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[Governor Funds Logo]
GOVERNOR FUNDS
EQUITY FUNDS
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Established Growth Fund
Aggressive Growth Fund
International Equity Fund
BOND FUNDS
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Intermediate Term Income Fund
Limited Duration Government Securities Fund
Pennsylvania Municipal Bond Fund
ASSET ALLOCATION FUNDS
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Lifestyle Conservative Growth Fund
Lifestyle Moderate Growth Fund
Lifestyle Growth Fund
PROSPECTUS
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OCTOBER 30, 2000
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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
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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 International Equity Fund
fees. 9 Fees and Expenses
Bond Funds
10 Intermediate Term Income Fund
13 Limited Duration Government Securities Fund
16 Pennsylvania Municipal Bond Fund
19 Fees and Expenses
Asset Allocation Funds
20 Lifestyle Conservative Growth Fund
22 Lifestyle Moderate Growth Fund
24 Lifestyle Growth Fund
28 Fees and Expenses
Principal Risks of the Funds
30 Principal Risks
Other Considerations
31 Portfolio Turnover
31 Temporary Defensive Positions
31 Other Types of Investments
FUND MANAGEMENT
ICON
Review this section for 32 Reorganization
details on the people and 32 The Investment Advisor and Sub-Advisor
organizations who oversee 35 Portfolio Managers
the Funds. 35 The Administrators and Distributor
SHAREHOLDER INFORMATION
ICON
Review this section for 36 Pricing of Fund Shares
details on how shares are 37 Purchasing and Adding to Your Shares
valued, how to purchase, 40 Selling Your Shares
sell and exchange shares, 44 Distributions Arrangements/Sales Charges
related charges and payments 49 Exchanging Your Shares
of dividends and 50 Dividends, Distributions and Taxes
distributions.
FINANCIAL HIGHLIGHTS
ICON
53
BACK COVER
ICON
Where to Learn More About Governor Funds
</TABLE>
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RISK/RETURN SUMMARY AND FUND EXPENSES
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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
Martindale Andres & Company, LLC (the "Advisor") manages each Fund except the
International Equity Fund, which is subadvised by Brinson Partners, Inc. (the
"Sub-Advisor").
RISK/RETURN PROFILE OF MUTUAL FUNDS
EQUITY FUNDS
Established Growth Fund
Aggressive 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]
2
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RISK/RETURN SUMMARY AND FUND EXPENSES
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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 Advisor selects investments based on
the company's stock 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 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> 5
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 five 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
[PERFORMANCE BAR CHART AND TABLE]
<TABLE>
<S> <C>
1995 12.61%
1996 21.92%
1997 26.24%
1998 19.53%
1999 24.20%
</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.
The chart and table assume reinvestment of dividends and distributions. Fund
performance in the chart and table 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, 2000: 0.36%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending
December 31, 1999)*
<TABLE>
<CAPTION>
FUND PAST PAST SINCE
INCEPTION YEAR 5 YEARS INCEPTION
<S> <C> <C> <C> <C>
ESTABLISHED GROWTH FUND
(with maximum sales charge of
5.50%) 1/1/95 17.39% 24.99% 24.99%
S&P 500 INDEX 1/1/95 21.04% 28.56% 28.56%
</TABLE>
* For current performance information call 1-800-766-3960.
4
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RISK/RETURN SUMMARY AND FUND EXPENSES
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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 the 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 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 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
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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 five 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
[PERFORMANCE BAR CHART AND TABLE]
<TABLE>
<S> <C>
1995 26.89%
1996 19.54%
1997 15.91%
1998 3.51%
1999 18.88%
</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.
The chart and table assume reinvestment of dividends and distributions. Fund
performance in the chart and table reflects the impact of fee waivers;
without fee waivers, returns for the Fund would have been lower.
Best quarter: Q2 1999 21.54%
Worst quarter: Q3 1998 -19.50%
Year-to-date return for the period ended September 30, 2000: 11.87%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending
December 31, 1999)*
<TABLE>
<CAPTION>
FUND PAST PAST SINCE
INCEPTION YEAR 5 YEARS INCEPTION
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH FUND
(with maximum sales charge of
5.50%) 7/1/94 12.31% 15.38% 15.16%
RUSSELL 2000 INDEX 7/1/94 21.26% 16.69% 16.08%
</TABLE>
* For current performance information call 1-800-766-3960.
6
<PAGE> 8
RISK/RETURN SUMMARY AND FUND EXPENSES
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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 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 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>
7
<PAGE> 9
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 calendar year's performance, no performance is shown for the
Fund.
</TABLE>
8
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RISK/RETURN SUMMARY AND FUND EXPENSES EQUITY FUNDS
THIS TABLE DESCRIBES THE
FEES AND EXPENSES THAT YOU
MAY PAY IF YOU BUY AND
HOLD SHARES OF THE
ESTABLISHED GROWTH,
AGGRESSIVE 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, 2000,
restated for termination
of fee waivers.
FEES AND EXPENSES
<TABLE>
SHAREHOLDER FEES
(FEES PAID DIRECTLY
FROM
YOUR INVESTMENT) ESTABLISHED AGGRESSIVE INTERNATIONAL
GROWTH GROWTH EQUITY
FUND FUND FUND
<S> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases 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%
Distribution (12b-1)
fees None None None
Other expenses(1) .38% .40% .60%
Total Annual Fund
Operating Expenses(2) 1.13% 1.40% 1.85%
(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 later under
"Distribution and Shareholder Servicing
Arrangements -- Service Organizations") up to
an annual rate of 0.25% of the daily net assets
of the Fund for shares owned by the
shareholders with whom the Service Organization
has a servicing relationship.
(2) The Advisor and the administrators will waive a portion of their fees until
October 31, 2000, pursuant to a contract with
the Fund dated October 29, 1999. Until October
31, 2000, the net annual operating expenses
will be .94%, 1.06% and .98% for each of the
Established Growth, Aggressive Growth and
International Equity Funds, respectively.
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
Because this example is
hypothetical and for
comparison only, your
actual costs will be
different.
E X A M P L E
1 3 5
YEAR YEARS YEARS
ESTABLISHED GROWTH
FUND $659 $889 1$,138
AGGRESSIVE GROWTH FUND $685 $969 1$,274
INTERNATIONAL EQUITY
FUND $728 1$,100 1$,496
</TABLE>
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RISK/RETURN SUMMARY AND FUND EXPENSES
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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 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 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>
10
<PAGE> 12
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 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>
11
<PAGE> 13
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 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 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 Funds Average, 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.
The chart and table assume reinvestment of dividends and distributions. Fund
performance in the chart and table 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
[PERFORMANCE BAR CHART AND TABLE]
<TABLE>
<S> <C>
1997 8.09%
1998 7.83%
1999 -2.59%
</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: Q2 1999 -1.61%
Year-to-date return for the period ended September 30, 2000: 5.65%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1999)*
<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 -6.94% 2.42%
LEHMAN BROTHERS AGGREGATE BOND INDEX 12/2/96 -0.82% 5.25%
LIPPER INTERMEDIATE INVESTMENT GRADE
DEBT FUNDS AVERAGE 12/2/96 -0.98% 4.68%
</TABLE>
* For current performance information call 1-800-766-3960.
12
<PAGE> 14
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").
13
<PAGE> 15
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 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>
14
<PAGE> 16
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 four years to demonstrate that the Fund's value varied at different
times. The table below the bar chart compares the Fund's performance over
time to that of the Lehman Brothers 1-3 Year Government Bond Index, an
unmanaged index which tracks the performance of short-term U.S. government
and corporate bonds.
For the period from October 31, 1995 to July 1, 1997, the Fund'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
[PERFORMANCE BAR CHART AND TABLE]
<TABLE>
<S> <C>
1996 4.05%
1997 5.33%
1998 5.71%
1999 2.59%
</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. The
chart and table assume reinvestment of dividends and distributions. Fund
performance in the chart and table 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: Q2 1999 0.38%
Year-to-date return for the period ended September 30, 2000: 4.69%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending
December 31, 1999)*
<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 -0.50% 3.86%
LEHMAN BROTHERS 1-3 YEAR GOVERNMENT BOND INDEX 10/31/95 2.96% 5.59%
</TABLE>
* For current performance information call 1-800-766-3960.
15
<PAGE> 17
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>
-
16
<PAGE> 18
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 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>
17
<PAGE> 19
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 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 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>
<S> <C>
1997 5.63%
1998 4.95%
1999 -2.14%
</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.
The chart and table assume reinvestment of dividends and distributions. Fund
performance in the chart and table 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: Q2 1999 -1.89%
Year-to-date return for the period ended September 30, 2000: 4.83%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending
December 31, 1999)*
<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 -6.55% 1.82%
LEHMAN BROTHERS PENNSYLVANIA 1-12 YEAR
MUNICIPAL BOND INDEX 10/1/96 0.74% 4.82%
</TABLE>
* For current performance information call 1-800-766-3960.
18
<PAGE> 20
RISK/RETURN SUMMARY AND FUND EXPENSES BOND FUNDS
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, 2000,
restated for termination
of 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
Because this example is
hypothetical and for
comparison only, your
actual costs will be
different.
FEES AND EXPENSES
<TABLE>
SHAREHOLDER FEES LIMITED
(FEES PAID DIRECTLY FROM DURATION
YOUR INVESTMENT) INTERMEDIATE GOVERNMENT PENNSYLVANIA
TERM SECURITIES MUNICIPAL
INCOME FUND FUND BOND FUND
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases 4.50% 3.00% 4.50%
Annual Fund Operating
Expenses (expenses that are
deducted from fund assets)
(as a percentage of average
net assets)
Management fees .60% .60% .60%
Distribution (12b-1) fees None None None
Other expenses(1) .29% .34% .33%
Total Annual Fund
Operating Expenses(2) .89% .94% .93%
</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 later under "Distribution and Shareholder Servicing Arrangements --
Service Organizations") up to an annual rate of 0.25% of the daily net assets of
the Fund for shares owned by the shareholders with whom the Service Organization
has a servicing relationship.
(2) The Advisor and the administrators will waive a portion of their fees until
October 31, 2000, pursuant to a contract with the Fund dated October 29, 1999.
Until October 31, 2000, the net annual operating expenses will be .54%, .59% and
.57% for each of the Intermediate Term Income, Limited Duration Government
Securities and Pennsylvania Municipal Bond Funds, respectively.
EXAMPLE
<TABLE>
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
INTERMEDIATE TERM INCOME
FUND $537 $721 $921 $1,497
LIMITED DURATION GOVERNMENT
SECURITIES FUND $393 $591 $804 $1,420
PENNSYLVANIA MUNICIPAL BOND
FUND $541 $733 $942 $1,542
</TABLE>
19
<PAGE> 21
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 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>
20
<PAGE> 22
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 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>
21
<PAGE> 23
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>
22
<PAGE> 24
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 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.
23
<PAGE> 25
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
FIXED INCOME FUNDS 10 - 40%
Limited Duration Government Securities Fund
Intermediate Term Income Fund
EQUITY FUNDS 50 - 80%
Established Growth Fund
Aggressive 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, small capitalization
stock risk, foreign risk, credit risk and interest rate
risk. Market risk is the risk that the value of the
securities in which a fund invests may go up or down in
response to the prospects of individual companies and/or
general economic conditions. Price changes may be temporary
or last for extended periods. Management risk is the risk
that a strategy which the Advisor 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.
</TABLE>
24
<PAGE> 26
RISK/RETURN SUMMARY AND FUND EXPENSES
-
RISK/RETURN SUMMARY OF THE
LIFESTYLE FUNDS
CONTINUED
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. 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.
25
<PAGE> 27
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 will have
the authority to select and substitute the underlying funds
in which the Lifestyle Funds will invest. The Advisor is
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 its 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.
26
<PAGE> 28
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 calendar
year's performance, no performance is shown for the Funds.
</TABLE>
27
<PAGE> 29
RISK/RETURN SUMMARY AND FUND EXPENSES ASSET ALLOCATION FUNDS
-
FEES AND EXPENSES
THIS TABLE DESCRIBES THE
FEES AND EXPENSES THAT YOU
MAY PAY IF YOU BUY AND
HOLD SHARES OF ONE OF THE
LIFESTYLE CONSERVATIVE
GROWTH, LIFESTYLE MODERATE
GROWTH OR LIFESTYLE GROWTH
FUNDS.
Annual Fund operating
expenses are paid out of
Fund assets, and are
reflected in the share
price. Each Fund's fees
and expenses are based
upon the Fund's operating
expenses for the period
ended June 30, 2000,
restated for termination
of fee waivers.
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM
YOUR INVESTMENT) LIFESTYLE LIFESTYLE LIFESTYLE
CONSERVATIVE MODERATE GROWTH
<-> GROWTH FUND GROWTH FUND FUND
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) 24.81% 7.10% 8.78%
Total Annual Fund Operating
Expenses(3) 25.56% 7.85% 9.53%
(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 later under
"Distribution and Shareholder Servicing
Arrangements -- Service Organizations") up to
an annual rate of 0.25% of the daily net assets
of the Fund for 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 ended June
30, 2000 were .47%, .69%, .61%, .56%, .94%,
1.06%, and .97% for the Prime Money Market,
U.S. Treasury Obligations Money Market, Limited
Duration Government Securities, Intermediate
Term Income, Established Growth, Aggressive
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) The
Advisor and the administrators will waive
and/or reimburse a portion of their fees until
October 31, 2000, pursuant to a contract with
the Fund dated October 29, 1999. Until October
31, 2000, the net annual operating expenses
will be 2.33%, 2.41% and 2.60% for each of the
Lifestyle Conservative Growth, Lifestyle
Moderate Growth and Lifestyle Growth Funds,
respectively. After October 31, 2000, the
Advisor will voluntarily reimburse expenses 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 reimbursement
is voluntary and may be terminated at any time.
</TABLE>
28
<PAGE> 30
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
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 $2,640 $5,762 $7,732 $10,036
LIFESTYLE MODERATE GROWTH
FUND $1,189 $2,604 $3,940 $ 6,961
LIFESTYLE GROWTH FUND $1,340 $2,999 $4,512 $ 7,734
</TABLE>
29
<PAGE> 31
RISK/RETURN SUMMARY AND FUND EXPENSES
-
PRINCIPAL RISKS
<TABLE>
<CAPTION>
FOREIGN INTEREST SMALL AFFILIATED
MARKET MANAGEMENT INVESTMENT RATE CREDIT CONCENTRATION CAPITALIZATION PERSONS
RISK RISK RISK RISK RISK RISK STOCK RISK RISK
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Established Growth Fund X X
----------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund X 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 X
----------------------------------------------------------------------------------------------------------------------------
Lifestyle Moderate
Growth Fund X X X X X X X
----------------------------------------------------------------------------------------------------------------------------
Lifestyle Growth Fund X X X X X X X
</TABLE>
A description of these and other risks can be found in the individual
profiles for each Fund.
30
<PAGE> 32
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 has 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
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.
31
<PAGE> 33
[ICON]
FUND MANAGEMENT
-
REORGANIZATION
On October 27, 2000, the Board of Trustees of the Trust approved Agreements
and Plans of Reorganization between the Trust and Vision Group of Funds, Inc.
('Vision Funds"). The Agreements and Plans of Reorganization, which provide
for the reorganization of the Trust into Vision Funds, will also be submitted
to a vote of the shareholders of the Trust at a meeting to be held on or
about December 13, 2000. If the Agreements and Plans of Reorganization are
approved by shareholders, and certain other conditions are satisfied, the
assets and liabilities of each of the Trust's Funds will be transferred to
similar Funds in Vision Funds, and the shareholders of the Trust's Funds will
become shareholders of Vision Funds. A combined proxy statement and
prospectus with respect to the proposed reorganization will be mailed to
shareholders in advance of the meeting. If the Agreements and Plans of
Reorganization are approved by shareholders, it is expected that the
reorganization will occur in mid to late December 2000.
It is proposed that each Fund will reorganize into the corresponding Vision
Fund as follows: Governor Prime Money Market Fund into the Vision
Institutional Prime Money Market Fund; Governor U.S. Treasury Obligations
Money Market Fund into the Vision Treasury Money Market Fund; Governor
Established Growth Fund into the Vision Large Cap Core Fund; Governor
Aggressive Growth Fund into the Vision Small Cap Stock Fund; Governor
International Equity Fund into the Vision International Equity Fund; Governor
Limited Duration Government Securities Fund into the Vision Institutional
Limited Duration U.S. Government Fund; Governor Intermediate Term Income Fund
into the Vision Intermediate Term Bond Fund; Governor Pennsylvania Municipal
Bond Fund into the Vision Pennsylvania Municipal Income Fund; Governor
Lifestyle Conservative Growth Fund into the Vision Managed
Allocation -- Conservative Growth Fund; Governor Lifestyle Moderate Growth
Fund into the Vision Managed Allocation -- Moderate Growth Fund and Governor
Lifestyle Growth Fund into the Vision Managed Allocation -- Aggressive Growth
Fund.
The Vision Institutional Prime Money Market, Vision Small Cap Stock, Vision
International Equity, Vision Institutional Limited Duration U.S. Government,
Vision Intermediate Term Bond, Vision Pennsylvania Municipal Income, Vision
Managed Allocation -- Conservative Growth, Vision Managed
Allocation -- Moderate Growth and Vision Managed Allocation -- Aggressive
Growth Funds have recently been organized for the purpose of continuing the
investment operations of the corresponding Governor Fund named above, and
have no assets or prior history of investment operations.
THE INVESTMENT ADVISOR AND SUB-ADVISOR
Martindale Andres & Company, LLC ("Martindale") is the investment advisor of
each Fund. Until October 6, 2000, the Advisor was a wholly-owned subsidiary
of Keystone Financial, Inc. ("Keystone"), 1 Keystone Plaza, Harrisburg,
Pennsylvania 17101. On May 31, 2000, the Funds' previous advisor, Governors
Group Advisors, Inc., reorganized into Martindale Andres & Company, LLC, the
Funds' previous sub-advisor, with no resulting change of actual control or
management. The Advisor assumed all of the obligations and responsibilities
of Governors Group Advisors, Inc. under the Investment Advisory Agreement
with respect to the Funds, and under the Sub-Advisory Agreement with Brinson
Partners, Inc.
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.
32
<PAGE> 34
FUND MANAGEMENT
For these advisory services, the Funds paid the Advisor fees at the rates
shown below during their fiscal year ended June 30, 2000:
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE
NET ASSETS FOR THE
YEAR ENDED 6/30/00
<S> <C>
------------------------------
Established Growth Fund .60%*
------------------------------
Aggressive Growth Fund .70%*
------------------------------
International Equity Fund .40%*
------------------------------
Intermediate Term Income Fund .30%*
------------------------------
Limited Duration Government Securities Fund .30%*
------------------------------
Pennsylvania Municipal Bond Fund .30%*
------------------------------
Lifestyle Conservative Growth Fund .10%*
------------------------------
Lifestyle Moderate Growth Fund .10%*
------------------------------
Lifestyle Growth Fund .09%*
-------------------------------------------------------------------------------------
</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%, .60%, .60%, .60%, .25%, .25% and .25%,
respectively, for the Established Growth, Aggressive
Growth, International Equity, Intermediate Term Income,
Limited Duration Government Securities, Pennsylvania
Municipal Bond, Lifestyle Conservative Growth, Lifestyle
Moderate Growth and Lifestyle Growth Funds.
On October 6, 2000, Keystone merged into M&T Corp., the corporate parent of
M&T Bank (the "Bank Merger"). Consummation of the Bank Merger caused a change
in the ownership of Martindale, which automatically terminated the investment
advisory agreement between Martindale and the Governor Funds then in effect
("Previous Advisory Agreement") in accordance with its terms and as required
by the Investment Company Act of 1940 (the "1940 Act"). Since the termination
of the Previous Advisory Agreement, Martindale has been providing investment
advisory services to the Funds under the terms of an Interim Investment
Advisory Agreement approved by the Board of Trustees on September 14, 2000.
The terms and conditions of the Interim Advisory Agreement are identical in
all material respects to the Previous Advisory Agreement, including the fees,
except for its termination provisions and any compensation payable to
Martindale is to be held in an interest-bearing escrow account with State
Street Bank & Trust Company.
At the September 14, 2000 meeting, the Board also approved a New Advisory
Agreement with Martindale. The New Advisory Agreement is identical in all
material respects to the Previous Advisory Agreement, including the rate of
investment advisory fee, except for its effective and termination dates.
Specifically, the New Advisory Agreement will become effective, as to a
Governor Fund, on the date the shareholders of that Governor Fund approve it.
Shareholder approval of the New Advisory Agreement is necessary in order for
Martindale to receive the amount of fees it would have otherwise received
under the Previous Advisory Agreement for managing the Funds under the
Interim Advisory Agreement. The fees payable under both the Interim Advisory
Agreement and New Advisory Agreement are identical to the rate of advisory
fee under the Previous Advisory Agreement.
If shareholders of the Funds do not approve the New Advisory Agreement,
Martindale will be entitled to receive the lesser of the total amount held in
the escrow account or any costs it incurred in
33
<PAGE> 35
FUND MANAGEMENT
performing under the Interim Advisory Agreement (plus interest earned on the
amount while in the interest-bearing escrow account), on behalf of that
Governor Fund, and such amount will be released to Martindale from the
interest-bearing escrow account. Any excess monies held in the
interest-bearing escrow account will be returned to the relevant Governor
Fund.
As to a particular Governor Fund, if shareholders do not approve the New
Advisory Agreement, the Board of Trustees of the Governor Funds will decide
what action should be taken with respect to that Fund's investment advisory
arrangements.
The Advisor has entered into a Sub-Advisory agreement with Brinson Partners,
Inc., 209 South LaSalle Street, Chicago, Illinois 60604 (the "Sub-Advisor"),
which subadvises the International Equity Fund. The Sub-Advisor is a wholly
owned subsidiary of UBS AG. The 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 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 Sub-Advisor receives a fee from
the Advisor based on a percentage of the International Equity Fund's average
daily net assets.
As discussed above, consummation of the Bank Merger caused a change in the
ownership of Martindale, which automatically terminated the Previous Advisory
Agreement then in effect between Martindale and the Governor Funds in
accordance with its terms and as required by the 1940 Act. In turn, the
investment sub-advisory agreement then in effect between Martindale and
Brinson relating to the management of the International Equity Fund
("Previous Sub-Advisory Agreement"), automatically terminated in accordance
with its terms. There has been no change in ownership of Brinson. Since the
termination of the Previous Sub-Advisory Agreement, Brinson has been
providing investment sub-advisory services under the terms of an Interim
Sub-Advisory Agreement approved by the Board of Trustees on September 14,
2000. The terms and conditions of the Interim Sub-Advisory Agreement are
identical in all material respects to the Previous Sub-Advisory Agreement,
including the fees, except for its termination provisions and any
compensation payable to Brinson is to be held in an interest-bearing escrow
account with State Street Bank & Trust Company.
At the September 14, 2000 meeting, the Board also approved a New Sub-Advisory
Agreement with Brinson (the "New Sub-Advisory Agreement"). The New
Sub-Advisory Agreement is identical in all material respects to the Previous
Sub-Advisory Agreement, including the rate of investment sub-advisory fee,
except for its effective and termination dates. The New Sub-Advisory
Agreement will become effective upon its approval by shareholders of the
International Equity Fund. Shareholder approval of the New Sub-Advisory
Agreement is necessary in order for Brinson to receive the amount of fees it
would have otherwise received under the Previous Sub-Advisory Agreement for
managing the International Equity Fund under the Interim Sub-Advisory
Agreement. The fees payable under both the Interim Sub-Advisory Agreement and
New Sub-Advisory Agreement are identical to the rate of advisory fee under
the Previous Sub-Advisory Agreement.
If shareholders of the International Equity Fund do not approve the New
Sub-Advisory Agreement, Brinson will be entitled to receive the lesser of the
total amount held in the escrow account or any costs it incurred in
performing under the Interim Sub-Advisory Agreement (plus interest earned on
the amount while in the interest-bearing escrow account), on behalf of the
International Equity Fund, and such amount will be released to Brinson from
the interest-bearing escrow account. Any excess monies held in the
interest-bearing escrow account will be returned to the International Equity
Fund.
34
<PAGE> 36
FUND MANAGEMENT
If shareholders do not approve the New Sub-Advisory Agreement, the Board of
Trustees will decide what action should be taken with respect to the
International Equity Fund's sub-advisory arrangements.
PORTFOLIO MANAGERS
William C. Martindale, Jr. is responsible for the day-to-day management of
the Established Growth Fund's portfolio and the Aggressive Growth Fund's
portfolio. Mr. Martindale 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 serves as the Advisor's Chief Investment Officer. Prior to 1989,
Mr. Martindale served in various investment-related capacities with Dean
Witter Reynolds.
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 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 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 Advisor
since 1990, and for the past five years has managed retirement plan and
personal trust assets for the Advisor's clients.
The 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 chaired by Thomas Madsen, Managing Director, who has more than
24 years experience in the investment industry.
THE ADMINISTRATORS AND DISTRIBUTOR
Martindale Andres & Company, LLC 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, on May 31, 2000, the Funds'
previous co-administrator, Governors Group Advisors, Inc., was reorganized
into Martindale Andres & Company, LLC, with no resulting change of actual
control or management. The reorganization resulted in Martindale Andres &
Company, LLC, assuming all of the obligations and responsibilities of the
Funds' previous co-administrator under the Management and Administration
Agreement with the Fund.
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-Advisor and other service providers.
35
<PAGE> 37
[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.
36
<PAGE> 38
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, M&T Bank, 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
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.
-----------------------------------------------------------------------------
37
<PAGE> 39
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: BY EXPRESS MAIL:
Governor Funds Governor Funds
P.O. Box 182707 c/o BISYS Fund Services
Columbus, OH 43218-2707 Attn: T.A. Operations
3435 Stelzer Road
Columbus, OH 43219
For Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to the appropriate Fund.
3. Mail or deliver application and payment to the address above.
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.
38
<PAGE> 40
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:
- Complete the Automatic Invest
Plan portion on your Account
Application.
Make sure you note:
- Your bank name, address and account number
- The amount you wish to invest
automatically (minimum $25)
- How often you want to invest (every month, 4 times a year, twice a year
or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-766-3960 for an enrollment form.
DIRECTED DIVIDEND OPTION
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in another Governor Fund without a sales charge. You
must maintain the minimum balance in each Fund into which you plan to reinvest
dividends or the reinvestment will be suspended and your dividends paid to you.
The Funds may modify or terminate this reinvestment option without notice. You
can change or terminate your participation in the reinvestment option at any
time.
39
<PAGE> 41
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.
40
<PAGE> 42
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
CONTINUED
<TABLE>
<S> <C>
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>
41
<PAGE> 43
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 or one of its 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.
42
<PAGE> 44
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 or one of its affiliates), a Fund may ask you to increase your
balance. If it is still below $1,000 (or $250) after 60 days, the Fund may
close your account and send you the proceeds.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be canceled and the money reinvested in
the appropriate Fund.
43
<PAGE> 45
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 average daily net 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 average daily
net 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 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>
44
<PAGE> 46
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.
45
<PAGE> 47
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 M&T Bank, 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 M&T Bank, 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, M&T Bank or an affiliate trust or agency account.
46
<PAGE> 48
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.
47
<PAGE> 49
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.
48
<PAGE> 50
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.
49
<PAGE> 51
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 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."
50
<PAGE> 52
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. Additionally, any loss realized on a sale or
redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of a Fund
within a period of 61 days beginning 30 days before and ending 30 days after
the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of a Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
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.
51
<PAGE> 53
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
CONTINUED
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 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.
52
<PAGE> 54
[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 FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.88 $ 14.06 $ 11.13 $ 10.00
----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.01 0.06 0.10 0.08
Net realized and unrealized gain from
investment transactions 1.20 2.16 2.99 1.13
----------------------------------------------------------------------------------------------
Total from Investment Activities 1.21 2.22 3.09 1.21
----------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.01) (0.06) (0.10) (0.08)
In excess of net investment income (0.00)** -- -- --
Net realized gains from investment
transactions (3.41) (0.34) (0.06) --
----------------------------------------------------------------------------------------------
Total Distributions (3.42) (0.40) (0.16) (0.08)
----------------------------------------------------------------------------------------------
Net change in net asset value
per share (2.21) 1.82 2.93 1.13
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.67 $ 15.88 $ 14.06 $ 11.13
----------------------------------------------------------------------------------------------
Total Return (excluding sales
charge) 9.31% 16.20% 27.92% 12.20%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period
(in thousands) $277,934 $260,437 $258,812 $190,914
Ratio of expenses to average net
assets 0.94% 0.91% 0.71% 0.44%(c)
Ratio of net investment income to
average net assets 0.07% 0.42% 0.77% 1.39%(c)
Ratio of expenses to average net
assets* 1.13% 1.19% 1.06% 1.01%(c)
Portfolio Turnover 41% 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.
** Less than $0.005 per share.
(a) Commencement of operations of the Fund was December 2, 1996.
(b) Not annualized.
(c) Annualized.
53
<PAGE> 55
FINANCIAL HIGHLIGHTS AGGRESSIVE GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.02 $ 11.41 $ 10.24 $ 10.00
----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income (loss) (0.03) (0.01) (0.01) 0.01
Net realized and unrealized gain from
investment transactions 1.60 1.00 1.30 0.24
----------------------------------------------------------------------------------------------
Total from Investment Activities 1.57 0.99 1.29 0.25
----------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income -- -- -- (0.01)
In excess of net investment income -- (0.01) -- --
Net realized gains from investment
transactions (1.71) (0.37) (0.12) --
----------------------------------------------------------------------------------------------
Total Distributions (1.71) (0.38) (0.12) (0.01)
----------------------------------------------------------------------------------------------
Net change in net asset value
per share (0.14) 0.61 1.17 0.24
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.88 $ 12.02 $ 11.41 $ 10.24
----------------------------------------------------------------------------------------------
Total Return (excluding sales
charge) 16.31% 9.24% 12.72% 2.52%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period
(in thousands) $148,926 $139,512 $135,612 $105,258
Ratio of expenses to average net
assets 1.06% 1.04% 0.83% 0.66%(c)
Ratio of net investment income (loss)
to average net assets (0.25%) (0.05%) (0.09%) 0.28%(c)
Ratio of expenses to average net
assets* 1.40% 1.47% 1.33% 1.35%(c)
Portfolio Turnover 43% 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.
54
<PAGE> 56
FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JUNE 30, 2000 JUNE 30, 1999(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.59 $ 10.00
----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.08 0.11
Net realized and unrealized gain from investment
and foreign currency transactions 1.28 0.48
----------------------------------------------------------------------------------------------
Total from Investment Activities 1.36 0.59
----------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.14) --
Net realized gains from investment and foreign
currency transactions (0.14) --
----------------------------------------------------------------------------------------------
Total Distributions (0.28) --
----------------------------------------------------------------------------------------------
Net change in net asset value per share 1.08 0.59
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.67 $ 10.59
----------------------------------------------------------------------------------------------
Total Return (excluding sales charge) 12.87% 5.90%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $44,697 $39,506
Ratio of expenses to average net assets 0.97% 0.98%(c)
Ratio of net investment income to average net
assets 0.72% 2.80%(c)
Ratio of expenses to average net assets* 1.85% 1.86%(c)
Portfolio Turnover 56% 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.
55
<PAGE> 57
FINANCIAL HIGHLIGHTS INTERMEDIATE TERM INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.49 $ 10.10 $ 9.77 $ 10.00
----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.60 0.59 0.62 0.36
Net realized and unrealized gain
(loss) from investment transactions (0.31) (0.50) 0.33 (0.23)
----------------------------------------------------------------------------------------------
Total from Investment Activities 0.29 0.09 0.95 0.13
----------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.60) (0.59) (0.62) (0.36)
Net realized gains from investment
transactions -- (0.11) -- --
----------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.70) (0.62) (0.36)
----------------------------------------------------------------------------------------------
Net change in net asset value
per share (0.31) (0.61) 0.33 (0.23)
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.18 $ 9.49 $ 10.10 $ 9.77
----------------------------------------------------------------------------------------------
Total Return (excluding sales
charge) 3.18% 0.82% 9.95% 1.40%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of period (in
thousands) $245,161 $305,981 $275,565 $207,859
Ratio of expenses to average net
assets 0.56% 0.56% 0.57% 0.37%(c)
Ratio of net investment income to
average net assets 6.38% 5.97% 6.27% 6.45%(c)
Ratio of expenses to average net
assets* 0.89% 0.98% 0.92% 0.84%(c)
Portfolio Turnover 192% 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.
56
<PAGE> 58
LIMITED DURATION
FINANCIAL HIGHLIGHTS GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.83 $ 9.96 $ 10.00
----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.55 0.54 0.56
Net realized and unrealized gain (loss) from
investment transactions (0.14) (0.13) (0.04)
----------------------------------------------------------------------------------------------
Total from Investment Activities 0.41 0.41 0.52
----------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.55) (0.54) (0.56)
Net realized gains from investment transactions -- (0.00)** (0.00)**
----------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.54) (0.56)
----------------------------------------------------------------------------------------------
Net change in net asset value per share (0.14) (0.13) (0.04)
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.69 $ 9.83 $ 9.96
----------------------------------------------------------------------------------------------
Total Return (excluding sales charge) 4.31% 4.25% 5.39%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in thousands) $73,140 $52,041 $29,360
Ratio of expenses to average net assets 0.61% 0.59% 0.65%(c)
Ratio of net investment income to average net
assets 5.77% 5.51% 5.58%(c)
Ratio of expenses to average net assets* 0.94% 1.03% 1.18%(c)
Portfolio Turnover 237% 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.
** Less than $0.005 per share.
(a) Commencement of operations of the Fund was July 1, 1997.
(b) Not annualized.
(c) Annualized.
57
<PAGE> 59
PENNSYLVANIA
FINANCIAL HIGHLIGHTS MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.05 $ 10.39 $ 10.29 $ 10.21
------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.46 0.47 0.49 0.34
Net realized and unrealized gain
(loss) from investment
transactions (0.27) (0.26) 0.11 0.06
------------------------------------------------------------------------------------------
Total from Investment Activities 0.19 0.21 0.60 0.40
------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.46) (0.48) (0.50) (0.32)
Net realized gains from investment
transactions (0.01) (0.07) -- --
------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.55) (0.50) (0.32)
------------------------------------------------------------------------------------------
Net change in net asset value per
share (0.28) (0.34) 0.10 0.08
------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 10.05 $ 10.39 $ 10.29
------------------------------------------------------------------------------------------
Total Return (excluding sales
charge) 1.96% 1.94% 5.89% 3.98%(b)
RATIO/SUPPLEMENTAL DATA:
Net assets, at end of year (in
thousands) $ 92,664 $111,893 $118,685 $123,194
Ratio of expenses to average net
assets 0.59% 0.59% 0.58% 0.37%(c)
Ratio of net investment income to
average net assets 4.59% 4.45% 4.65% 4.46%(c)
Ratio of expenses to average net
assets* 0.93% 1.00% 0.92% 0.86%(c)
Portfolio Turnover 96% 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.
58
<PAGE> 60
LIFESTYLE CONSERVATIVE
FINANCIAL HIGHLIGHTS GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JUNE 30, 2000 JUNE 30, 1999(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.15 $ 10.00
------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.25 0.07
Net realized and unrealized gain from investment
transactions 0.24 0.15
------------------------------------------------------------------------------------------
Total from Investment Activities 0.49 0.22
------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.25) (0.07)
Net realized gains from investment transactions (0.00)** --
------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.07)
------------------------------------------------------------------------------------------
Net change in net asset value per share 0.24 0.15
------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.39 $ 10.15
------------------------------------------------------------------------------------------
Total Return (excluding sales charge) 4.94% 2.21%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $ 311 $ 150
Ratio of expenses to average net assets 1.65% 1.79%(c)
Ratio of net investment income to average net
assets 2.19% 2.57%(c)
Ratio of expenses to average net assets* 25.56% 92.41%(c)
Portfolio Turnover 28% 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.
** Less than $0.005 per share.
(a) Commencement of operations of the Fund was February 3, 1999.
(b) Not annualized.
(c) Annualized.
59
<PAGE> 61
LIFESTYLE MODERATE
FINANCIAL HIGHLIGHTS GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JUNE 30, 2000 JUNE 30, 1999(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.56 $ 10.00
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.18 0.04
Net realized and unrealized gain from investment
transactions 0.54 0.56
---------------------------------------------------------------------------------------
Total from Investment Activities 0.72 0.60
---------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.18) (0.04)
Net realized gains from investment transactions (0.01) --
---------------------------------------------------------------------------------------
Total Distributions (0.19) (0.04)
---------------------------------------------------------------------------------------
Net change in net asset value per share 0.53 0.56
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.09 $ 10.56
---------------------------------------------------------------------------------------
Total Return (excluding sales charge) 6.81% 6.02%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $ 1,214 $ 285
Ratio of expenses to average net assets 1.64% 1.76%(c)
Ratio of net investment income to average net
assets 1.09% 1.17%(c)
Ratio of expenses to average net assets* 7.85% 36.79%(c)
Portfolio Turnover 32% 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.
60
<PAGE> 62
LIFESTYLE
FINANCIAL HIGHLIGHTS GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JUNE 30, 2000 JUNE 30, 1999(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.77 $ 10.00
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.11 0.02
Net realized and unrealized gain from investment
transactions 0.75 0.77
---------------------------------------------------------------------------------------
Total from Investment Activities 0.86 0.79
---------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
Net investment income (0.11) (0.02)
In excess of net investment income (0.03) --
Net realized gains from investment transactions (0.00)** --
---------------------------------------------------------------------------------------
Total Distributions (0.14) (0.02)
---------------------------------------------------------------------------------------
Net change in net asset value per share 0.72 0.77
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.49 $ 10.77
---------------------------------------------------------------------------------------
Total Return (excluding sales charge) 8.00% 7.87%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, at end of period (in thousands) $ 1,352 $ 218
Ratio of expenses to average net assets 1.64% 1.81%(c)
Ratio of net investment income to average net
assets 0.26% 0.07%(c)
Ratio of expenses to average net assets* 9.53% 51.10%(c)
Portfolio Turnover 28% 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.
** Less than $0.005 per share.
(a) Commencement of operations of the Fund was February 18, 1999.
(b) Not annualized.
(c) Annualized.
61
<PAGE> 63
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 64
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 65
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 66
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:
o For a duplicating fee, by writing the Public Reference Section of the
Commission, Washington D.C. 20549-6009 or by electronic request to
[email protected]. Information on the operation of the Public
Reference Section may be obtained by calling 1-202-942-8090.
o Free from the Commission's website at http://www.sec.gov
(Investment Company Act file no. 811-09029)
MT-1617
<PAGE> 67
PRIME MONEY MARKET FUND
U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
ESTABLISHED GROWTH FUND
AGGRESSIVE 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
Eleven Investment Portfolios of
GOVERNOR FUNDS
Statement of Additional Information
October 30, 2000
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, 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, 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> 68
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES...........................................2
Other Investment Policies and Risk Considerations...........................16
Investment Restrictions.....................................................38
Portfolio Turnover..........................................................41
Valuation of Prime Money Market and Treasury Money Market Funds.............42
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................43
HOW TO PURCHASE AND REDEEM SHARES...........................................43
Employee Benefit Plans......................................................43
Purchases of Shares.........................................................43
Purchases of S Shares.......................................................44
Governor Funds Individual Retirement Account ("IRA")........................45
In-Kind Purchases...........................................................45
Sales Charges...............................................................46
Concurrent Purchases........................................................48
Letter of Intent............................................................48
Right of Accumulation.......................................................48
Check-Writing Redemption Procedure - Prime Money Market and Treasury Money
Market Funds..........................................................49
Payments to Shareholders....................................................49
MANAGEMENT AND SERVICE PROVIDERS OF THE TRUST...............................50
Trustees and Officers.......................................................50
Investment Advisor and Investment Sub-Advisor...............................52
Portfolio Transactions......................................................57
Administrators..............................................................59
Distributor.................................................................62
Administrative Services and Distribution Plans..............................62
Custodian...................................................................63
Transfer Agency and Fund Accounting Services................................64
Code of Ethics..............................................................67
Auditors....................................................................67
Legal Counsel...............................................................67
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............................................74
30-Day Yield of the Funds...................................................74
Calculation of Total Return.................................................75
Distribution Rates..........................................................76
Performance Comparisons.....................................................76
Miscellaneous...............................................................77
-i-
<PAGE> 69
TABLE OF CONTENTS
(CONTINUED)
FINANCIAL STATEMENTS........................................................78
APPENDIX A.................................................................A-1
APPENDIX B.................................................................B-1
ii
<PAGE> 70
STATEMENT OF ADDITIONAL INFORMATION
GOVERNOR FUNDS
Governor Funds (the "Trust") is an open-end management investment
company which currently offers eleven 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, 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, Income, Government Securities and
Pennsylvania Bond Funds commenced operations on October 7, 1996, July 1, 1997,
December 2, 1996, February 3, 1997, 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.
On October 27, 2000, the Board of Trustees of the Trust approved
Agreements and Plans of Reorganization between the Trust and Vision Group of
Funds, Inc. ("Vision Funds"). The Agreements and Plans of Reorganization, which
provide for the reorganization of the Trust into Vision Funds, will also be
submitted to a vote of the shareholders of the Trust at a meeting to be held on
or about December 13, 2000. If the Agreements and Plans of Reorganization are
approved by shareholders, and certain other conditions are satisfied, the assets
and liabilities of each of the Trust's Funds will be transferred to similar
Funds in Vision Funds, and the shareholders of the Trust's Funds will become
shareholders of Vision Funds. A combined proxy statement and prospectus with
respect to the proposed reorganization will be mailed to shareholders in advance
of the meeting. If the Agreements and Plans of Reorganization are approved by
shareholders, it is expected that the reorganization will occur in mid to late
December 2000.
It is proposed that each Fund will reorganize into the corresponding
Vision Fund as follows: Governor Prime Money Market Fund into the Vision
Institutional Prime Money Market Fund; Governor U. S. Treasury Obligations Money
Market Fund into the Vision Treasury Money Market Fund; Governor Established
Growth Fund into the Vision Large Cap Core Fund; Governor Aggressive Growth Fund
into the Vision Small Cap Stock Fund; Governor International Equity Fund into
the Vision International Equity Fund; Governor Limited Duration Government
Securities Fund into the Vision Institutional Limited Duration U.S. Government
Fund; Governor Intermediate Term Income Fund into the Vision Intermediate Term
Bond Fund; Governor Pennsylvania Municipal Bond Fund into the Vision
Pennsylvania Municipal Income Fund; Governor Lifestyle Conservative Growth Fund
into the Vision Conservative Growth Fund; Governor Lifestyle Moderate Growth
Fund into the Vision Moderate Growth Fund; and Governor Lifestyle Growth Fund
into the Vision Aggressive Growth Fund.
The Vision Institutional Prime Money Market, Vision Small Cap Stock,
Vision International Equity, Vision Institutional Limited Duration U.S.
Government, Vision Intermediate Term Bond, Vision Pennsylvania Municipal Income,
Vision Conservative Growth, Vision Moderate Growth and Vision Aggressive Growth
Funds have recently been organized for the purpose of continuing the investment
operations of the corresponding Governor Fund named above, and have no assets or
prior history of investment operations.
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
-1-
<PAGE> 71
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 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
-2-
<PAGE> 72
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 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 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, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. The 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.
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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.
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
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 Advisor believes to be of
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high quality and which the 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 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 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.
The Aggressive Growth Fund attempts to invest in high quality small to
mid capitalization companies that its 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 Advisor attempts to invest in companies that are selling at
earnings multiples which the Advisor believes to be less than their expected
long-term growth rate.
The Fund's 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 Advisor does not utilize a sector neutral strategy. The
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
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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 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 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 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 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 Sub-Advisor may attempt to manage the Fund's
exposure to various currencies to take advantage of different yield, risk and
return characteristics. The 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 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 Sub-Advisor will purchase for the Fund only
securities contained in the underlying index relevant to the Benchmark. The
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 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 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 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 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
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master demand notes are direct lending arrangements between the Income Fund and
the issuer, they are not normally traded. Although there is no secondary market
in the notes, the Income Fund may demand payment of principal and accrued
interest at any time. While the notes are not typically rated by NRSROs, the
Fund's Advisor must determine them to be of comparable credit quality to
commercial paper in which the Income Fund could invest. The Fund's 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
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debt security, the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a debt security, the shorter the
duration of the security.
There are some situations where the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Fund's 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
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Pennsylvania income taxes. With respect to the Fund's objective of preserving
capital, its Advisor will attempt to protect principal value in a rising
interest rate environment and enhance principal value in a declining interest
rate environment.
The two principal classifications of Exempt Securities which may be
held by the Pennsylvania Bond Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from proceeds of
a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Fund are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
The Fund may also invest in "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The Fund invests in Exempt Securities which are rated at the time of
purchase within the four highest rating groups assigned by one or more NRSROs
for bonds and within the two highest rating groups for notes, tax-exempt
commercial paper, or variable rate demand obligations, as the case may be. The
Fund may also purchase Exempt Securities which are unrated at the time of
purchase but are determined to be of comparable quality by its 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 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 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 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
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minimum tax. To the extent the Fund invests in these securities, individual
Shareholders, depending on their own tax status, may be subject to alternative
minimum tax on that part of the Fund's distributions derived from these bonds.
Opinions relating to the validity of Exempt Securities and to the
exemption of interest thereon from federal and Pennsylvania state income taxes
are normally rendered by bond counsel to the respective issuers at the time of
issuance. Neither the Fund nor the Advisor 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 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
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on the two classes are based on payments received on the underlying Exempt
Securities. One class has the characteristics of a typical auction rate
security, where at specified intervals its interest rate is adjusted, and
ownership changes, based on an auction mechanism. This class' interest rate
generally is expected to be below the coupon rate of the underlying Exempt
Securities and generally is at a level comparable to that of an Exempt Security
of similar quality and having a maturity equal to the period between interest
rate adjustments. The second class bears interest at a rate that exceeds the
interest rate typically borne by a security of comparable quality and maturity;
this rate also is adjusted, but in this case inversely to changes in the rate of
interest of the first class. If the interest rate on the first class exceeds the
coupon rate of the underlying Exempt Securities, its interest rate will exceed
the rate paid on the second class. In no event will the aggregate interest paid
with respect to the two classes exceed the interest paid by the underlying
Exempt Securities. The value of the second class and similar securities should
be expected to fluctuate more than the value of an Exempt Security of comparable
quality and maturity and their purchase by the Fund should increase the
volatility of its net asset value and, thus, its price per share. These
custodial receipts are sold in private placements. The Fund also may purchase
directly from issuers, and not in a private placement, Exempt Securities having
characteristics similar to custodial receipts. These securities may be issued as
part of a multi-class offering and the interest rate on certain classes may be
subject to a cap or a floor.
The Fund may use one or more of the investment techniques described
below. Use of such techniques may cause the Fund to earn income which would be
taxable to its Shareholders.
THE LIFESTYLE FUNDS
The investment objective of the Lifestyle Conservative Growth Fund is
capital appreciation and income. The investment objective of the Lifestyle
Moderate Growth Fund is capital appreciation and, secondarily, income. The
investment objective of the Lifestyle Growth Fund is capital appreciation. Each
Lifestyle Fund is a fund-of-funds that seeks to achieve its objective by
investing in Underlying Funds. The table below illustrates the initial
underlying Fund allocation and ranges for each Lifestyle Fund:
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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%
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
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 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 Advisor will make allocation decisions according to its outlook
for the economy, financial markets, and relative market valuation of the
Underlying Funds.
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Each Lifestyle Fund's net asset value will fluctuate with changes in
the value of the Underlying Funds in which they invest. Each Lifestyle Fund's
investment return is diversified by its investment in the Underlying Funds.
To the extent a Lifestyle Fund or the Underlying Funds are engaged in a
temporary defensive position, they will not be pursuing their investment
objective.
The investments of the Lifestyle Funds are concentrated in the
Underlying Funds, so each Lifestyle Fund's performance is directly related to
the performance of the Underlying Funds.
Each Lifestyle Fund may invest in the Prime Money Market and Treasury
Money Market Funds. Both the Prime Money Market and Treasury Money Market Funds
each seek current income with liquidity and stability of principal. The Prime
Money Market Fund and the Treasury Money Market Fund seek to maintain a constant
net asset value of $1.00 per share for purchases and redemptions, but there can
be no assurance that either will be able to do so.
Other Investment Policies and Risk Considerations
The investment policies described in the Prospectuses and this
Statement of Additional Information are among those which one or more of the
Funds have the ability to utilize. Some of these policies may be employed on a
regular basis; others may not be used at all. Accordingly, reference to any
particular policy, method or technique carries no implication that it will be
utilized or, if it is, that it will be successful.
Equities. Equity securities such as those in which the Established
Growth Fund, Aggressive Growth Fund 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.
Growth-Oriented Companies. The Aggressive Growth Fund is 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 Fund does 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 Fund. 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 Fund to sell such securities at
the time and price the Advisor deems 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.
Bonds. Since the Income Fund, Government Securities Fund and
Pennsylvania Bond Fund each invests in bonds, investors in such a Fund are
exposed to bond market risk, I.E., fluctuations in the market value of bonds.
Bond prices are influenced primarily by changes in the level of interest rates.
When interest rates rise, the prices of bonds generally fall; conversely, when
interest rates fall, bond prices generally rise although certain types of bonds
are subject to the risks of prepayment as described above
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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' Advisor 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' Advisor or Sub-Advisor, as the case may be,
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 Advisor and Sub-Advisor 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, 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,
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 Advisor, or Sub-Advisor. Should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest received on such securities. Loans are
subject
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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 Advisor or
Sub-Advisor, as the case may be, 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, 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, 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 Advisor or Sub-Advisor, as the case may be, 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,
International Equity Fund, Income Fund and Pennsylvania Bond Fund, as part of
its option transactions, also may write index put and call options. Through the
writing of index options a Fund can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked-to-market to
reflect the current value of the option written. The current value of the traded
option is the last
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<PAGE> 88
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, 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, 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 advisable, the Fund may pay for
such puts either separately in cash or by paying a higher price for
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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 Advisor's or Sub-Advisor's
opinion, present minimal credit risks.
Futures Contracts. The Established Growth Fund, Aggressive 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
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 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, 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 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 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, International Equity Fund and Income Fund
and including ECDs, ETDs, CTDs, Yankee CDs, CCP and Europaper for the Prime
Money Market Fund) may subject these Funds to investment risks that differ in
some respects from those related to investments in securities of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other investment
income, possible seizure, nationalization, or expropriation of foreign deposits
or investments, the possible establishment of exchange controls or taxation at
the source, less stringent disclosure requirements, less liquid or developed
securities markets or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal, interest or dividends on
such securities
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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 Advisor or Sub-Advisor, as the case
may be, 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.
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 Sub-Advisor based upon its
research.
To manage exposure to currency fluctuations, the International Equity
Fund may alter equity or money market exposures (in its normal asset allocation
mix as previously identified), enter into forward currency exchange contracts,
buy or sell options, futures or options on futures relating to foreign
currencies and may purchase securities indexed to currency baskets. The
International Equity Fund will also use these currency exchange techniques in
the normal course of business to hedge against adverse changes in exchange rates
in connection with purchases and sales of securities. Some of these strategies
may require the International Equity Fund to set aside liquid assets in a
segregated custodial account to cover its obligations. These techniques are
further described below.
The International Equity Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (i.e., "forward foreign currency"
contract or "forward" contract). A forward contact involves an obligation to
purchase or sell a specific currency amount at a future date, which may be any
fixed number of days from the date of the contract, agreed upon by the parties,
at a price set at the time of the contract. The International Equity Fund will
convert currency on a spot basis from time to time and investors should be aware
of the potential costs of currency conversion.
When the 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.
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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 Fund will
incur a loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, a Fund's
losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The Income Fund and the Pennsylvania Bond Fund also may each sell
options on interest rate futures contracts as part of closing purchase
transactions to terminate its options positions. No assurance can be given that
such closing transactions can be effected or that there will be a correlation
between price movements in the options on interest rate futures and price
movements in that Fund's portfolio securities which are the subject of the
hedge. In addition, a Fund's purchase of such options will be based upon
predictions as to anticipated interest rate trends, which could prove to be
inaccurate.
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In general, the value of futures contracts sold by a Fund to offset
declines in its portfolio securities will not exceed the total market value of
the portfolio securities to be hedged, and futures contracts purchased by a Fund
will be covered by a segregated account consisting of cash or liquid securities
in an amount equal to the total market value of such futures contracts, less the
initial margin deposited therefor.
When buying futures contracts and when writing put options, a Fund will
be required to segregate in a separate account cash and/or liquid securities in
an amount sufficient to meet its obligations. When writing call options, a Fund
will be required to own the financial instrument or futures contract underlying
the option or segregate cash and/or liquid securities in an amount sufficient to
meet its obligations under written calls.
The following risks apply to the Pennsylvania Bond Fund.
Risks of Non-Diversification. Potential Shareholders should consider
the fact that the Pennsylvania Bond Fund's portfolio consists primarily of
securities issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize that the Pennsylvania Bond
Fund's performance is closely tied to general economic conditions within the
Commonwealth as a whole and to economic conditions within particular industries
and geographic areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal operating
fund of the Commonwealth) experienced deficits in fiscal years 1990 and 1991,
tax increases and spending decreases have resulted in surpluses the last several
years; as of June 30, 1999, the General Fund had a surplus of $2,863.4 million.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly into
medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of nonagricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Pennsylvania Exempt Securities in the Pennsylvania Bond
Fund or the ability of the respective obligors to make payments of interest and
principal due on such Securities.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations, including, as of October 13, 2000, suits relating to the following
matters: (i) In February 1999, a taxpayer filed a petition for review in the
Pennsylvania Commonwealth Court asking the court to declare that Chapter 5
(relating to Sports Facilities Financing) of the Capital Facilities Debt
Enabling Act violates the Pennsylvania Constitution. The Commonwealth Court
dismissed the action with prejudice, and the Supreme Court of Pennsylvania
affirmed the Commonwealth Court's decision. The petitioner has filed a petition
for a writ of certiorari with the United State Supreme Court. (ii) In 1987, the
Pennsylvania Supreme Court held the statutory scheme for county funding of the
judicial system to be in conflict with the Pennsylvania Constitution, but it
stayed its judgment to permit enactment by the legislature of funding
legislation consistent with the opinion. The Court appointed a special master to
submit a plan for implementation, and the special master recommended a
four-phase transition to state funding of a unified judicial system, during each
of which specified court employees would transfer into the state payroll system.
Phase 1, involving the transfer of
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approximately 165 county-level court administrators, was implemented in
legislation enacted in 1999. The remainder of the recommendation for later
phases remains pending before the Supreme Court of Pennsylvania. (iii) In March
1998, certain Philadelphia residents, 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 were violating a regulation of the U.S. Department
of Education promulgated under Title VI of the Civil Rights Act of 1964 and
certain other provisions in that the Commonwealth's system for funding public
schools has the effect of discriminating on the basis of race. The district
court dismissed the complaint, but in August 1999 the Third Circuit Court of
Appeals reversed and remanded for further proceedings. On June 23, 2000, by
agreement of the parties, the district court stayed all proceedings and placed
the case in civil suspense until approximately June 8, 2001. (vi) PPG Industries
has challenged the constitutionality of the manufacturing exemption from the
capital stock/franchise tax insofar as it limits the exemption for headquarters
property and payroll only to headquarters property and payroll attributable to
manufacturing in Pennsylvania. On appeal, the Pennsylvania Supreme Court held
that this limitation discriminates against interstate commerce, and it remanded
the case to Commonwealth Court for a determination whether the tax is a
"compensatory tax" justifying the discrimination or, failing that, a
recommendation for a remedy. In November 1999, the Commonwealth Court
recommended that (1) for the duration of the contested period, the limitation be
invalidated and (2) prospectively, the manufacturing exemption be invalidated in
its entirety, leaving to the Pennsylvania legislature the task of amending the
statute to restore any exemption it chooses to adopt in a constitutional manner.
The legislature subsequently amended the state tax law to provide that for the
years 1999 and 2000 the manufacturing exemption will apply to both in-state and
out-of-state property and payroll. The Pennsylvania Supreme Court is considering
the Commonwealth Court's recommendation and the position of the parties. (v)
Unisys Corporation has challenged the three-factor apportionment formula used
for the apportionment of capital stock value in the Pennsylvania franchise tax.
In a decision issued in March 1999, the Commonwealth Court held for the taxpayer
on statutory grounds, but denied its constitutional claims. Both the
Commonwealth and the taxpayer appealed to the Pennsylvania Supreme Court. Briefs
were filed during 1999. Recently, the Supreme Court ordered the filing of
supplemental briefs and scheduled oral argument for the week of December 4,
2000.
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 Aa3 by Moody's, and Philadelphia's General
Obligation Bonds are currently rated BBB and BBB respectively by S&P and Baa2
and Baa1 respectively by Moody's.
The City of Philadelphia (the "City") experienced a series of General
Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term solution
for its economic difficulties. The audited balance of the City's General Fund as
of June 30, 1998 was a surplus of $169.2 million up from a surplus of
approximately $128.8 million as of June 30, 1997.
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. As one
of the conditions of issuing bonds on behalf of the City, PICA exercises
oversight of the City's finances. The City is currently operating under a five
year plan approved by PICA in 2000. 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, but its authority
to refund outstanding debt is unrestricted. PICA had approximately $959 million
in special revenue bonds outstanding as of June 30, 2000.
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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
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 will have the
authority to select and substitute Underlying Funds. The Advisor is 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 its affiliates are also responsible for managing the
Underlying Funds. The Trustees and officers of the Trust may also have
conflicting interests in fulfilling their fiduciary duties to both the Funds and
the Underlying Funds.
BANK OBLIGATIONS. Each Fund, other than the Treasury Money Market Fund
and the Government Securities Fund, may invest in bank obligations such as
bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by the Funds will be those guaranteed by
domestic and foreign banks having, at the time of investment, capital, surplus,
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and demand and time deposits will be those of domestic and foreign banks and
savings and loan associations, if (a) at the time of investment the depository
institution has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published
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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, 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 their Advisor or
Sub-Advisor, as the case may be, 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 Advisor will consider the earning power, cash flow, and
other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. In
determining average weighted portfolio maturity, a long-term variable amount
master demand note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next interest rate adjustment or the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
although the Treasury Money Market Fund currently expects to invest only in
those obligations which are backed by the full faith and credit of the U.S.
Government. Obligations of certain agencies and instrumentalities of the U.S.
Government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Each Fund may also invest in the following types of U.S. Treasury
securities: direct obligations issued by the U.S. Treasury including bills,
notes and bonds which differ from each other only in interest rates, maturities
and times of issuance; U.S. Treasury securities that have
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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
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 Advisor will consider such an event in determining
whether the Pennsylvania Bond Fund should continue to hold the obligation.
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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 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 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 Advisor will consider the earning power, cash flow and other liquidity
ratios of the issuers of such securities (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate security purchased by a Fund,
the Fund may resell the security at any time to a third party. The absence of an
active secondary market, however, could make it difficult for the Fund to
dispose of a variable or floating rate security in the event the issuer of the
security defaulted on its payment obligations and the Fund could, as a result or
for other reasons, suffer a loss to the extent of the default. To the extent
that there exists no readily available market for such security and the Fund is
not entitled to receive the principal amount of a security within seven days,
such a security will be treated as an illiquid security for purposes of
calculation of that Fund's limitation on investments in illiquid securities, as
set forth in its investment restrictions. Variable or floating rate securities
may be secured by bank letters of credit.
With respect to the Prime Money Market and U.S. Treasury Funds, in the
event the interest rate of a variable or floating rate obligation is established
by reference to an index or an interest rate that may from time to time lag
behind other market interest rates, there is the risk that the market value of
such
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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 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, the Aggressive 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 Advisor or Sub-Advisor has determined such securities to
be liquid.
Pursuant to procedures adopted by the Board of Trustees of the Trust,
the Advisor or 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 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, the Advisor or 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
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Prime Money Market Fund's, Aggressive 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 their 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 Advisor deems to be of comparable quality to securities so
rated.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely 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,
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which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
Mortgage-backed and asset-based securities have certain characteristics
which are different from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a Fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Income Fund may invest
a portion of its assets in derivative mortgage-backed securities such as
stripped mortgage-backed securities which are highly sensitive to changes in
prepayment and interest rates.
Mortgage-backed securities and asset-backed securities, like all fixed
income securities, generally decrease in value as a result of increases in
interest rates. In addition, although generally the value of fixed-income
securities increases during periods of falling interest rates and, as stated
above, decreases during periods of rising interest rates, as a result of
prepayments and other factors, this is not always the case with respect to
mortgage-backed securities and asset-backed securities.
Although the extent of prepayments of a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of declining interest rates.
Accordingly, amounts available for reinvestment by a Fund are likely to be
greater during a period of declining interest rates and, as a result, likely to
be reinvested at lower interest rates than during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors,
such as changes in credit use and payment patterns resulting from social, legal
and economic factors, will predominate. Mortgage-backed securities and
asset-backed securities generally decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
There are certain risks associated specifically with CMOs. CMOs issued
by private entities are not U.S. government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, as stated above, the Income Fund will
invest only in CMOs which are rated in one of the four highest rating categories
by an NRSRO or, if unrated, are determined by the 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
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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 Advisor
or 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 and the
Aggressive Growth Fund may invest in equity REITs. REITs pool investors' funds
for investment primarily in commercial real estate properties. Investment in
REITs may subject the Funds to certain risks. REITs may be affected by changes
in the value of the underlying property owned by the trust. REITs are dependent
upon specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by 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.
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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 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 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-Advisor, BISYS, or their affiliates.
SHORT SALES. Each of the Income Fund, the Government Securities Fund
and the Pennsylvania Bond Fund may from time to time sell securities short.
Short sales are effected when it is believed that the price of a particular
security will decline, and involves the sale of a security which the Fund does
not own in the hope of purchasing the same security at a later date at a lower
price. To make delivery to the buyer, the Fund must borrow the security, and the
Fund is obligated to return the security to the lender, which is accomplished by
a later purchase of the security by that Fund. The frequency of short sales will
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
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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 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 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
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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,
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.
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
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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, BISYS, and
Martindale Andres & Company, LLC and BISYS Ohio, as the Funds' administrators,
and their affiliates will reduce their fees charged to a Fund other than the
Lifestyle Funds by an amount equal to the fees charged by such service providers
based on a percentage of that Fund's assets attributable to such Fund's
investment in the Governor money market fund.
Investment Restrictions
The Funds' investment objectives are non-fundamental policies and may
be changed without a vote of the shareholders of the applicable Fund. The
following investment restrictions may be changed only by a vote of the majority
of the outstanding Shares of a Fund (as defined under "ADDITIONAL INFORMATION -
Vote of a Majority of the Outstanding Shares").
The Prime Money Market and Treasury Money Market Funds will not:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the Fund's total assets would
be invested in such issuer or the Fund would hold more than 10% of the
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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, International Equity,
Income, Government Securities and Lifestyle Funds will not:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government (and "regulated investment companies" as
defined in the Code for each Lifestyle Fund and the International Equity Fund),
its agencies or instrumentalities, if, immediately after such purchase, more
than 5% of the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of the outstanding voting securities of the issuer,
except that 25% or less of the Fund's total assets may be invested without
regard to such limitations. There is no limit to the percentage of assets
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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 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, 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, International
Equity, Income, Government Securities, Pennsylvania Bond and Lifestyle Funds
will not:
1. Borrow money or issue senior securities except that each Fund may
enter into reverse repurchase agreements and may otherwise borrow money or issue
senior securities as and to the extent permitted by the 1940 Act or any rule,
order or interpretation thereunder. (The 1940 Act currently permits each Fund to
borrow up to one-third the value of its total assets at the time of such
borrowing.)
2. Make loans, except that the Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, make time deposits with financial institutions and enter
into repurchase agreements.
The following additional investment restriction may be changed without
the vote of a majority of the outstanding Shares of a Fund: each Fund may not
purchase or otherwise acquire any security if, as a result, more than 15% of its
net assets would be invested in securities that are illiquid.
In addition to the investment restrictions set forth above, each Fund
may not:
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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, 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.
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
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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, International Equity, Income, Government Securities, Pennsylvania Bond,
Lifestyle Conservative Growth, Lifestyle Moderate Growth and Lifestyle Growth
Funds for the fiscal year ended June 30, 2000, are as follows:
Fiscal Year Ended
June 30, 2000
-------------
Established Growth Fund 41%
Aggressive Growth Fund 43%
International Equity Fund 56%
Income Fund 192%
Government Securities Fund 237%
Pennsylvania Bond Fund 96%
Lifestyle Conservative Growth Fund 28%
Lifestyle Moderate Growth Fund 32%
Lifestyle Growth Fund 28%
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
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
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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.
Employee Benefit Plans
Purchases, exchanges and redemptions of Shares through an employee
benefit plan may be subject to different requirements and limitations imposed by
employers than those discussed below. Investors should consult their employer
for more information on how to purchase, exchange and redeem Shares of the Funds
through their employer's plan.
Purchases of Shares
Shares (Investor Shares of the Prime Money Market Fund) may be
purchased through procedures established by the Distributor in connection with
the requirements of qualified accounts maintained by or on behalf of certain
persons ("Customers") by the Advisor, its affiliates or their correspondent
entities (collectively, "Entities").
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'
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custodian. Prior to wiring any such funds and in order to ensure that wire
orders are invested promptly, investors must call the Trust at (800) 766-3960 to
obtain instructions regarding the bank account number into which the funds
should be wired and other pertinent information.
Shares of the Funds are purchased at the net asset value per share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor, its
agents or broker-dealers with whom it has an agreement of an order in good form
to purchase Shares plus any applicable sales charge as described below.
Purchases of Shares of a Fund will be effected only on a Business Day (as
defined in the Prospectus) of that Fund.
For an order for the purchase of Shares of a Non-Money Market Fund that
is placed through a broker-dealer, the applicable public offering price will be
the net asset value as so determined (plus any applicable sales charge), but
only if the broker-dealer receives the order and transmits it to the Distributor
prior to the Valuation Time for that day. The broker-dealer is responsible for
transmitting such orders by the Valuation Time. If the broker-dealer fails to do
so, the investor's right to that day's closing price must be settled between the
investor and the broker-dealer. If the broker-dealer receives the order after
the Valuation Time for that day, the price will be based on the net asset value
determined as of the Valuation Time for the next Business Day.
An order to purchase Shares of a Money Market Fund will be deemed to
have been received by the Distributor only when federal funds with respect
thereto are available to the Money Market Fund's custodian for investment.
Federal funds are monies credited to a bank's account with a Federal Reserve
Bank. Payment for an order to purchase Shares of a Money Market Fund which is
transmitted by federal funds wire will be available the same day for investment
by that Money Market Fund's custodian, if received prior to the last Valuation
Time (see "VALUATION OF SHARES" in the Prospectus). Payments transmitted by
other means (such as by check drawn on a member of the Federal Reserve System)
will normally be converted into federal funds within two banking days after
receipt. The Trust strongly recommends that investors of substantial amounts use
federal funds to purchase Money Market Shares. Shares of the Money Market Funds
purchased before 12:00 noon, Eastern Time, begin earning dividends on the same
Business Day. Shares of the Money Market Funds purchased after 12:00 noon,
Eastern Time, begin earning dividends on the next Business Day. All Shares of
the Money Market Funds continue to earn dividends through the day before their
redemption.
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
At a meeting of the Board of Trustees held on October 27, 2000, the
Board of the Trust approved the liquidation of the S Shares of the Prime Money
Market Fund. It is expected that the liquidation will be effected on or about
December 1, 2000. Shareholders can redeem their S Shares of the Prime Money
Market Fund at any time prior to liquidation.
The Trust will no longer accept requests to purchase S Shares of the
Prime Money Market Fund effective October 27, 2000.
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Governor Funds Individual Retirement Account ("IRA")
A Governor Funds IRA enables individuals, even if they participate in
an employer-sponsored retirement plan, to establish their own retirement
program. Governor Funds IRA contributions may be tax-deductible and earnings are
tax deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA
contributions is restricted or eliminated for individuals who participate in
certain employer pension plans and whose annual income exceeds certain limits.
Existing IRAs and future contributions up to the IRA maximums, whether
deductible or not, still earn income on a tax-deferred basis.
All Governor Funds IRA distribution requests must be made in writing to
the Distributor. Any deposits to a Governor Funds IRA must distinguish the type
and year of the contributions.
For more information on the Governor Funds IRAs call the Trust at (800)
766-3960. Investment in Shares of the Governor Funds Pennsylvania Municipal Bond
Fund or any other tax-exempt fund would not be appropriate for a Governor Funds
IRA. Shareholders are advised to consult a tax advisor on Governor Funds IRA
contribution and withdrawal requirements and restrictions.
In-Kind Purchases
Payment of Shares of a Fund may, in the discretion of the Advisor, be
made in the form of securities that are permissible investments for that Fund as
described in the prospectuses. For further information about this form of
payment, contact the Advisor. In connection with an in-kind securities payment,
a Fund will require, among other things, that the securities be valued on the
date of purchase in accordance with the pricing methods used by the Fund and
that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form of transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
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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.
<TABLE>
THE ESTABLISHED GROWTH FUND, AGGRESSIVE GROWTH FUND AND INTERNATIONAL EQUITY FUND
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % of and Brokerage
At Public Offering 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 5.82% 5.50% 4.95%
$50,000 but less than 4.71 4.50 4.05
$100,000
$100,000 but less than 3.63 3.50 3.15
$250,000
$250,000 but less than 2.56 2.50 2.25
$500,000
$500,000 but less than 1.52 1.50 1.35
$1,000,000
$1,000,000 or more 0 0 0
</TABLE>
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THE GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % of and Brokerage
At Public Offering 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 3.09 3.00 2.70
$100,000
$100,000 but less than 2.56 2.50 2.25
$250,000
$250,000 but less than 2.04 2.00 1.80
$500,000
$500,000 but less than 1.52 1.50 1.35
$1,000,000
$1,000,000 or more 0 0 0
</TABLE>
THE INCOME FUND, PENNSYLVANIA BOND FUND AND THE LIFESTYLE FUNDS
<TABLE>
<CAPTION>
Dealer Discounts
Amount of Transaction Sales Charge as % of and Brokerage
At Public Offering 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 4.71% 4.50% 4.05%
$50,000 but less than 4.71 4.50 4.05
$100,000
$100,000 but less than 3.63 3.50 3.15
$250,000
$250,000 but less than 2.56 2.50 2.25
$500,000
$500,000 but less than 1.52 1.50 1.35
$1,000,000
$1,000,000 or more 0 0 0
</TABLE>
The Distributor and/or its affiliates pay additional compensation from
time to time, out of its assets and not as an additional charge to the Funds, to
certain institutions and other persons in connection with the sale of shares of
the Funds. Subject to applicable regulations of the National Association of
Securities Dealers, Inc., the Distributor and/or its affiliates may also
contribute to various cash incentive arrangements to promote the sale of shares.
This additional compensation can vary among such
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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
("Governor Load Funds"). For example, if a Shareholder concurrently purchases
Shares in the Established Growth Fund at the total public offering price of
$50,000 and Shares in another Governor Load Fund at the total public offering
price of $50,000, the sales charge for such shares of the Established Growth
Fund would be that applicable to a $100,000 purchase as shown in the table
above. This privilege, however, may be modified or eliminated at any time or
from time to time by the Trust without notice thereof.
Letter of Intent
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Shares of a Fund at a designated total public offering price within a designated
13-month period. Each purchase of Shares under a Letter of Intent will be made
at the net asset value plus the sales charge applicable at the time of such
purchase to a single transaction of the total dollar amount indicated in the
Letter of Intent. A Letter of Intent may include purchases of Shares made not
more than 90 days prior to the date such investor signs a Letter of Intent;
however, the 13-month period during which the Letter of Intent is in effect will
begin on the date of the earliest purchase to be included. This program may be
modified or eliminated at any time or from time to time by the Trust without
notice. For further information about letters of intent, interested investors
should contact the Trust at (800) 766-3960.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
Shares actually purchased if the full amount indicated is not purchased, and
such escrowed Shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed Shares, whether paid in cash or
reinvested in additional Shares, are not subject to escrow. The escrowed Shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
An adjustment will be made to reflect any reduced sales charge applicable to
Shares purchased during the 90-day period prior to the date the Letter of Intent
was entered into at the conclusion of the 13-month period and in the form of
additional Shares credited to the Shareholder's account at the then current
public offering price applicable to a single purchase of the total amount of the
total purchases. Additionally, if the total purchases within the 13-month period
exceed the amount specified, a similar adjustment will be made to reflect
further reduced sales charges applicable to such purchases, if any.
Right of Accumulation
Pursuant to the right of accumulation, investors are permitted to
purchase Shares of a Fund at the public offering price applicable to the total
of (a) the total public offering price of the Shares of the Fund then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's combined holdings of the Shares of all Governor Load Funds. The
"purchaser's combined holdings"
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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.
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.
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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.
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.
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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>
Position(s) Held Principal Occupation
Name, Address and Age with the Trust During Past 5 Years
--------------------- -------------- -------------------
<S> <C> <C>
A. James Durica President From 1998 to October 6, 2000, Treasurer
23 Front Street and Chief Investment Officer of Keystone
Harrisburg, PA 17101 Financial, Inc. ("Keystone"); from 1999
Age: 53 to October 6, 2000, Chairman of Keystone
Investment Services, Inc.; prior to that,
Senior Vice President of Keystone.
John J. Bolger Trustee From 1988 to present, retired; prior to
Governor Funds that, Vice President of Pennsylvania
3435 Stelzer Road Bankers Association.
Columbus, OH 43219
Age: 65
James L. Brock Trustee From 1996 to present, Dean of Sigmund
Governor Funds Weis School of Business, Susquehanna
3435 Stelzer Road University, prior to that, Vice President
Columbus, OH 43219 of Marketing at Pacific Steel and
Age: 56 Recycling (distributor of steel and
agricultural products and
commercial/industrial recycler of scrap
metals and fibers).
John S. Cramer Trustee From 1996 to present, President and CEO
Governor Funds of Pinnacle Health System; prior to that,
3435 Stelzer Road President and CEO of Capital Health
Columbus, OH 43219 System.
Age: 58
Michael A. Grunewald* Treasurer From 1992 to present, employee of BISYS
3435 Stelzer Road Fund Services Limited Partnership.
Columbus, OH 43219
Age: 30
Michael P. Malloy* Secretary From 1993 to present, partner in the law
Drinker Biddle & Reath LLP firm of Drinker Biddle & Reath LLP.
One Logan Square
18th & Cherry Streets
Philadelphia, PA 19103
Age: 41
</TABLE>
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<PAGE> 121
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address and Age with the Trust During Past 5 Years
--------------------- -------------- -------------------
<S> <C> <C>
Alaina V. Metz* Assistant Secretary From 1995 to present, employee of BISYS
3435 Stelzer Road Fund Services Limited Partnership; prior
Columbus, Ohio 43219 to that, supervisor of Blue Sky
Age: 33 Compliance at Alliance Capital
Management, L.P. (investment management
firm).
</TABLE>
------------------
*Messrs. Durica, Grunewald and Malloy and Ms. Metz are each considered
to be an "interested person" of the Trust as defined in the 1940 Act.
Messrs. Bolger, Brock and Cramer are members of the Audit, Valuation,
and Nominating Committees of the Board of Trustees. Mr. Cramer, Mr. Bolger, and
Mr. Brock each serves as Chairman of the Audit, Valuation, and Nominating
Committees, respectively. The Audit Committee, among other things, reviews
results of the annual audit and recommends to the Trust the firm to be selected
as independent auditors. The Valuation Committee reviews the pricing of certain
securities. The Nominating Committee recommends to the Board all persons to be
nominated as trustees of the Trust.
As of the date of this Statement of Additional Information, the Trust's
officers and trustees, as a group, own less than 1% of any Fund's outstanding
Shares.
The Trust pays each Trustee, other than officers or employees of the
Advisor, BISYS or BISYS Fund Services, Inc. or any of their affiliates, an
annual fee of $8,000, $2,000 for each regular Board meeting attended, and
out-of-pocket expenses incurred in attending Board meetings. The officers of the
Trust receive no compensation directly from the Trust for performing the duties
of their offices. The Advisor receives fees for acting as 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. Mr. Durica is an
employee 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-Advisor
Martindale Andres & Company, LLC ("Martindale") is the investment
advisor of each Fund. On May 31, 2000, the Funds' previous advisor, Governors
Group Advisors, Inc. reorganized into Martindale Andres & Company, LLC with no
resulting change of control or management. Until October 6, 2000, the Advisor
was a wholly owned subsidiary of Keystone Financial, Inc., 1 Keystone Plaza,
Harrisburg, Pennsylvania 17101. The Advisor assumed all of the obligations and
responsibilities of Governors Group Advisors, Inc. under the Investment Advisory
and Management and Administration Agreements with the Trust and under the
Sub-Advisory Agreement with Brinson Partners, Inc. (the "Sub-Advisor"),
sub-advisor to the International Equity Fund.
On October 6, 2000, Keystone Financial merged into M&T Corp., the
corporate parent of M&T Bank (the "Bank Merger"). Consummation of the Bank
Merger caused a change in the ownership of
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<PAGE> 122
Martindale, which automatically terminated the investment advisory agreement
between Martindale and the Governor Funds then in effect ("Previous Advisory
Agreement") in accordance with its terms and as required by the 1940 Act. Since
the termination of the Previous Advisory Agreement, Martindale has been
providing investment advisory services under the terms of an interim investment
advisory agreement approved by the Board of Trustees on September 14, 2000. The
terms and conditions of the Interim Advisory Agreement are identical in all
material respects to the Previous Advisory Agreement, including the fees, except
for its termination provisions and any compensation payable to Martindale is to
be held in an interest-bearing escrow account with State Street Bank & Trust
Company.
At the September 14, 2000 meeting, the Board also approved a New
Advisory Agreement with Martindale. The New Advisory Agreement is identical in
all material respects to the Previous Advisory Agreement, including the rate of
investment advisory fee, except for its effective and termination dates.
Specifically, the New Advisory Agreement will become effective, as to a Governor
Fund, on the date the shareholders of that Governor Fund approve it. Shareholder
approval of the New Advisory Agreement is necessary in order for Martindale to
receive the amount of fees it would have otherwise received under the Previous
Advisory Agreement for managing the Funds under the Interim Advisory Agreement.
The fees payable under both the Interim Advisory Agreement and New Advisory
Agreement are identical to the rate of advisory fee under the Previous Advisory
Agreement.
If shareholders of the Funds do not approve the New Advisory Agreement,
Martindale will be entitled to receive the lesser of the total amount held in
the escrow account or any costs it incurred in performing under the Interim
Advisory Agreement (plus interest earned on the amount while in the
interest-bearing escrow account), on behalf of that Governor Fund, and such
amount will be released to Martindale from the interest-bearing escrow account.
Any excess monies held in the interest-bearing escrow account will be returned
to the relevant Governor Fund.
As to a particular Governor Fund, if shareholders do not approve the
New Advisory Agreement, the Board of Trustees of the Governor Funds will decide
what action should be taken with respect to that Fund's investment advisory
arrangements.
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, 2000, the Advisor earned
and voluntarily waived the amounts indicated below with respect to its
investment advisory services pursuant to the investment advisory agreement:
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<PAGE> 123
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30, 2000 (1)
Fees Earned ----------------- Fees Waived
----------- -----------
<S> <C> <C>
Prime Money Market Fund $ 1,191,581 $ 595,791
Treasury Money Market Fund $ 83,746 $ 41,873
Established Growth Fund $ 1,967,407 $ 393,485
Aggressive Growth Fund $ 1,368,992 $ 410,697
International Equity Fund $ 527,053 $ 358,395
Income Fund $ 1,710,672 $ 855,336
Government Securities Fund $ 345,946 $ 172,973
Pennsylvania Bond Fund $ 600,219 $ 300,110
Lifestyle Conservative Growth Fund $ 567 $ 323
Lifestyle Moderate Growth Fund $ 2,049 $ 1,229
Lifestyle Growth Fund $ 1,637 $ 1,066
</TABLE>
------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, 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, 1999, the former advisor,
Governors Group Advisors, Inc., a wholly-owned subsidiary of Keystone, 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
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
Lifestyle Conservative Growth Fund 59 3
</TABLE>
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<PAGE> 124
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1999 (1)
-----------------
Fees Earned Fees Waived
----------- -----------
<S> <C> <C>
Lifestyle Moderate Growth Fund 156 12
Lifestyle Growth Fund 108 4
</TABLE>
------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, 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 previous
advisor, Martindale, Andres & Company, Inc., 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>
------------------------
(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 advisor
had not received any compensation under the Investment Advisory Agreement with
respect to the International Equity Fund or the Lifestyle Funds since those
Funds had not commenced operations.
The Advisor has entered into a Sub-Advisory Agreement with the
Sub-Advisor on behalf of the International Equity Fund. The Sub-Advisor is a
wholly owned subsidiary of UBS AG. The Sub-Advisor was organized in 1989 and was
acquired by Swiss Bank Corporation, a predecessor company of
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<PAGE> 125
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 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.
As discussed above, consummation of the Bank Merger caused a change in
the ownership of Martindale, which automatically terminated the Previous
Advisory Agreement then in effect between Martindale and the Governor Funds in
accordance with its terms and as required by the 1940 Act. In turn, the
investment sub-advisory agreement then in effect between Martindale and Brinson
relating to the management of the International Equity Fund ("Previous
Sub-Advisory Agreement"), automatically terminated in accordance with its terms.
There has been no change in ownership of Brinson. Since the termination of the
Previous Sub-Advisory Agreement, Brinson has been providing investment
sub-advisory services under the terms of an interim sub-advisory agreement
approved by the Board of Trustees on September 14, 2000. The terms and
conditions of the Interim Sub-Advisory Agreement are identical in all material
respects to the Previous Sub-Advisory Agreement, including the fees, except for
its termination provisions and any compensation payable to Brinson is to be held
in an interest-bearing escrow account with State Street Bank & Trust Company.
At the September 14, 2000 meeting, the Board also approved a New
Sub-Advisory Agreement with Brinson (the "New Sub-Advisory Agreement"). The New
Sub-Advisory Agreement is identical in all material respects to the Previous
Sub-Advisory Agreement, including the rate of investment sub-advisory fee,
except for its effective and termination dates. The New Sub-Advisory Agreement
will become effective upon its approval by shareholders of the International
Equity Fund. Shareholder approval of the New Sub-Advisory Agreement is necessary
in order for Brinson to receive the amount of fees it would have otherwise
received under the Previous Sub-Advisory Agreement for managing the
International Equity Fund under the Interim Sub-Advisory Agreement. The fees
payable under both the Interim Sub-Advisory Agreement and New Sub-Advisory
Agreement are identical to the rate of advisory fee under the Previous
Sub-Advisory Agreement.
If shareholders of the Funds do not approve the New Sub-Advisory
Agreement, Brinson will be entitled to receive the lesser of the total amount
held in the escrow account or any costs it incurred in performing under the
Interim Sub-Advisory Agreement (plus interest earned on the amount while in the
interest-bearing escrow account), on behalf of the International Equity Fund,
and such amount will be released to Brinson from the interest-bearing escrow
account. Any excess monies held in the interest-bearing escrow account will be
returned to the International Equity Fund.
If shareholders do not approve the New Sub-Advisory Agreement, the
Board of Trustees will decide what action should be taken with respect to the
International Equity Fund's sub-advisory arrangements.
For the fiscal year ended June 30, 2000, the Sub-Advisor earned
$168,658. For the period from February 9, 1999 through June 30, 1999, the
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, 2001, 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 Investment
Sub-Advisory Agreement or interested persons (as defined in the 1940 Act)
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<PAGE> 126
of any party to the Investment Advisory Agreement or the 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 Agreement 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 Agreement 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-Advisor determine, subject to the general
supervision of the Board of Trustees of the Trust and in accordance with the
Funds' investment objectives and restrictions, which securities are to be
purchased and sold by each Fund, and which brokers and dealers are to be
eligible to execute the Funds' portfolio transactions. Purchases and sales of
portfolio securities with respect to the Prime Money Market, Treasury Money
Market, Income, Government Securities and Pennsylvania Bond Funds, usually are
principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Purchases and sales of portfolio securities with
respect to the Established Growth, Aggressive Growth 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 Advisor or Sub-Advisor 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-Advisor may receive
orders for transactions on behalf of the Funds. The Advisor and/or Sub-Advisor
is authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing each such Fund's brokerage transactions
which is in excess of the amount of commission another broker would have charged
for effecting that transaction if the Advisor or Sub-Advisor determines in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker 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-Advisor is considered to be in addition to and not in lieu of services
required to be performed by the Advisor or Sub-Advisor 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-Advisor who may
indirectly benefit from the availability of such information. Similarly, the
Funds may indirectly benefit from information made
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<PAGE> 127
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-Advisor is 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-Advisor 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 and the Aggressive 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 year ended June 30, 2000, the amounts of such transactions and
related commissions on behalf of the Established Growth Fund were $45,250,107
and $64,325, respectively, and on behalf of the Aggressive Growth Fund were
$10,981,970 and $32,316, respectively. 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; and on
behalf of the Aggressive Growth Fund were $8,989,508 and $21,240, 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. The 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 year ended June 30, 2000, the amounts of such
transactions and related commissions on behalf of the International Equity Fund
were $9,615,144 and $18,730. 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.
For the fiscal year ended June 30, 2000, the Funds paid brokerage
commissions as follows:
Established Growth Fund $215,056
Aggressive Growth Fund $121,604
Income Fund $ 9,903
International Equity Fund $ 96,172
Pennsylvania Bond Fund $ 10,570
For the fiscal year ended June 30, 2000, no brokerage commissions were
paid by the Trust on behalf of the Prime Money Market Fund, the U.S. Treasury
Money Market Fund, or the Government Securities Fund.
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
International Equity Fund $104,394
For the fiscal year 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-Advisor 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-Advisor and does not reduce the advisory fees payable
to the Advisor and/or Sub-
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Advisor by a Fund. Such information may be useful to the Advisor and/or
Sub-Advisor 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-Advisor 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-Advisor,
M&T Bank, BISYS, or their affiliates, and will not give preference to the
Advisor's, the Sub-Advisor's, or M&T Bank'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-Advisor. 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-Advisor
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-Advisor 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-Advisor 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-Advisor, its parent or its subsidiaries or affiliates and, in
dealing with its customers, the Advisor or Sub-Advisor, 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, 2000, the Established Growth 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, 2000, the Established Growth Fund held $1,241,000 of equity
securities of First Union and $10,406,000 of equity securities of Morgan Stanley
Dean Witter & Co.; the Government Securities Fund held $12,564,000 of debt
securities of Lehman Brothers, Inc., and $5,001,000 of debt securities of
Merrill Lynch & Co., Inc.; the Treasury Money Market Fund held $3,138,000 of
debt securities of Lehman Brothers, Inc. and $3,612,000 of debt securities of
Merrill Lynch & Co., Inc.; the Prime Money Market Fund held $11,976,000 of debt
securities of Zions Bancorp, $10,011,000 of debt securities of Goldman Sachs &
Co., $11,998,000 of debt securities of JP Morgan Co., $57,990,000 of debt
securities of Lehman Brothers, Inc. and $10,000,000 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-Advisor under the
Investment Sub-Advisory Agreement, by The Bank of New York under the Custody
Agreement, by
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BISYS Fund Services, Inc. under the Transfer Agency Agreement and Fund
Accounting Agreement and by BISYS under the Distribution Agreement).
As noted above, on May 31, 2000, Governors Group Advisors, Inc., the
Funds' previous advisor, reorganized into Martindale Andres & Company, LLC, with
no resulting change of actual control or management. The reorganization resulted
in the Advisor assuming all of the obligations and responsibilities of Governors
Group Advisors, Inc. under the Management and Administration Agreement with the
Trust.
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-Advisor under the Investment
Sub-Advisory Agreement, 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 ended June 30, 2000, 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 Year Ended
June 30, 2000(1)
----------------
Fees Earned Fees Waived
----------- -----------
<S> <C> <C>
Prime Money Market Fund $ 446,845 $ 104,264
Treasury Money Market Fund $ 31,405 $ 7,328
Established Growth Fund $ 393,485 $ 91,814
Aggressive Growth Fund $ 205,350 $ 47,915
International Equity Fund $ 63,247 $ 14,758
Income Fund $ 427,672 $ 99,791
Government Securities Fund $ 86,487 $ 20,180
Pennsylvania Bond Fund $ 150,056 $ 35,013
</TABLE>
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<PAGE> 130
There are no fees payable to the Administrators from the Lifestyle Funds under
the Administration Agreement.
-------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, February 9, 1999, December 2, 1996, July 1,
1997 and October 1, 1996, respectively.
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:
Fiscal Year or Period Ended
June 30, 1999(1)
----------------
<TABLE>
<CAPTION>
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
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.
-------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December
2, 1996, February 3, 1997, February 9, 1999, December 2, 1996, July 1,
1997 and October 1, 1996, 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 Year or 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
</TABLE>
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<PAGE> 131
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
June 30, 1998(1)
----------------
<S> <C>
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 International Equity
Fund since that Fund 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.
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, 2001, if approved at least annually (i) by the
Trust's Board of Trustees or by the vote of a majority of the outstanding Shares
of the Funds, and (ii) by the vote of a majority of the Trustees of the Trust
who are not parties to the Distribution Agreement or interested persons (as
defined in the 1940 Act) of any party to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
Administrative Services and Distribution Plans
The Trust has adopted an Administrative Services Plan (the "Services
Plan") pursuant to which each Fund is authorized to pay compensation to banks
and other financial institutions (each a "Service Organization"), which may
include the Advisor, Sub-Advisor, M&T Bank 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
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<PAGE> 132
average daily net assets of that Fund for shares 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.
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 assets
of each Lifestyle Fund. The Distributor may delegate some or all of these
functions to another organization. See "How to Purchase Shares -- Purchases
Through Intermediaries."
The Administrative Services and Distribution Plans ("the Plans") have
been approved by the Board of Trustees of the Trust, including a majority of the
Trustees who are not interested persons of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Plans or in any Agreements thereunder (the "Disinterested Trustees"). The
Plans may be terminated as to a Fund by a vote of a majority of the
Disinterested Trustees. The Trustees review quarterly a written report of the
amounts expended pursuant to the Plans and the purposes for which such
expenditures were made. The Plans may be amended by a vote of the Trustees,
provided that any material amendments also require the vote of a majority of the
Disinterested Trustees. For so long as the Plans are in effect, selection and
nomination of those Disinterested Trustees shall be committed to the discretion
of the Trust's Disinterested Trustees. All Agreements may be terminated at any
time without the payment of any penalty by a vote of a majority of the
Disinterested Trustees. The Plans will continue in effect for successive
one-year periods, provided that each such continuance is specifically approved
by a majority of the Board of Trustees, including a majority of the
Disinterested Trustees.
Custodian
The Bank of New York, 100 Church Street, New York, New York, 10286,
serves as custodian (the "Custodian") to the Funds pursuant to the Custody
Agreement. The Custodian's responsibilities include safeguarding and controlling
each Fund's cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on each Fund's investments.
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<PAGE> 133
Transfer Agency and Fund Accounting Services
BISYS Fund Services, Inc. serves as transfer agent and dividend
disbursing agent (the "Transfer Agent") for the Funds pursuant to the Transfer
Agency Agreement. Pursuant to such Agreement, the Transfer Agent, among other
things, performs the following services in connection with the Funds'
Shareholders of record: maintenance of shareholder records for each of the
Funds' Shareholders of record; processing Shareholder purchase and redemption
orders; processing transfers and exchanges of Shares of the Funds on the
Shareholder files and records; processing dividend payments and reinvestments;
and assistance in the mailing of Shareholder reports and proxy solicitation
materials. For such services the Transfer Agent receives a fee based on the
number of shareholders of record.
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to each of the Funds pursuant to a Fund Accounting Agreement. BISYS
Fund Services, Inc. receives a fee from the Trust for such services for all the
Trust's funds computed at an annual rate of three one-hundredths of one percent
(.03%) (.04% for the International Equity Fund) of the Trust's average daily net
assets up to $2 billion and .02% (.03% for the International Equity Fund) of the
Trust's average daily net assets of $2 billion or more, subject to a minimum
annual fee of $30,000 ($40,000 for the International Equity Fund and $35,000 for
the Pennsylvania Bond Fund). Under such Agreement, BISYS Fund Services, Inc.
maintains the accounting books and records for the Funds, including journals
containing an itemized daily record of all purchases and sales of portfolio
securities, all receipts and disbursements of cash and all other debits and
credits, general and auxiliary ledgers reflecting all asset, liability, reserve,
capital, income and expense accounts, including interest accrued and interest
received, and other required separate ledger accounts; maintains a monthly trial
balance of all ledger accounts; performs certain accounting services for the
Funds, including calculation of the net asset value per share, calculation of
the dividend and capital gain distributions, if any, and of yield,
reconciliation of cash movements with the Funds' custodian, and verification and
reconciliation with the Funds' custodian of all daily trade activity; provides
certain reports; obtains dealer quotations, prices from a pricing service or
matrix prices on all portfolio securities in order to mark the portfolio to the
market; and prepares an interim balance sheet, statement of income and expense,
and statement of changes in net assets for the Funds.
Unless sooner terminated as provided therein, the Fund Accounting
Agreement has an initial term expiring on June 30, 2001, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Fund Accounting Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Fund Accounting Agreement; upon 180 days' written notice by the Trust after the
initial term but only in connection with the reorganization of the Funds into
another registered management investment company; and for cause (as defined in
the Fund Accounting Agreement) by the party alleging cause, on not less than 60
days' notice by the Trust's Board of Trustees or by BISYS Fund Services, Inc.
The Fund Accounting Agreement provides that BISYS Fund Services, Inc.
shall not be liable for any error of judgment or mistake of law or any loss
suffered by a Fund in connection with the matters to which the Fund Accounting
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
or negligence in the performance of its duties, or from the reckless disregard
by BISYS Fund Services, Inc. of its obligations and duties thereunder.
For the fiscal year ended June 30, 2000, BISYS Fund Services, Inc.
earned the amounts indicated below with respect to its fund accounting services
to the indicated Funds.
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<PAGE> 134
Fiscal Year Ended
June 30, 2000(1)
----------------
Prime Money Market Fund $ 96,491
Treasury Money Market Fund $ 30,000
Established Growth Fund $ 82,888
Aggressive Growth Fund $ 45,875
International Equity Fund $ 66,332
Income Fund $ 92,823
Government Securities Fund $ 32,883
Pennsylvania Bond Fund $ 37,806
Lifestyle Conservative Growth Fund $ 30,000
Lifestyle Moderate Growth Fund $ 30,000
Lifestyle Growth Fund $ 30,000
-------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December 2,
1996, February 3, 1997, 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, 1999, BISYS Fund Services,
Inc. earned the amounts indicated below with respect to its fund accounting
services for the indicated Funds.
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<PAGE> 135
Fiscal Year or Period Ended
June 30, 1999(1)
----------------
Prime Money Market Fund 77,899
Treasury Money Market Fund 31,233
Established Growth Fund 78,219
Aggressive Growth Fund 41,519
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
-------------------------
(1) Such Funds commenced operations October 7, 1996, July 1, 1997, December 2,
1996, February 3, 1997, 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 Fund Services,
Inc. earned the amounts indicated below with respect to its fund accounting
services to the indicated Funds.
Fiscal Year or Period Ended
June 30, 1998(1)
----------------
Prime Money Market Fund $47,847
Treasury Money Market Fund $30,875
Established Growth Fund $70,172
Aggressive Growth Fund $41,513
Income Fund $75,419
Government Securities Fund $32,239
Pennsylvania Bond Fund $43,737
-------------------------
(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, BISYS Fund Services,
Inc. did not receive any compensation for its fund
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<PAGE> 136
accounting services with respect to the International Equity and Lifestyle Funds
since those Funds had not commenced operations.
Code of Ethics
The Trust, Advisor and Sub-Advisor have adopted codes of ethics that
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Funds.
Auditors
The financial statements for the Funds as of June 30, 2000, 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.
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
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<PAGE> 137
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 September 29, 2000, M&T Bank possessed, on behalf of its or its
affiliates' underlying accounts, voting or investment power with respect to more
than 25% of the outstanding Shares of each Fund with the exception of the
Lifestyle Funds.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders meeting for the election of
Trustees. Shares of the Trust have non-cumulative voting rights and,
accordingly, the holders of more than 50% of the Trust's outstanding shares
(irrespective of class) may elect all of the Trustees. Except as set forth above
and in the Prospectuses, the Trustees will continue to hold office and may
appoint successor Trustees.
The Agreement and Declaration of Trust authorizes the Board of
Trustees, without shareholder approval, to issue shares to a party or parties
and for such amount and type of consideration and on such terms, subject to
applicable law, as the Trustees may deem appropriate. The Board of Trustees may
issue fractional shares and shares held in the treasury. The Board of Trustees
has full power and authority, in its sole discretion, and without obtaining
shareholder approval, to divide or combine the shares or any class or series
thereof into a greater or lesser number, to classify or reclassify any issued
shares or any class or series thereof into one or more classes or series of
shares, and to take such other action with respect to the Trust's shares as the
Board of Trustees may deem desirable. The Agreement and Declaration of Trust
authorizes the Trustees without shareholder approval to cause the Trust, or any
series thereof, to merge or consolidate with any corporation, association, trust
or other organization or sell or exchange all or substantially all of the
property belonging to the Trust or any series thereof. The Agreement and
Declaration of Trust permits the termination of the Trust or of any series or
class of the Trust by the Trustees without shareholder approval.
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
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<PAGE> 138
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 September 29, 2000, 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
---------------- ----------
BISYS Fund Services 38.2591%
Keystone Financial Sweep Customers
3435 Stelzer Road
Columbus, Ohio 43219
National Financial Services Corp. 11.6217%
200 Liberty Street
New York, NY 10281
Altru Company 46.6420%
1315 11th Avenue
Altoona, PA 16601
PRIME MONEY MARKET FUND S SHARES
Name and Address Percentage
---------------- ----------
BISYS Fund Services 100.0000%
Governor Funds Financial Sweep Customer
3435 Stelzer Road
Columbus, OH 43219
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<PAGE> 139
U.S. TREASURY OBLIGATIONS MONEY MARKET
Name and Address Percentage
---------------- ----------
National Financial Services Corp. 9.3012%
200 Liberty Street
New York, NY 10281
Altru Company 85.2995%
1315 11th Avenue
Altoona, PA 16601
PENNSYLVANIA MUNICIPAL BOND FUND
Name and Address Percentage
---------------- ----------
Altru Company 94.9547%
1315 11th Avenue
Altoona, PA 16601
INTERMEDIATE TERM INCOME FUND
Name and Address Percentage
---------------- ----------
Altru Company 62.6013%
1315 11th Avenue
Altoona, PA 16601
Altru Company 36.7868%
1315 11th Avenue
Altoona, PA 16601
ESTABLISHED GROWTH FUND
Name and Address Percentage
---------------- ----------
Altru Company 51.0240%
1315 11th Avenue
Altoona, PA 16601
Altru Company 39.6519%
1315 11th Avenue
Altoona, PA 16601
AGGRESSIVE GROWTH FUND
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<PAGE> 140
Name and Address Percentage
---------------- ----------
Altru Company 5.9555%
1315 11th Avenue
Altoona, PA 16601
Altru Company 43.4020%
1315 11th Avenue
Altoona, PA 16601
Altru Company 46.3750%
1315 11th Avenue
Altoona, PA 16601
LIMITED DURATION GOVERNMENT SECURITIES FUND
Name and Address Percentage
---------------- ----------
Altru Company 80.0650%
1315 11th Avenue
Altoona, PA 16601
Altru Company 18.6348%
1315 11th Avenue
Altoona, PA 16601
INTERNATIONAL EQUITY FUND
Name and Address Percentage
---------------- ----------
Altru Company 57.3491%
1315 11th Avenue
Altoona, PA 16601
Altru Company 41.5901%
1315 11th Avenue
Altoona, PA 16601
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<PAGE> 141
LIFESTYLE CONSERVATIVE GROWTH FUND
Name and Address Percentage
---------------- ----------
NFSC FEBO C3X-203068 10.2925%
Robert Holsinger
520 Barley Street
Roaring Spg., PA 16673
NFSC FEBO C3X-262960 5.0503%
Earl E. Meily
14 Cardinal Drive
Milton, PA 17847
NFSC FEBO C3X-065390 13.8158%
NFSC FMTC IRA Rollover
RR 4 Box 117
Mifflinburg, PA 17844
NFSC FEBO C3X-381306 6.8836%
Thomas P. McIntyre, Sr.
1618 County Street
Laureldale, PA 19605
NFSC FEBO C3X-459526 13.8338%
NFSC FMTC IRA
2306 E. Allegheny Avenue
Philadelphia, PA 19134
NFSC FEBO C3X-000094 5.6497%
NFSC FMTC Roth IRA
15600 Bank Street
Mt. Savage, MD 21545
NFSC FEBO C3X-022110 17.6351%
Shirley Decker
102 Highlands
Danville, PA 17821
NFSC FEBO C3X-022012 7.9594%
NFSC FMTC IRA Rollover
3303 Comfort Hill Road
Wellsburg, NY 14894
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
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<PAGE> 142
or that class present at a meeting at which the holders of more than 50% of the
votes attributable to Shareholders of record of such Trust, Fund, or class are
represented in person or by proxy, or (b) the holders of more than 50% of the
outstanding votes of Shareholders of that Trust, Fund or class.
Additional General Tax Information
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to 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. Moreover, if a Fund were to fail to make
sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to distribute with respect to each calendar year at least
98% of their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year period
ending October 31 of such calendar year and 100% of any such amounts that were
not distributed in the prior year. Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
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
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other positions, or to borrow money, so as to make sufficient distributions to
shareholders to avoid corporate-level tax. Moreover, some or all of the taxable
income recognized may be ordinary income or short-term capital gain, so that the
distributions may be taxable to shareholders as ordinary income. In addition, in
the case of any shares of a PFIC in which a Fund invests, the Fund may be liable
for corporate-level tax on any ultimate gain or distributions on the shares if
the Fund fails to make an election to recognize income annually during the
period of its ownership of the shares.
Seven-Day and 30-Day Yields of the Prime Money Market Fund and the Treasury
Money Market Fund
The standardized seven-day yield for the Prime Money Market Fund and
the Treasury Money Market Fund is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical preexisting account
in that Fund having a balance of one Share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from Shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7). The net change in the account
value of the Fund includes the value of additional Shares purchased with
dividends from the original Share, dividends declared on both the original Share
and any such additional Shares, and all fees, other than nonrecurring account or
sales charges, that are charged to all Shareholder accounts in proportion to the
length of the base period and assuming such Fund's average account size. The
capital changes to be excluded from the calculation of the net change in account
value are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The 30-day yield is calculated as described above
except that the base period is 30 days rather than seven days.
The effective yield for Shares of the Prime Money Market Fund and the
Treasury Money Market Fund is computed by compounding the base period return, as
calculated above, by adding 1 to the base period return raising the sum to a
power equal to 365 divided by seven and subtracting 1 from the result.
For the seven-day period ended June 30, 2000, the seven-day yield and
seven-day effective yield for Investor Shares of the Prime Money Market Fund
were 6.10% and 6.28%, respectively. For the 30-day period ended June 30, 2000,
the yield and effective yield for Investor Shares of the Prime Money Market Fund
were 6.07% and 6.25%, respectively. For the seven-day period ended June 30,
2000, the seven-day yield and seven-day effective yield for S Shares of the
Prime Money Market Fund were 5.90% and 6.07%, respectively. For the 30-day
period ended June 30, 2000, the yield and effective yield for S Shares of the
Prime Money Market Fund were 5.88% and 6.04%, respectively.
For the seven-day period ended June 30, 2000, the Treasury Money Market
Fund's seven-day yield and seven-day effective yield were 5.41% and 5.56%,
respectively. For the 30-day period ended June 30, 2000, the yield and effective
yield for the Treasury Money Market Fund were 5.38% and 5.52%, 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
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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, 2000, the yields for the Income
Fund, the Government Securities Fund and the Pennsylvania Bond Fund were 5.95%,
5.49% and 4.13%, respectively, assuming the imposition of the maximum sales
charge, and 6.28%, 5.82% and 4.45%, 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 6.84%, assuming
the imposition of the maximum sales charge, and 7.37%, excluding the effect of a
sales charge.
Calculation of Total Return
Average annual total return is a measure of the change in value of an
investment in a Fund over the period covered, which assumes any dividends or
capital gains distributions are reinvested in that Fund immediately rather than
paid to the investor in cash. Average annual total return will be calculated by:
(1) adding to the total number of Shares purchased by a hypothetical $1,000
investment in a Fund (less the maximum sales charge, if any), all additional
Shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of Shares owned at the end of
the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
annualizing the result for periods of less than one year. A Fund, however, may
also advertise aggregate total return in addition to or in lieu of average
annual total return. Aggregate total return is a measure of the change in value
of an investment in a Fund over the relevant period and is calculated similarly
to average annual total return except that the result is not annualized.
For the one year period ended June 30, 2000, the five year period ended
June 30, 2000 and the period from commencement of operations to June 30, 2000,
the average annual total returns for the 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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<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Fund With Maximum Sales Load(1) Without Sales Load
---- ------------------------ ------------------
Since Since
1 Year 5 Years Inception(2) 1 Year 5 Years Inception(2)
------ ------- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Prime Money Market
Investor Shares* N/A N/A N/A 5.46% N/A 5.16%
Prime Money Market
S Shares* N/A N/A N/A 5.25% N/A 5.11%
Treasury Money Market* N/A N/A N/A 4.76% N/A 4.61%
Established Growth 3.32% 19.96% 22.27% 9.31% 21.31% 23.53%
Aggressive Growth 9.91% 14.50% 15.52% 16.31% 15.81% 16.62%
International Equity 6.63% N/A 9.20% 12.87% N/A 13.74%
Income -1.50% N/A 2.90% 3.18% N/A 4.23%
Government Securities 1.22% N/A 4.06% 4.31% N/A 4.75%
Pennsylvania Bond -2.59% N/A 2.40% 1.96% N/A 3.67%
Lifestyle Conservative
Growth .20% N/A 1.73% 4.94% N/A 5.12%
Lifestyle Moderate
Growth 1.98% N/A 5.76% 6.81% N/A 9.29%
Lifestyle Growth 3.12% N/A 8.16% 8.00% N/A 11.87%
</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, Aggressive
Growth Fund and International Equity Fund is 5.50%. The maximum sales
load for the Income Fund, Pennsylvania Bond Fund, Lifestyle
Conservative Growth Fund, Lifestyle Moderate Growth Fund and Lifestyle
Growth 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), February 9, 1999, December
2, 1996, October 31, 1995 (the Government Securities Fund's predecessor
CIF), October 1, 1996, February 3, 1999, February 4, 1999 and February
18, 1999, respectively.
Past performance is no guarantee as to future performance.
Distribution Rates
The Funds may from time to time advertise current distribution rates.
Performance Comparisons
Investors may judge the performance of the Funds by comparing them to
the performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies through various mutual fund or market indices
such as those prepared by Dow Jones & Co., Inc. and S&P and to
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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-Advisor 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-Advisor, 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 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.
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<PAGE> 147
FINANCIAL STATEMENTS
The Financial Statements for the Prime Money Market, Treasury Money
Market, Established Growth, Aggressive Growth, International Equity, Income,
Government Securities, Pennsylvania Bond, Lifestyle Conservative Growth,
Lifestyle Moderate Growth and Lifestyle Growth Funds for the fiscal year ended
June 30, 2000 and the financial highlights for each of the respective periods
presented, appearing in the 2000 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 2000 Annual Report to Shareholders of
Governor Funds are incorporated herein.
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<PAGE> 148
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.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign obligations may be
lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local
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currency issuer ratings to identify those instances where sovereign risks make
them different for the same issuer.
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 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.
Fitch 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 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.
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<PAGE> 150
"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
a capacity for meeting financial commitments which is highly uncertain and
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
----------------------------------------------
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.
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<PAGE> 151
"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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<PAGE> 152
- "r" - The `r' highlights obligations that Standard & Poor's believes
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an `r' symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
- N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
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" - Bonds are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
"B" - Bonds are generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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<PAGE> 153
"Caa " - Bonds are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch 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. This is the lowest
investment grade category.
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<PAGE> 154
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"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
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.
- `NR' indicates the Fitch does not rate the issuer or issue in
question.
- `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
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Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"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.
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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.
Fitch uses 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, 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
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the New York Futures Exchange. The Fund would deal only in standardized
contract's on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month Treasury Bills; and ninety-day
commercial paper. A Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
II. Stock Index Futures Contracts.
-----------------------------
GENERAL. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Fund will sell index futures contracts in order to offset a
decrease in market value of its securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, a Fund will purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize stock index futures contracts
in anticipation of changes in the composition of its holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
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
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value of which may vary but is generally equal to 10% or less of the value of
the contract. This amount is known as initial margin. The nature of initial
margin in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to a Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instrument fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and a Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and a Fund would be
required to make a variation margin payment to the broker. At any time prior to
expiration of the futures contract, the Advisor or Sub-Advisor may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate a Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to a Fund, and a Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts.
------------------------------------------
There are several risks in connection with the use of futures
by a Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, a
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
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
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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
transaction" (as
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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.
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