<PAGE> 1
As filed with the Securities and Exchange Commission on October 29, 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. 2 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 3 |_|
---------------
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):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on February 28, 1999 pursuant to paragraph (b)
[ ] 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
Investor Shares of
Prime Money Market Fund
U.S. Treasury Obligations Money
Market Fund
[LOGO]
S Shares of
Prime Money Market Fund GOVERNOR
FUNDS
Managed by Govenors Group
Advisors, Inc. and subadvised by
Martindale Andres & Company, Inc.
PROSPECTUS
November 1, 1999
The Securities and Exchange
Commission has not approved or
disapproved the shares described
in this Prospectus or determined
whether this Prospectus is
accurate or complete. Any
representation to the contrary
is a criminal offense.
Questions?
Call 1-800-766-3960
or your investment
representative. www.governorfunds.com
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
[LOGO]
Review this section for a 2 Prime Money Market Fund
summary of each Fund's 5 U.S. Treasury Obligations Money Market Fund
investments, risks, past
performance, and fees.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
[LOGO]
Review this section for 8 Prime Money Market Fund
information on investment 9 U.S. Treasury Obligations Money Market Fund
strategies and their risks. 10 Investment Risks
FUND MANAGEMENT
[LOGO]
Review this section for 11 The Investment Advisor and Sub-Advisor
details on the people and 12 The Administrators and Distributor
organizations who oversee
the Funds.
SHAREHOLDER INFORMATION
[LOGO]
Review this section for 13 Pricing of Fund Shares
details on how shares are 14 Purchasing and Adding to Your Investor Shares
valued, how to purchase, 17 Purchasing S Shares
sell and exchange shares, 18 Selling Your Investor Shares
related charges and payments 19 General Policies on Selling Shares
of dividends and 21 General Policy on Redemption of S Shares
distributions. 22 Exchanging Your Shares
23 Dividends, Distributions and Taxes
FINANCIAL HIGHLIGHTS
[LOGO]
24 Prime Money Market Fund
25 U.S. Treasury Obligations Money Market Fund
BACK COVER
[LOGO]
Where to Learn More About Governor Funds
</TABLE>
1
<PAGE> 4
[LOGO]
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 The Fund is a "money market fund" that seeks to maintain a
INVESTMENT STRATEGIES 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 The Fund's performance per share will change daily based on
INVESTMENT RISKS 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 interest rates will affect the yield or value of the
Fund's investments in debt securities.
WHO MAY Consider investing in the Fund if you:
WANT TO INVEST? - 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>
2
<PAGE> 5
RISK/RETURN SUMMARY AND FUND EXPENSES PRIME MONEY MARKET FUND
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF
12/31
<TABLE>
<CAPTION>
'1997' 1.31%
- ------ ----
<S> <C>
'1998' 1.22%
</TABLE>
Best quarter: Q4 1997 1.31%
Worst quarter: Q4 1998 1.22%
Year-to-date total return for
the period ended September 30,
1999: 3.45%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
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.
The returns for S Shares
will be lower than the
Investor Shares' returns
because expenses of the
classes differ.
<TABLE>
<CAPTION>
SINCE
PAST INCEPTION
YEAR (OCTOBER 7, 1996)
<S> <C> <C>
PRIME MONEY MARKET FUND (INVESTOR SHARES) 5.16% 5.16%
</TABLE>
* As of December 31, 1998 the 7-day yield (Investor Shares) was 4.68%. Without
expense limitations, the Fund's yield would have been 4.32% 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.
Both the chart and the table assume reinvestment of dividends and distributions.
3
<PAGE> 6
RISK/RETURN SUMMARY AND FUND EXPENSES PRIME MONEY MARKET FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
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) (as a percentage of average net
assets)
Management fees .40% .40%
Distribution (12b-1) fees None None
Other expenses(1) .33% .52%
Total Annual Fund Operating Expenses .73% .92%(2)
Fee Waivers(3) .24% .23%
Net Annual Fund Operating Expenses .49% .69%
</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
various banks, trust companies,
broker-dealers (other than the Distributor)
and other financial organizations ("Service
Organizations") 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 period ended June
30, 1999, but have been restated to reflect
the estimated expenses that would have been
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 will be waived by the Advisor
and administrators until October 31, 2000
pursuant to a contract with the Fund dated
October 29, 1999.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
PRIME MONEY MARKET FUND
INVESTOR SHARES $50 $208 $380 $ 878
S SHARES $70 $270 $487 $1,112
</TABLE>
THIS TABLE DESCRIBES THE
FEES AND EXPENSES THAT YOU
MAY PAY IF YOU BUY AND
HOLD SHARES OF THE PRIME
MONEY MARKET FUND.
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. The Fund's
fees and expenses are
based on the Fund's
operating expenses for the
fiscal year ended June 30,
1999, restated for current
fee waivers.
Use the example at right 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,
except for the expiration
of the contractual fee
waivers on October 31,
2000
Because this example is
hypothetical and for
comparison only, your actual
costs will be different.
4
<PAGE> 7
[LOGO]
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 The Fund is a "money market fund" that seeks to maintain a stable net asset
INVESTMENT STRATEGIES 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, and repurchase agreements backed by such securities.
PRINCIPAL The Fund's performance per share will change daily based on many factors,
INVESTMENT RISKS including the quality of the instruments in the Fund's investment portfolio,
national and international economic conditions and general market
conditions. Changes in interest rates will affect the yield or value of the
Fund's investments in debt securities.
WHO MAY Consider investing in the Fund if you:
WANT TO INVEST? - 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>
5
<PAGE> 8
U.S. TREASURY OBLIGATIONS
RISK/RETURN SUMMARY AND FUND EXPENSES 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.
PERFORMANCE BAR CHART AND TABLE
TOTAL RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
'1998' 4.62%
- ------ ----
<S> <C>
</TABLE>
Best quarter: Q3 1998 1.19%
Worst quarter: Q4 1998 1.05%
Year-to-date total return for
the period ended September 30,
1999: 3.04%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
<TABLE>
<CAPTION>
SINCE
PAST INCEPTION
YEAR (JULY 1, 1997)
<S> <C> <C>
U.S. TREASURY OBLIGATIONS MONEY
MARKET FUND 4.62% 4.70%
</TABLE>
* As of December 31, 1998 the 7-day yield was 4.03%. Without expense
limitations, the Fund's yield would have been 3.63% 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.
Both the chart and the table assume reinvestment of dividends and distributions.
6
<PAGE> 9
U.S. TREASURY OBLIGATIONS
RISK/RETURN SUMMARY AND FUND EXPENSES MONEY MARKET FUND
FEES AND EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTOR
INVESTMENT) SHARES
Maximum sales charge (load) imposed on
purchases None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets)
(as a percentage of average net assets)
Management fees .40%
Distribution (12b-1) fees None
Other expenses(1) .56%
Total Annual Fund Operating Expenses .96%
Fee Waivers(2) .24%
Net Annual Fund Operating Expenses .72%
</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
Service Organizations 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 will be waived by the Advisor
and administrators until October 31, 2000
pursuant to a contract with the Fund dated
October 29, 1999.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
U.S. TREASURY OBLIGATIONS
MONEY MARKET FUND $74 $282 $507 $1,154
</TABLE>
THIS TABLE DESCRIBES THE
FEES AND EXPENSES THAT YOU
MAY PAY IF YOU BUY AND
HOLD SHARES OF THE U.S.
TREASURY OBLIGATIONS MONEY
MARKET FUND. 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. The
Fund's fees and expenses
are based on the Fund's
operating expenses for the
fiscal year ended June 30,
1999, restated for current
fee waivers.
Use the example at right 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,
except for the expiration
of the contractual fee
waivers on October 31,
2000
Because this example is
hypothetical and for
comparison only, your actual
costs will be different.
7
<PAGE> 10
[LOGO]
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 dollar-weighted average portfolio 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.
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% of the Fund's total
assets);
- securities of money market mutual funds;
- when-issued or delayed-delivery securities;
- 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.
8
<PAGE> 11
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.
9
<PAGE> 12
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
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 do not 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 determine whether 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
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.
10
<PAGE> 13
[LOGO]
FUND MANAGEMENT
THE INVESTMENT ADVISOR AND SUB-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 as follows during the fiscal year
ended June 30, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF
AVERAGE NET ASSETS
FOR THE YEAR ENDED 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 Funds 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 Advisor has informed the Fund that it expects that on, before or about
June 1, 2000, the Advisor will be reorganized into the Sub-Advisor, with no
resulting change of actual control or management. The Advisor and Sub-Advisor
are wholly-owned subsidiaries of Keystone. The reorganization would result in
the Sub-Advisor assuming all of the obligations and responsibilities of the
Advisor under the Investment Advisory Agreement with the Fund and under the
Sub-Advisory Agreement with the International Equity Fund Sub-Advisor. This
prospectus will be supplemented if that reorganization does not occur.
11
<PAGE> 14
FUND MANAGEMENT
THE ADMINISTRATORS AND DISTRIBUTOR
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. As noted above, the Advisor has informed the Fund that it
expects that on, before or about June 1, 2000, the Advisor will be
reorganized into the Sub-Advisor, with no resulting change of actual control
or management. The reorganization would result in the Sub-Advisor assuming
all of the obligations and responsibilities of the Advisor under the
Management and Administration Agreement with the Fund. This prospectus will
be supplemented if that reorganization does not occur.
BISYS Fund Services Limited Partnership ("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.
The Statement of Additional Information has more detailed information about
the Advisor and other service providers.
12
<PAGE> 15
[LOGO]
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
NAV is calculated
separately for the Prime
Money Market Fund's
Investor Shares and S
Shares.
---------------------------
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, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
13
<PAGE> 16
SHAREHOLDER INFORMATION
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.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
<S> <C> <C>
Regular $1,000 $25
(non-retirement)
-----------------------------------------------
Retirement (IRA) $1,000 $25
-----------------------------------------------
Automatic Investment
Plan $ 250 $25
</TABLE>
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.
-----------------------------------------------------------------------------
14
<PAGE> 17
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR INVESTOR SHARES
CONTINUED
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:
Governor Funds
P.O. Box 182707
Columbus, OH 43218-2707
BY EXPRESS MAIL:
Governor Funds
c/o BISYS Fund Services
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.
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.
15
<PAGE> 18
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR INVESTOR SHARES
CONTINUED
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# 890028418
Include: your name
your confirmation
number
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.
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.
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.
Note: Your bank may charge a wire transfer fee.
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:
o 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)
o 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.
16
<PAGE> 19
SHAREHOLDER INFORMATION
-----------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------
PURCHASING 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, respectively, 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.
17
<PAGE> 20
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.
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
(unless you have declined telephone sales wish to receive your funds (mail, wire, electronic
privileges) transfer). (See "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
(See "General Policies on Selling write a letter of instruction indicating:
Shares -- Redemptions in Writing - your Fund and account number
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
WIRE TRANSFER Call 1-800-766-3960 to request a wire transfer.
You must indicate this option on your If you call by 4 p.m. Eastern time, your payment will
account application. normally be wired to your bank on the next business day.
The Fund may charge a wire transfer fee Otherwise, it will normally be wired on the second
NOTE: Your financial institution may also business day after your call.
charge a separate fee.
ELECTRONIC REDEMPTIONS Call 1-800-766-3960 to request an electronic redemption.
Your bank must participate in the If you call by 4 p.m. Eastern time, the NAV of your shares
Automated Clearing House (ACH) and must will normally be determined on the same day and the
be a U.S. bank. proceeds will be credited within 8 days.
Your bank may charge for this service.
</TABLE>
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.
QUESTIONS?
Call 1-800-766-3960 or
your investment representative.
18
<PAGE> 21
SHAREHOLDER INFORMATION
SELLING YOUR INVESTOR SHARES
CONTINUED
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.
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 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.
19
<PAGE> 22
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
CONTINUED
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.
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 their 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.
20
<PAGE> 23
SHAREHOLDER INFORMATION
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.
21
<PAGE> 24
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to:
Governor Funds
P.O. Box 182707
Columbus, OH 43218-2707
or by calling 1-800-766-3960
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.
SERVICE ORGANIZATIONS
Service Organizations 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
each 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
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.
22
<PAGE> 25
SHAREHOLDER INFORMATION
SERVICE ORGANIZATIONS
CONTINUED
- 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 its customers. Customers with accounts at Service
Organizations should consult their Service Organization for information
concerning their sub-accounts. The Advisor, its affiliates 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.
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.
23
<PAGE> 26
[LOGO]
FINANCIAL HIGHLIGHTS PRIME MONEY MARKET FUND
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 KPMG LLP whose report, along with the Funds' financial statements,
are included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
INVESTOR
SHARES S SHARES
---------- ------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999(B) 1999(B) 1998 1997(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.047 0.008 0.051 0.037
--------------------------------------------------------------------------------------------
Total from Investment Activities 0.047 0.008 0.051 0.037
--------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.047) (0.008) (0.051) (0.037)
--------------------------------------------------------------------------------------------
Total Distributions (0.047) (0.008) (0.051) (0.037)
--------------------------------------------------------------------------------------------
Net change in net asset value per
share -- -- -- --
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------
Total Return 4.80% 0.85%(c) 5.19% 3.73%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in
thousands) $261,561 $ 685 $217,861 $95,850
Ratio of expenses to average net
assets 0.49% 0.68%(d) 0.48% 0.36%(d)
Ratio of net investment income to
average net assets 4.68% 4.23%(d) 5.14% 5.02%(d)
Ratio of expenses to average net
assets* 0.80% 0.91%(d) 0.76% 0.70%(d)
Ratio of net investment income to
average net assets* 4.37% 4.00%(d) 4.86% 4.68%(d)
</TABLE>
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was October 7, 1996.
(b) Effective April 19, 1999, the Fund designated the existing shares as
Investor Shares and commenced the offering of S Shares.
(c) Not annualized.
(d) Annualized.
24
<PAGE> 27
U.S. TREASURY OBLIGATIONS
FINANCIAL HIGHLIGHTS MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1999 1998(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.042 0.047
---------------------------------------------------------------------------------------
Total from Investment Activities 0.042 0.047
---------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.042) (0.047)
---------------------------------------------------------------------------------------
Total Distributions (0.042) (0.047)
---------------------------------------------------------------------------------------
Net change in net asset value per share -- --
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000
---------------------------------------------------------------------------------------
Total Return 4.28% 4.78%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (in thousands) $19,575 $23,520
Ratio of expenses to average net assets 0.72% 0.71%
Ratio of net investment income to average net
assets 4.20% 4.64%
Ratio of expenses to average net assets* 1.05% 1.07%
Ratio of net investment income to average net
assets* 3.87% 4.28%
</TABLE>
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was July 1, 1997.
25
<PAGE> 28
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 29
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, OH 43218-2707
Telephone: 1-800-766-3960
www.governorfunds.com
- --------------------------------------------------------------------------------
You can review and copy the Funds' reports and SAIs at the Public
Reference Room of the Securities and Exchange Commission.
You can get copies:
- For a duplicating fee, by calling or 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)
18 40 59-073
<PAGE> 30
Equity Funds
Established Growth Fund
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund
[LOGO]
Bond Funds
Intermediate Term Income Fund GOVERNOR
Limited Duration Government FUNDS
Securities Fund
Pennsylvania Municipal
Bond Fund
Asset Allocation Funds
Lifestyle Conservative Growth Fund
Lifestyle Moderate Growth Fund
Lifestyle Growth Fund
PROSPECTUS
November 1, 1999
The Securities and Exchange
Commission has not approved or
disapproved the shares described
in this Prospectus or determined
whether this Prospectus is
accurate or complete. Any
representation to the contrary
is a criminal offense.
Questions?
Call 1-800-766-3960
or your investment
representative. www.governorfunds.com
<PAGE> 31
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
[ICON]
Review this important Equity Funds
section, which summarizes 3 Established Growth Fund
each Fund's investments, 5 Aggressive Growth Fund
risks, past performance, and 7 Emerging Growth Fund
fees. 9 International Equity Fund
11 Fees and Expenses
Bond Funds
12 Intermediate Term Income Fund
15 Limited Duration Government Securities Fund
18 Pennsylvania Municipal Bond Fund
21 Fees and Expenses
Asset Allocation Funds
22 Lifestyle Conservative Growth Fund
24 Lifestyle Moderate Growth Fund
26 Lifestyle Growth Fund
30 Fees and Expenses
Principal Risks of the Funds
32 Principal Risks
Other Considerations
33 Portfolio Turnover
33 Temporary Defensive Positions
33 Other Types of Investments
33 Year 2000
FUND MANAGEMENT
[ICON]
Review this section for 34 The Investment Advisor and Sub-Advisors
details on the people and 35 Portfolio Managers
organizations who oversee 36 The Administrators and Distributor
the Funds.
SHAREHOLDER INFORMATION
[ICON]
Review this section for 37 Pricing of Fund Shares
details on how shares are 38 Purchasing and Adding to Your Shares
valued, how to purchase, 41 Selling Your Shares
sell and exchange shares, 45 Distributions Arrangements/Sales Charges
related charges and payments 50 Exchanging Your Shares
of dividends and 51 Dividends, Distributions and Taxes
distributions.
FINANCIAL HIGHLIGHTS
[ICON]
54
BACK COVER
[ICON]
Where to Learn More About Governor Funds
</TABLE>
1
<PAGE> 32
[ICON]
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").
RISK/RETURN PROFILE OF MUTUAL FUNDS
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
Pennsylvania Municipal Bond Fund
ASSET ALLOCATION FUNDS
Lifestyle Conservative Growth Fund
Lifestyle Moderate Growth Fund
Lifestyle Growth Fund
RISK PROFILE OF MUTUAL FUNDS
[GRAPHIC]
FUND TYPE ASSET CLASS
EQUITY FUNDS HIGHER RISK SMALL COMPANY STOCKS
ASSET INTERNATIONAL STOCKS
ALLOCATION
FUNDS LARGE COMPANY STOCKS
BOND FUNDS CORPORATE BONDS
MUNICIPAL BONDS
GOVERNMENT BONDS
LOWER RISK
MONEY MARKET FUNDS CASH EQUIVALENTS
2
<PAGE> 33
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
ESTABLISHED GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Established Growth Fund seeks growth of capital with
some current income as a secondary objective.
PRINCIPAL The Fund will invest substantially all, but under normal
INVESTMENT STRATEGIES market conditions no less than 65%, of its total assets in
common stocks and securities convertible into common stocks
MARKET CAPITALIZATION is a of companies with market capitalizations at the time of
common measure of the size purchase of at least $1 billion. The Fund intends to invest
of a company. It is the 90% or more of its assets in common stocks under normal
market price of a share of market conditions. The Sub-Advisor selects investments based
the company's stock on a number of factors related to historical and projected
multiplied by the number of earnings and the price/earnings relationships, as well as
outstanding shares. 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 The principal risks of investing in the Fund are market risk
INVESTMENT RISKS and management risk. Market risk is the risk that the value
of the securities in which the 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 the Fund holds
may underperform other securities and types of securities.
There can be no assurance the Fund will achieve its
investment objective.
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - 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
</TABLE>
3
<PAGE> 34
RISK/RETURN SUMMARY AND FUND EXPENSES 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 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
Standard & Poor's 500
Composite Stock Index ("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's
predecessor 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 5.50%, 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>
'1995' 12.61%
- ------ -----
<S> <C>
'1996' 21.92%
'1997' 26.24%
'1998' 19.53%
</TABLE>
(1) The bar chart does not reflect the
impact of any applicable sales charges. If
sales charges were 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.
Best
quarter: Q4 1998 21.87%
Worst
quarter: Q3 1998 -15.22%
Year-to-date return for the
period ended September 30,
1999: 4.81%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
<TABLE>
<CAPTION>
FUND PAST SINCE
INCEPTION YEAR INCEPTION
<S> <C> <C> <C>
ESTABLISHED GROWTH FUND
(with maximum sales charge of
5.50%) 1/1/95 12.95% 25.19%
S&P 500 INDEX 1/1/95 28.58% 30.51%
</TABLE>
* For current performance information call 1-800-766-3960.
4
<PAGE> 35
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
AGGRESSIVE GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Aggressive Growth Fund seeks growth of capital.
PRINCIPAL The Fund will invest substantially all, but under normal
INVESTMENT STRATEGIES market conditions no less than 65%, of its total assets in
common stocks and securities convertible into common stocks
MARKET CAPITALIZATION is a of companies with market capitalizations at the time of
common measure of the size purchase ranging between $100 million and $5 billion. The
of a company. It is the Fund intends to invest 90% or more of its assets in common
market price of a share of stocks and securities convertible to common stocks under
the company's stock normal market conditions. Stocks purchased by the Fund
multiplied by the number of generally will be traded on established U.S. markets and
outstanding shares. 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 The principal risks of investing in the Fund are market
INVESTMENT RISKS risk, management risk and small capitalization stock risk.
Market risk is the risk that the value of the securities in
which the 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 the Fund holds may underperform other
securities and types of securities. There can be no
assurance the 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.
WHO MAY Consider investing in the Fund if you are an individual:
WANT TO INVEST? - 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>
5
<PAGE> 36
RISK/RETURN SUMMARY AND FUND EXPENSES 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 in
the Russell 3000 Index,
which measures the
performance 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's predecessor
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 5.50%, 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>
'1995' 26.89%
- ------ -----
<S> <C>
'1996' 19.54%
'1997' 15.91%
'1998' 3.51%
</TABLE>
(1) The bar chart does not reflect the
impact of any applicable sales charges. If
sales charges were 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.
Best
quarter: Q4 1998 21.48%
Worst
quarter: Q3 1998 -19.50%
Year-to-date return for the
period ended September 30,
1999: 4.65%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
<TABLE>
<CAPTION>
FUND PAST SINCE
INCEPTION YEAR INCEPTION
<S> <C> <C> <C>
AGGRESSIVE GROWTH FUND
(with maximum sales charge of
5.50%) 7/1/94 -2.21% 14.35%
RUSSELL 2000 INDEX 7/1/94 -2.55% 14.97%
</TABLE>
* For current performance information call 1-800-766-3960.
6
<PAGE> 37
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
EMERGING GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Emerging Growth Fund seeks long-term growth of capital.
PRINCIPAL The Fund will invest substantially all, but under normal
INVESTMENT STRATEGIES market conditions no less than 65%, of its total assets in
common stocks and securities convertible into common stocks
MARKET CAPITALIZATION is a of growth-oriented companies with equity market
common measure of the size capitalizations, at the time of purchase, of between $30
of a company. It is the million and $350 million. The Fund may invest a portion of
market price of a share of its assets in larger companies.
the company's stock
multiplied by the number of The Sub-Advisor will purchase and maintain positions in
outstanding shares. 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.
PRINCIPAL The principal risks of investing in the Fund are market
INVESTMENT RISKS risk, management risk, and micro capitalization stock risk.
Market risk is the risk that the value of the securities in
which the 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 the Fund holds may underperform other
securities and types of securities. There can be no
assurance the 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. Micro
capitalization stocks tend to carry greater risk and exhibit
greater price volatility than larger capitalization stocks
because their businesses may not be well-established. Micro
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.
</TABLE>
7
<PAGE> 38
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
EMERGING GROWTH FUND
CONTINUED
<TABLE>
<S> <C>
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - 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 Because the Emerging Growth Fund has less than one year's
INFORMATION performance, no performance is shown for the Fund.
</TABLE>
8
<PAGE> 39
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The International Equity Fund seeks long-term capital
appreciation, primarily through a diversified portfolio of
non-U.S. equity securities.
PRINCIPAL The Fund will invest substantially all, but under normal
INVESTMENT STRATEGIES market conditions in no event less than 65%, of its total
assets in equity or convertible securities in at least eight
A FORWARD FOREIGN CURRENCY countries other than the United States. Although it may
CONTRACT is a commitment to invest anywhere in the world, the Fund invests primarily in
purchase or sell a foreign the equity markets listed in the Morgan Stanley Capital
currency at a future date at International Europe, Australasia, Far East ("MSCI EAFE")
a negotiated forward rate. Index(R), the benchmark against which the Fund measures its
performance. The Fund may also invest in forward foreign
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.
PRINCIPAL The principal risks of investing in the Fund are market
INVESTMENT RISKS risk, management risk, and foreign risk. Market risk is the
risk that the value of the securities in which the 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 the Fund holds may
underperform other securities and types of securities. There
can be no assurance the 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.
</TABLE>
9
<PAGE> 40
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
INTERNATIONAL EQUITY FUND
CONTINUED
<TABLE>
<S> <C>
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - 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 Because the International Equity Fund has less than one
INFORMATION year's performance, no performance is shown for the Fund.
</TABLE>
10
<PAGE> 41
RISK/RETURN SUMMARY AND FUND EXPENSES EQUITY FUNDS
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 ended June 30, 1999,
restated for current fee
waivers.
<TABLE>
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY
FROM
YOUR INVESTMENT) ESTABLISHED AGGRESSIVE EMERGING INTERNATIONAL
GROWTH GROWTH GROWTH EQUITY
FUND FUND FUND FUND
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of offering
price) 5.50% 5.50% 5.50% 5.50%
Annual Fund Operating
Expenses
(expenses that are
deducted from Fund
assets) (as a
percentage of average
net assets)
Management fees .75% 1.00% 1.25% 1.25%
Distribution (12b-1)
fees None None None None
Other expenses(1) .46% .40% 1.22% .61%
Total Annual Fund
Operating Expenses 1.21% 1.40% 2.47% 1.86
Fee Waivers(2) .27% .34% .78% .88%
Net Annual Fund
Operating Expenses .94% 1.06% 1.69% .98%
</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 various banks,
trust companies, broker-dealers (other than the
Distributor) and other financial institutions
("Service Organizations") under an
Administrative Services Plan (described below
under "Distribution and Shareholder Servicing
Arrangements -- 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 will be waived by the Advisor
and administrators until October 31, 2000
pursuant to a contract with the Funds dated
October 29, 1999.
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
Funds' operating
expenses, except for
the expiration of the
current contractual
fee waivers on October
31, 2000
Because this example is
hypothetical and for
comparison only, your
actual costs will be
different.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
ESTABLISHED GROWTH FUND $640 $ 887 $1,154 $1,912
AGGRESSIVE GROWTH FUND $652 $ 937 $1,242 $2,107
EMERGING GROWTH FUND $712 $1,207 $1,727 $3,146
INTERNATIONAL EQUITY FUND $644 $1,017 $1,408 $2,477
</TABLE>
11
<PAGE> 42
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
INTERMEDIATE TERM INCOME FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Intermediate Term Income Fund seeks current income with
long-term growth of capital as a secondary objective.
PRINCIPAL The Fund normally invests substantially all, but under
INVESTMENT STRATEGIES normal market conditions no less than 65%, of its total
INVESTMENT GRADE DEBT assets in fixed income securities. These include bonds,
SECURITIES are those of debentures, notes, mortgage-backed and asset-backed
medium credit quality or securities, state, municipal or industrial revenue bonds,
better as determined by a variable and floating rate securities, variable master
national rating agency, such demand notes, obligations issued or supported as to
as Standard & Poor's Ratings principal and interest by the U.S. Government or its
Group (debt securities rated agencies or instrumentalities and debt securities
in the four highest rating convertible into, or exchangeable for, common stocks. The
categories, i.e. BBB or Fund invests only in investment grade debt securities.
higher) and Moody's Unrated obligations will be purchased only if they are
Investors Service, Inc. determined by the Sub-Advisor to be at least comparable in
(debt securities rated in quality at the time of purchase to eligible rated
the four highest rating securities. The Fund will have a dollar-weighted average
categories, i.e. Baa or maturity of 3 to 10 years.
higher). The higher the
credit rating, the less The Sub-Advisor selects securities based on current yield,
likely it is that the issuer maturity, yield to maturity, anticipated changes in interest
of the securities will rates, and the overall quality of the investment.
default on its principal and
interest payments.
DOLLAR-WEIGHTED AVERAGE
MATURITY gives you the
average time until all 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").
</TABLE>
12
<PAGE> 43
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
INTERMEDIATE TERM INCOME FUND
CONTINUED
<TABLE>
<S> <C>
PRINCIPAL The principal risks of investing in the Fund are credit
INVESTMENT RISKS 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
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 the Fund holds may underperform other securities
and types of securities. There can be no assurance the Fund
will achieve its investment objectives.
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - 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
</TABLE>
13
<PAGE> 44
RISK/RETURN SUMMARY AND FUND EXPENSES 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>
'1997' 8.09%
- ------ ----
<S> <C>
'1998' 7.83%
</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: Q3 1998 4.24%
Worst
quarter: Q1 1997 -0.61%
Year-to-date return for the
period ended September 30,
1999: -2.20%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
<TABLE>
<CAPTION>
FUND PAST SINCE
INCEPTION YEAR INCEPTION
<S> <C> <C> <C>
INTERMEDIATE TERM INCOME FUND
(with a maximum sales charge of 4.50%) 12/2/96 3.00% 4.91%
LEHMAN BROTHERS AGGREGATE BOND INDEX 12/2/96 8.69% 8.31%
LIPPER INTERMEDIATE INVESTMENT GRADE
BOND INDEX 12/2/96 7.87% 7.53%
</TABLE>
* For current performance information call 1-800-766-3960.
14
<PAGE> 45
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIMITED DURATION GOVERNMENT SECURITIES FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Limited Duration Government Securities Fund seeks
current income, with preservation of capital as a secondary
objective.
PRINCIPAL The Fund normally invests substantially all, but under
INVESTMENT STRATEGIES normal market conditions no less than 65%, of its total
assets in obligations issued or supported as to principal
and interest by the U.S. Government or its agencies and
instrumentalities including mortgage-backed securities,
variable and floating rate securities and zero coupon
securities, and in repurchase agreements backed by such
securities. The Fund expects to maintain a duration of less
than three years under normal market conditions.
</TABLE>
DURATION DEFINED: "Duration" is the average time it takes to receive expected
cash flows (discounted to their present value) on a particular fixed-income
instrument or a portfolio of instruments. Duration usually defines the effect 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").
15
<PAGE> 46
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIMITED DURATION GOVERNMENT SECURITIES FUND
CONTINUED
<TABLE>
<S> <C>
PRINCIPAL The principal risks of investing in the Fund are credit
INVESTMENT RISKS 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
the Fund holds may underperform other securities and types
of securities. There can be no assurance the Fund will
achieve its investment objectives.
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - 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
</TABLE>
16
<PAGE> 47
LIMITED DURATION
RISK/RETURN SUMMARY AND FUND EXPENSES 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 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 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's predecessor
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 3.00%, 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.
PERFORMANCE BAR CHART AND TABLE(1)
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
<TABLE>
<CAPTION>
'1996' 4.05%
- ------ ----
<S> <C>
'1997' 5.33%
'1998' 5.71%
</TABLE>
(1) The bar chart does not reflect the
impact of any applicable sales charges. If
sales charges were 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.
Best quarter: Q3 1998 1.91%
Worst quarter: Q1 1996 0.53%
Year-to-date return for the
period ended September 30,
1999: 2.08%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
<TABLE>
<CAPTION>
FUND PAST SINCE
INCEPTION YEAR INCEPTION
<S> <C> <C> <C>
LIMITED DURATION GOVERNMENT SECURITIES FUND
(with maximum sales charge of 3.00%) 10/31/95 2.53% 4.27%
LEHMAN BROTHERS 1-3 YEAR GOVERNMENT BOND INDEX 10/31/95 6.97% 6.44%
</TABLE>
* For current performance information call 1-800-766-3960.
17
<PAGE> 48
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
PENNSYLVANIA MUNICIPAL BOND FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Pennsylvania Municipal Bond Fund seeks income exempt
from both Federal and Pennsylvania state income taxes, and
preservation of capital.
PRINCIPAL The Fund primarily invests in municipal securities issued by
INVESTMENT STRATEGIES Pennsylvania and its local governments ("Pennsylvania
Municipal Securities"), and in debt obligations issued by
WHAT ARE MUNICIPAL the government of Puerto Rico and other governmental
SECURITIES? entities whose debt obligations provide interest income
exempt from Federal and Pennsylvania state income taxes. The
State and local governments Fund is nondiversified, which means that it can invest a
issue municipal securities large percentage of its assets in a small number of issuers.
to raise money to finance The Fund expects that the dollar-weighted average maturity
public works, to repay of its investments will be 3 to 10 years. The Fund invests
outstanding obligations, to in investment grade municipal securities.
raise funds for general
operating expenses and to During normal market conditions the Fund normally will
make loans to other public invest at least:
institutions. Some municipal - 65% of its total assets in Pennsylvania municipal
securities, known as private securities; and
activity bonds, are backed - 80% of its net assets in securities paying interest that
by private entities and are is exempt from Federal income tax but may be subject to the
used to finance various Federal alternative minimum tax when received by certain
non-public projects. shareholders.
Municipal securities, which
can be issued as bonds,
notes or commercial paper,
usually have fixed interest
rates, although some have
interest rates that change
from time to time.
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.
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.
</TABLE>
18
<PAGE> 49
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
PENNSYLVANIA MUNICIPAL BOND FUND
CONTINUED
<TABLE>
<S> <C>
PRINCIPAL The principal risks of investing in the Fund are credit
INVESTMENT RISKS 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 the Fund holds may underperform other
securities and types of securities. There can be no
assurance the Fund will achieve its investment objectives.
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.
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - 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
</TABLE>
19
<PAGE> 50
PENNSYLVANIA
RISK/RETURN SUMMARY AND FUND EXPENSES 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.
PERFORMANCE BAR CHART AND TABLE(1)
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
<TABLE>
<CAPTION>
'1997' 5.63%
- ------ ----
<S> <C>
'1998' 4.95%
</TABLE>
(1) The bar chart does not reflect the
impact of any applicable sales charges. If
sales charges were 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.
Best quarter: Q3 1998 2.92%
Worst
quarter: Q1 1997 -0.30%
Year-to-date return for the
period ended September 30,
1999: -1.28%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)*
<TABLE>
<CAPTION>
FUND PAST SINCE
INCEPTION YEAR INCEPTION
<S> <C> <C> <C>
PENNSYLVANIA MUNICIPAL BOND FUND
(with maximum sales charge of 4.50%) 10/1/96 0.24% 3.63%
LEHMAN BROTHERS PENNSYLVANIA 1-12 YEAR
MUNICIPAL BOND INDEX 10/1/96 5.82% 6.70%
</TABLE>
* For current performance information call 1-800-766-3960.
20
<PAGE> 51
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,
restated for current fee
waivers.
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
Funds' operating
expenses, except for
the expiration of the
contractual fee
waivers on October 31,
2000
Because this example is
hypothetical and for
comparison only, your
actual costs will be
different.
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES LIMITED
(FEES PAID DIRECTLY FROM DURATION
YOUR INVESTMENT) INTERMEDIATE GOVERNMENT PENNSYLVANIA
TERM SECURITIES MUNICIPAL
INCOME FUND FUND BOND FUND
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)
Management fees .60% .60% .60%
Distribution (12b-1) fees None None None
Other expenses(1) .28% .33% .30%
Total Annual Fund Operating
Expenses .88% .93% .90%
Fee Waivers(2) .34% .34% .33%
Net Annual Fund Operating
Expenses .54% .59% .57%
</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 service
organizations under an Administrative Services
Plan (described below under "Distribution and
Shareholder Servicing Arrangements -- 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 will be waived by the Advisor
and administrators until October 31, 2000
pursuant to a contract with the Funds dated
October 29, 1999.
<TABLE>
<CAPTION>
EXAMPLE
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
INTERMEDIATE TERM
INCOME FUND $503 $685 $882 $1,452
LIMITED DURATION
GOVERNMENT SECURITIES FUND $359 $555 $767 $1,378
PENNSYLVANIA MUNICIPAL
BOND FUND $506 $693 $897 $1,483
</TABLE>
21
<PAGE> 52
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
<TABLE>
<S> <C>
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 Each Lifestyle Fund seeks to achieve its objective by
INVESTMENT STRATEGIES investing in a combination of underlying funds managed by
the Advisor.
</TABLE>
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
dollar-weighted
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 Money
Market and U.S.
Treasury Obligations
Money Market Funds,
the Sub-Advisor must
determine that the
instrument carries
minimal credit risk.
The underlying funds in which each Lifestyle Fund
may invest include 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.
THE LIFESTYLE CONSERVATIVE GROWTH FUND currently
plans to generally invest the largest proportion of
its assets in Governor Funds that invest primarily
in fixed income securities. The Fund's remaining
assets may be invested in shares of underlying
Governor Funds that invest primarily in equity
securities and in money market instruments.
The Fund currently plans to invest in shares of the
following underlying Governor Funds within the
percentage ranges indicated:
<TABLE>
<CAPTION>
INVESTMENT RANGE
(PERCENTAGE OF THE
LIFESTYLE CONSERVATIVE
GROWTH FUND'S
ASSET CLASS ASSETS)
<S> <C>
MONEY MARKET FUNDS 0 - 30%
Prime Money Market Fund
U.S. Treasury Obligations Money Market Fund
FIXED INCOME FUNDS 30 - 60%
Limited Duration Government Securities Fund
Intermediate Term Income Fund
EQUITY FUNDS 10 - 40%
Established Growth Fund
Aggressive Growth Fund
International Equity Fund
</TABLE>
22
<PAGE> 53
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
<TABLE>
<S> <C>
PRINCIPAL The principal risks of investing in the LIFESTYLE
INVESTMENT RISKS CONSERVATIVE GROWTH FUND are credit risk, interest rate
risk, management risk, market risk, foreign risk and small
capitalization stock 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 an underlying 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
underlying 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 underlying
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. 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. 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. 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. There can be no assurance that the Fund or each
underlying fund will achieve its investment objectives.
</TABLE>
23
<PAGE> 54
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
THE LIFESTYLE MODERATE GROWTH FUND currently plans
to generally invest 50% to 80% of its assets in
Governor Funds that invest primarily in either
equity securities or fixed income securities. The
Fund's remaining assets may be invested in shares of
underlying Governor Funds that invest primarily in
money market instruments.
The Fund currently plans to invest in shares of the
following underlying Governor Funds within the
percentage ranges indicated:
<TABLE>
<CAPTION>
INVESTMENT RANGE
(PERCENTAGE OF THE
LIFESTYLE MODERATE
GROWTH FUND'S
ASSET CLASS ASSETS)
<S> <C>
MONEY MARKET FUNDS 0 - 20%
Prime Money Market Fund
U.S. Treasury Obligations Money Market Fund
FIXED INCOME FUNDS 20 - 50%
Limited Duration Government Securities Fund
Intermediate Term Income Fund
EQUITY FUNDS 30 - 60%
Established Growth Fund
Aggressive Growth Fund
International Equity Fund
</TABLE>
<TABLE>
<S> <C>
PRINCIPAL The principal risks of investing in the Lifestyle Moderate
INVESTMENT RISKS Growth Fund are credit risk, interest rate risk, management
risk, market risk, foreign risk and small capitalization
stock 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 an underlying 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 underlying 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 underlying fund may suffer from the inability to
invest in higher-yielding securities.
</TABLE>
24
<PAGE> 55
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
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. 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. 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. 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. There can be no
assurance that the Fund or each underlying fund will
achieve its investment objectives.
25
<PAGE> 56
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
THE LIFESTYLE GROWTH FUND currently plans to
generally invest 50% to 80% of its assets in
Governor Funds that invest primarily in equity
securities. The Fund's remaining assets may be
invested in shares of underlying Governor Funds that
invest primarily in fixed income securities and
money market instruments.
The Fund currently plans to invest in shares of the
following underlying Governor Funds within the
percentage ranges indicated:
<TABLE>
<CAPTION>
INVESTMENT RANGE
(PERCENTAGE OF THE
LIFESTYLE GROWTH
ASSET CLASS FUND'S ASSETS)
<S> <C>
MONEY MARKET FUNDS 0 - 10%
Prime Money Market Fund
U.S. Treasury Obligations Money Market Fund
Money Market Fund
FIXED INCOME FUNDS 10 - 40%
Limited Duration Government Securities Fund
Intermediate Term Income Fund
EQUITY FUNDS 50 - 80%
Established Growth Fund
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund
</TABLE>
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Lifestyle Growth
Fund are market risk, management risk, micro capitalization
stock risk, small capitalization stock risk, foreign risk,
credit risk and interest rate risk. Market risk is the risk
that 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 or each
underlying fund will achieve its investment objectives.
Micro capitalization stocks may fail to reach their apparent
value at the time of investment or may even fail as a
business. Micro
</TABLE>
26
<PAGE> 57
RISK/RETURN SUMMARY AND FUND EXPENSES
- -
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
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. Small and micro 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
and micro 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. 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. 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 an
underlying 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 underlying 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
underlying fund may suffer from the inability to
invest in higher-yielding securities.
27
<PAGE> 58
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
<TABLE>
<S> <C>
PRINCIPAL
INVESTMENT RISKS Each Lifestyle Fund is also subject to affiliated persons
(ALL LIFESTYLE FUNDS) 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.
</TABLE>
To the extent that a Lifestyle Fund invests in the
Prime Money Market Fund and/or the U.S. Treasury
Obligations Money Market Fund, it is subject to the
following money market fund risks:
- The underlying money market funds may not be
able to maintain a net asset value of $1.00 per
share.
- An investment in the underlying money market
funds is neither insured nor guaranteed by the
U.S. Government. Shares of the underlying money
market funds 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 underlying money market fund
will be achieved. In addition, each underlying
money market fund's investment policies, as well
as the relatively short maturity of obligations
purchased by the underlying money market funds,
may result in frequent changes in each
underlying money market fund's portfolio, which
may give rise to taxable gains.
- The underlying money market funds' performance
per share will change daily based on many
factors, including the quality of the
instruments in the underlying money market
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
underlying money market fund's investments in
debt securities.
- The underlying money market funds are also
subject to credit risks. The underlying money
market funds could lose money if the issuer of a
security is unable to meet its financial
obligations.
28
<PAGE> 59
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
- 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.
<TABLE>
<S> <C>
WHO MAY Consider investing in the Lifestyle Funds if you:
WANT TO INVEST? - are seeking a diversified investment
These Funds will not be appropriate for anyone:
- allocating their own investment portfolio
- seeking regular income
PERFORMANCE INFORMATION Because the Lifestyle Funds have less than one year's
performance, no performance is shown for the Funds.
</TABLE>
29
<PAGE> 60
RISK/RETURN SUMMARY AND FUND EXPENSES ASSET ALLOCATION FUNDS
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 estimated
operating expenses for the
fiscal period ending June
30, 2000.
<TABLE>
FEES AND EXPENSES
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM
YOUR INVESTMENT) LIFESTYLE LIFESTYLE LIFESTYLE
CONSERVATIVE MODERATE GROWTH
GROWTH FUND GROWTH FUND FUND
<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)
Management fees .25% .25% .25%
Distribution (12b-1) fees(1) .50% .50% .50%
Other expenses(2) 1.68% 1.76% 1.95%
Total Annual Fund Operating
Expenses 2.43% 2.51% 2.70%
Fee Waiver(3) .10% .10% .10%
Net Annual Fund Operating Expenses 2.33% 2.41% 2.60%
</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 not listed above, and the
payment of a servicing fee to Service
Organizations under an Administrative Services
Plan (described below under "Distribution and
Shareholder Servicing Arrangements -- 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.
Other Expenses also include expenses for the
underlying funds. Expenses for the underlying
funds of each Lifestyle Fund are based upon the
strategic allocation of each Lifestyle 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). The net annual operating expenses for
the underlying Funds for the fiscal year or
period ended June 30, 1999 were .49%, .72%,
.59%, .54%, .94%, 1.06%, 1.69%, and .98% for
the Prime Money Market, U.S. Treasury
Obligations Money Market, Limited Duration
Government Securities, Intermediate Term
Income, Established Growth, Aggressive Growth,
Emerging Growth and International Equity Funds,
respectively. 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 will be waived by the Advisor
until October 31, 2000, pursuant to a contract
with the Funds dated October 29, 1999. THE
ADVISOR WILL REIMBURSE EXPENSES UNTIL OCTOBER
31, 2000 TO THE EXTENT NECESSARY TO PREVENT A
LIFESTYLE FUND'S NET ANNUAL FUND OPERATING
EXPENSES, EXCLUDING THE EXPENSES FOR THE
UNDERLYING FUNDS, FROM EXCEEDING 1.65%. THIS
EXPENSE REIMBURSEMENT OBLIGATION IS ALSO
PURSUANT TO THE CONTRACT WITH THE FUNDS DATED
OCTOBER 29, 1999.
30
<PAGE> 61
RISK/RETURN SUMMARY AND FUND EXPENSES ASSET ALLOCATION FUNDS
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 fees associated
with each underlying fund
are reflected in this
example. The example
assumes:
- $10,000 investment
- 5% annual return
- redemption at the end
of each period
- no changes in the
Funds' operating
expenses, except for
the expiration of the
contractual fee
waivers and expense
reimbursements on
October 31, 2000
Because this example is
hypothetical and for
comparison only, your
actual costs will be
different.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
LIFESTYLE CONSERVATIVE
GROWTH FUND $675 $1,164 $1,679 $3,085
LIFESTYLE MODERATE GROWTH
FUND $683 $1,187 $1,717 $3,161
LIFESTYLE GROWTH FUND $701 $1,242 $1,807 $3,338
</TABLE>
31
<PAGE> 62
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS
<TABLE>
<CAPTION>
FOREIGN INTEREST SMALL
MARKET MANAGEMENT INVESTMENT RATE CREDIT CONCENTRATION CAPITALIZATION
RISK RISK RISK RISK RISK RISK STOCK RISK
<S> <C> <C> <C> <C> <C> <C> <C>
Established Growth Fund X X
---------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund X X X
---------------------------------------------------------------------------------------------------------------
Emerging Growth Fund X X
---------------------------------------------------------------------------------------------------------------
International Equity
Fund X X X
---------------------------------------------------------------------------------------------------------------
Intermediate Term Income
Fund X X X X
---------------------------------------------------------------------------------------------------------------
Limited Duration
Government Securities
Fund X X X X
---------------------------------------------------------------------------------------------------------------
Pennsylvania Municipal
Bond Fund X X X X X
---------------------------------------------------------------------------------------------------------------
Lifestyle Conservative
Growth Fund X X X X X X
---------------------------------------------------------------------------------------------------------------
Lifestyle Moderate
Growth Fund X X X X X X
---------------------------------------------------------------------------------------------------------------
Lifestyle Growth Fund X X X X X X
<CAPTION>
MICRO AFFILIATED
CAPITALIZATION PERSONS
STOCK RISK RISK
<S> <C> <C>
Established Growth Fund
----------------------------------------------------------------
Aggressive Growth Fund
----------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------
Lifestyle Moderate
Growth Fund X
---------------------------------------------------------------------------------------------------------------
Lifestyle Growth Fund X X
</TABLE>
A description of these and other risks can be found in the individual
profiles for each Fund.
32
<PAGE> 63
RISK/RETURN SUMMARY AND FUND EXPENSES
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 have and 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 do not 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 determine whether 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.
33
<PAGE> 64
[ICON]
FUND MANAGEMENT
THE INVESTMENT ADVISOR AND SUB-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 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 for the period
ended June 30, 1999 and currently are in effect. The
International Equity Fund commenced operations on
February 9, 1999; the Lifestyle Conservative Growth Fund
commenced operations on February 3, 1999; the Lifestyle
Moderate Growth Fund commenced operations on February 4,
1999; and the Lifestyle Growth Fund commenced operations
on February 18, 1999.
34
<PAGE> 65
FUND MANAGEMENT
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 and the Board of Trustees of the Funds 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 informed the Fund that it expects that on, before or about
June 1, 2000, the Adviser will be reorganized into the Sub-Advisor, with no
resulting change of actual control or management. The Advisor and Sub-Advisor
are wholly-owned subsidiaries of Keystone. The reorganization would result in
the Sub-Advisor assuming all of the obligations and responsibilities of the
Advisor under the Investment Advisory Agreement with the Fund and under the
Sub-Advisory Agreement with the International Equity Fund Sub-Advisor. This
prospectus will be supplemented if the reorganization does not occur.
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 Funds 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 average daily 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.
35
<PAGE> 66
FUND MANAGEMENT
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 and Pennsylvania Municipal Bond
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 with Keystone, and has managed the
Intermediate Term Income Fund (a predecessor CIF 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.
Mark Stevenson, CFA, 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 ADMINISTRATORS AND DISTRIBUTOR
The Advisor and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), whose address
is 3435 Stelzer Road, Columbus, Ohio 43219-3035, serve as Funds'
administrators. As noted above, the Advisor has informed the Fund that it
expects that on, before or about June 1, 2000, the Advisor will be
reorganized into the Sub-Advisor, with no resulting change of actual control
or management. The reorganization would result in the Sub-Advisor assuming
all of the obligations and responsibilities of the Advisor under the
Management and Administration Agreement with the Fund. This prospectus will
be supplemented if that reorganization does not occur.
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.
The Statement of Additional Information has more detailed information about
the Advisor, Sub-Advisors and other service providers.
36
<PAGE> 67
[ICON]
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 some Funds'
NAV daily in The Wall
Street Journal and other
newspapers.
---------------------------
The per share net asset value ("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 and
Shareholder Servicing Arrangements/ Sales
Charges" on any day that the New York
Stock Exchange is 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.
37
<PAGE> 68
SHAREHOLDER INFORMATION
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.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
<S> <C> <C>
Regular $1,000 $25
(non-retirement)
-----------------------------------------------
Retirement (IRA) $1,000 $25
-----------------------------------------------
Automatic Investment
Plan $ 250 $25
</TABLE>
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.
-----------------------------------------------------------------------------
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.
38
<PAGE> 69
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
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:
Governor Funds
P.O. Box 182707
Columbus, OH 43218-2707
BY EXPRESS MAIL:
Governor Funds
c/o BISYS Fund Services
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.
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.
39
<PAGE> 70
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
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# 8900284218
Include: Your name
Your confirmation number
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.
AFTER INSTRUCTING YOUR BANK TO WIRE THE FUNDS, PLEASE CALL 1-800-766-3960 TO
ADVISE US OF THE AMOUNT BEING WIRED.
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.
Note: Your bank may charge a wire transfer fee.
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:
o 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)
o 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.
40
<PAGE> 71
SHAREHOLDER INFORMATION
-----------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------
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.
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through your 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
(unless you have declined telephone to receive your funds (mail, wire, electronic transfer).
sales privileges) (See "General Policies on Selling Shares -- Verifying
Telephone Redemptions" below)
</TABLE>
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.
QUESTIONS?
Call 1-800-766-3960 or
your investment representative.
41
<PAGE> 72
SHAREHOLDER INFORMATION
<TABLE>
<S> <C>
SELLING YOUR SHARESCONTINUED
BY MAIL OR OVERNIGHT SERVICE 1. Call 1-800-766-3960 to request redemption forms or write
(See "General Policies on Selling a letter of instruction indicating:
Shares -- Redemptions in Writing - your Fund and account number
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
WIRE TRANSFER Call 1-800-766-3960 to request a wire transfer.
You must indicate this option on your If you call by 4 p.m. Eastern time, your payment will
account application. normally be wired to your bank on the next business day.
The Fund may charge a wire transfer Otherwise, it will normally be wired on the second business
fee. day after your 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 the If you call by 4 p.m. Eastern time, the NAV of your shares
Automated Clearing House (ACH) and will normally be determined on the same day and the proceeds
must be a U.S. bank. will be credited within 8 days.
Your bank may charge for this service.
QUESTIONS?
Call 1-800-766-3960 or
your investment representative.
</TABLE>
42
<PAGE> 73
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
CONTINUED
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.
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 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 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.
43
<PAGE> 74
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
CONTINUED
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 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 their 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.
44
<PAGE> 75
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.
<TABLE>
<S> <C>
Sales Charge (Load) Front-end sales charge (at the time of your purchase);
(All Funds) reduced sales charges are available.
Administrative Services Plan Fee Subject to annual shareholder servicing fees of up to
(All Funds) 0.25% of a Fund's assets.
Distribution (12b-1) Fee Subject to annual distribution and shareholder servicing
(Lifestyle Funds Only) fees of up to 0.50% of a Lifestyle Fund's assets.
</TABLE>
CALCULATION OF SALES CHARGES
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
AND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AMOUNT OF TRANSACTION AS % OF NET AS % OF PUBLIC
AT PUBLIC OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C>
Less than $50,000 5.82% 5.50%
-------------------------------------------------------------------------
$50,000 but 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 $1,000,000 1.52 1.50
-------------------------------------------------------------------------
$1,000,000 or more 0 0
</TABLE>
45
<PAGE> 76
SHAREHOLDER INFORMATION
- -
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS/SALES CHARGES
CONTINUED
FOR THE LIMITED DURATION GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AMOUNT OF TRANSACTION AS % OF NET AS % OF PUBLIC
AT PUBLIC OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C>
Less than $50,000 3.09% 3.00%
-------------------------------------------------------------------------
$50,000 but 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 $1,000,000 1.52 1.50
-------------------------------------------------------------------------
$1,000,000 or more 0 0
</TABLE>
FOR THE INTERMEDIATE TERM INCOME FUND, PENNSYLVANIA MUNICIPAL BOND FUND AND
THE LIFESTYLE FUNDS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AMOUNT OF TRANSACTION AS % OF NET AS % OF PUBLIC
AT PUBLIC OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C>
Less than $50,000 4.71% 4.50%
-------------------------------------------------------------------------
$50,000 but 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 $1,000,000 1.52 1.50
-------------------------------------------------------------------------
$1,000,000 or more 0 0
</TABLE>
The Advisor and Distributor pay securities dealers from their own resources
up to .25% of the offering price of shares of the Funds for individual sales
of over $1 million.
46
<PAGE> 77
SHAREHOLDER INFORMATION
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS/SALES CHARGES
CONTINUED
SALES CHARGE REDUCTIONS
Reduced sales charges are available to shareholders with investments of
$50,000 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 Funds, BISYS and any affiliated
company thereof.
- brokers, dealers and agents who have a sales agreement with the
Distributor, and their employees (and their spouses and children under
21).
- investors who purchase shares with the proceeds from a distribution from
the Advisor, Keystone or an affiliate trust or agency account.
47
<PAGE> 78
SHAREHOLDER INFORMATION
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS/SALES CHARGES
CONTINUED
- 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 Lifestyle 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 do not pay 12b-1 fees.
Over time, shareholders may pay more than the equivalent of the maximum
permitted front-end sales charge because 12b-1 fees are paid out of the
Lifestyle Fund's assets on an on-going basis.
48
<PAGE> 79
SHAREHOLDER INFORMATION
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS/SALES CHARGES
CONTINUED
SERVICE ORGANIZATIONS
Service Organizations may provide certain administrative services for their
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 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, its affiliates, or administrators
also may pay Service Organizations for rendering services to customers'
sub-accounts.
49
<PAGE> 80
SHAREHOLDER INFORMATION
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
P.O. 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.
50
<PAGE> 81
SHAREHOLDER INFORMATION
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
generally distributed at least annually.
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. Dividends declared in October, November or
December of a year will be taxable to you in that year even if not paid until
January of the following year. 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."
51
<PAGE> 82
SHAREHOLDER INFORMATION
- -
DIVIDENDS, DISTRIBUTIONS AND TAXES
CONTINUED
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.)
Generally, this gain or loss will be long-term or short-term depending on
whether your holding period for the shares exceeds 12 months, except that 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 these taxes as constituting a distribution to
each shareholder, which would allow each shareholder either (1) to credit
this proportionate amount of taxes against U.S. federal income tax liability
or (2) to take this amount as an itemized deduction.
The Pennsylvania Municipal Bond Fund anticipates that substantially all of
its income dividends will be "exempt interest dividends," which are exempt
from federal income taxes. However, some dividends may be taxable, such as
any dividends that are derived from occasional taxable investments, and any
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. Also, 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.
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.
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.
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", and, together with
Pennsylvania Municipal Securities, called "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
52
<PAGE> 83
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
CONTINUED
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 are 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.
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.
53
<PAGE> 84
[ICON]
FINANCIAL HIGHLIGHTS ESTABLISHED GROWTH FUND
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 KPMG LLP, Two Nationwide Plaza, Columbus, Ohio 43215 whose report,
along with the Funds' financial statements, are included in the annual
report, which is available upon request.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.06 $ 11.13 $ 10.00
-------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.06 0.10 0.08
Net realized and unrealized gain on
investments 2.16 2.99 1.13
-------------------------------------------------------------------------------
Total from Investment Activities 2.22 3.09 1.21
-------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.06) (0.10) (0.08)
Net realized gains (0.34) (0.06) --
-------------------------------------------------------------------------------
Total Distributions (0.40) (0.16) (0.08)
-------------------------------------------------------------------------------
Net change in net asset value
per share 1.82 2.93 1.13
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.88 $ 14.06 $ 11.13
-------------------------------------------------------------------------------
Total Return (excluding sales
charge) 16.20% 27.92% 12.20%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period
(in thousands) $260,437 $258,812 $190,914
Ratio of expenses to average net
assets 0.91% 0.71% 0.44%(c)
Ratio of net investment income to
average net assets 0.42% 0.77% 1.39%(c)
Ratio of expenses to average net
assets* 1.19% 1.06% 1.01%(c)
Ratio of net investment income to
average net assets* 0.14% 0.42% 0.82%(c)
Portfolio Turnover 2% 6% 1%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was December 2, 1996.
(b) Not annualized.
(c) Annualized.
54
<PAGE> 85
FINANCIAL HIGHLIGHTS AGGRESSIVE GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.41 $ 10.24 $ 10.00
-------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income (loss) (0.01) (0.01) 0.01
Net realized and unrealized gain on
investments 1.00 1.30 0.24
-------------------------------------------------------------------------------
Total from Investment Activities 0.99 1.29 0.25
-------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income -- -- (0.01)
In excess of net investment income (0.01) -- --
Net realized gains (0.37) (0.12) --
-------------------------------------------------------------------------------
Total Distributions (0.38) (0.12) (0.01)
-------------------------------------------------------------------------------
Net change in net asset value
per share 0.61 1.17 0.24
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.02 $ 11.41 $ 10.24
-------------------------------------------------------------------------------
Total Return (excluding sales
charge) 9.24% 12.72% 2.52%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period
(in thousands) $139,512 $135,612 $105,258
Ratio of expenses to average net
assets 1.04% 0.83% 0.66%(c)
Ratio of net investment income (loss)
to average net assets (0.05%) (0.09%) 0.28%(c)
Ratio of expenses to average net
assets* 1.47% 1.33% 1.35%(c)
Ratio of net investment income (loss)
to average net assets* (0.48%) (0.59%) (0.41%)(c)
Portfolio Turnover 18% 8% 2%
</TABLE>
* During the period, certain fees were voluntarily reduced and/ or reimbursed.
If such voluntary fee reductions and/ or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 3, 1997.
(b) Not annualized.
(c) Annualized.
55
<PAGE> 86
FINANCIAL HIGHLIGHTS EMERGING GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
JUNE 30, 1999(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-----------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income --
Net realized and unrealized gain on investments 2.07
-----------------------------------------------------------------------
Total from Investment Activities 2.07
-----------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.06)
Net realized gains (0.03)
-----------------------------------------------------------------------
Total Distributions (0.09)
-----------------------------------------------------------------------
Net change in net asset value per share 1.98
-----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.98
-----------------------------------------------------------------------
Total Return (excluding sales charge) 20.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $9,927
Ratio of expenses to average net assets 1.41%
Ratio of net investment income (loss) to average
net assets (0.02%)
Ratio of expenses to average net assets* 2.60%
Ratio of net investment income (loss) to average
net assets* (1.21%)
Portfolio Turnover 53%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was July 1, 1998.
56
<PAGE> 87
FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
JUNE 30, 1999(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-----------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.11
Net realized and unrealized gain on investments 0.48
-----------------------------------------------------------------------
Total from Investment Activities 0.59
-----------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income --
Net realized gains --
-----------------------------------------------------------------------
Total Distributions --
-----------------------------------------------------------------------
Net change in net asset value per share 0.59
-----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.59
-----------------------------------------------------------------------
Total Return (excluding sales charge) 5.90%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $39,506
Ratio of expenses to average net assets 0.98%(c)
Ratio of net investment income to average net
assets 2.80%(c)
Ratio of expenses to average net assets* 1.86%(c)
Ratio of net investment income to average net
assets* 1.92%(c)
Portfolio Turnover 17%
</TABLE>
* During the period, certain fees were voluntarily reduced and/ or reimbursed.
If such voluntary fee reductions and/ or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 9, 1999.
(b) Not annualized.
(c) Annualized.
57
<PAGE> 88
FINANCIAL HIGHLIGHTS INTERMEDIATE TERM INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.10 $ 9.77 $ 10.00
-------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.59 0.62 0.36
Net realized and unrealized gain
(loss) on investments (0.50) 0.33 (0.23)
-------------------------------------------------------------------------------
Total from Investment Activities 0.09 0.95 0.13
-------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.59) (0.62) (0.36)
Net realized gains (0.11) -- --
-------------------------------------------------------------------------------
Total Distributions (0.70) (0.62) (0.36)
-------------------------------------------------------------------------------
Net change in net asset value
per share (0.61) 0.33 (0.23)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 10.10 $ 9.77
-------------------------------------------------------------------------------
Total Return (excluding sales
charge) 0.82% 9.95% 1.40%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of period (in
thousands) $305,981 $275,565 $207,859
Ratio of expenses to average net
assets 0.56% 0.57% 0.37%(c)
Ratio of net investment income to
average net assets 5.97% 6.27% 6.45%(c)
Ratio of expenses to average net
assets* 0.98% 0.92% 0.84%(c)
Ratio of net investment income to
average net assets* 5.55% 5.92% 5.98%(c)
Portfolio Turnover 149% 218% 329%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was December 2, 1996.
(b) Not annualized.
(c) Annualized.
58
<PAGE> 89
LIMITED DURATION
FINANCIAL HIGHLIGHTS GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1999 1998(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.96 $ 10.00
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.54 0.56
Net realized and unrealized gain (loss) on
investments (0.13) (0.04)
---------------------------------------------------------------------------------------
Total from Investment Activities 0.41 0.52
---------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.54) (0.56)
Net realized gains -- --
---------------------------------------------------------------------------------------
Total Distributions (0.54) (0.56)
---------------------------------------------------------------------------------------
Net change in net asset value per share (0.13) (0.04)
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.96
---------------------------------------------------------------------------------------
Total Return (excluding sales charge) 4.25% 5.39%
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in thousands) $52,041 $29,360
Ratio of expenses to average net assets 0.59% 0.65%
Ratio of net investment income to average net
assets 5.51% 5.58%
Ratio of expenses to average net assets* 1.03% 1.18%
Ratio of net investment income to average net
assets* 5.07% 5.05%
Portfolio Turnover 519% 482%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(a) Commencement of operations of the Fund was July 1, 1997.
59
<PAGE> 90
PENNSYLVANIA
FINANCIAL HIGHLIGHTS MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.39 $ 10.29 $ 10.21
-----------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.47 0.49 0.34
Net realized and unrealized gain
(loss) on investments (0.26) 0.11 0.06
-----------------------------------------------------------------------------
Total from Investment Activities 0.21 0.60 0.40
-----------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.48) (0.50) (0.32)
Net realized gains (0.07) -- --
-----------------------------------------------------------------------------
Total Distributions (0.55) (0.50) (0.32)
-----------------------------------------------------------------------------
Net change in net asset value per
share (0.34) 0.10 0.08
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.05 $ 10.39 $ 10.29
-----------------------------------------------------------------------------
Total Return (excluding sales
charge) 1.94% 5.89% 3.98%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in
thousands) $111,893 $118,685 $123,194
Ratio of expenses to average net
assets 0.59% 0.58% 0.37%(c)
Ratio of net investment income to
average net assets 4.45% 4.65% 4.46%(c)
Ratio of expenses to average net
assets* 1.00% 0.92% 0.86%(c)
Ratio of net investment income to
average net assets* 4.04% 4.31% 3.97%(c)
Portfolio Turnover 90% 62% 98%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was October 1, 1996.
(b) Not annualized.
(c) Annualized.
60
<PAGE> 91
LIFESTYLE CONSERVATIVE
FINANCIAL HIGHLIGHTS GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
JUNE 30, 1999(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-----------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.07
Net realized and unrealized gain on investments 0.15
-----------------------------------------------------------------------
Total from Investment Activities 0.22
-----------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.07)
Net realized gains --
-----------------------------------------------------------------------
Total Distributions (0.07)
-----------------------------------------------------------------------
Net change in net asset value per share 0.15
-----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.15
-----------------------------------------------------------------------
Total Return (excluding sales charge) 2.21%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $ 150
Ratio of expenses to average net assets 1.79%(c)
Ratio of net investment income to average net
assets 2.57%(c)
Ratio of expenses to average net assets* 92.41%(c)
Ratio of net investment income (loss) to average
net assets* (88.05%)(c)
Portfolio Turnover 2%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 3, 1999.
(b) Not annualized.
(c) Annualized.
61
<PAGE> 92
LIFESTYLE MODERATE
FINANCIAL HIGHLIGHTS GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
JUNE 30, 1999(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-----------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.04
Net realized and unrealized gain on investments 0.56
-----------------------------------------------------------------------
Total from Investment Activities 0.60
-----------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.04)
Net realized gains --
-----------------------------------------------------------------------
Total Distributions (0.04)
-----------------------------------------------------------------------
Net change in net asset value per share 0.56
-----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.56
-----------------------------------------------------------------------
Total Return (excluding sales charge) 6.02%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $ 285
Ratio of expenses to average net assets 1.76%(c)
Ratio of net investment income to average net
assets 1.17%(c)
Ratio of expenses to average net assets* 36.79%(c)
Ratio of net investment income (loss) to average
net assets* (33.86%)(c)
Portfolio Turnover 6%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 4, 1999.
(b) Not annualized.
(c) Annualized.
62
<PAGE> 93
LIFESTYLE
FINANCIAL HIGHLIGHTS GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
JUNE 30, 1999(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-----------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.02
Net realized and unrealized gain on investments 0.77
-----------------------------------------------------------------------
Total from Investment Activities 0.79
-----------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.02)
Net realized gains --
-----------------------------------------------------------------------
Total Distributions (0.02)
-----------------------------------------------------------------------
Net change in net asset value per share 0.77
-----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.77
-----------------------------------------------------------------------
Total Return (excluding sales charge) 7.87%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $ 218
Ratio of expenses to average net assets 1.81%(c)
Ratio of net investment income to average net
assets 0.07%(c)
Ratio of expenses to average net assets* 51.10%(c)
Ratio of net investment income (loss) to average
net assets* (49.22%)(c)
Portfolio Turnover 0%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
(a) Commencement of operations of the Fund was February 18, 1999.
(b) Not annualized.
(c) Annualized.
63
<PAGE> 94
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 95
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, OH 43218-2707
Telephone: 1-800-766-3960
www.governorfunds.com
- --------------------------------------------------------------------------------
You can review and copy the Funds' reports and SAIs at the Public
Reference Room of the Securities and Exchange Commission.
You can get copies:
- For a duplicating fee, by calling or 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)
18 40 59-072
<PAGE> 96
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
October 29, 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> 97
TABLE OF CONTENTS
-----------------
Page
INVESTMENT OBJECTIVES AND POLICIES...................................... 1
Other Investment Policies and Risk Considerations.......................16
Investment Restrictions.................................................34
Portfolio Turnover......................................................43
Valuation of Prime Money Market and Treasury Money Market Funds.........43
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..........................44
HOW TO PURCHASE AND REDEEM SHARES.......................................44
Special Restrictions - The Emerging Growth Fund.........................44
Employee Benefit Plans..................................................44
Purchases of Shares.....................................................45
Purchases of S Shares...................................................46
Governor Funds Individual Retirement Account ("IRA")....................46
In-Kind Purchases.......................................................47
Sales Charges...........................................................47
Concurrent Purchases....................................................49
Letter of Intent........................................................49
Right of Accumulation...................................................50
Check-Writing Redemption Procedure - Prime Money Market
and Treasury Money Market Funds.....................................50
Payments to Shareholders................................................51
MANAGEMENT AND SERVICE PROVIDERS OF THE TRUST...........................52
Trustees and Officers...................................................52
Investment Advisor and Investment Sub-Advisors..........................54
Portfolio Transactions..................................................57
Administrators..........................................................59
Glass-Steagall Act......................................................62
Distributor.............................................................62
Administrative Services and Distribution Plans..........................63
Custodian...............................................................64
Transfer Agency and Fund Accounting Services............................64
Auditors................................................................66
Legal Counsel...........................................................66
Additional Information..................................................67
Description of Shares...................................................67
Vote of a Majority of the Outstanding Shares............................72
Additional General Tax Information......................................73
Seven-Day and 30-Day Yields of the Prime Money Market Fund
and the Treasury Money Market Fund..................................73
30-Day Yield of the Funds...............................................74
Calculation of Total Return.............................................75
Distribution Rates......................................................77
Performance Comparisons.................................................77
Miscellaneous...........................................................77
FINANCIAL STATEMENTS....................................................78
i
<PAGE> 98
APPENDIX A.............................................................A-1
APPENDIX B.............................................................B-1
ii
<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
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.
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
-1-
<PAGE> 100
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 and Moody's Investors Service) 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 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,
-2-
<PAGE> 101
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 agreements backed by such securities.
Such securities include those of the Government National Mortgage Association
and the Export-Import Bank of the United States.
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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. 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.
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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 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 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
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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 the Sub-Advisor believes are undervalued based upon internal research and
proprietary valuation systems. This international equity strategy reflects the
International Equity Fund Sub-Advisor's 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
Europe, Australasia, 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 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.
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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.
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.
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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 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
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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.
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
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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 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.
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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 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.
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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 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.
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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 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
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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:
RANGES (PERCENTAGE OF EACH FUND'S NET ASSETS)
NAME OF FUND RANGE
------------ -----
Lifestyle Conservative Growth Fund
Prime Money Market Fund 0 - 30%
Treasury Money Market Fund
Government Securities Fund 30 - 60%
Income Fund
Established Growth Fund
Aggressive Growth Fund
International Equity Fund 10 - 40%
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NAME OF FUND RANGE
------------ -----
Lifestyle Moderate Growth Fund
- ------------------------------
Money Market Fund
Treasury Money Market Fund 0 - 20%
Government Securities Fund
Income Fund 20 - 50%
Established Growth Fund
Aggressive Growth Fund
International Equity Fund 30 - 60%
Lifestyle Growth Fund
- ---------------------
Prime Money Market Fund
Treasury Money Market Fund 0 - 10%
Government Securities Fund
Income Fund 10 - 40%
Established Growth Fund
Aggressive Growth Fund
Emerging Growth Fund
International Equity Fund 50 - 80%
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.
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.
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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.
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
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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. 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, Pennsylvania
Bond Fund, Prime Money Market Fund and Treasury Money Market 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 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
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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 exercise the 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 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
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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.
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
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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.
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.
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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.
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.
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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 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
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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 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 seek 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.
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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 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
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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.
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 seven
years; as of June 30, 1998, the General Fund had a surplus of $1,958.9 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.
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Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including as of June 1, 1999, suits relating to the following
matters: (i) In February 1999, a taxpayer filed a petition for review in the
Commonwealth Court of Pennsylvania asking the court to declare that Chapter 5
(relating to Sports Facilities Financing) of the Capital Facilities Debt
Enabling Act is in violation of the Pennsylvania Constitution. Commonwealth
Court denied the taxpayer's motion for a preliminary injunction and the Supreme
Court denied an appeal of such denial. The respondents have filed preliminary
objections in the nature of a demurrer, requesting the Court dismiss the case
with prejudice. Oral arguments before the Commonwealth Court regarding the
preliminary objections were scheduled for May 19, 1999, (ii) The American Civil
Liberties Union ("ACLU") 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, among other things, 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. In July 1998, a settlement agreement
was reached with the City of Philadelphia. The Commonwealth has agreed to pay
$100,000 to settle plaintiffs' $1.4 million claim for attorney's fees and to
take other actions in exchange for a full and final release and dismissal of the
case against the Commonwealth parties. The settlement was approved by the
district court on February 1, 1999, and the case was dismissed; (iii) 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 it 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 1992, a new action in mandamus was
filed seeking to compel the Commonwealth to comply with the original decision.
The Court issued a writ in mandamus and appointed a special master in 1996 to
submit a plan for implementation, which it intended to require by January 1,
1998. In January 1997, the Court established a committee, consisting of the
special master and representatives of the Executive and Legislative branches, to
develop an implementation plan; an implementation plan was filed in July 1997.
In April 1998 the General Assembly appropriated approximately $12 million for
the funding of county court administrator, under the implementation plan.
However, no legislation has been approved for the payment of Commonwealth
compensation county court administrators. In May 1998, an action was filed by
the Administrative Governing Board of the First Judicial District claiming the
city government has failed to provide adequate funds for the Operation of the
courts of the First Judicial District. In November 1998, the First Judicial
District Governing Board filed with the Supreme Court a renewed motion for entry
of an order providing emergency relief, which requests the City of Philadelphia
to provide funds to the First Judicial District Courts, in order to maintain
necessary judicial operations throughout the end of the fiscal year. Although
the Supreme Court issued no order, the City is apparently continuing its funding
of the courts; (iv) Litigation was filed in both state and federal court by an
association of rural and small schools and several individual school districts
and parents 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; a trial in the state case commenced in January
1997 and has recessed; no briefing schedule or date for oral argument has yet
been set; on July 9, 1998 the state court issued an opinion dismissing the
petitioners' claim in its entirety. On July 20, 1998 the petitioner filed a
timely motion for post-trial relief, taking exception to the state court's
findings of fact and conclusions of law. The Supreme Court, after assuming
jurisdiction in the case directed that all parties submit briefs on all issues
presented in the petitioners' motion for post-trial relief; and (v) In 1995, the
Commonwealth, the Governor of Pennsylvania, the City of Philadelphia and the
Mayor of Philadelphia were joined as additional respondents in an enforcement
action commenced in Commonwealth Court in 1973 by the Pennsylvania Human
Relations Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The Commonwealth and the City were joined to
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determine their liability, if any, to pay additional costs necessary to remedy
segregation-related conditions found to exist in Philadelphia public schools. In
January 1997, the Pennsylvania Supreme Court ordered the parties to brief
certain issues. The Supreme Court heard oral argument on the issues in February
1998 but no decision has been issued, (vi) In February 1997, five residents of
the City of Philadelphia, joined by the City, the School District and others,
filed a civil action in the Commonwealth Court for declaratory judgment against
the Commonwealth and certain Commonwealth officers and officials that the
defendants had failed to provide an adequate quality of education in
Philadelphia, as required by the Pennsylvania Constitution. In March 1998, the
Commonwealth Court dismissed the case on the grounds that the issues prescribed
are not justifiable. An appeal to the Supreme Court of Pennsylvania is pending,
(vii) In April 1995, the Commonwealth reached a settlement agreement with
Fidelity Bank and certain other banks with respect to the constitutional
validity of the Amended Bank Shares Act and related legislation; although this
settlement agreement did not require expenditure of Commonwealth funds, the
petitions of other banks are currently pending with the Commonwealth Court; In
January 1998 a panel of the Commonwealth Court ruled in favor of the
Commonwealth, finding no constitutional violation. Royal Bank filed exceptions,
which the Commonwealth Court en banc denied. Royal Bank appealed to the Supreme
Court and briefing has been completed. The Court has not yet scheduled oral
arguments. (viii) Suit has been filed in State Court against the State
Employees' Retirement Board claiming that the use of gender district actuarial
factors to compute benefits received before August 1, 1983 violates the
Pennsylvania Constitution (gender-neutral factors have been used since August 1,
1983, the date on which the U.S. Supreme Court held in Arizona Governing
Committee v. Norris that the use of such factors violated the Federal
Constitution); in 1996, the Commonwealth Court heard oral argument en banc, and
in 1997 denied the plaintiff's motion for judgement on the pleading. The case is
currently in discovery. (ix) In March 1997, Rite Aid of Pennsylvania, Inc. filed
in the United States District Court for the Eastern District of Pennsylvania, a
civil action against the Secretary of Public Welfare alleging that regulations
promulgated in October 1995 governing payment rates for prescription drugs and
related services provided to recipients of benefits under the Pennsylvania
Medical Assistance Program violated provisions of Title XIX of the Social
Security Act and regulations of the U.S. Department of Health and Human
Services, as well as provisions of State Law and Federal constitutional due
process. In August 1998, the Court declared that certain pharmacy reimbursement
rates were in violation of the Medicaid Act and enjoined the secretary from
using these rates to reimburse for any prescription drugs and related services
provided to Medicaid recipients on and after October 1, 1998. The Secretary
filed motions for appeal and in March 1999, the U.S. Court of Appeals for the
Third Circuit reversed the District Court's order and remanded the case for
further proceedings. The plaintiffs on April 5, 1999 filed an application for
rehearing. (x) On March 9, 1998 several residents of the City of Philadelphia
along with the School District of Philadelphia and others brought suit in the
United States District Court for the Eastern District of Pennsylvania against
the Governor, the Secretary of Education and others alleging that the defendants
are violating a regulation of the U.S. Department of Education promulgated under
Title VI of the Civil Rights Act of 1964 in that the Commonwealth's system for
funding public schools has the effect of discrimination on the basis of race. On
November 18, 1998, the District Court dismissed the action with prejudice. An
appeal by the plaintiffs was filed and the parties are awaiting the scheduling
of oral argument.
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 A3 by Moody's, and Philadelphia's and
Pittsburgh's general obligation bonds are currently rated BBB and BBB
respectively by S&P and Baa2 and Baa1 respectively by Moody's.
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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, 1998 was a surplus of $169.2 million up from a surplus of
approximately $128.8 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. Pica had
approximately $1.1 billion in special revenue bonds outstanding as of April 15,
1999.
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.
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.
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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.
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
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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").
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
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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 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
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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.
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.
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.
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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, 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 GNMA and government-related
organizations such as the 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
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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 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
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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 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
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risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by 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
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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 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 options
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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 to the extent allowed by the
1940 Act. 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").
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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 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.
The following additional investment restriction may be changed without
the vote of a majority of the outstanding Shares of each money market fund: 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 not 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, in order to comply with Securities and
Exchange Commission regulations relating to money market funds.
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.
The Established Growth, Aggressive Growth, Emerging Growth,
International Equity, Income, Government Securities and Lifestyle Funds will
not:
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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
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
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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;
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 this 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.
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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 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 2%
Aggressive Growth Fund 18%
Emerging Growth Fund 53%
International Equity Fund 17%
Income Fund 149%
Government Securities Fund 519%
Pennsylvania Bond Fund 90%
Lifestyle Conservative Growth Fund 2%
Lifestyle Moderate Growth Fund 6%
Lifestyle Growth Fund 0%
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.
Valuation of Prime Money Market and Treasury Money Market Funds
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
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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 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
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.
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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").
Shares of the Funds (Investor Shares of the Prime Money Market Fund)
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 (Investor Shares of the Prime Money
Market Fund) 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 (Investor Shares of the Prime Money
Market Fund) 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 (Investor Shares of the Prime Money
Market Fund) 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
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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.
Every Shareholder will receive a confirmation of each new transaction
in his or her account, which will also show the total number of Shares owned by
the Shareholder and the number of Shares being held in safekeeping by the
Transfer Agent for the account of the Shareholder. Reports of purchases and
redemptions of Shares by entities on behalf of their Customers will be sent by
the Entities to their Customers. Shareholders may rely on these statements in
lieu of certificates. Certificates representing Shares will not be issued.
Purchases 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.
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.
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<PAGE> 145
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.
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 AND INTERNATIONAL EQUITY FUND
-47-
<PAGE> 146
<TABLE>
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % of and Brokerage
at Public Offering Net Amount Sales Charge as % of
Price Invested Public Offering Price * 1 moved from here; text
- ----------------------- -------------------- --------------------- not shown
Commissions as % of Public
Offering Price
--------------------------
<S> <C> <C> <C>
Less than $50,000 5.82% 5.50% 4.95%
$50,000 but 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>
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 Price
- --------------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C>
Less than $50,000 3.09% 3.00% 2.70%
$50,000 but 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 $1,000,000 1.52 1.50 1.35
$1,000,000 or more 0 0 0
</TABLE>
THE INCOME FUND, PENNSYLVANIA BOND FUND AND THE LIFESTYLE FUNDS
-48-
<PAGE> 147
<TABLE>
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % and Brokerage
At Public Offering of Net Amount Sales Charge as % of ** 1 Commissions as % of
Price Invested Public Offering Price Public Offering Price
- --------------------- ----------------- --------------------- ------------------------
<S> <C> <C> <C>
Less than $50,000 4.71% 4.50% 4.05%
$50,000 but 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 $1,000,000 1.52 1.50 1.35
$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.
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.
-49-
<PAGE> 148
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 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.
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.
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<PAGE> 149
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.
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> 150
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,
23 Front Street employee of Keystone
Harrisburg, PA 17101 Financial, Inc.
Age: 54
Lana Burkhardt* President and Trustee From 1992 to present,
23 Front Street employee of Keystone
Harrisburg, PA 17101 Financial, Inc.
Age: 42
John J. Bolger Trustee From 1988 to present,
Governor Funds retired; prior to that, Vice
3435 Stelzer Road President of Pennsylvania
Columbus, OH 43219 Bankers Association.
Age: 64
James L. Brock Trustee From 1996 to present, Dean of
Governor Funds Sigmund Weis School of
3435 Stelzer Road Business, Susquehanna
Columbus, OH 43219 University, prior to that,
Age: 55 Vice President of Marketing at
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.
</TABLE>
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<PAGE> 151
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE TRUST DURING PAST 5 YEARS
- --------------------- ------------------------------- -------------------
<S> <C> <C>
Laura C. Plumley* Assistant Secretary From 1994 to 1997, Counsel
23 Front Street and Chief of Compliance at
Harrisburg, PA 17101 Pennsylvania Securities
Age: 39 Commission; from 1997 to 1998,
employee of Keystone Financial
Unlimited, Inc. From January
1999 to present, an employee
of Keystone Financial Bank,
N.A.
Michael A. Grunewald* Treasurer From 1992 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, OH 43219 Services Limited 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,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited Partnership;
Age: 32 prior to that, 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
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<PAGE> 152
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 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 Earned Fees Waived
----------- -----------
<S> <C> <C>
Prime Money Market Fund 1,012,098 506,054
Treasury Money Market Fund 86,867 43,582
Established Growth Fund 1,854,418 513,293
Aggressive Growth Fund 1,241,231 444,537
Emerging Growth Fund 103,488 85,064
International Equity Fund 179,833 122,287
Income Fund 1,780,672 890,336
Government Securities Fund 249,439 124,719
Pennsylvania Bond Fund 691,568 345,784
</TABLE>
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<PAGE> 153
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1999 (1)
---------------------------
Fees Earned Fees Waived
----------- -----------
<S> <C> <C>
Lifestyle Conservative Growth 59 3
Fund
Lifestyle Moderate Growth 156 12
Fund
Lifestyle Growth Fund 108 4
</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, 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 Earned 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> 154
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 Earned 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>
For the fiscal year or period ended June 30, 1997, the former advisor
had not received any compensation under the Investment Advisory Agreement with
respect to the Treasury Money Market and Government Securities Funds since those
Funds had not commenced operations.
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.
The Advisor has informed the Fund that it expects that on, before or
about June 1, 2000, the Advisor will be reorganized into the Sub-Advisor, with
no resulting change of actual control or management. The Advisor and Sub-Advisor
are wholly-owned subsidiaries of Keystone. The reorganization would result in
the Sub-Advisor assuming all of the obligations and responsibilities of the
Advisor under the Investment Advisory Agreement with the Fund and under the
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"). This Statement of
Additional Information will be supplemented if that reorganization does not
occur.
The Advisor also has entered into a Sub-Advisory Agreement with the
International Equity Fund Sub-Advisor 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.
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<PAGE> 155
For the period from February 9, 1999 through June 30, 1999, the
International Equity Fund Sub-Advisor earned $49,615.
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 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 8transactions. 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
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<PAGE> 156
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 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 and the Emerging Growth Fund
to Boston Institutional in return for research services relating to equity
securities including market information from Bloomberg, Inc. and equity analysis
from Value Line, Inc. 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 $10,490,572 and $11,627, respectively; on behalf of
the Aggressive Growth Fund were $8,989,508 and $21,240, respectively; and on
behalf of the Emerging Growth Fund were $516,570 and $2,652, respectively. The
International Equity Fund Sub-Advisor may also direct brokerage transactions on
behalf of the International Equity Fund to Merrill Lynch, Instinet and Hoenig in
return for research services relating to equity securities. For the fiscal
period ended June 30, 1999, the amounts of such transactions and related
commissions on behalf of the International Equity Fund were $1,002,403 and
$3,393, 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:
Established Growth Fund 36,991
Aggressive Growth Fund 38,115
Emerging Growth Fund 13,299
International Equity Fund 104,394
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 , the Income Fund or the
Government Securities 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.
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,
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<PAGE> 157
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 Established Growth Fund,
Income Fund, Government Securities Fund, Pennsylvania Bond Fund, Treasury Money
Market Fund and the Prime Money Market Fund 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 Established Growth Fund held $2,350,000 of
equity securities of First Union and $10,250,000 of equity securities of Morgan
Stanley Dean Witter Discover & Co.; the Income Fund held $8,000,000 of debt
securities of Lehman Brothers, Inc. $4,931,000 of debt securities of Merrill
Lynch & Co., Inc.; the Government Securities Fund held $8,749,000 of debt
securities of Lehman Brothers, Inc., and $3,094,000 of debt securities of
Merrill Lynch & Co., Inc.; the Treasury Money Market Fund held $376,000 of debt
securities of Lehman Brothers, Inc. and $5,000,000 of debt securities of
Merrill Lynch & Co., Inc.; the Prime Money Market held $11,976,000 of debt
securities of Zions Bancorp, $10,011,000 of debt securities of Goldman Sachs
& Co.; 11,998,000 of JP Morgan Co.; $63,860,000 of debt securities of Lehman
Brothers, Inc. and $41,012,000 of debt securities of Merrill Lynch & Co., Inc.
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).
As noted above, the Advisor has informed the Fund that it expects that
on, before or about June 1, 2000, the Advisor will be reorganized into the
Sub-Advisor, with no resulting change of actual control or management. The
reorganization would result in the Sub-Advisor assuming all of the obligations
and responsibilities of the Advisor under the Management and Administration
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<PAGE> 158
Agreement with the Fund. This Statement of Additional Information will be
supplemented if that reorganization does not occur.
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 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 and voluntarily waived 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)
Fees Earned Fees Waived
----------- -----------
<S> <C> <C>
Prime Money Market Fund $330,250 $39,270
Treasury Money Market Fund 28,212 3,152
Established Growth Fund 321,042 36,696
Aggressive Growth Fund 160,962 18,184
Emerging Growth Fund 10,811 1,290
International Equity Fund 21,580 5,035
Income Fund 386,279 44,983
Government Securities Fund 55,421 7,612
Pennsylvania Bond Fund 149,744 17,193
</TABLE>
There are no fees payable to the Administrators from the Lifestyle Funds under
the Administration Agreement.
- -------------------------
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<PAGE> 159
(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:
<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 year or period ended June 30,
1998, the former administrator had not received any compensation under
the Administration Agreement with respect to the Emerging Growth or
International Equity Funds since those Funds had not commenced
operations.
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(1)
-------------------
<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>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, December 2, 1996,
February 3, 1997, December 2, 1996 and July 1, 1997.
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<PAGE> 160
For the fiscal period ended June 30, 1997, the former administrator had
not received any compensation under the Administration Agreement with respect to
the Treasury Money Market and Government Securities Funds since those Funds had
not commenced operations.
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.
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
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<PAGE> 161
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.
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.
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<PAGE> 162
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.
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
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<PAGE> 163
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.
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
* 2 moved from here; text not shown June 30, 1999(1)
---------------------------
<S> <C>
Prime Money Market Fund 77,899
Treasury Money Market Fund 31,233
Established Growth Fund 78,219
Aggressive Growth Fund 41,519
Emerging Growth Fund 33,059
International Equity Fund 26,017
Income Fund 93,623
Government Securities Fund 32,985
Pennsylvania Bond Fund 43,384
Lifestyle Conservative Growth Fund 12,500
Lifestyle Moderate Growth Fund 12,500
Lifestyle Growth Fund 12,500
</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.
**2 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, 1998(1)
---------------------------
<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
</TABLE>
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<PAGE> 164
<TABLE>
<S> <C>
Government Securities Fund $32,239
Pennsylvania Bond Fund $43,737
</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. For the fiscal year or period ended June 30, 1998 and October 1, 1996.
For the fiscal year or period ended June 30, 1998, BISYS Fund Services, Inc. did
not receive any compensation for its fund accounting services with respect to
the Emerging Growth, International Equity and Lifestyle Funds since those Funds
had not commenced operations.
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.
<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>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, December 2, 1996,
February 3, 1997, December 2, 1996, and October 1, 1996. For the fiscal year or
period ended June 30, 1997, BISYS Fund Services, Inc. did not receive any
compensation for its fund accounting services with respect to the Treasury Money
Market or Government Securities Funds since those Funds had not commenced
operations.
Auditors
The financial statements for the Funds as of June 30, 1999, and for the
periods indicated therein, have been audited by KPMG LLP, Two Nationwide Plaza,
Columbus, Ohio 43215, 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.
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<PAGE> 165
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 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
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<PAGE> 166
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.
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 October 18, 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:
PRIME MONEY MARKET-INVESTOR SHARES
Name and Address Percentage
- ---------------- ----------
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<PAGE> 167
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 55.02%
BISYS Fund Services
Keystone Financial Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 34.20%
National Financial Services Corp.
200 Liberty Street
New York, NY 10281 9.82%
** 3 PRIME MONEY MARKET FUND S SHARES
** 4 Name and Address ** 5 Percentage
BISYS Fund Services
** 6 Governor Funds Financial Sweep Customer
** 7 3435 Stelzer Road
** 8 Columbus, OH 43219 ** 9 100.0000%
U.S. TREASURY OBLIGATIONS MONEY MARKET
Name and Address
Keystone Financial, Inc.
** 10 1315 Eleventh Avenue, P.O. Box 2450 85.11%
** 11 Altoona, PA 16601
National Financial Services Corp.
200 Liberty Street 9.70%
New York, NY 10281
PENNSYLVANIA MUNICIPAL BOND FUND
Name and Address Percentage
- ---------------- ----------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 94.65%
INTERMEDIATE TERM INCOME FUND
Name and Address Percentage
- ---------------- ----------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 97.33%
ESTABLISHED GROWTH FUND
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<PAGE> 168
* 10 moved from here; text not shown Percentage
----------
* 11 moved from here; text not shown
Name and Address
- ----------------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 94.70%
AGGRESSIVE GROWTH FUND
Name and Address Percentage
- ---------------- ----------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 88.89%
LIMITED DURATION GOVERNMENT SECURITIES FUND
Name and Address Percentage
- ---------------- ----------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 99.13%
EMERGING GROWTH FUND
Name and Address Percentage
- ---------------- ----------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 88.22%
INTERNATIONAL EQUITY FUND
Name and Address Percentage
- ---------------- ----------
Keystone Financial, Inc.
1315 Eleventh Avenue, P.O. Box 2450
Altoona, PA 16601 99.60%
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<PAGE> 169
LIFESTYLE CONSERVATIVE GROWTH FUND
Name and Address Percentage
- ---------------- ----------
NFSC FEBO C3X- 459526
* 13 moved from here; text not shown
** 12 NFSC FMTC IRA 17.13%
2306 E. Allegheny Avenue
Philadelphia, PA 19134
NFSC FEBO C3X-203068
Robert Holsinger
520 Barley Street
Roaring Spring, PA 16673 12.74%
NFSC FEBO C3X-236217
Jacob L. Buck, Jr.
RR 2 Box 1755
Milton, PA 17847 8.49%
NFSC FEBO C3X-262960
Earl E. Meily
14 Cardinal Drive
Milton, PA 17847 6.36%
NFSC FEBO C3X-065390
NFSC FMTC IRA Rollover
RR 4 Box 117
Mifflinburg, PA 17844 17.11%
NFSC FEBO C3X-381306
Thomas P. McIntyre, Sr.
1618 County Street
Laureldale, PA 19605 8.52%
LIFESTYLE MODERATE GROWTH FUND
Name and Address Percentage
- ---------------- ----------
Robert R. Wozniewicz
Mary Kathryn Wozniewicz
14 N. Pin Oak Drive
Boiling Springs, PA 17007 5.84%
* 12 moved from here; text not shown
* 14 moved from here; text not shown
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<PAGE> 170
LIFESTYLE GROWTH FUND
Name and Address Percentage
- ---------------- ----------
NFSC FEBO C3X-104361
NFSC FMTC IRA Rollover
3513 Fort Roberdeau Avenue 12.67%
Altoona, PA 16602
NFSC FEBO C3X-156965
NFSC FMTC IRA
P.O. Box 8 7.53%
Curryville, PA 16631
NFSC FEBO C3X-170054
NFSC FMTC IRA
425 Ferguson Avenue
State College, PA 16803 7.36%
NFSC FEBO C3X-414212
* 3 moved from here; text not shown
6.45%
* 4 moved from here; text not shown ** 14
* 5 moved from here; text not shown
* 6 moved from here; text not shown
* 7 moved from here; text not shown
* 8 moved from here; text not shown
* 9 moved from here; text not shown
** 13 NFSC FMTC IRA Rollover
1475 Mallory Road
Chemung, NY 14825
NFSC FEBO C3X 499153
NFSC FMTC IRA Rollover
5 Sweet Briar Lane
Hagerstown, MD 21742 5.04%
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.
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<PAGE> 171
Additional General Tax Information
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute its income and gain
each year, so that the 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.
The Pennsylvania Municipal Bond Fund intends to invest all, or
substantially all, of its assets in debt obligations the interest on which is
exempt for federal income tax purposes. In order for the 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.
As described in its Prospectus, the 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 Internal Revenue Code (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
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<PAGE> 172
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 4.48% and 4.58%, 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 4.43% and 4.52%, 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 4.28% and 4.38%, 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 4.24% and 4.32%, 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 3.90% and 3.98%,
respectively. For the 30-day period ended June 30, 1999, the yield and effective
yield for the Treasury Money Market Fund were 3.91% and 3.98%, 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 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, the Government Securities Fund and the Pennsylvania Bond Fund were 5.57%,
4.86% and 4.08%, respectively, assuming the imposition of the maximum sales
charge, and 5.84%, 5.01% and 4.27%, respectively, excluding the effect of a
sales charge. For the same period, the tax equivalent yields for the
Pennsylvania Bond Fund, assuming a 39.6% federal tax rate, were 6.75%, assuming
the imposition of the maximum sales charge, and 7.07%, excluding the effect of a
sales charge.
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<PAGE> 173
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> 174
<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 4.80% 5.05%
Treasury Money Market* N/A N/A 4.28% 4.53%
Established Growth 9.80% 25.36% 16.20% 26.94%
Aggressive Growth 3.27% 15.37% 9.24% 16.68%
Income -3.76% 2.79% 0.82% 4.64%
Government Securities 1.10% 3.99% 4.25% 4.87%
Pennsylvania Bond -2.66% 2.56% 1.94% 4.30%
</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 and Aggressive Growth Fund is 5.50%. The maximum sales load for
the 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.
The aggregate total returns for the period from commencement of
operations to June 30, 1999 for the Emerging Growth, International Equity and
Lifestyle Funds are as follows:
GOVERNOR FUNDS
<TABLE>
<CAPTION>
Aggregate Total Returns
-----------------------
Fund With Maximum Sales Load(3) Without Sales Load
- ---- -------------------------- ------------------
Since (4) Inception Since (4) Inception
------------------- -------------------
<S> <C> <C>
Emerging Growth Fund 14.12% 20.74%
International Equity Fund 0.09% 5.90%
Lifestyle Conservative Growth Fund -2.38% 2.21%
Lifestyle Moderate Growth Fund 1.26% 6.02%
Lifestyle Growth Fund 3.03% 7.87%
</TABLE>
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<PAGE> 175
(3) The maximum sales load for the Emerging Growth Fund and the International
Equity Fund is 5.50%. The maximum sales load for the Lifestyle Funds is 4.50%.
(4) Commenced operations July 1, 1998, February 9, 1999, February 3, 1999,
February 4, 1999, and February 18, 1999, respectively.
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 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 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 serve the Trust subject to (1) removal by the vote
of two-thirds of the Board of Trustees or (2) removal by the vote of
shareholders owning at least two-thirds of the
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<PAGE> 176
outstanding shares of all series. Generally, shareholders owning a majority 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.
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 KPMG LLP 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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<PAGE> 177
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
A-1
<PAGE> 178
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.
"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.
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<PAGE> 179
"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."
"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
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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.
"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.
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"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 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.
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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 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;
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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", "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.
"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.
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"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 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.
"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.
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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 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
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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.
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
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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
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.
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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 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.
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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
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
B-5
<PAGE> 191
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.
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
B-6
<PAGE> 192
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.
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.
B-7
<PAGE> 193
Registration Statement
of
GOVERNOR FUNDS
on
Form N-1A
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) 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. is
incorporated herein by reference to exhibit
(d)(1) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1999
(2) Form of Advisory Fee Waiver Contract between
Governor Funds, Martindale Andres & Company,
Inc. and Governors Group Advisors, Inc.
(3) Investment Sub-Advisory Agreement dated
November 16, 1998, between Governors Group
Advisors, Inc. and Martindale Andres &
Company, Inc. is incorporated herein by
reference to exhibit (d)(2) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1999
(4) Investment Sub-Advisory Agreement dated
November 16, 1998, between Governors Group
Advisors, Inc. and Brinson Partners, Inc. is
incorporated herein by reference to exhibit
(d)(3) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1999
(e) (1) Distribution Agreement dated November 16,
1998, between Governor Funds and BISYS Fund
Services Limited Partnership d/b/a BISYS
Fund Services is incorporated herein by
reference to
<PAGE> 194
exhibit (e)(1) of Post-Effective Amendment
No. 1 to Registrant's Registration Statement
on Form N-1A filed with the Commission on
August 30, 1999
(f) None.
(g) (1) Custody Agreement dated November 16, 1998,
between Governor Funds and The Bank of New
York.
(2) Form of 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
(h) (1) Management and Administration Agreement
dated November 16, 1998, among Governor
Funds, BISYS Fund Services Ohio, Inc. and
Governors Group Advisors, Inc. is
incorporated herein by reference to exhibit
(h)(1) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1999
(2) Administration Fee Waiver Contract between
Governor Funds, BISYS Fund Services Ohio,
Inc. and Governors Group Advisors, Inc.
(3) Transfer Agency Agreement dated November 16,
1998, between Governor Funds and BISYS Fund
Services, Inc. is incorporated herein by
reference to exhibit (h)(3) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1999
(3) Fund Accounting Agreement dated November 16,
1998, between Governor Funds and BISYS Fund
Services, Inc. is incorporated herein by
reference to exhibit (h)(4) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1999
(i) Opinion of Counsel that shares are validly issued,
fully paid and non-assessable.
(j) (1) Consent of KPMG, LLP.
(2) Consent of Drinker Biddle & Reath LLP.
(k) None.
<PAGE> 195
(l) Purchase Agreement dated November 16, 1998 is
incorporated herein by reference to exhibit (l) of
Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A filed with the
Commission on August 30, 1999
(m) (1) Rule 12b-1 Plan is incorporated herein
by reference to exhibit (15)(a) of the
Initial Registration Statement.
(2) Administrative Services Plan 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 filed 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 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
<PAGE> 196
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 October 26,
1999, Governors Group Advisors had $1.18 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; A. James Durica, President and Director of Governors Group
Advisors, has been a Senior Vice President of Keystone for over ten
years; Laura C. Plumley has been Assistant Secretary of Governor Funds
since February, 1999 and an employee of Keystone Financial Bank, N.A.,
since January, 1999 (prior to that she was an employee of Keystone
Financial Unlimited, Inc., 1 Keystone Plaza, North Front and Market
Street, P.O. Box 3660, Harrisburg, PA 17105-3660, from 1997 through
1998 and prior to that she was employed by the Pennsylvania Securities
Commission, Harrisburg, PA since 1993); 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 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., a Vice President of Governors Group Advisors, has
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,
<PAGE> 197
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 Portfolios, the AmSouth
Mutual Funds, the American Performance Funds, The Coventry Group, The
BB&T Mutual Funds Group, M.S.D.&T. Funds, the Pacific Capital Funds,
the MMA Praxis Mutual Funds, The Riverfront Funds, Inc., the Summit
Investment Trust, Fifth Third Funds, Hirtle Callaghan Trust, HSBC Funds
Trust, HSBC Mutual Funds Trust, The Infinity Mutual Funds, Inc.,
Intrust Funds Trust, Magna Funds, Magna Funds, Merchantile Mutual Fund,
Inc., Metamarkets.com, Meyers Investment Trust, The Republic Funds
Trust, The Republic Advisor Trust Funds Trust, Sefton Funds, Alpine
Equity Trust, ESC Strategic Funds, Inc., The Eureka Funds, USAllianz
Funds, USAllianz Funds Variable Insurance Products Trust, The Victory
<PAGE> 198
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).
<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> 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 meets all the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933,
as amended, and has duly caused this Post-Effective Amendment No. 2 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
29th day of October, 1999.
GOVERNOR FUNDS
Registrant
/s/*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.
Signature Title Date
--------- ----- ----
/s/* Robert E. Leech Chairman and Trustee October 29, 1999
- ----------------------------
Robert E. Leech
/s/* Lana V. Burkhardt President and Trustee October 29, 1999
- ----------------------------
Lana V. Burkhardt
/s/* John J. Bolger Trustee October 29, 1999
- ----------------------------
John J. Bolger
/s/* James L. Brock Trustee October 29, 1999
- ----------------------------
James L. Brock
/s/* John S. Cramer Trustee October 29, 1999
- ----------------------------
John S. Cramer
/s/* Michael A. Grunewald Treasurer October 29, 1999
- ----------------------------
Michael A. Grunewald
*By/s/ Michael P. Malloy
-------------------------
Michael P. Malloy
Attorney-In-Fact
<PAGE> 201
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(d)(2) Form of Advisory Fee Waiver Contract between Governor
Funds, Martindale Andres & Company, Inc. and
Governors Group Advisors, Inc.
(g)(1) Custody Agreement dated November 16, 1998, between
Governor Funds and The Bank of New York.
(h)(2) Form of Administration Fee Waiver Contract between
Governor Funds, BISYS Fund Services Ohio, Inc. and
Governors Group Advisors, Inc.
(i) Opinion of counsel that shares are validly issued,
fully paid and non-assessable.
(j)(1) Consent of KPMG, LLP.
(j)(2) Consent of Drinker Biddle & Reath LLP.
<PAGE> 1
October 29, 1999
Lana V. Burkhardt
President
Governor Funds
3435 Stelzer Road
Columbus, OH 43219
Re: Governor Funds
Dear Ms. Burkhardt:
By our execution of this letter agreement (the "Agreement"), intending
to be legally bound hereby, Martindale Andres & Company, Inc. and Governors
Group Advisors, Inc. (the "Advisors") agree that in order to improve the
performance of Governor Funds which is comprised of the Prime Money Market, U.S.
Treasury Obligations Money Market, 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 (each
a "Fund" and collectively, the "Funds"), the Advisors shall, from October 29,
1999 through October 31, 2000, waive all or a portion of their investment
advisory fees in the amount necessary so that after fee waivers the maximum
advisory fee shall not exceed .20% for the Prime Money Market Fund, .20% for the
U.S. Treasury Obligations Money Market Fund, .60% for the Established Growth
Fund, .70% for the Aggressive Growth Fund, .50% for the Emerging Growth Fund,
.40% for the International Equity Fund, .30% for the Intermediate Term Income
Fund, .30% for the Limited Duration Government Securities Fund, .30% for the
Pennsylvania Municipal Bond Fund, .15% for the Lifestyle Conservative Growth
Fund, .15% for the Lifestyle Moderate Growth Fund, and .15% for the Lifestyle
Growth Fund.
The Advisors acknowledge that they shall not be entitled to collect on
or make a claim for waived fees at any time in the future.
MARTINDALE ANDRES & COMPANY, INC.
By:
---------------------------------
Title:
------------------------------
GOVERNORS GROUP ADVISORS, INC.
By:
---------------------------------
Title:
------------------------------
Your signature below acknowledges
acceptance of this Agreement:
By:
------------------------------
Lana V. Burkhardt
President
Governor Funds
<PAGE> 1
CUSTODY AGREEMENT
-----------------
Agreement made as of this 16th day of November, 1998, between GOVERNOR
FUNDS, a Delaware business trust organized and existing under the laws of
Delaware, having its principal office and place of business at 3435 Stelzer
Road, Columbus, Ohio 43219 (hereinafter called the "Fund"), and THE BANK OF NEW
YORK, a New York corporation authorized to do a banking business, having its
principal office and place of business at One Wall Street, New York, New York
10286 (hereinafter called the "Custodian").
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Authorized Persons" shall be deemed to include any person, whether
or not such person is an officer or employee of the Fund, duly authorized by the
Board of Trustees of the Fund to execute any Certificate, instruction, notice or
other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities, its successor
or successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Authorized Persons, and the term Certificate shall also
include Instructions.
5. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
<PAGE> 2
6. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency Unit or
any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
9. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
10. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Trustees specifically approving deposits therein by the
Custodian.
11. "Financial Futures Contract" shall mean the firm commitment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
12. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
14. "FX Transaction" shall mean any transaction for the purchase by one
party of an agreed amount in one Currency against the sale by it to the other
party of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications transmitted
by electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission signed by an Authorized Person and tested telex.
16. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the
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benefit of a broker, dealer, futures commission merchant, or Clearing Member, or
otherwise, in accordance with an agreement between the Fund, the Custodian and a
broker, dealer, futures commission merchant or a Clearing Member (a "Margin
Account Agreement"), separate and distinct from the custody account, in which
certain Securities and/or money of the Fund shall be deposited and withdrawn
from time to time in connection with such transactions as the Fund may from time
to time determine. Securities held in the Book-Entry System or the Depository
shall be deemed to have been deposited in, or withdrawn from, a Margin Account
upon the Custodian's effecting an appropriate entry in its books and records.
17. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
19. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Authorized Person or from a person
reasonably believed by the Custodian to be an Authorized Person.
20. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
21. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
22. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or assets.
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<PAGE> 4
23. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
24. "Series" shall mean the various portfolios, if any, of the Fund
listed on Appendix B hereto as amended from time to time.
25. "Shares" shall mean the shares of beneficial interest of the Fund,
each of which is, in the case of a Fund having Series, allocated to a particular
Series.
26. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
27. "Stock Index Option" shall mean an exchange traded option entitling
the holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and money at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all money owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and money is not
finally collected. The Fund shall deliver to the
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<PAGE> 5
Custodian a certified resolution of the Board of Trustees of the Fund,
substantially in the form of Exhibit A hereto, approving, authorizing and
instructing the Custodian on a continuous and on-going basis to deposit in the
Book-Entry System all Securities eligible for deposit therein, regardless of the
Series to which the same are specifically allocated and to utilize the
Book-Entry System to the extent possible in connection with its performance
hereunder, including, without limitation, in connection with settlements of
purchases and sales of Securities, loans of Securities and deliveries and
returns of Securities collateral. Prior to a deposit of Securities specifically
allocated to a Series in the Depository, the Fund shall deliver to the Custodian
a certified resolution of the Board of Trustees of the Fund, substantially in
the form of Exhibit B hereto, approving, authorizing and instructing the
Custodian on a continuous and ongoing basis until instructed to the contrary by
a Certificate actually received by the Custodian to deposit in the Depository
all Securities specifically allocated to such Series eligible for deposit
therein, and to utilize the Depository to the extent possible with respect to
such Securities in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities, and deliveries and returns of Securities collateral.
Securities and money deposited in either the Book-Entry System or the Depository
will be represented in accounts which include only assets held by the Custodian
for customers, including, but not limited to, accounts in which the Custodian
acts in a fiduciary or representative capacity and will be specifically
allocated on the Custodian's books to the separate account for the applicable
Series. Prior to the Custodian's accepting, utilizing and acting with respect to
Clearing Member confirmations for Options and transactions in Options for a
Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Trustees, substantially in the form
of Exhibit C hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with respect to such
Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all money received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address of
the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series basis,
of all transfers to or from the account of the Fund for a Series, either
hereunder or with any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are transferred to the account
of the Fund for a Series, the Custodian shall also by book-entry or otherwise
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identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
money held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) collect all income, dividends and distributions due or payable;
(b) give notice to the Fund and present for payment and collect the
amount payable upon such Securities which are called, but only if either (i) the
Custodian receives a written notice of such call, or (ii) notice of such call
appears in one or more of the publications listed in Appendix C annexed hereto,
which may be amended at any time by the Custodian (and the Custodian shall
promptly send a copy of such Appendix as amended to the Fund) without the prior
notification or consent of the Fund;
(c) present for payment and collect the amount payable upon all
Securities which mature;
(d) surrender Securities in temporary form for definitive
Securities;
(e) execute, as custodian, any necessary declarations or
certificates of ownership under the Internal Revenue Code of 1986, as amended or
the laws or regulations of any other taxing authority now or hereafter in
effect;
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<PAGE> 7
(f) hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any Securities
held by the Custodian for such Series hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received by the Custodian, such
proxies and other similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund), but without
indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of the Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be exercised;
(b) deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation, or the exercise of
any conversion privilege and receive and hold hereunder specifically allocated
to such Series any cash or other Securities received in exchange;
(c) deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates are
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available. The Fund shall deliver to the Custodian such a Certificate no later
than the business day preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall comply with Section
17(f) of the Investment Company Act of 1940, as amended, in connection with the
purchase, sale, settlement, closing-out or writing of Futures Contracts,
Options, or Futures Contract Options by making payments or deliveries specified
in Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing-out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or futures commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any nominee of
the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such certificate,
and deliver any Futures Contract, Option or Futures Contract Option for which
such instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (b) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay to the
broker specified in the Certificate out of the money held for the account of
such Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
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<PAGE> 9
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the name of the issuer
and the title of the Security; the number of shares or principal amount sold,
and accrued interest, if any; (c) the date of sale; (d) the sale price per unit;
(e) the total amount payable to the Fund upon such sale; (f) the name of the
broker through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (g) the name of the broker to whom the Securities
are to be delivered. The Custodian shall deliver the Securities specifically
allocated to such Series to the broker specified in the Certificate against
payment of the total amount payable to the Fund upon such sale, provided that
the same conforms to the total amount payable as set forth in such Certificate
or Oral Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect to each
Option purchased: (a) the Series to which such Option is specifically allocated;
(b) the type of Option (put or call); (c) the name of the issuer and the title
and number of shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Stock
Index Options purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the total amount payable by the Fund
in connection with such purchase; (h) the name of the Clearing Member through
whom such Option was purchased; and the name of the broker to whom payment is to
be made. The Custodian shall pay, upon receipt of a Clearing Member's statement
confirming the purchase of such Option held by such Clearing Member for the
account of the Custodian (or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of money held for the account of the
Series to which such Option is to be specifically allocated, the total amount
payable upon such purchase to the Clearing Member through whom the purchase was
made, provided that the same conforms to the total amount payable as set forth
in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and the name of the Clearing Member through whom the sale was made.
The Custodian shall consent to the delivery of the Option sold by the Clearing
Member which previously supplied the confirmation described in preceding
paragraph 1 of this Article with respect to such Option against payment to the
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Custodian of the total amount payable to the Fund, provided that the same
conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the money held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Option was exercised.
The Custodian shall, upon receipt of the amount payable upon the exercise of the
Put Option, deliver or direct the Depository to deliver the Securities
specifically allocated to such Series, provided the same conforms to the amount
payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for which
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the
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<PAGE> 11
Custodian has the right, upon prior written notification to the Fund, at any
time to refuse to issue any receipts for Securities in the possession of the
Custodian and not deposited with the Depository underlying a Covered Call
Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put Option
is written; (g) the name of the Clearing Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered; (h)
the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; and the amount of cash and/or the amount and kind of
Securities specifically allocated to such Series to be deposited into the
Collateral Account for such Series. The Custodian shall, after making the
deposits into the Collateral Account specified in the Certificate, issue a Put
Option guarantee letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the money held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
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10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Collateral Account
for such Series; and (k) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian has specifically agreed to issue, which are in accordance
with the customs prevailing among Clearing Members in Stock Index Options and
make the deposits into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the money held for the account of the Series to which
such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; the premium to be paid by the Fund; the
expiration date; (e) the type of Option (put or call); (f) the date of such
purchase; (g) the name of the Clearing Member to whom the premium is to be paid;
and (h) the amount of cash and/or the amount and kind of Securities, if any, to
be withdrawn from the Collateral
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<PAGE> 13
Account, a specified Margin Account, or the Senior Security Account for such
Series. Upon the Custodian's payment of the premium and the return and/or
cancellation of any receipt issued pursuant to paragraphs 6, 8 or 10 of this
Article with respect to the Option being liquidated through the Closing Purchase
Transaction, the Custodian shall remove, or direct the Depository to remove, the
previously imposed restrictions on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein,
and upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contracts entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom the
Futures Contract was entered into; and (i) the amount of fee or commission, if
any, to be paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make the
deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the money specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
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<PAGE> 14
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a)
the Futures Contract and the Series to which the same relates; (b) with respect
to a Stock Index Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or delivery is to be made or
received; and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
5. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a futures
commission merchant upon receipt of a Certificate from the Fund specifying: (a)
the name of the futures commission merchant; (b) the specific cash and
Securities to be delivered; (c) the date of such delivery; and (d) the date of
the agreement between the Fund and such futures commission merchant entered
pursuant to Rule 17f-6 under the Investment Company Act 1940, as amended. Each
delivery of such a Certificate by the Fund shall constitute (x) a representation
and warranty by the Fund that the Rule 17f-6 agreement has been duly authorized,
executed and delivered by the Fund and the futures commission merchant and
complies with Rule 17f-6, and (y) an agreement by the Fund that the Custodian
shall not be liable for the acts or omissions of any such futures commission
merchant.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the Futures Contract
Option purchased; (d) the expiration date; (e) the exercise price; (f) the dates
of purchase and settlement; (g) the amount of premium to be paid by the Fund
upon such purchase; (h) the name of the
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<PAGE> 15
broker or futures commission merchant through whom such option was purchased;
and (i) the name of the broker, or futures commission merchant, to whom payment
is to be made. The Custodian shall pay out of the money specifically allocated
to such Series, the total amount to be paid upon such purchase to the broker or
futures commissions merchant through whom the purchase was made, provided that
the same conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) Series to
which such Futures Contract Option was specifically allocated; (b) the type of
Futures Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker or futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and the amount of cash and/or
the amount and kind of Securities to be deposited in the Senior Security Account
for such Series. The Custodian shall make, out of the money and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits, if any, to be made to the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be necessary to identify
the Futures Contract underlying the Futures Contract Option; (d) the expiration
date; the exercise price; (e) the premium to be received by the Fund; (f) the
name of the broker or futures commission merchant through whom the premium is to
be received; and the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon receipt of the premium specified in the Certificate, make
out of the money and Securities specifically allocated to such Series the
deposits into the Senior Security Account, if any, as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
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<PAGE> 16
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the money and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to
a previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; the
exercise price; (d) the premium to be paid by the Fund; (e) the expiration date;
(f) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (g) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased by
the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements
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<PAGE> 17
delivered to the Fund pursuant to paragraph 3 of Article III herein and, (b)
make such withdrawals from and/or in the case of an exercise such deposits into
the Senior Security Account as may be specified in a Certificate. The deposits
to and/or withdrawals from the Margin Account, if any, shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article VI
hereof.
10. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a futures
commission merchant upon receipt of a Certificate from the Fund specifying: (a)
the name of the futures commission merchant; (b) the specific cash and
Securities to be delivered; (c) the date of such delivery; and (d) the date of
the agreement between the Fund and such futures commission merchant entered
pursuant to Rule 17f-6 under the Investment Company Act 1940, as amended. Each
delivery of such a Certificate by the Fund shall constitute (x) a representation
and warranty by the Fund that the Rule 17f-6 agreement has been duly authorized,
executed and delivered by the Fund and the futures commission merchant and
complies with Rule 17f-6, and (y) an agreement by the Fund that the Custodian
shall not be liable for the acts or omissions of any such futures commission
merchant.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the Series
for which such short sale was made; (b) the name of the issuer and the title of
the Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon such sale,
if any; (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of cash and/or the
amount and kind of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing-out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon
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<PAGE> 18
such closing-out; (g) the net total amount payable to the broker upon such
closing-out; (h) the amount of cash and the amount and kind of Securities to be
withdrawn, if any, from the Margin Account; (i) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from the Senior Security
Account; and (j) the name of the broker through whom the Fund is effecting such
closing-out. The Custodian shall, upon receipt of the net total amount payable
to the Fund upon such closing-out, and the return and/or cancellation of the
receipts, if any, issued by the Custodian with respect to the short sale being
closed-out, pay out of the money held for the account of the Fund to the broker
the net total amount payable to the broker, and make the withdrawals from the
Margin Account and the Senior Security Account, as the same are specified in the
Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connection with such
Reverse Repurchase Agreement and specifically allocated to such Series; (c) the
broker or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and
(f) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a Senior Security
Account for such Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable to the Fund
specified in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security Account,
specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
the date of termination; (d) the name of the broker or dealer with or through
whom the Reverse Repurchase Agreement is to be terminated; and (e) the amount of
cash and/or the amount and kind of Securities to be withdrawn from the Senior
Securities Account for such Series. The Custodian shall, upon receipt of the
amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
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<PAGE> 19
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan for which The Bank of New York is not a
securities lending agent of portfolio Securities specifically allocated to a
Series held by the Custodian hereunder, the Fund shall deliver or cause to be
delivered to the Custodian a Certificate specifying with respect to each such
loan: (a) the Series to which the loaned Securities are specifically allocated;
(b) the name of the issuer and the title of the Securities; (c) the number of
shares or the principal amount loaned; (d) the date of loan and delivery; (e)
the total amount to be delivered to the Custodian against the loan of the
Securities, including the amount of cash collateral and the premium, if any,
separately identified; and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry System or
Depository only in the form of a certified or bank cashier's check payable to
the order of the Fund or the Custodian drawn on New York Clearing House funds
and may deliver Securities in accordance with the customs prevailing among
dealers in securities.
2. Promptly after each termination of a loan of Securities by the Fund
for which The Bank of New York is not a securities lending agent, the Fund shall
deliver or cause to be delivered to the Custodian a Certificate specifying with
respect to each such loan termination and return of Securities: (a) the Series
to which the loaned Securities are specifically allocated; (b) the name of the
issuer and the title of the Securities to be returned; (c) the number of shares
or the principal amount to be returned; (d) the date of termination; (e) the
total amount to be delivered by the Custodian (including the cash collateral for
such Securities minus any offsetting credits as described in said Certificate);
and (f) the name of the broker, dealer, or financial institution from which the
Securities will be returned. The Custodian shall receive all Securities returned
from the broker, dealer, or financial institution to which such Securities were
loaned and upon receipt thereof shall pay, out of the money held for the account
of the Fund, the total amount payable upon such return of Securities as set
forth in the Certificate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the
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<PAGE> 20
Custodian into, or withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or withdrawal and shall so
notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member in
whose name, or for whose benefit, the account was established as specified in
the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: the
name of the Margin Account; the amount and kind of Securities held therein; and
the amount of money held therein. The Custodian shall make available upon
request to any broker, dealer, or futures commission merchant specified in the
name of a Margin Account a copy of the statement furnished the Fund with respect
to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such statement, the Fund shall furnish to the Custodian
a Certificate specifying the then market value of the Securities described in
such statement. In the event such then market value is indicated to be less than
the Custodian's obligation with respect to any outstanding Put Option guarantee
letter or similar document, the Fund shall promptly specify in a Certificate the
additional cash and/or Securities to be deposited in such Collateral Account to
eliminate such deficiency.
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<PAGE> 21
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Trustees of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out of
the money held for the account of each Series the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and price;
and
(b) the amount of money to be received by the Custodian for the sale
of such Shares and specifically allocated to the separate account in the name of
such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
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<PAGE> 22
4. Except as provided hereinafter, whenever the Fund desires the
Custodian to make payment out of the money held by the Custodian hereunder in
connection with a redemption of any Shares, it shall furnish to the Custodian a
Certificate specifying:
(a) the number and Series of Shares redeemed; and
(b) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the money held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out of the money held in
the separate account of the Series of the Shares being redeemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the money held by the
Custodian in the separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated to
such Series, as set forth in a Certificate or Oral Instructions, or which
results in an overdraft in the separate account of such Series for some other
reason, or if the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement, (except a borrowing
for investment or for temporary or emergency purposes using Securities as
collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such prime commercial
lending rate but in no event to be less than 6% per annum. In addition, the Fund
hereby agrees that the Custodian shall have a continuing lien, security
interest, and security entitlement in and to any property including any
investment property or any financial asset specifically allocated to such Series
at any time held by it for the benefit of such Series or in which the Fund may
have an interest which is then in the Custodian's possession or control or in
possession or control of any
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<PAGE> 23
third party acting in the Custodian's behalf. Notwithstanding Section 9 of
Article XVIII hereof, the Fund authorizes the Custodian, in its sole discretion,
at any time to charge any such overdraft or indebtedness together with interest
due thereon against any balance of account standing to such Series' credit on
the Custodian's books. In addition, the Fund hereby covenants that on each
Business Day on which either it intends to enter a Reverse Repurchase Agreement
and/or otherwise borrow from a third party, or which next succeeds a Business
Day on which at the close of business the Fund had outstanding a Reverse
Repurchase Agreement or such a borrowing, it shall prior to 9 a.m., New York
City time, advise the Custodian, in writing, of each such borrowing, shall
specify the Series to which the same relates, and shall not incur any
indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the principal amount of
any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities.
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ARTICLE XV
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund in
order for the Fund to transmit Instructions to the Custodian (the "Software"),
the Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting Instructions
to, and receiving communications from, the Custodian in connection with its
account(s). The Fund shall use the Software solely for its own internal and
proper business purposes, and not in the operation of a service bureau, and
agrees not to sell, reproduce, lease or otherwise provide, directly or
indirectly, the Software or any portion thereof to any third party other than
the Fund's designated Fund Accounting Agent without the prior written consent of
the Custodian. The Fund acknowledges that the Custodian and its suppliers have
title and exclusive proprietary rights to the Software, including any trade
secrets or other ideas, concepts, know how, methodologies, or information
incorporated therein and the exclusive rights to any copyrights, trademarks and
patents (including registrations and applications for registration of either) or
statutory or legal protections available with respect thereof. The Fund further
acknowledges that all or a part of the Software may be copyrighted or
trademarked (or a registration or claim made therefor) by the Custodian or its
suppliers. The Fund shall not take any action with respect to the Software
inconsistent with the foregoing acknowledgments, nor shall the Fund attempt to
decompile, reverse engineer or modify the Software. The Fund may not copy, sell,
lease or provide, directly or indirectly, any of the Software or any portion
thereof to any other person or entity without the Custodian's prior written
consent. The Fund may not remove any statutory copyright notice, or other notice
included in the Software or on any media containing the Software. The Fund shall
reproduce any such notice on any reproduction of the Software and shall add
statutory copyright notice or other notice to the Software or media containing
the Software upon the Bank's request. Custodian agrees to provide reasonable
training, instruction manuals and access to Custodian's "help desk" in
connection with the Fund's user support necessary to use of the Software. At the
Fund's request, Custodian agrees to permit reasonable testing of the Software by
the Fund.
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data bases relating
solely to the assets of the Fund and transactions with respect thereto), and any
proprietary data, processes, information and documentation (other than which are
or become part of the public domain or are legally required to be made available
to the public) (collectively, the "Information"), are the exclusive and
confidential property of the Custodian. The Fund shall keep the Information
confidential by using the same care and discretion that the Fund uses with
respect to its own confidential property and trade secrets and shall neither
make nor permit any disclosure without the prior written consent of the
Custodian. Upon termination of this Agreement or the Software license
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<PAGE> 25
granted hereunder for any reason, the Fund shall return to the Custodian all
copies of the Information which are in its possession or under its control or
which the Fund distributed to third parties. The provisions of this Article
shall not affect the copyright status of any of the Information which may be
copyrighted and shall apply to all Information whether or not copyrighted.
4. The Custodian reserves the right to modify, at its own expense, the
Software from time to time upon reasonable prior notice and the Fund shall
install new releases of the Software as the Custodian may direct. The Fund
agrees not to modify or attempt to modify the Software without the Custodian's
prior written consent. The Fund acknowledges that any modifications to the
Software, whether by the Fund or the Custodian and whether with or without the
Custodian's consent, shall become the property of the Custodian.
5. THE CUSTODIAN AND ITS MANUFACTURERS AND SUPPLIERS MAKE NO WARRANTIES
OR REPRESENTATIONS OF ANY KIND WITH REGARD TO THE SOFTWARE OR THE METHOD(S) BY
WHICH THE FUND MAY TRANSMIT INSTRUCTIONS TO THE CUSTODIAN, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
6. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED
STATES LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY CIRCUMSTANCES RESELL,
DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM)
IN OR TO ANY OTHER COUNTRY. IF THE CUSTODIAN DELIVERS THE SOFTWARE TO THE FUND
OUTSIDE THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT ADMINISTRATIVE REGULATIONS. DIVERSION CONTRARY TO U.S.
LAWS PROHIBITED. The Fund hereby authorizes Custodian to report its name and
address to government agencies to which Custodian is required to provide such
information by law.
7. Where the method for transmitting Instructions by the Fund involves
an automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall not
be liable for any failure to act pursuant to such Instructions, the Fund may not
claim that such Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
8. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Fund's sole responsibility to ensure
that only persons duly authorized by the Fund transmit such Instructions to the
Custodian. The Fund will cause all persons transmitting Instructions to the
Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the Custodian
to act in accordance with and rely upon Instructions received by it pursuant
hereto.
(b) The Fund hereby represents, acknowledges and agrees that it is
fully informed of the protections and risks associated with the various methods
of transmitting Instructions to the Custodian and that there may be more secure
methods of transmitting instructions to the Custodian than the method(s)
selected by the Fund. The Fund hereby agrees
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<PAGE> 26
that the security procedures (if any) to be followed in connection with the
Fund's transmission of Instructions provide to it a commercially reasonable
degree of protection in light of its particular needs and circumstances.
9. The Fund hereby represents, warrants and covenants to the
Custodian that this Agreement has been duly approved by a resolution of its
Board of Trustees, and that its transmission of Instructions pursuant hereto
shall at all times comply with the Investment Company Act.
10. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a Business Day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions.
11. The Custodian will indemnify and hold harmless the Fund with
respect to any liabilities, damages, expenses, losses or claims incurred by or
brought against the Fund by reason any claim of infringement against any patent,
copyright, license or other property right arising out or by reason of the
Fund's use of the Software in the form provided under this Section. The
Custodian at its own expense will defend such action or claim brought against
the Fund to the extent that it is based on a claim that the Software in the form
provided by the Custodian infringes any patents, copyrights, license or other
property right, PROVIDED that the Custodian is provided with reasonable written
notice of such claim, provided that the Fund has not settled, compromised or
confessed any such claim without the Custodian's written consent, in which event
the Custodian shall have no liability or obligation hereunder, and provided the
Fund cooperates with and assists the Custodian in the defense of such claim. The
Custodian shall be entitled to participate in the defense of any such claim and,
unless the Custodian is also a party to such claim and the Custodian determines
in good faith that joint representation would be inappropriate, to assume the
defense of such claim with counsel reasonably satisfactory to the Fund. After
the Custodian notifies the Fund of its election to assume the defense of any
such claim, the Fund shall not be entitled to be indemnified for fees of counsel
or any other expenses with respect to the defense of such claim incurred
subsequent to the Fund's receipt of such notice, provided that the Custodian
diligently conducts such defense. If, as a result of any claim of infringement
against any patent, copyright, license or other property right, the Custodian is
enjoined from using the Software, or if the Custodian believes that the Software
is likely to become the subject of a claim of infringement, the Custodian at its
option may in its sole discretion either (a) at its expenses procure the right
for the Fund to continue to use the Software, or (b), replace or modify the
Software so as to make it non-infringing, or (c) may discontinue the license
granted herein upon written notice to the Fund.
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<PAGE> 27
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Securities for which the primary market is
outside the United States ("Foreign Securities") and other assets, the foreign
banking institutions and foreign securities depositories and clearing agencies
designated on Schedule I hereto ("Foreign Sub-Custodians"). The Fund may
designate any additional foreign sub-custodian with which the Custodian has an
agreement for such entity to act as the Custodian's agent, as its sub-custodian
and any such additional foreign sub-custodian shall be deemed added to Schedule
I. Upon receipt of a Certificate from the Fund, the Custodian shall cease the
employment of any one or more Foreign Sub-Custodians for maintaining custody of
the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted from
Schedule I.
2. Each delivery of a Certificate to the Custodian in connection with a
transaction involving the use of a Foreign Sub-Custodian shall constitute a
representation and warranty by the Fund that its Board of Trustees, or its third
party foreign custody manager as defined in Rule 17f-5 under the Investment
Company Act of 1940, as amended, if any, has determined that use of such Foreign
Sub-Custodian satisfies the requirements of such Investment Company Act of 1940
and such Rule 17f-5 thereunder.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence of any loss,
damage, cost, expense, liability or claim sustained or incurred by the Fund or
any Series if and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub-Custodian agreement, use reasonable efforts
to arrange for the independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records relate to the performance of such Foreign Sub-Custodian under its
agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
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<PAGE> 28
7. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
8. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or relating to
any actions or omissions of any Foreign Sub-Custodian the sole responsibility
and liability of the Custodian shall be to take appropriate action at the Fund's
expense to recover such loss or damage from the Foreign Sub-Custodian. It is
expressly understood and agreed that the Custodian's sole responsibility and
liability shall be limited to amounts so recovered from the Foreign
Sub-Custodian.
ARTICLE XVII
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions specifying
with respect to such FX Transaction: (a) the Series to which such FX Transaction
is specifically allocated; (b) the type and amount of Currency to be purchased
by the Fund; (c) the type and amount of Currency to be sold by the Fund; (d) the
date on which the Currency to be purchased is to be delivered; (e) the date on
which the Currency to be sold is to be delivered; and (f) the name of the person
from whom or through whom such currencies are to be purchased and sold. Unless
otherwise instructed by a Certificate or Oral Instructions, the Custodian shall
deliver, or shall instruct a Foreign Sub-Custodian to deliver, the Currency to
be sold on the date on which such delivery is to be made, as set forth in the
Certificate, and shall receive, or instruct a Foreign Sub-Custodian to receive,
the Currency to be purchased on the date as set forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as
the Currency to be purchased, as specified in the Certificate or Oral
Instructions, the Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall continue
until the Currency to be received by the Fund has been received in full.
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary of
The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through
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<PAGE> 29
customary banking channels. The Fund may issue a standing Certificate with
respect to FX Transaction but the Custodian may establish rules or limitations
concerning any foreign exchange facility made available to the Fund. The Fund
shall bear all risks of investing in Securities or holding Currency. Without
limiting the foregoing, the Fund shall bear the risks that rules or procedures
imposed by a Foreign Sub-Custodian or foreign depositories, exchange controls,
asset freezes or other laws, rules, regulations or orders shall prohibit or
impose burdens or costs on the transfer to, by or for the account of the Fund of
Securities or any cash held outside the Fund's jurisdiction or denominated in
Currency other than its home jurisdiction or the conversion of cash from one
Currency into another currency. The Custodian shall not be obligated to
substitute another Currency for a Currency (including a Currency that is a
component of a Composite Currency Unit) whose transferability, convertibility or
availability has been affected by such law, regulation, rule or procedure.
Neither the Custodian nor any Foreign Sub-Custodian shall be liable to the Fund
for any loss resulting from any of the foregoing events.
ARTICLE XVIII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI,
neither the Custodian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omission to act or
otherwise, either hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or willful misconduct.
In no event shall the Custodian be liable to the Fund or any third party for
special, indirect or consequential damages or lost profits or loss of business,
arising under or in connection with this Agreement, even if previously informed
of the possibility of such damages and regardless of the form of action. The
Custodian may, with respect to questions of law arising hereunder or under any
Margin Account Agreement, apply for and obtain the advice and opinion of counsel
to the Fund, at the expense of the Fund, or of its own counsel at its own
expense, and shall be fully protected with respect to anything done or omitted
by it in good faith in conformity with such advice or opinion. The Custodian
shall be liable to the Fund for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any negligence or
willful misconduct on the part of the Custodian or any of its employees or
agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) the validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or writing
thereof, or the propriety of the amount paid or received therefor;
(b) the legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend by
the Fund;
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<PAGE> 30
(d) the legality of any borrowing by the Fund using Securities as
collateral;
(e) the legality of any loan of portfolio Securities, nor shall the
Custodian be under any duty or obligation to see to it that any cash collateral
delivered to it by a broker, dealer, or financial institution or held by it at
any time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as a result
of such loan. The Custodian specifically, but not by way of limitation, shall
not be under any duty or obligation periodically to check or notify the Fund
that the amount of such cash collateral held by it for the Fund is sufficient
collateral for the Fund, but such duty or obligation shall be the sole
responsibility of the Fund. In addition, the Custodian shall be under no duty or
obligation to see that any broker, dealer or financial institution to which
portfolio Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
(f) the sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the Custodian
shall be under no duty or obligation to see that any broker, dealer, futures
commission merchant or Clearing Member makes payment to the Fund of any
variation margin payment or similar payment which the Fund may be entitled to
receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund is
entitled to receive, or to notify the Fund of the Custodian's receipt or
non-receipt of any such payment, provided that the Custodian shall be
responsible for reconciling any payment specified in a Certificate with the
payment received.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by the
final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held in
the Depository, unless the Custodian shall have actually received timely notice
from the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action, suit or proceeding in respect to any Securities held by the
Depository which in its opinion
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<PAGE> 31
may involve it in expense or liability, unless indemnity satisfactory to it
against all expense and liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from the Transfer
Agent of the Fund nor to take any action to effect payment or distribution by
the Transfer Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as
Co-Custodian or Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and money at any time
owned by the Fund, upon such terms and conditions as may be approved in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.
8. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to, or held by it or by any Foreign
Sub-Custodian, for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such Series under the
provisions of its then current prospectus, or to ascertain whether any
transactions by the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The Custodian
may charge such compensation and any expenses with respect to a Series incurred
by the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series, provided that the
Custodian has issued an invoice for such compensation and expenses to the Fund
or other party designated by the Fund. The Fund agrees that the Custodian may
charge such compensation and expenses against any money specifically allocated
to the appropriate Series ten days after receipt of an invoice for such charges
by the Fund or its designee, provided that the Fund or its designee has not
disputed such charge. The Custodian agrees that, provided it has received timely
notice of a dispute of such charges, it will not charge the disputed
compensation and/or expenses until the Fund or its designee notifies the
Custodian in writing that the dispute has been resolved. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series, net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the
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<PAGE> 32
provisions of this Agreement. The expenses for which the Custodian shall be
entitled to reimbursement hereunder shall include, but are not limited to, the
expenses of sub-custodians and foreign branches of the Custodian incurred in
settling outside of New York City transactions involving the purchase and sale
of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral Instructions
are given to the Custodian. The Fund agrees that the fact that such confirming
instructions are not received, or that contrary instructions are received, by
the Custodian shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund in acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions
provided such instructions reasonably appear to have been received from an
Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
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<PAGE> 33
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in accordance
with the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX
TERMINATION
1. Any party hereto may terminate this Agreement by giving to the other
parties a notice in writing specifying the date of such termination, which shall
be not less than ninety (90) days after the date of giving of such notice
provided that the Fund may terminate upon ten (10) days notice if (a) Custodian
pursuant to Section 11 of Article XV has elected to discontinue the software
license, or (b) any time after June 1, 199 the Fund reasonably believes that the
Systems, Third Party Software, or Third Party Services (as defined in this
Agreement) may not be 2000 Compliant by December 31, 199 . In the event such
notice is given by the Fund, it shall be accompanied by a copy of a resolution
of the Board of Trustees of the Fund, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement and designating a
successor custodian or custodians, each of which shall be a bank or trust
company having not less than $2,000,000 aggregate capital, surplus and undivided
profits. In the event such notice is given by the Custodian, the Fund shall, on
or before the termination date, deliver to the Custodian a copy of a resolution
of the Board of Trustees of the Fund, certified by the Secretary or any
Assistant Secretary, designating a successor custodian or custodians. In the
absence of such designation by the Fund the Custodian may designate a successor
custodian which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and the Custodian shall upon receipt
of a notice of acceptance by the successor custodian on that date deliver
directly to the successor custodian all Securities and money then owned by the
Fund and held by
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<PAGE> 34
it as Custodian, after deducting all fees, expenses and other amounts for the
payment or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and money then owned by
the Fund be deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book Entry System which
cannot be delivered to the Fund to hold such Securities hereunder in accordance
with this Agreement.
ARTICLE XX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Authorized Persons of the Fund under its seal, setting forth the names
and the signatures of the present Authorized Persons. The Fund agrees to furnish
to the Custodian a new Certificate in similar form in the event that any such
present Authorized Person ceases to be an Authorized Person or in the event that
other or additional Authorized Persons are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the Authorized Persons as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
4. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Trustees.
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<PAGE> 35
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
8. YEAR 2000 COMPLIANCE. The Custodian hereby warrants that it will use
commercially reasonable efforts to ensure that the computer software and
hardware (as used in this subsection, the "Systems") that are owned by the
Custodian and used to provide the services to be provided by the Custodian under
this Agreement (as used in this subsection "Services") are 2000 Compliant or
will be made 2000 Compliant before December 31, 199 . With respect to software
that the Custodian licenses from third parties and uses in providing the
Services ("Third Party Software"), the Custodian warrants that it has used or
will use commercially reasonable efforts to test the same by September 30, 199
to certify, in accordance with the Custodian's standard practices, that the
Third Party Software is 2000 Compliant. If the Custodian cannot certify any
Third Party Software as 2000 Compliant, the Custodian will use commercially
reasonable efforts to replace such Third Party Software with software that is
warranted or certified by its vendor as 2000 Compliant, if such replacement is
available, compatible with the Custodian's Systems and deemed by the Custodian
as appropriate under the circumstances. In the event that the Custodian uses
third party service providers to provide the Services or any portion thereof
("Third Party Services"), the Custodian warrants that it has in place a program
under which it will use commercially reasonable efforts to contact such service
providers and obtain from them assurances that the Systems use in providing
Third Party Services are 2000 Compliant. As used herein, the term "2000
Compliant" means that the Systems will function without material error caused by
the introduction of dates falling on or after January 1, 2000. Notwithstanding
the foregoing, the parties hereto acknowledge and agree that the Custodian
cannot and does not warrant that the Systems, Third Party Software or Third
Party Services will continue to interface with the hardware, firmware, software
(including operating systems), records or data used by the Fund or third
parties, nor does the Custodian make any warranties hereunder with respect to
any public utility, communications service provider, securities or commodities
exchange, or funds transfer network.
9. 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.
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<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
GOVERNOR FUNDS
[SEAL] By: /s/ Lana V. Burkhardt
--------------------------------
Attest:
/s/ Lana V. Burkhardt
- -------------------------------
THE BANK OF NEW YORK
[SEAL] By: /s/ James E. Hillman
--------------------------------
Name: James E. Hillman
Title: Senior Vice President
Attest:
/s/ Daniel J. Ganniello
- -------------------------------
-36-
<PAGE> 37
APPENDIX A
I, , President and I, , of GOVERNOR FUNDS,
a Delaware business trust (the "Fund"), do hereby certify that:
The following persons have been duly authorized in conformity with the
Fund's Declaration of Trust and By-Laws to execute any Certificate, instruction,
notice or other instrument on behalf of the Fund, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
/s/ Lana V. Burkhardt
- -------------------- ---------------------- ---------------------------
-37-
<PAGE> 38
APPENDIX B
SERIES
Governor Prime Money Market Fund
Governor Pennsylvania Municipal Bond Fund
Governor Established Growth Fund
Governor Intermediate Term Income Fund
Governor Aggressive Growth Fund
Governor U.S. Treasury Obligations Money Market Fund
Governor Limited Duration Government Securities Fund
Governor Emerging Growth Fund
Governor International Equity Fund
Governor Lifestyle Conservative Growth Fund
Governor Lifestyle Moderate Growth Fund
Governor Lifestyle Growth Fund
-38-
<PAGE> 39
APPENDIX C
I, , a Vice President with THE BANK OF NEW YORK do hereby
designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
-39-
<PAGE> 40
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting of GOVERNOR FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on
October 5, 1998 at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of November 16, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to deposit in the
Book-Entry System, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated, and to utilize the Book-Entry System
to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries
and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
GOVERNOR FUNDS, as of the day of , 199 .
_________________________
[SEAL]
-40-
<PAGE> 41
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that he or she
is the duly elected and acting of GOVERNOR FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on
October 5, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of November 16, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary to deposit in the Depository, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated, and to utilize
the Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in connection
with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
GOVERNOR FUNDS, as of the day of , 199 .
_______________________
[SEAL]
-41-
<PAGE> 42
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or
she is the duly elected and acting of GOVERNOR FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on
October 5, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of November 16, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary to deposit in the Participants Trust Company as Depository, as
defined in the Custody Agreement, all securities eligible for deposit
therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Participants Trust Company to the extent
possible in connection with its performance thereunder, including,
without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal
of GOVERNOR FUNDS, as of the day of , 199 .
_______________________
[SEAL]
-42-
<PAGE> 43
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he or she
is the duly elected and acting of GOVERNOR FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on
October 5, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of November 16, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary, to accept, utilize and act with respect to Clearing Member
confirmations for Options and transaction in Options, regardless of the
Series to which the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
GOVERNOR FUNDS, as of the day of , 199 .
____________________
[SEAL]
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<PAGE> 44
EXHIBIT D
The undersigned, , hereby certifies that he or
she is the duly elected and acting of GOVERNOR FUNDS, a
Delaware business trust (the "Fund"), further certifies that the following
resolutions were adopted by the Board of Trustees of the Fund at a meeting duly
held on October 5, 1998, at which a quorum was at all times present and that
such resolutions have not been modified or rescinded and are in full force and
effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
the Custody Agreement between The Bank of New York and the Fund dated
as of November 16, 1998 (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to act in accordance with,
and to rely on Instructions (as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant
use of such access codes only to Authorized Persons of the Fund as
defined in the Custody Agreement, shall establish internal safekeeping
procedures to safeguard and protect the confidentiality and
availability of user and access codes, passwords and authentication
keys, and shall use Instructions only in a manner that does not
contravene the Investment Company Act of 1940, as amended, or the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
GOVERNOR FUNDS, as of the day of , 199 .
------------------------------
[SEAL]
-44-
<PAGE> 1
October 29, 1999
Lana V. Burkhardt
President
Governor Funds
3435 Stelzer Road
Columbus, OH 43219
Re: Governor Funds
Dear Ms. Burkhardt:
By our execution of this letter agreement (the "Agreement"), intending
to be legally bound hereby, BISYS Fund Services Ohio, Inc (the
"Co-Administrators") agree that in order to improve the performance of Governor
Funds which is comprised of the Prime Money Market, U.S. Treasury Obligations
Money Market, 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 (each a "Fund" and
collectively, the "Funds"), the Co-Administrators shall, from October 29, 1999
through October 31, 2000, waive all or a portion of their administration fees in
the amount necessary so that after fee waivers the maximum administration fees
for each Fund except for the Lifestyle Conservative Growth, Lifestyle Moderate
Growth and Lifestyle Growth Funds (collectively the "Lifestyle Funds") shall not
exceed .115% of each Fund's average daily net assets. There are no
administration fees charged on the Lifestyle Funds.
The Co-Administrators acknowledge that they shall not be entitled to
collect on or make a claim for waived fees at any time in the future.
BISYS FUND SERVICES OHIO, INC.
By:
-----------------------------
Title:
--------------------------
GOVERNORS GROUP ADVISORS, INC.
By:
-----------------------------
Title:
--------------------------
Your signature below acknowledges
acceptance of this Agreement:
By:
------------------------------
Lana V. Burkhardt
President
Governor Funds
<PAGE> 1
LAW OFFICES
DRINKER BIDDLE & REATH LLP
ONE LOGAN SQUARE
18TH AND CHERRY STREETS
PHILADELPHIA, PA 19103-6996
TELEPHONE: (215) 988-2700
FAX: (215) 988-2757
October 29, 1999
Governor Funds
3435 Stelzer Road
Columbus, OH 43219
RE: POST-EFFECTIVE AMENDMENT NO. 2 ON FORM N-1A
-------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Governor Funds, a Delaware business trust
(the "Trust"), in connection with the preparation and filing with the Securities
and Exchange Commission of the Trust's Post-Effective Amendment No. 2 to its
Registration Statement on Form N-1A under the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended.
The Trust is authorized to issue an unlimited number of shares of
beneficial interest of the Prime Money Market, U.S. Treasury Obligations Money
Market, 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 (the "Funds"), with a par value $0.0001 per
share (the "Shares").
We have reviewed the Trust's Agreement and Declaration of Trust,
By-Laws, resolutions adopted by Board of Trustees of the Trust and such other
legal and factual matters as we have deemed appropriate. We have assumed that
the Shares have been or will be issued against payment therefor as described
in the Trust's Registration Statement on Form N-1A under the 1933 Act as
amended.
This opinion is based exclusively on the Delaware Business Trust Act
and the federal law of the United States of America.
Based upon the foregoing, it is our opinion that the Shares of the
Funds, when issued as described in the Registration Statement for these Funds,
will be validly issued,
<PAGE> 2
Governor Funds
October 29, 1999
Page 2
fully paid and non-assessable by the Trust in accordance with the Agreement and
Declaration of Trust and By-laws of the Trust and resolutions of the Board and
Shareholders, and that the holders of the Shares of the Funds will be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the general corporation law of the State
of Delaware (except that we express no opinion as to such holders who are also
trustees of the Trust).
We hereby consent to the filing of this opinion as an exhibit to the
Trust's Post-Effective Amendment No. 2 with the Securities and Exchange
Commission.
Very truly yours,
/s/DRINKER BIDDLE & REATH LLP
-----------------------------
DRINKER BIDDLE & REATH LLP
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Shareholders and Board of Trustees
of the Governor Funds:
We consent to the references to our name under the headings "Financial
Highlights" in the prospectuses and "Auditors" and "Financial Statements" in the
Statement of Additional Information and to the inclusion of our report dated
August 13, 1999 included in Post-Effective Amendment No.2 to File No. 333-65213.
/s/ KPMG, LLP
October 27, 1999
Columbus, Ohio
<PAGE> 1
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. 2 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
October 29, 1999
