you've invested the $250 minimum required to open the account.
To invest regularly from your bank account:
- Complete the Automatic Invest Plan portion on your
Account Application.
Make sure you note:
* Your bank name, address and account number
* The amount you wish to invest automatically (minimum $25)
* How often you want to invest (every month, 4 times a year, twice a
year or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-766-3960 for an enrollment form.
Directed Dividend Option
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in another Governor Fund without a sales charge. You
must maintain the minimum balance in each Fund into which you plan to reinvest
dividends or the reinvestment will be suspended and your dividends paid to you.
The Funds may modify or terminate this reinvestment option without notice. You
can change or terminate your participation in the reinvestment option at any
time.
47
<PAGE> 80
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions will be automatically reinvested unless you
request otherwise. You can receive them in cash or by electronic funds transfer
to your bank account if you are not a participant in an IRA account or in a
tax-qualified plan. There are no sales charges for reinvested distributions.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE, SOME
OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A TAXABLE
DISTRIBUTION.
-------------------
QUESTIONS?
CALL 1-800-766-3960
OR YOUR INVESTMENT
REPRESENTATIVE.
-------------------
48
<PAGE> 81
SHAREHOLDER INFORMATION
- -----------------------
SELLING YOUR SHARES
- -------------------
You may sell your shares at any time the New York Stock Exchange is open for
business. Your sales price will be the next NAV after your sell order is
received by the Funds, their transfer agent, or your investment representative.
Normally you will receive your proceeds within a week after your request is
received. See section on "General Policies on Selling Shares" below.
- --------------------------------------------------------------------------------
WITHDRAWING MONEY FROM YOUR FUND INVESTMENT
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
- --------------------------------------------------------------------------------
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through you financial advisor or broker, ask him or her
for redemption procedures. Your advisor and/or broker may have transaction
minimums and/or transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
By telephone
(unless you have declined
telephone sales privileges)
1. Call 1-800-766-3960 with instructions as to how you wish to
receive your funds (mail, wire, electronic transfer). (See
"General Policies on Selling Shares--Verifying Telephone
Redemptions" below)
49
<PAGE> 82
By mail or overnight service (See "General Policies on Selling
Shares--Redemptions in Writing Required" below)
1. Call 1-800-766-3960 to request redemption forms or write a letter of
instruction indicating:
- - your Fund and account number
- - amount you wish to redeem
- - address where your check should be sent
- - account owner signature
2. Mail to:
(if by regular mail)
Governor Funds
P.O. Box 182707
Columbus, OH
43218-2707
(if by overnight service)
Governor Funds
c/o BISYS Fund Services
Attn: T.A. Operations
3435 Stelzer Road
Columbus, Ohio 43219
- --------------------------------------------------------------------------------
Wire transfer
You must indicate this option on your account application.
The Fund may charge a wire
transfer fee.
NOTE: Your financial
institution may also charge a
separate fee.
Call 1-800-766-3960 to request a wire transfer.
If you call by 4 p.m. Eastern time, your payment will normally be wired to your
bank on the next business day. Otherwise, it will normally be wired on the
second business day after your call.
- --------------------------------------------------------------------------------
Electronic Redemptions
Your bank must participate in
the Automated Clearing House
(ACH) and must be a U.S. bank.
Your bank may charge for this service.
Call 1-800-766-3960 to request an electronic redemption.
If you call by 4 p.m. Eastern time, the NAV of your shares will normally be
determined on the same day and the proceeds will be credited within 8 days.
AUTO WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum monthly withdrawal is $50. To activate
this feature:
- - Make sure you've checked the appropriate box on the Account Application.
Or call 1-800-766-3960.
- - Include a voided personal check.
50
<PAGE> 83
- - Your account must have a value of $5,000 or more to start withdrawals.
- - If the value of your account falls below $1,000 ($250 if you are an
employee of the Advisor, Sub-Advisor or one of their affiliates), you may
be asked to add sufficient funds to bring the account back to $1,000 (or
$250), or the Fund may close your account and mail the proceeds to you.
-------------------
QUESTIONS?
CALL 1-800-766-3960
OR YOUR INVESTMENT
REPRESENTATIVE.
-------------------
51
<PAGE> 84
GENERAL POLICIES ON SELLING SHARES
- ----------------------------------
REDEMPTIONS IN WRITING REQUIRED
Redemption requests may require a signature guarantee. The signature guarantee
requirement will be waived if the following conditions apply:
- the redemption check is payable to the shareholder(s) of record.
- the redemption check is mailed to the shareholder(s) at the address
of record or mailed or wired to a commercial bank account previously
designated on the Account Registration Form.
To change the address to which a redemption check is to be mailed, a
written request therefor must be received by the Transfer Agent. In connection
with such request, the Transfer Agent will require a signature guarantee by an
eligible guarantor institution. For purposes of this policy, the term "eligible
guarantor institution" shall include banks, brokers, dealers, credit unions,
securities exchanges and associations, clearing agencies and savings
associations as those terms are defined in the Securities Exchange Act of 1934.
The Transfer Agent reserves the right to reject any signature guarantee if (1)
it has reason to believe that the signature is not genuine, (2) it has reason to
believe that the transaction would otherwise be improper, or (3) the guarantor
institution is a broker or dealer that is neither a member of a clearing
corporation nor maintains net capital of at least $100,000.
VERIFYING TELEPHONE REDEMPTIONS
The Fund makes every effort to ensure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, you may be responsible for any
fraudulent telephone orders. If appropriate precautions have not been taken by
the Transfer Agent, the Transfer Agent may be liable for losses due to
unauthorized transactions.
REDEMPTIONS WITHIN 10 DAYS OF INVESTMENT
When you have made an investment by check, you cannot redeem any portion of it
until the Transfer Agent is satisfied that the check has cleared (which may
require up to 10 business days). You can avoid this delay by purchasing shares
with a certified check.
REDEMPTION IN KIND
The Funds reserve the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund operations
(for example, more than 1% of a Fund's net assets). If the Funds deem it
advisable for the benefit of all shareholders, redemption in kind will consist
of securities equal in market value to your shares. When you convert these
securities to cash, you will pay brokerage charges.
52
<PAGE> 85
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining shareholders.
CLOSING OF SMALL ACCOUNTS
If your account falls below $1,000 ($250 if you are an employee of the Advisor,
Sub-Advisor or one of its affiliates), a Fund may ask you to increase your
balance. If it is still below $1,000 (or $250) after 60 days, the Fund may close
your account and send you the proceeds.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that remain
uncashed for six months will be canceled and the money reinvested in the
appropriate Fund.
53
<PAGE> 86
SHAREHOLDER INFORMATION
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS/SALES CHARGES
- -------------------------------------------------------------------------------
This section describes the sales charges and fees you will pay as an investor in
the Funds and ways to qualify for reduced sales charges.
INVESTOR SHARES
Sales Charge (Load) Front-end sales charge
(All Funds) (at the time of your
purchase); reduced sales
charges are available.
Administrative Services Subject to annual
Plan Fee (all Funds) Shareholder servicing
Fees of up to 0.25% of
a Funds's assets.
Distribution (12b-1) Fee Subject to annual
(Lifestyle Funds Only) distribution and
shareholder servicing
fees of up to 0.50% of a
Lifestyle Fund's assets.
54
<PAGE> 87
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES, CONTINUED
- --------------------------------------------------------------------------------
CALCULATION OF SALES CHARGES
INVESTOR SHARES
Investor shares are sold at their public offering price. This price includes the
initial sales charge. Therefore, part of the money you invest will be used to
pay the sales charge. The remainder is invested in Fund shares. The sales charge
decreases with larger purchases. There is no sales charge on reinvested
dividends and distributions.
The current sales charge rates are as follows:
FOR THE ESTABLISHED GROWTH FUND, AGGRESSIVE GROWTH FUND, EMERGING GROWTH
FUND, INTERNATIONAL EQUITY FUND, INTERMEDIATE TERM INCOME FUND, PENNSYLVANIA
MUNICIPAL BOND FUND AND LIFESTYLE FUNDS
<TABLE>
<CAPTION>
Amount of Transaction Sales Charge as % of
at Public Offering Net Amount Sales Charge as % of
Price Invested Public Offering Price
- ----------------------- ------------------ ---------------------
<S> <C> <C>
Less than $100,000 4.71% 4.50%
$100,000 but less than $250,000 3.63 3.50
$250,000 but less than $500,000 2.56 2.50
$500,000 but less than 1.52 1.50
$1,000,000
$1,000,000 or more 0 0
</TABLE>
55
<PAGE> 88
FOR THE LIMITED DURATION GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
Amount of Transaction Sales Charge as % of Sales Charge as % of
At Public Offering Net Amount Public Offering Price
Price Invested ---------------------
- ----------------------- --------
<S> <C> <C>
Less than $100,000 3.09% 3.00%
$100,000 but less than $250,000 2.56 2.50
$250,000 but less than $500,000 2.04 2.00
$500,000 but less than 1.52 1.50
$1,000,000
$1,000,000 or more 0 0
</TABLE>
56
<PAGE> 89
SHAREHOLDER INFORMATION
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS/SALES CHARGES, CONTINUED
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS
Reduced sales charges for Investor shares are available to shareholders with
investments of $100,000 or more. In addition, you may qualify for reduced sales
charges under the following circumstances.
- concurrent Purchases. You may combine concurrent purchases of a Fund and
one or more of the Governor Funds sold with a sales charge ("Governor Load
Funds"). For example, if a shareholder concurrently purchases shares in the
Established Growth Fund at the total public offering price of $50,000 and
shares in another Governor Load Fund at the total public offering price of
$50,000, the sales charge for such shares of the Established Growth Fund
would be that applicable to a $100,000 purchase as shown in the table
above.
- Letter of Intent. You inform the Fund in writing that you intend to
purchase enough shares over a 13-month period to qualify for a reduced
sales charge. You must include a minimum of 5% of the total amount you
intend to purchase with your letter of intent. Shares purchased with the
minimum will be held in escrow (while remaining registered in your name) to
secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge,
if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed
shares will not be available for disposal by the investor until all
purchases pursuant to the Letter of Intent have been made or the higher
sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released.
- Rights of Accumulation. When the value of shares you already own plus the
amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the reduced
sales charge.
- Combination Privilege. Combine accounts of multiple Funds or accounts of
immediate family household members (spouse and children under 21) to
achieve reduced sales charges.
SALES CHARGE WAIVERS
The following qualify for waivers of sales charges:
- purchasers for whom Keystone, the Advisor, one of their affiliates or
another financial institution acts in a fiduciary, advisory, agency,
custodial (other than individual retirement accounts), or similar capacity.
- officers, trustees, directors, advisory board members, employees and
retired employees (including spouses, children and parents of the
foregoing) of Keystone, the Advisor, the Trust, BISYS and any affiliated
company thereof.
57
<PAGE> 90
- brokers, dealers and agents who have a sales agreement with the
Distributor, and their employees (and their spouses and children under 21).
- investment advisors or financial planners regulated by a federal or state
governmental authority who are purchasing Shares for their own account or
for an account for which they are authorized to make investment decisions
(i.e., a discretionary account) and who charge a management, consulting or
other fee for their services, and clients of such investment advisors or
financial planners who place trades for their own accounts if the accounts
are linked to the master account of such investment advisor or financial
planner on the books and records of a broker or agent.
In addition, the Distributor may waive sales charges for the purchase of a
Fund's shares with the proceeds from the recent redemption of shares of a
non-money market fund that imposes a sales charge. The purchase must be made
within 60 days of the redemption, and the Distributor must be notified in
writing by the investor, or by his financial institution, at the time the
purchase is made. A copy of the investor's account statement showing such
redemption must accompany such notice.
The Distributor may change or eliminate the foregoing waivers at any time
or from time to time without notice thereof. The Distributor may also
periodically waive all or a portion of the sales charge for all investors with
respect to a Fund.
................................................................................
REINSTATEMENT PRIVILEGE
IF YOU HAVE SOLD SHARES AND DECIDE TO REINVEST IN THE FUND WITHIN A 60 DAY
PERIOD, YOU WILL NOT BE CHARGED THE APPLICABLE SALES LOAD ON AMOUNTS UP TO THE
VALUE OF THE SHARES YOU SOLD. YOU MUST PROVIDE A WRITTEN REINSTATEMENT REQUEST
AND PAYMENT WITHIN 60 DAYS OF THE DATE YOUR INSTRUCTIONS TO SELL WERE PROCESSED.
................................................................................
DISTRIBUTION AND SERVICE (12b-1) FEES
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of the Funds' shares and/or for providing shareholder services. 12b-1 fees are
paid from a Lifestyle Fund's assets on an ongoing basis, and will increase the
cost of your investment. 12b-1 fees may cost you more than paying other types of
sales charges. The Lifestyle Funds may pay a 12b-1 fee of up to .50% of the
average daily net assets of a Fund; the other Funds will not pay 12b-1 fees.
Over time shareholders will pay more than the equivalent of the maximum
permitted front-end sales charge because 12b-1 distribution and service fees are
paid out of the Lifestyle Fund's assets on an on-going basis.
SERVICE ORGANIZATIONS
Various banks, trust companies, broker-dealers (other than the Distributor) and
other financial organizations ("Service Organization(s)") may provide certain
administrative services for its customers who invest in the Funds through
accounts maintained at that Service Organization. Each Fund, under servicing
agreements with the Service Organization, will pay the Service Organization an
annual rate of up to .25% of the Fund's average daily net assets for these
services, which may
58
<PAGE> 91
include:
- receiving and processing shareholder orders
- performing the accounting for customers' sub-accounts
- answering questions and handling correspondence for customer accounts
- acting as the shareholder of record for customer accounts
- issuing shareholder reports and transaction confirmations
- processing dividend and distribution payments from the Funds on
behalf of customers
- providing customers with a service that invests the assets of their
accounts in shares of the Funds pursuant to specific or pre-authorized
instructions
Investors who purchase, sell or exchange shares of the Funds through a customer
account maintained at a Service Organization may be charged extra for other
services which are not specified in the servicing agreement with the Fund but
are covered under separate fee schedules provided by the Service Organization to
their customers. Customers with accounts at Service Organizations should consult
their Service Organization for information concerning their sub-accounts. The
Advisor or administrators also may pay Service Organizations for rendering
services to customers' sub-accounts.
59
<PAGE> 92
EXCHANGING YOUR SHARES
- ----------------------
INSTRUCTIONS FOR EXCHANGING SHARES
- ------------------------------------------------------------------------------
Exchanges may be made by sending a written request to:
Governor Funds or by calling 1-800-766-3960
PO Box 182707
Columbus, OH 43218-2707
You can exchange your shares in one Fund for shares of another Fund of Governor
Funds usually without paying additional sales charges.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from one Fund to another are taxable.
Please provide the following information:
- Your name and telephone number
- The exact name on your account and account number
- Taxpayer identification number (usually your Social Security number)
- Dollar value or number of shares to be exchanged
- The name of the Fund from which the exchange is to be made
- The name of the Fund into which the exchange is being made
See "General Policies on Selling your Shares" for important information about
telephone transactions.
NOTES ON EXCHANGES
When exchanging from a Fund that has no sales charge or a lower sales charge to
a Fund with a higher sales charge, you will pay the difference.
The Exchange Privilege may be changed or eliminated at any time.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
All exchanges are based on the relative net asset value next determined after
the exchange order is received by the Funds.
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<PAGE> 93
DIVIDENDS, DISTRIBUTIONS AND TAXES
- ----------------------------------
Any income a Fund receives in the form of interest or dividends is paid out,
less expenses, to its shareholders as dividends. Dividends are declared and paid
semi-annually for the Emerging Growth Fund, annually for the International
Equity Fund, monthly for the Intermediate Term Income, Limited Duration
Government Securities and Pennsylvania Municipal Bond Funds and quarterly for
the other Funds. Capital gains, if any, for all Funds are distributed at least
annually.
Dividends are taxable in the year in which they are declared, even if they
appear on your account statement the following year. Dividends and distributions
are treated in the same manner for federal income tax purposes whether you
receive them in cash or in additional shares.
FEDERAL TAXES
- -------------
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss). Distributions attributable to the
net capital gain of a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions
(other than exempt-interest dividends, discussed below) will generally be
taxable as ordinary income. You will be subject to income tax on Fund
distributions regardless whether they are paid in cash or reinvested in
additional shares. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxable on the entire amount of the distribution received, even though,
as an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.)
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
It is expected that the International Equity Fund will be subject to foreign
withholding taxes with respect to dividends or interest received from sources in
foreign countries. The International Equity Fund may make an election to treat a
proportionate amount of such taxes as constituting a distribution to each
shareholder, which would allow each shareholder either (1) to credit such
proportionate amount of taxes against U.S. federal income tax liability or (2)
to take such amount as an itemized deduction.
The Pennsylvania Municipal Bond Fund anticipates that substantially all of its
income dividends
61
<PAGE> 94
will be "exempt interest dividends," which are exempt from federal income taxes.
However, some dividends will be taxable, such as dividends that are derived from
occasional taxable investments, and distributions of short and long-term capital
gains.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Pennsylvania Municipal Bond Fund generally will not be deductible for
federal income tax purposes.
You should note that a portion of the exempt-interest dividends paid by the
Pennsylvania Municipal Bond Fund may constitute an item of tax preference for
purposes of determining federal alternative minimum tax liability.
Exempt-interest dividends will also be considered along with other adjusted
gross income in determining whether any Social Security or railroad retirement
payments received by you are subject to federal income taxes.
If you receive an exempt-interest dividend with respect to any share and the
share is held by you for six months or less, any loss on the sale or exchange of
the share will be disallowed to the extent of such dividend amount.
PENNSYLVANIA STATE TAXES
- ------------------------
Shareholders will not be subject to Pennsylvania Personal Income Tax on
distributions from the Pennsylvania Municipal Bond Fund attributable to interest
income from Pennsylvania Exempt Securities or from obligations of the United
States, its territories and certain of its agencies and instrumentalities
("Federal Exempt Securities"). However, Pennsylvania Personal Income Tax will
apply to distributions to Pennsylvania Shareholders from the Pennsylvania
Municipal Bond Fund attributable to gain realized on the disposition of any
investment, including Exempt Securities, or to interest income from investments
other than Exempt Securities. Pennsylvania Shareholders also will be subject to
the Pennsylvania Personal Income tax on any gain they realize on the disposition
of Shares in the Pennsylvania Municipal Bond Fund.
Distributions attributable to interest from Exempt Securities is not subject to
the Philadelphia School District Net Income Tax. However, for Philadelphia
residents, distributions attributable to gain from the disposition of Exempt
Securities are subject to the Philadelphia School District Net Income Tax,
except that distributions attributable to gain on any investment held for more
than six months are exempt. A Shareholder's gain on the disposition of shares in
the Pennsylvania Municipal Bond Fund that he or she has held for more than six
months will not be subject to the Philadelphia School District Net Income Tax.
STATE AND LOCAL TAXES
- ---------------------
Shareowners may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/or foreign tax consequences relevant to your specific situation.
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<PAGE> 95
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE FUNDS'
FINANCIAL PERFORMANCE. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE FUND SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE THAT AN
INVESTOR WOULD HAVE EARNED [OR LOST] ON AN INVESTMENT IN THE FUND (ASSUMING
REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS). THIS INFORMATION HAS BEEN
AUDITED BY_______ WHOSE REPORT, ALONG WITH THE FUNDS' FINANCIAL STATEMENTS, ARE
INCLUDED IN THE ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST.
ESTABLISHED GROWTH FUND FINANCIAL HIGHLIGHTS
AGGRESSIVE GROWTH FUND FINANCIAL HIGHLIGHTS
EMERGING GROWTH FUND FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS
INTERMEDIATE TERM INCOME FUND FINANCIAL HIGHLIGHTS
LIMITED DURATION GOVERNMENT SECURITIES FUND FINANCIAL HIGHLIGHTS
PENNSYLVANIA MUNICIPAL BOND FUND FINANCIAL HIGHLIGHTS
LIFESTYLE CONSERVATIVE GROWTH FUND FINANCIAL HIGHLIGHTS
LIFESTYLE MODERATE GROWTH FUND FINANCIAL HIGHLIGHTS
LIFESTYLE GROWTH FUND FINANCIAL HIGHLIGHTS
<PAGE> 96
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
The Funds' annual and semi-annual reports to shareholders contain detailed
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
- -------------------------------------------------------------------------------
YOU CAN GET FREE COPIES OF ANNUAL/SEMI-ANNUAL REPORTS AND THE SAI, PROSPECTUSES
OF OTHER GOVERNOR FUNDS, OR REQUEST OTHER INFORMATION AND DISCUSS YOUR QUESTIONS
ABOUT THE FUNDS BY CONTACTING A BROKER OR BANK THAT SELLS THE FUNDS, OR YOU CAN
CONTACT THE FUNDS DIRECTLY AT:
GOVERNOR FUNDS
P.O. BOX 182707
COLUMBUS, OHIO 43218-2707
TELEPHONE: 1-800-766-3960
WWW.GOVERNORFUNDS.COM
- -------------------------------------------------------------------------------
You can review the Funds' reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get copies:
- For a fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009 or calling
1-800-SEC-0330.
- Free from the Commission's Website at http://www.sec.gov.
(Investment Company Act file no. 811-09029)
65
<PAGE> 97
PRIME MONEY MARKET FUND
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
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
Twelve Investment Portfolios of
GOVERNOR FUNDS
Statement of Additional Information
___________, 1999
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the prospectuses (the "Prospectuses") of the
Prime Money Market Fund, U.S. Treasury Obligations Money Market Fund (the
"Treasury Money Market Fund"), Established Growth Fund, Aggressive Growth Fund,
International Equity Fund, Emerging Growth Fund, Intermediate Term Income Fund
(the "Income Fund"), Limited Duration Government Securities Fund (the
"Government Securities Fund"), Pennsylvania Municipal Bond Fund (the
"Pennsylvania Bond Fund"), Lifestyle Conservative Growth Fund, Lifestyle
Moderate Growth Fund and Lifestyle Growth Fund, each dated as of the date
hereof. The Prime Money Market Fund, Treasury Money Market Fund, Established
Growth Fund, Aggressive Growth Fund, International Equity Fund, Emerging Growth
Fund, Income Fund, Government Securities Fund, Pennsylvania Bond Fund, and
Lifestyle Conservative Growth, Lifestyle Moderate Growth and Lifestyle Growth
Funds (collectively, the "Lifestyle Funds") are hereafter collectively referred
to as the "Funds" and individually as a "Fund." The Funds are all of the funds
of Governor Funds, a Delaware business trust (the "Trust"). This Statement of
Additional Information is incorporated in its entirety into each Fund's
Prospectus. Copies of the Funds' Prospectuses may be obtained by writing the
Trust at 3435 Stelzer Road, Columbus, Ohio 43219, or by telephoning toll free
(800) 766-3960.
<PAGE> 98
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................
Additional Information on Portfolio Instruments...................................................................
Investment Restrictions...........................................................................................
Portfolio Turnover................................................................................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................................
HOW TO PURCHASE AND REDEEM SHARES.................................................................................
MANAGEMENT AND SERVICE PROVIDERS OF THE TRUST.....................................................................
Trustees and Officers.............................................................................................
Investment Advisor and Investment Subadvisors.....................................................................
Portfolio Transactions............................................................................................
Administrators....................................................................................................
Glass-Steagall Act................................................................................................
Distributor.......................................................................................................
Administrative Services and Distribution Plans....................................................................
Custodian.........................................................................................................
Auditors
Legal Counsel.....................................................................................................
ADDITIONAL INFORMATION............................................................................................
Description of Shares.............................................................................................
Vote of a Majority of the Outstanding Shares......................................................................
Additional General Tax Information................................................................................
Seven-Day and 30-Day Yields of the Prime Money Market Fund and the Treasury Money
Market Fund.................................................................................................
30-Day Yield of the Funds.........................................................................................
Calculation of Total Return.......................................................................................
Distribution Rates................................................................................................
Performance Comparisons...........................................................................................
Miscellaneous.....................................................................................................
FINANCIAL STATEMENTS..............................................................................................
APPENDIX A........................................................................................................
APPENDIX B........................................................................................................
</TABLE>
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<PAGE> 99
STATEMENT OF ADDITIONAL INFORMATION
GOVERNOR FUNDS
Governor Funds (the "Trust") is an open-end management investment
company which currently offers twelve separate investment portfolios. This
Statement of Additional Information covers all of those portfolios: the Prime
Money Market Fund, Treasury Money Market Fund, Established Growth Fund,
Aggressive Growth Fund, Emerging Growth Fund, International Equity Fund, Income
Fund, Government Securities Fund, Lifestyle Conservative Growth Fund, Lifestyle
Moderate Growth Fund, and Lifestyle Growth Fund, each of which is considered to
be a diversified portfolio, and the Pennsylvania Bond Fund, which is considered
to be a non-diversified portfolio. The Prime Money Market, Treasury Money
Market, Established Growth, Aggressive Growth, Emerging Growth, Income,
Government Securities and Pennsylvania Bond Funds commenced operations on
October 7, 1996, July 1, 1997, December 2, 1996, February 3, 1997, July 1, 1998,
December 2, 1996, July 1, 1997, and October 1, 1996, respectively, as separate
investment portfolios ("Predecessor Funds") of The Sessions Group, which was
organized as an Ohio business trust. On January 30, 1999, those Funds were
reorganized as portfolios of the Trust.
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectuses. Capitalized
terms not defined herein are defined in the relevant Prospectus. No investment
in Shares of any Fund should be made without first reading such Fund's
Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and
policies of the Funds as set forth in their respective Prospectuses.
THE PRIME MONEY MARKET FUND
Subject to the general limitations discussed in the Prospectus, the
Prime Money Market Fund invests in the following types of securities.
The Prime Money Market Fund may invest in a variety of U.S. Treasury
obligations, differing in their interest rates, maturities, and times of
issuance, and other obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities (collectively, "Government Obligations").
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association and the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the Student Loan Marketing Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks or the
Federal Home Loan Mortgage Corporation, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Prime Money Market
Fund will invest in the obligations of such agencies or instrumentalities only
when the Advisor believes that the credit risk with respect thereto is minimal.
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<PAGE> 100
The Prime Money Market Fund may invest in bankers' acceptances
guaranteed by domestic and foreign banks if at the time of investment the
guarantor bank has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published financial
statements). The Prime Money Market Fund may also invest in certificates of
deposit and time deposits of domestic and foreign banks and savings and loan
associations if (a) at the time of investment the depositor institution has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of their most recently published financial statements) or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
The Prime Money Market Fund may also invest in Eurodollar Certificates
of Deposit ("ECDs") which are U.S. dollar denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs") which are U.S. dollar denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs") which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; and Yankee Certificates of Deposit
("Yankee CDs") which are certificates of deposit issued by U.S. branches of a
foreign bank denominated in U.S. dollars and held in the United States. Under
normal market conditions, the Prime Money Market Fund will not invest more than
20% of its total assets in such foreign securities (including Canadian
Commercial Paper and Europaper as defined below).
The Prime Money Market Fund will not invest in time deposits with
maturities in excess of seven days which are subject to penalties upon early
withdrawal if, in the aggregate with other illiquid securities held by the Prime
Money Market Fund, such deposits exceed 10% of such Fund's net assets. Such time
deposits include ETDs and CTDs but do not include certificates of deposit.
The Prime Money Market Fund may invest in short-term promissory notes
issued by corporations (including variable amount master demand notes) and in
municipal obligations rated at the time of purchase by one or more appropriate
nationally recognized statistical ratings organizations ("NRSROs", e.g.;
Standard & Poor's Corporation) in one of the two highest rating categories for
short-term debt obligations or, if not rated, determined by the Advisor or
Sub-Advisor to be of comparable quality to instruments that are so rated.
Instruments may be purchased in reliance upon a rating only when the rating
organization is not affiliated with the issuer or guarantor of the instrument.
For a description of the rating symbols of the NRSROs, see the Appendix to the
Statement of Additional Information. The Prime Money Market Fund may also invest
in Canadian Commercial Paper ("CCP"), which is U.S. dollar denominated
commercial paper issued by a Canadian corporation or a Canadian subsidiary of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer which, in each case, is rated at the time of purchase
by one or more appropriate NRSROs in one of the two highest rating categories
for short-term debt obligations or, if not rated, determined by the Advisor or
Sub-Advisor to be of comparable quality to instruments that are so rated.
The Prime Money Market Fund may also invest in corporate debt
securities with remaining maturities of 397 days or less although at the time of
issuance such securities had maturities exceeding 397 days. The Prime Money
Market Fund may invest in such securities so long as comparable securities of
such issuer have been rated in the highest rating category for short-term debt
obligations by the appropriate NRSROs or are otherwise deemed to be eligible for
purchase by the Prime Money Market Fund in accordance with the guidelines
adopted by the Trust's Board of Trustees.
Variable amount master demand notes in which the Prime Money Market
Fund may invest are unsecured demand notes that permit the indebtedness
thereunder to vary and that provide for periodic adjustments in the interest
rate according to the terms of the instrument. Because master demand notes are
direct lending arrangements between the Prime Money Market Fund and the issuer,
they are not
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<PAGE> 101
normally traded. Although there is no secondary market in the notes, the Prime
Money Market Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by NRSROs, issuers of variable
amount master demand notes (which are normally manufacturing, retail, financial,
and other business concerns) must satisfy the same criteria as set forth above
for commercial paper. The Advisor or Sub-Advisor will consider the earning
power, cash flow, and other liquidity ratios of the issuers of such notes and
will continuously monitor their financial status and ability to meet payment on
demand. In determining dollar-weighted average portfolio maturity, a variable
amount master demand note will be deemed to have a maturity equal to the period
of time remaining until the principal amount can be recovered from the issuer
through demand. The Prime Money Market Fund may purchase variable amount master
demand notes with face maturities in excess of 397 days only so long as the
Prime Money Market Fund may demand payment at any time on no more than 30 days'
notice or at specified intervals not exceeding 397 days and upon no more than 30
days' notice.
The Prime Money Market Fund may purchase asset-backed securities, which
are securities issued by special purpose entities whose primary assets consist
of a pool of mortgages, loans, receivables or other assets, primarily automobile
and credit card receivables and home equity loans. Payment of principal and
interest may depend largely on cash flows generated by the assets backing the
securities and, in certain cases, supported by letters of credit, surety bonds
or other forms of credit or liquidity enhancements. The value of asset-backed
securities also may be affected by the creditworthiness of the servicing agent
for the pool of assets, the originator of the loans or receivables or the
financial institution providing the credit support.
The Prime Money Market Fund may also acquire variable and floating rate
notes issued by both governmental and non-governmental issuers, subject to the
Prime Money Market Fund's investment objective, policies and restrictions.
THE TREASURY MONEY MARKET FUND
Subject to the limitations discussed in the Prospectus, under normal
market conditions, the Treasury Money Market Fund will invest at least 65% of
its total assets in the following types of securities: direct obligations issued
by the U.S. Treasury including bills, notes and bonds which differ from each
other only in interest rates, maturities and times of issuance; U.S. Treasury
securities that have been stripped of their unmatured interest coupons (which
typically provide for interest payments semi-annually); interest coupons that
have been stripped from such U.S. Treasury securities; receipts and certificates
for such stripped debt obligations and stripped coupons (collectively, "Stripped
Treasury Securities"); and in repurchase agreements backed by such securities.
Stripped Treasury Securities will include (1) coupons that have been stripped
from U.S. Treasury bonds, which may be held through the Federal Reserve Bank's
book-entry system called "Separate Trading of Registered Interest and Principal
of Securities" ("STRIPS") or through a program entitled "Coupon Under Book-Entry
Safekeeping" ("CUBES").
Treasury bills have maturities of one year or less; Treasury notes have
maturities of one to ten years; and Treasury bonds generally have maturities of
greater than ten years. Stripped Treasury Securities are sold at a deep discount
because the buyer of those securities receives only the right to receive a
future fixed payment (representing principal or interest) on the security and
does not receive any rights to periodic interest payments on the security. The
Treasury Money Market Fund may engage in other investment techniques described
below.
The Treasury Money Market Fund may also invest up to 35% of its total
assets in Government Obligations which are backed by the full faith and credit
of the U.S. Treasury and in repurchase
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<PAGE> 102
agreements backed by such securities. Such securities include those of the
Government National Mortgage Association and the Export-Import Bank of the
United States.
THE ESTABLISHED GROWTH FUND
The investment objectives of the Established Growth Fund are growth of
capital with some current income as a secondary objective. Under normal market
conditions, the Established Growth Fund will invest substantially all, but under
such conditions in no event less than 65%, of its total assets in common stocks
and securities convertible into common stocks of companies with market
capitalizations of at least $1 billion. For purposes of the foregoing,
securities convertible into common stocks include convertible bonds, convertible
preferred stock, options and rights. The securities purchased by the Established
Growth Fund are generally traded on established U.S. markets and exchanges.
Under normal market conditions, the Established Growth Fund intends to
operate with a fully invested philosophy, I.E., the Established Growth Fund will
generally invest 90% or more of its assets in common stocks. The Established
Growth Fund's equity investments will be based on two principles: (1) a solid
long-term fundamental business outlook and (2) an attractively valued stock
price. The Established Growth Fund's investment decisions are based upon the
Sub-Advisor's assessment of a company's expected performance through a business
and market cycle which normally translates into a three to five year investment
horizon. In an effort to mitigate some volatility, the Established Growth Fund
does seek to maintain representation in all major economic sectors. Subject to
those guidelines, the Established Growth Fund intends to invest in the
securities of companies its Sub-Advisor believes to be of high quality and which
the Sub-Advisor believes satisfy one or more of the following criteria: (1) have
a well recognized domestic and/or global franchise; (2) have a long-term revenue
and earnings growth track record which its Sub-Advisor believes to be superior;
(3) have a solid balance sheet, which includes a low debt-to-equity ratio, and
the ability to generate sufficient free cash flow; (4) have a long-term
sustainable competitive advantage; and (5) have demonstrated a history of
increasing shareholder value.
Under normal market conditions, the Established Growth Fund may also
invest up to 35% of its total assets in warrants, foreign securities through
sponsored American Depositary Receipts ("ADRs"), securities of other investment
companies and REITs (real estate investment trusts), cash and Short-Term
Obligations and may engage in other investment techniques described below.
"Short-Term Obligations" consist of obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (including U.S. Treasury
securities stripped of the unmatured interest coupons and such stripped interest
coupons), with maturities of 12 months or less, certificates of deposit,
bankers' acceptances and demand and time deposits of selected banks, securities
of money market mutual funds, and commercial paper rated in one of the two
highest rating categories by appropriate NRSROs and repurchase agreements
collateralized by such obligations. The Established Growth Fund may also invest
up to 100% of its total assets in Short-Term Obligations and cash when deemed
appropriate for temporary defensive purposes as determined by its Sub-Advisor to
be warranted due to current or anticipated market conditions. However, to the
extent that the Established Growth Fund is so invested, it may not achieve its
investment objectives.
THE AGGRESSIVE GROWTH FUND
The investment objective of the Aggressive Growth Fund is growth of
capital. Any income earned by the Aggressive Growth Fund will be incidental to
its overall objective of growth of capital.
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<PAGE> 103
Under normal market conditions, the Aggressive Growth Fund will invest
substantially all, but under such conditions in no event less than 65%, of its
total assets in common stocks and securities convertible into common stocks of
companies with market capitalizations ranging between $100 million and $5
billion. Under normal market conditions, the Aggressive Growth Fund intends to
operate with a fully invested philosophy, e.g., the Aggressive Growth Fund will
generally invest 90% or more of its assets in common stocks and securities
convertible into common stocks.
The Aggressive Growth Fund attempts to invest in high quality small to
mid capitalization companies that its Sub-Advisor believes have demonstrated one
or more of the following characteristics: (1) strong management team with an
ownership stake in the business; (2) solid revenue and earnings history; (3)
unique position in the company's targeted market; (4) innovative products and
solid new product distribution channels; and (5) solid balance sheet. In
addition, the Sub-Advisor attempts to invest in companies that are selling at
earnings multiples which the Sub-Advisor believes to be less than their expected
long-term growth rate.
The Fund's Sub-Advisor employs a "bottom-up" approach in its security
selection process. A "bottom-up" approach emphasizes company specific factors
rather than industry factors when making its buy/sell decisions. As a result of
this approach, the Fund's Sub-Advisor does not utilize a sector neutral
strategy. The Sub-Advisor does not seek to have the Aggressive Growth Fund have
representation in all economic sectors; therefore, the Aggressive Growth Fund's
sector weightings may be overweighted and/or underweighted relative to its
appropriate peers and/or benchmarks.
For purposes of the foregoing, securities convertible into common
stocks include convertible bonds, convertible preferred stock, options and
rights. The securities purchased by the Aggressive Growth Fund are generally
traded on established U.S. markets and exchanges, although as discussed below,
the Aggressive Growth Fund may invest in restricted or privately placed
securities. Under normal market conditions, the Aggressive Growth Fund may also
invest up to 35% of its total assets in warrants, foreign securities through
sponsored ADRs, securities of other investment companies and REITs, cash and
Short-Term Obligations and may engage in other investment techniques described
below.
THE EMERGING GROWTH FUND
The investment objective of the Emerging Growth Fund is long-term
growth of capital. Under normal market conditions, the Emerging Growth Fund will
invest substantially all, but under such conditions in no event less than 65%,
of its total assets in common stocks and securities convertible into common
stocks of growth-oriented micro-cap companies. For purposes of this policy, the
Emerging Growth Fund considers companies with equity market capitalizations, at
the time of purchase, of between $30 million and $350 million to be micro-cap
companies, and securities convertible into common stocks include convertible
bonds, convertible preferred stock, options and rights. Under normal market
conditions, up to 35% of the Emerging Growth Fund's total assets may be invested
in common stocks and securities convertible into common stock of companies not
meeting the foregoing micro-cap company equity market parameters.
The Sub-Advisor's investment style with respect to the Emerging Growth
Fund may be characterized as "buy-and-hold." When making individual security
selections, the Sub-Advisor's investment horizon is expected to be a three to
five year period. The Sub-Advisor will purchase and maintain positions in
securities of companies that the Sub-Advisor believes have demonstrated one or
more of the following characteristics: (1) strong entrepreneurial management
team with a substantial ownership interest in the business; (2) solid long-term
revenue and earnings outlook; (3) unique position in the company's targeted
market; (4) sustainable competitive advantage in the company's targeted
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<PAGE> 104
market; and (5) solid balance sheet. In addition, the Sub-Advisor attempts to
invest in companies that are selling at earnings multiples which the Sub-Advisor
believes to be less than their projected three to five year earnings growth
rate. This growth at a discount management style relies on a combination of
quantitative and fundamental analysis of historical and projected data to
determine the Sub-Advisor's assessment of a stock's expected return.
Under normal market conditions, the Emerging Growth Fund may also
invest up to 25% of its total assets in warrants, foreign securities, directly
or through sponsored ADRs, securities of other investment companies and REITs,
cash and Short-Term Obligations and may purchase the other investments and
engage in other investment techniques described below. The Emerging Growth Fund
may also invest up to 100% of its total assets in Short-Term Obligations and
cash when deemed appropriate for temporary defensive purposes as determined by
the Fund's Sub-Advisor to be warranted due to current or anticipated market
conditions. However, to the extent that the Emerging Growth Fund is so invested,
it may not achieve its investment objective.
THE INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is capital
appreciation, primarily through a diversified portfolio of non-U.S. equity
securities. Under normal market conditions, the International Equity Fund will
invest substantially all, but under such conditions in no event less than 65%,
of its total assets in equity securities of companies domiciled outside the
United States. That portion of the Fund not invested in equity securities is, in
normal circumstances, invested in U.S. and foreign government securities,
high-grade commercial paper, certificates of deposit, foreign currency, bankers
acceptances, cash and cash equivalents, time deposits, repurchase agreements and
similar money market instruments, both foreign and domestic. The Fund may invest
in convertible debt securities of foreign issuers which are convertible into
equity securities at such time as a market for equity securities is established
in the country involved.
The International Equity Fund Sub-Advisor's investment perspective for
the Fund is to invest in the equity securities of non-U.S. markets and companies
which are believed to be undervalued based upon internal research and
proprietary valuation systems. This international equity strategy reflects the
decisions concerning the relative attractiveness of asset classes, the
individual international equity markets, industries across and within those
markets, other common risk factors within those markets and individual
international companies. The International Equity Fund Sub-Advisor initially
identifies those securities which it believes to be undervalued in relation to
the issuer's assets, cash flow, earnings and revenues. The relative performance
of foreign currencies is an important factor in the Fund's performance. The
International Equity Fund Sub-Advisor may attempt to manage the Fund's exposure
to various currencies to take advantage of different yield, risk and return
characteristics. The International Equity Fund Sub-Advisor's proprietary
valuation model determines which securities are potential candidates for
inclusion in the Fund.
The benchmark for the Fund is the Morgan Stanley Capital International
European, Australian, Far East ("EAFE") Index(R) (the "Benchmark"). The
Benchmark is a market driven, broad based index which includes non-U.S. equity
markets in terms of capitalization and performance. The Benchmark is designed to
provide a representative total return for all major stock exchanges located
outside the U.S. From time to time, the International Equity Fund Sub-Advisor
may substitute securities in an equivalent index when it believes that such
securities in the index more accurately reflect the relevant international
market.
As a general matter, the International Equity Fund Sub-Advisor will
purchase for the Fund only securities contained in the underlying index relevant
to the Benchmark. The International Equity Fund Sub-Advisor will attempt to
enhance the long-term risk and return performance of the Fund relative to the
Benchmark by deviating from the
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normal Benchmark mix of country allocation and currencies in reaction to
discrepancies between current market prices and fundamental values. The active
management process is intended to produce a superior performance relative to the
Benchmark index.
The Fund will under normal market conditions generally purchase
securities of companies domiciled in a minimum of eight countries outside the
United States.
THE INTERMEDIATE TERM INCOME FUND
The investment objectives of the Income Fund are current income with
long-term growth of capital as a secondary objective. Under normal market
conditions, the Income Fund will invest substantially all, but under such
conditions in no event less than 65%, of its total assets in fixed income
securities of all types, including variable and floating rate securities and
variable amount master demand notes. A portion of the Income Fund (but under
normal market conditions no more than 35% of its total assets) may be invested
in securities of other investment companies, preferred stocks and, for cash
management purposes, Short-Term Obligations (as described above), and the Income
Fund may engage in other investment techniques described below. Fixed income
securities include bonds, debentures, notes, mortgage-backed and asset-backed
securities, state, municipal or industrial revenue bonds, obligations issued or
supported as to principal and interest by the U.S. Government or its agencies or
instrumentalities ("Government Obligations") and debt securities convertible
into, or exchangeable for, common stocks. In addition, a portion of the Income
Fund may from time to time be invested in participation certificates in pools of
mortgages issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Income Fund may invest up to 100% of its total assets in
Short-Term Obligations and cash when deemed appropriate for temporary defensive
purposes as determined by its Sub-Advisor to be warranted due to current or
anticipated market conditions. However, to the extent that the Income Fund is so
invested, it may not achieve its investment objectives.
Under normal market conditions, the Income Fund expects to invest
primarily in Government Obligations, mortgage-backed securities and in debt
obligations of United States corporations. The Income Fund also intends that,
under normal market conditions, its portfolio will maintain a dollar-weighted
average maturity of three to ten years.
The Income Fund expects to invest in a variety of U.S. Treasury
obligations, differing in their interest rates, maturities, and times of
issuance, and other Government Obligations. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as the Government National
Mortgage Association ("GNMA") and the Export-Import Bank of the United States,
are supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal National Mortgage Association ("FNMA"), are supported by
the right of the issuer to borrow from the Treasury; others are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks or the
Federal Home Loan Mortgage Corporation ("FHLMC"), are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. The Income Fund
will invest in the obligations of such agencies or instrumentalities only when
its Sub-Advisor believes that the credit risk with respect thereto is minimal.
The Income Fund also expects to invest in bonds, notes and debentures
of a wide range of U.S. corporate issuers. Such obligations may be secured or
unsecured promises to pay and will in most cases differ in their interest rates,
maturities and times of issuance.
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<PAGE> 106
The Income Fund invests only in debt securities which are rated at the
time of purchase within the four highest rating groups assigned by one or more
appropriate NRSROs or, if unrated, which the Fund's Sub-Advisor deems to be of
comparable quality to securities so rated. Securities within the fourth highest
rating group are considered by Moody's Investors Service, Inc. ("Moody's") to
have some speculative characteristics, and while interest payments and principal
security appears adequate for the present, such securities lack certain
protective elements or may be characteristically unreliable over any great
period of time. For a description of the rating symbols of the NRSROs, see the
Appendix to the Statement of Additional Information.
The Income Fund may also invest in U.S. dollar denominated
international bonds for which the primary trading market is in the United States
("Yankee Bonds"), or for which the primary trading market is abroad ("Eurodollar
Bonds"), and in Canadian Bonds and bonds issued by institutions organized for a
specific purpose, such as the World Bank and the European Economic Community, by
two or more sovereign governments ("Supranational Agency Bonds").
Mortgage-Backed Securities. The Income Fund also invests in
mortgage-backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or by nongovernmental entities which are rated, at
the time of purchase, within the four highest bond rating categories assigned by
one or more appropriate NRSROs, or, if unrated, which its Sub-Advisor deems to
be of comparable quality to securities so rated. There are currently three basic
types of mortgage-backed securities: (1) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
FHLMC; (2) those issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and (3) those issued by
private issuers that represent an interest in or are collateralized by whole
mortgage loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
Such mortgage-backed securities may have mortgage obligations directly
backing such securities, including among others, conventional thirty year fixed
rate mortgage obligations, graduated payment mortgage obligations, fifteen year
mortgage obligations and adjustable rate mortgage obligations. All of these
mortgage obligations can be used to create pass-through securities. A
pass-through security is created when mortgage obligations are pooled together
and undivided interests in the pool or pools are sold. The cash flow from the
mortgage obligations is passed through to the holders of the securities in the
form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an individual mortgage
obligation prepays the remaining principal before the mortgage obligation's
scheduled maturity date.
As a result of the pass-through of prepayments of principal on the
underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. Because
the prepayment characteristics of the underlying mortgage obligations vary, it
is not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. In addition,
prepayment rates will be used to determine a security's estimated average life
and the Income Fund's dollar-weighted average portfolio maturity. Accelerated
prepayments have an adverse impact on yields for pass-through securities
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligations are repaid. The opposite is
true for pass-through securities purchased at a discount. The Income Fund may
purchase mortgage-related securities at a premium or a discount. Reinvestment of
principal payments may occur at higher or lower rates than the original yield on
such securities. Due to the prepayment feature and the need to reinvest payments
and
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prepayments of principal at current rates, mortgage-related securities can be
less effective than typical bonds of similar maturities at maintaining yields
during periods of declining interest rates.
Collateralized Mortgage Obligations. The Income Fund may also acquire
collateralized mortgage obligations or "CMOs" and stripped mortgage-backed
securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). Payments of principal or interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs. CMOs may be issued by agencies or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans.
IOs and POs. Stripped mortgage-backed securities are securities
representing interests in a pool of mortgages the cash flow from which has been
separated into interest and principal components. "IOs" (interest only
securities) receive the interest portion of the cash flow while "POs" (principal
only securities) receive the principal portion. Stripped mortgage-backed
securities may be issued by U.S. Government agencies or by private issuers, such
as mortgage banks, commercial banks, investment banks, savings and loan
associations and special purpose subsidiaries of the foregoing. As interest
rates rise and fall, the value of IOs tends to move in the same direction as
interest rates. The value of other mortgage-backed securities described herein,
like other debt instruments, will tend to move in the opposite direction
compared to interest rates. POs perform best when prepayments on the underlying
mortgages rise since this increases the rate at which the investment is returned
and the yield to maturity on the PO. When payments on mortgages underlying a PO
are slow, the life of the PO is lengthened and the yield to maturity is reduced.
The Income Fund may purchase stripped mortgage-backed securities for
hedging purposes to protect the Income Fund against interest rate fluctuations.
For example, since an IO will tend to increase in value as interest rates rise,
it may be utilized to hedge against a decrease in value of other fixed-income
securities in a rising interest rate environment. If the Income Fund purchases a
mortgage-related security at a premium, all or part of the premium may be lost
if there is a decline in the market value of the security, whether resulting
from changes in interest rates or prepayments in the underlying mortgage
collateral. Moreover, with respect to stripped mortgage-backed securities, if
the underlying mortgage securities experience greater than anticipated
prepayments of principal, the Income Fund may fail to recoup fully its initial
investment in these securities even if the securities are rated in the highest
rating category by an NRSRO. Stripped mortgage-backed securities may exhibit
greater price volatility than ordinary debt securities because of the manner in
which their principal and interest are returned to investors. The market value
of the class consisting entirely of principal payments can be extremely volatile
in response to changes in interest rates. The yields on stripped mortgage-backed
securities that receive all or most of the interest are generally higher than
prevailing market yields on other mortgage-backed obligations because their cash
flow patterns are also volatile and there is a greater risk that the initial
investment will not be fully recouped. No more than 10% of the Income Fund's
total assets will be invested in IOs and in POs.
Asset-Backed Securities. Asset-backed securities are similar to
mortgage-backed securities except that instead of using mortgages to
collateralize the obligations, a broad range of other assets may be used as
collateral, primarily automobile and credit card receivables and home equity
loans. Such receivables and loans are securitized in pass-through structures
similar to the mortgage pass-through or pay-through structures described above.
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Certain debt securities such as, but not limited to, mortgage-backed
securities, CMOs and asset-backed securities, as well as other securities
subject to prepayment of principal prior to the stated maturity date, are
expected to be repaid prior to their stated maturity dates. As a result, the
effective maturity of these securities is expected to be shorter than the stated
maturity. For purposes of compliance with stated maturity policies and
calculation of the Income Fund's dollar-weighted average maturity, the effective
maturity of such securities will be used.
Variable Amount Master Demand Notes. Variable amount master demand
notes in which the Income Fund may invest are unsecured demand notes that permit
the indebtedness thereunder to vary and that provide for periodic adjustments in
the interest rate according to the terms of the instrument. Because master
demand notes are direct lending arrangements between the Income Fund and the
issuer, they are not normally traded. Although there is no secondary market in
the notes, the Income Fund may demand payment of principal and accrued interest
at any time. While the notes are not typically rated by NRSROs, the Fund's
Sub-Advisor must determine them to be of comparable credit quality to commercial
paper in which the Income Fund could invest. The Fund's Sub-Advisor will
consider the earning power, cash flow, and other liquidity ratios of the issuers
of such notes and will continuously monitor their financial status and ability
to meet payment on demand. In determining dollar-weighted average portfolio
maturity, a variable amount master demand note will be deemed to have a maturity
equal to the period of time remaining until the principal amount can be
recovered from the issuer through demand.
THE LIMITED DURATION GOVERNMENT SECURITIES FUND
The investment objectives of the Government Securities Fund are current
income with preservation of capital as a secondary objective. Under normal
market conditions, the Government Securities Fund will invest substantially all,
but under such conditions in no event less than 65%, of its total assets in
Government Obligations and in repurchase agreements backed by such securities.
Government Obligations which the Government Securities Fund may purchase also
include mortgage-backed securities, variable and floating rate securities and
zero coupon securities, as described more fully above under "The Intermediate
Term Income Fund." Under current market conditions, the Government Securities
Fund expects to maintain an average portfolio duration of one to three years.
A portion of the Government Securities Fund (but under normal market
conditions no more than 10% of its total assets) may be invested in securities
of other investment companies.
Duration. The Government Securities Fund will attempt to limit its
exposure to interest rate risk by maintaining a duration which, on a weighted
average basis and under normal market conditions, will generally be less than
three years. Duration is a measure of the average life of a fixed-income
security that was developed as a more precise alternative to the concepts of
"term to maturity" or "average dollar weighted maturity" as measures of
"volatility" or "risk" associated with changes in interest rates. Duration
incorporates a security's yield, coupon interest payments, final maturity and
call features into one measure.
Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments and the nature
of the call provisions, the market values of debt obligations may respond
differently to changes in interest rates.
Traditionally, a debt security's "term-to-maturity" has been used as a
measure of the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term-to-maturity" measures only the time until a debt security provides its
final
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payment, taking no account of the pattern of the security's payments prior to
maturity. Average dollar weighted maturity is calculated by averaging the terms
to maturity of each debt security held with each maturity "weighted" according
to the percentage of assets that it represents. Duration is a measure of the
expected life of a debt security on a present value basis and reflects both
principal and interest payments. Duration takes the length of the time intervals
between the present time and the time that the interest and principal payments
are scheduled or, in the case of a callable security, expected to be received,
and weights them by the present values of the cash to be received at each future
point in time. For any debt security with interest payments occurring prior to
the payment of principal, duration is ordinarily less than maturity. In general,
all other factors being the same, the lower the stated or coupon rate of
interest of a debt security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a debt security,
the shorter the duration of the security.
There are some situations where the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Fund's Sub-Advisor will use more
sophisticated analytical techniques to project the economic life of a security
and estimate its interest rate exposure. Since the computation of duration is
based on predictions of future events rather than known factors, there can be no
assurance that the Government Securities Fund will at all times achieve its
targeted portfolio duration.
The change in market value of U.S. Government fixed-income securities
is largely a function of changes in the prevailing level of interest rates. When
interest rates are falling, a portfolio with a shorter duration generally will
not generate as high a level of total return as a portfolio with a longer
duration. When interest rates are flat, shorter duration portfolios generally
will not generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case). When interest rates are rising, a portfolio with a
shorter duration will generally outperform longer duration portfolios. With
respect to the composition of a fixed-income portfolio, the longer the duration
of the portfolio, generally the greater the anticipated potential for total
return, with, however, greater attendant interest rate risk and price volatility
than for a portfolio with a shorter duration.
While the Government Securities Fund intends to maintain an average
portfolio duration of one to three years under normal market conditions, there
is no limit as to the maturity of any one security which the Government
Securities Fund may purchase.
THE PENNSYLVANIA MUNICIPAL BOND FUND
The investment objectives of the Pennsylvania Bond Fund are income
which is exempt from federal income tax and Pennsylvania state income tax,
although such income may be subject to the federal alternative minimum tax when
received by shareholders, and preservation of capital. Under normal market
conditions, at least 80% of the net assets of the Pennsylvania Bond Fund are
invested in a portfolio of debt obligations consisting of bonds, notes,
commercial paper and certificates of indebtedness, issued by or on behalf of the
Commonwealth of Pennsylvania, or any county, political subdivision or
municipality thereof (including any agency, board, authority or commission of
any of the foregoing), the interest on which, in the opinion of bond counsel to
the issuer, is exempt from federal and Pennsylvania income taxes (but may be
treated as a preference item for individuals for purposes of the federal
alternative minimum tax) ("Pennsylvania Exempt Securities") and in debt
obligations issued by
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the Government of Puerto Rico and such other governmental entities whose debt
obligations, either by law or treaty, generate interest income which is exempt
from federal and Pennsylvania state income taxes (but may be treated as a
preference item for individuals for purposes of the federal alternative minimum
tax) (together, with Pennsylvania Exempt Securities, called "Exempt
Securities"). In addition, under normal market conditions, at least 65% of the
Fund's net assets are invested in Pennsylvania Exempt Securities. As a matter of
fundamental policy, under normal market conditions, at least 80% of the net
assets of the Fund are invested in securities, the interest on which is exempt
from federal income tax but may be subject to the federal alternative minimum
tax when received by certain Shareholders. To the extent such securities are not
Pennsylvania Exempt Securities, the income therefrom may be subject to
Pennsylvania income taxes. With respect to the Fund's objective of preserving
capital, its Sub-Advisor will attempt to protect principal value in a rising
interest rate environment and enhance principal value in a declining interest
rate environment.
The two principal classifications of Exempt Securities which may be
held by the Pennsylvania Bond Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from proceeds of
a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Fund are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
The Fund may also invest in "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The Fund invests in Exempt Securities which are rated at the time of
purchase within the four highest rating groups assigned by one or more NRSROs
for bonds and within the two highest rating groups for notes, tax-exempt
commercial paper, or variable rate demand obligations, as the case may be. The
Fund may also purchase Exempt Securities which are unrated at the time of
purchase but are determined to be of comparable quality by its Sub-Advisor. The
applicable Exempt Securities ratings are described in the Appendix to this
Statement of Additional Information. Securities within the fourth highest rating
group are considered by Moody's to have some speculative characteristics, and
while interest payments and principal security appears adequate for the present,
such securities lack certain protective elements or may be characteristically
unreliable over any great period of time.
The Fund expects to maintain a dollar-weighted average portfolio
maturity of three to ten years. Within this range, the Fund's Sub-Advisor may
vary the average maturity substantially in anticipation of a change in the
interest rate environment. There is no limit as to the maturity of any
individual security.
The Fund may hold uninvested cash reserves pending investment during
temporary defensive periods or if, in the opinion of its Sub-Advisor, suitable
Exempt Securities are unavailable. There is no percentage limitation on the
amount of assets which may be held uninvested. Uninvested cash reserves will not
earn income.
Other Investments. Under normal market conditions, at least 80% of the
net assets of the Fund will be invested in Exempt Securities. However, up to 20%
of the net assets of the Fund may be invested in municipal obligations of other
states, and any political subdivision, county or municipality
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thereof, which are not Exempt Securities and in taxable obligations if, for
example, suitable Exempt Securities are unavailable or for cash management
purposes. In addition, the Fund may invest up to 100% of its assets in such
securities when deemed appropriate for temporary defensive purposes as
determined by the Fund's Sub-Advisor to be warranted due to market conditions.
Such taxable obligations consist of Government Obligations and Short-Term
Obligations (as described above). Under such circumstances and during the period
of such investment, the Fund may not achieve its stated investment objectives.
The Fund has no limit to the extent that it may invest its net assets
in Exempt Securities, the interest income from which may be treated as a
preference item for purposes of the federal alternative minimum tax. To the
extent the Fund invests in these securities, individual Shareholders, depending
on their own tax status, may be subject to alternative minimum tax on that part
of the Fund's distributions derived from these bonds.
Opinions relating to the validity of Exempt Securities and to the
exemption of interest thereon from federal and Pennsylvania state income taxes
are normally rendered by bond counsel to the respective issuers at the time of
issuance. Neither the Fund nor the Advisor nor the Sub-Advisor will review the
proceedings relating to the issuance of Exempt Securities or the basis for such
opinions.
Floating and Variable Rate Securities and Zero Coupon Securities.
Exempt Securities purchased by the Fund may include rated and unrated variable
and floating rate obligations the interest on which is tax-exempt. The Fund may
also invest in zero coupon securities. Such securities are more fully described
below under "Risk Factors and Investment Techniques."
The Fund may also purchase floating and variable rate demand notes and
bonds, which are tax exempt obligations ordinarily having stated maturities in
excess of one year, but which permit the holder to demand payment of principal
at any time, or at specified intervals. Variable rate demand notes include
master demand notes which are obligations that permit the Fund to invest
fluctuating amounts, at varying rates of interest, pursuant to direct
arrangements between the Fund, as lender, and the borrower. These obligations
permit daily changes in the amount borrowed. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Use of letters of credit or other credit support arrangements will not
adversely affect the tax-exempt status of these obligations. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value, plus accrued interest. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Each obligation purchased by
the Fund will meet the quality criteria established for the purchase of Exempt
Securities. The Fund's Sub-Advisor will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations in the Fund's portfolio.
Participation Interests. The Fund may purchase from financial
institutions participation interests in Exempt Securities (such as industrial
development bonds and municipal lease/purchase agreements). A participation
interest gives the Fund an undivided interest in the Exempt Security in the
proportion that the Fund's participation interest bears to the total principal
amount of the Exempt Security. These instruments may have fixed, floating or
variable rates of interest. If the participation interest is unrated, it will be
backed by an irrevocable letter of credit or guarantee of a bank that the Board
of Trustees has determined meets the prescribed quality standards for banks in
whose securities the Fund may invest, or the payment obligation otherwise will
be collateralized by Government Obligations. For certain
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<PAGE> 112
participation interests, the Fund will have the right to demand payment, on not
more than seven days' notice, for all or any part of the Fund's participation
interest in the Exempt Security, plus accrued interest. As to these instruments,
the Fund intends to exercise its right to demand payment only upon a default
under the terms of the Exempt Security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
Custodial Receipts. The Fund may purchase custodial receipts
representing the right to receive certain future principal and interest payments
on Exempt Securities which underlie the custodial receipts. A number of
different arrangements are possible. In a typical custodial receipt arrangement,
an issuer or a third party owner of Exempt Securities deposits such obligations
with a custodian in exchange for two classes of custodial receipts. The two
classes have different characteristics, but, in each case, payments on the two
classes are based on payments received on the underlying Exempt Securities. One
class has the characteristics of a typical auction rate security, where at
specified intervals its interest rate is adjusted, and ownership changes, based
on an auction mechanism. This class' interest rate generally is expected to be
below the coupon rate of the underlying Exempt Securities and generally is at a
level comparable to that of an Exempt Security of similar quality and having a
maturity equal to the period between interest rate adjustments. The second class
bears interest at a rate that exceeds the interest rate typically borne by a
security of comparable quality and maturity; this rate also is adjusted, but in
this case inversely to changes in the rate of interest of the first class. If
the interest rate on the first class exceeds the coupon rate of the underlying
Exempt Securities, its interest rate will exceed the rate paid on the second
class. In no event will the aggregate interest paid with respect to the two
classes exceed the interest paid by the underlying Exempt Securities. The value
of the second class and similar securities should be expected to fluctuate more
than the value of an Exempt Security of comparable quality and maturity and
their purchase by the Fund should increase the volatility of its net asset value
and, thus, its price per share. These custodial receipts are sold in private
placements. The Fund also may purchase directly from issuers, and not in a
private placement, Exempt Securities having characteristics similar to custodial
receipts. These securities may be issued as part of a multi-class offering and
the interest rate on certain classes may be subject to a cap or a floor.
The Fund may use one or more of the investment techniques described
below. Use of such techniques may cause the Fund to earn income which would be
taxable to its Shareholders.
THE LIFESTYLE FUNDS
The investment objective of the Lifestyle Conservative Growth Fund is
capital appreciation and income. The investment objective of the Lifestyle
Moderate Growth Fund is capital appreciation and, secondarily, income. The
investment objective of the Lifestyle Growth Fund is capital appreciation. Each
Lifestyle Fund is a fund-of-funds that seeks to achieve its objective by
investing in Underlying Funds. The table below illustrates the initial
underlying Fund allocation and ranges for each Lifestyle Fund:
<TABLE>
<CAPTION>
RANGES (PERCENTAGE OF EACH FUND'S NET ASSETS)
NAME OF FUND RANGE
------------ -----
LIFESTYLE CONSERVATIVE GROWTH FUND
- ----------------------------------
<S> <C>
Prime Money Market Fund 0 - 30%
U.S. Treasury
</TABLE>
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<PAGE> 113
<TABLE>
<CAPTION>
NAME OF FUND RANGE
------------ -----
<S> <C>
Money Market Fund
Government Securities Fund 30 - 60%
Income Fund
Established Growth Fund
Aggressive Growth Fund
International Equity Fund 10 - 40%
LIFESTYLE MODERATE GROWTH FUND
- ------------------------------
Prime Money Market Fund
U.S. Treasury Money Market Fund 0 - 20%
Government Securities Fund 20 - 50%
Income Fund
Established Growth Fund
Aggressive Growth Fund
International Equity Fund 30 - 60%
LIFESTYLE GROWTH FUND
- ---------------------
Prime Money Market Fund
U.S. Treasury Money Market Fund 0 - 10%
Government Securities Fund 10 - 40%
Income Fund
Established Growth Fund
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund 50 - 80%
</TABLE>
The allocation of each Lifestyle Fund's assets among the Underlying
Funds will initially be made by the Fund's Sub-Advisor within the percentage
ranges set forth in the table above. However, the particular Underlying Fund in
which each Lifestyle Fund may invest, the allocation ranges, and the investments
in each Underlying Fund may be changed from time to time without shareholder
approval. The Sub-Advisor will make allocation decisions according to its
outlook for the economy, financial markets, and relative market valuation of the
Underlying Funds.
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Each Lifestyle Fund's net asset value will fluctuate with changes in
the value of the Underlying Funds in which they invest. Each Lifestyle Fund's
investment return is diversified by its investment in the Underlying Funds.
To the extent a Lifestyle Fund or the Underlying Funds are engaged in a
temporary defensive position, they will not be pursuing their investment
objective.
The investments of the Lifestyle Funds are concentrated in the
Underlying Funds, so each Lifestyle Fund's performance is directly related to
the performance of the Underlying Funds.
Each Lifestyle Fund may invest in the Prime Money Market and Treasury
Money Market Funds. Both the Prime Money Market and Treasury Money Market Funds
each seek current income with liquidity and stability of principal. The Prime
Money Market Fund and the Treasury Money Market Fund seek to maintain a constant
net asset value of $1.00 per share for purchases and redemptions, but there can
be no assurance that either will be able to do so.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
The investment policies described in the Prospectuses and this
Statement of Additional Information are among those which one or more of the
Funds have the ability to utilize. Some of these policies may be employed on a
regular basis; others may not be used at all. Accordingly, reference to any
particular policy, method or technique carries no implication that it will be
utilized or, if it is, that it will be successful.
Equities. Equity securities such as those in which the Established
Growth Fund, Aggressive Growth Fund, Emerging Growth Fund and International
Equity Fund may invest are more volatile and carry more risks than some other
forms of investment, including investments in high grade fixed income
securities. Therefore, each Fund is subject to stock market risk, e.g., the
possibility that stock prices in general will decline over short or even
extended periods of time.
Equity securities of micro-cap companies, such as those in which the
Emerging Growth Fund may invest, may offer a greater capital appreciation
potential but are more volatile and carry more risk than some other forms of
investment, including investments in equity securities of larger, more
established companies or high grade fixed income securities. Investments in
micro-cap companies represent some of the smaller and least liquid equity
securities in the U.S. markets.
Growth-Oriented Companies. The Aggressive Growth Fund and the Emerging
Growth Fund are both intended for investors who have a long-term investment time
horizon and who can accept the higher risks involved in seeking potentially
higher capital appreciation through investments in growth oriented companies. A
growth oriented company typically invests most of its net income in its
enterprise and does not pay out much, if any, in dividends. Accordingly, the
Aggressive Growth and Emerging Growth Funds do not anticipate any significant
distributions to Shareholders from net investment income, and potential
investors should be in a financial position to forego current income from their
investment in the Aggressive Growth and Emerging Growth Funds. In addition,
smaller capitalized companies generally have limited product lines, markets and
financial resources and are dependent upon a limited management group. The
securities of less seasoned companies and/or smaller capitalized companies may
have limited marketability, which may affect or limit their liquidity and
therefore the ability of the Aggressive Growth and Emerging Growth Funds to sell
such securities at the time and price they deem advisable. In addition, such
securities may be subject to more abrupt or erratic market movements over time
than securities of more seasoned and/or larger capitalized companies or the
market as a whole.
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Micro Capitalization Companies. The Emerging Growth Fund is subject to
the risks associated with investments in micro capitalization companies. Risks
of investing in micro capitalization companies include the probability that some
companies may never realize the value discount potential that appeared to be
inherent in them at the time of investment or may even fail as a business for
several reasons. For example, a new product or innovation may not take hold, an
anticipated takeover or turnaround may not occur, a trademark may lose its value
to other generic products. Also, micro capitalization companies may lack the
resources, financial or otherwise, to take advantage of a valuable product or
favorable market position or may be unable to withstand the competitive
pressures of larger, more established rivals. The Emerging Growth Fund's
Sub-Advisor will seek to minimize the risks described above by broad
diversification of the Emerging Growth Fund's portfolio. However, there can be
no assurance that such diversification will prevent loss in value of certain
portfolio securities or in the Emerging Growth Fund's net asset value.
Bonds. Since the Income Fund, Government Securities Fund and
Pennsylvania Bond Fund each invests in bonds, investors in such a Fund are
exposed to bond market risk, I.E., fluctuations in the market value of bonds.
Bond prices are influenced primarily by changes in the level of interest rates.
When interest rates rise, the prices of bonds generally fall; conversely, when
interest rates fall, bond prices generally rise although certain types of bonds
are subject to the risks of prepayment as described above when interest rates
fall. The values of debt securities also may be affected by change in the credit
rating or financial condition of the issuing entities. While bonds normally
fluctuate less in price than stocks, there have been in the recent past extended
periods of cyclical increases in interest rates that have caused significant
declines in bond prices and have caused the effective maturity of securities
with prepayment features to be extended, thus effectively converting short or
intermediate term securities (which generally have less market risk and less
fluctuation in market value) into longer term securities (the prices of which
generally are more volatile).
Depending upon the prevailing market conditions, the Funds'
Sub-Advisors may purchase debt securities at a discount from face value, which
produces a yield greater than the coupon rate. Conversely, if debt securities
are purchased at a premium over face value, the yield will be lower than the
coupon rate. In making investment decisions, the Funds' Sub-Advisors will
consider many factors other than current yield, including the preservation of
capital, maturity, and yield to maturity.
Net Asset Value. Each Fund's net asset value generally will not be
stable and should fluctuate based upon changes in the value of such Fund's
portfolio securities. Depending upon the performance of each Funds' investments,
the net asset value per share of a Fund may decrease instead of increase. Each
of the Prime Money Market and Treasury Money Market Funds will attempt to
maintain a stable net asset value of $1.00 per share.
The Sub-Advisors manage the Funds generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. Especially with respect to the
Income Fund and the Government Securities Fund, the Advisor intends to manage
actively those Funds' portfolios, which may result in high portfolio turnover
rates. For more information regarding the effects of high portfolio turnover see
"Portfolio Turnover" below.
Derivatives. The Income Fund, Government Securities Fund and
Pennsylvania Bond Fund may invest in any one or more of the following
securities: certain variable or floating rate securities, and, as described
below, the Income Fund and the Government Securities Fund may invest in
mortgage-backed securities, and the Established Growth Fund, Aggressive Growth
Fund, Emerging Growth Fund, International Equity Fund, the Income Fund and the
Pennsylvania Bond Fund may invest in put and call options and futures. Such
instruments are considered to be "derivatives." A derivative is generally
defined as an instrument whose value is based upon, or derived from, some
underlying index, reference rate (e.g., interest rates), security, commodity or
other asset. Certain derivatives that may be purchased
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by a Fund, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal. The Established
Growth Fund, Aggressive Growth Fund, Emerging Growth Fund, International Equity
Fund, Income Fund and the Government Securities Fund each will not invest more
than 20% of its total assets in any such derivatives at any one time, except
that there is no limitation on the amount of a Fund's total assets which may be
invested in variable or floating rate obligations. There is no limit on the
amount of the Pennsylvania Bond Fund's assets that may be invested in
derivatives.
Securities Lending. In order to generate additional income, each Fund
may, from time to time, lend its portfolio securities to broker-dealers, banks,
or institutional borrowers of securities. A Fund must receive 100% collateral in
the form of cash or U.S. Government securities. This collateral will be valued
daily by the Fund's Sub-Advisor. Should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund. During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest received on such securities. Loans are subject to
termination by the Fund or the borrower at any time. While a Fund does not have
the right to vote securities on loan, each Fund intends to terminate the loan
and right to vote if that is considered important with respect to the
investment. In the event the borrower would default in its obligations, a Fund
bears the risk of delay in recovery of the portfolio securities and the loss of
rights in the collateral. A Fund will enter into loan agreements only with
broker-dealers, banks, or other institutions that the Fund's Sub-Advisor has
determined are creditworthy under guidelines established by the Trust's Board of
Trustees. No Fund will lend more than 33% of the total value of its portfolio
securities at any one time.
Convertible Securities. The Established Growth Fund, Aggressive Growth
Fund, Emerging Growth Fund, International Equity Fund and Income Fund each may
invest in convertible securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. Convertible
securities rank senior to common stocks in a corporation's capital structure
and, therefore, entail less risk than the corporation's common stock. The value
of a convertible security is a function of its "investment value" (its value as
if it did not have a conversion privilege) and its "conversion value" (the
security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
Writing Covered Call and Put Options. The Established Growth Fund,
Aggressive Growth Fund, Emerging Growth Fund, International Equity Fund, Income
Fund and Pennsylvania Bond Fund may write covered call and put options on
securities, or futures contracts regarding securities, in which such Fund may
invest, in an effort to realize additional income. A put option gives the
purchaser the right to sell, and a writer has the obligation to purchase, the
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security. A
call option gives the purchaser of the option the right to buy, and a writer has
the obligation to sell, the underlying security at the stated exercise price at
any time prior to the expiration of the option, regardless of the market price
of the security. The premium paid to the writer is consideration for undertaking
the obligations under the option contract. Such options will be listed on
national securities or futures exchanges. Each Fund may write covered call
options as a means of seeking to enhance its income through the receipt of
premiums in instances in which the Fund's Sub-Advisor determines that the
underlying securities or futures contracts are not likely to increase in value
above the exercise price. Each Fund also may seek to earn additional income
through the receipt of premiums by writing put options. By writing a call
option, a Fund limits its opportunity to profit from any increase in the market
value of the underlying security above the exercise price of the option; by
writing a put option, a Fund
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assumes the risk that it may be required to purchase the underlying security at
a price in excess of its then current market value.
Each of the Established Growth Fund, Aggressive Growth Fund, Emerging
Growth Fund, International Equity Fund, Income Fund and Pennsylvania Bond Fund,
as part of its option transactions, also may write index put and call options.
Through the writing of index options a Fund can achieve many of the same
objectives as through the use of options on individual securities. Options on
securities indices are similar to options on a security except that, rather than
the right to take or make delivery of a security at a specified price, an option
on a securities index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked-to-market to
reflect the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the mean between bid
and asked price. If an option expires on the stipulated expiration date or if
the Fund enters into a closing purchase transaction, it will realize a gain (or
a loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If a call option is exercised, the Fund may deliver the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received and the Fund will
realize a gain or loss. The Established Growth Fund, Aggressive Growth Fund,
Emerging Growth Fund, International Equity Fund, Income Fund and Pennsylvania
Bond Fund will each limit its writing of options such that at no time will more
than 25% of its total assets be subject to such options transactions.
Purchasing Options. The Established Growth Fund, Aggressive Growth
Fund, Emerging Growth Fund, International Equity Fund, Income Fund and
Pennsylvania Bond Fund may each purchase put and call options written by third
parties covering indices and those types of financial instruments or securities
in which the Fund may invest to attempt to provide protection against adverse
price effects from anticipated changes in prevailing prices for such
instruments. The purchase of a put option is intended to protect the value of a
Fund's holdings in a falling market while the purchase of a call option is
intended to protect the value of a Fund's positions in a rising market. Put and
call options purchased by a Fund will be valued at the last sale price, or in
the absence of such a price, at the mean between bid and asked price. Such
options will be listed on national securities or futures exchanges.
In purchasing a call option, a Fund would be in a position to realize a
gain if, during the option period, the price of the underlying security, index
or futures contract increased by an amount in excess of the premium paid for the
call option. It would realize a loss if the price of the underlying security,
index or futures contract declined or remained the same or did not increase
during the period by more than the amount of the premium. By purchasing a put
option, the Fund would be in a position to realize a gain if, during the option
period, the price of the security, index or futures contract declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the security, index or futures contract increased or remained the same or did
not decrease during that period by more than the amount of the premium. If a put
or call option purchased by the Fund were permitted to expire without being sold
or exercised, its premium would represent a realized loss to the Fund.
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Puts. The Pennsylvania Bond Fund also may require "puts" with respect
to Exempt Securities held in its portfolio. The Pennsylvania Bond Fund may sell,
transfer, or assign a put in conjunction with the sale, transfer, or assignment
of the underlying security or securities.
The amount payable to the Pennsylvania Bond Fund upon its exercise of a
"put" is normally (i) the Fund's acquisition cost of the Exempt Securities
(excluding any accrued interest which the Fund paid on the acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period.
Puts may be acquired by the Pennsylvania Bond Fund to facilitate the
liquidity of its portfolio assets. Puts may also be used to facilitate the
reinvestment of the Fund's assets at a rate of return more favorable than that
of the underlying security. Puts may, under certain circumstances, also be used
to shorten the maturity of underlying variable rate or floating rate securities
for purposes of calculating the remaining maturity of those securities.
The Pennsylvania Bond Fund expects that it will generally acquire this
type of put only where the put is available without the payment of any direct or
indirect consideration. However, if necessary or advisable, the Fund may pay for
such puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the puts (thus reducing the yield to
maturity otherwise available for the same securities).
The Pennsylvania Bond Fund intends to enter into such puts only with
dealers, banks, and broker-dealers which, in its Sub-Advisor's opinion, present
minimal credit risks.
Futures Contracts. The Established Growth Fund, Aggressive Growth Fund,
Emerging Growth Fund, International Equity Fund, Income Fund and Pennsylvania
Bond Fund may each purchase or sell contracts for the future delivery of the
specific financial instruments or securities in which that Fund may invest, and
indices based upon the types of securities in which that Fund may invest
(collectively, "Futures Contracts"). Each such Fund may use this investment
technique as a substitute for a comparable market position in the underlying
securities or to hedge against anticipated future changes in market prices,
which otherwise might adversely affect either the value of such Fund's
securities or the prices of securities which such Fund intends to purchase at a
later date. In addition, the Income Fund and the Pennsylvania Bond Fund may
purchase or sell futures contracts to hedge against changes in market interest
rates which may result in the premature call at par value of certain securities
which that Fund has purchased at a premium.
To the extent a Fund is engaging in a futures transaction as a hedging
device, because of the risk of an imperfect correlation between securities in
the Fund's portfolio that are the subject of a hedging transaction and the
futures contract used as a hedging device, it is possible that the hedge will
not be fully effective if, for example, losses on the portfolio securities
exceed gains on the futures contract or losses on the futures contract exceed
gains on the portfolio securities. For futures contracts based on indices, the
risk of imperfect correlation increases as the composition of a Fund's portfolio
varies from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the future contract has
been less or greater than that of the securities. Such "over hedging" or "under
hedging" may adversely affect a Fund's net investment results if the market does
not move as anticipated when the hedge is established.
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Successful use of futures by a Fund also is subject to the Fund's
Sub-Advisor's ability to predict correctly movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting the value of securities held in its portfolio
and prices increase instead, the Fund will lose part or all of the benefit of
the increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a long position if the
option is a put). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin account
which represents the amount by which the market price of the futures contract,
at exercise, exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract.
Call options sold by a Fund with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with the instruments underlying, the
futures contract. Put options sold by a Fund with respect to futures contracts
will be covered when, among other things, cash or liquid securities are placed
in a segregated account to fulfill the obligation undertaken.
The Established Growth Fund, Aggressive Growth Fund, Emerging Growth
Fund, International Equity Fund, Income Fund and Pennsylvania Bond Fund may each
utilize various index futures to protect against changes in the market value of
the securities in its portfolio or which it intends to acquire. Securities index
futures contracts are based on an index of various types of securities, e.g.,
stocks or long-term corporate bonds. The index assigns relative values to the
securities included in an index, and fluctuates with changes in the market value
of such securities. The contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash based upon the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. The
acquisition or sale of an index futures contract enables a Fund to protect its
assets from fluctuations in prices of certain securities without actually buying
or selling such securities.
In general, the value of futures contracts sold by a Fund to offset
declines in its portfolio securities will not exceed the total market value of
the portfolio securities to be hedged, and futures contracts purchased by a Fund
will be covered by a segregated account consisting of cash or liquid securities
in an amount equal to the total market value of such futures contracts, less the
initial margin deposited therefor.
When buying futures contracts and when writing put options, a Fund will
be required to segregate in a separate account cash and/or liquid securities in
an amount sufficient to meet its obligations. When writing call options, a Fund
will be required to own the financial instrument or futures contract underlying
the option or segregate cash and/or liquid securities in an amount sufficient to
meet its obligations under written calls.
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Interest Rate Swaps. The International Equity Fund may engage in
interest rate swaps in order to attempt to protect its investments from interest
rate fluctuations. The International Equity Fund intends to use interest rate
swaps as a hedge and not as a speculative investment. Interest rate swaps
involve the exchange of the International Equity Fund with another party of
their respective rights to receive interest (e.g., an exchange of fixed rate
payments for floating rate payments). For example, if the International Equity
Fund holds an interest paying security whose interest rate is reset once a year,
it may swap the right to receive at a rate that is reset daily. Such a swap
position would offset changes in the value of the underlying security because of
subsequent changes in interest rates. This would protect the International
Equity Fund from a decline in the value of the underlying security due to rising
rates, but would also limit its ability to benefit from falling interest rates.
The International Equity Fund will enter into interest rate swaps only
on a net basis (i.e., the two payments streams will be netted out, with the
International Equity Fund receiving or paying as the case may be, only the net
amount of the two payments). The net amount of the excess, if any, of the
International Equity Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and an amount of cash
or liquid high grade debt securities having an aggregate net asset value at
least equal to the accrued excess, will be maintained in a segregated account by
the International Equity Fund's custodian bank.
The use of interest rate swaps involves investment techniques and risks
different from those associated with ordinary portfolio security transactions.
If the International Equity Fund Sub-Advisor is incorrect in its forecasts of
market values, interest rates and other applicable factors, the investment
performance of the International Equity Fund will be less favorable than it
would have been if this investment technique were never used. Interest rate
swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to an interest rate swap defaults, the
International Equity Fund's risk of loss consists of the net amount of interest
payments that the International Equity Fund is contractually entitled to
receive.
Zero Coupon Securities. The Income Fund, Government Securities Fund and
Pennsylvania Bond Fund may each invest in zero coupon securities which are debt
securities issued or sold at a discount from their face value which do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified redemption date (or cash payment date). The amount of the discount
varies depending on the time remaining until maturity or cash payment date,
prevailing interest rates, liquidity of the security and perceived credit
quality of the issuer. Zero coupon securities also may take the form of debt
securities that have been stripped of their unmatured interest coupons, the
coupons themselves and receipts or certificates representing interests in such
stripped debt obligations and coupons. The market prices of zero coupon
securities generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit qualities. Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
federal income taxes, a Fund may be required to distribute such income accrued
with respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Short Sales. The Income Fund, Government Securities Fund and
Pennsylvania Bond Fund may from time to time sell securities short. Short sales
are effected when the Fund's Sub-Advisor believes that the price of a particular
security will decline, and involve the sale of a security which a Fund does not
own in the hope of purchasing the same security at a later date at a lower
price. When a Fund sells a security short, it will borrow the same security from
a broker or other institution to complete the sale. A
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Fund may make a profit or incur a loss depending upon whether the market price
of the security sold short decreases or increases between the date of the short
sale and the date on which the Fund must replace the borrowed security. An
increase in the value of a security sold short by a Fund over the price at which
it was sold short will result in a loss to that Fund, and there can be no
assurance that a Fund will be able to close out the position at any particular
time or at an acceptable price.
All short sales must be fully collateralized, and the Income Fund,
Government Securities Fund and Pennsylvania Bond Fund will not sell securities
short if, immediately after and as a result of the sale, the value of all
securities sold short by that Fund exceeds 25% of its total assets.
Foreign Investments. Investments in foreign securities (including
Yankee Bonds, Eurodollar Bonds and Supranational Bonds) for the Established
Growth Fund, Aggressive Growth Fund, Emerging Growth Fund, International Equity
Fund and Income Fund and including ECDs, ETDs, CTDs, Yankee CDs, CCP and
Europaper for the Prime Money Market Fund) may subject these Funds to investment
risks that differ in some respects from those related to investments in
securities of U.S. domestic issuers. Such risks include future adverse political
and economic developments, the possible imposition of withholding taxes on
interest or other investment income, possible seizure, nationalization, or
expropriation of foreign deposits or investments, the possible establishment of
exchange controls or taxation at the source, less stringent disclosure
requirements, less liquid or developed securities markets or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal, interest or dividends on such securities or the purchase or sale
thereof. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks. The Income Fund will acquire securities issued
by foreign branches of U.S. banks, foreign banks, or other foreign issuers only
when the Fund's Sub-Advisor believes that the risks associated with such
instruments are minimal.
Investments in foreign securities will usually involve currencies of
foreign countries, and the value of the assets of a Fund that may invest in
foreign securities as measured in United States dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversions between various currencies. Many European countries have adopted a
single European currency, the euro. On January 1, 1999, the euro became legal
tender for all countries participating in the Economic and Monetary Union
("EMU"). A new European Central Bank has been created to manage the monetary
policy of the new unified region. On the same date, the exchange rates were
irrevocably fixed between the EMU member countries. National currencies will
continue to circulate until they are replaced by euro coins and bank notes by
the middle of 2002. This change is likely to significantly impact the European
capital markets in which the Fund invests
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and may result in the Fund facing additional risks in pursuing its investment
objective. These risks, which include, but are not limited to, uncertainty as to
proper tax treatment of the currency conversion, volatility of currency exchange
rates as a result of the conversion, uncertainty as to capital market reaction,
conversion costs that may affect issuer profitability and creditworthiness, and
lack of participation by some European countries, may increase the volatility of
the Fund's net asset value per share. These or other factors, including
political and economic risks, could cause market disruptions after the
introduction of the euro, and could adversely affect the value of securities
held by the Funds.
The normal currency allocation of the International Equity Fund is
identical to the currency mix of the Benchmark. The International Equity Fund
expects to maintain this normal currency exposure when global currency markets
are fairly priced relative to each other and relative to associated risks. The
International Equity Fund may actively deviate from such normal currency
allocations to take advantage of or to protect the International Equity Fund
from risk and return characteristics of the currencies and short-term interest
rates when those prices deviate significantly from fundamental value. Deviations
from the Benchmark are determined by the International Equity Fund Sub-Advisor
based upon its research.
To manage exposure to currency fluctuations, the International Equity
Fund may alter equity or money market exposures (in its normal asset allocation
mix as previously identified), enter into forward currency exchange contracts,
buy or sell options, futures or options on futures relating to foreign
currencies and may purchase securities indexed to currency baskets. The
International Equity Fund will also use these currency exchange techniques in
the normal course of business to hedge against adverse changes in exchange rates
in connection with purchases and sales of securities. Some of these strategies
may require the International Equity Fund to set aside liquid assets in a
segregated custodial account to cover its obligations. These techniques are
further described below.
The International Equity Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (i.e., "forward foreign currency"
contract or "forward" contract). A forward contact involves an obligation to
purchase or sell a specific currency amount at a future date, which may be any
fixed number of days from the date of the contract, agreed upon by the parties,
at a price set at the time of the contract. The International Equity Fund will
convert currency on a spot basis from time to time and investors should be aware
of the potential costs of currency conversion.
When the International Equity Fund Sub-Advisor believes that the
currency of a particular country may suffer a significant decline against the
U.S. dollar or against another currency, the Fund may enter into a currency
contract to sell, for a fixed amount of U.S. dollars or other appropriate
currency, the amount of foreign currency approximating the value of some or all
of the International Equity Fund's securities denominated in such foreign
currency.
At the maturity of a forward contract, the International Equity Fund
may either sell a portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by repurchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency. The International Equity Fund may realize a
gain or loss from currency transactions.
The International Equity Fund also may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Fund's
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exposure to changes in currency exchange rates. Call options on foreign currency
written by the International Equity Fund will be "covered," which means that the
Fund will own an equal amount of the underlying foreign currency. With respect
to put options on foreign currency written by the International Equity Fund, the
Fund will establish a segregated account with its custodian bank consisting of
cash, U.S. government securities or other high-grade liquid debt securities in
an amount equal to the amount the Fund would be required to pay upon exercise of
the put.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts. The Income Fund and the Pennsylvania Bond Fund may purchase and sell
interest rate futures contracts and options on interest rate futures contracts
as a substitute for a comparable market position or to hedge against adverse
movements in interest rates.
To the extent such Fund has invested in interest rate futures contracts
or options on interest rate futures contracts as a substitute for a comparable
market position, the Fund will be subject to the investment risks of having
purchased the securities underlying the contract.
The Income Fund and the Pennsylvania Bond Fund may each also purchase
call options on interest rate futures contracts to hedge against a decline in
interest rates and may purchase put options on interest rate futures contracts
to hedge its portfolio securities against the risk of rising interest rates.
If a Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities held in that Fund's portfolio
and rates decrease instead, such Fund will lose part or all of the benefit of
the increased value of the securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
These sales of securities may, but will not necessarily, be at increased prices
which reflect the decline in interest rates.
The Income Fund and the Pennsylvania Bond Fund may sell call options on
interest rate futures contracts to partially hedge against declining prices of
its portfolio securities. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in that Fund's portfolio holdings. A Fund may sell put options on
interest rate futures contracts to hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contracts. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option sold by a Fund is exercised, the Fund will
incur a loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, a Fund's
losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The Income Fund and the Pennsylvania Bond Fund also may each sell
options on interest rate futures contracts as part of closing purchase
transactions to terminate its options positions. No assurance can be given that
such closing transactions can be effected or that there will be a correlation
between price movements in the options on interest rate futures and price
movements in that Fund's portfolio securities which are the subject of the
hedge. In addition, a Fund's purchase of such options will be based upon
predictions as to anticipated interest rate trends, which could prove to be
inaccurate.
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In general, the value of futures contracts sold by a Fund to offset
declines in its portfolio securities will not exceed the total market value of
the portfolio securities to be hedged, and futures contracts purchased by a Fund
will be covered by a segregated account consisting of cash or liquid securities
in an amount equal to the total market value of such futures contracts, less the
initial margin deposited therefor.
When buying futures contracts and when writing put options, a Fund will
be required to segregate in a separate account cash and/or liquid securities in
an amount sufficient to meet its obligations. When writing call options, a Fund
will be required to own the financial instrument or futures contract underlying
the option or segregate cash and/or liquid securities in an amount sufficient to
meet its obligations under written calls.
The following risks apply to the Pennsylvania Bond Fund.
Risks of Non-Diversification. Potential Shareholders should consider
the fact that the Pennsylvania Bond Fund's portfolio consists primarily of
securities issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize that the Pennsylvania Bond
Fund's performance is closely tied to general economic conditions within the
Commonwealth as a whole and to economic conditions within particular industries
and geographic areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal operating
fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax
increases and spending decreases have resulted in surpluses the last four years;
as of June 30, 1996, the General Fund had a surplus of $635.2 million. The
deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly into
medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of nonagricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Pennsylvania Exempt Securities in the Pennsylvania Bond
Fund or the ability of the respective obligors to make payments of interest and
principal due on such Securities.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suits relating to the following matters: (i) the ACLU has
filed suit in federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia
because of that settlement. After its earlier denial of class certification was
reversed by the Third Circuit Court of Appeals, the district court granted class
certification to the ACLU and the parties are proceeding with discovery. (No
available estimate of potential liability); (ii) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for county funding of the judicial system
to be in conflict with the constitution of the Commonwealth, but stayed judgment
pending enactment by the legislature of funding consistent with the opinion, and
the legislature has yet to consider legislation implementing the judgment. In
1997, the Court established a tripartite committee to develop an implementation
plan; (iii) litigation has been filed in both state and federal court by an
association of rural and small schools and several individual school districts
and parents
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challenging the constitutionality of the Commonwealth's system for funding local
school districts -- the federal case has been stayed pending the resolution of
the state case, and the trial, briefing and argument have been completed as of
September, 1997, and the presiding judge has taken the case under advisement (no
available estimates of potential liability); (iv) Envirotest/Synterra Partners
("Envirotest") has filed suit against the Commonwealth asserting that it
sustained damages in excess of $350 million, as a result of investments it made
in reliance on a contract to conduct emissions testing before the emission
testing program was suspended. Envirotest has entered into a Standstill
Agreement with the Commonwealth pursuant to which Envirotest will receive $145
million over four years through 1998; (v) the Commonwealth of Pennsylvania, its
governor, the City of Philadelphia and its mayor were joined in an enforcement
action commenced in 1973 against the School District of Philadelphia pursuant to
the Pennsylvania Human Relations Act. The enforcement action was pursued to
remedy unintentional segregation in the public schools in Philadelphia. The
Supreme Court of Pennsylvania has outlined a briefing schedule to resolve this
matter (no available estimates of potential liability); and (vi) in 1997, a
group including residents, non-profit groups, the City of Philadelphia and the
School District of Philadelphia brought an action seeking a declaratory judgment
against the Commonwealth for failing to fulfill its obligation to provide an
adequate educational system for the City of Philadelphia (no available estimates
of potential liability).
Although there can be no assurance that such conditions will continue,
the Commonwealth's general obligation bonds are currently rated AA- by Standard
& Poor's Corporation ("S&P") and A1 by Moody's, and Philadelphia's and
Pittsburgh's general obligation bonds are currently rated BBB- and BBB+
respectively by S&P and Baa and Baa1 respectively by Moody's.
The City of Philadelphia (the "City") experienced a series of General
Fund deficits for Fiscal Years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term solution
for its economic difficulties. The audited balance of the City's General Fund as
of June 30, 1996 was a surplus of $118.5 million up from a surplus of
approximately $80.5 million as of June 30, 1995.
In recent years an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.76
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. PICA
provides assistance regarding the City's finances. The City is currently
operating under a five year plan approved by PICA in 1996. PICA's power to issue
further bonds to finance capital projects expired on December 31, 1994. PICA's
authority to issue bonds to finance cash flow deficits expired December 31,
1996, and its authority to refund existing debt will not expire.
The Pennsylvania Bond Fund's classification as "non-diversified" means
that the proportion of the Pennsylvania Bond Fund's assets that may be invested
in the securities of a single issuer is not limited by the 1940 Act. However,
the Pennsylvania Bond Fund intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which requires the Pennsylvania Bond Fund
generally to invest as of the end of each fiscal quarter, with respect to 50% of
its total assets, not more than 5% of such assets in the obligations of a single
issuer; as to the remaining 50% of its total assets, the Pennsylvania Bond Fund
is not so restricted. In no event, however, may the Pennsylvania Bond Fund
invest more than 25% of its total assets in the obligations of any one issuer as
of the end of each fiscal quarter. Since a relatively high percentage of the
Pennsylvania Bond Fund's assets may be invested in the obligations of a limited
number of issuers, some of which may be within the same economic sector, the
Pennsylvania Bond Fund's portfolio securities may be more susceptible to any
single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company.
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Municipal Lease Obligations. Certain municipal lease/purchase
obligations in which the Pennsylvania Bond Fund may invest may contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. Although "non-appropriation" lease/purchase
obligations are secured by the leased property, disposition of the leased
property in the event of foreclosure might prove difficult. In evaluating the
credit quality of a municipal lease/purchase obligation that is unrated, the
Sub-Advisor will consider, on an ongoing basis, a number of factors including
the likelihood that the issuing municipality will discontinue appropriating
funding for the leased property.
The following risk applies to the Lifestyle Funds.
Affiliated Persons. In managing the Funds, the Advisor and Sub-Advisor
will have the authority to select and substitute Underlying Funds. The Advisor
and Sub-Advisor are subject to conflicts of interest in allocating Fund assets
among the various Underlying Funds both because the fees payable to it and/or
its affiliates by some Underlying Funds are higher than the fees payable by
other Underlying Funds and because the Advisor and Sub-Advisor and their
affiliates are also responsible for managing the Underlying Funds. The Trustees
and officers of the Trust may also have conflicting interests in fulfilling
their fiduciary duties to both the Funds and the Underlying Funds.
BANK OBLIGATIONS. Each Fund, other than the Treasury Money Market Fund
and the Government Securities Fund, may invest in bank obligations such as
bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by the Funds will be those guaranteed by
domestic and foreign banks having, at the time of investment, capital, surplus,
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and demand and time deposits will be those of domestic and foreign banks and
savings and loan associations, if (a) at the time of investment the depository
institution has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
The Prime Money Market Fund, Established Growth Fund, Aggressive Growth
Fund, Emerging Growth Fund, International Equity Fund, and the Income Fund may
also invest in ECDs, Yankee CDs, ETDs, and Canadian Time Deposits, which are
basically the same as ETDs except they are issued by Canadian offices of major
Canadian banks.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
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The Funds, other than the Treasury Money Market Fund and the Government
Securities Fund, will purchase commercial paper consisting of issues rated at
the time of purchase by one or more NRSROs in one of the two highest rating
categories for short-term debt obligations. Each such Fund may also invest in
commercial paper that is not rated but that is determined by the respective
Sub-Advisor to be of comparable quality to instruments that are so rated by an
NRSRO. For a description of the rating symbols of the NRSROs, see the Appendix.
The Prime Money Market Fund may also invest, subject to the foregoing quality
criteria, in CCP.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes in which the Prime Money Market Fund, the Income Fund, the Government
Securities Fund and the Pennsylvania Bond Fund may invest are unsecured demand
notes that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate according to the terms of the instrument.
Because master demand notes are direct lending arrangements between a Fund and
the issuer, they are not normally traded. Although there is no secondary market
in the notes, the Fund may demand payment of principal and accrued interest at
any time within 30 days. While such notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial and other business concerns), must
satisfy, for purchase by a Fund, the same criteria as set forth above for
commercial paper. The Sub-Advisor will consider the earning power, cash flow,
and other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. In
determining average weighted portfolio maturity, a long-term variable amount
master demand note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next interest rate adjustment or the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
although the Treasury Money Market Fund currently expects to invest only in
those obligations which are backed by the full faith and credit of the U.S.
Government. Obligations of certain agencies and instrumentalities of the U.S.
Government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Each Fund may also invest in the following types of U.S. Treasury
securities: direct obligations issued by the U.S. Treasury including bills,
notes and bonds which differ from each other only in interest rates, maturities
and times of issuance; U.S. Treasury securities that have been stripped of their
unmatured interest coupons (which typically provide for interest payments
semi-annually); interest coupons that have been stripped from such U.S. Treasury
securities; receipts and certificates for such stripped debt obligations and
stripped coupons (collectively, "Stripped Treasury Securities"); and in
repurchase agreements collateralized by such securities. Stripped Treasury
Securities will include (1) coupons that have been stripped from U.S. Treasury
bonds, which may be held through the Federal Reserve Bank's book-entry system
called "Separate Trading of Registered Interest and Principal of Securities"
("STRIPS") or through a program entitled "Coupon Under Book-Entry Safekeeping"
("CUBES").
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Treasury bills have maturities of one year or less; Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
greater than ten years. Stripped Treasury Securities are sold at a deep discount
because the buyer of those securities receives only the right to receive a
future fixed payment (representing principal or interest) on the security and
does not receive any rights to periodic interest payments on the security.
EXEMPT SECURITIES. The assets of the Pennsylvania Bond Fund will be
primarily invested in Exempt Securities. Exempt Securities include debt
obligations issued by governmental entities to obtain funds for various public
purposes, such as the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general operating expenses,
and the extension of loans to other public institutions and facilities. Private
activity bonds that are issued by or on behalf of public authorities to finance
various privately-operated facilities are included within the term Exempt
Securities, only if the interest paid thereon is exempt from both Pennsylvania
income taxes and federal taxes, although such interest may be treated as a
preference item for purposes of the federal alternative minimum tax.
Among other types of Exempt Securities, the Pennsylvania Bond Fund may
purchase short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, Project Notes, Tax-Exempt
Commercial Paper, Construction Loan Notes and other forms of short-term
tax-exempt loans. Such instruments are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In addition, the Pennsylvania Bond Fund may invest in other
types of tax-exempt instruments, such as municipal bonds, private activity
bonds, and pollution control bonds.
Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the
federal government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.
The two principal classifications of Exempt Securities consist of
"general obligation" and "revenue" issues. The Pennsylvania Bond Fund may also
acquire "moral obligation" issues, which are normally issued by special purpose
authorities. There are, of course, variations in the quality of Exempt
Securities, both within a particular classification and between classifications,
and the yields on Exempt Securities depend upon a variety of factors, including
the financial condition of the issuer, general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Ratings represent the opinions of an NRSRO as to the
quality of Exempt Securities. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Exempt Securities with
the same maturity, interest rate and rating may have different yields, while
Exempt Securities of the same maturity and interest rate with different ratings
may have the same yield. Subsequent to purchase, an issue of Exempt Securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase. The Sub-Advisor will consider such an event in
determining whether the Pennsylvania Bond Fund should continue to hold the
obligation.
An issuer's obligations under its Exempt Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet
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its obligations for the payment of interest on and principal of its Exempt
Securities may be materially adversely affected by litigation or other
conditions.
The Pennsylvania Bond Fund may also invest in municipal lease
obligations or installment purchase contract obligations. Municipal lease
obligations or installment purchase contract obligations (collectively, "lease
obligations") have special risks not ordinarily associated with Exempt
Securities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation ordinarily is based by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. The staff of the Commission currently considers certain lease
obligations to be illiquid. Determination as to the liquidity of such securities
is made by the Sub-Advisor. The Pennsylvania Bond Fund will not invest more than
15% of the value of its net assets in lease obligations that are illiquid and in
other illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES. The Prime Money Market Fund,
U.S. Treasury Fund, Income Fund, Government Securities Fund and Pennsylvania
Bond Fund may acquire variable and floating rate securities, subject to such
Fund's investment objectives, policies and restrictions. A variable rate
security is one whose terms provide for the adjustment of its interest rate on
set dates and which, upon such adjustment, can reasonably be expected to have a
market value that approximates its par value or amortized cost, as the case may
be. A floating rate security is one whose terms provide for the adjustment of
its interest rate whenever a specified interest rate changes and which, at any
time, can reasonably be expected to have a market value that approximates its
par value or amortized cost, as the case may be. Such securities, that are not
obligations of the U.S. Government or its agencies or instrumentalities, are
frequently not rated by NRSROs however, unrated variable and
floating rate securities purchased by a Fund will be determined by the
Sub-Advisor to be of comparable quality at the time of purchase to rated
instruments eligible for purchase under that Fund's investment policies. In
making such determinations, the Sub-Advisor will consider the earning power,
cash flow and other liquidity ratios of the issuers of such securities (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
security purchased by a Fund, the Fund may resell the security at any time to a
third party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate security in the
event the issuer of the security defaulted on its payment obligations and the
Fund could, as a result or for other reasons, suffer a loss to the extent of the
default. To the extent that there exists no readily available market for such
security and the Fund is not entitled to receive the principal amount of a
security within seven days, such a security will be treated as an illiquid
security for purposes of calculation of that Fund's limitation on investments in
illiquid securities, as set forth in its investment restrictions. Variable or
floating rate securities may be secured by bank letters of credit.
With respect to the Prime Money Market and U.S. Treasury Funds, in the
event the interest rate of a variable or floating rate obligation is established
by reference to an index or an interest rate that may from time to time lag
behind other market interest rates, there is the risk that the market value of
such obligation, on readjustment of its interest rate, will not approximate its
amortized cost which could adversely affect such Fund's ability to maintain a
stable net asset value. In such an instance, the Advisor or Sub-Advisor will
seek to sell such security to the extent it can do so in an orderly fashion
given current market conditions.
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To the extent that the Prime Money Market Fund or U.S. Treasury Fund
holds a security for which it is not entitled to receive the principal amount
within seven days of demand and for which no readily available market exists,
such a security will be treated as an illiquid security for purposes of
calculation of the 10% limitation on such securities as set forth under
Restricted Securities.
In the event the interest rate of a variable or floating rate
obligation is established by reference to an index or an interest rate that may
from time to time lag behind other market interest rates, there is the risk that
the market value of such obligation, on readjustment of its interest rate, will
not approximate its par value, or, with respect to a money market fund, its
amortized cost.
Variable and floating rate obligations for which no readily available
market exists and which are not subject to a demand feature that will permit the
Income, Government Securities and Pennsylvania Bond Funds to receive payment of
the principal within seven days after demand by that Fund, will be considered
illiquid and therefore, together with other illiquid securities held by such
Fund, will not exceed 15% of such Fund's net assets.
Variable or floating rate securities invested in by the Prime Money
Market Fund and the Treasury Money Market Fund may have maturities of more than
397 days, to the extent permitted under SEC regulations.
RESTRICTED SECURITIES. Securities in which the Prime Money Market Fund,
the Treasury Fund, Aggressive Growth Fund, the Emerging Growth Fund, the
International Equity Fund and the Income Fund may invest include securities
issued by corporations without registration under the Securities Act of 1933, as
amended (the "1933 Act"), such as securities issued in reliance on the so-called
"private placement" exemption from registration which is afforded by Section
4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are
restricted as to disposition under the Federal securities laws, and generally
are sold to institutional investors such as a Fund who agree that they are
purchasing the securities for investment and not with a view to public
distribution. Any resale must also generally be made in an exempt transaction.
Section 4(2) securities are normally resold to other institutional investors
through or with the assistance of the issuer or investment dealers who make a
market in such Section 4(2) securities, thus providing liquidity. Any such
restricted securities will be considered to be illiquid for purposes of a Fund's
limitations on investments in illiquid securities unless the Sub-Advisor has
determined such securities to be liquid.
Pursuant to procedures adopted by the Board of Trustees of the Trust, a
Sub-Advisor may determine Section 4(2) securities to be liquid if such
securities are eligible for resale under Rule 144A under the 1933 Act and are
readily saleable. Rule 144A permits the Prime Money Market Fund, the Aggressive
Growth Fund, the Emerging Growth Fund, the International Equity Fund and the
Income Fund to purchase securities which have been privately placed and resell
such securities to certain qualified institutional buyers without restriction.
For purposes of determining whether a Rule 144A security is readily saleable,
and therefore liquid, a Sub-Advisor must consider, among other things, the
frequency of trades and quotes for the security, the number of dealers willing
to purchase or sell the security and the number of potential purchasers, dealer
undertakings to make a market in the security,
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and the nature of the security and marketplace trades of such security. However,
investing in Rule 144A securities, even if such securities are initially
determined to be liquid, could have the effect of increasing the level of the
Prime Money Market Fund's, Aggressive Growth Fund's, the Emerging Growth Fund's,
the International Equity Fund's and the Income Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Income Fund and the
Government Securities Fund may, consistent with its investment objective and
policies, invest in mortgage-related securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. In addition, the Income Fund
may also invest in mortgage-related securities issued by non-governmental
entities.
Mortgage-backed securities, for purposes of the Income Fund's and the
Government Securities Fund's Prospectus and this Statement of Additional
Information, represent pools of mortgage loans assembled for sale to investors
by various governmental agencies such as the GNMA and government-related
organizations such as FNMA and FHLMC, as well as by non-governmental issuers
such as commercial banks, savings and loan institutions, mortgage bankers and
private mortgage insurance companies in the case of the Income Fund. Although
certain mortgage-related securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, is not
so secured. If a Fund purchases a mortgage-related security at a premium, that
portion may be lost if there is a decline in the market value of the security
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the securities are prone to
prepayment, thereby shortening the average life of the security and shortening
the period of time over which income at the higher rate is received. Conversely,
when interest rates are rising, the rate of prepayment tends to decrease,
thereby lengthening the average life of the security and lengthening the period
of time over which income at the lower rate is received. For these and other
reasons, a mortgage-related security's average maturity may be shortened or
lengthened as a result of interest rate fluctuations and, therefore, it is not
possible to predict accurately the security's return to a Fund. In addition,
regular payments received in respect of mortgage-related securities include both
interest and principal. No assurance can be given as to the return a Fund will
receive when these amounts are reinvested.
The Income Fund may invest in mortgage-backed securities which are CMOs
structured on pools of mortgage pass-through certificates or mortgage loans.
Mortgage-backed securities will be purchased only if rated in the four highest
bond rating categories assigned by one or more appropriate NRSROs, or, if
unrated, which the Sub-Advisor deems to be of comparable quality to securities
so rated.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely
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the obligations of the FNMA and are not backed by or entitled to the full faith
and credit of the United States. The FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by FHLMC include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When the FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
Mortgage-backed and asset-based securities have certain characteristics
which are different from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a Fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Income Fund may invest
a portion of its assets in derivative mortgage-backed securities such as
stripped mortgage-backed securities which are highly sensitive to changes in
prepayment and interest rates.
Mortgage-backed securities and asset-backed securities, like all fixed
income securities, generally decrease in value as a result of increases in
interest rates. In addition, although generally the value of fixed-income
securities increases during periods of falling interest rates and, as stated
above, decreases during periods of rising interest rates, as a result of
prepayments and other factors, this is not always the case with respect to
mortgage-backed securities and asset-backed securities.
Although the extent of prepayments of a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of declining interest rates.
Accordingly, amounts available for reinvestment by a Fund are likely to be
greater during a period of declining interest rates and, as a result, likely to
be reinvested at lower interest rates than during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors,
such as changes in credit use and payment patterns resulting from social, legal
and economic factors, will predominate. Mortgage-backed securities and
asset-backed securities generally decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
There are certain risks associated specifically with CMOs. CMOs issued
by private entities are not U.S. government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, as stated above, the Income Fund will
invest only in CMOs which are rated in one of the
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four highest rating categories by an NRSRO or, if unrated, are determined by the
Sub-Advisor to be of comparable quality. Also, a number of different factors,
including the extent of prepayment of principal of the underlying obligations,
affect the availability of cash for principal payments by the CMO issuer on any
payment date and, accordingly, affect the timing of principal payments on each
CMO class.
Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured, and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
The cash flows and yields on IOs and POs are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
obligations. For example, a rapid or slow rate of principal payments may have a
material adverse effect on the yield of IOs or POs, respectively. If the
underlying obligations experience greater than anticipated prepayments of
principal, an investor may fail to recoup fully its initial investment in an IO.
Furthermore, if the underlying obligations experience slower than anticipated
prepayments of principal, the yield of a PO will be affected more severely than
would be the case with a traditional mortgage-backed security. IOs and POs have
exhibited large price changes in response to changes in interest rates and are
considered to be volatile in nature.
WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a
"when-issued" basis (I.E., for delivery beyond the normal settlement date at a
stated price and yield). When a Fund agrees to purchase securities on a
"when-issued" basis, the Fund's custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, a Fund's custodian will set aside portfolio securities to
satisfy the purchase commitment, and in such a case, the Fund may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of that Fund's
commitment. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. In addition, because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described above, such Fund's liquidity and the ability of the
Sub-Advisor to manage it might be affected in the event its commitments to
purchase "when-issued" securities ever exceeded 25% of its total assets. Under
normal market conditions, however, each Fund's commitment to purchase
"when-issued" or "delayed-delivery" securities will not exceed 25% of its total
assets.
When a Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
that Fund's incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. Each Fund will engage in "when-issued" delivery
transactions only for the purpose of acquiring portfolio securities consistent
with such Fund's investment objectives and policies and not for investment
leverage. If the Pennsylvania Bond Fund sells a "when-issued" or
"delayed-delivery" security before delivery, any gain would not be tax-exempt.
REAL ESTATE INVESTMENT TRUSTS. The Established Growth Fund, the
Aggressive Growth Fund and the Emerging Growth Fund may invest in equity REITs.
REITs pool investors' funds for investment primarily in commercial real estate
properties. Investment in REITs may subject the Funds to certain risks. REITs
may be affected by changes in the value of the underlying property owned by the
trust. REITs are dependent upon specialized management skill, may not be
diversified and are subject to the risks of financing projects. REITs are also
subject to heavy cash flow dependency, defaults by
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borrowers, self liquidation and the possibility of failing to qualify for the
beneficial tax treatment available to REITs under the Internal Revenue Code and
to maintain its exemption from the 1940 Act. As a shareholder in a REIT, each
Fund would bear, along with other shareholders, its pro rata portion of the
REIT's operating expenses. These expenses would be in addition to the advisory
and other expenses each Fund bears directly in connection with its own
operations.
REPURCHASE AGREEMENTS. Securities held by each Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities from banks and registered broker-dealers which the
Sub-Advisor deems creditworthy under guidelines approved by the Trust's Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price would generally equal
the price paid by the 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 will be required
to maintain continually the value of collateral held pursuant to the agreement
at not less than the repurchase price (including accrued interest). This
requirement will be continually monitored by the Sub-Advisor. If the seller were
to default on its repurchase obligation or become insolvent, the Fund would
suffer a loss to the extent that the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price under the agreement, or
to the extent that the disposition of such securities by such Fund were delayed
pending court action. Additionally, there is no controlling legal precedent
confirming that a Fund would be entitled, as against a claim by such seller or
its receiver or trustee in bankruptcy, to retain the underlying securities.
Securities subject to repurchase agreements must be of the same type and quality
as those in which a Fund may invest directly. Securities subject to repurchase
agreements will be held by the Fund's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system.
REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow funds by entering
into reverse repurchase agreements in accordance with its investment
restrictions. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase the securities at a mutually agreed-upon date and price. At the
time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid securities consistent with that Fund's investment restrictions having a
value equal to the repurchase price (including accrued interest), and will
subsequently continually monitor the account to ensure that such equivalent
value is maintained at all times. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which that Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act and therefore a form of leveraging. A Fund may experience a negative impact
on its net asset value if interest rates rise during the term of a reverse
repurchase agreement. A Fund generally will invest the proceeds of such
borrowings only when such borrowings will enhance the Fund's liquidity or when
the Fund reasonably expects that the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction.
Except as permitted by the 1940 Act, the Trust will not execute
portfolio transactions through, acquire portfolio securities issued by, make
savings deposits in, or enter into repurchase or reverse repurchase agreements
with the Advisor, Sub-Advisors, BISYS, or their affiliates.
SHORT SALES. Each of the Income Fund, the Government Securities Fund
and the Pennsylvania Bond Fund may from time to time sell securities short.
Short sales are effected when it is believed that the price of a particular
security will decline, and involves the sale of a security which the Fund does
not own in the hope of purchasing the same security at a later date at a lower
price. To make delivery to the buyer, the Fund must borrow the security, and the
Fund is obligated to return the security to the lender, which is accomplished by
a later purchase of the security by that Fund. The frequency of short sales will
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vary substantially in different periods, and it is not intended that any
specified portion of a Fund's assets will as a matter of practice be invested in
short sales.
At any time that a Fund has an open short sale position, such Fund is
required to segregate with its custodian (and to maintain such amount until the
Fund replaces the borrowed security) an amount of cash or U.S. Government
securities or other liquid securities equal to the difference between (i) the
current market value of the securities sold short and (ii) any cash or
securities required to be deposited with the broker in connection with the short
sale (not including the proceeds from the short sale). As a result of these
requirements, a Fund will not gain any leverage merely by selling short, except
to the extent that it earns interest on the immobilized cash or securities while
also being subject to the possibility of gain or loss from the securities sold
short. A Fund's possible losses may exceed the total amount of cash or liquid
securities deposited with the broker (not including the proceeds of the short
sale) and segregated by the Fund.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund purchases the security to replace the borrowed security. A Fund will
realize a gain if the security declines in price between those dates. The amount
of any gain will be decreased and the amount of any loss increased by any
premium or interest the Fund may be required to pay in connection with a short
sale. It should be noted that possible losses from short sales differ from those
that could arise from a cash investment in a security in that the former may be
limitless while the latter can only equal the total amount of the Fund's
investment in the security.
HEDGING TRANSACTIONS. Hedging transactions, including the use of
options and futures, in which certain of the Funds are authorized to engage,
have risks associated with them including possible default by the other party to
the transaction, illiquidity and, to the extent the Sub-Advisor's view as to
certain market movements is incorrect, the risk that the use of such hedging
transactions could result in losses greater than if they had not been used.
Use of put and call options may result in losses to a Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation a Fund can
realize on its investments or cause a Fund to hold a security it might otherwise
sell. The use of options and futures transactions entails certain other risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund create the possibility that losses on the hedging instrument may be greater
than gains in the value of such Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of hedging transactions would reduce net asset
value, and possible income, and such losses can be greater than if the hedging
transactions had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of
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options discussed in greater detail below. In addition, many hedging
transactions involving options require segregation of a Fund's assets in special
accounts, as described further below.
With certain exceptions, exchange-listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options are cash settled for the net
amount, if any, by which the option is "in-the-money" (i.e., where the value of
the underlying instrument exceeds, in the case of a call option, or is less
than, in the case of a put option, the exercise price of the option) at the time
the option is exercised. Frequently, rather than taking or making delivery of
the underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option. A Fund's ability to close out
its position as a purchaser or seller of a put or call option is dependent in
part, upon the liquidity of the option market. In addition, the hours of trading
for listed options may not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the options markets close
before the markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Exchange-listed options generally have standardized terms and
performance mechanics unlike over-the-counter traded options. The Funds
currently expect to purchase and sell only exchange-traded options.
Exchange-traded options generally are guaranteed by the clearing agency which is
the issuer or counterparty to such options. This guarantee usually is supported
by a daily payment system (i.e., variation margin requirements) operated by the
clearing agency in order to reduce overall credit risk. As a result, unless the
clearing agency defaults, there is generally relatively little counterparty
credit risk associated with options purchased on an exchange.
All options written by a Fund must be "covered" (i.e., a Fund must own
the securities or futures contract subject to a call option or must meet the
asset segregation requirements) as long as the call is outstanding. Even though
a Fund will receive the option premium to help protect it against loss, a call
option written by a Fund exposes such Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require such Fund to hold a security
or instrument which it might otherwise have sold. With respect to put options
written by a Fund, such Fund will place liquid securities in a segregated
account to cover its obligations under such put option and will monitor the
value of the assets in such account and its obligations under the put option
daily.
FUTURES CONTRACTS. The Established Growth, Aggressive Growth, Emerging
Growth, International Equity, Income, and Pennsylvania Bond Funds may each enter
into futures contracts. This investment technique is designed primarily to act
as a substitute for a position in the underlying security and to hedge against
anticipated future changes in market conditions or interest rates which
otherwise might adversely affect the value of securities which such Fund holds
or intends to purchase. For example, when interest rates are expected to rise or
market values of portfolio securities are expected to fall, a Fund can seek
through the sale of futures contracts to offset a decline in the value of its
portfolio securities. When interest rates are expected to fall or market values
are expected to rise, a Fund, through the purchase of such contracts, can
attempt to secure better rates or prices for such Fund than might later be
available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period.
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Futures transactions involve brokerage costs and require a Fund to
segregate liquid assets, such as cash, U.S. Government securities or other
liquid obligations, to cover its performance under such contracts. A Fund may
lose the expected benefit of futures transactions if interest rates, securities
prices or foreign exchange rates move in an unanticipated manner. Such
unanticipated changes may also result in poorer overall performance than if such
Fund had not entered into any futures transactions. In addition, the value of a
Fund's futures positions may not prove to be perfectly or even highly correlated
with the value of its portfolio securities, limiting the Fund's ability to hedge
effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
REGULATORY RESTRICTIONS. To the extent required to comply with
Securities and Exchange Commission Release No. IC-10666, when purchasing a
futures contract or writing a put option, each Fund will maintain in a
segregated account cash or liquid securities equal to the value of such
contracts.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being classified as a "commodity
pool operator," a Fund will not enter into a futures contract or purchase an
option thereon if immediately thereafter the initial margin deposits for futures
contracts held by such Fund plus premiums paid by it for open options on futures
would exceed 5% of the liquidation value of such Fund's total assets after
taking into account unrealized profits and unrealized losses on any contracts
entered into. The Funds will not engage in transactions in futures contracts or
options thereon for speculation, but only to attempt to hedge against changes in
market conditions affecting the values of securities which such Fund holds or
intends to purchase.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
securities issued by other investment companies. In addition, each Fund, other
than the Prime Money Market Fund and the Treasury Money Market Fund, may invest
in money market funds advised by the Advisors. Each Fund other than the
Lifestyle Funds currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by such Fund. As a shareholder of another investment
company, a Fund would bear, along with other shareholders, its pro rata portion
of that company's expenses, including advisory fees. These expenses would be in
addition to the advisory and other expenses that such Fund bears directly in
connection with its own operations. Investment companies in which the Funds may
invest may also impose a sales or distribution charge in connection with the
purchase or redemption of their shares and other types of commissions or
charges. Such charges will be payable by such Fund and, therefore, will be borne
directly by shareholders of such Fund. In order to avoid the imposition of
additional fees as a result of investing in shares of a Governor money market
fund, the Advisor, Sub-Advisor, BISYS, and Governors Group Advisors, Inc. and
BISYS Ohio, as the Funds' administrators, and their affiliates will reduce their
fees charged to a Fund other than the Lifestyle Funds by an amount equal to the
fees charged by such service providers based on a percentage of that Fund's
assets attributable to such Fund's investment in the Governor money market fund.
Investment Restrictions
The Funds' investment objectives are non-fundamental policies and may
be changed without a vote of the shareholders of the applicable Fund. The
following investment restrictions may be changed only by a vote of the majority
of the outstanding Shares of a Fund (as defined under "ADDITIONAL INFORMATION -
Vote of a Majority of the Outstanding Shares").
The Prime Money Market and Treasury Money Market Funds will not:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of
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the Fund's total assets would be invested in such issuer or the Fund would hold
more than 10% of the outstanding voting securities of the issuer, except that
25% or less of the Fund's total assets may be invested without regard to such
limitations. There is no limit to the percentage of assets that may be invested
in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
2. Purchase any securities which would cause more than 25% of the
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements secured by obligations of the U.S. Government, its
agencies or instrumentalities; (b) with respect to the Prime Money Market Fund
there is no limitation with respect to domestic bank certificates of deposit or
bankers' acceptances, and repurchase agreements secured by bank instruments; (c)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents; and (d) utilities will be divided according to
their services. For example, gas, gas transmission, electric and gas, electric,
and telephone will each be considered a separate industry.
3. Borrow money or issue senior securities except that each Fund may
enter into reverse repurchase agreements and may otherwise borrow money or issue
senior securities as and to the extent permitted by the 1940 Act or any rule,
order or interpretation thereunder. (The 1940 Act currently permits each Fund to
borrow up to one-third the value of its total assets at the time of such
borrowing.) So long as the Fund's borrowings, including reverse repurchase
agreements and dollar roll agreements, exceed 5% of such Fund's total assets,
the Fund will not acquire any portfolio securities.
4. Make loans, except that the Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, make time deposits with financial institutions and enter
into repurchase agreements.
In order to comply with Securities and Exchange Commission regulations
relating to money market funds, the Prime Money Market and Treasury Money Market
Funds will limit investments in the securities of any single issuer (other than
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by such securities)
to nor more than 5% of the value of their total assets at the time of purchase,
except for 25% of the value of their total assets which may be invested in First
Tier Securities of any one issuer for a period of up to three business days.
The following additional investment restriction may be changed without
the vote of a majority of the outstanding Shares of the applicable Fund. Each
Fund may not purchase or otherwise acquire any security if, as a result, more
than 10% of its net assets would be invested in securities that are illiquid.
For purposes of this investment restriction, illiquid securities include
securities which are not readily marketable and repurchase agreements with
maturities in excess of seven days.
The Established Growth, Aggressive Growth, Emerging Growth,
International Equity, Income, Government Securities and Lifestyle Funds will
not:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government (and "regulated investment companies" as
defined in the Code for each Lifestyle Fund and the International Equity Fund),
its agencies or instrumentalities, if, immediately after such purchase, more
than 5% of the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of the outstanding voting securities of the issuer,
except that 25% or less of the Fund's total assets may be invested without
regard to such limitations. There is no limit to the percentage of assets that
may be invested in U.S. Treasury bills, notes, or other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
2. Purchase any securities which would cause more than 25% of the
Fund's total assets at the time of purchase to be invested in securities of one
or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
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issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements secured by obligations of the U.S. Government, its
agencies or instrumentalities (and "regulated investment companies" as defined
in the Code for each Lifestyle Fund and the International Equity Fund); (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents; (c) with respect to the Established Growth Fund,
the Emerging Growth Fund, the International Equity Fund, the Income Fund and the
Government Securities Fund, utilities will be divided according to their
services (for example, gas, gas transmission, electric and gas, electric, and
telephone will each be considered a separate industry); and (d) with respect to
the Aggressive Growth Fund and Emerging Growth Fund, technology companies will
be divided according to their services (for example, medical devices,
biotechnology, semi-conductor, software and communications will each be
considered a separate industry).
The Pennsylvania Bond Fund will not:
Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, if at the
end of each fiscal quarter, (a) more than 5% of the Fund's total assets (taken
at current value) would be invested in such issuer (except that up to 50% of the
Fund's total assets may be invested without regard to such 5% limitation), and
(b) more than 25% of its total assets (taken at current value) would be invested
in securities of a single issuer. There is no limit to the percentage of assets
that may be invested in U.S. Treasury bills, notes, or other obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. For
purposes of this limitation, a security is considered to be issued by the
governmental entity (or entities) whose assets and revenues back the security,
or, with respect to a private activity bond that is backed only by the assets
and revenues of a non-governmental user, such non-governmental user.
In addition, the Established Growth, Aggressive Growth, Emerging
Growth, International Equity, Income, Government Securities, Pennsylvania Bond
and Lifestyle Funds will not:
1. Borrow money or issue senior securities except that each Fund may
enter into reverse repurchase agreements and may otherwise borrow money or issue
senior securities as and to the extent permitted by the 1940 Act or any rule,
order or interpretation thereunder. (The 1940 Act currently permits each Fund to
borrow up to one-third the value of its total assets at the time of such
borrowing.)
2. Make loans, except that the Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, make time deposits with financial institutions and enter
into repurchase agreements.
The following additional investment restriction may be changed without
the vote of a majority of the outstanding Shares of a Fund: each Fund may not
purchase or otherwise acquire any security if, as a result, more than 15% of its
net assets would be invested in securities that are illiquid.
In addition to the investment restrictions set forth above, each Fund
may not:
1. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities, except as may be
necessary to make margin payments in connection with derivative securities
transactions, and except to the extent disclosed in the current prospectus or
statement of additional information of such Fund;
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<PAGE> 140
2. Underwrite the securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities";
3. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein are not prohibited by this restriction); and
4. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current prospectus or statement of additional
information of such Fund.
The following additional investment restrictions may be changed without
the vote of a majority of the outstanding Shares of the Funds. Each Fund may
not:
1. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, and (b)
to the extent permitted by the 1940 Act, or pursuant to any exemptions
therefrom;
2. Mortgage or hypothecate the Fund's assets in excess of one-third of
such Fund's total assets.
3. None of the Prime Money Market Fund, Treasury Money Market Fund,
Established Growth Fund, Aggressive Growth Fund, Emerging Growth Fund, or
International Equity Fund may engage in any short sales. However, each of the
Income Fund, Government Securities Fund and Pennsylvania Bond Fund may not
engage in short sales of any securities at any time if, immediately after and as
a result of the short sale, the market value of securities sold short by such
Fund would exceed 25% of the value of that Fund's total assets.
If any percentage restriction or requirement described above is
satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in asset value will not constitute a
violation of such restriction or requirement. However, should a change in net
asset value or other external events cause a Fund's investments in illiquid
securities to exceed the limit set forth in that Fund's Prospectus or Statement
of Additional Information for its investment in illiquid securities, such Fund
will act to cause the aggregate amount of such securities to come within such
limit as soon as reasonably practicable. In such an event, however, no Fund
would be required to liquidate any portfolio securities where such Fund would
suffer a loss on the sale of such securities.
The Underlying Funds in which the Lifestyle Funds may invest have
adopted certain investment restrictions which may be more or less restrictive
than those listed above, thereby allowing a Lifestyle Fund to participate in
certain investment strategies indirectly that may be prohibited under the
fundamental and non-fundamental investment restrictions and policies listed
above.
Portfolio Turnover
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the portfolio securities. The Securities and
Exchange Commission requires that the calculation exclude all securities whose
remaining maturities at the time of acquisition were one year or less.
The portfolio turnover rates for the Established Growth, Aggressive
Growth, Emerging Growth, International Equity, Income, Government Securities,
Pennsylvania Bond, Lifestyle Conservative
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Growth, Lifestyle Moderate Growth and Lifestyle Growth Funds for the fiscal year
or period ended June 30, 1999, are as follows:
Fiscal Year or Period
Ended
June 30, 1999
-------------
Established Growth Fund ____%
Aggressive Growth Fund ____%
Emerging Growth Fund ____%
International Equity Fund ____%
Income Fund ____%
Government Securities Fund ____%
Pennsylvania Bond Fund ____%
Lifestyle Conservative Growth Fund ____%
Lifestyle Moderate Growth Fund ____%
Lifestyle Growth Fund ____%
The portfolio turnover rate for a Fund may vary greatly from year to
year as well as within a particular year, and may also be affected by cash
requirements for redemptions of Shares. High portfolio turnover rates will
generally result in higher transaction costs, including brokerage commissions,
to a Fund and may result in additional tax consequences to a Fund's
Shareholders. Portfolio turnover will not be a limiting factor in making
investment decisions.
NET ASSET VALUE
The Prime Money Market Fund and the Treasury Money Market Fund
(collectively, the "Money Market Funds" and individually, a "Money Market Fund")
have each elected to use the amortized cost method of valuation pursuant to Rule
2a-7 under the 1940 Act. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Money Market Fund would receive if it sold the instrument.
Pursuant to Rule 2a-7, each Money Market Fund will maintain a
dollar-weighted average portfolio maturity appropriate to the Money Market
Fund's objective of maintaining a stable net asset value per share, provided
that neither Money Market Fund will purchase any security with a remaining
maturity of more than 397 days (thirteen months) (securities subject to
repurchase agreements may bear longer maturities) nor maintain a dollar-weighted
average portfolio maturity which exceeds 90 days. The Trust's Board of Trustees
has also undertaken to establish procedures reasonably designed, taking into
account current market conditions and the investment objective of the Money
Market Funds, to stabilize the net asset value per share of each Money Market
Fund for purposes of sales and redemptions at $1.00. These procedures include
review by the Trustees, at such intervals as they deem appropriate and
reasonable, to determine the extent, if any, to which the net asset value per
share of each Money
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Market Fund calculated by using available market quotations deviates from $1.00
per Share. In the event such deviation exceeds one-half of one percent, Rule
2a-7 requires that the Board of Trustees to promptly consider what action, if
any, should be initiated. If the Trustees believe that the extent of any
deviation from a Money Market Fund's $1.00 amortized cost price per Share may
result in material dilution or other unfair results to new or existing
investors, they shall cause the Fund to take such steps as they consider
appropriate to eliminate or reduce, to the extent reasonably practicable, any
such dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity, shortening the average portfolio maturity,
withholding or reducing dividends, reducing the number of a Money Market Fund's
outstanding Shares without monetary consideration, or utilizing a net asset
value per share determined by using available market quotations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's
distributor, BISYS (the "Distributor"). The principal office of the Distributor
is 3435 Stelzer Road, Columbus, Ohio 43219. If you wish to purchase Shares,
telephone the Trust at (800) 766-3960.
SPECIAL RESTRICTIONS - THE EMERGING GROWTH FUND
Prospective investors should be aware that management may consider
closing the Emerging Growth Fund to new Shareholders at the end of the 90th
calendar day after the Emerging Growth Fund reaches $300 million in total
assets. No investments by new Shareholders will be accepted after such closure.
Depending upon market conditions and the availability of suitable investments
for the Emerging Growth Fund, investments from new Shareholders may be accepted.
The time period for any such investments by new Shareholders will be determined
by the Fund's Sub-Advisor based primarily on the ability to effectively invest
the Emerging Growth Fund's available cash. There is no limitation on purchases
of the Emerging Growth Fund's Shares through the reinvestment of dividends and
capital gains distributions paid by the Emerging Growth Fund.
The Emerging Growth Fund reserves the right to modify or eliminate
restrictions on the sale of its Shares if such action is in the interest of the
Emerging Growth Fund's Shareholders.
EMPLOYEE BENEFIT PLANS
Purchases, exchanges and redemptions of Shares through an employee
benefit plan may be subject to different requirements and limitations imposed by
employers than those discussed below. Investors should consult their employer
for more information on how to purchase, exchange and redeem Shares of the Funds
through their employer's plan.
PURCHASES OF SHARES
Shares (Investor Shares of the Prime Money Market Fund) may be
purchased through procedures established by the Distributor in connection with
the requirements of qualified accounts maintained by or on behalf of certain
persons ("Customers") by the Advisor, its affiliates or their correspondent
entities (collectively, "Entities").
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<PAGE> 143
Shares (Investor Shares of the Prime Money Market Fund) of the Funds
sold to the Entities acting in a fiduciary, advisory, custodial, agency, or
other similar capacity on behalf of Customers will normally be held of record by
the Entities. With respect to Investor Shares of a Fund so sold, it is the
responsibility of the particular Entity to transmit purchase or redemption
orders to the Distributor and to deliver federal funds for purchase on a timely
basis. Beneficial ownership of Shares will be recorded by the Entities and
reflected in the account statements provided by the Entities to Customers.
Investors may also purchase Shares of the Funds by completing and
signing an Account Registration Form and mailing it, together with a check (or
other negotiable bank draft or money order) in at least the minimum initial
purchase amount, payable to the applicable Fund, to The Governor Funds, P.O. Box
182707, Columbus, Ohio 43218-2707. Subsequent purchases of Shares of a Fund may
be made at any time by mailing a check (or other negotiable bank draft or money
order) payable to the Trust, to the above address.
If an Account Registration Form has been previously received by the
Trust, investors may also purchase Shares by wiring funds to the Funds'
custodian. Prior to wiring any such funds and in order to ensure that wire
orders are invested promptly, investors must call the Trust at (800) 766-3960 to
obtain instructions regarding the bank account number into which the funds
should be wired and other pertinent information.
Shares of the Funds are purchased at the net asset value per share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor, its
agents or broker-dealers with whom it has an agreement of an order in good form
to purchase Shares plus any applicable sales charge as described below.
Purchases of Shares of a Fund will be effected only on a Business Day (as
defined in the Prospectus) of that Fund.
For an order for the purchase of Shares of a Non-Money Market Fund that
is placed through a broker-dealer, the applicable public offering price will be
the net asset value as so determined (plus any applicable sales charge), but
only if the broker-dealer receives the order and transmits it to the Distributor
prior to the Valuation Time for that day. The broker-dealer is responsible for
transmitting such orders by the Valuation Time. If the broker-dealer fails to do
so, the investor's right to that day's closing price must be settled between the
investor and the broker-dealer. If the broker-dealer receives the order after
the Valuation Time for that day, the price will be based on the net asset value
determined as of the Valuation Time for the next Business Day.
An order to purchase Shares of a Money Market Fund will be deemed to
have been received by the Distributor only when federal funds with respect
thereto are available to the Money Market Fund's custodian for investment.
Federal funds are monies credited to a bank's account with a Federal Reserve
Bank. Payment for an order to purchase Shares of a Money Market Fund which is
transmitted by federal funds wire will be available the same day for investment
by that Money Market Fund's custodian, if received prior to the last Valuation
Time (see "VALUATION OF SHARES" in the Prospectus). Payments transmitted by
other means (such as by check drawn on a member of the Federal Reserve System)
will normally be converted into federal funds within two banking days after
receipt. The Trust strongly recommends that investors of substantial amounts use
federal funds to purchase Money Market Shares. Shares of the Money Market Funds
purchased before 12:00 noon, Eastern Time, begin earning dividends on the same
Business Day. Shares of the Money Market Funds purchased after 12:00 noon,
Eastern Time, begin earning dividends on the next Business Day. All Shares of
the Money Market Funds continue to earn dividends through the day before their
redemption.
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PURCHASE OF S SHARES
S Shares of the Prime Money Market Fund are offered to customers of
Keystone Financial, Inc. ("Keystone"), any of its banking affiliates or Service
Organizations that establish cash management services, such as a Sweep Account
with Keystone, any of its affiliates or a Service Organization. Each Sweep
Account combines a Transaction Account with a periodic sweep of balance to or
from the Prime Money Market Fund. Investors may open a Sweep Account by
completing and signing the appropriate Sweep Materials. The Sweep Materials
contain important information about the various features and operations of the
Sweep Account and should be reviewed in conjunction with the prospectus and
statement of additional information .
S Shares may be purchased on any Business Day by making a deposit into
your Transaction Account. On each Business Day that Keystone, any of its banking
affiliates or a Service Organization is open for business, Keystone, any of its
banking affiliates or a Service Organization computes the net amount of all
deposits, withdrawals, charges and credits made to and from a Transaction
Account in accordance with their Sweep Account procedures (the "Net Sweep
Amount"). If deposits and credits exceed withdrawals and charges, you authorize
Keystone, any of its banking affiliates or a Service Organization, on your
behalf, to transmit a purchase order to the Prime Money Market Fund in your
Sweep Account in the amount of that day's Net Sweep Amount in accordance with
the Sweep Account procedures of Keystone, any of its banking affiliates or a
Service Organization. Your purchase order will be made effective and full and
fractional S Shares will be purchased at the net asset value per Share next
determined after receipt by the Trust. It is the responsibility of Keystone, any
of its banking affiliates or a Service Organization to transmit orders for the
purchases of S Shares by its customers to the Transfer Agent and deliver
required funds on a timely basis, in accordance with the procedures stated
above. Share purchases and redemptions executed through Keystone, any of its
banking affiliates or a Service Organization are executed only on Business Days
that Keystone, any of its banking affiliates or a Service Organization,
respectively, is open for business. Contact Keystone, any of its banking
affiliates or your Service Organization for additional information about
Keystone's, any of its banking affiliates', or the Service Organizations' Sweep
Account procedures.
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<PAGE> 145
GOVERNOR FUNDS INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A Governor Funds IRA enables individuals, even if they participate in
an employer-sponsored retirement plan, to establish their own retirement
program. Governor Funds IRA contributions may be tax-deductible and earnings are
tax deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA
contributions is restricted or eliminated for individuals who participate in
certain employer pension plans and whose annual income exceeds certain limits.
Existing IRAs and future contributions up to the IRA maximums, whether
deductible or not, still earn income on a tax-deferred basis.
All Governor Funds IRA distribution requests must be made in writing to
the Distributor. Any deposits to a Governor Funds IRA must distinguish the type
and year of the contributions.
For more information on the Governor Funds IRAs call the Trust at (800)
766-3960. Investment in Shares of the Governor Funds Pennsylvania Municipal Bond
Fund or any other tax-exempt fund would not be appropriate for a Governor Funds
IRA. Shareholders are advised to consult a tax advisor on Governor Funds IRA
contribution and withdrawal requirements and restrictions.
IN-KIND PURCHASES
Payment of Shares of a Fund may, in the discretion of the Advisor, be
made in the form of securities that are permissible investments for that Fund as
described in the prospectuses. For further information about this form of
payment, contact the Advisor. In connection with an in-kind securities payment,
a Fund will require, among other things, that the securities be valued on the
date of purchase in accordance with the pricing methods used by the Fund and
that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form of transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
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<PAGE> 146
SALES CHARGES
The public offering price of Shares of each Non-Money Market Fund
equals net asset value plus a sales charge in accordance with the tables below.
There is no sales charge imposed by either the Prime Money Market Fund or
Treasury Money Market Fund in connection with the purchase of its shares. BISYS
receives this sales charge as Distributor and reallows a portion of it as dealer
discounts and brokerage commissions. However, the Distributor, in its sole
discretion may pay certain dealers all or part of the portion of the sales
charge it receives. A broker or dealer who receives a reallowance in excess of
90% of the sales charge may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933.
THE ESTABLISHED GROWTH FUND, AGGRESSIVE GROWTH FUND, EMERGING GROWTH
FUND, INTERNATIONAL EQUITY FUND, INCOME FUND, PENNSYLVANIA BOND FUND AND
LIFESTYLE FUNDS
<TABLE>
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % and Brokerage
at Public Offering of Net Amount Sales Charge as % of Commissions as % of
Price Invested Public Offering Price Public Offering Price
- ----------------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C>
Less than $100,000 4.71% 4.50% 4.05%
$100,000 but less than
$250,000 3.63 3.50 3.15
$250,000 but less than
$500,000 2.56 2.50 2.25
$500,000 but less than 1.52 1.50 1.35
$1,000,000
$1,000,000 or more 0 0 0
</TABLE>
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<PAGE> 147
THE GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % and Brokerage
At Public Offering of Net Amount Sales Charge as % of Commissions as % of
Price Invested Public Offering Price Public Offering
- --------------------- -------------------- --------------------- -------------------
<S> <C> <C> <C>
Less than $100,000 3.09% 3.00% 2.70%
$100,000 but less than
$250,000 2.56 2.50 2.25
$250,000 but less than
$500,000 2.04 2.00 1.80
$500,000 but less than 1.52 1.50 1.35
$1,000,000
$1,000,000 or more 0 0 0
</TABLE>
The Distributor and/or its affiliates pay additional compensation from
time to time, out of its assets and not as an additional charge to the Funds, to
certain institutions and other persons in connection with the sale of shares of
the Funds. Subject to applicable regulations of the National Association of
Securities Dealers, Inc., the Distributor and/or its affiliates may also
contribute to various cash incentive arrangements to promote the sale of shares.
This additional compensation can vary among such institutions depending upon
such factors as the amounts their customers have invested (or may invest) in the
Funds, the particular program involved, or the amount of reimbursable expenses.
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CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining concurrent purchases of a Fund and one or more of the
other funds of the Trust sold with a sales charge and advised by the Advisor or
Sub-Advisor ("Governor Load Funds"). For example, if a Shareholder concurrently
purchases Shares in the Established Growth Fund at the total public offering
price of $50,000 and Shares in another Governor Load Fund at the total public
offering price of $50,000, the sales charge for such shares of the Established
Growth Fund would be that applicable to a $100,000 purchase as shown in the
table above. This privilege, however, may be modified or eliminated at any time
or from time to time by the Trust without notice thereof.
LETTER OF INTENT
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Shares of a Fund at a designated total public offering price within a designated
13-month period. Each purchase of Shares under a Letter of Intent will be made
at the net asset value plus the sales charge applicable at the time of such
purchase to a single transaction of the total dollar amount indicated in the
Letter of Intent. A Letter of Intent may include purchases of Shares made not
more than 90 days prior to the date such investor signs a Letter of Intent;
however, the 13-month period during which the Letter of Intent is in effect will
begin on the date of the earliest purchase to be included. This program may be
modified or eliminated at any time or from time to time by the Trust without
notice. For further information about letters of intent, interested investors
should contact the Trust at (800) 766-3960.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
Shares actually purchased if the full amount indicated is not purchased, and
such escrowed Shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed Shares, whether paid in cash or
reinvested in additional Shares, are not subject to escrow. The escrowed Shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
An adjustment will be made to reflect any reduced sales charge applicable to
Shares purchased during the 90-day period prior to the date the Letter of Intent
was entered into at the conclusion of the 13-month period and in the form of
additional Shares credited to the Shareholder's account at the then current
public offering price applicable to a single purchase of the total amount of the
total purchases. Additionally, if the total purchases within the 13-month period
exceed the amount specified, a similar adjustment will be made to reflect
further reduced sales charges applicable to such purchases, if any.
RIGHT OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Shares of a Fund at the public offering price applicable to the total
of (a) the total public offering price of the Shares of the Fund then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's
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<PAGE> 149
combined holdings of the Shares of all Governor Load Funds. The "purchaser's
combined holdings" described in the preceding sentence shall include the
combined holdings of the purchaser, the purchaser's spouse and children under
the age of 21 and the purchaser's retirement plan accounts. To receive the
applicable public offering price pursuant to the right of accumulation,
Shareholders must, at the time of purchase, give the Transfer Agent sufficient
information to permit confirmation of qualification. This right of accumulation,
however, may be modified or eliminated at any time or from time to time by the
Trust without notice.
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(Intentionally Left Blank)
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<PAGE> 151
CHECK-WRITING REDEMPTION PROCEDURE - PRIME MONEY MARKET AND TREASURY MONEY
MARKET FUNDS
The Transfer Agent will provide any Shareholder of a Fund who so
requests with a supply of checks, imprinted with the Shareholder's name, which
may be drawn against that Fund's account maintained by The Bank of New York (the
"Bank"), for redemption of Investor Shares. These checks may be made payable to
the order of any person in any amount not less than $500. To participate in this
procedure, an investor must complete the Check-Writing Redemption Form available
from the Transfer Agent. When a check is presented to the Bank for payment, the
Transfer Agent (as the Shareholder's agent) will cause the applicable Fund to
redeem sufficient Investor Shares in the Shareholder's account to cover the
amount of the check. Shares continue earning daily dividends until the day on
which the check is presented to the Bank for payment. Cancelled checks will be
returned to the Shareholder. Due to the delay caused by the requirement that
redemptions be priced at the next computed net asset value, the Bank will only
accept for payment checks presented through normal bank clearing channels.
Shareholders should not attempt to withdraw the full amount of an account or to
close out an account by using this procedure.
No charge will be made to a Shareholder for participation in the
check-writing redemption procedure or for the clearance of any checks. However,
a Shareholder's account may be subject to charges for copies, returned checks
and/or returned items of deposit.
In order to stop payment on a check, the Shareholder must notify the
Trust in writing before the check has been presented to the Bank for payment. A
charge may be deducted from the Shareholder's account for each stop payment
order.
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PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within seven
days after receipt by the Distributor of the request for redemption. However, to
the greatest extent possible, each Fund will attempt to honor requests from
Shareholders for next day payments upon redemption of Shares if the request for
redemption is received by the Distributor before the Valuation Time on a
Business Day or, if the request for redemption is received after the Valuation
Time, to honor requests for payment on the second Business Day. Each Fund will
attempt to so honor redemption requests unless it would be disadvantageous to a
Fund or the Shareholders of that Fund to sell or liquidate portfolio securities
in an amount sufficient to satisfy requests for payments in that manner.
At various times, the Trust may be requested to redeem Shares for which
it has not yet received good payment. In such circumstances, the Trust may delay
the forwarding of proceeds for up to 10 days or more until payment has been
collected for the purchase of such Shares. The Trust intends to pay cash for all
Shares redeemed, but under abnormal conditions which make payment in cash
unwise, the Trust may make payment wholly or partly in readily marketable
portfolio securities at their then market value equal to the redemption price.
In such cases, an investor may incur brokerage costs in converting such
securities to cash.
Due to the relatively high cost of handling small investments, the
Trust reserves the right to redeem, at net asset value, the Shares of a Fund of
any Shareholder if, because of redemptions of Shares by or on behalf of the
Shareholder (but not as a result of a decrease in the market price of such
Shares, the deduction of any sales charge or the establishment of an account
with less than $1,000 using the Auto Invest Plan), the account of such
Shareholder has a value of less than $1,000 ($250 if the Shareholder is an
employee of the Advisor or one of its affiliates). Accordingly, an investor
purchasing Shares of a Fund in only the minimum investment amount may be subject
to such involuntary redemption if he or she thereafter redeems some of his or
her Shares. Before the Trust exercises its right to redeem such Shares and to
send the proceeds to the Shareholder, the Shareholder will be given notice that
the value of the Shares in his or her account is less than the minimum amount
and will be allowed at least 60 days to make an additional investment in an
amount which will increase the value of the account to at least $1,000 ($250 if
the Shareholder is an employee of the Advisor or one of its affiliates).
Shares of the Funds are sold on a continuous basis by BISYS, and BISYS
has agreed to use appropriate efforts to solicit all purchase orders. In
addition to purchasing Shares directly from BISYS, Shares may be purchased
through procedures established by BISYS in connection with the requirements of
accounts at the Advisor or the Advisor's affiliated entities or correspondents
(collectively, "Entities"). Customers purchasing Shares of the Funds may include
officers, directors, or employees of the Advisor or the Entities.
The Trust may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the Exchange is
restricted by applicable rules and regulations of the Commission, (b) the
Exchange is closed for other than customary weekend and holiday closings, (c)
the Commission has by order permitted such suspension, or (d) an emergency
exists as a result of which (i) disposal by the Trust of securities owned by it
is not reasonably practical, or (ii) it is not reasonably practical for the
Trust to determine the fair value of its net assets.
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<PAGE> 153
MANAGEMENT AND SERVICE PROVIDERS OF THE TRUST
Trustees and Officers
Overall responsibility for management of the Trust rests with its Board
of Trustees. The Trustees elect the officers of the Trust to supervise actively
its day-to-day operations.
The names of the Trustees and officers of the Trust, their addresses,
and principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE TRUST DURING PAST 5 YEARS
--------------------- ------------------------------- -------------------
<S> <C> <C>
Robert E. Leech* Chairman and Trustee From 1991 to present, employee
23 Front Street of Keystone Financial, Inc.
Harrisburg, PA 17101
Age: 54
Lana Burkhardt* President and Trustee From 1992 to present, employee
23 Front Street of Keystone Financial, Inc.
Harrisburg, PA 17101
Age: 42
John J. Bolger Trustee From 1988 to present, retired;
Governor Funds prior to that, Vice President
3435 Stelzer Road of Pennsylvania Bankers
Columbus, OH 43219 Association.
Age: 64
James L. Brock Trustee From 1996 to present, Dean of
Governor Funds Sigmund Weis School of
3435 Stelzer Road Business, prior to that, Vice
Columbus, OH 43219 President of Marketing at
Age: 55 Pacific Steel and Recycling
(distributor of steel and
agricultural products and
commercial/industrial recycler
of scrap metals and fibers).
John S. Cramer Trustee From 1996 to present,
Governor Funds President and CEO of Pinnacle
3435 Stelzer Road Health System; prior to that,
Columbus, OH 43219 President and CEO of Capital
Age: 57 Health System.
Laura C. Plumley* Assistant Secretary From 19__ to present, employee
23 Front Street of Keystone Financial, Inc.
Harrisburg, PA 17101
Age: __
</TABLE>
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<PAGE> 154
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE TRUST DURING PAST 5 YEARS
--------------------- ------------------------------- -------------------
<S> <C> <C>
Michael A. Grunewald* Treasurer From 1992 to present, employee
3435 Stelzer Road of BISYS Fund Services Limited
Columbus, OH 43219 Partnership.
Age: 29
Michael P. Malloy* Secretary From 1993 to present, partner
Drinker Biddle & Reath LLP in the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 40
Alaina V. Metz* Assistant Secretary From 1995 to present, employee
3435 Stelzer Road of BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership; prior to that,
Age: 32 supervisor of Blue Sky
Compliance at Alliance Capital
Management, L.P. (investment
management firm).
</TABLE>
- ------------------
*Messrs. Grunewald, Leech and Malloy and Mesdames Burkhardt, Metz and
Plumley are each considered to be an "interested person" of the Trust as defined
in the 1940 Act.
Messrs. Bolger, Brock and Cramer are members of the Audit, Valuation,
and Nominating Committees of the Board of Trustees. Mr. Cramer, Mr. Bolger, and
Mr. Brock each serves as Chairman of the Audit, Valuation, and Nominating
Committees, respectively. The Audit Committee, among other things, reviews
results of the annual audit and recommends to the Trust the firm to be selected
as independent auditors. The Valuation Committee reviews the pricing of certain
securities. The Nominating Committee recommends to the Board all persons to be
nominated as trustees of the Trust.
As of the date of this Statement of Additional Information, the Trust's
officers and trustees, as a group, own less than 1% of any Fund's outstanding
Shares.
The Trust pays each Trustee, other than officers or employees of the
Advisor, BISYS or BISYS Fund Services, Inc. or any of their affiliates, an
annual fee of $8,000, $2,000 for each regular Board meeting attended, and
out-of-pocket expenses incurred in attending Board meetings. The officers of the
Trust receive no compensation directly from the Trust for performing the duties
of their offices. The Advisors receive fees for acting as advisor and
sub-advisor. BISYS and the Advisor receive fees from each Fund for acting as
administrators, and may receive fees pursuant to the Administrative Services
Plan described below. BISYS may retain all or a portion of any sales load
imposed upon purchases of Shares. BISYS Fund Services, Inc. receives fees from
the Funds for acting as transfer agent and for
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<PAGE> 155
providing certain fund accounting services. Mesdames Burkhardt and Plumley and
Mr. Leech are employees of the Advisor and Mr. Grunewald and Ms. Metz are
employees of BISYS. Drinker Biddle & Reath LLP, of which Mr. Malloy is a
partner, receives legal fees as counsel to the Trust.
Investment Advisor and Investment Sub-Advisors
Governors Group Advisors, Inc. is the investment adviser of each Fund.
The Advisor is a wholly owned subsidiary of Keystone Financial, Inc., 1 Keystone
Plaza, Harrisburg, Pennsylvania 17101. The Advisor was organized in 1998 and has
not previously served as the investment advisor to a registered open-end
management investment company.
Subject to the general supervision of the Board of Trustees of the
Trust and in accordance with the investment objective and restrictions of each
Fund, the Advisor has agreed to manage each Fund, make decisions with respect to
and place orders for all purchases and sales of its portfolio securities, and
maintain each Fund's records relating to such purchases and sales.
The Advisor may from time to time voluntarily reduce all or a portion
of its advisory fee with respect to a Fund to increase the net income of that
Fund available for distribution as dividends.
For the fiscal year or period ended June 30, 1999, the Advisor earned
and voluntarily waived the amounts indicated below with respect to its
investment advisory services pursuant to the investment advisory agreement:
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1999 (1)
-----------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Money Market Fund ______ ______
Treasury Money Market Fund ______ ______
Established Growth Fund ______ ______
Aggressive Growth Fund ______ ______
Emerging Growth Fund ______ ______
International Equity Fund ______ ______
Income Fund ______ ______
Government Securities Fund ______ ______
Pennsylvania Bond Fund ______ ______
Lifestyle Conservative Growth ______ ______
Fund
</TABLE>
-57-
<PAGE> 156
- ------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, July 1, 1998, February 9, 1999, December 2,
1996, July 1, 1997, October 1, 1996, February 3, 1999, February 4, 1999
and February 18, 1999, respectively.
For the fiscal year or period ended June 30, 1998, the former advisor,
Martindale, Andres & Company, Inc. ("Martindale"), a wholly owned subsidiary of
Keystone, earned and voluntarily waived the amounts indicated below with respect
to its investment advisory services to the Predecessor Funds pursuant to the
prior Investment Advisory Agreement:
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1998 (1)
-----------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Money Market Fund $ 623,575 $311,790
Treasury Money Market Fund $ 98,397 $74,397
Established Growth Fund $1,680,122 $720,420
Aggressive Growth Fund $1,254,636 $593,310
Income Fund $1,431,762 $715,881
Government Securities Fund $ 198,771 $153,207
Pennsylvania Bond Fund $ 715,423 $357,712
</TABLE>
For the fiscal year or period ended June 30, 1998, the former advisor
had not received any compensation under the Investment Advisory Agreement with
respect to the Emerging Growth Fund, International Equity Fund or the Lifestyle
Funds since those Funds had not commenced operations.
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<PAGE> 157
For the year or period ended June 30, 1997, the former adviser earned
and voluntarily waived the amounts indicated below with respect to its
investment advisory services pursuant to the Investment Advisory Agreement:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997
-------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Money Market Fund $282,882 $236,280
Established Growth Fund $735,635 $558,942
Aggressive Growth Fund $385,280 $263,486
Income Fund $680,552 $529,626
Pennsylvania Bond Fund $506,296 $420,686
</TABLE>
The Advisor has entered into a Sub-Advisory Agreement with Martindale
Andres & Company, Inc., Four Falls Corporate Center, Suite 200, West
Conshohocken, Pennsylvania 19428. The Sub-Advisor was organized in 1989 and was
acquired by Keystone in December 1995. Subject to the supervision of the Advisor
and the Board of Trustees of the Trust and in accordance with the investment
objective and restrictions of each Fund, the Sub-Advisor manages each Fund other
than the International Equity Fund, makes decisions with respect to and places
orders for all purchases and sales of its portfolio securities, and maintains
each such Fund's records relating to such purchases and sales.
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<PAGE> 158
The Advisor also has entered into a Sub-Advisory Agreement with Brinson
Partners, Inc., 209 South LaSalle Street, Chicago, Illinois 60604 (the
"International Equity Fund Sub-Advisor" or collectively with the Sub-Advisor,
the "Sub-Advisors") on behalf of the International Equity Fund. The
International Equity Fund Sub-Advisor is a wholly owned subsidiary of UBS AG.
The International Equity Fund Sub-Advisor was organized in 1989 and was acquired
by Swiss Bank Corporation, a predecessor company of UBS AG. Subject to the
supervision of the Advisor and the Board of Trustees of the Trust and in
accordance with the investment objective and restrictions of the International
Equity Fund, the International Equity Fund Sub-Advisor manages the International
Equity Fund, makes decisions with respect to and places orders for all purchases
and sales of its portfolio securities, and maintains the records relating to
such purchases and sales.
For the period from February 9, 1999 through June 30, 1999, the
International Equity Fund Sub-Advisor earned $__________ and voluntarily waived
$__________ with respect to its investment Sub-Advisory services pursuant to the
Investment Sub-Advisory Agreement.
Unless sooner terminated, each of the Investment Advisory and
Investment Sub-Advisory Agreements will continue in effect with respect to a
Fund until June 30, 2000, and from year to year
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<PAGE> 159
thereafter, for successive annual periods ending on June 30, if, as to that
Fund, such continuance is approved at least annually by the Trust's Board of
Trustees or by vote of a majority of the outstanding Shares of that Fund and a
majority of the Trustees who are not parties to the Investment Advisory
Agreement or the particular Investment Sub-Advisory Agreement or interested
persons (as defined in the 1940 Act) of any party to the Investment Advisory
Agreement or the particular Investment Sub-Advisory Agreement by votes cast in
person at a meeting called for such purpose. The Investment Advisory Agreement
and the Investment Sub-Advisory Agreements each are terminable as to a Fund at
any time on at least 60 days' written notice without penalty by the Trustees, by
vote of a majority of the outstanding Shares of that Fund, or by the Advisor or
the Sub-Advisor. The Investment Advisory Agreement and the Investment
Sub-Advisory Agreements also each terminate automatically in the event of its
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement and the Investment Sub-Advisory
Agreements provide that the Advisor and the Sub-Advisors shall not be liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Investment Advisory Agreement and the
Investment Sub-Advisory Agreements, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Advisor or the particular Sub-Advisor in the performance of its
duties, or from reckless disregard by the Advisor of its duties and obligations
thereunder.
Portfolio Transactions
Pursuant to the Investment Advisory and Investment Sub-Advisory
Agreements, the Advisor and Sub-Advisors determine, subject to the general
supervision of the Board of Trustees of the Trust and in accordance with the
Funds' investment objectives and restrictions, which securities are to be
purchased and sold by each Fund, and which brokers and dealers are to be
eligible to execute the Funds' portfolio transactions. Purchases and sales of
portfolio securities with respect to the Prime Money Market, Treasury Money
Market, Income, Government Securities and Pennsylvania Bond Funds, usually are
principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Purchases and sales of portfolio securities with
respect to the Established Growth, Aggressive Growth, Emerging Growth and
International Equity Funds usually are effected on a national securities
exchange or in the over-the-counter market. Transactions on stock exchanges
involve the payment of negotiated brokerage commissions. Transactions in the
over-the-counter market are generally principal transactions with dealers.
Allocation of transactions, including their frequency, to various
brokers and dealers is determined by the Sub-Advisors in their best judgment and
in a manner deemed fair and reasonable to Shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, brokers and dealers who provide
supplemental investment research to the Advisor and/or Sub-Advisors may receive
orders for transactions on behalf of the Funds. The Advisor and/or Sub-Advisors
are authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing each such Fund's brokerage transactions
which is in excess of the amount of commission another broker would have charged
for effecting that transaction if the Advisor or Sub-Advisors determines in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker viewed in terms of that
particular transaction or in terms of all of the accounts over which it
exercises investment discretion. Any such research and other statistical and
factual information provided by brokers to a Fund
-61-
<PAGE> 160
or to the Advisor or Sub-Advisors is considered to be in addition to and not in
lieu of services required to be performed by the Advisor or Sub-Advisors under
its agreement regarding management of the Fund. The cost, value and specific
application of such information are indeterminable and hence are not practicably
allocable among the Funds and other clients of the Advisor or Sub-Advisors who
may indirectly benefit from the availability of such information. Similarly, the
Funds may indirectly benefit from information made available as a result of
transactions effected for such other clients. Under the Investment Advisory and
Investment Sub-Advisory Agreements, the Advisor and/or Sub-Advisors are
permitted to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934. In the event the Advisor and/or Sub-Advisors do follow such a practice, it
will do so on a basis which it believes is fair and equitable to the Trust and
the Funds.
The Advisor may direct brokerage transactions on behalf of the
Established Growth Fund, the Aggressive Growth Fund, the Emerging Growth Fund
and the International Equity Fund to Boston Institutional in return for research
services relating to equity securities including market information from
Bloomberg Financial Markets and equity analysis from Zacks Software. For the
fiscal period or year ended June 30, 1999, the amounts of such transactions and
related commissions on behalf of the Established Growth Fund were $______ and
$_______, respectively; on behalf of the Aggressive Growth Fund were $____ and
$____, respectively; and on behalf of the Emerging Growth Fund were $____ and
$____, respectively. For the fiscal period ended June 30, 1998, the amounts of
such transactions and related commissions on behalf of the Established Growth
Fund were $9,446,185 and $15,267, respectively, and on behalf of the Aggressive
Growth Fund were $5,083,071 and $13,815, respectively. There were no trades
directed on behalf of the Emerging Growth Fund for the fiscal year ended June
30, 1998.
For the fiscal period ended June 30, 1999 the Funds paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
<S> <C>
Prime Money Market Fund ___________
U.S. Treasury Money Market Fund ___________
Established Growth Fund ___________
Aggressive Growth Fund ___________
Emerging Growth Fund ___________
International Equity Fund ___________
Income Fund ___________
Government Securities Fund ___________
Pennsylvania Bond Fund ___________
</TABLE>
For the fiscal period ended June 30, 1999, no brokerage commissions
were paid by the Trust on behalf of the Prime Money Market Fund, the U.S.
Treasury Money Market Fund, the Pennsylvania Bond Fund or the Income Fund.
While the Advisor and/or Sub-Advisors generally seek competitive
commissions, the Trust may not necessarily pay the lowest commission available
on each brokerage transaction, for reasons discussed above. Information so
received is in addition to and not in lieu of services required to be performed
by the Advisor and/or Sub-Advisors and does not reduce the advisory fees payable
to the Advisor and/or Sub-Advisors by a Fund. Such information may be useful to
the Advisor and/or Sub-Advisors in serving both the Fund and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the Advisor and/or Sub-Advisors in carrying out
their obligations to a Fund.
-62-
<PAGE> 161
Except as permitted by applicable laws, rules and regulations, the
Trust will not, on behalf of a Fund, execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Advisor, the Sub-Advisors,
Keystone, BISYS, or their affiliates, and will not give preference to the
Advisor's, the Sub-Advisors', or Keystone's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements, and reverse
repurchase agreements.
Investment decisions for each Fund are made independently from those
for other funds of the Trust or any other investment company or account managed
by the Advisor or Sub-Advisors. Any such other fund, investment company or
account may also invest in the same securities as the Trust on behalf of a Fund.
When a purchase or sale of the same security is made at substantially the same
time on behalf of a Fund and another fund of the Trust, investment company or
account, the transaction will be averaged as to price and available investments
will be allocated as to amount in a manner which the Advisor or Sub-Advisors
believe to be equitable to the Fund and such other fund, investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained by a Fund.
To the extent permitted by law, the Advisor or Sub-Advisors may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for other funds of the Trust, investment companies or accounts in order to
obtain best execution. As provided by the Investment Advisory and Investment
Sub-Advisory Agreements, in making investment recommendations for the Funds, the
Advisor or Sub-Advisors will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by the Trust is a customer of
the Advisor or Sub-Advisors, its parent or its subsidiaries or affiliates and,
in dealing with its customers, the Advisor or Sub-Advisors, its parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Funds or any other fund of the
Trust.
For the fiscal year ended June 30, 1999, the ________ Funds held
securities of their regular brokers or dealers, as defined in Rule 10b-1 under
the 1940 Act or their parent companies. As of June 30, 1999, the ______ Fund
held ________ of _______.
Administrators
BISYS Fund Services Ohio, Inc. and the Advisor serve as administrators
(the "Administrators") to the Funds pursuant to a Management and Administration
Agreement (the "Administration Agreement"). The Administrators assist in
supervising all operations of the Funds (other than those performed by the
Advisor under the Investment Advisory Agreements, by the Sub-Advisors under the
Investment Sub-Advisory Agreements, by The Bank of New York under the Custody
Agreement, by BISYS Fund Services, Inc. under the Transfer Agency Agreement and
Fund Accounting Agreement and by BISYS under the Distribution Agreement).
Under the Administration Agreement, the Administrators have agreed to
maintain office facilities; furnish statistical and research data, clerical,
certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Commission on Form N-SAR or any replacement forms
therefor; compile data for, prepare for execution by the Funds and file all of
the Funds' federal and state tax returns and required tax filings other than
those required to be made by the Funds' custodian and Transfer Agent; prepare
compliance filings pursuant to state securities laws with the advice of the
Trust's counsel; assist to the extent requested by the Trust with the Trust's
preparation of its Annual and Semi-Annual Reports to Shareholders and its
Registration Statement (on Form N-1A or any replacement therefor); compile data
for, prepare and file timely Notices to the Commission required pursuant to Rule
24f-2 under the 1940 Act; keep and maintain the financial accounts and records
of the Funds, including
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<PAGE> 162
calculation of daily expense accruals; determine the actual variance from $1.00
of the Prime Money Market Fund's and the Treasury Money Market Fund's net asset
value per share; and generally assist in all aspects of the Funds' operations
other than those performed by the Advisor under the Investment Advisory
Agreement, by the Sub-Advisors under the Investment Sub-Advisory Agreements, by
The Bank of New York under the Custody Agreement, by BISYS Fund Services, Inc.
under the Transfer Agency Agreement and Fund Accounting Agreement, and by BISYS
under the Distribution Agreement. Under the Administration Agreement, the
Administrators may delegate all or any part of their responsibilities
thereunder.
For the fiscal year or period ended June 30, 1999, the Administrators
earned the following amounts with respect to their administration services to
the Funds indicated below pursuant to the Administration Agreement:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1999(1)
----------------
<S> <C>
Prime Money Market Fund
Treasury Money Market Fund
Established Growth Fund
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund
Income Fund
Government Securities Fund
Pennsylvania Bond Fund
Lifestyle Conservative Growth Fund
Lifestyle Moderate Growth Fund
Lifestyle Growth Fund
</TABLE>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, July 1, 1998, February 9, 1999, December 2,
1996, July 1, 1997, October 1, 1996, February 3, 1999, February 4, 1999
and February 18, 1999, respectively.
For the fiscal year or period ended June 30, 1998, BISYS, the Trust's
former administrator, earned the following amounts with respect to its
administration services to the Funds indicated below pursuant to the prior
Administration Agreement:
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<PAGE> 163
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1998(1)
----------------
<S> <C>
Prime Money Market Fund $179,279
Treasury Money Market Fund $ 28,247
Established Growth Fund $257,620
Aggressive Growth Fund $144,284
Income Fund $274,422
Government Securities Fund $ 38,098
Pennsylvania Bond Fund $137,123
</TABLE>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, December 2, 1996, July 1, 1997 and October
1, 1996, respectively.
For the fiscal period ended June 30, 1997, the former administrator
earned the following amounts with respect to its administrative services to the
Predecessor Funds indicated below pursuant to the prior Administration
Agreement:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997
-------------
<S> <C>
Prime Money Market Fund $ 81,328
Established Growth Fund $ 112,311
Aggressive Growth Fund $ 44,692
Income Fund $ 129,863
Pennsylvania Bond Fund $ 97,040
</TABLE>
Unless sooner terminated as provided therein, the Administration
Agreement has an initial term expiring on June 30, 2001, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Administration Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Administration Agreement; through a failure to renew at the end of a one-year
term; upon 180 days' written notice by the Trust after the initial term but only
in connection with the reorganization of the Funds into another registered
management investment company; and for cause (as defined in the Administration
Agreement) by the party alleging cause, on not less than 60 days' notice by the
Trust's Board of Trustees or by the Administrators.
The Administration Agreement provides that neither Administrator shall
be liable for any error of judgment or mistake of law or any loss suffered by a
Fund in connection with the matters to which the Administration Agreement
relates, except for a loss resulting from willful misfeasance, bad faith, or
negligence on its part in the performance of its duties, or from the reckless
disregard by it of its obligations and duties thereunder.
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<PAGE> 164
Glass-Steagall Act
The Advisor and Martindale, Andres & Company, Inc. each believes that
it possesses the legal authority to perform the services for the Funds
contemplated by the relevant Prospectuses, this Statement of Additional
Information and the Investment Advisory and Sub-Advisory Agreements and the
Administration Agreement without violation of applicable statutes and
regulations. Future changes in either Federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict the Advisor from continuing to perform
such services for the Trust. In addition, current state securities laws on the
issue of the registration of banks as brokers or dealers may differ from the
interpretation of federal law, and banks and financial institutions may be
required to register as dealers pursuant to the laws of a specific state.
Depending upon the nature of any changes in the services which could be provided
by the Advisors, the Board of Trustees of the Trust would review the Trust's
relationship with the Advisors and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of the Advisors and/or their affiliated and
correspondent banks in connection with Customer purchases of Shares of a Fund,
those banks might be required to alter materially or discontinue the services
offered by them to Customers. It is not anticipated, however, that any change in
the Trust's method of operations would affect its net asset value per share or
result in financial losses to any Customer.
Distributor
BISYS serves as agent for each Fund in the distribution of its Shares
pursuant to a Distribution Agreement (the "Distribution Agreement"). Unless
otherwise terminated, the Distribution Agreement has an initial term expiring on
June 30, 2000, and thereafter shall be renewed automatically for successive
annual periods ending June 30, 2000, if approved at least annually (i) by the
Trust's Board of Trustees or by the vote of a majority of the outstanding Shares
of the Funds, and (ii) by the vote of a majority of the Trustees of the Trust
who are not parties to the Distribution Agreement or interested persons (as
defined in the 1940 Act) of any party to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
Administrative Services and Distribution Plans
The Trust has adopted an Administrative Services Plan (the "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 the Advisor, Sub-Advisors, Keystone and its banking affiliates,
Entities, and BISYS, which agree to provide certain ministerial, record keeping
and/or administrative support services for their customers or account holders
(collectively, "customers") who are the beneficial or record owner of Shares of
that Fund. In consideration for such services, a Service Organization receives a
fee from each Fund, computed daily and paid monthly, at an annual rate of up to
.25% of the average daily net asset value of Shares of that Fund owned
beneficially or of record by such Service Organization's customers for whom the
Service Organization provides such services.
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<PAGE> 165
The servicing agreements adopted under the Services Plan (the
"Servicing Agreements") require the Service Organizations receiving such
compensation to perform certain ministerial, record keeping and/or
administrative support services with respect to the beneficial or record owners
of Shares of the Funds, such as processing dividend and distribution payments
from the Funds on behalf of customers, providing periodic statements to
customers showing their positions in the Shares of the Funds, providing
sub-accounting with respect to Shares beneficially owned by such customers,
providing customers with a service that invests the assets of their accounts in
Shares of a Fund pursuant to specific or pre-authorized instructions. As of the
date hereof, no such servicing agreements have been entered into by the Trust on
behalf of either Fund.
The Trust has adopted a Distribution Plan under Rule 12b-1 under the
1940 Act (the "12b-1 Plan") pursuant to which each Lifestyle Fund is authorized
to reimburse the Distributor. Amounts paid to the Distributor under the Trust's
12b-1 Plan may be used by the Distributor to cover expenses that are related to
(i) the distribution of Shares of the Lifestyle Funds, (ii) ongoing servicing
and/or maintenance of the accounts of shareholders of the Lifestyle Funds, (iii)
payments to institutions for selling Shares of the Lifestyle Funds, and (iv)
sub-transfer agency services, subaccounting services or administrative services
related to the sale of the Shares of the Lifestyle Funds, all as set forth in
the Trust's 12b-1 Plan. 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 asset
value of each Lifestyle Fund's Shares. The Distributor may delegate some or all
of these functions to another organization. See "How to Purchase Shares --
Purchases Through Intermediaries."
The Administrative Services and Distribution Plans ("the Plans") have
been approved by the Board of Trustees of the Trust, including a majority of the
Trustees who are not interested persons of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Plans or in any Agreements thereunder (the "Disinterested Trustees"). The
Plans may be terminated as to a Fund by a vote of a majority of the
Disinterested Trustees. The Trustees review quarterly a written report of the
amounts expended pursuant to the Plans and the purposes for which such
expenditures were made. The Plans may be amended by a vote of the Trustees,
provided that any material amendments also require the vote of a majority of the
Disinterested Trustees. For so long as the Plans are in effect, selection and
nomination of those Disinterested Trustees shall be committed to the discretion
of the Trust's Disinterested Trustees. All Agreements may be terminated at any
time without the payment of any penalty by a vote of a majority of the
Disinterested Trustees. The Plans will continue in effect for successive
one-year periods, provided that each such continuance is specifically approved
by a majority of the Board of Trustees, including a majority of the
Disinterested Trustees.
Custodian
The Bank of New York, 48 Wall Street, New York, New York, 10286, serves
as custodian (the "Custodian") to the Funds pursuant to the Custody Agreement.
The Custodian's responsibilities include safeguarding and controlling each
Fund's cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on each Fund's investments.
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<PAGE> 166
Transfer Agency and Fund Accounting Services
BISYS Fund Services, Inc. serves as transfer agent and dividend
disbursing agent (the "Transfer Agent") for the Funds pursuant to the Transfer
Agency Agreement. Pursuant to such Agreement, the Transfer Agent, among other
things, performs the following services in connection with the Funds'
Shareholders of record: maintenance of shareholder records for each of the
Funds' Shareholders of record; processing Shareholder purchase and redemption
orders; processing transfers and exchanges of Shares of the Funds on the
Shareholder files and records; processing dividend payments and reinvestments;
and assistance in the mailing of Shareholder reports and proxy solicitation
materials. For such services the Transfer Agent receives a fee based on the
number of shareholders of record.
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to each of the Funds pursuant to a Fund Accounting Agreement. BISYS
Fund Services, Inc. receives a fee from the Trust for such services for all the
Trust's funds computed at an annual rate of three one-hundredths of one percent
(.03%) (.04% for the International Equity Fund) of the Trust's average daily net
assets up to $2 billion and .02% (.03% for the International Equity Fund) of the
Trust's average daily net assets of $2 billion or more, subject to a minimum
annual fee of $30,000 ($40,000 for the International Equity Fund and $35,000 for
the Pennsylvania Bond Fund). Under such Agreement, BISYS Fund Services, Inc.
maintains the accounting books and records for the Funds, including journals
containing an itemized daily record of all purchases and sales of portfolio
securities, all receipts and disbursements of cash and all other debits and
credits, general and auxiliary ledgers reflecting all asset, liability, reserve,
capital, income and expense accounts, including interest accrued and interest
received, and other required separate ledger accounts; maintains a monthly trial
balance of all ledger accounts; performs certain accounting services for the
Funds, including calculation of the net asset value per share, calculation of
the dividend and capital gain distributions, if any, and of yield,
reconciliation of cash movements with the Funds' custodian, and verification and
reconciliation with the Funds' custodian of all daily trade activity; provides
certain reports; obtains dealer quotations, prices from a pricing service or
matrix prices on all portfolio securities in order to mark the portfolio to the
market; and prepares an interim balance sheet, statement of income and expense,
and statement of changes in net assets for the Funds.
Unless sooner terminated as provided therein, the Fund Accounting
Agreement has an initial term expiring on June 30, 2001, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Fund Accounting Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Fund Accounting Agreement; upon 180 days' written notice by the Trust after the
initial term but only in connection with the reorganization of the Funds into
another registered management investment company; and for cause (as defined in
the Fund Accounting Agreement) by the party alleging cause, on not less than 60
days' notice by the Trust's Board of Trustees or by BISYS Fund Services, Inc.
The Fund Accounting Agreement provides that BISYS Fund Services, Inc.
shall not be liable for any error of judgment or mistake of law or any loss
suffered by a Fund in connection with the matters to which the Fund Accounting
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
or negligence in the performance of its duties, or from the reckless disregard
by BISYS Fund Services, Inc. of its obligations and duties thereunder.
For the fiscal year or period ended June 30, 1999, BISYS Fund Services,
Inc. earned the amounts indicated below with respect to its fund accounting
services for the indicated Funds.
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<PAGE> 167
For the fiscal year or period ended June 30, 1998, BISYS Fund Services,
Inc. earned the amounts indicated below with respect to its fund accounting
services to the indicated Funds.
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1999(1)
----------------
<S> <C>
Prime Money Market Fund ______
Treasury Money Market Fund ______
Established Growth Fund ______
Aggressive Growth Fund ______
Emerging Growth Fund ______
International Equity Fund ______
Income Fund ______
Government Securities Fund ______
Pennsylvania Bond Fund ______
Lifestyle Conservative Growth Fund ______
Lifestyle Moderate Growth Fund ______
Lifestyle Growth Fund ______
</TABLE>
- -------------------------
f(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December 2,
1996, February 3, 1997, July 1, 1998, February 9, 1999, December 2, 1996, July
1, 1997, October 1, 1996, February 3, 1999, February 4, 1999 and February 18,
1999, respectively.
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1998
-------------
<S> <C>
Prime Money Market Fund $47,847
Treasury Money Market Fund $30,875
Established Growth Fund $70,172
Aggressive Growth Fund $41,513
Income Fund $75,419
Government Securities Fund $32,239
Pennsylvania Bond Fund $43,737
</TABLE>
For the fiscal period ended June 30, 1997, BISYS Fund Services, Inc.
earned the amounts indicated below with respect to its fund accounting services
to the indicated Funds.
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<PAGE> 168
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997
-------------
<S> <C>
Prime Money Market Fund $ 21,776
Established Growth Fund $ 31,176
Aggressive Growth Fund $ 13,033
Income Fund $ 35,604
Pennsylvania Bond Fund $ 30,096
</TABLE>
- -------------------------
Auditors
The financial statements for the Funds as of June 30, 1999, and for the
periods indicated therein, have been audited by ________, as set forth in their
report appearing with the aforementioned financial statements incorporated by
reference herein, and are incorporated by reference herein in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Legal Counsel
Drinker Biddle & Reath LLP, One Logan Square, 18th & Cherry Streets,
Philadelphia, Pennsylvania 19103, is counsel to the Trust and will pass upon the
legality of the Shares offered hereby.
ADDITIONAL INFORMATION
Description of Shares
The Trust is a Delaware business trust. The Trust was organized on
September 3, 1998.
Under the Agreement and Declaration of Trust, the beneficial interest
in the Trust may be divided into an unlimited number of full and fractional
transferable shares. The Agreement and Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares of the Trust into one
or more additional classes by setting or changing in any one or more respects,
their respective designations, preferences, conversion or other rights, voting
powers, restrictions, limitations, qualifications and terms and conditions of
redemption. Pursuant to such authority, the Board of Trustees has authorized the
issuance of two classes of shares: Investor Shares, representing interests in
each Fund; and S Shares representing interests in the Prime Money Market Fund.
The Trustees may classify or reclassify any particular class of shares into one
or more series.
Each share of the Trust has a par value of $0.0001, represents an equal
proportionate interest in the Funds, and is entitled to such dividends and
distributions of the income earned on the particular Fund's assets as are
declared at the discretion of the Trustees. Shares of the Funds have no
preemptive rights and only such conversion or exchange rights as the Board of
Trustees may grant in its discretion. When issued for payment as described in
the Prospectuses, each Fund's Shares will be fully paid and non-assessable by
the Trust. In the event of the termination of the Trust or the Funds,
shareholders of the
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<PAGE> 169
Funds would be entitled to receive the assets available for distribution
belonging to the particular Class of Shares of the particular Fund, and a
proportionate distribution of any general assets not belonging to any particular
portfolio which are available for distribution. Shareholders of the Funds are
entitled to participate in the net distributable assets of the Funds on
liquidation, based on the number of shares of the particular class of Shares of
the particular Fund that are held by each of them.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held, and will vote in the
aggregate and not by fund except as otherwise expressly required by law. For
example, Shareholders of a Fund will vote in the aggregate with other
shareholders of the Trust with respect to the election of Trustees. However,
Shareholders of that Fund will vote as a fund, and not in the aggregate with
other shareholders of the Trust, for purposes of approval or amendment of the
Fund's investment advisory agreement.
Individual Trustees are elected by the shareholders of the Trust,
although Trustees may, under certain circumstances, fill vacancies, including
vacancies created by expanding the size of the Board. Trustees may be removed by
the Board of Trustees or shareholders in accordance with the provisions of the
Agreement and Declaration of Trust and By-Laws of the Trust and Delaware law.
An annual or special meeting of shareholders to conduct necessary
business is not required by the Agreement and Declaration of Trust, the 1940 Act
or other authority except, under certain circumstances, to elect Trustees, amend
the Agreement and Declaration of Trust, the investment advisory agreement or a
Fund's fundamental policies and to satisfy certain other requirements. To the
extent that such a meeting is not required, the Trust does not intend to have an
annual or special meeting of shareholders.
As of August 24, 1999, Keystone possessed, on behalf of its or its
affiliates' underlying accounts, voting or investment power with respect to more
than 25% of the outstanding Shares of each Fund with the exception of the
Lifestyle Funds.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders meeting for the election of
Trustees. Shares of the Trust have non-cumulative voting rights and,
accordingly, the holders of more than 50% of the Trust's outstanding shares
(irrespective of class) may elect all of the Trustees. Except as set forth above
and in the Prospectuses, the Trustees will continue to hold office and may
appoint successor Trustees.
The Agreement and Declaration of Trust authorizes the Board of
Trustees, without shareholder approval, to issue shares to a party or parties
and for such amount and type of consideration and on such terms, subject to
applicable law, as the Trustees may deem appropriate. The Board of Trustees may
issue fractional shares and shares held in the treasury. The Board of Trustees
has full power and authority, in its sole discretion, and without obtaining
shareholder approval, to divide or combine the shares or any class or series
thereof into a greater or lesser number, to classify or reclassify any issued
shares or any class or series thereof into one or more classes or series of
shares, and to take such other action with respect to the Trust's shares as the
Board of Trustees may deem desirable. The Agreement and Declaration of Trust
authorizes the Trustees without shareholder approval to cause the Trust, or any
series thereof, to merge or consolidate with any corporation, association, trust
or other organization or sell or exchange all or substantially all of the
property belonging to the Trust or any series thereof. The Agreement and
Declaration of Trust permits the termination of the Trust or of any series or
class of the Trust by the Trustees without shareholder approval.
-71-
<PAGE> 170
The Agreement and Declaration of Trust provides that the Trustees and
officers, when acting in their capacity as such, will not be personally liable
to any person other than the Trust or a beneficial owner for any act, omission
or obligation of the Trust, or any Trustee or any officer of the Trust. Neither
a Trustee nor an officer of the Trust shall be liable for any act or omission in
his capacity as Trustee or as an officer of the Trust, or for any act or
omission of any officer (or other officer) or employee of the Trust or of any
other person or party, provided that the Agreement and Declaration of Trust does
not protect any Trustee or officer against any liability to the Trust or to
shareholders of record to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee or the duties of such
officer.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each fund or class affected by the matter. For purposes of determining whether
the approval of a majority of the outstanding shares of a fund or class will be
required in connection with a matter, a fund or class will be deemed to be
affected by a matter unless it is clear that the interests of each fund or class
in the matter are identical, or that the matter does not affect any interest of
the fund. Under Rule 18f-2, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the election of Trustees
may be effectively acted upon by shareholders of the Trust voting without regard
to series.
As of August 24, 1999, the name, address and percentage of the
outstanding shares held by other investors who may have owned of record 5% or
more of the outstanding shares of a particular class of a Fund were as follows:
<TABLE>
Prime Money Market Investor
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 52.6895%
BISYS Fund Services
Keystone Financial Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 36.6759%
National Financial Services Corp.
200 Liberty Street
New York, NY 10281 10.0496%
</TABLE>
<TABLE>
Pennsylvania Municipal Bond
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 94.7361%
</TABLE>
<TABLE>
Intermediate Term Income
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 20.6261%
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 76.7571%
</TABLE>
<TABLE>
Established Growth
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 26.3786%
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 68.4841%
</TABLE>
<TABLE>
Aggressive Growth
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 62.9636%
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 30.8564%
</TABLE>
<TABLE>
Limited Duration Government Securities
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 88.9911%
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 10.1948%
</TABLE>
<TABLE>
Emerging Growth
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 80.6397%
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 7.3774%
</TABLE>
<TABLE>
International Equity Fund
<CAPTION>
Name and Address Percentage
<S> <C>
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 96.3183%
</TABLE>
<TABLE>
Lifestyle Conservative Growth Fund
<CAPTION>
Name and Address Percentage
<S> <C>
NFSC FEBO C3X-032956
NFSC FMTC IRA Rollover
2096 Blair Street
Williamsport, PA 17701 5.3144%
NFSC FEBO C3X-203068
Robert Holsinger
520 Barley Street
Roaring Spring, PA 16673 16.7543%
NFSC FEBO C3X-236217
Jacob L. Buck, Jr.
RR 2 Box 1755
Milton, PA 17847 11.1585%
NFSC FEBO C3X-262960
Earl E. Meily
14 Cardinal Drive
Milton, PA 17847 8.4196%
NFSC FEBO C3X-065390
NFSC FMTC IRA Rollover
RR 4 Box 117
Mifflinburg, PA 17844 22.4894%
NFSC FEBO C3X-381306
Thomas P. McIntyre, Sr.
1618 County Street
Laureldale, PA 19605 11.2052%
</TABLE>
<TABLE>
Lifestyle Moderate Growth Fund
<CAPTION>
Name and Address Percentage
<S> <C>
NFSC FEBO C3X-163449
NFSC FMTC IRA
3301 Shellers Bnd Apt. 946
State College, PA 16801 5.9390%
NFSC FEBO C3X-176338
NFSC FMTC IRA
106 Blair Street
Martinsburg, PA 16662 5.6536%
</TABLE>
<TABLE>
Lifestyle Growth Fund
<CAPTION>
Name and Address Percentage
<S> <C>
NFSC FEBO C3X-104361
NFSC FMTC IRA Rollover
3513 Fort Roberdeau Avenue
Altoona, PA 16602 18.0145%
NFSC FEBO C3X-156965
NFSC FMTC IRA
P.O. Box 8
Curryville, PA 16631 10.6998%
NFSC FEBO C3X-170054
NFSC FMTC IRA
425 Feguson Avenue
State College, PA 16803 10.4635%
</TABLE>
<TABLE>
Prime Money Market Fund Shares
<CAPTION>
Name and Address Percentage
<S> <C>
BISYS Fund Services
Governor Funds Financial Sweep Customer
3435 Stelzer Road
Columbus, OH 43219 100.0000%
</TABLE>
Vote of a Majority of the Outstanding Shares
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority of the outstanding Shares" of the Trust, a
Fund or a class means the affirmative vote, at a meeting of Shareholders duly
called, of the lesser of (a) 67% or more of the votes of Shareholders of the
Trust, Fund or that class present at a meeting at which the holders of more than
50% of the votes attributable to Shareholders of record of such Trust, Fund, or
class are represented in person or by proxy, or (b) the holders of more than 50%
of the outstanding votes of Shareholders of that Trust, Fund or class.
Additional General Tax Information
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to invest all, or substantially
all, of its assets in debt obligations the interest on which is exempt for
federal income tax purposes, so that a fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
fund would be taxed on its taxable income at regular corporate rates without any
deduction for distributions to shareholders; and (2) shareholders would be taxed
as if they received ordinary dividends, although corporate shareholders could be
eligible for the dividends received deduction.
In order for the Pennsylvania Municipal Bond Fund to pay tax-exempt
dividends for any taxable year, at least 50% of the aggregate value of the
Fund's assets at the close of each quarter of the Fund's taxable year must
consist of exempt-interest obligations.
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<PAGE> 171
As described in their Prospectus, Pennsylvania Municipal Bond Fund is
designed to provide investors with tax-exempt interest income. The Fund is not
intended to constitute a balanced investment program and is not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts
since such plans and accounts are generally tax-exempt and, therefore, would not
gain any additional benefit from the Fund's dividends being tax-exempt. In
addition, the Fund may not be an appropriate investment for persons or entities
that are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person which regularly uses a part of such
facilities in its trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, which occupies more
than 5% of the usable area of such facilities or for which such facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations,
partnerships and its partners and an S corporation and its shareholders.
The tax principles applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by a Fund, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause a Fund to
recognize taxable income prior to the receipt of cash, thereby requiring the
Fund to liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to shareholders as
ordinary income.
In addition, in the case of any shares of a PFIC in which a Fund
invests, the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
Seven-Day and 30-Day Yields of the Prime Money Market Fund and the Treasury
Money Market Fund
The standardized seven-day yield for the Prime Money Market Fund and
the Treasury Money Market Fund is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical preexisting account
in that Fund having a balance of one Share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from Shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7). The net change in the account
value of the Fund includes the value of additional Shares purchased with
dividends from the original Share, dividends declared on both the original Share
and any such additional Shares, and all fees, other than nonrecurring account or
sales charges, that are charged to all Shareholder accounts in proportion to the
length of the base period and assuming such Fund's average account size. The
capital changes to be excluded from the calculation of the net change in account
value are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The 30-day yield is calculated as described above
except that the base period is 30 days rather than seven days.
The effective yield for Shares of the Prime Money Market Fund and the
Treasury Money Market Fund is computed by compounding the base period return, as
calculated above, by adding 1 to the base period return raising the sum to a
power equal to 365 divided by seven and subtracting 1 from the result.
For the seven-day period ended June 30, 1999, the seven-day yield and
seven-day effective yield for Investor Shares of the Prime Money Market Fund
were ____% and ____%, respectively. For the 30-day period ended June 30, 1999,
the yield and effective yield for Investor Shares of the Prime Money Market Fund
were ____% and ____%, respectively. For the seven-day period ended June 30,
1999, the seven-day yield and seven-day effective yield for S Shares of the
Prime Money Market Fund were ___% and ___%, respectively. For the 30-day period
ended June 30, 1999, the yield and effective yield for S Shares of the Prime
Money Market Fund were ___% and ___%, respectively.
For the seven-day period ended June 30, 1999, the Treasury Money Market
Fund's seven-day yield and seven-day effective yield were ___% and ___%,
respectively. For the 30-day period ended June 30, 1999, the yield and effective
yield for the Treasury Money Market Fund were ____% and ___%, respectively.
30-Day Yield of the Funds
The yield of the Funds will be computed by annualizing net investment
income per share for a recent 30-day period and dividing that amount by the Fund
Share's maximum offering price (reduced by any undeclared earned income expected
to be paid shortly as a dividend) on the last trading day of that period. Net
investment income will reflect amortization of any market value premium or
discount of fixed income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. The yield of a Fund will
vary from time to time depending upon market conditions, the composition of the
Fund's portfolio and operating expenses of the Trust allocated to such Fund.
These factors and possible differences in the methods used in calculating yield
should be considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's Shares and to the
relative risks associated with the investment objectives and policies of that
Fund.
In addition, tax equivalent yields are computed by dividing that
portion of the Pennsylvania Bond Fund's yield (as computed above) which is
tax-exempt by one minus a stated income tax rate and
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<PAGE> 172
adding that result to that portion, if any, of the yield of the Pennsylvania
Bond Fund which is not tax-exempt.
For the 30-day period ended June 30, 1999, the yields for the Income
Fund and the Pennsylvania Bond Fund were ____% and ____%, respectively, assuming
the imposition of the maximum sales charge, and ____% and ____%, respectively,
excluding the effect of a sales charge. For the same period, the tax equivalent
yields for the Pennsylvania Bond Fund, assuming a ____% federal tax rate, were
____%, assuming the imposition of the maximum sales charge, and ____%, excluding
the effect of a sales charge.
For the 30-day period ended June 30, 1999, the yields for the
Government Securities Fund were ____% assuming the imposition of the maximum
sales charge, and ____% excluding the effect of a sales charge.
Calculation of Total Return
Average annual total return is a measure of the change in value of an
investment in a Fund over the period covered, which assumes any dividends or
capital gains distributions are reinvested in that Fund immediately rather than
paid to the investor in cash. Average annual total return will be calculated by:
(1) adding to the total number of Shares purchased by a hypothetical $1,000
investment in a Fund (less the maximum sales charge, if any), all additional
Shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of Shares owned at the end of
the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
annualizing the result for periods of less than one year. A Fund, however, may
also advertise aggregate total return in addition to or in lieu of average
annual total return. Aggregate total return is a measure of the change in value
of an investment in a Fund over the relevant period and is calculated similarly
to average annual total return except that the result is not annualized.
For the one year period ended June 30, 1999, and the period from
commencement of operations to June 30, 1999, the average annual total returns
for the Funds (other than the Emerging Growth, International Equity and
Lifestyle Funds), including the performance of any Fund's Predecessor Fund and
predecessor CIF (which CIF performance has been restated to reflect the
estimated fees for such Fund for the current fiscal years 1998 and 1997), are as
follows:
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<PAGE> 173
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Fund With Maximum Sales Load(1) Without Sales Load
---- -------------------------- ------------------
Since Since
1 Year Inception(2) 1 Year Inception(2)
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Prime Money Market* N/A N/A ____% ____%
Treasury Money Market* N/A N/A ____% ____%
Established Growth ____% ____% ____% ____%
Aggressive Growth ____% ____% ____% 18.62%
Income ____% ____% ____% 7.14%
Government Securities ____% ____% ____% 5.10%
Pennsylvania Bond ____% ____% ____% 5.67%
</TABLE>
- ----------------------
* The Prime Money Market and Treasury Money Market Funds do not have
sales loads.
1 The maximum sales load for the Established Growth Fund, Emerging Growth
Fund, Aggressive Growth Fund, Income Fund and Pennsylvania Bond Fund,
is 4.50%. The maximum sales load for the Government Securities Fund is
3.00%.
2 Commenced operations October 7, 1996, July 1, 1997, January 1, 1995
(the Established Growth Fund's predecessor CIF), July 1, 1994 (the
Aggressive Growth Fund's predecessor CIF), December 2, 1996, October
31, 1995 (the Government Securities Fund's predecessor CIF), and
October 1, 1996, respectively.
Past performance is no guarantee as to future performance.
Distribution Rates
The Funds may from time to time advertise current distribution rates.
Performance Comparisons
Investors may judge the performance of the Funds by comparing them to
the performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies through various mutual fund or market indices
such as those prepared by Dow Jones & Co., Inc. and S&P and to data prepared by
Lipper Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds. Comparisons may also be made to
indices or data published in MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET
JOURNAL, MORNINGSTAR, INC., IBBOTSON ASSOCIATES, CDA/WIESENBERGER, THE NEW YORK
TIMES, BUSINESS WEEK, U.S.A. TODAY and local periodicals. In addition to
performance information, general information about the Funds that appears in a
publication such as those mentioned above may be included in advertisements,
sales literature and reports to shareholders. The Funds may also include in
advertisements and reports to shareholders information
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<PAGE> 174
discussing the performance of the Advisor or Sub-Advisors in comparison to other
investment Advisors and to other institutions.
From time to time, the Trust may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of dollar
cost averaging); (2) discussions of general economic trends; (3) presentations
of statistical data to supplement such discussions; (4) descriptions of past or
anticipated portfolio holdings for the Funds; (5) descriptions of investment
strategies for the Funds; (6) descriptions or comparisons of various investment
products, which may or may not include the Funds; (7) comparisons of investment
products (including the Funds) with relevant market or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) testimonials describing the experience
of persons that have invested in a Fund. The Trust may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of a Fund.
Current yields or total return will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
total return may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and total
return are functions of a Fund's quality, composition and maturity, as well as
expenses allocated to that Fund. Fees imposed upon Customer accounts by the
Advisor, Sub-Advisors, their affiliates or their affiliated or correspondent
banks for cash management services or other services will reduce a Fund's
effective yield and total return to Customers. The current yield and performance
of the Funds may be obtained by calling the Trust at 1-800-766-3960.
Miscellaneous
Individual Trustees are generally elected by the shareholders and,
subject to removal by the vote of two-thirds of the Board of Trustees, serve for
a term lasting until the next meeting of shareholders at which Trustees are
elected. Such meetings are not required to be held at any specific intervals.
Generally, shareholders owning not less than 20% of the outstanding shares of
the Trust entitled to vote may cause the Trustees to call a special meeting.
The Trust is registered with the Commission as a management investment
company. Such registration does not involve supervision by the Commission of the
management or policies of the Trust.
The Prospectuses and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectuses and this Statement of Additional Information are not
an offering of the securities herein described in any state in which such
offering may not lawfully be made. No salesman, dealer, or other person is
authorized to give any information or make any representation other than those
contained in the Prospectuses and this Statement of Additional Information.
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FINANCIAL STATEMENTS
The Financial Statements for the Prime Money Market, Treasury Money
Market, Established Growth, Aggressive Growth, Emerging Growth, International
Equity, Income, Government Securities, Pennsylvania Bond, Lifestyle Conservative
Growth, Lifestyle Moderate Growth and Lifestyle Growth Funds for the fiscal
period or year ended June 30, 1999 and the financial highlights for each of the
respective periods presented, appearing in the 1999 Annual Report to
Shareholders of Governor Funds and the report thereon of ________, the Trust's
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. No other parts of the 1999 Annual
Report to Shareholders of Governor Funds are incorporated herein.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and Poor's for commercial
paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be
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evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2," and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1," and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
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"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB," but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
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"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest
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are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca," and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa." The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations
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will not be met when due. Debt rated "CCC" is well below investment grade
and has considerable uncertainty as to timely payment of principal, interest or
preferred dividends. Debt rated "DD" is a defaulted debt obligation, and the
rating "DP" represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB," and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", and "C" - Bonds have high default risk. Default
is a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
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"DDD," "DD," and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to denote relative standing within
these major rating categories.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely repayment of principal and
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interest. "BB" indicates the lowest degree of speculation and "CC" the
highest degree of speculation.
"D" - This designation indicates that the long-term debt
is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's note rating reflects the liquidity
factors and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
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"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Statement of Additional Information, the
Established Growth, Aggressive Growth, Emerging Growth, International Equity,
Income and Pennsylvania Bond Funds may enter into futures contracts and options
for hedging purposes. Such transactions are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS.
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Funds, through using
futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, a Fund is immediately
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, a Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Fund
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entering into a futures contract sale. If the offsetting sale price exceeds
the purchase price, a Fund realizes a gain, and if the purchase price exceeds
the offsetting sale price, a Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange and the New York Futures Exchange.
The Fund would deal only in standardized contract's on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership.
A public market now exists in futures contracts covering
various financial instruments including long-term Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month Treasury Bills; and ninety-day
commercial paper. A Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
II. STOCK INDEX FUTURES CONTRACTS.
GENERAL. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Fund will sell index futures contracts in order to offset a
decrease in market value of its securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, a Fund will purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize stock index futures contracts
in anticipation of changes in the composition of its holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
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III. FUTURES CONTRACTS ON FOREIGN CURRENCIES.
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by a Fund to
hedge against exposure to fluctuations in exchange rates between the U.S. dollar
and other currencies arising from multinational transactions.
IV. MARGIN PAYMENTS.
Unlike when a Fund purchases or sells a security, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with a Fund's custodian an amount of cash or cash equivalents, the value
of which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to a Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instrument fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and a Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and a Fund would be
required to make a variation margin payment to the broker. At any time prior to
expiration of the futures contract, the Advisor or Sub-Advisor may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate a Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to a Fund, and a Fund
realizes a loss or gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks in connection with the use of futures
by a Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, a
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
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advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, a Fund involved
will experience either a loss or gain on the future which will not be completely
offset by movements in the price of the securities which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of securities being hedged if the volatility over a particular time
period of the prices of such securities has been greater than the volatility
over such time period of the future, or if otherwise deemed to be appropriate by
the Advisor or Sub-Advisor. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by the
Advisor or Sub-Advisor. It is also possible that, where a Fund has sold futures
to hedge its portfolio against a decline in the market, the market may advance
and the value of securities held by a Fund may decline. If this occurred, a Fund
would lose money on the future and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities or a currency before a Fund is able to
invest its cash (or cash equivalents) in securities (or options) in an orderly
fashion, it is possible that the market may decline instead; if a Fund then
concludes not to invest in securities or options at that time because of concern
as to possible further market decline or for other reasons, a Fund will realize
a loss on the futures contract that is not offset by a reduction in the price of
securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Advisor or Sub-Advisor
may still not result in a successful hedging transaction over a short time
frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the
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Funds would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Successful use of futures by the Funds is also subject to the
Advisor's or Sub-Advisor's ability to predict correctly movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, a Fund will lose part or
all of the benefit to the increased value of its securities which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
VI. OPTIONS ON FUTURES CONTRACTS.
The Funds may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected in
the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
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market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Funds because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts. Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options during the current fiscal year, and will not do so in the
future absent any necessary regulatory approvals.
The tax principles applicable to certain financial investments and
future contracts and options that may be acquired by a Fund are complex and, in
some cases, uncertain. Such investments may cause a Fund to recognize taxable
income prior to the receipt of cash, thereby requiring the fund to liquidate
other positions, or to borrow money, so as to make sufficient distributions to
shareholders to avoid corporate-level tax. Moreover, some or all of the taxable
income recognized may be ordinary income or short-term capital gain, so that the
distributions may be taxable to shareholders as ordinary income.
VII. ACCOUNTING AND TAX TREATMENT.
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by the Funds at the close of
the Funds' taxable year will be treated for federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and sixty
percent of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time a Fund holds the futures contract ("the
40-60 rule"). The amount of any capital gain or loss actually realized by a Fund
in a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by a Fund in a
prior year as a result of the constructive sale of the contracts. With respect
to futures contracts to sell, which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by a Fund, losses as to such contracts to sell will be subject
to certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which will also
be applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed not
to begin prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of a
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, a Fund would be allowed (in lieu
of the foregoing) to elect either (1) to offset gains or losses from portions
which are part of a mixed straddle by separately identifying each mixed straddle
to which such treatment applies, or (2) to establish a mixed straddle account
for which gains and losses would be recognized and offset on a periodic basis
during the taxable year. Under either election, the 40-60 rule will apply to the
net gain or loss attributable to the futures contracts, but in the case of a
mixed straddle account election, no more than 50% of any net gain may be treated
as long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures contracts generally receive federal tax treatment similar to
that described above.
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Certain foreign currency contracts entered into by the Funds
may be subject to the "mark-to-market" process. If the Fund makes a Capital
Asset Election with respect to such contracts, the contracts will be subject to
the 40-60 rule, described above. Otherwise, such gain or loss will be treated as
100% ordinary gain or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts. As
of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Foreign currency contracts entered into by a Fund
may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern
the federal income tax treatment of certain transactions denominated in terms of
a currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument. However, regulated futures contracts and non-equity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
"mark-to-market" rules, unless an election is made to have such currency rules
apply. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. "Section 988 hedging transactions" are not subject to
the mark-to-market or loss deferral rules under the Code. It is anticipated that
some of the non-U.S. dollar denominated investments and foreign currency
contracts that a Fund may make or may enter into will be subject to the special
currency rules described above. Gain or loss attributable to the foreign
currency component of transactions engaged in by the Funds which are not subject
to special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
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Under the federal income tax provisions applicable to
regulated investment companies, less than 30% of a company's gross income must
be derived from gains realized on the sale or other disposition of securities
held for less than three months. With respect to futures contracts and other
financial instruments subject to the "mark-to-market" rules, the Internal
Revenue Service has ruled in private letter rulings that a gain realized from
such a futures contract or financial instrument will be treated as being derived
from a security held for three months or more (regardless of the actual period
for which the contract or instrument is held) if the gain arises as a result of
a constructive sale under the "mark-to-market" rules, and will be treated as
being derived from a security held for less than three months only if the
contract or instrument is terminated (or transferred) during the taxable year
(other than by reason of the mark-to-market rules) and less than three months
have elapsed between the date the contract or instrument is acquired and the
termination date. In determining whether the 30% test is met for a taxable year,
increases and decreases in the value of the Funds' futures contracts and other
investments that qualify as part of a "designated hedge," as defined in the
Code, may be netted.
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Registration Statement
of
GOVERNOR FUNDS
on
Form N-1A
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Agreement and Declaration of Trust, dated as
of September 3, 1998 is incorporated herein
by reference to exhibit (1) of the
Registration Statement on Form N-1A filed
with the Commission on October 1, 1998 (the
"Initial Registration Statement").
(b) By-Laws are incorporated herein by reference to
exhibit (2) of the Initial Registration Statement.
(c) None.
(d) (1) Investment Advisory Agreement dated November
16, 1998, between Governor Funds and
Governors Group Advisors, Inc.
(2) Investment Sub-Advisory Agreement dated
November 16, 1998, between Governors Group
Advisors, Inc. and Martindale Andres &
Company, Inc.
(3) Investment Sub-Advisory Agreement dated
November 16, 1998, between Governors Group
Advisors, Inc. and Brinson Partners, Inc.
(e) (1) Distribution Agreement dated November 16,
1998, between Governor Funds and BISYS Fund
Services Limited Partnership d/b/a BISYS
Fund Services.
(f) None.
(g) (1) Form of Custody Agreement dated November 16,
1998, between Governor Funds and The Bank of
New York is incorporated by reference to
Exhibit (b)(8)(a) of the Initial
Registration Statement.
(2) Cash Management and Related Services
Agreement dated November 16, 1998, between
Governor Funds and The Bank of New York is
incorporated by reference to Exhibit
(b)(8)(b) of the Initial Registration
Statement.
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<PAGE> 195
(h) (1) Management and Administration Agreement
dated November 16, 1998, among Governor
Funds, BISYS Fund Services Ohio, Inc. and
Governors Group Advisors, Inc.
(2) Transfer Agency Agreement dated November 16,
1998, between Governor Funds and BISYS Fund
Services, Inc.
(3) Fund Accounting Agreement dated November 16,
1998, between Governor Funds and BISYS Fund
Services, Inc.
(i) To be filed by amendment.
(j) Consent of Drinker Biddle & Reath LLP.
(k) None.
(l) Purchase Agreement dated November 16, 1998.
(m) (1) Rule 12b-1 Plan is incorporated herein by
reference to exhibit (15)(a) of the Initial
Registration Statement.
(2) Administrative Services Agreement is
incorporated herein by reference to exhibit
(15)(b) of the Initial Registration
Statement.
(n) None.
(o) Rule 18f-3 Plan is incorporated herein by reference
to exhibit (18) of the Initial Registration
Statement.
Item 24. Persons Controlled By or Under Common Control with Registrant
None.
Item 25. Indemnification
Article VI, Section 6.4 of the Registrant's Declaration of
Trust, incorporated by reference herein as Exhibit (a) hereto,
provides for the indemnification of Registrant's Trustees and
officers. Indemnification of the Group's principal
underwriter, custodians, investment advisers, manager and
administrator, transfer agent and fund accountant is provided
for, respectively, in Section 1.11 of the Distribution
Agreement incorporated by reference herein as Exhibit e(1)
hereto, Article XVII, Section 14 of the Custody Agreement
incorporated by reference herein as Exhibit g(1) hereto,
Section 9 of the Investment Advisory Agreement incorporated by
reference herein as Exhibit d(1) hereto, Section 4 of the
Management and Administration Agreement incorporated by
reference herein as Exhibit h(1) hereto, Section 9 of the
Transfer Agency Agreement incorporated by
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<PAGE> 196
reference herein as Exhibit h(2) hereto, Section 7 of the Fund
Accounting Agreement incorporated by reference herein as
Exhibit h(3) hereto. The Group has obtained from a major
insurance carrier a trustees' and officers' liability policy
covering certain types of errors and omissions.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers,
and controlling persons of Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person
of Registrant in the successful defense of any action, suit,
or proceeding) is asserted by such trustee, officer, or
controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed
by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser.
(a) Governors Group Advisors, Inc., ("Governors Group Advisors"), 23
Front Street, Harrisburg, Pennsylvania, is the investment advisor for
the Governor Funds. Governors Group Advisors is a wholly-owned
subsidiary of Keystone Financial, Inc. ("Keystone"). As of August 26,
1999, Governors Group Advisors had $1.2 billion assets under
management.
To the knowledge of Registrant, none of the directors or officers of
Governors Group Advisors is or has been at any time during the past two
fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except as described below.
Keystone Financial, Inc.
23 North Front Street
Harrisburg, Pennsylvania 17105
Robert E. Leech, Chairman & CEO of Governors Group Advisors, has been
President and CEO of Keystone's Asset Management Group for the past
seven years; Lana V. Burkhardt, President and Director of Governors
Group Advisors, has been a Vice President of Keystone's Asset
Management Group for the past six years; Laura C. Plumley,
_____________; and James F. Patterson, Treasurer of Governors Group
Advisors, has been a Vice President of Mutual Funds Administration at
Keystone since July 1998 (prior to that he was an employee of Federated
Investors, Inc., Federated Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222 since November 1996, and
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<PAGE> 197
prior to that he was an employee of BISYS Fund Services, 3435 Stelzer
Road, Columbus, Ohio 43219 since January 1996).
Martindale Andres & Company, Inc.
Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
William C. Martindale, Jr., and Robert P. Andres, each a Vice President of
Governors Group Advisors, have been officers of Martindale Andres & Company,
Inc. since June 1989.
(b) Martindale Andres & Company, Inc., West Conshohocken, Pennsylvania
("Martindale Andres"), is the sub-investment adviser for Prime Money Market
Fund, Pennsylvania Municipal Bond Fund, Established Growth Fund, Intermediate
Term Income Fund, Aggressive Growth Fund, U.S. Treasury Obligations Money Market
Fund, Limited Duration Government Securities Fund, Emerging Growth Fund,
Lifestyle Conservative Growth Fund, Lifestyle Moderate Growth Fund and Lifestyle
Growth Fund. Martindale Andres is a wholly-owned subsidiary of Keystone
Financial, Inc. In addition to serving as investment adviser of such Funds,
Martindale Andres has managed since its founding the investment portfolios of
high net worth individuals, endowments and pension and common trust funds.
To the knowledge of Registrant, none of the directors or
officers of Martindale Andres is or has been at any time
during the past two fiscal years engaged in any other
business, profession, vocation or employment of a substantial
nature, except that certain officers and directors of
Martindale Andres also hold positions with Martindale Andres'
parent, Keystone Financial, Inc.
The information required by this Item 26 with respect to each
director, officer or partner of Martindale Andres is
incorporated by reference to Form ADV filed by Martindale
Andres with the Securities and Exchange Commission pursuant to
the Investment Advisors Act of 1940 (SEC File No. 801-51203).
(c) Brinson Partners, Inc., Chicago, Illinois, ("Brinson"), is the
sub-investment advisor for the International Equity Fund.
To the knowledge of Registrant, none of the directors or
officers of Brinson is or has been at any time during the past
two fiscal years engaged in any other business, profession,
vocation or employment of a substantial nature.
The information required by this Item 26 with respect to each
director, officer or partner of Brinson is incorporated by
reference to Form ADV filed by Brinson with the Securities and
Exchange Commission pursuant to the Investment Advisors Act of
1940 (SEC File No. 801-34910).
Item 27. Principal Underwriter
(a) BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS") acts as distributor for Registrant. BISYS also distributes
the securities of The Victory
Page 4
<PAGE> 198
Portfolios, Fifth Third Funds, the AmSouth Mutual Funds, the American
Performance Funds, The Coventry Group, The BB&T Mutual Funds Group, the
M.S.D.&T. Funds, the Pacific Capital Funds, the MMA Praxis Mutual
Funds, Pacific Capital Funds, the Summit Investment Trust, Hirtle
Callaghan Trust, HSBC Family of Funds, The Infinity Mutual Funds, Inc.,
Intrust Funds, Magna Funds, Meyers Investment Trust, The Republic Funds
Trust, The Republic Advisors Funds Trust, Sefton Funds Trust, Alpine
Equity Trust, ESC Strategic Funds, Inc., The Eureka Funds, Mercantile
Mutual Funds, Inc., The Victory Variable Funds, Vintage Funds, Inc.,
and Variable Insurance Funds, each of which is a management investment
company.
(b) The information required by this Item 27 with respect to each
director, officer or partner of BISYS Fund Services Limited Partnership
d/b/a BISYS Fund Services ("BISYS") is incorporated by reference to
Form BD filed by BISYS with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (SEC File No. 8-32480).
(c) None.
Item 28. Location of Accounts and Records
(1) Governors Group Advisors, Inc., 23 Front Street,
Harrisburg, Pennsylvania 17101 (records relating to its
functions as investment adviser and co-administrator).
(2) Martindale Andres & Company, Inc., 200 Four Falls
Corporate Center, West Conshohocken, Pennsylvania 19728
(records relating to its functions as sub-adviser).
(3) Brinson Partners, Inc., 209 South LaSalle Street, Chicago,
Illinois 60604 (records relating to its functions as
sub-adviser).
(4) BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its function as distributor).
(5) BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219 (records relating to its functions as transfer
agent and fund accountant).
(6) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219 (records relating to its functions as
co-administrator).
(7) Drinker Biddle & Reath LLP, One Logan Square, 18th &
Cherry Streets, Philadelphia, Pennsylvania 19103 (Agreement
and Declaration of Trust, By-Laws and Minute Books).
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<PAGE> 199
Item 29. Management Services.
None.
Item 30. Undertakings.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to
whom a prospectus is delivered.
Page 6
<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant hereby
certifies that it has duly caused this Post-Effective Amendment No. 1 to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Harrisburg, and State of Pennsylvania, on the
30th day of August, 1999.
GOVERNOR FUNDS
Registrant
*Robert E. Leech
----------------------------
Robert E. Leech
Chairman and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Robert E. Leech Chairman and Trustee August 30, 1999
- -------------------------------
Robert E. Leech
* Lana V. Burkhardt President and Trustee August 30, 1999
- -------------------------------
Lana V. Burkhardt
* John J. Bolger Trustee August 30, 1999
- -------------------------------
John J. Bolger
* James L. Brock Trustee August 30, 1999
- -------------------------------
James L. Brock
* John S. Cramer Trustee August 30, 1999
- -------------------------------
John S. Cramer
* Michael A. Grunewald Treasurer August 30, 1999
- -------------------------------
Michael A. Grunewald
*By/s/ Michael P. Malloy
- -------------------------------
Michael P. Malloy
Attorney-In-Fact
</TABLE>
<PAGE> 201
GOVERNOR FUNDS
(the "Trust")
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Robert
E. Leech, hereby constitutes and appoints Michael P. Malloy, his true and lawful
attorney, to execute in his name, place, and stead, in his capacity as Trustee
or officer, or both, of the Trust, the Registration Statement on Form N-1A of
Governor Funds and any amendments thereto and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission; and said attorney shall have full power and authority to do
and perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorney being hereby ratified and approved.
DATED: October 5, 1998
/s/ Robert E. Leech
- -----------------------
Robert E. Leech
<PAGE> 202
GOVERNOR FUNDS
(the "Trust")
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, James L.
Brock, hereby constitutes and appoints Michael P. Malloy his true and lawful
attorney, to execute in his name, place, and stead, in his capacity as Trustee
or officer, or both, of the Trust, the Registration Statement on Form N-1A of
Governor Funds and any amendments thereto and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission; and said attorney shall have full power and authority to do
and perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorney being hereby ratified and approved.
DATED: October 5, 1998
/s/ James L. Brock
- ----------------------
James L. Brock
<PAGE> 203
GOVERNOR FUNDS
(the "Trust")
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, James S.
Cramer, hereby constitutes and appoints Michael P. Malloy, his true and lawful
attorney, to execute in his name, place, and stead, in his capacity as Trustee
or officer, or both, of the Trust, the Registration Statement on Form N-1A of
Governor Funds and any amendments thereto and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission; and said attorney shall have full power and authority to do
and perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorney being hereby ratified and approved.
DATED: October 5, 1998
/s/ John S. Cramer
- -----------------------
John S. Cramer
<PAGE> 204
GOVERNOR FUNDS
(the "Trust")
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Lana V.
Burkhardt, hereby constitutes and appoints Michael P. Malloy, her true and
lawful attorney, to execute in her name, place, and stead, in her capacity as
Trustee or officer, or both, of the Trust, the Registration Statement on Form
N-1A of Governor Funds and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorney shall have full power and authority
to do and perform in her name and on her behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as she might or could do in person, said acts of
said attorney being hereby ratified and approved.
DATED: October 5, 1998
/s/ Lana V. Burkhardt
- -----------------------
Lana V. Burkhardt
<PAGE> 205
GOVERNOR FUNDS
(the "Trust")
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, John J.
Bolger, hereby constitutes and appoints Michael P. Malloy, his true and lawful
attorney, to execute in his name, place, and stead, in his capacity as Trustee
or officer, or both, of the Trust, the Registration Statement on Form N-1A of
Governor Funds and any amendments thereto and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission; and said attorney shall have full power and authority to do
and perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorney being hereby ratified and approved.
DATED: October 5, 1998
/s/ John J. Bolger
- --------------------------
John J. Bolger
<PAGE> 206
GOVERNOR FUNDS
(the "Trust")
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Michael
Grunewald, hereby constitutes and appoints Michael P. Malloy, his true and
lawful attorney, to execute in his name, place, and stead, in his capacity as
Trustee or officer, or both, of the Trust, the Registration Statement on Form
N-1A of Governor Funds and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorney shall have full power and authority
to do and perform in his name and on his behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as he might or could do in person, said acts of
said attorney being hereby ratified and approved.
DATED: October 5, 1998
/s/ Michael A. Grunewald
- ----------------------------
Michael A. Grunewald
<PAGE> 207
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(d)(1) Investment Advisory Agreement dated November 16,
1998, between Governor Funds and Governors Group
Advisors, Inc.
(d)(2) Investment Sub-Advisory Agreement dated November 16,
1998, between Governors Group Advisors, Inc. and
Martindale Andres & Company, Inc.
(d)(3) Investment Sub-Advisory Agreement dated November 16,
1998, between Governors Group Advisors, Inc. and
Brinson Partners, Inc.
(e)(1) Distribution Agreement dated November 16, 1998,
between Governor Funds and BISYS Fund Services
Limited Partnership d/b/a BISYS Fund Services.
(h)(1) Management and Administration Agreement dated
November 16, 1998, among Governor Funds, BISYS Fund
Services Ohio, Inc. and Governors Group Advisors,
Inc.
(h)(2) Transfer Agency Agreement dated November 16, 1998,
between Governor Funds and BISYS Fund Services, Inc.
(h)(3) Fund Accounting Agreement dated November 16, 1998,
between Governor Funds and BISYS Fund Services, Inc.
(j) Consent of Drinker Biddle & Reath LLP.
(l) Purchase Agreement dated November 16, 1998.
<PAGE> 1
Exhibit (d)(1)
INVESTMENT ADVISORY AGREEMENT
This Agreement is made as of November 16, 1998, by and between
GOVERNOR FUNDS, a Delaware business trust (the "Trust"), and GOVERNORS GROUP
ADVISORS, INC., a Delaware corporation (the "Advisor").
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Trust desires to retain the Advisor to provide,
or to arrange for the provision of, investment advisory services to twelve newly
created investment portfolios of the Trust and may retain the Advisor to serve
in such capacity to certain additional investment portfolios of the Trust, all
as now or hereafter may be identified in Schedule A hereto (such new investment
portfolios and any such additional investment portfolios together called the
"Funds") and the Advisor represents that it is willing and possesses legal
authority to so furnish such services without violation of applicable laws
(including the Glass- Steagall Act) and regulations;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
SECTION 1. APPOINTMENT. The Trust hereby appoints the Advisor
to act as Advisor to the Funds for the period and on the terms set forth in this
Agreement. The Advisor accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided. Additional
investment portfolios may from time to time be added to those covered by this
Agreement by the parties executing a new Schedule A which shall become effective
upon its execution and shall supersede any Schedule A having an earlier date.
SECTION 2. DELIVERY OF DOCUMENTS. The Trust has furnished the
Advisor with copies properly certified or authenticated of each of the
following:
(a) the Trust's Declaration of Trust (such
Declaration of Trust, as presently in effect and as it shall
from time to time be amended and restated, is herein called
the "Declaration of Trust");
(b) the Trust's By-Laws and any amendments thereto;
(c) resolutions of the Trust's Board of Trustees
authorizing the appointment of the Advisor and approving this
Agreement;
(d) the Trust's Notification of Registration on Form
N-8A under the 1940 Act as filed with the Securities and
Exchange Commission on October 1, 1998 and all amendments
thereto;
<PAGE> 2
(e) all of the Trust's procedures and guidelines and
all resolutions of the Trust's Board relevant to the services
to be provided by the Advisor hereunder;
(f) the Trust's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended ("1933 Act"),
(File No. 333-65213), and under the 1940 Act as filed with the
Securities and Exchange Commission and the most recent
amendment thereto; and
(g) the most recent Prospectus and Statement of
Additional Information of each of the Funds (such Prospectus
and Statement of Additional Information, as presently in
effect, and all amendments and supplements thereto, are herein
collectively called the "Prospectus").
The Trust will furnish the Advisor from time to time
with copies of all amendments of or supplements to the foregoing.
SECTION 3. MANAGEMENT. Subject to the supervision of the
Trust's Board of Trustees, the Advisor will provide a continuous investment
program for each of the Funds, including investment research and management with
respect to all securities and investments and cash equivalents in the Funds. The
Advisor will determine from time to time what securities and other investments
will be purchased, retained or sold by the Trust with respect to the Funds and
will implement such determinations through the placement, in the name of the
Funds, of orders for the execution of portfolio transactions with or through
such brokers or dealers as it may select. The Advisor will provide the services
under this Agreement in accordance with each of the Fund's investment
objectives, policies, and restrictions as stated in the Prospectus, as the same
may be amended, supplemented or restated from time to time, and resolutions of
the Trust's Board of Trustees.
In fulfilling its responsibilities hereunder, the Advisor
further agrees that it will:
(a) use the same skill and care in providing such
services as it uses in providing services to fiduciary
accounts for which it has investment responsibilities;
(b) conform with all applicable Rules and Regulations
of the Securities and Exchange Commission and in addition will
conduct its activities under this Agreement in accordance with
any applicable regulations of any governmental authority
pertaining to the investment advisory activities of the
Advisor;
(c) not make loans to any person to purchase or carry
shares of beneficial interest in the Trust or make loans to
the Trust;
- 2 -
<PAGE> 3
(d) place orders pursuant to its investment
determinations for the Funds either directly with the issuer
or with any broker or dealer. In placing orders with brokers
and dealers, the Advisor will attempt to obtain prompt
execution of orders in an effective manner at the most
favorable price. In assessing the best execution available for
any transaction, the Advisor shall consider all factors it
deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition
and execution capability of the broker-dealer and the
reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). Consistent with this
obligation, the Advisor may, in its discretion and to the
extent permitted by law, purchase and sell portfolio
securities to and from brokers and dealers who provide
brokerage and research services (within the meaning of Section
28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Funds and/or other accounts over which the
Advisor exercises investment discretion. Subject to the review
of the Trust's Board of Trustees from time to time with
respect to the extent and continuation of the policy, the
Advisor is authorized to pay a broker or dealer who provides
such brokerage and research services a commission for
effecting a securities transaction for any of the Funds which
is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if,
but only if, the Advisor determines in good faith that such
commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction
or the overall responsibilities of the Advisor with respect to
the accounts as to which it exercises investment discretion.
In placing orders with brokers and dealers, consistent with
applicable laws, rules and regulations, the Advisor may
consider the sale of shares of the Trust. Except as otherwise
permitted by applicable laws, rules and regulations, in no
instance will portfolio securities be purchased from or sold
to BISYS Fund Services Ohio Inc., the Advisor or any
affiliated person of the Trust, BISYS Fund Services Ohio Inc.
or the Advisor. In executing portfolio transactions for any
Fund, the Advisor may, but shall not be obligated to, to the
extent permitted by applicable laws and regulations, aggregate
the securities to be sold or purchased with those of other
Funds and its other clients where such aggregation is not
inconsistent with the policies set forth in the Trust's
registration statement. In such event, the Advisor will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, pursuant to any applicable law or
regulation and in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the
Funds and such other clients.
(e) will maintain all books and records with respect
to the securities transactions of the Funds and will furnish
the Trust's Board of Trustees such periodic and special
reports as the Board may request;
(f) will treat confidentially and as proprietary
information of the Trust all records and other information
relative to the Trust and the Funds and
- 3 -
<PAGE> 4
prior, present, or potential shareholders, and will not use
such records and information for any purpose other than
performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by
the Trust, which approval shall not be withheld where the
Advisor may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so
requested by the Trust; and
(g) will maintain its policy and practice of
conducting its fiduciary functions independently. In making
investment recommendations for the Funds, the Advisor's
personnel will not inquire or take into consideration whether
the issuers of securities proposed for purchase or sale for
the Trust's account are customers of the Advisor or of its
parents, subsidiaries or affiliates. In dealing with such
customers, the Advisor and its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether
securities of those customers are held by the Trust.
SECTION 4. SUB-ADVISOR. It is understood that the Advisor may
from time to time employ or associate with itself such person or persons as the
Advisor believes to be fitted to assist it in the performance of this Agreement
(each a "Sub-Advisor"); provided, however, that the compensation of such person
or persons shall be paid by the Advisor and that the Advisor shall be as fully
responsible to the Trust for the acts and omissions of any such person as it is
for its own acts and omissions; and provided further, that the retention of any
Sub-Advisor shall be approved as may be required by the 1940 Act. In the event
that any Sub-Advisor appointed hereunder is terminated, the Advisor may provide
investment advisory services pursuant to this Agreement to the Funds without
further shareholder approval.
SECTION 5. SERVICES NOT EXCLUSIVE. The Advisor will for all
purposes herein be deemed to be an independent contractor and will, unless
otherwise expressly provided herein or authorized by the Board from time to
time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent. The investment management services furnished by
the Advisor hereunder are not to be deemed exclusive, and the Advisor shall be
free to furnish similar services to others so long as its services under this
Agreement are not impaired thereby.
SECTION 6. BOOKS AND RECORDS. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Advisor hereby agrees that
all records which it maintains for the Funds are the property of the Trust and
further agrees to surrender promptly to the Trust any of such records upon the
Trust's request. The Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
SECTION 7. EXPENSES. During the term of this Agreement, the
Advisor will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Funds.
- 4 -
<PAGE> 5
SECTION 8. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, each of the Funds will pay the
Advisor and the Advisor will accept as full compensation therefor a fee as set
forth on Schedule A hereto. The obligations of the Funds to pay the
above-described fee to the Advisor will begin as of the respective dates of the
initial public sale of shares in the Funds; provided, however, that the Advisor
may from time to time waive some or all of such fees until such time as it
notifies the Trust that it has terminated such waiver. Upon any termination of
this Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to the
full monthly period and shall be payable upon the date of termination of this
Agreement.
For the purpose of determining fees payable to the Advisor,
the value of the net assets of a particular Fund shall be computed in the manner
described in the Trust's Declaration of Trust or in the Prospectus or Statement
of Additional Information respecting that Fund as from time to time is in effect
for the computation of the value of such net assets in connection with the
determination of the liquidating value of the shares of such Fund.
SECTION 9. LIMITATION OF LIABILITY. Notwithstanding anything
herein to the contrary, the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in connection
with the performance of this Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Advisor in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement.
SECTION 10. DURATION AND TERMINATION. This Agreement will
become effective as of the date first written above (or, if a particular Fund is
not in existence on that date, on the date a registration statement or
post-effective amendment to a registration statement relating to that Fund
becomes effective with the Securities and Exchange Commission and Schedule A
hereto is amended to add such Fund), provided that it shall have been approved
by vote of a majority of the outstanding voting securities of such Fund, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall continue in effect until June 30, 2000.
Thereafter, if not terminated, this Agreement shall continue
in effect as to a particular Fund for successive periods of twelve months each
ending on June 30 of each year, provided such continuance is specifically
approved at least annually (a) by the vote of a majority of those members of the
Trust's Board of Trustees who are not parties to this Agreement or interested
persons of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the vote of a majority of the
Trust's Board of Trustees or by the vote of a majority of all votes attributable
to the outstanding Shares of such Fund. Notwithstanding the foregoing, this
Agreement may be terminated as to a particular Fund at any time on sixty days'
written notice to the other party, without the payment of any penalty, by the
Trust (by vote of the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of such Fund) or by the Advisor. This Agreement
will immediately terminate in
- 5 -
<PAGE> 6
the event of its assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested persons" and "assignment" shall
have the same meanings as ascribed to such terms in the 1940 Act.)
SECTION 11. ADVISOR'S REPRESENTATIONS. The Advisor hereby
represents that it is willing and possesses all requisite legal authority to
provide the services contemplated by this Agreement without violation of
applicable laws and regulations, including but not limited to the Glass-Steagall
Act and the regulations promulgated thereunder.
SECTION 12. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
SECTION 13. NAME. The Trust hereby acknowledges that the name
"Governor(s)" is a property right of the Advisor. The Advisor agrees that the
Trust and the Funds may, so long as this Agreement remains in effect, use
"Governor(s)" as part of its name. The Advisor may permit other persons, firms
or corporations, including other investment companies, to use such name and may,
upon termination of this Agreement, require the Trust and the Funds to refrain
from using the name "Governor(s)" in any form or combination in its name or in
its business or in the name of any of its Funds, and the Trust shall, as soon as
practicable following its receipt of any such request from the Advisor, so
refrain from using such name.
SECTION 14. YEAR 2000 COMPLIANT. The Advisor represents and
warrants that all services rendered and all computer systems used in the
performance of the Advisor's obligations under this Agreement shall be Year 2000
Compliant. "Year 2000 Compliant" means that the services and systems are
designed to and shall:
(a) operate in the year 2000 and later with four digit year
date capability;
(b) operate fault-free in the processing of date and
date-dependent data before, during and after January 1, 2000, including
but not limited to accepting date input, providing date output, and
performing date calculations, comparison and sequencing;
(c) function accurately and without interruption before,
during, and after January 1, 2000, without any adverse effect on
operations and associated with the advent of the new century;
(d) store and provide output of date information in ways that
are unambiguous as to century.
The representations and warranties contained herein may not be disclaimed or
limited by operation of law.
- 6 -
<PAGE> 7
SECTION 15. LIMITATION OF LIABILITY OF THE TRUSTEES AND
SHAREHOLDERS. Governor Funds is a business trust organized under Delaware law
and under a Declaration of Trust, to which reference is hereby made and a copy
of which is on file at the Office of the Secretary of State of Delaware as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Governor Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, employees or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, officers, employees, agents or shareholders of the Trust personally,
but bind only the assets of the Trust, and all persons dealing with any of the
Funds of the Trust must look solely to the assets of the Trust belonging to such
Fund for the enforcement of any claims against the Trust.
SECTION 16. MISCELLANEOUS. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the law of the State of Delaware; provided that nothing herein shall
be construed in a manner inconsistent with the 1940 Act, the Advisers Act of
1940, as amended, or any rule or regulation of the Securities and Exchange
Commission thereunder. This Agreement may be executed in two or more
counterparts which together shall constitute a single Agreement.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
GOVERNOR FUNDS
By /s/ Lana V. Burkhardt
---------------------------
Name Lana V. Burkhardt
---------------------------
Title President
---------------------------
GOVERNORS GROUP ADVISORS,
INC.
By /s/ Lana V. Burkhardt
---------------------------
Name Lana V. Burkhardt
---------------------------
Title President
---------------------------
Dated: November 16 , 1998
- 8 -
<PAGE> 9
Schedule A
to the
Investment Advisory Agreement
between Governor Funds and
Governors Group Advisors, Inc.
dated as of November 16, 1998
<TABLE>
<CAPTION>
NAME OF FUND COMPENSATION* DATE
- ------------ ------------- ----
<S> <C> <C>
Prime Money Market Fund Annual Rate of .40% of such Fund's November 16, 1998
average net assets
Pennsylvania Annual Rate of .60% of such Fund's November 16, 1998
Municipal Bond average daily net assets
Fund
Established Growth Annual Rate of .75% of such Fund's November 16, 1998
Fund average daily net assets
Intermediate Term Income Annual Rate of .60% of such Fund's November 16, 1998
Fund average daily net assets
Aggressive Growth Annual Rate of 1.00% of such Fund's November 16, 1998
Fund average daily net assets
U.S. Treasury Annual Rate of .40% of such Fund's November 16, 1998
Obligations Money average daily net assets
Market Fund
Limited Duration Annual Rate of .60% of such Fund's November 16, 1998
Government average daily net assets
Securities Fund
Emerging Growth Annual Rate of 1.25% of such Fund's November 16, 1998
Fund average daily net assets
International Equity Fund Annual Rate of 1.25% of such Fund's November 16, 1998
average daily net assets
Lifestyle Conservative Annual Rate of .25% of such Fund's November 16, 1998
Growth Fund average daily net assets
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
NAME OF FUND COMPENSATION* DATE
- ------------ ------------- ----
<S> <C> <C>
Lifestyle Moderate Annual Rate of .25% of such Fund's November 16, 1998
Growth Fund average daily net assets
Lifestyle Growth Fund Annual Rate of .25% of such Fund's November 16, 1998
average daily net assets
</TABLE>
*All Fees are computed daily and paid monthly.
GOVERNORS GROUP ADVISORS, INC. GOVERNOR FUNDS
By /s/ Lana V. Burkhardt By /s/ Lana V. Burkhardt
------------------------------- -------------------------------
Name Lana V. Burkhardt Name Lana V. Burkhardt
------------------------------- -------------------------------
Title President Title President
------------------------------- -------------------------------
- 2 -
<PAGE> 1
Exhibit (d)(2)
INVESTMENT SUB-ADVISORY AGREEMENT
This Agreement is made as of November 16, 1998, by and between
GOVERNORS GROUP ADVISORS, INC., a Delaware corporation (the "Advisor"), and
MARTINDALE ANDRES & COMPANY, INC., a Pennsylvania corporation (the
"Sub-Advisor").
WHEREAS, Governor Funds, a Delaware business trust (the
"Trust"), is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, pursuant to an Investment Advisory Agreement dated as
of October 5, 1998, by and between the Trust and the Advisor (the "Advisory
Agreement"), the Advisor has agreed to furnish investment advisory services to
the Trust with respect to each of its investment portfolios; and
WHEREAS, the Advisory Agreement expressly authorizes the
Advisor to employ or associate itself with one or more investment sub-advisers
provided that the retention of any such sub-adviser shall be approved in
accordance with the provisions of the 1940 Act; and
WHEREAS, the Advisor desires to appoint the Sub-Advisor as
investment sub-adviser to each investment portfolio of the Trust set forth on
Schedule A hereto (each, a "Fund," collectively, the "Funds"), and the
Sub-Advisor wishes to accept such appointment; and
WHEREAS, the Board of Trustees of the Trust and the
shareholders of each Fund have approved this Agreement and the appointment of
the Sub-Advisor as investment sub-adviser to such Fund.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
SECTION 1. APPOINTMENT. The Advisor hereby appoints the
Sub-Advisor to act as investment sub-adviser to the Funds for the period and on
the terms set forth in this Agreement. The Sub-Advisor accepts such appointment
and agrees to furnish the services herein set forth for the compensation herein
provided. Additional investment portfolios may from time to time be added to
those covered by this Agreement by the parties executing a new Schedule A which
shall become effective upon its execution and shall supersede any Schedule A
having an earlier date.
SECTION 2. DELIVERY OF DOCUMENTS. The Trust or Advisor has
furnished the Sub-Advisor with copies properly certified or authenticated of
each of the following:
<PAGE> 2
(a) the Trust's Certificate of Trust, as filed with the
Secretary of State of Delaware on September 3, 1998, as amended or
restated to the date hereof;
(b) the Trust's Declaration of Trust, as amended or restated
to the date hereof (such Declaration, as presently in effect and as it
shall from time to time be amended and restated, is herein called the
"Declaration of Trust");
(c) the Trust's By-Laws and any amendments thereto;
(d) resolutions of the Trust's Board of Trustees authorizing
the appointment of the Sub-Advisor and approving this Agreement;
(e) the Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission
on October 1, 1998 and all amendments thereto;
(f) all of the Trust's procedures and guidelines and all
resolutions of the Trust's Board relevant to the services to be
provided by the Sub-Advisor hereunder;
(g) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act"), (File No. 333-65213),
and under the 1940 Act as filed with the Securities and Exchange
Commission and the most recent amendment thereto; and
(h) the most recent Prospectus and Statement of Additional
Information of each of the Funds (such Prospectus and Statement of
Additional Information, as presently in effect, and all amendments and
supplements thereto, are herein collectively called the "Prospectus").
The Trust will furnish the Sub-Advisor from time to time with
copies of all amendments of or supplements to the foregoing.
SECTION 3. MANAGEMENT. Subject to the supervision of the
Advisor and the Trust's Board of Trustees, the Sub-Advisor will provide a
continuous investment program for each of the Funds, including investment
research and management with respect to all securities and investments and cash
equivalents in the Funds. The Sub-Advisor will determine from time to time what
securities and other investments will be purchased, retained or sold by the
Trust with respect to the Funds and will implement such determinations through
the placement, in the name of the Funds, of orders for the execution of
portfolio transactions with or through such brokers or dealers as it may select.
The Sub-Advisor will provide the services under this Agreement in accordance
with each of the Fund's investment objectives, policies, and restrictions
- 2 -
<PAGE> 3
as stated in the Prospectus, as the same may be amended, supplemented or
restated from time to time, and resolutions of the Trust's Board of Trustees.
In fulfilling its responsibilities hereunder, the Sub-Advisor
further agrees that it will:
(a) use the same skill and care in providing such services as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) conform with all applicable Rules and Regulations of the
Securities and Exchange Commission and in addition will conduct its
activities under this Agreement in accordance with any applicable
regulations of any governmental authority pertaining to the investment
advisory activities of the Sub-Advisor;
(c) not make loans to any person to purchase or carry shares
of beneficial interest in the Trust or make loans to the Trust;
(d) place orders pursuant to its investment determinations for
the Funds either directly with the issuer or with any broker or dealer.
In placing orders with brokers and dealers, the Sub-Advisor will
attempt to obtain prompt execution of orders in an effective manner at
the most favorable price. In assessing the best execution available for
any transaction, the Sub-Advisor shall consider all factors it deems
relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability
of the broker-dealer and the reasonableness of the commission, if any
(for the specific transaction and on a continuing basis). Consistent
with this obligation, the Sub-Advisor may, in its discretion and to the
extent permitted by law, purchase and sell portfolio securities to and
from brokers and dealers who provide brokerage and research services
(within the meaning of Section 28(e) of the Securities Exchange Act of
1934) to or for the benefit of the Funds and/or other accounts over
which the Sub-Advisor exercises investment discretion. Subject to the
review of the Advisor and the Trust's Board of Trustees from time to
time with respect to the extent and continuation of the policy, the
Sub-Advisor is authorized to pay a broker or dealer who provides such
brokerage and research services a commission for effecting a securities
transaction for any of the Funds which is in excess of the amount of
commission another broker or dealer would have charged for effecting
that transaction if, but only if, the Sub-Advisor determines in good
faith that such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the overall
responsibilities of the Sub-Advisor with respect to the accounts as to
which it exercises investment discretion. In placing orders with
brokers and dealers, consistent with applicable laws, rules and
regulations, the Sub-Advisor may consider the sale of shares of the
- 3 -
<PAGE> 4
Trust. Except as otherwise permitted by applicable laws, rules and
regulations, in no instance will portfolio securities be purchased from
or sold to BISYS Fund Services Ohio Inc., the Advisor, the Sub-Advisor
or any affiliated person of the Trust, BISYS Fund Services Ohio Inc.,
the Advisor or the Sub-Advisor. In executing portfolio transactions for
any Fund, the Sub-Advisor may, but shall not be obligated to, to the
extent permitted by applicable laws and regulations, aggregate the
securities to be sold or purchased with those of other Funds and its
other clients where such aggregation is not inconsistent with the
policies set forth in the Trust's registration statement. In such
event, the Sub-Advisor will allocate the securities so purchased or
sold, and the expenses incurred in the transaction, pursuant to any
applicable law or regulation and in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the
Funds and such other clients.
(e) will maintain all books and records with respect to the
securities transactions of the Funds and will furnish the Advisor and
the Trust's Board of Trustees such periodic and special reports as the
Advisor or the Board may request;
(f) will treat confidentially and as proprietary information
of the Trust all records and other information relative to the Trust
and the Funds and prior, present, or potential shareholders, and will
not use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Trust, which
approval shall not be withheld where the Sub-Advisor may be exposed to
civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities,
or when so requested by the Trust; and
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment recommendations
for the Funds, the Sub-Advisor's personnel will not inquire or take
into consideration whether the issuers of securities proposed for
purchase or sale for the Trust's account are customers of the
Sub-Advisor or of its parents, subsidiaries or affiliates. In dealing
with such customers, the Sub-Advisor and its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether
securities of those customers are held by the Trust.
SECTION 4. SERVICES NOT EXCLUSIVE. The Sub-Advisor will for
all purposes herein be deemed to be an independent contractor and will, unless
otherwise expressly provided herein or authorized by the Board from time to
time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent. The investment management services furnished by
the Sub-Advisor hereunder are not to be deemed exclusive, and the Sub-Advisor
shall be free to furnish similar services to others so long as its services
under this Agreement are not impaired thereby.
- 4 -
<PAGE> 5
SECTION 5. BOOKS AND RECORDS. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Sub-Advisor hereby agrees
that all records which it maintains for the Funds are the property of the Trust
and further agrees to surrender promptly to the Trust any of such records upon
the Trust's request. The Sub-Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
SECTION 6. EXPENSES. During the term of this Agreement, the
Sub-Advisor will pay all expenses incurred by it in connection with its
activities under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Funds.
SECTION 7. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, the Advisor will pay the
Sub-Advisor and the Sub-Advisor will accept as full compensation therefor a fee
as set forth on Schedule A hereto. The obligations of the Advisor to pay the
above-described fee to the Sub-Advisor will begin as of the respective dates of
the initial public sale of shares in the Funds; provided, however, that the
Sub-Advisor may from time to time voluntarily waive any or all such fees. Upon
any termination of this Agreement before the end of any month, the fee for such
part of a month shall be prorated according to the proportion which such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
For the purpose of determining fees payable to the
Sub-Advisor, the value of the net assets of a particular Fund shall be computed
in the manner described in the Trust's Declaration of Trust or in the Prospectus
or Statement of Additional Information respecting that Fund as from time to time
is in effect for the computation of the value of such net assets in connection
with the determination of the liquidating value of the shares of such Fund.
SECTION 8. LIMITATION OF LIABILITY. Notwithstanding anything
herein to the contrary, the Sub-Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds or the Advisor
in connection with the performance of this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Sub-Advisor in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement.
SECTION 9. DURATION AND TERMINATION. This Agreement will
become effective as of the date first written above (or, if a particular Fund is
not in existence on that date, on the date a registration statement or
post-effective amendment to a registration statement relating to that Fund
becomes effective with the Securities and Exchange Commission and Schedule A
hereto is amended to add such Fund), provided that it shall have been approved
by vote of a majority of the outstanding voting securities of such Fund, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall continue in effect until June 30, 2000.
- 5 -
<PAGE> 6
Thereafter, if not terminated, this Agreement shall continue
in effect as to a particular Fund for successive periods of twelve months each
ending on June 30 of each year, provided such continuance is specifically
approved at least annually (a) by the vote of a majority of those members of the
Trust's Board of Trustees who are not parties to this Agreement or interested
persons of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the vote of a majority of the
Trust's Board of Trustees or by the vote of a majority of all votes attributable
to the outstanding Shares of such Fund. Notwithstanding the foregoing, this
Agreement may be terminated as to a particular Fund at any time on sixty days'
written notice to the other parties, without the payment of any penalty, by the
Advisor or by the Trust (by vote of the Trust's Board of Trustees or by vote of
a majority of the outstanding voting securities of such Fund) or by the
Sub-Advisor. This Agreement will immediately terminate in the event of its
assignment and in the event of the termination of the Advisory Agreement. (As
used in this Agreement, the terms "majority of the outstanding voting
securities," "interested persons" and "assignment" shall have the same meanings
as ascribed to such terms in the 1940 Act.)
SECTION 10. SUB-ADVISOR'S REPRESENTATIONS. The Sub-Advisor
hereby represents that it is willing and possesses all requisite legal authority
to provide the services contemplated by this Agreement without violation of
applicable laws and regulations, including but not limited to the Glass-Steagall
Act and the regulations promulgated thereunder.
SECTION 11. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
SECTION 12. YEAR 2000 COMPLIANT. The Sub-Advisor represents
and warrants that all services rendered and all computer systems used in the
performance of the Sub-Advisor's obligations under this Agreement shall be Year
2000 Compliant. "Year 2000 Compliant" means that the services and systems are
designed to and shall:
(a) operate in the year 2000 and later with four digit year
date capability;
(b) operate fault-free in the processing of date and
date-dependent data before, during and after January 1, 2000, including but not
limited to accepting date input, providing date output, and performing date
calculations, comparison and sequencing;
(c) function accurately and without interruption before,
during, and after January 1, 2000, without any adverse effect on operations and
associated with the advent of the new century;
(d) store and provide output of date information in ways that
are unambiguous as to century.
- 6 -
<PAGE> 7
The representations and warranties contained herein may not be disclaimed or
limited by operation of law.
SECTION 13. LIMITATION OF LIABILITY OF THE TRUSTEES AND
SHAREHOLDERS. Governor Funds is a business trust organized under Delaware law
and under a Declaration of Trust, to which reference is hereby made and a copy
of which is on file at the Office of the Secretary of State of Delaware as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Governor Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, employees or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, officers, employees, agents or shareholders of the Trust personally,
but bind only the assets of the Trust, and all persons dealing with any of the
Funds of the Trust must look solely to the assets of the Trust belonging to such
Fund for the enforcement of any claims against the Trust.
SECTION 14. MISCELLANEOUS. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the law of the State of Delaware; provided that nothing herein shall
be construed in a manner inconsistent with the 1940 Act, the Investment Advisers
Act of 1940, as amended, or any rule or regulation of the Securities and
Exchange Commission thereunder. This Agreement may be executed in two or more
counterparts which together shall constitute a single Agreement.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
GOVERNORS GROUP ADVISORS, INC.
By /s/Lana V. Burkhardt
-------------------------------------
Name Lana V. Burkhardt
-------------------------------------
Title President
-------------------------------------
MARTINDALE ANDRES & COMPANY, INC.
By /s/William C. Martindale Jr.
-------------------------------------
Name William C. Martindale Jr.
-------------------------------------
Title Chief Investment Officer
-------------------------------------
Dated: November 16, 1998
- 8 -
<PAGE> 9
Schedule A
to the
Investment Advisory Agreement
between
Governors Group Advisors, Inc.
and
Martindale Andres & Company, Inc.
dated as of November 16, 1998
<TABLE>
<CAPTION>
NAME OF FUND COMPENSATION* DATE
- ------------ ------------- ----
<S> <C> <C>
Prime Money Market Fund Annual Rate of .20% of such Fund's November 16, 1998
average net assets
Pennsylvania Annual Rate of .30% of such Fund's November 16, 1998
Municipal Bond Fund average daily net assets
Established Growth Annual Rate of .40% of such Fund's November 16, 1998
Fund average daily net assets
Intermediate Term Income Annual Rate of .30% of such Fund's November 16, 1998
Fund average daily net assets
Aggressive Growth Annual Rate of .50% of such Fund's November 16, 1998
Fund average daily net assets
U.S. Treasury Annual Rate of .10% of such Fund's November 16, 1998
Obligations Money average daily net assets
Market Fund
Limited Duration Annual Rate of .30% of such Fund's November 16, 1998
Government average daily net assets
Securities Fund
Emerging Growth Annual Rate of .50% of such Fund's November 16, 1998
Fund average daily net assets
Lifestyle Conservative Annual Rate of .05% of such Fund's November 16, 1998
Growth Fund average daily net assets
Lifestyle Moderate Annual Rate of .05% of such Fund's November 16, 1998
Growth Fund average daily net assets
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
NAME OF FUND COMPENSATION* DATE
- ------------ ------------- ----
<S> <C> <C>
Lifestyle Growth Fund Annual Rate of .05% of such Fund's November 16, 1998
average daily net assets
</TABLE>
*All Fees are computed daily and paid monthly.
GOVERNORS GROUP ADVISORS, INC. MARTINDALE ANDRES & COMPANY, INC.
By /s/ Lana V. Burkhardt By /s/ William C. Martindale Jr.
----------------------------- ----------------------------------
Name Lana V. Burkhardt Name William C. Martindale Jr.
----------------------------- ----------------------------------
Title President Title Chief Investment Officer
----------------------------- ----------------------------------
- 2 -
<PAGE> 1
Exhibit (d)(3)
INVESTMENT SUB-ADVISORY AGREEMENT
This Agreement is made as of November 16, 1998, by and between
GOVERNORS GROUP ADVISORS, INC., a Delaware corporation (the "Advisor"), and
BRINSON PARTNERS, INC., a Delaware corporation (the "Sub-Advisor").
WHEREAS, Governor Funds, a Delaware business trust (the
"Trust"), is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, pursuant to an Investment Advisory Agreement dated as
of October 5, 1998, by and between the Trust and the Advisor (the "Advisory
Agreement"), the Advisor has agreed to furnish investment advisory services to
the Trust with respect to each of its investment portfolios; and
WHEREAS, the Advisory Agreement expressly authorizes the
Advisor to employ or associate itself with one or more investment sub-advisers
provided that the retention of any such sub-adviser shall be approved in
accordance with the provisions of the 1940 Act; and
WHEREAS, the Advisor desires to appoint the Sub-Advisor as
investment sub-adviser to the International Equity Fund, an investment portfolio
of the Trust, and to each additional investment portfolio of the Trust as may
from time to time be identified on Schedule A hereto (each, a "Fund,"
collectively, the "Funds"), and the Sub-Advisor wishes to accept such
appointment; and
WHEREAS, the Board of Trustees of the Trust and the
shareholders of each Fund have approved this Agreement and the appointment of
the Sub-Advisor as investment sub-adviser to such Fund.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
SECTION 1. APPOINTMENT. The Advisor hereby appoints the
Sub-Advisor to act as investment sub-adviser to the Funds for the period and on
the terms set forth in this Agreement. The Sub-Advisor accepts such appointment
and agrees to furnish the services herein set forth for the compensation herein
provided. Additional investment portfolios may from time to time be added to
those covered by this Agreement by the parties executing a new Schedule A which
shall become effective upon its execution and shall supersede any Schedule A
having an earlier date.
SECTION 2. DELIVERY OF DOCUMENTS. The Trust or Advisor has
furnished the Sub-Advisor with copies properly certified or authenticated of
each of the following:
<PAGE> 2
(a) the Trust's Certificate of Trust, as filed with the
Secretary of State of Delaware on September 3, 1998, as amended or
restated to the date hereof;
(b) the Trust's Declaration of Trust, as amended or restated
to the date hereof (such Declaration, as presently in effect and as it
shall from time to time be amended and restated, is herein called the
"Declaration of Trust");
(c) the Trust's By-Laws and any amendments thereto;
(d) resolutions of the Trust's Board of Trustees authorizing
the appointment of the Sub-Advisor and approving this Agreement;
(e) the Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission
on October 1, 1998 and all amendments thereto;
(f) all of the Trust's procedures and guidelines and all
resolutions of the Trust's Board relevant to the services to be
provided by the Sub-Advisor hereunder;
(g) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act"), (File No. 333-65213),
and under the 1940 Act as filed with the Securities and Exchange
Commission and the most recent amendment thereto; and
(h) the most recent Prospectus and Statement of Additional
Information of each of the Funds (such Prospectus and Statement of
Additional Information, as presently in effect, and all amendments and
supplements thereto, are herein collectively called the "Prospectus").
The Trust will furnish the Sub-Advisor from time to time with
copies of all amendments of or supplements to the foregoing.
SECTION 3. MANAGEMENT. Subject to the supervision of the
Advisor and the Trust's Board of Trustees, the Sub-Advisor will provide a
continuous investment program for each of the Funds, including investment
research and management with respect to all securities and investments and cash
equivalents in the Funds. The Sub-Advisor will determine from time to time what
securities and other investments will be purchased, retained or sold by the
Trust with respect to the Funds and will implement such determinations through
the placement, in the name of the Funds, of orders for the execution of
portfolio transactions with or through such brokers or dealers as it may select.
The Sub-Advisor will provide the services under this Agreement in accordance
with each of the Fund's investment objectives, policies, and restrictions as
stated in the Prospectus, as the same may be amended, supplemented or restated
from time to time, and resolutions of the Trust's Board of Trustees.
- 2 -
<PAGE> 3
In fulfilling its responsibilities hereunder, the Sub-Advisor
further agrees that it will:
(a) use the same skill and care in providing such services as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) conform with all applicable Rules and Regulations of the
Securities and Exchange Commission and in addition will conduct its
activities under this Agreement in accordance with any applicable
regulations of any governmental authority pertaining to the investment
advisory activities of the Sub-Advisor;
(c) not make loans to any person to purchase or carry shares
of beneficial interest in the Trust or make loans to the Trust;
(d) place orders pursuant to its investment determinations for
the Funds either directly with the issuer or with any broker or dealer.
In placing orders with brokers and dealers, the Sub-Advisor will
attempt to obtain prompt execution of orders in an effective manner at
the most favorable price. In assessing the best execution available for
any transaction, the Sub-Advisor shall consider all factors it deems
relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability
of the broker-dealer and the reasonableness of the commission, if any
(for the specific transaction and on a continuing basis). Consistent
with this obligation, the Sub-Advisor may, in its discretion and to the
extent permitted by law, purchase and sell portfolio securities to and
from brokers and dealers who provide brokerage and research services
(within the meaning of Section 28(e) of the Securities Exchange Act of
1934) to or for the benefit of the Funds and/or other accounts over
which the Sub-Advisor exercises investment discretion. Subject to the
review of the Advisor and the Trust's Board of Trustees from time to
time with respect to the extent and continuation of the policy, the
Sub-Advisor is authorized to pay a broker or dealer who provides such
brokerage and research services a commission for effecting a securities
transaction for any of the Funds which is in excess of the amount of
commission another broker or dealer would have charged for effecting
that transaction if, but only if, the Sub-Advisor determines in good
faith that such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the overall
responsibilities of the Sub-Advisor with respect to the accounts as to
which it exercises investment discretion. In placing orders with
brokers and dealers, consistent with applicable laws, rules and
regulations, the Sub-Advisor may consider the sale of shares of the
Trust. Except as otherwise permitted by applicable laws, rules and
regulations, in no instance will portfolio securities be purchased from
or sold to BISYS Fund Services Ohio Inc., the Advisor, the Sub-Advisor
or any affiliated person of the Trust, BISYS Fund Services Ohio Inc.,
the Advisor or the Sub-Advisor. In
- 3 -
<PAGE> 4
executing portfolio transactions for any Fund, the Sub-Advisor may, but
shall not be obligated to, to the extent permitted by applicable laws
and regulations, aggregate the securities to be sold or purchased with
those of other Funds and its other clients where such aggregation is
not inconsistent with the policies set forth in the Trust's
registration statement. In such event, the Sub-Advisor will allocate
the securities so purchased or sold, and the expenses incurred in the
transaction, pursuant to any applicable law or regulation and in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Funds and such other clients.
(e) will maintain all books and records with respect to the
securities transactions of the Funds and will furnish the Advisor and
the Trust's Board of Trustees such periodic and special reports as the
Advisor or the Board may request;
(f) will treat confidentially and as proprietary information
of the Trust all records and other information relative to the Trust
and the Funds and prior, present, or potential shareholders, and will
not use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except where
the Sub-Advisor may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by
the Trust; and
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment recommendations
for the Funds, the Sub-Advisor's personnel will not inquire or take
into consideration whether the issuers of securities proposed for
purchase or sale for the Trust's account are customers of the
Sub-Advisor or of its parents, subsidiaries or affiliates. In dealing
with such customers, the Sub-Advisor and its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether
securities of those customers are held by the Trust.
SECTION 4. SERVICES NOT EXCLUSIVE. The Sub-Advisor will for
all purposes herein be deemed to be an independent contractor and will, unless
otherwise expressly provided herein or authorized by the Board from time to
time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent. The investment management services furnished by
the Sub-Advisor hereunder are not to be deemed exclusive, and the Sub-Advisor
shall be free to furnish similar services to others so long as its services
under this Agreement are not impaired thereby.
SECTION 5. BOOKS AND RECORDS. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Sub-Advisor hereby agrees
that all records which it maintains for the Funds are the property of the Trust
and further agrees to surrender promptly to the Trust any of such records upon
the Trust's request. The Sub-Advisor further agrees to
- 4 -
<PAGE> 5
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
SECTION 6. EXPENSES. During the term of this Agreement, the
Sub-Advisor will pay all expenses incurred by it in connection with its
activities under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Funds.
SECTION 7. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, the Advisor will pay the
Sub-Advisor and the Sub-Advisor will accept as full compensation therefor a fee
as set forth on Schedule A hereto. The obligations of the Advisor to pay the
above-described fee to the Sub-Advisor will begin as of the respective dates of
the initial public sale of shares in the Funds; provided, however, that the
Sub-Advisor may from time to time voluntarily waive any or all such fees. Upon
any termination of this Agreement before the end of any month, the fee for such
part of a month shall be prorated according to the proportion which such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
For the purpose of determining fees payable to the
Sub-Advisor, the value of the net assets of a particular Fund shall be computed
in the manner described in the Trust's Declaration of Trust or in the Prospectus
or Statement of Additional Information respecting that Fund as from time to time
is in effect for the computation of the value of such net assets in connection
with the determination of the liquidating value of the shares of such Fund.
SECTION 8. LIMITATION OF LIABILITY. Notwithstanding anything
herein to the contrary, the Sub-Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds or the Advisor
in connection with the performance of this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Sub-Advisor in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement.
SECTION 9. DURATION AND TERMINATION. This Agreement will
become effective as of the date first written above (or, if a particular Fund is
not in existence on that date, on the date a registration statement or
post-effective amendment to a registration statement relating to that Fund
becomes effective with the Securities and Exchange Commission and Schedule A
hereto is amended to add such Fund), provided that it shall have been approved
by vote of a majority of the outstanding voting securities of such Fund, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall continue in effect until June 30, 2000.
Thereafter, if not terminated, this Agreement shall continue
in effect as to a particular Fund for successive periods of twelve months each
ending on June 30 of each year, provided such continuance is specifically
approved at least annually (a) by the vote of a majority of those members of the
Trust's Board of Trustees who are not parties to this Agreement or interested
persons of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the vote of a majority of the
Trust's Board of
- 5 -
<PAGE> 6
Trustees or by the vote of a majority of all votes attributable to the
outstanding Shares of such Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to a particular Fund at any time on sixty days' written
notice to the other parties, without the payment of any penalty, by the Advisor
or by the Trust (by vote of the Trust's Board of Trustees or by vote of a
majority of the outstanding voting securities of such Fund) or by the
Sub-Advisor. This Agreement will immediately terminate in the event of its
assignment and in the event of the termination of the Advisory Agreement. (As
used in this Agreement, the terms "majority of the outstanding voting
securities," "interested persons" and "assignment" shall have the same meanings
as ascribed to such terms in the 1940 Act.)
SECTION 10. SUB-ADVISOR'S REPRESENTATIONS. The Sub-Advisor
hereby represents that it is willing and possesses all requisite legal authority
to provide the services contemplated by this Agreement without violation of
applicable laws and regulations, including but not limited to the Glass-Steagall
Act and the regulations promulgated thereunder.
SECTION 11. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
SECTION 12. YEAR 2000 COMPLIANT. The Sub-Advisor represents
and warrants that all services rendered and all computer systems licensed,
maintained or controlled by the Sub-Advisor as well as the Sub-Advisor's
interfaces with third parties (provided that the foregoing does not represent or
warrant that the third party's systems are Year 2000 compliant) utilized in the
performance of the Sub-Advisor's obligations under this Agreement shall be Year
2000 Compliant. "Year 2000 Compliant" means that the services and systems are
designed to and shall:
(a) operate in the year 2000 and later with four digit year
date capability;
(b) operate fault-free in the processing of date and
date-dependent data before, during and after January 1, 2000, including but not
limited to accepting date input, providing date output, and performing date
calculations, comparison and sequencing;
(c) function accurately and without interruption before,
during, and after January 1, 2000, without any adverse effect on operations and
associated with the advent of the new century;
(d) store and provide output of date information in ways that
are unambiguous as to century.
The representations and warranties contained herein may not be disclaimed or
limited by operation of law.
- 6 -
<PAGE> 7
SECTION 13. LIMITATION OF LIABILITY OF THE TRUSTEES AND
SHAREHOLDERS. Governor Funds is a business trust organized under Delaware law
and under a Declaration of Trust, to which reference is hereby made and a copy
of which is on file at the Office of the Secretary of State of Delaware as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Governor Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, employees or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, officers, employees, agents or shareholders of the Trust personally,
but bind only the assets of the Trust, and all persons dealing with any of the
Funds of the Trust must look solely to the assets of the Trust belonging to such
Fund for the enforcement of any claims against the Trust.
SECTION 14. MISCELLANEOUS. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the law of the State of Delaware; provided that nothing herein shall
be construed in a manner inconsistent with the 1940 Act, the Investment Advisers
Act of 1940, as amended, or any rule or regulation of the Securities and
Exchange Commission thereunder. This Agreement may be executed in two or more
counterparts which together shall constitute a single Agreement.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
GOVERNORS GROUP ADVISORS, INC.
By /s/ Lana V. Burkhardt
---------------------------
Name Lana V. Burkhardt
---------------------------
Title President
---------------------------
BRINSON PARTNERS, INC.
By /s/ Samuel W. Anderson
---------------------------
Name Samuel W. Anderson
---------------------------
Title Vice President
---------------------------
By /s/ Mark F. Kemper
---------------------------
Name Mark F. Kemper
---------------------------
Title Assistant Secretary
---------------------------
Dated: November 16, 1998
- 8 -
<PAGE> 9
Schedule A
to the
Investment Advisory Agreement
between
Governors Group Advisors, Inc.
and
Brinson Partners, Inc.
dated as of November 16, 1998
<TABLE>
<CAPTION>
NAME OF FUND COMPENSATION* DATE
- ------------ ------------- ----
<S> <C> <C>
International Equity Growth Fund Annual Rate of .40% of the first $50 November 16, 1998
million of such Fund's average daily
net assets, .35% of the next $150
million of such Fund's average daily
net assets, and .30% of such Fund's
average daily net assets in excess
of $200 million
</TABLE>
*All Fees are computed daily and paid monthly.
GOVERNORS GROUP ADVISORS, INC. BRINSON PARTNERS, INC.
By /s/ Lana V. Burkhardt By /s/ Samuel W. Anderson
-------------------------- -----------------------------
Name Lana V. Burkhardt Name Samuel W. Anderson
-------------------------- -----------------------------
Title President Title Vice President
-------------------------- -----------------------------
By /s/ Mark F. Kemper
-----------------------------
Name Mark F. Kemper
-----------------------------
Title Assistant Secretary
-----------------------------
<PAGE> 1
Exhibit (e)(1)
DISTRIBUTION AGREEMENT
This Agreement is made this 16th day of November, 1998, between
Governor Funds, a Delaware business trust (the "Trust"), 3435 Stelzer Road,
Columbus, Ohio, 43219, and BISYS Fund Services Limited Partnership d/b/a BISYS
Fund Services, an Ohio limited partnership ("Distributor"), 3435 Stelzer Road,
Columbus, Ohio 43219.
WHEREAS, the Trust is an open-end management investment company,
organized as a Delaware business trust and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each of the investment portfolios of
the Trust identified on Schedule A hereto as such Schedule may be amended from
time to time (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Distributor.
1.1 Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Trust then in effect
under the Securities Act of 1933, as amended ("1933 Act"). As used in this
Agreement, the term "registration statement" shall mean Parts A (the
prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term "prospectus"
shall mean each form of prospectus and Statement of Additional Information used
by the Funds for delivery to shareholders and prospective shareholders after the
effective dates of the above referenced registration statements, together with
any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit orders for
the sale of the Shares and will undertake such advertising and promotion as it
believes reasonable in connection with such solicitation. The Trust understands
that Distributor is now and, in the future, may be the distributor of the shares
of several investment companies or series (together, "Companies") including
Companies having investment objectives similar to those of the Trust. The Trust
further understands that investors and potential investors in the Trust may
invest in shares of such other Companies. The Trust agrees that Distributor's
duties to such Companies shall not be deemed in conflict with its duties to the
Trust under this paragraph 1.2.
Page 1
<PAGE> 2
Distributor shall, at its own expense except as otherwise provided by
any plan adopted by the Trust under Rule 12b-1 under the 1940 Act, finance
appropriate activities which it deems reasonable which are primarily intended to
result in the sale of the Shares, including, but not limited to, advertising,
compensation of underwriters, dealers and sales personnel, the printing and
mailing of prospectuses to other than current Shareholders, and the printing and
mailing of sales literature.
1.3 In its capacity as distributor of the Shares, all activities of
Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under the
Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Trust.
1.5 Distributor will transmit any orders received by it for purchase or
redemption of the Shares to the transfer agent and custodian for the Funds.
1.6 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8 The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9 The Trust shall furnish from time to time, for use in connection
with the sale of the Shares, such information with respect to the Funds and the
Shares as Distributor may reasonably request; and the Trust warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Trust shall also furnish Distributor upon
request with: (a) unaudited semi-annual statements of the Funds' books and
accounts prepared by the Trust, (b) a monthly itemized list of the securities in
the Funds, (c) monthly balance sheets as soon as practicable after the end of
each month, and (d) from time to time such additional information regarding the
financial condition of the Funds as Distributor may reasonably request.
Page 2
<PAGE> 3
1.10 The Trust represents to Distributor that, with respect to the
Shares, all registration statements and prospectuses filed by the Trust with the
Commission under the 1933 Act have been carefully prepared in conformity with
the requirements of said Act and rules and regulations of the Commission
thereunder and all statements of fact contained in any such registration
statement and prospectus will be true and correct in all material respects when
such registration statement becomes effective. Furthermore, neither any
registration statement nor any prospectus when such registration statement
becomes effective includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of the Shares. The Trust may,
but shall not be obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or supplements to
any prospectus as, in the light of future developments, may, in the opinion of
the Trust's counsel, be necessary or advisable. If the Trust shall not propose
such amendment or amendments and/or supplement or supplements within fifteen
days after receipt by the Trust of a written request from Distributor to do so,
Distributor may, at its option, terminate this Agreement. The Trust shall not
file any amendment to any registration statement or supplement to any prospectus
without giving Distributor reasonable notice thereof in advance; provided,
however, that nothing contained in this Agreement shall in any way limit the
Trust's right to file at any time such amendments to any registration statement
and/or supplements to any prospectus, of whatever character, as the Trust may
deem advisable, such right being in all respects absolute and unconditional.
1.11 The Trust authorizes Distributor and dealers to use any prospectus
in the form furnished from time to time in connection with the sale of the
Shares. The Trust agrees to indemnify, defend and hold Distributor, its several
partners and employees, and any person who controls Distributor within the
meaning of Section 15 of the 1933 Act free and harmless from and against any and
all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Distributor, its partners and
employees, or any such controlling person, may incur under the 1933 Act or under
common law or otherwise, arising out of or based upon any untrue statement, or
alleged untrue statement, of a material fact contained in any registration
statement or any prospectus or arising out of or based upon any omission, or
alleged omission, to state a material fact required to be stated in either any
registration statement or any prospectus or necessary to make the statements in
either thereof not misleading; provided, however, that the Trust's agreement to
indemnify Distributor, its partners or employees, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or expenses
arising out of any statements or representations as are contained in any
prospectus and in such financial and other statements as are furnished in
writing to the Trust by Distributor and used in the answers to the registration
statement or in the corresponding statements made in the prospectus, or arising
out of or based upon any omission or alleged omission to state a material fact
in connection with the giving of such information required to be stated in such
answers or necessary to make the answers not misleading; and further provided
that the Trust's agreement to
Page 3
<PAGE> 4
indemnify Distributor and the Trust's representations and warranties
hereinbefore set forth in paragraph 1.10 shall not be deemed to cover any
liability to the Trust or its Shareholders to which Distributor would otherwise
be subject by reason of willful misfeasance, bad faith or negligence in the
performance of its duties, or by reason of Distributor's reckless disregard of
its obligations and duties under this Agreement. The Trust's agreement to
indemnify Distributor, its partners and employees, and any such controlling
person, as aforesaid, is expressly conditioned upon the Trust's being notified
of any action brought against Distributor, its partners or employees, or any
such controlling person, such notification to be given by letter or by telegram
addressed to the Trust at its principal office in Columbus, Ohio and sent to the
Trust by the person against whom such action is brought, within 10 days after
the summons or other first legal process shall have been served. The failure to
so notify the Trust of any such action shall not relieve the Trust from any
liability which the Trust may have to the person against whom such action is
brought by reason of any such untrue, or allegedly untrue, statement or
omission, or alleged omission, otherwise than on account of the Trust's
indemnity agreement contained in this paragraph 1.11. The Trust will be entitled
to assume the defense of any suit brought to enforce any such claim, demand or
liability, but, in such case, such defense shall be conducted by counsel of good
standing chosen by the Trust and approved by Distributor, which approval shall
not be unreasonably withheld. In the event the Trust elects to assume the
defense of any such suit and retain counsel of good standing approved by
Distributor, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case the
Trust does not elect to assume the defense of any such suit, or in case
Distributor reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse Distributor, its partners and employees, or the controlling
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by Distributor or them. The Trust's
indemnification agreement contained in this paragraph 1.11 and the Trust's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
Distributor, its partners and employees, or any controlling person, and shall
survive the delivery of any Shares.
This agreement of indemnity will inure exclusively to Distributor's
benefit, to the benefit of its several partners and employees, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Trust agrees promptly to notify Distributor of the commencement
of any litigation or proceedings against the Trust or any of its officers or
Trustees in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees and any person who controls the Trust within the
meaning of Section 15 of the 1933 Act free and harmless from and against any and
all claims, demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or Trustees
or any such controlling person, may incur under the 1933 Act or under common law
or otherwise, but
Page 4
<PAGE> 5
only to the extent that such liability or expense incurred by the Trust, its
officers or Trustees or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished in writing by
Distributor to the Trust and used in the answers to any of the items of the
registration statement or in the corresponding statements made in the
prospectus, or shall arise out of or be based upon any omission, or alleged
omission, to state a material fact in connection with such information furnished
in writing by Distributor to the Trust required to be stated in such answers or
necessary to make such information not misleading. Distributor's agreement to
indemnify the Trust, its officers and Trustees, and any such controlling person,
as aforesaid, is expressly conditioned upon Distributor's being notified of any
action brought against the Trust, its officers or Trustees, or any such
controlling person, such notification to be given by letter or telegram
addressed to Distributor at its principal office in Columbus, Ohio, and sent to
Distributor by the person against whom such action is brought, within 10 days
after the summons or other first legal process shall have been served.
Distributor shall have the right of first control of the defense of such action,
with counsel of its own choosing, satisfactory to the Trust, if such action is
based solely upon such alleged misstatement or omission on Distributor's part,
and in any other event the Trust, its officers or Trustees or such controlling
person shall each have the right to participate in the defense or preparation of
the defense of any such action. The failure to so notify Distributor of any such
action shall not relieve Distributor from any liability which Distributor may
have to the Trust, its officers or Trustees, or to such controlling person by
reason of any such untrue or alleged untrue statement, or omission or alleged
omission, otherwise than on account of Distributor's indemnity agreement
contained in this paragraph 1.12.
1.13 No Shares shall be offered by either Distributor or the Trust
under any of the provisions of this Agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act or if and so long as a current prospectus as required by Section 10(a) of
said Act is not on file with the Commission; provided, however, that nothing
contained in this paragraph 1.13 shall in any way restrict or have an
application to or bearing upon the Trust's obligation to repurchase Shares from
any Shareholder in accordance with the provisions of the Trust's prospectus,
Declaration of Trust, or By-Laws.
1.14 The Trust agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Commission for amendments to the
registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration
statement or prospectus then in
Page 5
<PAGE> 6
effect or the initiation by service of process on the Trust of
any proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration
statement or prospectus then in effect or which requires the
making of a change in such registration statement or
prospectus in order to make the statements therein not
misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement or prospectus which
may from time to time be filed with the Commission.
For purposes of this section, informal requests by or acts of the Staff
of the Commission shall not be deemed actions of or requests by the Commission.
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and its prior, present
or potential Shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Trust, which
approval shall not be withheld where Distributor may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Trust.
1.16 This Agreement shall be governed by the laws of the State of
Delaware.
1.17 Distributor agrees to perform comprehensive date testing on the
systems it utilizes to provide the services hereunder to simulate the actual
turning of the century and leap year. These tests shall be intended to identify
any operational issues regarding the accurate processing of date/time data from,
into and between the Twentieth and Twenty-First Century, including leap year
calculations. Distributor agrees to use all commercially reasonable efforts to
implement all necessary updates and changes for such systems, if any, to
accommodate the turn of the century and leap year if not making such updates or
changes would have a material or significant adverse affect on the services to
be performed by Distributor hereunder, and shall have substantially tested such
upgrades and changes by March 31, 1999. Distributor agrees to provide the Trust
quarterly updates on the status of its Year 2000 readiness project and to make
its personnel reasonably available to address any questions or concerns.
Promptly upon becoming aware of such, Distributor agrees to use all
commercially reasonable efforts to cure any defect or deficiency that relates to
the processing of date/time data from, into and between the Twentieth and
Twenty-First centuries, including leap year calculations in any system
Distributor utilizes to provide services hereunder if not curing such
Page 6
<PAGE> 7
defect or deficiency would have a material or significant adverse affect on the
services to be performed by Distributor hereunder.
The representations and warranties contained herein may not be
disclaimed or limited by operation of law.
1.18 Notwithstanding anything to the contrary, amounts owed by the
Trust to the Distributor shall only be paid out of the assets and property of
the particular Fund involved.
2. Sale and Payment.
Under this Agreement, the following provisions shall apply with respect
to the sale of and payment of Shares of a Fund sold at an offering price which
includes a sales load (collectively, the "Load Shares;" individually, a "Load
Share") as described in the prospectuses of any Funds identified on Schedule B
hereto (collectively, the "Load Funds"; individually, a "Load Fund"):
(a) Distributor shall have the right, as principal, to
purchase Load Shares at their net asset value and to sell such
Load Shares to the public against orders therefor at the
applicable public offering price, as defined in Section 3
hereof. Distributor shall also have the right, as principal,
to sell Load Shares to dealers against orders therefor at the
public offering price less a concession determined by
Distributor, which concession shall not exceed the amount of
the sales charge or underwriting discount, if any, referred to
in Section 3 below.
(b) Prior to the time of delivery of any Load Shares by a Load
Fund to, or on the order of, Distributor, Distributor shall
pay or cause to be paid to the Load Fund or to its order an
amount in Boston or New York clearing house funds equal to the
applicable net asset value of such Shares. Distributor may
retain so much of any sales charge or underwriting discount as
is not allowed by Distributor as a concession to dealers.
3. Public Offering Price.
The public offering price of a Load Share shall be the net asset value
of such Load Shares, plus any applicable sales charge, all as set forth in the
current prospectus of the Load Fund. The net asset value of Shares shall be
determined in accordance with the provisions of the Declaration of Trust and
By-Laws of the Trust and the then current prospectus of the Load Fund.
4. Issuance of Shares.
The Trust reserves the right to issue, transfer or sell Load Shares at
net asset value (a) in connection with the merger or consolidation of the Trust
or the Load Fund(s) with any other
Page 7
<PAGE> 8
investment company or the acquisition by the Trust or the Load Fund(s) of all or
substantially all of the assets or of the outstanding Shares of any other
investment company; (b) in connection with a pro rata distribution directly to
the holders of Shares in the nature of a stock dividend or split; (c) upon the
exercise of subscription rights granted to the holders of Shares on a pro rata
basis; (d) in connection with the issuance of Load Shares pursuant to any
exchange and reinvestment privileges described in any then current prospectus of
the Load Fund; and (e) otherwise in accordance with any then current prospectus
of the Load Fund.
5. Term, Duration and Matters Relating to the Trust as a Delaware
Business Trust.
This Agreement shall become effective with respect to each Fund listed
on Schedule A hereof as of the date first set forth above (or, if a particular
Fund is not in existence on such date, on the date an amendment to Schedule A to
this Agreement relating to that Fund is executed), and, unless sooner terminated
as provided herein, shall continue in effect until June 30, 2000. Thereafter, if
not terminated as provided herein, this Agreement shall continue with respect to
a particular Fund in effect automatically for successive one-year periods ending
on June 30 of each year with respect to each of the Funds, provided such
continuance is specifically approved at least annually by (a) the Trust's Board
of Trustees or (b) by "vote of a majority of the outstanding voting securities"
(as defined below) of the Trust, provided, however, that in either event the
continuance is also approved by a majority of the Trust's Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any such party, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable without penalty, on not
less than sixty days' prior written notice, by the Trust's Board of Trustees, by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Trust or by Distributor. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Governor Funds is a business trust organized under Delaware law and
under a Declaration of Trust, to which reference is hereby made, and to any and
all amendments thereto so filed or hereafter filed. The obligations of "Governor
Funds" entered into in the name or on behalf thereof by any of the Trustees,
officers, employees or agents are made not individually, but in such capacities,
and are not binding upon any of the Trustees, officers, employees, agents or
shareholders of the Trust personally, but bind only the assets of the Trust and
all persons dealing with any of the Funds of the Trust must look solely to the
assets of the Trust belonging to such Fund for the enforcement of any claims
against the Trust.
Page 8
<PAGE> 9
1.19 This Agreement may be executed in one or more counterparts and all
such counterparts will constitute one and the same instrument.
BISYS FUND SERVICES LIMITED GOVERNOR FUNDS
PARTNERSHIP
By BISYS Fund Services, Inc., By /s/ Lana V. Burkhardt
General Partner -------------------------
Name Lana V. Burkhardt
By /s/ William J. Tomko -------------------------
----------------------------
Name William J. Tomko Title President
---------------------------- ------------------------
Title Executive Vice President
---------------------------
Page 9
<PAGE> 10
Dated: November 16, 1998
Schedule A
to the
Distribution Agreement
between Governor Funds and
BISYS Fund Services Limited Partnership
November 16, 1998
Name of Fund
- ------------
The Prime Money Market Fund
The U.S. Treasury Obligations
Money Market Fund
The Aggressive Growth Fund
The Emerging Growth Fund
The Established 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
BISYS FUND SERVICES LIMITED GOVERNOR FUNDS
PARTNERSHIP
By BISYS Fund Services, Inc.,
General Partner
By /s/ William J. Tomko By /s/ Lana V. Burkhardt
------------------------ -------------------------
Page 1
<PAGE> 11
Name William J. Tomko Name Lana V. Burkhardt
----------------------------- -------------------------
Title Executive Vice President Title President
----------------------------- -------------------------
Page 2
<PAGE> 12
Dated: November 16, 1998
Schedule B
to the
Distribution Agreement
between Governor Funds and
BISYS Fund Services Limited Partnership
November 16, 1998
Name of Load Fund
- -----------------
The Aggressive Growth Fund
The Emerging Growth Fund
The Established 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
BISYS FUND SERVICES LIMITED GOVERNOR FUNDS
PARTNERSHIP
By BISYS Fund Services, Inc.,
General Partner
By /s/ William J. Tomko By /s/ Lana V. Burkhardt
----------------------------- --------------------------
Name William J. Tomko Name Lana V. Burkhardt
----------------------------- --------------------------
Page 1
<PAGE> 13
Title Executive Vice President Title President
----------------------------- --------------------------
Page 2
<PAGE> 1
Exhibit (h)(1)
MANAGEMENT AND ADMINISTRATION AGREEMENT
This Agreement is made as of this 16th day of November, 1998, by and
among Governor Funds, a Delaware business trust, (the "Trust"), 3435 Stelzer
Road, Columbus, Ohio 43219, BISYS Fund Services Ohio, Inc., an Ohio corporation
("BISYS"), 3435 Stelzer Road, Columbus, Ohio 43219, and Governors Group
Advisors, Inc., ("Governors") a wholly-owned subsidiary of Keystone Financial,
Inc. (Governors and BISYS are collectively referred to as the "Administrators").
WHEREAS, the Trust is an open-end management investment company,
organized as a Delaware business trust and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Administrators to provide, as
co-administrators, certain management and administration services to certain
investment portfolios of the Trust (individually, a "Fund," and collectively,
the "Funds"), and may retain the Administrators to serve in such capacity with
respect to additional investment portfolios of the Trust, all as now or
hereafter may be identified in Schedule A hereto as such Schedule may be amended
from time to time; and
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Managers and Administrators
---------------------------------------
Subject to the direction and control of the Board of Trustees of the
Trust, and as delineated on Schedule 1 to the Agreement, the Administrators
agree to assist in supervising various aspects of each Fund's operations except
those performed by the investment adviser for the Funds under its Investment
Advisory Agreement, the custodian for the Funds under its Custody Agreement, the
transfer agent for the Funds under its Transfer Agency Agreement and the fund
accountant for the Funds under its Fund Accounting Agreement.
The Administrators will maintain office facilities (which may be in the
offices of the Administrators or an affiliate but shall be in such location as
the Trust shall reasonably determine); furnish statistical and research data,
clerical, certain bookkeeping services and stationery and office supplies;
prepare the periodic reports to the Commission on Form N-SAR or any replacement
forms therefor; compile data for, assist the Trust or its designee in the
preparation of, and file, all the Funds' federal and state tax returns and
required tax filings other than those required to be made by the Funds'
custodian and transfer agent; prepare compliance filings pursuant to state
securities laws with the advice of the Trust's counsel; assist to the extent
requested by the Trust with the Trust's preparation of its Annual and
Semi-Annual Reports to Shareholders and its Registration Statements (on Form
N-1A or any replacement therefor); compile data for, prepare and file timely
Notices to the Commission required pursuant to Rule 24f-2
<PAGE> 2
under the 1940 Act; keep and maintain the financial accounts and records of the
Funds, including calculation of daily expense accruals; in the case of money
market funds, periodic review of the amount of the deviation, if any, of the
current net asset value per share (calculated using available market quotations
or an appropriate substitute that reflects current market conditions) from each
money market fund's amortized cost price per share; and generally assist in all
aspects of the operations of the Funds. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, the Administrators hereby agree that all records
which each maintains for the Trust are the property of the Trust and further
agree to surrender promptly to the Trust any of such records upon the Trust's
request. The Administrators further agree to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act. The Administrators may delegate some or all of their
responsibilities under this Agreement.
The Administrators may, at their expense, subcontract with any entity
or person concerning the provision of the services contemplated hereunder;
provided, however, that the Administrators shall not be relieved of any of their
obligations under this Agreement by the appointment of such subcontractor and
provided further, that the Administrators shall be responsible, to the extent
provided in Section 4 hereof for all acts of such subcontractor as if such acts
were their own.
2. Fees; Expenses; Expense Reimbursement
-------------------------------------
In consideration of services rendered and expenses assumed pursuant to
this Agreement, the Administrators shall be entitled jointly to a fee based on
the average net assets of the Trust, paid by each of the Funds on the first
business day of each month, or at such time(s) as the Administrators shall
request and the parties hereto shall agree, a fee computed daily and paid as
specified below calculated at the applicable annual rate set forth on Schedule A
hereto. The fee for the period from the day of the month this Agreement is
entered into until the end of that month shall be prorated according to the
proportion which such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for such part
of a month shall be prorated according to the proportion which such period bears
to the full monthly period and shall be payable upon the date of termination of
this Agreement.
For the purpose of determining fees payable to the Administrators, the
value of the net assets of a particular Fund shall be computed in the manner
described in the Trust's Declaration of Trust or in the Prospectus or Statement
of Additional Information respecting that Fund as from time to time is in effect
for the computation of the value of such net assets in connection with the
determination of the liquidating value of the shares of such Fund.
Notwithstanding anything to the contrary, amounts owed by the Trust to the
Administrators shall only be paid out of the assets and property of the
particular Fund involved.
The Administrators will from time to time employ or associate with
themselves such person or persons as the Administrators may believe to be
particularly fitted to assist them in the performance of this Agreement. Such
person or persons may be partners, officers, or employees who are employed by
the Administrators and the Trust. The compensation of such person or persons
shall be paid by the Administrators and no obligation may be incurred on behalf
of the
-2-
<PAGE> 3
Funds in such respect. Other expenses to be incurred in the operation of the
Funds including taxes, interest, brokerage fees and commissions, if any, fees of
Trustees who are not partners, officers, directors, shareholders or employees of
the Administrators or the investment adviser or distributor for the Funds,
Commission fees and state Blue Sky qualification and renewal fees and expenses,
advisory fees, pricing service fees, custodian fees, transfer and dividend
disbursing agents' fees, fund accounting fees, certain insurance premiums,
outside and, to the extent authorized by the Trust, inside auditing and legal
fees and expenses, costs of maintenance of the Trust's existence, typesetting
and printing prospectuses for regulatory purposes and for distribution to
current shareholders of the Funds, costs of shareholders' and Trustees' reports
and meetings, fees incurred under the Trust's Distribution and Shareholder
Service Plan and Administrative Services Plan and any extraordinary expenses
will be borne by the Funds.
3. Proprietary and Confidential Information
----------------------------------------
Each Administrator agrees on behalf of itself and its officers and
employees to treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and prior, present, or
potential shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where the
Administrator may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
4. Limitation of Liability; Indemnification
----------------------------------------
Each Administrator shall not be liable for any loss suffered by the
Funds in connection with the matters to which this Agreement relates, except for
a loss resulting from willful misfeasance, bad faith or negligence on its part
in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also a
partner, employee, or agent of the Administrators, who may be or become an
officer, Trustee, employee, or agent of the Trust or the Funds shall be deemed,
when rendering services to the Trust or the Funds, or acting on any business of
that party, to be rendering such services to or acting solely for that party and
not as a partner, employee, or agent or one under the control or direction of
the Administrators even though paid by it. The parties hereto agree that this
Agreement shall not create any joint and/or several liability between the
Administrators with respect to services provided by any particular Administrator
as set forth herein and the Schedules hereto.
A Fund agrees to indemnify and hold harmless each Administrator, its
employees, agents, directors, officers and nominees from and against any and all
claims, demands, actions and suits, whether groundless or otherwise, and from
and against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to such Administrator's actions taken or nonactions with
respect to the performance of services under this Agreement with respect to such
Fund or based, if applicable, upon reasonable reliance on information, records,
instructions or requests with respect to such Fund given or made to such
Administrator by a duly authorized representative of
-3-
<PAGE> 4
the Trust; provided that this indemnification shall not apply to actions or
omissions of such Administrator in cases of its own bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties, and further provided that prior to confessing any claim against it which
may be the subject of this indemnification, such Administrator shall give the
Trust written notice of and reasonable opportunity to defend against said claim
in its own name or in the name of such Administrator.
5. Term
----
This Agreement shall become effective as of the date first written
above (or, if a particular Fund is not in existence on that date, on the date an
amendment to Schedule A to this Agreement relating to that Fund is executed)
and, unless sooner terminated as provided herein, shall continue until June 30,
2001, and thereafter shall be renewed automatically for successive one year
terms, unless written notice not to renew is given by the non-renewing party to
the other parties at least 60 days prior to the expiration of the then-current
term. This Agreement is terminable with respect to a particular Fund through a
failure to renew at the end of a one-year term; upon mutual agreement of the
parties hereto; upon 180 days' written notice by the Trust after the initial
term hereof but only in connection with the reorganization of the Funds into
another registered management investment company; or for "cause" (as defined
below) by the party alleging "cause," on not less than 60 days notice by the
Trust's Board of Trustees or by the Administrators. This Agreement is also
terminable as provided in Section 7 herein. Written notice not to renew may be
given for any reason, with or without "cause."
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence, multiple negligent acts by an
Administrator which in the aggregate are determined by the Trust's Board of
Trustees to constitute a serious failure to perform satisfactorily such
Administrator's obligations hereunder or reckless disregard on the part of the
party to be terminated with respect to its obligations and duties set forth
herein; (b) a final, unappealable judicial, regulatory or administrative ruling
or order in which the party to be terminated has been found guilty of criminal
or unethical behavior in the conduct of its business; (c) the dissolution or
liquidation of either party or other cessation of business other than a
reorganization or recapitalization of such party as an ongoing business; (d)
financial difficulties on the part of the party to be terminated which are
evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary case
under Title 11 of the United States Code, as from time to time in effect, or any
applicable law, other than said Title 11, of any jurisdiction relating to the
liquidation or reorganization of debtors or to the modification or alteration of
the rights of creditors; or (e) any circumstance which substantially impairs the
performance of the obligations and duties of the party to be terminated, or the
ability to perform those obligations and duties as contemplated herein.
Notwithstanding the foregoing, the absence of an annual review of this Agreement
by the Board of Trustees shall not, in and of itself, constitute "cause" as used
herein.
6. Governing Law and Matters Relating to the Trust as a Delaware
Business Trust
-------------------------------------------------------------
This Agreement shall be governed by the law of the State of Delaware.
Governor Funds is a business trust organized under the laws of Delaware and
under a Declaration of Trust, to
-4-
<PAGE> 5
which reference is hereby made and a copy of which is on file at the office of
the Secretary of State of Delaware as required by law, and to any and all
amendments thereto so filed or hereafter filed. The obligations of "Governor
Funds" entered into in the name or on behalf thereof by any of the Trustees,
officers, employees or agents are made not individually, but in such capacities,
and are not binding upon any of the Trustees, officers, employees, agents or
shareholders of the Trust personally but bind only the assets of the Trust, and
all persons dealing with any of the Funds of the Trust must look solely to the
assets of the Trust belonging to such Fund for the enforcement of any claims
against the Trust.
7. Year 2000 Compliant
-------------------
BISYS agrees to perform comprehensive date testing on the systems it
utilizes to provide the services hereunder to simulate the actual turning of the
century and leap year. These tests shall be intended to identify any operational
issues regarding the accurate processing of date/time data from, into and
between the Twentieth and Twenty-First Century, including leap year
calculations. BISYS agrees to use all commercially reasonable efforts to
implement all necessary updates and changes for such systems, if any, to
accommodate the turn of the century and leap year if not making such updates or
changes would have a material or significant adverse affect on the services to
be performed by BISYS hereunder, and shall have substantially tested such
upgrades and changes by March 31, 1999. BISYS agrees to provide the Trust
quarterly updates on the status of its Year 2000 readiness project and to make
its personnel reasonably available to address any questions or concerns.
If in the event that at any time prior to March 31, 1999, the Trust
reasonably determines that any of the systems BISYS utilizes to perform the
services hereunder will not be Year 2000 ready by September 30, 1999, and that
such lack of readiness will have a material or significant adverse affect on the
services to be performed by BISYS hereunder, the Trust shall have the right to
terminate the Agreement upon providing written notice to BISYS describing, in
reasonable detail, the basis for its termination; provided, however, that BISYS
shall have sixty (60) days following receipt of any such notice to cure any
deficiencies to the Trust's reasonable satisfaction. Promptly upon becoming
aware of such, BISYS agrees to use all commercially reasonable efforts to cure
any defect or deficiency that relates to the processing of date/time data from,
into and between the Twentieth and Twenty-First centuries, including leap year
calculations in any system BISYS utilizes to provide services hereunder if not
curing such defect or deficiency would have a material or significant adverse
affect on the services to be performed by BISYS hereunder.
-5-
<PAGE> 6
8. Miscellaneous.
--------------
This Agreement may be executed in one or more counterparts and all such
counterparts will constitute one and the same instrument. The representations
and warranties contained herein may not be disclaimed or limited by operation of
law.
BISYS FUND SERVICES OHIO, INC. GOVERNOR FUNDS
By: /s/ William J. Tomko By: /s/ Lana V. Burkhardt
------------------------------------ -----------------------------
its: Executive Vice President its: President
GOVERNOR GROUP ADVISORS, INC.
By: /s/ Lana V. Burkhardt
------------------------------------
its: President
-6-
<PAGE> 7
SCHEDULE 1
ADMINISTRATIVE SERVICES
Under the Agreement, Governors shall provide the following services and maintain
the records relating thereto:
1. Review and comment on the Trust's Registration Statement, Prospectus,
Statement of Additional Information, Annual and Semi-Annual Reports to
Shareholders, Annual and Semi-Annual Form N-SAR, notices pursuant to
Rule 24f-2 and proxy materials.
2. Review and comment on certain materials to be distributed to the
Trust's Board for the Board's meetings.
3. Consulting with BISYS regarding fidelity bond and E&O/D&O insurance
coverage. BISYS shall obtain such insurance.
4. Attend shareholder and Board meetings as requested from time to time.
5. Maintain expense files and coordinate the payment of invoices.
BISYS shall provide all the other services required to be performed by the
Administrators under the Agreement.
<PAGE> 8
Dated: November 16, 1998
Schedule A to the
Management and Co-Administration Agreement
among Governor Funds,
BISYS Fund Services Ohio, Inc.
and Governors Group Advisors, Inc.
dated November 16, 1998
<TABLE>
<CAPTION>
Name of Fund Compensation* Date
------------ ------------- ----
<S> <C> <C>
Prime Money Market, Pennsylvania Annual rate of .15% of each November 16, 1998
Municipal Bond, Established Growth, Fund's average daily net
Intermediate Term Income, Aggressive assets
Growth, U.S. Treasury Obligations
Money Market, Limited Duration
Government Securities, Emerging
Growth and International Equity Funds
Lifestyle Conservative Growth, None.
Lifestyle Moderate Growth, and
Lifestyle Growth Funds.
</TABLE>
*All fees are computed daily and paid periodically.
BISYS FUND SERVICES OHIO, INC. GOVERNOR FUNDS
By: /s/ William J. Tomko By: /s/ Lana V. Burkhardt
---------------------------------- --------------------------
its: Executive Vice President its: President
GOVERNOR GROUP ADVISORS, INC.
By: /s/ Lana V. Burkhardt
----------------------------------
its: President
<PAGE> 1
Exhibit (h)(2)
TRANSFER AGENCY AGREEMENT
This Agreement is made as of November 16, 1998, between Governor Funds
(the "Trust"), a Delaware business trust having its principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219 and BISYS Fund Services, Inc.
("BISYS"), a Delaware corporation having its principal place of business at 3435
Stelzer Road, Columbus, Ohio 43219.
WHEREAS, the Trust desires that BISYS perform certain services for
those series of the Trust set forth in the Schedule A attached hereto, as such
Schedule may be amended from time to time (individually referred to herein as a
"Fund" and collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
SECTION 1. SERVICES. BISYS shall perform for the Trust the transfer
agent services set forth in Schedule B hereto.
BISYS also agrees to perform for the Trust such special
services incidental to the performance of the services enumerated herein as
agreed to by the parties from time to time. BISYS shall perform such additional
services as are provided on an amendment to Schedule B hereof, in consideration
of such fees as the parties hereto may agree.
BISYS may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the Trust
(individually, a "Subtransfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Subtransfer Agent shall be the agent of BISYS and not the agent of the
Trust or such Fund, and that BISYS shall be fully responsible for the acts of
such Subtransfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Subtransfer Agent.
SECTION 2. FEES. The Trust shall pay BISYS for the services to be
provided by BISYS under this Agreement in accordance with, and in the manner set
forth in, Schedule C hereto. Fees for any additional services to be provided by
BISYS pursuant to an amendment to Schedule B hereto shall be subject to mutual
agreement at the time such amendment to Schedule C is proposed. Notwithstanding
anything to the contrary, amounts owed by the Trust to BISYS shall only be paid
out of the assets and property of the particular Fund involved.
SECTION 3. REIMBURSEMENT OF EXPENSES. In addition to paying BISYS the
fees described in Section 2 hereof, the Trust agrees to reimburse BISYS for
BISYS' out-of-pocket expenses in providing services hereunder, including without
limitation the following:
A. All freight and other delivery and bonding charges incurred by BISYS
in delivering materials to and from the Trust and in delivering all
materials to shareholders;
<PAGE> 2
B. All direct telephone, telephone transmission and telecopy or other
electronic transmission expenses incurred by BISYS in communication
with the Trust, the Trust's investment adviser or custodian, dealers,
shareholders or others as required for BISYS to perform the services to
be provided hereunder;
C. Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms, proxies,
notices or other form of printed material which shall be required by
BISYS for the performance of the services to be provided hereunder;
D. The cost of microfilm or microfiche of records or other materials;
E. All systems-related expenses associated with the provision of
special reports and services pursuant to Section 1 herein; and
F. Any expenses BISYS shall incur at the written direction of an
officer of the Trust thereunto duly authorized by the Trust's Board of
Trustees.
SECTION 4. EFFECTIVE DATE. This Agreement shall become effective as of
the date first written above (the "Effective Date").
SECTION 5. TERM. This Agreement shall continue in effect, unless
earlier terminated by either party hereto as provided hereunder, until June 30,
2001. Thereafter, this Agreement shall be renewed automatically for successive
one-year terms unless written notice not to renew is given by the non-renewing
party to the other party at least 60 days prior to the expiration of the
then-current term; provided, however, that after such termination, for so long
as BISYS, with the written consent of the Trust, in fact continues to perform
any one or more of the services contemplated by this Agreement or any Schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due BISYS and unpaid by the Trust upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. BISYS shall be entitled to collect from the Trust, in addition to
the fees and disbursements provided by Sections 2 and 3 hereof, the amount of
all of BISYS' reasonable cash disbursements for services in connection with
BISYS' activities in effecting such termination, including without limitation,
the delivery to the Trust and/or its distributor or investment advisers and/or
other parties, of the Trust's property, records, instruments and documents, or
any copies thereof. To the extent that BISYS may retain in its possession copies
of any Trust documents or records subsequent to such termination which copies
had not been requested by or on behalf of the Trust in connection with the
termination process described above, BISYS, for its reasonable out-of-pocket
expenses, will provide the Trust with reasonable access to such copies. This
Agreement is terminable with respect to a particular Fund only upon mutual
agreement of the parties hereto; upon 180 days' written notice by the Trust
after the initial term hereof but only in connection with the reorganization of
the Funds into another registered management investment company; or for "cause"
(as defined below) by the party alleging "cause," on not less than 60 days'
notice by the Trust's Board of Trustees or by BISYS. This Agreement is also
terminable as provided in Section 28 herein. Written notice not to renew may be
given for any reason, with or without "cause."
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence, multiple negligent acts by BISYS which
in the aggregate are determined by the Trust's Board of Trustees to constitute a
serious failure to perform satisfactorily BISYS's obligations hereunder, or
reckless disregard on the part of the party to be terminated with respect to its
obligations and duties set forth herein; (b) a final, unappealable judicial,
regulatory or administrative ruling or order in which the party to be terminated
has been found guilty of criminal or unethical behavior in the conduct of its
-2-
<PAGE> 3
business; (c) financial difficulties on the part of the party to be terminated
which are evidenced by the authorization or commencement of, or involvement by
way of pleading, answer, consent, or acquiescence in, a voluntary or involuntary
case under Title 11 of the United States Code, as from time to time is in
effect, or any applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors; or (d) any circumstance which
substantially impairs the performance of the obligations and duties as
contemplated herein of the party to be terminated.
SECTION 6. UNCONTROLLABLE EVENTS. BISYS assumes no responsibility
hereunder, and shall not be liable, for any damage, loss of data, delay or any
other loss whatsoever caused by events beyond its reasonable control.
SECTION 7. LEGAL ADVICE. BISYS shall notify the Trust at any time BISYS
believes that it is in need of the advice of counsel (other than counsel in the
regular employ of BISYS or any affiliated companies) with regard to BISYS'
responsibilities and duties pursuant to this Agreement; and after so notifying
the Trust, BISYS, at its discretion, shall be entitled to seek, receive and act
upon advice of legal counsel of its choosing, such advice to be at the expense
of the Trust or Funds unless relating to a matter involving BISYS' willful
misfeasance, bad faith, negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and except as provided in section 9
hereof, BISYS shall in no event be liable to the Trust or any Fund or any
shareholder or beneficial owner of the Trust for any action reasonably taken
pursuant to such advice.
SECTION 8. INSTRUCTIONS. Whenever BISYS is requested or authorized to
take action hereunder pursuant to instructions from a shareholder or a properly
authorized agent of a shareholder ("shareholder's agent"), concerning an account
in a Fund, BISYS shall be entitled to rely upon any certificate, letter or other
instrument or communication, whether in writing, by electronic or telephone
transmission, reasonably believed by BISYS to be genuine and to have been
properly made, signed or authorized by an officer or other authorized agent of
the Trust or by the shareholder or shareholder's agent, as the case may be, and
shall be entitled to receive as conclusive proof of any fact or matter required
to be ascertained by it hereunder a certificate signed by an officer of the
Trust or any other person authorized by the Trust's Board of Trustees or by the
shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statements of Additional
Information of the Trust relating to the Funds to the extent that such services
are described therein unless BISYS receives written instructions to the contrary
in a timely manner from the Trust.
SECTION 9. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION. BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Trust
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Trust agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests given or
made to BISYS by the Trust, the investment adviser and on any records provided
by any fund accountant or custodian thereof; provided that this indemnification
shall not apply to actions or omissions of BISYS in cases of its own bad faith,
willful misfeasance, negligence or from reckless
-3-
<PAGE> 4
disregard by it of its obligations and duties; and further provided that prior
to confessing any claim against it which may be the subject of this
indemnification, BISYS shall give the Trust written notice of and reasonable
opportunity to defend against said claim in its own name or in the name of
BISYS.
SECTION 10. RECORD RETENTION AND CONFIDENTIALITY. BISYS shall keep and
maintain on behalf of the Trust all books and records which the Trust or BISYS
is, or may be, required to keep and maintain pursuant to any applicable
statutes, rules and regulations, including without limitation Rules 31a-1 and
31a-2 under the Investment Company Act of 1940, as amended (the "1940 Act"),
relating to the maintenance of books and records in connection with the services
to be provided hereunder. BISYS further agrees that all such books and records
shall be the property of the Trust and to make such books and records available
for inspection by the Trust or by the Securities and Exchange Commission (the
"Commission") at reasonable times and otherwise to keep confidential all books
and records and other information relative to the Trust and its shareholders;
except when requested to divulge such information by duly-constituted
authorities or court process, or requested by a shareholder, or shareholder's
agent, with respect to information concerning an account as to which such
shareholder has either a legal or beneficial interest or when requested by the
Trust, the shareholder, or shareholder's agent, or the dealer of record as to
such account.
SECTION 11. REPORTS. BISYS will furnish to the Trust and to its
properly authorized auditors, investment advisers, examiners, distributors,
dealers, underwriters, salesmen, insurance companies and others designated by
the Trust in writing, such reports at such times as are prescribed in Schedule D
attached hereto, or as subsequently agreed upon by the parties pursuant to an
amendment to Schedule D. The Trust agrees to examine each such report or copy
promptly and will report or cause to be reported any errors or discrepancies
therein no later than three business days from the receipt thereof. In the event
that errors or discrepancies, except such errors and discrepancies as may not
reasonably be expected to be discovered by the recipient within ten days after
conducting a diligent examination, are not so reported within the aforesaid
period of time, a report will for all purposes be accepted by and binding upon
the Trust and any other recipient, and, except as provided in Section 9 hereof,
BISYS shall have no liability for errors or discrepancies therein and shall have
no further responsibility with respect to such report except to perform
reasonable corrections of such errors and discrepancies within a reasonable time
after requested to do so by the Trust.
SECTION 12. RIGHTS OF OWNERSHIP. All computer programs and procedures
developed to perform services required to be provided by BISYS under this
Agreement are the property of BISYS. All records and other data except such
computer programs and procedures are the exclusive property of the Trust and all
such other records and data will be furnished to the Trust in appropriate form
as soon as practicable after termination of this Agreement for any reason.
SECTION 13. RETURN OF RECORDS. BISYS may at its option at any time, and
shall promptly upon the Trust's demand, turn over to the Trust and cease to
retain BISYS' files, records and documents created and maintained by BISYS
pursuant to this Agreement; provided, however, that to the extent needed by
BISYS in the performance of its services or for its legal protection, BISYS may
retain copies of such files, records and documents at BISYS' own expense. If not
so turned over to the Trust, such documents and records will be retained by
BISYS for six years from the year of creation. At the end of such six-year
period, such records and documents will be turned over to the Trust unless the
Trust authorizes in writing the destruction of such records and documents.
SECTION 14. BANK ACCOUNTS. The Trust and the Funds shall establish and
maintain such bank accounts with such bank or banks as are selected by the
Trust, as are necessary in order that BISYS may perform the services required to
be performed hereunder. To the extent that the performance of such services
shall require BISYS directly to disburse amounts for payment of dividends,
redemption proceeds
-4-
<PAGE> 5
or other purposes, the Trust and Funds shall provide such bank or banks with all
instructions and authorizations necessary for BISYS to effect such
disbursements.
SECTION 15. REPRESENTATIONS OF THE TRUST. The Trust certifies to BISYS
that: (a) as of the close of business on the Effective Date, each Fund which is
in existence as of the Effective Date has authorized unlimited shares, and (b)
by virtue of its Declaration of Trust, shares of each Fund which are redeemed by
the Trust may be sold by the Trust from its treasury, and (c) this Agreement has
been duly authorized by the Trust and, when executed and delivered by the Trust,
will constitute a legal, valid and binding obligation of the Trust, enforceable
against the Trust in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
SECTION 16. REPRESENTATIONS OF BISYS. BISYS represents and warrants
that: (a) BISYS has been in, and shall continue to be in, compliance with all
provisions of law, including Section 17A(c) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), required in connection with the
performance of its duties under this Agreement; and (b) the various procedures
and systems which BISYS has implemented with regard to safekeeping from loss or
damage attributable to fire, theft, or any other cause of the blank checks,
records, and other data of the Trust and BISYS' records, data, equipment,
facilities and other property used in the performance of its obligations
hereunder are adequate and that it will make such changes therein from time to
time as are required for the secure performance of its obligations hereunder.
SECTION 17. INSURANCE. BISYS shall notify the Trust should its
insurance coverage with respect to professional liability or errors and
omissions coverage be cancelled or reduced. Such notification shall include the
date of change and the reasons therefor. BISYS shall notify the Trust of any
material claims against it with respect to services performed under this
Agreement, whether or not they may be covered by insurance, and shall notify the
Trust from time to time as may be appropriate of the total outstanding claims
made by BISYS under its insurance coverage.
SECTION 18. INFORMATION TO BE FURNISHED BY THE TRUST AND FUNDS. The
Trust has furnished to BISYS the following:
(a) Copies of the Declaration of Trust of the Trust and of any
amendments thereto, certified by the proper official of the state in
which such Declaration has been filed.
(b) Copies of the following documents:
1. The Trust's By-Laws and any amendments thereto;
2. Certified copies of resolutions of the Board of Trustees
covering the following matters:
a. Approval of this
Agreement and authorization of a specified
officer of the Trust to execute and deliver
this Agreement and authorization of
specified officers of the Trust to instruct
BISYS hereunder; and
b. Authorization of BISYS
to act as Transfer Agent for the Trust on
behalf of the Funds.
-5-
<PAGE> 6
(c) A list of all officers of the Trust, together with specimen
signatures of those officers, who are authorized to instruct BISYS in
all matters.
(d) Two copies of the following (if such documents are employed by
the Trust):
1. Prospectuses and Statements of Additional
Information;
2. Distribution Agreement; and
3. All other forms commonly used by the Trust or its
Distributor with regard to their relationships and
transactions with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the Trust
authorized, issued, and outstanding as of the Effective Date of BISYS'
appointment as Transfer Agent (or as of the date on which BISYS'
services are commenced, whichever is the later date) and as to receipt
of full consideration by the Trust for all shares outstanding, such
statement to be certified by the Treasurer of the Trust.
SECTION 19. INFORMATION FURNISHED BY BISYS. BISYS has furnished to the
Trust the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' Bylaws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the following
matters:
1. Approval of this Agreement, and authorization of a
specified officer of BISYS to execute and deliver this
Agreement;
2. Authorization of BISYS to act as Transfer Agent for
the Trust.
(d) A copy of the most recent independent accountants' report relating
to internal accounting control systems as filed with the Commission
pursuant to Rule 17Ad-13 of the Exchange Act.
SECTION 20. AMENDMENTS TO DOCUMENTS. The Trust shall furnish BISYS
written copies of any amendments to, or changes in, any of the items referred to
in Section 18 hereof forthwith upon such amendments or changes becoming
effective. In addition, the Trust agrees that no amendments will be made to the
Prospectuses or Statement of Additional Information of the Trust which might
have the effect of changing the procedures employed by BISYS in providing the
services agreed to hereunder or which amendment might affect the duties of BISYS
hereunder unless the Trust first obtains BISYS' approval of such amendments or
changes.
SECTION 21. RELIANCE ON AMENDMENTS. BISYS may rely on any amendments to
or changes in any of the documents and other items to be provided by the Trust
pursuant to Sections 18 and 20 of this Agreement and subject to Section 9, the
Trust hereby indemnifies and holds harmless BISYS from and against any and all
claims, demands, actions, suits, judgments, liabilities, losses, damages, costs,
charges, counsel fees and other expenses of every nature and character which may
result from actions or omissions on the part of BISYS in reasonable reliance
upon such amendments and/or changes. Although BISYS is authorized to rely on the
above-mentioned amendments to and changes in the documents and other items to be
provided pursuant to Sections 18 and 20 hereof, BISYS shall be under no duty to
comply with or
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<PAGE> 7
take any action as a result of any of such amendments or changes unless the
Trust first obtains BISYS' consent to and approval of such amendments or
changes.
SECTION 22. COMPLIANCE WITH LAW. Except for the obligations of BISYS
set forth in Section 10 hereof, the Trust assumes full responsibility for the
preparation, contents and distribution of each prospectus of the Trust as to
compliance with all applicable requirements of the Securities Act of 1933, as
amended (the "1933 Act"), the 1940 Act and any other laws, rules and regulations
of governmental authorities having jurisdiction. BISYS shall have no obligation
to take cognizance of any laws relating to the sale of the Trust's shares. The
Trust represents and warrants that no shares of the Trust will be offered to the
public until the Trust's registration statement under the 1933 Act and the 1940
Act has been declared or becomes effective.
SECTION 23. NOTICES. Any notice provided hereunder shall be
sufficiently given when sent by registered or certified mail to the party
required to be served with such notice, at the following address: 3435 Stelzer
Road, Columbus, Ohio 43219, with a copy to Michael P. Malloy, Drinker Biddle &
Reath LLP, Philadelphia National Bank Building 1345 Chestnut Street,
Philadelphia, PA 19107-3496 for notices to the Trust, or at such other address
as such party may from time to time specify in writing to the other party
pursuant to this Section.
SECTION 24. HEADINGS. Paragraph headings in this Agreement are included
for convenience only and are not to be used to construe or interpret this
Agreement.
SECTION 25. ASSIGNMENT. This Agreement and the rights and duties
hereunder shall not be assignable by either of the parties hereto except by the
specific written consent of the other party. This Section 25 shall not limit or
in any way affect BISYS' right to appoint a Sub-transfer Agent pursuant to
Section 1 hereof.
SECTION 26. GOVERNING LAW. This Agreement shall be governed by and
provisions shall be construed in accordance with the laws of the State of
Delaware.
SECTION 27. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
The Governor Funds is a business trust organized under Delaware law and under a
Declaration of Trust, to which reference is hereby made and a copy of which is
on file at the Office of the Secretary of State of Delaware as required by law,
and to any and all amendments thereto so filed or hereafter filed. The
obligations of "Governor Funds" entered into in the name or on behalf thereof by
any of the Trustees, officers, employees or agents are made not individually,
but in such capacities, and are not binding upon any of the Trustees, officers,
employees, agents or shareholders of the Trust personally, but bind only the
assets of the Trust and all persons dealing with any of the Funds of the Trust
must look solely to the assets of the Trust belonging to such Fund for the
enforcement of any claims against the Trust.
SECTION 28. YEAR 2000 COMPLIANT. BISYS agrees to perform comprehensive
date testing on the systems it utilizes to provide the services hereunder to
simulate the actual turning of the century and leap year. These tests shall be
intended to identify any operational issues regarding the accurate processing of
date/time data from, into and between the Twentieth and Twenty-First Century,
including leap year calculations. BISYS agrees to use all commercially
reasonable efforts to implement all necessary updates and changes for such
systems, if any, to accommodate the turn of the century and leap year if not
making such updates or changes would have a material or significant adverse
affect on the services to be performed by BISYS hereunder, and shall have
substantially tested such upgrades and changes by March 31, 1999. BISYS agrees
to provide the Trust quarterly updates on the status of its Year 2000 readiness
project and to make its personnel reasonably available to address any questions
or concerns.
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<PAGE> 8
If in the event that at any time prior to March 31, 1999, the Trust
reasonably determines that any of the systems BISYS utilizes to perform the
services hereunder will not be Year 2000 ready by September 30, 1999, and that
such lack of readiness will have a material or significant adverse affect on the
services to be performed by BISYS hereunder, the Trust shall have the right to
terminate the Agreement upon providing written notice to BISYS describing, in
reasonable detail, the basis for its termination; provided, however, that BISYS
shall have sixty (60) days following receipt of any such notice to cure any
deficiencies to the Trust's reasonable satisfaction. Promptly upon becoming
aware of such, BISYS agrees to use all commercially reasonable efforts to cure
any defect or deficiency that relates to the processing of date/time data from,
into and between the Twentieth and Twenty-First centuries, including leap year
calculations in any system BISYS utilizes to provide services hereunder if not
curing such defect or deficiency would have a material or significant adverse
affect on the services to be performed by BISYS hereunder.
SECTION 29. MISCELLANEOUS. This Agreement may be executed in one or
more counterparts and all such counterparts will constitute one and the same
instrument. The representations and warranties contained herein may not be
disclaimed or limited by operation of law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
BISYS FUND SERVICES, INC. GOVERNOR FUNDS
By: /s/ William J. Tomko By: /s/ Lana V. Burkhardt
-------------------------------- -----------------------------
its: Executive Vice President its: President
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<PAGE> 9
Dated: November 16, 1998
SCHEDULE A
TO THE
TRANSFER AGENCY AGREEMENT
BETWEEN
GOVERNOR FUNDS
AND
BISYS FUND SERVICES, INC.
NOVEMBER 16, 1998
Name of Fund
------------
The Aggressive Growth Fund
The Emerging Growth Fund
The Established Growth Fund
The International Equity Fund
The Intermediate Term Income Fund
The Limited Duration Government Securities Fund
The Prime Money Market Fund
The Pennsylvania Municipal Bond Fund
The U.S. Treasury Obligations Money Market Fund
The Lifestyle Conservative Growth Fund
The Lifestyle Moderate Growth
The Lifestyle Growth
GOVERNOR FUNDS
By: /s/ Lana V. Burkhardt
---------------------------
its: President
BISYS FUND SERVICES, INC.
By: /s/ William J. Tomko
---------------------------
its: Executive Vice President
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<PAGE> 10
SCHEDULE B
TRANSFER AGENCY SERVICES
1. Shareholder Transactions
------------------------
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend
option, taxpayer identifications numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10b-10 under the
Exchange Act.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new
shares through dividend reinvestment.
2. Shareholder Information Services
--------------------------------
a. Make information available to shareholder servicing unit and
other remote access units regarding trade date, share price, current
holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or
special order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements, or marketing material to current
shareholders.
3. Compliance Reporting
--------------------
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers Regulation, Inc. and the
States in which the Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service
forms for corresponding Fund and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
--------------------------------------
a. Provide reports for tracking rights of accumulation and
purchases made under a Letter of Intent.
b. Account for separation of shareholder investments from
transaction sale charges for purchases of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and
marketing expenses.
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<PAGE> 11
d. Track sales and commission statistics by dealer and provide
for payment of commissions on direct shareholder purchases in a load
Fund.
5. Shareholder Account Maintenance
-------------------------------
a. Maintain all shareholder records for each account in the
Trust.
b. Issue customer statements on scheduled cycle, providing
duplicate second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
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<PAGE> 12
SCHEDULE C
Fees
Transfer Agent:
Annual fees per fund:
- ---------------------
Daily dividend fund base fee $ 25 per shareholder
Variable NAV fund fee $ 23 per shareholder
Annual Minimums per fund: $20,000
Multiple classes of shares:
- ---------------------------
Classes of shares which have different net asset values or pay different daily
dividends will be treated as separate classes, and the fee schedule above,
including the appropriate minimums, will be charged for each separate class.
Additional services:
- --------------------
Additional services such as IRA processing are subject to additional fees which
will be quoted upon request. Programming costs or data base management fees for
special reports or specialized processing will be quoted upon request.
Out of pocket charges:
- ----------------------
Out-of-pocket costs, including postage, Tymnet charges, statement/confirm paper
and forms, and microfiche, will be added to the transfer agent fees.
GOVERNOR FUNDS
By: /s/ Lana V. Burkhardt
-------------------------------
its: President
BISYS FUND SERVICES, INC.
By /s/ William J. Tomko
-------------------------------
its: Executive Vice President
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<PAGE> 13
SCHEDULE D
REPORTS
I. Daily Shareholder Activity Journal
II. Daily Fund Activity Summary Report
A. Beginning Balance
B. Dealer Transactions
C. Shareholder Transactions
D. Reinvested Dividends
E. Exchanges
F. Adjustments
G. Ending Balance
III. Daily Wire and Check Registers
IV. Monthly Dealer Processing Reports
V. Monthly Dividend Reports
VI. Sales Data Reports for Blue Sky Registration
VII. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed with
the Securities and Exchange Commission pursuant to Rule 17Ad-13 of the
Exchange Act.
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<PAGE> 1
Exhibit (h)(3)
FUND ACCOUNTING AGREEMENT
This Agreement is made as of November 16, 1998 between Governor Funds
(the "Trust"), a Delaware business trust having its principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219, and BISYS Fund Services, Inc.
("BISYS"), a Delaware corporation having its principal place of business at 3435
Stelzer Road, Columbus, Ohio 43219.
WHEREAS, the Trust desires that BISYS perform certain fund accounting
services for each of the investment portfolios of the Trust identified on
Schedule A hereto, as such Schedule may be amended from time to time
(individually referred to herein as a "Fund" and collectively as the "Funds");
and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
Section 1. SERVICES AS FUND ACCOUNTANT.
(a) MAINTENANCE OF BOOKS AND RECORDS. BISYS will keep
and maintain the following books and records of each Fund
pursuant to Rule 31a-1 under the Investment Company Act of
1940 (the "Rule"):
(i) Journals containing an itemized daily record in
detail of all purchases and sales of securities, all
receipts and disbursements of cash and all other debits and
credits, as required by subsection (b)(1) of the Rule;
(ii) General and auxiliary ledgers reflecting all
asset, liability, reserve, capital, income and expense
accounts, including interest accrued and interest received,
as required by subsection (b)(2)(i) of the Rule;
(iii) Separate ledger accounts required by
subsection (b)(2)(ii) and (iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts
(except shareholder accounts) as required by subsection
(b)(8) of the Rule.
(b) PERFORMANCE OF DAILY ACCOUNTING SERVICES. In
addition to the maintenance of the books and records
specified above, BISYS shall perform the following
accounting services daily for each Fund:
(i) Calculate the net asset value per share
utilizing prices obtained from the sources described in
subsection 1(b)(ii) below;
(ii) Obtain security prices from independent
pricing services, or if such quotes are unavailable, then
obtain such prices from each Fund's investment adviser or
its designee, as approved by the Trust's Board of Trustees;
(iii) Verify and reconcile with the Funds'
custodian all daily trade activity;
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<PAGE> 2
(iv) Compute, as appropriate, each Fund's net income
and capital gains, dividend payables, dividend factors, 7-day
yields, 7-day effective yields, 30-day yields, and weighted
average portfolio maturity;
(v) Review daily the net asset value calculation and
dividend factor (if any) for each Fund prior to release to
shareholders, check and confirm the net asset values and
dividend factors for reasonableness and deviations, and
distribute net asset values and yields to NASDAQ;
(vi) Report to the Trust the daily market pricing of
securities in any money market Funds, with the comparison to
the amortized cost basis;
(vii) Determine unrealized appreciation and
depreciation on securities held in variable net asset value
Funds;
(viii) Amortize premiums and accrete discounts on
securities purchased at a price other than face value, if
requested by the Trust;
(ix) Update fund accounting system to reflect rate
changes, as received from a Fund's investment adviser, on
variable interest rate instruments;
(x) Post Fund transactions to appropriate categories;
(xi) Accrue expenses of each Fund according to
instructions received from the Trust's Administrator;
(xii) Determine the outstanding receivables and
payables for all (1) security trades, (2) Fund share
transactions and (3) income and expense accounts;
(xiii) Provide accounting reports in connection with
the Trust's regular annual audit and other audits and
examinations by regulatory agencies; and
(xiv) Provide such periodic reports as the parties
shall agree upon, as set forth in a separate schedule.
(c) SPECIAL REPORTS AND SERVICES
(i) BISYS may provide additional special reports upon
the request of the Trust or a Fund's investment adviser, which
may result in an additional charge, the amount of which shall
be agreed upon between the parties.
(ii) BISYS may provide such other similar services
with respect to a Fund as may be reasonably requested by the
Trust, which may result in an additional charge, the amount of
which shall be agreed upon between the parties.
(d) Additional Accounting Services. BISYS shall also
perform the following additional accounting services for each
Fund:
(i) Provide monthly a download (and hard copy
thereof) of the financial statements described below, upon
request of the Trust. The download will include the following
items:
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<PAGE> 3
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
(ii) Provide accounting information for the
following:
(A) federal and state income tax
returns and federal excise tax returns;
(B) the Trust's semi-annual reports
with the Securities and Exchange Commission ("SEC")
on Form N-SAR;
(C) the Trust's annual, semi-annual
and quarterly (if any) shareholder reports;
(D) registration statements on
Form-N1A and other filings relating to the
registration of shares;
(E) the Administrator's monitoring
of the Trust's status as a regulated investment
company under Subchapter M of the Internal Revenue
Code, as amended;
(F) annual audit by the Trust's
auditors; and
(G) examinations performed by the
SEC.
Section 2. SUBCONTRACTING.
BISYS may, at its expense, subcontract with any entity or person
acceptable to the Trust concerning the provision of the services contemplated
hereunder; provided, however, that BISYS shall not be relieved of any of its
obligations under this Agreement by the appointment of such subcontractor and
provided further, that BISYS shall be responsible, to the extent provided in
Section 7 hereof, for all acts of such subcontractor as if such acts were its
own.
Section 3. COMPENSATION.
The Trust shall pay BISYS for the services to be provided by BISYS
under this Agreement in accordance with, and in the manner set forth in,
Schedule A hereto, as such Schedule may be amended from time to time.
Notwithstanding anything to the contrary, amounts owed by the Trust to BISYS
shall only be paid out of the assets and property of the particular Fund
involved.
Section 4. REIMBURSEMENT OF EXPENSES.
In addition to paying BISYS the fees described in Section 3 hereof, the
Trust agrees to reimburse BISYS for BISYS's out-of-pocket expenses in providing
services hereunder, including without limitation the following:
(1) All freight and other delivery and bonding charges incurred by
BISYS in delivering materials to and from the Trust;
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<PAGE> 4
(2) All direct telephone, telephone transmission and telecopy or other
electronic transmission expenses incurred by BISYS in communication
with the Trust, the Trust's investment adviser or custodian, dealers or
others as required for BISYS to perform the services to be provided
hereunder;
(3) The cost of obtaining security market quotes pursuant to Section
1(b)(ii) above;
(4) The cost of microfilm or microfiche of records or other materials;
(5) Any expenses BISYS shall incur at the written direction of an
officer of the Trust thereunto duly authorized by the Trust's Board of
Trustees;
(6) All systems-related expenses associated with the provision of
special reports and services pursuant to Section 1(c) herein; and
(7) Any additional out-of-pocket expenses reasonably incurred by BISYS
in the performance of its duties and obligations under this Agreement.
Section 5. EFFECTIVE DATE. This Agreement shall become effective with
respect to a Fund as of the date first written above (or, if a particular Fund
is not in existence on that date, on the date an amendment to Schedule A to this
Agreement relating to that Fund is executed) (the "Effective Date").
Section 6. TERM. This Agreement shall continue in effect with respect
to a Fund, unless earlier terminated by either party hereto as provided
hereunder, until June 30, 2001, and thereafter shall be renewed automatically
for successive one-year terms unless written notice not to renew is given by the
non-renewing party to the other party at least 60 days prior to the expiration
of the then-current term; provided, however, that after such termination, for so
long as BISYS, with the written consent of the Trust, in fact continues to
perform any one or more of the services contemplated by this Agreement or any
schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due BISYS and unpaid by the Trust upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. BISYS shall be entitled to collect from the Trust, in addition to
the compensation described under Section 3 hereof, the amount of all of BISYS'
reasonable cash disbursements for services in connection with BISYS' activities
in effecting such termination, including without limitation, the delivery to the
Trust and/or its designees of the Trust's property, records, instruments and
documents, or any copies thereof. To the extent that BISYS may retain in its
possession copies of any Trust documents or records subsequent to such
termination, which copies had not been requested by or on behalf of the Trust in
connection with the termination process described above, for its reasonable
out-of-pocket expenses, BISYS will provide the Trust with reasonable access to
such copies. This Agreement is terminable with respect to a particular Fund only
upon mutual agreement of the parties hereto; upon 180 days' written notice by
the Trust after the initial term hereof but only in connection with the
reorganization of the Funds into another registered management investment
company; or for "cause" (as defined below) by the party alleging "cause," on not
less than 60 days' notice by the Trust's Board of Trustees or by BISYS. This
Agreement is also terminable as provided in Section 25 herein. Written notice
not to renew may be given for any reason, with or without "cause."
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence, multiple negligent acts by BISYS which
in the aggregate are determined by the Trust's Board of Trustees to constitute a
serious failure to perform satisfactorily BISYS' obligations hereunder, or
reckless disregard on the part of either party with respect to its obligations
and duties set forth herein; (b) a final, unappealable judicial, regulatory or
administrative ruling or order in which either party has been
Page 4
<PAGE> 5
found guilty of criminal or unethical behavior in the conduct of its business;
(c) the dissolution or liquidation of either party or other cessation of
business other than a reorganization or recapitalization of such party as an
ongoing business; (d) financial difficulties on the part of either party which
is evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary case
under Title 11 of the United States Code, as from time to time is in effect, or
any applicable law, other than said Title 11, of any jurisdiction relating to
the liquidation or reorganization of debtors or to the modification or
alteration of the rights of creditors; or (e) any circumstance which
substantially impairs the performance of either party's obligations and duties
as contemplated herein.
Section 7. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION. BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Trust
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. A Fund agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement with respect to such Fund or based,
if applicable, upon reasonable reliance on information, records, instructions or
requests with respect to such Fund given or made to BISYS by a duly authorized
representative of the Trust; provided that this indemnification shall not apply
to actions or omissions of BISYS in cases of its own bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties, and further provided that prior to confessing any claim against it which
may be the subject of this indemnification, BISYS shall give the Trust written
notice of and reasonable opportunity to defend against said claim in its own
name or in the name of BISYS.
Section 8. RECORD RETENTION AND CONFIDENTIALITY. BISYS shall keep and
maintain on behalf of the Trust all books and records which the Trust or BISYS
is, or may be, required to keep and maintain pursuant to any applicable
statutes, rules and regulations, including without limitation Rules 31a-1 and
31a-2 under the Investment Company Act of 1940, as amended (the "1940 Act"),
relating to the maintenance of books and records in connection with the services
to be provided hereunder. BISYS further agrees that all such books and records
shall be the property of the Trust and to make such books and records available
for inspection by the Trust or by the Securities and Exchange Commission at
reasonable times and otherwise to keep confidential all books and records and
other information relative to the Trust and its shareholders; except when
requested to divulge such information by duly-constituted authorities or court
process.
Section 9. UNCONTROLLABLE EVENTS. BISYS assumes no responsibility
hereunder, and shall not be liable, for any damage, loss of data, delay or any
other loss whatsoever caused by events beyond its reasonable control.
Section 10. REPORTS. BISYS will furnish to the Trust and to its
properly authorized auditors, investment advisers, examiners, distributors,
dealers, underwriters, salesmen, insurance companies and others designated by
the Trust in writing, such reports and at such times as are prescribed pursuant
to the terms and the conditions of this Agreement to be provided or completed by
BISYS, or as subsequently agreed upon by the parties pursuant to an amendment
hereto. The Trust agrees to examine each such report or copy promptly and will
report or cause to be reported any errors or discrepancies therein no later than
three business days from the receipt thereof. In the event that errors or
discrepancies, except such errors and discrepancies as may not reasonably be
expected to be discovered by the recipient within ten days after conducting a
diligent examination, are not so reported within the aforesaid period of time, a
Page 5
<PAGE> 6
report will for all purposes be accepted by and binding upon the Trust and any
other recipient, and except as provided in Section 7 hereof, BISYS shall have no
liability for errors or discrepancies therein and shall have no further
responsibility with respect to such report except to perform reasonable
corrections of such errors and discrepancies within a reasonable time after
requested to do so by the Trust.
Section 11. RIGHTS OF OWNERSHIP. All computer programs and procedures
developed to perform services required to be provided by BISYS under this
Agreement are the property of BISYS. All records and other data except such
computer programs and procedures are the exclusive property of the Trust and all
such other records and data will be furnished to the Trust in appropriate form
as soon as practicable after termination of this Agreement for any reason.
Section 12. RETURN OF RECORDS. BISYS may at its option at any time, and
shall promptly upon the Trust's demand, turn over to the Trust and cease to
retain BISYS' files, records and documents created and maintained by BISYS
pursuant to this Agreement; provided, however, that to the extent needed by
BISYS in the performance of its services or for its legal protection, BISYS may
retain copies of such files, records and documents at BISYS' own expense. If not
so turned over to the Trust, such documents and records will be retained by
BISYS for six years from the year of creation. At the end of such six-year
period, such records and documents will be turned over to the Trust unless the
Trust authorizes in writing the destruction of such records and documents.
Section 13. REPRESENTATIONS OF THE TRUST. The Trust certifies to BISYS
that: (1) as of the close of business on the Effective Date, each Fund which is
in existence as of the Effective Date has authorized unlimited shares, and (2)
this Agreement has been duly authorized by the Trust and, when executed and
delivered by the Trust, will constitute a legal, valid and binding obligation of
the Trust, enforceable against the Trust in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
Section 14. REPRESENTATIONS OF BISYS. BISYS represents and warrants
that: (1) the various procedures and systems which BISYS has implemented with
regard to safeguarding from loss or damage attributable to fire, theft, or any
other cause of the blank checks, records, and other data of the Trust and BISYS'
records, data, equipment facilities and other property used in the performance
of its obligations hereunder are adequate and that it will make such changes
therein from time to time as are required for the secure performance of its
obligations hereunder, and (2) this Agreement has been duly authorized by BISYS
and, when executed and delivered by BISYS, will constitute a legal, valid and
binding obligation of BISYS, enforceable against BISYS in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting the rights and remedies of creditors and
secured parties.
Section 15. INSURANCE. BISYS shall notify the Trust should any of its
insurance coverage be cancelled or reduced. Such notification shall include the
date of change and the reasons therefor. BISYS shall notify the Trust of any
material claims against it with respect to services performed under this
Agreement, whether or not they may be covered by insurance, and shall notify the
Trust from time to time as may be appropriate of the total outstanding claims
made by BISYS under its insurance coverage.
Section 16. INFORMATION TO BE FURNISHED BY THE TRUST AND FUNDS. The
Trust has furnished to BISYS the following:
(a) Copies of the Declaration of Trust of the Trust and of any
amendments thereto, certified by the proper official of the state in
which such Declaration has been filed.
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<PAGE> 7
(b) Copies of the following documents:
(i) The Trust's By-Laws and any amendments thereto; and
(ii) Certified copies of resolutions of the Board of Trustees
covering the approval of this Agreement, authorization of a
specified officer of the Trust to execute and deliver this
Agreement and authorization for specified officers of the
Trust to instruct BISYS thereunder.
(c) A list of all the officers of the Trust, together with
specimen signatures of those officers who are authorized to instruct
BISYS in all matters.
(d) Two copies of the Prospectus and Statement of Additional
Information for each Fund.
Section 17. INFORMATION FURNISHED BY BISYS.
(a) BISYS has furnished to the Trust the following:
(i) BISYS's Articles of Incorporation; and
(ii) BISYS's Bylaws and any amendments thereto.
(b) BISYS shall, upon request, furnish certified copies of actions
of BISYS covering the following matters:
(i) Approval of this Agreement, and authorization of a
specified officer of BISYS to execute and deliver this
Agreement; and
(ii) Authorization of BISYS to act as fund accountant for the
Trust and to provide accounting services for the Trust.
Section 18. AMENDMENTS TO DOCUMENTS. The Trust shall furnish BISYS
written copies of any amendments to, or changes in, any of the items referred to
in Section 16 hereof forthwith upon such amendments or changes becoming
effective.
Section 19. COMPLIANCE WITH LAW. Except for the obligations of BISYS
set forth in Section 8 hereof, the Trust assumes full responsibility for the
preparation, contents and distribution of each prospectus of the Trust as to
compliance with all applicable requirements of the Securities Act of 1933, as
amended, the 1940 Act and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligations hereunder to
take cognizance of any laws relating to the sale of the Trust's shares. The
Trust represents and warrants that no shares of the Trust will be offered to the
public until the Trust's registration statement under the Securities Act of 1933
and the 1940 Act has been declared or becomes effective.
Section 20. NOTICES. Any notice provided hereunder shall be
sufficiently given when sent by registered or certified mail to the party
required to be served with such notice, at the following address: 3435 Stelzer
Road, Columbus, Ohio 43219, with a copy to Michael P. Malloy, Drinker Biddle &
Reath LLP, Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, PA 19107-3496 for notices to the Trust, or at such other address
as such party may from time to time specify in writing to the other party
pursuant to this Section.
Page 7
<PAGE> 8
Section 21. HEADINGS. Paragraph headings in this Agreement are included
for convenience only and are not to be used to construe or interpret this
Agreement.
Section 22. ASSIGNMENT. This Agreement and the rights and duties
hereunder shall not be assignable with respect to a Fund by either of the
parties hereto except by the specific written consent of the other party.
Section 23. GOVERNING LAW. This Agreement shall be governed by and
provisions shall be construed in accordance with the laws of the State of
Delaware.
Section 24. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
The Governor Funds is a business trust organized under Delaware law and under a
Declaration of Trust, to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of Delaware as required by law,
and to any and all amendments thereto so filed or hereafter filed. The
obligations of "Governor Funds" entered into in the name or on behalf thereof by
any of the Trustees, officers, employees or agents are made not individually,
but in such capacities, and are not binding upon any of the Trustees, officers,
employees, agents or shareholders of the Trust personally, but bind only the
assets of the Trust and all persons dealing with any of the Funds of the Trust
must look solely to the assets of the Trust belonging to such Fund for the
enforcement of any claims against the Trust.
Section 25. YEAR 2000 COMPLIANT. BISYS agrees to perform comprehensive
date testing on the systems it utilizes to provide the services hereunder to
simulate the actual turning of the century and leap year. These tests shall be
intended to identify any operational issues regarding the accurate processing of
date/time data from, into and between the Twentieth and Twenty-First Century,
including leap year calculations. BISYS agrees to use all commercially
reasonable efforts to implement all necessary updates and changes for such
systems, if any, to accommodate the turn of the century and leap year if not
making such updates or changes would have a material or significant adverse
affect on the services to be performed by BISYS hereunder, and shall have
substantially tested such upgrades and changes by March 31, 1999. BISYS agrees
to provide the Trust quarterly updates on the status of its Year 2000 readiness
project and to make its personnel reasonably available to address any questions
or concerns.
If in the event that at any time prior to March 31, 1999, the Trust
reasonably determines that any of the systems BISYS utilizes to perform the
services hereunder will not be Year 2000 ready by September 30, 1999, and that
such lack of readiness will have a material or significant adverse affect on the
services to be performed by BISYS hereunder, the Trust shall have the right to
terminate the Agreement upon providing written notice to BISYS describing, in
reasonable detail, the basis for its termination; provided, however, that BISYS
shall have sixty (60) days following receipt of any such notice to cure any
deficiencies to the Trust's reasonable satisfaction. Promptly upon becoming
aware of such, BISYS agrees to use all commercially reasonable efforts to cure
any defect or deficiency that relates to the processing of date/time data from,
into and between the Twentieth and Twenty-First centuries, including leap year
calculations in any system BISYS utilizes to provide services hereunder if not
curing such defect or deficiency would have a material or significant adverse
affect on the services to be performed by BISYS hereunder.
Page 8
<PAGE> 9
Section 26. MISCELLANEOUS. This Agreement may be executed in one or
more counterparts and all such counterparts will constitute one and the same
instrument. The representations and warranties contained herein may not be
disclaimed or limited by operations of law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
GOVERNOR FUNDS
By: /s/ Lana V. Burkhardt
--------------------------------
its: President
BISYS FUND SERVICES, INC.
By: /s/ William J. Tomko
--------------------------------
its: Executive Vice President
Page 9
<PAGE> 10
Dated: November 16, 1998
SCHEDULE A
TO THE
FUND ACCOUNTING AGREEMENT
BETWEEN
GOVERNOR FUNDS
AND
BISYS FUND SERVICES, INC.
NOVEMBER 16, 1998
<TABLE>
<CAPTION>
Name of Fund Compensation* Date
- ------------ ------------- ----
<S> <C> <C>
Prime Money Market, The greater of (i) the annual rate of November 16, 1998
Pennsylvania .03% (.04% for international funds) of
Municipal Bond, the Funds' combined net assets up to $2
Established Growth, billion and .02% (.03% for international
Intermediate Term funds) of the Funds' combined net assets
Income, of $2 billion or more or (ii) the
Aggressive Growth, applicable annual minimum fee of $30,000
U.S. Treasury per fund ($35,000 municipal or
Obligations Money tax-exempt fund, $40,000 international
Market, Limited fund).
Duration Government
Securities,
Emerging Growth,
International Equity,
Lifestyle Conservative
Growth, Lifestyle Moderate
Growth and Lifestyle
Growth Funds
</TABLE>
BISYS FUND SERVICES, INC. GOVERNOR FUNDS
By: /s/ William J. Tomko By: /s/ Lana V. Burkhardt
----------------------------- ---------------------------
its: Executive Vice President its: President
- ------
* All fees are computed daily and paid periodically.
Page 10
<PAGE> 1
Exhibit (j)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references
to our Firm under the caption "Counsel" in the Statement of Additional
Information that is included in this Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A under the Securities Act of 1933, as
amended, of Governor Funds. This consent does not constitute a consent under
Section 7 of the Securities Act of 1933, and in consenting to the use of our
name and the references to our Firm under such caption we have not certified any
part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under Section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
----------------------------------
Philadelphia, Pennsylvania Drinker Biddle & Reath LLP
August 30, 1999
<PAGE> 1
Exhibit (l)
SHARE PURCHASE AGREEMENT
Governor Funds, a Delaware business trust (the "Trust"), and BISYS
Fund Services Limited Partnership d/b/a BISYS Fund Services, an Ohio limited
partnership ("Buyer"), hereby agree as follows:
1. The Trust hereby offers Buyer and Buyer hereby purchases, in
consideration for the payment of $100.00, one share of beneficial interest of
the Established Growth Fund, one share of beneficial interest of the Aggressive
Growth Fund, one share of beneficial interest of the Emerging Growth Fund, one
share of beneficial interest of the International Equity Fund, one share of
beneficial interest of the Intermediate Term Income Fund, one share of
beneficial interest of the Limited Duration Government Securities Fund, one
share of beneficial interest of the Pennsylvania Municipal Bond Fund, one share
of beneficial interest of the Lifestyle Conservative Growth Fund, one share of
beneficial interest of the Lifestyle Moderate Growth Fund, and one share of
beneficial interest of the Lifestyle Growth Fund, all for a purchase price of
$10.00 per share, and, in consideration for the payment of $3.00, one Investor
Share of the Prime Money Market Fund, one S Share of the Prime Money Market
Fund, and one Investor Share of the U.S. Treasury Obligations Money Market Fund,
all for a purchase price of $1.00 per share.
2. Buyer acknowledges that the shares purchased hereunder have not been
registered under the federal securities laws and that the Trust is relying on
certain exemptions from such registration requirements. Buyer represents and
warrants that it is acquiring such shares solely for investment purposes and
that Buyer has no present intention to redeem, sell or otherwise dispose of the
shares.
3. This Agreement shall be governed by the law of the State of
Delaware. Governor Funds is a business trust organized under the laws of
Delaware and under a Declaration of Trust, to which reference is hereby made and
a copy of which is on file at the office of the Secretary of State of Delaware
as required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Governor Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, employees or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, officers, employees, agents or shareholders of the Trust personally
but bind only the assets of the Trust, and all persons dealing with any of the
Funds of the Trust must look solely to the assets of the Trust belonging to such
Fund for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 31st day of December, 1998.
(SEAL)
GOVERNOR FUNDS
By: /s/ Lana V. Burkhardt
-----------------------------------
Lana V. Burkhardt, President
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS Fund Services Inc.,
General Partner
By: /s/ Michael A. Grunewald
-----------------------------------
Michael A. Grunewald
Treasurer
-2-
