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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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Stratevest Funds (the "Trust") is an open-end, management investment company. The Trust has six separate investment portfolios or mutual funds. Each fund offers its own shares and has a distinct investment goal to meet specific investor needs.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
| CONTENTS | ||
| Risk/Return Summary | 1 | |
| What are the Specific Risks of Investing in the Funds? | 9 | |
| What are the Funds' Fees and Expenses? | 10 | |
| What are the Principal Securities in Which the Funds Invest? | 11 | |
| What are the Specific Risks of Investing in the Funds? | 13 | |
| What do Shares Cost? | 15 | |
| How are the Funds Sold? | 17 | |
| How to Purchase Shares | 17 | |
| How to Exchange Shares | 18 | |
| How to Redeem Shares | 19 | |
| Account and Share Information | 21 | |
| Who Manages the Funds? | 22 | |
| Financial Information | 23 |
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The following describes the investment goals, strategies, and principal risks of each Fund. The investment goal of any Fund may be changed only upon approval of a majority of the Fund's outstanding shares. Percentage limitations with respect to assets of the Funds are applied at the time of purchase.
The Fund's goal is long-term capital appreciation.
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The Fund pursues its goal by investing primarily in value-oriented stocks of large-cap companies. The Adviser's valuation model seeks to identify companies that are considered undervalued. These companies are further screened to identify which are industry leaders with strong balance sheets and good growth potential relative to their valuation. This value approach seeks companies whose stock prices do not appear to reflect their underlying value as measured by assets, earnings, cash flow, business franchises, or other quantitative or qualitative measurements. Value stocks may be out of favor with or misunderstood by investors for a variety of reasons, but are considered by the Adviser to have inherent value or future prospects that are not currently reflected in their stock price. Stocks in the Fund's portfolio will typically have below-average price-to-earnings ratios and dividend yields that are generally higher than the overall market. At least 65% of the Fund's assets will be invested in these value-o riented and large cap stocks.
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[Graphic Representation Omitted--See Appendix]
The bar chart shows the variability of the Fund's shares total returns on a calendar year-end basis.
The total returns displayed for the Fund do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.
The Fund's total return for the six-month period from January 1, 2000 to June 30, 2000 was ____%.
Within the periods shown in the chart, the highest quarterly return was 18.74% (for the quarter ended December 31, 1998). The lowest quarterly return was (21.34%) (for the quarter ended September 30, 1990).
The following table represents the Fund's Average Annual Total Return for the calendar periods ended December 31, 1999. The table shows the Fund's shares total returns over a period of years relative to the ____ Index. Total returns for the indices shown do not reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
|
Calendar Period |
|
Large Cap Value Fund |
|
Index |
|
1 Year |
|
(8.70%) |
|
% |
|
5 Years |
|
16.43% |
|
% |
|
10 Years |
|
11.46% |
|
% |
Past performance is no guarantee of future results. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
*The Fund is the successor to a portfolio of assets of a common trust fund (CTF), managed by the Adviser, which were transferred to the Fund on September ___, 2000 in exchange for Fund shares. The quoted performance includes the performance of the CTF for periods before the date the Fund's registration statement became effective on August ___, 2000, adjusted to reflect the Fund's expenses. The CTF was not registered under the Investment Act of 1940 ("1940 Act") and therefore was not subject to certain investment restrictions that are imposed by the 1940 Act. If the CTF had been registered under the 1940 Act, performance may have been adversely affected.
The Fund's goal is long-term capital appreciation.
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The Fund pursues its goal by investing in stocks of large-cap companies utilizing a blended style of investing by using both a growth-based or value-based strategy. It is expected that the Fund will have the overall portfolio characteristics that define it as "large cap core," which is an investment style that has elements of both growth and value investing. However, the Adviser will typically favor a company's growth characteristics over its value characteristics.
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The Adviser selects economic sectors and industries with a potential for above average growth for a five year or more period. The Adviser seeks to identify companies that offer secular growth driven by factors such as technological changes and demographics and avoid industries subject to heavy governmental regulation or dependence on commodity pricing for growth. The Adviser uses fundamental research to identify companies with histories of sustained profitability and leadership within their respective industries. The primary focus is on the core earnings power of the company and the ability to provide above-average growth in revenues, earnings and cash flows for a multi-year period. At least 65% of the Fund's assets will be invested in these large cap stocks.
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[Graphic Representation Omitted--See Appendix]
The bar chart shows the variability of the Fund's shares total returns on a calendar year-end basis.
The total returns displayed for the Fund do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.
The Fund's total return for the six-month period from January 1, 2000 to June 30, 2000 was 2.33%.
Within the periods shown in the chart, the highest quarterly return was 26.07% (for the quarter ended December 31, 1998) and the lowest quarterly return was (10.25%) (for the quarter ended September 30, 1998).
The following table represents the Fund's Average Annual Total Return for the calendar periods ended December 31, 1999. The table shows the Fund's shares total returns over a period of years relative to the S&P 500 Index. Total returns for the indices shown do not reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
|
Calendar Period |
|
Large Cap |
|
S&P 500 |
|
1 Year |
|
12.88% |
|
21.04% |
|
Since Inception |
|
24.25% |
|
24.63% |
The Fund's shares start of performance date was December 17, 1997.
Past performance is no guarantee of future results. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
*The Fund is the successor to a portfolio of assets of a common trust fund (CTF), managed by the Adviser, which were transferred to the Fund on September ___, 2000 in exchange for Fund shares. The quoted performance includes the performance of the CTF for periods before the date the Fund's registration statement became effective on August ___, 2000, adjusted to reflect the Fund's expenses. The CTF was not registered under the Investment Act of 1940 ("1940 Act") and therefore was not subject to certain investment restrictions that are imposed by the 1940 Act. If the CTF had been registered under the 1940 Act, performance may have been adversely affected.
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The Fund's goal is long-term capital appreciation.
The Fund pursues its goal by investing primarily in growth-oriented stocks of large-cap companies. The Adviser focuses on companies which are industry leaders and which have strong balance sheets. The Adviser selects stocks of companies which have growth characteristics, such as above-average earnings growth potential. The Adviser also seeks to identify companies which are experiencing significant changes, such as new products, services, or methods of distribution, or overall business restructuring. In addition, the Adviser seeks to find companies that are expected to benefit from major secular changes occurring in society, politics and/or economics. Stocks in the Fund's portfolio will typically have above-average price-to-earnings ratios and dividend yields that are lower than the overall market. At least 65% of the Fund's assets will be invested in these growth-oriented large cap stocks.
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The Fund's goal is long-term capital appreciation.
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The Fund pursues its goal by investing in primarily in small-to-mid sized companies similar in size to those that comprise the S&P 400 Mid Cap Index. As of April 28, 2000, the range of the S&P 400 was $____ million to $___ billion. This range frequently changes as the market valuation of the stocks that comprise the index changes, or as stocks are added or removed from the index. The Adviser utilizes a blended style of investing by using a growth-based or value-based strategy (or both) as market conditions dictate. Stocks will be selected based upon either their relative value or potential for growth. The Adviser selects companies with strong earnings growth potential, a proven commitment to research and development of new products, strong management, and a demonstrated effectiveness in the marketplace. The Adviser will typically favor a company's growth characteristics over its value characteristics. In addition, the Adviser seeks to identify companies that are expected to benefit from major secu lar changes occurring in society, politics and/or economics. This investment approach is based on the conviction that, over the long term, the economy will continue to expand and develop and that this economic growth will be reflected in the growth of the revenues and earnings of publicly-held corporations. Ordinarily this investment strategy focuses on companies with moderate to high price/earnings ratios and dividend yields which are generally lower than the overall market. At least 65% of the Fund's assets will be invested in these mid cap core stocks.
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Since the Funds do not have a full calendar year of performance, they cannot yet provide you with performance information in the prospectus.
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The Fund's goal is to provide current income which is exempt from federal regular income tax and the personal income taxes imposed by the State of Vermont and Vermont municipalities.
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The Fund pursues its goal by investing primarily in high-quality municipal securities that pay interest that is exempt from federal regular income tax and personal income taxes imposed by the State of Vermont and Vermont municipalities. However, the interest on these securities may be subject to the federal alternative minimum tax (AMT). In order to manage the effects of interest rate changes on the Fund, the Adviser spreads maturities over a number years. To minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions, the Fund may temporarily depart from its principal investment strategies by investing its assets in securities subject to federal, Vermont state, and various Vermont municipal income taxes. This may cause the Fund to receive and distribute taxable income to investors. Under normal market conditions, at least 65% of the value of the Fund's assets will be invested in obligations issued by or on behalf of Vermont, its political subdivisions or agencies, or other securities that pay interest exempt from Vermont state and local personal income taxes.
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High-quality securities are rated in one of the top three ratings categories by a nationally recognized statistical ratings organization (NRSRO), or securities that are unrated but are determined by the Adviser to be of comparable quality. Downgraded securities will be evaluated on a case-by-case basis by the Adviser, who will determine whether or not the security continues to be an acceptable investment.
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[Graphic Representation Omitted--See Appendix]
The bar chart shows the variability of the Fund's shares total returns on a calendar year-end basis.
The total returns displayed for the Fund do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.
The Fund's total return for the six-month period from January 1, 2000 to June 30, 2000 was ____%.
Within the periods shown in the chart, the highest quarterly return was 4.94% (for the quarter ended December 31, 1990). The lowest quarterly return was (2.52%) (for the quarter ended March 31, 1994).
The following table represents the Fund's Average Annual Total Return for the calendar periods ended December 31, 1999. The table shows the Fund's shares total returns over a period of years relative to the Lehman 5-Year Municipal Bond Index. Total returns for the indices shown do not reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
|
Calendar Period |
|
Vermont |
|
Lehman 5-Year |
|
1 Year |
|
(2.98%) |
|
____% |
|
5 Years |
|
3.82% |
|
____% |
|
10 Years |
|
4.44% |
|
____% |
Past performance is no guarantee of future results. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
*The Fund is the successor to a portfolio of assets of a common trust fund (CTF), managed by the Adviser, which were transferred to the Fund on September ___, 2000 in exchange for Fund shares. The quoted performance includes the performance of the CTF for periods before the date the Fund's registration statement became effective on August ___, 2000, adjusted to reflect the Fund's expenses. The CTF was not registered under the Investment Act of 1940 ("1940 Act") and therefore was not subject to certain investment restrictions that are imposed by the 1940 Act. If the CTF had been registered under the 1940 Act, performance may have been adversely affected.
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The Fund's goal is to provide current income.
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The Fund pursues its goal by investing primarily in high-quality corporate bonds and securities issued by the U.S. government, its agencies and instrumentalities. High-quality securities are rated in one of the top three ratings categories by a nationally recognized statistical ratings organization (NRSRO), or securities that are unrated but are determined by the Adviser to be of comparable quality. Downgraded securities will be evaluated on a case-by-case basis by the Adviser, who will determine whether or not the security continues to be an acceptable investment. The Adviser's strategy is to adjust the Fund's weightings in these types of fixed-income securities, which in its opinion, will create the best opportunity for current income. The Adviser uses macroeconomic, credit and market analysis to select portfolio securities. The Fund maintains an average dollar-weighted maturity of three to ten years.
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[Graphic Representation Omitted--See Appendix]
The bar chart shows the variability of the Fund's shares total returns on a calendar year-end basis.
The total returns displayed for the Fund do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.
The Fund's total return for the six-month period from January 1, 2000 to June 30, 2000 was ____%.
Within the periods shown in the Chart, the highest quarterly return was 4.79% (for the quarter ended June 30, 1995). Its lowest quarterly return was (1.59%) (for the quarter ended March 31, 1994).
The following table represents the Fund's Average Annual Total Return for the calendar periods ended December 31, 1999. The table shows the Fund's shares total returns over a period of years relative to the Lehman Intermediate Government/Credit Index. Total returns for the indices shown do not reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
|
Calendar Period |
|
Intermediate |
|
Lehman |
|
1 Year |
|
(4.86%) |
|
0.39% |
|
5 Years |
|
5.16% |
|
7.10% |
|
10 Years |
|
5.52% |
|
7.26% |
Past performance is no guarantee of future results. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
*The Fund is the successor to a portfolio of assets of a common trust fund (CTF), managed by the Adviser, which were transferred to the Fund on September ___, 2000 in exchange for Fund shares. The quoted performance includes the performance of the CTF for periods before the date the Fund's registration statement became effective on August ___, 2000, adjusted to reflect the Fund's expenses. The CTF was not registered under the Investment Act of 1940 ("1940 Act") and therefore was not subject to certain investment restrictions that are imposed by the 1940 Act. If the CTF had been registered under the 1940 Act, performance may have been adversely affected.
All mutual funds take investment risks. Therefore, it is possible to lose money by investing in a Fund and there can be no assurance that a Fund will achieve its goal. The shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by The Stratevest Group, N.A. or its affiliates, and are not insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency.
|
Risks |
|
Large Cap |
|
Large Cap |
|
Large Cap |
|
Mid Cap |
|
Vermont |
|
Intermediate |
|
Stock Market Risks1 |
|
* |
|
* |
|
* |
|
* |
|
|
|
|
|
Risks Related to |
|
* |
|
|
|
* |
|
* |
|
|
|
|
|
Risks Related to |
|
|
|
* |
|
* |
|
* |
|
|
|
|
|
Risks Related to Company Size4 |
|
|
|
|
|
|
|
* |
|
|
|
|
|
Credit Risks5 |
|
|
|
|
|
|
|
|
|
* |
|
* |
|
Interest Rate Risks6 |
|
|
|
|
|
|
|
|
|
* |
|
* |
|
Call Risks7 |
|
|
|
|
|
|
|
|
|
* |
|
* |
|
Prepayment Risks8 |
|
|
|
|
|
|
|
|
|
* |
|
* |
|
Sector Risks9 |
|
* |
|
* |
|
* |
|
* |
|
* |
|
* |
|
Tax Risks10 |
|
|
|
|
|
|
|
|
|
* |
|
|
|
Diversification Risks11 |
|
|
|
|
|
|
|
|
|
* |
|
|
|
Vermont Risks12 |
|
|
|
|
|
|
|
|
|
* |
|
|
|
Liquidity Risks13 |
|
* |
|
* |
|
* |
|
* |
|
* |
|
* |
1 The value of equity securities rise and fall.
2 Value stocks depend less on price changes for returns and may lag behind growth stocks in an up market.
3 Growth stocks depend more on price changes for returns and may be more adversely affected in a down market compared to value stocks.
4 The smaller the capitalization of a company, the less liquid its stock and the more volatile its price.
5 The possibility that an issuer will default on a security by failing to pay interest or principal when due.
6 Prices of fixed income securities rise and fall in response to interest rate changes.
7 An issuer may redeem a fixed income security before maturity at a price below its current market price.
8 The relative volatility of mortgage-backed securities is due to the likelihood of prepayments which increase in a declining interest rate environment and decrease in a rising interest rate environment.
9 Market sectors may underperform other sectors or the market as a whole.
10 Changes in federal tax laws may cause the prices of municipal securities to fall.
11 The Vermont Municipal Bond Fund is non-diversified. Compared to diversified mutual funds, it may invest a higher percentage of its assets among fewer issuers of portfolio securities. This increases the Fund's risk by magnifying the impact (positively or negatively) that any one issuer has on the Fund's share price and performance.
12 Because the Vermont Municipal Bond Fund's portfolio may be comprised of securities issued or credit enhanced by issuers located in Vermont, the Fund will be more susceptible to any economic, business, political or other developments which generally affect these issuers.
13 Limited trading opportunities for certain securities and the inability to sell a security at will could result in losses to a Fund.
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Funds.
|
Shareholder Fees |
|
Intermediate |
|
Vermont |
|
Large Cap |
|
Large Cap |
|
Large Cap |
|
Mid Cap |
|
Maximum Sales Charge |
|
3.75% |
|
3.75% |
|
5.50% |
|
5.50% |
|
5.50% |
|
5.50% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Fund Operating Expenses (Before Waivers1) |
||||||||||||
|
Expenses That are Deducted from Fund Assets (as a percentage of projected average net assets) |
||||||||||||
|
Management Fee |
|
0.60% |
|
0.50% |
|
0.75% |
|
0.75% |
|
0.75% |
|
0.75% |
|
Distribution (12b-1) Fee2 |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
Shareholder Services Fee3 |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
Other Expenses |
|
0.29% |
|
0.34% |
|
0.36% |
|
0.30% |
|
0.59% |
|
0.48% |
|
Total Annual Fund Operating Expenses |
|
1.39% |
|
1.34% |
|
1.61% |
|
1.55% |
|
1.84% |
|
1.73% |
|
Fee Waiver |
|
0.30% |
|
0.30% |
|
0.30% |
|
0.30% |
|
0.38% |
|
0.33% |
|
Net Expense |
|
1.09% |
|
1.04% |
|
1.31% |
|
1.25% |
|
1.46% |
|
1.40% |
|
1 Based on certain contractual fee waivers that may change after August 31, 2000. |
||||||||||||
|
2 The distributor has contractually agreed to waive the distribution (12b-1) fee for the fiscal year ending August 31, 2001. |
||||||||||||
|
3 The shareholder servicing agent has agreed to contractually waive a portion of the shareholder services fee. The shareholder services fee will be 0.20% for the fiscal year ending August 31, 2001. |
||||||||||||
The following Example is intended to help you compare the cost of investing in a Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in a Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that a Fund's operating expenses are as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|
|
|
1 Year |
|
3 Years |
|
5 Years |
|
10 Years |
||||||||||||
|
Intermediate Bond Fund |
|
|
$ |
482 |
|
|
|
$ |
770 |
|
|
$ |
1,079 |
|
|
|
$ |
1,955 |
|
|
|
Vermont Municipal Bond Fund |
|
|
$ |
477 |
|
|
|
$ |
755 |
|
|
$ |
1,054 |
|
|
|
$ |
1,902 |
|
|
|
Large Cap Growth Fund |
|
|
$ |
676 |
|
|
|
$ |
1,003 |
|
|
$ |
1,352 |
|
|
|
$ |
2,333 |
|
|
|
Large Cap Value Fund |
|
|
$ |
670 |
|
|
|
$ |
985 |
|
|
$ |
1,321 |
|
|
|
$ |
2,270 |
|
|
|
Large Cap Core Fund |
|
|
$ |
691 |
|
|
|
$ |
1,062 |
|
|
$ |
1,456 |
|
|
|
$ |
2,558 |
|
|
|
Mid Cap Core Fund |
|
|
$ |
685 |
|
|
|
$ |
1,035 |
|
|
$ |
1,409 |
|
|
|
$ |
2,455 |
|
|
<R>
</R>
Equity securities represent a share of an issuer's earnings and assets, after the issuer pays its liabilities. A Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. However, equity securities offer greater potential for appreciation than many other types of securities, because their value increases directly with the value of the issuer's business. The following describes the types of equity securities in which the Funds invests.
Common stocks are the most prevalent type of equity security. Common stocks receive the issuer's earnings after the issuer pays its creditors and any preferred stockholders. As a result, changes in an issuer's earnings directly influence the value of its common stock.
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the types of fixed income securities in which the Funds may invest.
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a GSE). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
The Funds treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the market and prepayment risks of these mortgage backed securities.
Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Funds may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
Municipal securities are issued by states, counties, cities and other political subdivisions and authorities. Although many municipal securities are exempt from federal income tax, the Funds may invest in taxable municipal securities.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and pre-payments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of commercial paper, notes, or pass through certificates. Asset backed securities have prepayment risks. Like collateralized mortgage obligations ("CMOs"), asset backed securities may be structured like certain classes of mortgage backed securities known as Floaters and Inverse Floaters, interest only mortgage backed securities ("IOs") and principal only mortgage backed securities ("POs").
Tax exempt securities are fixed income securities that pay interest that is not subject to regular federal income taxes. Typically, states, counties, cities and other political subdivisions and authorities issue tax exempt securities. The market categorizes tax exempt securities by their source of repayment.
General obligation bonds are supported by the issuer's power to exact property or other taxes. The issuer must impose and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to impose additional taxes may be limited by its charter or state law.
Municipal notes are short-term tax exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds.
The Funds may temporarily depart from their principal investment strategies by investing their assets in cash and shorter-term debt securities and similar obligations. They may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Funds to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and a Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When a Fund receives your transaction request in proper form (as described in this prospectus) it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. From time to time the Funds may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of a Fund's assets may change on days you cannot purchase or redeem Shares.
Market values of the Funds' portfolio securities are determined as follows: Equity securities are generally valued according to the last sale price in the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). Fixed income securities are generally valued according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost.
The following table summarizes the minimum required investment amount and the maximum sales charge, if any, that you will pay on an investment in a Fund. An investor's minimum investment is calculated by combining all accounts the investor maintains with the Trust. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
|
Fund |
|
Minimum |
|
Maximum |
|
Large Cap Value Fund |
|
$2,500/$100 |
|
5.50% |
|
Large Cap Growth Fund |
|
$2,500/$100 |
|
5.50% |
|
Large Cap Core Fund |
|
$2,500/$100 |
|
5.50% |
|
Mid Cap Core Fund |
|
$2,500/$100 |
|
5.50% |
|
Vermont Municipal Bond Fund |
|
$2,500/$100 |
|
3.75% |
|
Intermediate Bond Fund |
|
$2,500/$100 |
|
3.75% |
1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amounts for Systematic Investment Programs is $100. Investment professionals may impose higher or lower minimum investment requirements on their customers than those imposed by a Fund.
Shares of the Large Cap Value Fund, Large Cap Growth Fund, Large Cap Core Fund and Mid Cap Core Fund are sold at their net asset value next determined after an order is received, plus a sales charge as follows:
|
Purchase Amount |
|
Sales Charge |
|
Sales Charge |
|
Less than $50,000 |
|
5.50% |
|
5.82% |
|
$50,000 but less than $100,000 |
|
4.50% |
|
4.71% |
|
$100,000 but less than $250,000 |
|
3.75% |
|
3.90% |
|
$250,000 but less than $500,000 |
|
2.50% |
|
2.56% |
|
$500,000 but less than $1 million |
|
2.00% |
|
2.04% |
|
$1 million or greater |
|
0.00% |
|
0.00% |
Shares of the Vermont Municipal Bond Fund and Intermediate Bond Fund are sold at their net asset value next determined after an order is received, plus a sales charge as follows:
|
Purchase Amount |
|
Sales Charge |
|
Sales Charge |
|
Less than $25,000 |
|
3.75% |
|
3.90% |
|
$25,000 but less than $50,000 |
|
3.50% |
|
3.63% |
|
$50,000 but less than $100,000 |
|
3.00% |
|
3.09% |
|
$100,000 but less than $250,000 |
|
2.50% |
|
2.56% |
|
$250,000 but less than $500,000 |
|
1.50% |
|
1.52% |
|
$500,00 but less than $1 million |
|
1.00% |
|
1.01% |
|
$1 million or greater |
|
0.00% |
|
0.00% |
If your investment qualifies for a reduction or elimination of the sales charge as described below, you or your investment professional should notify the Funds' Distributor at the time of purchase. If the Distributor is not notified, you will receive the reduced sales charge only on additional purchases, and not retroactively on previous purchases.
The sales charge at purchase may be reduced by:
The sales charge at purchase may be eliminated when shares are purchased:
The Fund's Distributor, Edgewood Services, Inc., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals. The Vermont Municipal Bond Fund may not be a suitable investment for retirement plans or for non-Vermont taxpayers because it invests in Vermont municipal securities.
When the Distributor receives marketing fees and sales charges, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
The Funds have adopted a Rule 12b-1 Plan, which allows them to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Funds' Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. The Funds will not accrue or pay any distribution expenses pursuant to the Plan until a separate class of shares has been registered with the Securities and Exchange Commission.
You may purchase Shares through the Stratevest Group, N.A., through an authorized broker/dealer, or directly from the Funds. Purchase orders must be received by 4:00 p.m. (Eastern time) in order to receive Fund shares at that day's public offering price. The Funds reserve the right to reject any request to purchase or exchange Shares.
Shareholders with existing accounts may purchase shares by Federal Reserve Wire. Trust customers should contact their account officer. All other customers should call Stratevest Funds Shareholder Services at 1-888-247-4505. You cannot purchase Shares by wire on holidays when the Federal Reserve is closed.
Submit a completed account application or additional investment form. Your form of payment may be by a check payable to the particular Fund or an authorization in your account application to withdraw funds from your checking account at an ACH member bank.
Checks should be sent to:
<R>
Stratevest Funds Shareholder Services
P.O. Box 8612
Boston, MA 02266-8612
</R>
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Stratevest Funds Shareholder Services
1099 Hingham Street
Rockland, MA 02370
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Funds will not accept third-party checks (checks originally payable to someone other than you or a Fund).
You may purchase Shares through an exchange from another Stratevest Fund. You must meet the minimum initial investment requirement for purchasing Shares and both accounts must have identical registrations. In addition, shares of the Funds may also be exchanged for certain other mutual funds distributed by Edgewood Services, Inc. and Federated Securities Corp. See "How to Exchange Shares" below for more information.
Once you have opened an account, you may automatically purchase additional Shares in a minimum amount of $100 on a regular basis by completing the Systematic Investment Program section of the New Account Form or by contacting the Funds or your investment professional.
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You may purchase Shares as retirement investments (such as qualified plans and IRAs or transfer or rollover of assets). Call your investment professional or the Funds for information on retirement investments. We suggest that you discuss retirement investments with your tax adviser. You may be subject to an annual IRA account fee. The Vermont Municipal Bond Fund may not be a suitable investment for retirement plans because it invests in municipal securities.
<R>
You may exchange Fund Shares for Shares of any other Fund in the Trust without a sales charge. Trust customers should call the Stratevest Shareholder Services at 1-888-247-4505 and all other investors should call or write to Stratevest Funds Shareholder Services, P.O. Box 8612, Boston MA 02266-8612. You must meet the minimum initial investment requirement for purchasing Shares and both accounts must have a common owner. Your exchange request must be received by 4:00 p.m. (Eastern time) in order for Shares to be exchanged based on that day's NAV.
</R>
In addition, shares of the Funds may also be exchanged for certain other mutual funds distributed by Edgewood Services, Inc. or Federated Securities Corp. ("Federated Funds").
To do this you must:
An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.
The Funds may modify or terminate the exchange privilege at any time. The Funds' management or investment adviser may determine from the amount, frequency and pattern of exchanges that a shareholder is engaged in excessive trading that is detrimental to a Fund and other shareholders. If this occurs, a Fund may terminate the availability of exchanges to that shareholder and may bar that shareholder from purchasing other Funds.
For further information on the availability of Federated Funds for exchange or further information about the exchanges privilege, call 1-888-247-4505.
Each Fund redeems Shares at their NAV next determined after the Fund receives the redemption request in proper form. If a redemption order is received before the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time), the redemption proceeds will normally be paid through the ACH system to the shareholder's bank account application, normally the second business day. Otherwise, a check for redemption proceeds will be mailed within one business day after receipt of a proper written redemption request.
Once you have completed the appropriate authorization form for telephone transactions, you may redeem Shares of a Fund by calling Stratevest Funds Shareholder Services at 1-888-247-4505. The Funds will record your telephone instructions. The Funds will follow reasonable procedures to insure telephone instructions are transmitted by authorized parties and are not fraudulent.
Trust customers should contact their account officer to receive redemption proceeds by Federal Reserve Wire. All other customers should contact Stratevest Funds Shareholder Services at 1-888-247-4505. Wire orders will only be accepted on days on which the Funds and the Federal Reserve Banks are open for business.
You may redeem Shares by mailing a written request to the Funds at:
<R>
Stratevest Funds
P.O. Box 8612
Boston, MA 02266-8612
</R>
Send requests by private courier or overnight delivery service to:
<R>
Stratevest Funds
1099 Hingham Street
Rockland, MA 02370
</R>
All requests must include:
Call your investment professional or the Funds if you need special instructions.
Signatures must be guaranteed if:
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.
Although the Funds intend to pay Share redemptions in cash, they reserve the right to pay the redemption price in whole or in part by a distribution of a Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from a Fund if those checks are undeliverable and returned to the Fund.
In the absence of your specific instructions, 10% of the value of your redemption from a retirement account in a Fund may be withheld for taxes. This withholding only applies to certain types of retirement accounts.
You may automatically redeem or exchange Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Funds. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. Generally, it is not advisable to continue to purchase Shares subject to a sales charge while redeeming Shares using this program.
The Funds will record your telephone instructions. If a Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Funds do not issue share certificates.
You will receive confirmation of purchases, redemptions and exchanges (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, dividends and capital gains paid.
The Large Cap Value Fund, Large Cap Growth Fund, Large Cap Core Fund and Mid Cap Core Fund declare and pay any dividends annually to shareholders. The Intermediate Bond Fund and Vermont Municipal Bond Fund declare and pay any dividends monthly to shareholders. Dividends are paid to all shareholders invested in a Fund on the record date. The record date is the date on which a shareholder must officially own Shares in order to earn a dividend.
In addition, the Funds pay any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a dividend or capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before a Fund declares a dividend or capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, non-retirement accounts may be closed if redemptions or exchanges cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Funds send an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time a Fund holds its assets.
With respect to Large Cap Value Fund, Large Cap Core Fund, Large Cap Growth Fund, and Mid Cap Core Fund, fund distributions are expected to be both dividends and capital gains. With respect to the Vermont Municipal Bond Fund and Intermediate Bond Fund, fund distributions are expected to be primarily dividends. Redemptions and exchanges are taxable sales.
It is anticipated that Vermont Municipal Bond Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Vermont Municipal Bond Fund's dividends will be exempt from the Vermont taxes discussed above to the extent they are derived from interest on obligations exempt from such taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in a Fund. Redemptions and exchanges are taxable sales.
Please consult your tax adviser regarding your federal, state and local tax liability.
The Board of Trustees governs the Funds. The Board selects and oversees the Adviser, The Stratevest Group, N.A. The Adviser manages each Fund's assets, including buying and selling portfolio securities. The Adviser has managed the Funds since their inception and managed the predecessor
common/collective trust funds. The Adviser's address is 111 Main Street, Burlington, Vermont.
<R>
The Adviser is a national banking association and is a wholly-owned subsidiary of Banknorth Group, a New England-based holding company. The Adviser and its affiliates have provided wealth management services to individuals and institutional investors since __________. As of May 31, 2000, the Adviser had approximately _________ in assets under management. The Adviser has managed the Funds since their inception.
</R>
<R>
The Large Cap Value Fund is co-managed by William S. Wolff and J. Alan Day. Mr. Wolff is a Managing Director and Senior Vice President of Investments of the Adviser, and has been employed by the Adviser and/or its predecessors since 1970. Mr. Wolff's 28 years of investment experience includes management of pooled investment vehicles (such as common and collective trust funds) with a variety of investment styles, including value investing, large, mid and small cap investing, and fixed income management. He earned a B.S. degree from the University of Vermont and a CTFA designation. Mr. Day is the Chief Economist, Vice President and an Investment Consultant of the Adviser, and has been employed by the Adviser and/or its predecessors since 1985. Mr. Day's banking and economic experience includes 28 years of investment management, market analysis, and commercial banking. He earned a B.A. from Ohio State University and is a graduate of the Stonier Graduate School of Banking.
The Large Cap Growth Fund is co-managed by H. Ashley Smith and Reginald P. Vincent. Messrs. Smith and Vincent have each been a Vice President and Senior Investment Counselor of the Adviser since 1998. Prior to 1998, they were both Senior Investment Counselors and members of the Investment Strategy Committee of the Private Banking Group for the Bank of Boston. Both managers' 30 years of investment experience includes developing and establishing investment policy, equity research and management of a wide range of individual, employee benefit and nonprofit accounts. Mr. Smith is a graduate of the Choate School and Babson College and is a member of the New York Society of Security Analysts. Mr. Vincent is a graduate of St. Lawrence University, the Municipal Bond School of the New York Stock Exchange and the National Association of Securities Dealers.
The Large Cap Core Fund is co-managed by Jonathan White and Dana Mitiguy. Mr. White has been a Senior Vice President and an Investment Consultant of the Adviser and/or its predecessors since 1994. Mr. White has over 25 years of investment management and trust services experience. He earned a B.A. from Dartmouth University and an M.B.A. from the University of New Hampshire. Mr. White is a Chartered Financial Analyst. Mr. Mitiguy has been a Senior Vice President and an Investment Consultant of the Adviser since 1995. Mr. Mitiguy has over 16 years of investment management and trust services experience. He earned a B.A. in Economics from Middlebury College and attended Cannon Trust School. Mr. Mitiguy has taken courses at Harvard University, Pace University and The New York Institute of Finance. Mr. Mitiguy is a Chartered Financial Analyst.
</R>
<R>
The Mid Cap Core Fund, Vermont Municipal Bond Fund and Intermediate Bond Fund are co-managed by Mr. Wolff and Ms. Carol Smith. Ms. Smith is a Vice President and Investment Consultant and has been employed by the Adviser and/or its predecessors since 1983. Ms. Smith's banking and economic experience include 17 years of investment management. She earned a B.S. in Business Administration from the University of Vermont and is a graduate of the New York Bankers Investment School.
</R>
The Adviser receives an investment advisory fee equal to a percentage of each Fund's average daily net assets at the following annual rates: 0.75% of Large Cap Value Fund, Large Cap Growth Fund, Large Cap Core Fund and Mid Cap Core Fund; 0.50% of Vermont Municipal Bond Fund and 0.60% of Intermediate Bond Fund. The Adviser may voluntarily waive a portion of its fee or reimburse a Fund for certain operating expenses.
The Funds' fiscal year end is ________. As this is the Funds' first fiscal year, financial information is not yet available.
<R>
</R>
A Statement of Additional Information (SAI) dated September _____, 2000, is incorporated by reference into this prospectus. To obtain the SAI and other information without charge, and make inquiries, call your investment professional or the Funds at 1-888-247-4505.
You can obtain information about the Funds (including the SAI) by writing to or visiting the Public Reference Room in Washington, DC. You may also access fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at [email protected] or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.
Stratevest Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7010
Edgewood Services, Inc., Distributor
<R>
Investment Company Act File No. 811-10021
Cusip 862793106
Cusip 862793205
Cusip 862793304
Cusip 862793403
Cusip 862793502
Cusip 862793601
25660 (7/00)
</R>
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
STATEMENT OF ADDITIONAL INFORMATION
STRATEVEST FUNDS
<R>STRATEVEST LARGE CAP VALUE FUND STRATEVEST LARGE CAP CORE FUND STRATEVEST
LARGE CAP GROWTH FUND STRATEVEST MID CAP CORE FUND STRATEVEST VERMONT MUNICIPAL
BOND FUND STRATEVEST INTERMEDIATE BOND FUND
This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in
conjunction with the prospectus for the Stratevest Funds dated September ______,
2000. Obtain the prospectus without charge by calling 1- 888-247-4505. </R>
september _______, 2000
CONTENTS
How are the Funds Organized?
Securities in Which the Funds Invest
What do Shares Cost?
How are the Funds Sold?
Exchanging Securities for Shares
Subaccounting Services
Redemption in Kind
Account and Share Information
Tax Information
Who Manages and Provides Services to the Funds?
How Do the Funds Measure Performance?
Financial Information
Investment Ratings
Addresses
<R>CUSIP 862793106 CUSIP 862793205 CUSIP 862793304 CUSIP 862793403 CUSIP
862793502 CUSIP 862793601
25661 (09/00)</R>
HOW ARE THE FUNDS ORGANIZED?
<R>Stratevest Funds ("Trust") is an open-end, management investment company that
was established under the laws of the State of Delaware on July 10, 2000. The
Trust may offer separate series of shares representing interests in separate
portfolios of securities. The Trust currently offers five diversified
portfolios: Stratevest Large Cap Value Fund, Stratevest Large Cap Growth Fund,
Stratevest Large Cap Core Fund, Stratevest Mid Cap Core Fund (collectively
referred to as the Equity Funds) and Stratevest Intermediate Bond Fund, and one
non-diversified portfolio, Stratevest Vermont Municipal Bond Fund. The Funds'
investment adviser is The Stratevest Group, N.A. (Adviser). </R>
SECURITIES IN WHICH THE FUNDS INVEST
In pursuing its investment strategy, a Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
Following tables indicate which types of securities are a: o P = Principal
investment of a Fund; o A = Acceptable (but not principal) investment of a Fund;
or o NA= Not an acceptable investment of a Fund.
<R>However, a Fund may invest in certain securities that are noted below as "NA"
for temporary defensive purposes.</R>
----------------------------------------------------------------------------------------
<R>SECURITIES LARGE-CAP LARGE-CAP LARGE-CAP MID-CAP VERMONT INTERMEDIATE
VALUE CORE FUND GROWTH CORE FUND MUNICIPAL BOND FUND
FUND FUND BOND FUND
----------------------------------------------------------------------------------------
COMMON STOCKS P P P P NA NA
----------------------------------------------------------------------------------------
PREFERRED STOCKS A A A A NA NA
----------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT A A A A NA NA
TRUSTS
----------------------------------------------------------------------------------------
WARRANTS A A A A NA NA
----------------------------------------------------------------------------------------
TREASURY SECURITIES NA NA NA NA A P
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
AGENCY SECURITIES NA NA NA NA A P
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
CORPORATE DEBT NA NA NA NA NA P
SECURITIES
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
COMMERCIAL PAPER NA NA NA NA NA A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
TAXABLE MUNICIPAL NA NA NA NA P NA
SECURITIES
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
MORTGAGE BACKED NA NA NA NA NA A
SECURITIES
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE NA NA NA NA NA A
OBLIGATIONS
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
ASSET BACKED SECURITIES NA NA NA NA NA A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
ZERO COUPON SECURITIES NA NA NA NA NA A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
BANK INSTRUMENTS NA NA NA NA NA A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
INSURANCE CONTRACTS NA NA NA NA NA A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
CREDIT ENHANCEMENT NA NA NA NA A A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES A A A A NA NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS NA NA NA NA P NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
SPECIAL REVENUE BONDS NA NA NA NA A NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
PRIVATE ACTIVITY BONDS NA NA NA NA A NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
TAX INCREMENT FINANCING NA NA NA NA A NA
BOND
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
MUNICIPAL NOTES NA NA NA NA P NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NA NA NA NA A NA
INSTRUMENTS
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
MUNICIPAL LEASES NA NA NA NA A NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
DEPOSITARY RECEIPTS A A A A NA NA
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
FOREIGN GOVERNMENT NA NA NA NA NA A
SECURITIES
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
FUTURES CONTRACTS A A A A A A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
OPTIONS A A A A A A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS A A A A A A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
DELAYED DELIVERY NA NA NA NA NA A
TRANSACTIONS
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
TO BE ANNOUNCED NA NA NA NA NA A
SECURITIES (TBAS)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
DOLLAR ROLLS NA NA NA NA NA A
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
INVESTING IN SECURITIES A A A A A A
OF OTHER INVESTMENT
COMPANIES
----------------------------------------------------------------------------------------
</R>
SECURITIES DESCRIPTIONS AND TECHNIQUES
EQUITY SECURITIES
Equity securities represent a share of an issuer's earnings and assets, after
the issuer pays its liabilities. The Funds cannot predict the income it will
receive from equity securities because issuers generally have discretion as to
the payment of any dividends or distributions. However, equity securities offer
greater potential for appreciation than many other types of securities, because
their value may increase with the value of the issuer's business. The following
describes the types of equity securities in which the Funds invest.
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings may
influence the value of its common stock.
<R>PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and distributions paid on
common stock. Preferred stocks may also permit the issuer to redeem the
stock. The Funds may also treat such redeemable preferred stock as a fixed
income security.</R>
REAL ESTATE INVESTMENT TRUSTS (REITS)
REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax if
they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial
real estate market.
<R>WARRANTS
Warrants give the Funds the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the
expiration date). The Funds may buy the designated securities by paying the
exercise price before the expiration date. Warrants may become worthless if
the price of the stock does not rise above the exercise price by the
expiration date. This increases the market risks of warrants as compared to
the underlying security. Rights are the same as warrants, except companies
typically issue rights to existing stockholders.</R>
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
The following describes the types of fixed income securities in which a Fund may
invest.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the
lowest credit risks.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The
United States supports some GSEs with its full faith and credit. Other GSEs
receive support through federal subsidies, loans or other benefits. A few
GSEs have no explicit financial support, but are regarded as having implied
support because the federal government sponsors their activities. Agency
securities are generally regarded as having low credit risks, but not as low
as treasury securities.
The Funds treat mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does not
reduce the market and prepayment risks of these mortgage
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities. A Fund may also purchase interests in bank loans
to companies. The credit risks of corporate debt securities vary widely among
issuers.
In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust
preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer
any payment that would reduce its capital below regulatory requirements.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and
use the proceeds (or bank loans) to repay maturing paper. If the issuer
cannot continue to obtain liquidity in this fashion, its commercial paper
may default.
TAXABLE MUNICIPAL SECURITIES
Municipal securities are issued by states, counties, cities and other
political subdivisions and authorities. Although the majority of municipal
securities are exempt from federal income tax, a Fund may invest in taxable
municipal securities.
MORTGAGE BACKED SECURITIES
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer
deducts its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates
receive a pro rata share of all payments and pre-payments from the underlying
mortgages. As a result, the holders assume all the prepayment risks of the
underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs, including interests in real estate mortgage investment conduits
(REMICs), allocate payments and prepayments from an underlying
pass-through certificate among holders of different classes of mortgage
backed securities. This creates different prepayment and interest rate
risks for each CMO class. The degree of increased or decreased prepayment
risks depends upon the structure of the CMOs. However, the actual returns
on any type of mortgage backed security depend upon the performance of the
underlying pool of mortgages, which no one can predict and will vary among
pools.
ASSET BACKED SECURITIES
Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial debts
with maturities of less than ten years. However, almost any type of fixed
income assets (including other fixed income securities) may be used to create
an asset backed security. Asset backed securities may take the form of
commercial paper, notes, or pass through certificates. Asset backed
securities have prepayment risks. Like CMOs, asset backed securities may be
structured like certain classes of mortgage backed securities known as
Floaters and Inverse Floaters, interest only mortgage backed securities
("IOs") and principal only mortgage backed securities ("POs").
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred
to as a coupon payment). Investors buy zero coupon securities at a price
below the amount payable at maturity. The difference between the purchase
price and the amount paid at maturity represents interest on the zero coupon
security. Investors must wait until maturity to receive interest and
principal, which increases the interest rate risks and credit risks of a zero
coupon security.
There are many forms of zero coupon securities. Some are issued at a discount
and are referred to as zero coupon or capital appreciation bonds. Others are
created from interest bearing bonds by separating the right to receive the
bond's coupon payments from the right to receive the bond's principal due at
maturity, a process known as coupon stripping. Treasury STRIPs, IOs and POs
are the most common forms of stripped zero coupon securities. In addition,
some securities give the issuer the option to deliver additional securities
in place of cash interest payments, thereby increasing the amount payable at
maturity. These are referred to as pay-in-kind or PIK securities.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Yankee instruments are denominated in U.S. dollars and issued
by U.S. branches of foreign banks. Eurodollar instruments are denominated in U.S.
dollars and issued by non-U.S. branches of U.S. or foreign banks.
INSURANCE CONTRACTS
Insurance contracts include guaranteed investment contracts, funding agreements
and annuities. A Fund treats these contracts as fixed income securities.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based in part upon its credit enhancement.
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to security's
holders. Either form of credit enhancement reduces credit risks by providing
another source of payment for a fixed income security.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities that a Fund has the option to
exchange for equity securities at a specified conversion price. The option
allows a Fund to realize additional returns if the market price of the equity
securities exceeds the conversion price. For example, a Fund may hold fixed
income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed income securities.
Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit a
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to regular federal income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact
property or other taxes. The issuer must impose and collect taxes sufficient
to pay principal and interest on the bonds. However, the issuer's authority
to impose additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by
the issuer such as specific taxes, assessments, tolls, or fees. Bondholders
may not collect from the municipality's general taxes or revenues. For
example, a municipality may issue bonds to build a toll road, and pledge the
tolls to repay the bonds. Therefore, a shortfall in the tolls normally would
result in a default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new
factory to improve its local economy. The municipality would lend the
proceeds from its bonds to the company using the factory, and the company
would agree to make loan payments sufficient to repay the bonds. The bonds
would be payable solely from the company's loan payments, not from any
other revenues of the municipality. Therefore, any default on the loan
normally would result in a default on the bonds.
The interest on many types of private activity bonds is subject to the
federal alternative minimum tax (AMT). A Fund may invest in bonds subject
to AMT.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or
other revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF
bonds would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and
related tax collections, failed to increase as anticipated.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities
issue such notes to fund their current operations before collecting taxes or
other municipal revenues. Municipalities may also issue notes to fund capital
projects prior to issuing long-term bonds. The issuers typically repay the
notes at the end of their fiscal year, either with taxes, other revenues or
proceeds from newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a
variable rate intended to cause the securities to trade at their face value.
The Funds treat demand instruments as short-term securities, because their
variable interest rate adjusts in response to changes in market rates, even
though their stated maturity may extend beyond thirteen months.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject
to annual appropriation. In other words, a municipality may end a lease,
without penalty, by not providing for the lease payments in its annual
budget. After the lease ends, the lessor can resell the equipment or facility
but may lose money on the sale.
The Funds may invest in securities supported by pools of municipal leases.
The most common type of lease backed securities are certificates of
participation (COPs). However, the Funds may also invest directly in
individual leases.
FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United States. The
Funds consider an issuer to be based outside the United States if:
o it is organized under the laws of, or has a principal office located in,
another country;
o the principal trading market for its securities is in another country; or
o it (or its subsidiaries) derived in its most current fiscal year at least 50%
of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.
The foreign securities in which the Funds invest are primarily denominated in
U.S. dollars. Along with the risks normally associated with domestic securities
of the same type, foreign securities are subject to risks of foreign investing.
DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by a
foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are traded in the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in
overseas markets. ADRs are also traded in U.S. dollars, eliminating the need
for foreign exchange transactions. The foreign securities underlying European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs), and
International Depositary Receipts (IDRs), are traded globally or outside the
United States. Depositary receipts involve many of the same risks of
investing directly in foreign securities, including currency risks and risks
of foreign investing.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples of these include, but are not limited to, the
International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Investment Bank and the Inter-American
Development Bank.
Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's full faith and credit.
Further, foreign government securities include mortgage-related securities
issued or guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, a Fund could close out an open contract to buy an asset at a future
date by entering into an offsetting contract to sell the same asset on the same
date. If the offsetting sale price is more than the original purchase price, the
Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may
limit the amount of open contracts permitted at any one time. Such limits may
prevent a Fund from closing out a position. If this happens, a Fund will be
required to keep the contract open (even if it is losing money on the contract),
and to make any payments required under the contract (even if it has to sell
portfolio securities at unfavorable prices to do so). Inability to close out a
contract could also harm a Fund by preventing it from disposing of or trading
any assets it has been using to secure its obligations under the contract.
A Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how a Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease a Fund's exposure to market and
currency risks, and may also expose a Fund to liquidity and leverage risks. OTC
contracts also expose a Fund to credit risks in the event that a counterparty
defaults on the contract.
A Fund may trade in the following types of derivative contracts.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified
price, date, and time. Entering into a contract to buy an underlying asset is
commonly referred to as buying a contract or holding a long position in the
asset. Entering into a contract to sell an underlying asset is commonly
referred to as selling a contract or holding a short position in the asset.
OPTIONS
Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call
option gives the holder (buyer) the right to buy the underlying asset from
the seller (writer) of the option. A put option gives the holder the right to
sell the underlying asset to the writer of the option. The writer of the
option receives a payment, or premium, from the buyer, which the writer keeps
regardless of whether the buyer uses (or exercises) the option.
The Funds may also write call options to generate income from premiums, and
in anticipation of a decrease or only limited increase in the value of the
underlying asset. If a call written by a Fund is exercised, the Fund foregoes
any possible profit from an increase in the market price of the underlying
asset over the exercise price plus the premium received.
The Funds may also write put options to generate income from premiums, and in
anticipation of an increase or only limited decrease in the value of the
underlying asset. In writing puts, there is a risk that a Fund may be
required to take delivery of the underlying asset when its current market
price is lower than the exercise price.
When a Fund writes options on futures contracts, it will be subject to margin
requirements similar to those applied to futures contracts.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which a Fund buys a security from a
dealer or bank and agree to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting a
Fund's return on the transaction. This return is unrelated to the interest
rate on the underlying security. The Funds will enter into repurchase
agreements only with banks and other recognized financial institutions, such
as securities dealers, deemed creditworthy by the Adviser.
The Funds' custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor
the value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to counterparty risks.
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which a Fund buys securities for a set price, with payment
and delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to a Fund. A Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the
price of its shares. Settlement dates may be a month or more after entering
into these transactions so that the market values of the securities bought
may vary from the purchase prices. Therefore, delayed delivery transactions
create market risks for the Fund. Delayed delivery transactions also involve
credit risks in the event of a counterparty default. These transactions
create leverage risks.
TO BE ANNOUNCED SECURITIES (TBAS)
As with other delayed delivery transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the
particular securities to be delivered. Instead, a Fund agrees to accept any
security that meets specified terms. For example, in a TBA mortgage backed
transaction, a Fund and the seller would agree upon the issuer, interest rate
and terms of the underlying mortgages. The seller would not identify the
specific underlying mortgages until it issues the security. TBA mortgage
backed securities increase interest rate risks because the underlying
mortgages may be less favorable than anticipated by a Fund.
DOLLAR ROLLS
Dollar rolls are transactions where the Fund sells mortgage backed securities
with a commitment to buy similar, but not identical, mortgage backed
securities on a future date at a lower price. Normally, one or both
securities involved are TBA mortgage backed securities. Dollar rolls are
subject to interest rate risks and credit risks. These transactions create
leverage risks.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
A Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
<R>INVESTMENT RATINGS FOR HIGH GRADE SECURITIES
The Adviser will determine whether a security is high grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to high grade
securities (AAA, AA, and A) based on their assessment of the likelihood of the
issuer's inability to pay interest or principal (default) when due on each
security. Lower credit ratings correspond to higher credit risk. If a security
has not received a rating, a Fund must rely entirely upon the Adviser's credit
assessment that the security is comparable to high grade. </R>
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
INVESTMENT RISKS
There are many factors which may affect an investment in the Funds. The Funds'
principal risks are described in its prospectus. Additional risk factors are
outlined below.
STOCK MARKET RISKS
o The value of equity securities in a Fund's portfolio will rise and fall.
These fluctuations could be a sustained trend or a drastic movement. A Fund's
portfolio will reflect changes in prices of individual portfolio stocks or
general changes in stock valuations. Consequently, a Fund's share price may
decline.
o The Adviser attempts to manage market risk by limiting the amount a Fund
invests in each company's equity securities. However, diversification will
not protect a Fund against widespread or prolonged declines in the stock
market.
SECTOR RISKS
o Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain
sector may underperform other sectors or the market as a whole. As the
Adviser allocates more of a Fund's portfolio holdings to a particular sector,
a Fund's performance will be more susceptible to any economic, business or
other developments which generally affect that sector.
RISKS RELATED TO INVESTING FOR GROWTH
o Due to their relatively high valuations, growth stocks are typically more
volatile than value stocks. For instance, the price of a growth stock may
experience a larger decline on a forecast of lower earnings, a negative
fundamental development, or an adverse market development. Further, growth
stocks may not pay dividends or may pay lower dividends than value stocks.
This means they depend more on price changes for returns and may be more
adversely affected in a down market compared to value stocks that pay higher
dividends.
RISKS RELATED TO INVESTING FOR VALUE
o Due to their relatively low valuations, value stocks are typically less
volatile than growth stocks. For instance, the price of a value stock may
experience a smaller increase on a forecast of higher earnings, a positive
fundamental development, or positive market development. Further, value
stocks tend to have higher dividends than growth stocks. This means they
depend less on price changes for returns and may lag behind growth stocks in
an up market.
RISKS RELATED TO COMPANY SIZE
o Generally, the smaller the market capitalization of a company, the fewer the
number of shares traded daily, the less liquid its stock and the more
volatile its price. Market capitalization is determined by multiplying the
number of its outstanding shares by the current market price per share.
o Companies with smaller market capitalizations also tend to have unproven
track records, a limited product or service base and limited access to
capital. These factors also increase risks and make these companies more
likely to fail than companies with larger market capitalizations.
INTEREST RATE RISKS
o Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates
rise, prices of fixed income securities fall. However, market factors, such
as the demand for particular fixed income securities, may cause the price of
certain fixed income securities to fall while the prices of other securities
rise or remain unchanged.
o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of
a fixed income security to changes in interest rates.
CREDIT RISKS
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, a Fund
will lose money.
o Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.
o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable maturity
(the spread) measures the additional interest paid for risk. Spreads may
increase generally in response to adverse economic or market conditions. A
security's spread may also increase if the security's rating is lowered, or
the security is perceived to have an increased credit risk. An increase in
the spread will cause the price of the security to decline.
o Credit risk includes the possibility that a party to a transaction involving
a Fund will fail to meet its obligations. This could cause a Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market price.
An increase in the likelihood of a call may reduce the security's price.
o If a fixed income security is called, a Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.
PREPAYMENT RISKS
o Unlike traditional fixed income securities, which pay a fixed rate of
interest until maturity (when the entire principal amount is due) payments on
mortgage backed securities include both interest and a partial payment of
principal. Partial payment of principal may be comprised of scheduled
principal payments as well as unscheduled payments from the voluntary
prepayment, refinancing, or foreclosure of the underlying loans. These
unscheduled prepayments of principal create risks that can adversely affect a
Fund holding mortgage backed securities.
Forexample, when interest rates decline, the values of mortgage backed
securities generally rise. However, when interest rates decline, unscheduled
prepayments can be expected to accelerate, and a Fund would be required to
reinvest the proceeds of the prepayments at the lower interest rates then
available. Unscheduled prepayments would also limit the potential for capital
appreciation on mortgage backed securities.
Conversely, when interest rates rise, the values of mortgage backed securities
generally fall. Since rising interest rates typically result in decreased
prepayments, this could lengthen the average lives of mortgage backed
securities, and cause their value to decline more than traditional fixed
income securities.
o Generally, mortgage backed securities compensate for the increased risk
associated with prepayments by paying a higher yield. The additional interest
paid for risk is measured by the difference between the yield of a mortgage
backed security and the yield of a U.S. Treasury security with a comparable
maturity (the spread). An increase in the spread will cause the price of the
mortgage backed security to decline. Spreads generally increase in response
to adverse economic or market conditions. Spreads may also increase if the
security is perceived to have an increased prepayment risk or is perceived to
have less market demand.
LIQUIDITY RISKS
o Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment grade
or are not widely held.
o Trading opportunities are more limited for CMOs that have complex terms or
that are not widely held. These features may make it more difficult to sell
or buy a security at a favorable price or time. Consequently, a Fund may have
to accept a lower price to sell a security, sell other securities to raise
cash or give up an investment opportunity, any of which could have a negative
effect on a Fund's performance. Infrequent trading of securities may also
lead to an increase in their price volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security when it wants to. If this happens, the Fund will be
required to continue to hold the security, and the Fund could incur losses.
SECTOR RISKS
o A substantial part of a Fund's portfolio may be comprised of securities
issued or credit enhanced by companies in similar businesses, by issuers
located in the same state, or with other similar characteristics. As a
result, a Fund will be more susceptible to any economic, business, political,
or other developments which generally affect these issuers.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
o Securities rated below investment grade, also known as junk bonds, generally
entail greater market, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic downturns
and financial setbacks may affect their prices more negatively, and their
trading market may be more limited.
RISKS ASSOCIATED WITH COMPLEX CMOS
o CMOs with complex or highly variable prepayment terms, such as companion
classes, IOs, POs, Inverse Floaters and residuals, generally entail greater
market, prepayment and liquidity risks than other mortgage backed securities.
For example, their prices are more volatile and their trading market may be
more limited.
TAX RISKS
o In order to be tax-exempt, municipal securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest
received and distributed by the Fund to shareholders to be taxable.
o Changes or proposed changes in federal tax laws may cause the prices of
municipal securities to fall.
<R>VERMONT INVESTMENT RISKS
Vermont is predominately a rural state with its key economic base comprised of
tourism, recreation, agriculture, manufacturing, health care and higher
education.
State finances are considered to be in excellent condition relative to the early
1990's. The state is running healthy budget surplus, however, in past years it
has run deficits. Per capita income averages 91% of the national average. This
makes the state economy more vulnerable to aggregate price increases from
factors in a domestic and global economy. The current bond rating of the State
of Vermont general obligation bonds by Standard & Poor's is AA.
There could be times when it is difficult to purchase bonds issued by Vermont or
its political subdivisions because of limited supply.
The Vermont agriculture industry is primarily small, family owned dairy farms
dependent upon The Northeast Dairy Compact to maintain milk prices at favorable
levels. The Compact is subject to congressional approval and if disapproved, the
future of the agriculture industry would be in question.
IBM, in Essex Junction, is a significant employer in the northwestern portion of
the state. Any situation that endangers IBM could negatively impact Chittenden,
Franklin, Addison, and Grand Isle counties in the State of Vermont and could
ultimately threaten the economic vitality of the State.</R>
INVESTMENT LIMITATIONS
DIVERSIFICATION
With respect to securities comprising 75% of the value of its total assets, the
Funds will not purchase securities of any one issuer (other than cash; cash
items; securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized by
such U.S. government securities; and securities of other investment companies)
if, as a result, more than 5% of the value of each Fund's total assets would be
invested in the securities of that issuer, or each Fund would own more than 10%
of the outstanding voting securities of that issuer.
CONCENTRATION
The Funds will not make investments that will result in the concentration of
their investments in the securities of issuers primarily engaged in the same
industry. For purposes of this restriction, the term concentration has the
meaning set forth in the Investment Company Act of 1940 Act (1940 Act) , any
rule or order thereunder, or any SEC staff interpretation thereof. Government
securities and municipal securities will not be deemed to constitute an
industry.
UNDERWRITING
The Funds may not underwrite the securities of other issuers, except that the
Funds may engage in transactions involving the acquisition, disposition or
resale of its portfolio securities, under circumstances where it may be
considered to be an underwriter under the Securities Act of 1933.
INVESTING IN COMMODITIES
The Funds may not purchase or sell physical commodities, provided that the Funds
may purchase securities of companies that deal in commodities. For purposes of
this restriction, investments in transactions involving futures contracts and
options, forward currency contracts, swap transactions and other financial
contracts that settle by payment of cash are not deemed to be investments in
commodities.
INVESTING IN REAL ESTATE
The Funds may not purchase or sell real estate, provided that this restriction
does not prevent the Funds from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Funds may exercise their rights under agreements relating to such
securities, including the right to enforce security interests and to hold real
estate acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner.
BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Funds may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act, any rule or order
thereunder, or any SEC staff interpretation thereof.
LENDING
The Funds may not make loans, provided that this restriction does not prevent
the Funds from purchasing debt obligations, entering into repurchase agreements,
lending their assets to broker/dealers or institutional investors and investing
in loans, including assignments and participation interests.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD AND BY
THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE
1940 ACT. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD
WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL
CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.
ILLIQUID SECURITIES
The Funds will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of each Fund's net assets.
INVESTING IN OTHER INVESTMENT COMPANIES
<R>The Funds may invest their assets in securities of other investment companies
as an efficient means of carrying out their investment policies. It should be
noted that investment companies incur certain expenses, such as management fees,
and, therefore, any investment by the Funds in shares of other investment
companies may be subject to such duplicate expenses. At the present time, the
Funds expect that their investments in other investment companies may include
shares of money market funds, including funds affiliated with the Funds'
investment adviser or distributor.</R>
The Funds may invest in the securities of affiliated money market funds as an
efficient means of managing the Funds' uninvested cash.
PURCHASES ON MARGIN
The Funds will not purchase securities on margin, provided that the Funds may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Funds may make margin deposits in
connection with their use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
For purposes of the above limitations, the Funds consider certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." Except with
respect to borrowing money, if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in a violation of such limitation.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Funds' portfolio securities are determined as follows:
o for equity securities, according to the last sale price in the market in which
they are primarily traded (either a national securities exchange or the
over-the-counter market), if available;
o in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices;
o futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading
on such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
o for fixed income securities, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that fixed
income securities with remaining maturities of less than 60 days at the time
of purchase may be valued at amortized cost; and
o for all other securities at fair value as determined in good faith by the Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing their NAV, the Funds
value foreign securities at the latest closing price on the exchange on which
they are traded immediately prior to the closing of the NYSE. Certain foreign
currency exchange rates may also be determined at the latest rate prior to the
closing of the NYSE. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at current rates. Occasionally, events that affect
these values and exchange rates may occur between the times at which they are
determined and the closing of the NYSE. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Funds' Board, although the actual
calculation may be done by others.
WHAT DO SHARES COST?
The Funds' net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Funds.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of Shares of the same Fund can reduce or eliminate the sales
charge you pay. Each Fund will combine purchases of Shares made on the same day
by you, your spouse and your children under age 21. In addition, purchases made
at one time by a trustee or fiduciary for a single trust estate or a single
fiduciary account can be combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in a Fund in calculating the applicable sales charge on
the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of Shares of two or more Funds in the Trust
in calculating the applicable sales charge.
LETTER OF INTENT
You can sign a Letter of Intent committing to purchase a certain amount of
Shares within a 13-month period to combine such purchases in calculating the
sales charge. The Funds' Custodian will hold Shares in escrow equal to the
maximum applicable sales charge. If you complete the Letter of Intent, the
Custodian will release the Shares in escrow to your account. If you do not
fulfill the Letter of Intent, the Custodian will redeem the appropriate amount
from the Shares held in escrow to pay the sales charges that were not applied to
your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
o the Trustees, employees and sales representatives of the Funds, the Adviser,
the Distributor and their affiliates;
o Directors and immediate family members of Directors of Banknorth Group, Inc.
and its affiliates.
o any associated person of an investment dealer who has a sales agreement with
the Distributor; and
o trusts, pension or profit-sharing plans for these individuals.
HOW ARE THE FUNDS SOLD?
Under the Distributor's Contract with the Funds, the Distributor (Edgewood Services,
Inc.), offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Funds achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Funds' service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Funds may compensate the Distributor more or less than its actual marketing
expenses. In no event will a Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
The maximum Rule 12b-1 Plan fee that can be paid in any one year may not be
sufficient to cover the marketing-related expenses the Distributor has incurred.
Therefore, it may take the Distributor a number of years to recoup these
expenses.
SHAREHOLDER SERVICES
The Funds may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals (such as broker-dealers or banks) may be paid fees, in
significant amounts, out of the assets of the Distributor and/or Federated
Shareholder Services Company (these fees do not come out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-related
and/or shareholder services, such as advertising, providing incentives to their
sales personnel, sponsoring other activities intended to promote sales, and
maintaining shareholder accounts These payments may be based upon such factors
as the number or value of Shares the investment professional sells or may sell;
the value of client assets invested; and/or the type and nature of sales or
marketing support furnished by the investment professional.
EXCHANGING SECURITIES FOR SHARES
You may contact the Distributor to request a purchase of Shares in exchange for
securities you own. The Funds reserve the right to determine whether to accept
your securities and the minimum market value to accept. The Funds will value
your securities in the same manner as they value their assets. This exchange is
treated as a sale of your securities for federal tax purposes.
REDEMPTION IN KIND
Although the Funds intend to pay Share redemptions in cash, they reserve the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Funds' portfolio securities.
Because the Funds have elected to be governed by Rule 18f-1 under the 1940 Act,
the Funds are obligated to pay Share redemptions to any one shareholder in cash
only up to the lesser of $250,000 or 1% of the net assets represented by such
Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Funds' Board determines that payment should be in kind. In such a
case, the Funds will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as a Fund determines its NAV. The
portfolio securities will be selected in a manner that the Funds' Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.
ACCOUNT AND SHARE INFORMATION
VOTING RIGHTS
Each share of each Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote.
All Shares of the Trust have equal voting rights, except that in matters
affecting only a particular Fund, only Shares of that Fund are entitled to vote.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Trust's outstanding shares
of all series entitled to vote.
As of _____________, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: ______________________________
Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
TAX INFORMATION
FEDERAL INCOME TAX
The Funds intend to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, they will not receive special tax treatment and will pay federal income
tax.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by a Fund.
FOREIGN INVESTMENTS
If the Funds purchase foreign securities, their investment income may be subject
to foreign withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which a Fund
would be subject. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Funds intend to operate so as to qualify for treaty-reduced tax
rates when applicable.
Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the coupon income generated by the
portfolio, whereas tax-basis income includes gains or losses attributable to
currency fluctuation. Due to differences in the book and tax treatment of
fixed-income securities denominated in foreign currencies, it is difficult to
project currency effects on an interim basis. Therefore, to the extent that
currency fluctuations cannot be anticipated, a portion of distributions to
shareholders could later be designated as a return of capital, rather than
income, for income tax purposes, which may be of particular concern to simple
trusts.
If the Funds invest in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Funds may be
subject to Federal income taxes upon disposition of PFIC investments.
If more than 50% of the value of a Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Funds intend to
qualify for certain Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Code may
limit a shareholder's ability to claim a foreign tax credit. Shareholders who
elect to deduct their portion of a Fund's foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax returns.
VERMONT TAXES
[TO BE ADDED]
WHO MANAGES AND PROVIDES SERVICES TO THE FUNDS?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year. The Trust is comprised of six funds.
As of ________, the Funds' Board and Officers as a group owned none of the
Funds' outstanding Shares.
----------------------------------------------------------------------------
NAME AGGREGATE
BIRTH DATE COMPENSATION
ADDRESS FROM TRUST
POSITION WITH TRUST PRINCIPAL OCCUPATIONS
FOR PAST FIVE YEARS
JOHN F. DONAHUE*+# Chairman and Director, Federated $0
Birth Date: July Investors, Inc.; Chairman, Federated
28, 1924 Investment Management Company,
Federated Investors Federated Global Investment Management
Tower Corp. and Passport Research, Ltd. ;
1001 Liberty Avenue formerly: Trustee, Federated
Pittsburgh, PA Investment Management Company and
CHAIRMAN and TRUSTEE Chairman and Director, Federated
Investment Counseling.
---------------------------------------------------------------------------
THOMAS G. BIGLEY Director, Member of Executive $0
Birth Date: Committee, Children's Hospital of
February 3, 1934 Pittsburgh; Director, Robroy
15 Old Timber Trail Industries, Inc. (coated steel
Pittsburgh, PA conduits/computer storage equipment);
TRUSTEE formerly: Senior Partner, Ernst &
Young LLP; Director, MED 3000 Group,
Inc. (physician practice management);
Director, Member of Executive
Committee, University of Pittsburgh.
---------------------------------------------------------------------------
JOHN T. CONROY, JR. President, Investment Properties $0
Birth Date: June Corporation; Senior Vice President,
23, 1937 John R. Wood and Associates, Inc.,
Grubb & Realtors; Partner or Trustee in
Ellis/Investment private real estate ventures in
Properties Southwest Florida; formerly:
Corporation President, Naples Property Management,
3201 Tamiami Trail Inc. and Northgate Village Development
North Corporation.
Naples, FL
TRUSTEE
---------------------------------------------------------------------------
NICHOLAS P. Director, Michael Baker Corporation $0
CONSTANTAKIS (engineering, construction, operations
Birth Date: and technical services); formerly:
September 3, 1939 Partner, Andersen Worldwide SC.
175 Woodshire Drive
Pittsburgh, PA
TRUSTEE
-------------------- --------------------------------------- -----------
JOHN F. CUNNINGHAM Chairman, President and Chief $0
Birth Date: March Executive Officer, Cunningham & Co.,
5, 1943 Inc. (strategic business consulting);
353 El Brillo Way Trustee Associate, Boston College;
Palm Beach, FL Director, Iperia Corp.
TRUSTEE (communications/software); formerly: Director, Redgate
Communications and EMC Corporation (computer storage
systems).
Previous Positions: Chairman of the
Board and Chief Executive Officer,
Computer Consoles, Inc.; President and
Chief Operating Officer, Wang
Laboratories; Director, First National
Bank of Boston; Director, Apollo
Computer, Inc.
---------------------------------------------------------------------------
LAWRENCE D. ELLIS, Professor of Medicine, University of $0
M.D.* Pittsburgh; Medical Director,
Birth Date: October University of Pittsburgh Medical
11, 1932 Center - Downtown; Hematologist,
3471 Fifth Avenue Oncologist and Internist, University
Suite 1111 of Pittsburgh Medical Center; Member,
Pittsburgh, PA National Board of Trustees, Leukemia
TRUSTEE Society of America.
---------------------------------------------------------------------------
PETER E. MADDEN Formerly: Representative, Commonwealth $0
Birth Date: March of Massachusetts General Court;
16, 1942 President, State Street Bank and Trust
One Royal Palm Way Company and State Street Corporation.
100 Royal Palm Way
Palm Beach, FL Previous Positions: Director, VISA USA
TRUSTEE and VISA International; Chairman and
Director, Massachusetts Bankers
Association; Director, Depository
Trust Corporation; Director, The
Boston Stock Exchange.
---------------------------------------------------------------------------
CHARLES F. Executive Vice President, Legal and $0
MANSFIELD, JR. External Affairs, Dugan Valva Contess,
Birth Date: April Inc. (marketing, communications,
10, 1945 technology and consulting); formerly:
80 South Road Management Consultant.
Westhampton Beach,
NY Previous Positions: Chief Executive
TRUSTEE Officer, PBTC International Bank;
Partner, Arthur Young & Company (now Ernst & Young LLP);
Chief Financial Officer of Retail Banking Sector, Chase
Manhattan Bank; Senior Vice President, Marine Midland
Bank; Vice President, Citibank; Assistant Professor of
Banking and Finance, Frank G. Zarb School of Business,
Hofstra University.
---------------------------------------------------------------------------
JOHN E. MURRAY, President, Law Professor, Duquesne $0
JR., J.D., S.J.D.# University; Consulting Partner,
Birth Date: Mollica & Murray; Director, Michael
December 20, 1932 Baker Corp. (engineering,
President, Duquesne construction, operations and technical
University services).
Pittsburgh, PA
TRUSTEE Previous Positions: Dean and Professor
of Law, University of Pittsburgh
School of Law; Dean and Professor of
Law, Villanova University School of
Law.
---------------------------------------------------------------------------
MARJORIE P. SMUTS Public Relations/Marketing/Conference $0
Birth Date: June Planning.
21, 1935
4905 Bayard Street Previous Positions: National
Pittsburgh, PA Spokesperson, Aluminum Company of
TRUSTEE America; television producer; business
owner.
---------------------------------------------------------------------------
JOHN S. WALSH President and Director, Heat Wagon, $0
Birth Date: Inc. (manufacturer of construction
November 28, 1957 temporary heaters); President and
2007 Sherwood Drive Director, Manufacturers Products, Inc.
Valparaiso, IN (distributor of portable construction
TRUSTEE heaters); President, Portable Heater
Parts, a division of Manufacturers
Products, Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly: Vice President,
Walsh & Kelly, Inc.
---------------------------------------------------------------------------
J. CHRISTOPHER Director or Trustee of some of the $0
DONAHUE+ Funds in the Federated Fund Complex;
Birth Date: April President, Chief Executive Officer and
11, 1949 Director, Federated Investors, Inc.;
Federated Investors President, Chief Executive Officer and
Tower Trustee, Federated Investment
1001 Liberty Avenue Management Company; Trustee, Federated
Pittsburgh, PA Investment Counseling; President,
EXECUTIVE VICE Chief Executive Officer and Director,
PRESIDENT Federated Global Investment Management
and TRUSTEE Corp.; President and Chief Executive
Officer, Passport Research, Ltd.;
Trustee, Federated Shareholder
Services Company; Director, Federated
Services Company; formerly: President,
Federated Investment Counseling.
---------------------------------------------------------------------------
PETER J. GERMAIN Senior Vice President and Director, $0
Birth Date: Mutual Fund Services Division,
September 2, 1959 Federated Services Company. Formerly
Federated Investors Senior Corporate Counsel, Federated
Tower Investors, Inc.
1001 Liberty Avenue
Pittsburgh, PA
PRESIDENT
---------------------------------------------------------------------------
JOHN W. MCGONIGLE Executive Vice President, Secretary $0
Birth Date: October and Director, Federated Investors,
26, 1938 Inc.; formerly: Trustee, Federated
Federated Investors Investment Management Company and
Tower Federated Investment Counseling;
1001 Liberty Avenue Director, Federated Global Investment
Pittsburgh, PA Management Corp., Federated Services
VICE PRESIDENT and Company and Federated Securities Corp.
SECRETARY
-------------------- --------------------------------------- -----------
BETH S. BRODERICK Assistant Vice President, Federated $0
Birth Date: August Services Company (1997 to present);
2, 1965 Client Services Officer, Federated
Federated Investors Services Company
Tower (1992-1997).
1001 Liberty Avenue
Pittsburgh, PA
VICE PRESIDENT
-------------------- --------------------------------------- -----------
JUDITH J. MACKIN Vice President and Director of $0
Birth Date: Administration for Mutual Fund
_______________ Services Group of Federated Investors,
Federated Investors Inc.
Tower
1001 Liberty Avenue
Pittsburgh, PA
VICE PRESIDENT
---------------------------------------------------------------------------
RICHARD J. THOMAS Senior Vice President, Federated $0
Birth Date: June Administrative Services; formerly:
17, 1954 Vice President, Federated
Federated Investors Administrative Services; held various
Tower management positions within Funds
1001 Liberty Avenue Financial Services Division of
Pittsburgh, PA Federated Investors, Inc.
TREASURER
---------------------------------------------------------------------------------------
* AN ASTERISK DENOTES A TRUSTEE WHO IS DEEMED TO BE AN INTERESTED PERSON AS
DEFINED IN THE 1940 ACT.
---------------------------------------------------------------------------------------
# A POUND SIGN DENOTES A MEMBER OF THE BOARD'S EXECUTIVE COMMITTEE, WHICH
HANDLES THE BOARD'S RESPONSIBILITIES BETWEEN ITS MEETINGS. + MR. DONAHUE IS THE
FATHER OF J. CHRISTOPHER DONAHUE, EXECUTIVE VICE PRESIDENT AND TRUSTEE OF THE
TRUST.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Funds.
The Adviser is a wholly owned subsidiary of Banknorth Group.
The Adviser shall not be liable to the Trust or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING
As required by SEC rules, the Funds, their Adviser, and their Distributor have
adopted codes of ethics. These codes govern securities trading activities of
investment personnel, Fund Trustees, and certain other employees. Although they
do permit these people to trade in securities, including those that a Fund could
buy, they also contain significant safeguards designed to protect the Funds and
their shareholders from abuses in this area, such as requirements to obtain
prior approval for, and to report, particular transactions.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Funds' Board.
RESEARCH SERVICES
Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Investment decisions for the Funds are made independently from those of other
accounts managed by the Adviser. When a Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit a Fund, it is possible
that this procedure could adversely impact the price paid or received and/or the
position obtained or disposed of by a Fund.
<R>ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Funds. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
the Trust as specified below:
AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE TRUST
ADMINISTRATIVE FEE
0.150 of 1% on the first $500 million
0.125 of 1% on the next $500 million
0.11 of 1% on the next $1 billion
0.10 of 1% on assets in excess of $2
billion
After each Fund's first year of operations, the administrative fee received during
any fiscal year shall be at least $75,000 per portfolio. Federated Services Company
may voluntarily waive a portion of its fee and may reimburse the Funds for
expenses.</R>
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FUND ACCOUNTANT
As fund accountant, pursuant to an accounting agreement with the Trust, Forum
Financial LLP provides fund accounting services to each Fund. These services
include calculating the NAV per share of each Fund and assists preparing the
Fund's financial statements and tax returns.
CUSTODIAN
Forum Trust, LLC, Portland, Maine, is custodian for the securities and cash of
the Funds. The Custodian may employ subcustodians to provide custody of the
Funds' domestic and foreign assets.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Funds pay the transfer agent a fee based on the size, type and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditor for the Funds, KPMG LLP, plans and performs its audit so
that it may provide an opinion as to whether the Funds' financial statements and
financial highlights are free of material misstatement.
HOW DO THE FUNDS MEASURE PERFORMANCE?
The Funds may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.
Share performance reflects the effect of non-recurring charges, such as maximum
sales charges, which, if excluded, would increase the total return and yield.
The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in a Fund's expenses; and various other
factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.
When Shares of a Fund are in existence for less than a year, a Fund may
advertise cumulative total return for that specific period of time, rather than
annualizing the total return.
YIELD AND TAX-EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The tax-equivalent yield of Shares is
calculated similarly to the yield, but is adjusted to reflect the taxable yield
that Shares would have had to earn to equal the actual yield, assuming the
maximum combined federal and state tax rate. The yield and tax-equivalent yield
do not necessarily reflect income actually earned by Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Vermont Municipal
Bond Fund. The interest earned by the municipal securities owned by the Fund
generally remains free from federal regular income tax and is often free from
state and local taxes as well. However, some of the Fund's income may be subject
to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 2000 - STATE OF VERMONT
TAX BRACKET:
COMBINED FEDERAL AND STATE 18.60% 34.72% 38.44% 44.64% 49.10%
---------------------------------------------------------------------------------
Joint Return $1-43,85$43,851-105,$105,951-161,$161,451-288,Over
288,350
Single Return $1-26,25$26,251-63,5$63,551-132,6$132,601-288,Over
288,350
TAX EXEMPT YIELD: TAXABLE YIELD EQUIVALENT:
1.00% 1.23% 1.53% 1.62% 1.81% 1.96%
1.50% 1.84% 2.30% 2.44% 2.71% 2.95%
2.00% 2.46% 3.06% 3.25% 3.61% 3.93%
2.50% 3.07% 3.83% 4.06% 4.52% 4.91%
3.00% 3.69% 4.60% 4.87% 5.42% 5.89%
3.50% 4.30% 5.36% 5.69% 6.32% 6.88%
4.00% 4.91% 6.13% 6.50% 7.23% 7.86%
4.50% 5.53% 6.89% 7.31% 8.13% 8.84%
5.00% 6.14% 7.66% 8.12% 9.03% 9.82%
5.50% 6.76% 8.43% 8.93% 9.93% 10.81%
6.00% 7.37% 9.19% 9.75% 10.84% 11.79%
6.50% 7.99% 9.96% 10.56% 11.74% 12.77%
7.00% 8.60% 10.72% 11.37% 12.64% 13.75%
7.50% 9.21% 11.49% 12.18% 13.55% 14.74%
8.00% 9.83% 12.25% 13.00% 14.45% 15.72%
8.50% 10.44% 13.02% 13.81% 15.35% 16.70%
9.00% 11.06% 13.79% 14.62% 16.26% 17.68%
---------------------------------------------------------------------------------------
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN CALCULATING THE
TAXABLE YIELD EQUIVALENT. FURTHERMORE, ADDITIONAL STATE AND LOCAL TAXES PAID ON
COMPARABLE TAXABLE INVESTMENTS WERE NOT USED TO INCREASE FEDERAL DEDUCTIONS.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
o references to ratings, rankings, and financial publications and/or performance
comparisons of Shares to certain indices;
o charts, graphs and illustrations using the Funds' returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact a Fund; and
o information about the mutual fund industry from sources such as the Investment
Company Institute.
The Funds may compare their performance, or performance for the types of
securities in which they invest, to a variety of other investments, including
federally insured bank products such as bank savings accounts, certificates of
deposit, and Treasury bills.
The Funds may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which a Fund uses in advertising may include:
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, financial,
and public utility companies. The Standard & Poor's index assumes
reinvestment of all dividends paid by stocks listed on the index. Taxes
due on any of these distributions are not included, nor are brokerage or
other fees calculated in the Standard & Poor's figures.
o STANDARD & POOR'S MIDCAP 400 STOCK PRICE INDEX, a composite index of 400
common stocks with market capitalizations between $200 million and $7.5
billion in industry, transportation, financial, and public utility
companies. The Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in the Standard & Poor's figures.
o <R>WILSHIRE LARGE CAP VALUE INDEX is a market capitalization index
including a selection of securities from the Wilshire Large Cap 750 Index
that meet Wilshire's criteria for value. This index measures large cap
stocks that exhibit value characteristics.
o WILSHIRE MID CAP VALUE INDEX is a market capitalization index including a
selection of securities from the Wilshire Mid Cap 500 Index that meet
Wilshire's criteria for value. This index measures mid cap stocks that
exhibit value characteristics.</R>
o RUSSELL 2000 INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be used to
compare to the total returns of funds whose portfolios are invested
primarily in small capitalization common stocks.
o <R>RUSSELL 2500 INDEX is a broadly diversified index measuring the
performance of the 2,500 smallest companies in the Russell 3000 Index,
which represents approximately 23% of the total market capitalization of
the Russell 3000 Index.</R>
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporation; and publicly issued,
fixed rate, non-convertible domestic bonds of companies in industry,
public utilities, and finance. The average maturity of these bonds
approximates nine years. Traced by Lehman Brothers, Inc., the index
calculates total return for one-month, three-month, twelve-month, and
ten-year periods and year-to-date.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is a universe
of government and corporate bonds rated BBB or higher with maturities
between 1-10 years.
o DOW JONES INDUSTRIAL AVERAGE (DJIA) is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by Dow Jones & Company, it is cited as
a principal indicator of market conditions.
o LIPPER, INC. ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of
all capital gains distributions and income dividends and takes into
account any change in net asset value over a specific period of time. From
time to time, a Fund will quote its Lipper ranking in advertising and
sales literature.
o CONSUMER PRICE INDEX is generally considered to be a measure of inflation.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
FINANCIAL INFORMATION
The Financial Statements for the Fund for the fiscal year ended _________ are
incorporated herein by reference to the Annual Report to Shareholders of the
Large Cap Core Fund and Intermediate Bond Fund dated ________________________.
INVESTMENT RATINGS
STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A Standard & Poor's (S&P) note rating reflects the liquidity concerns and market
access risks unique to notes.
SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
sign (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS S&P
assigns dual ratings to all long-term debt issues that have as part of their
provisions a variable rate demand feature. The first rating (long-term rating)
addresses the likelihood of repayment of principal and interest when due, and
the second rating (short-term rating) describes the demand characteristics.
Several examples are AAA/A-1+, AA/A-1+, A/A-1. (The definitions for the
long-term and the short-term ratings are provided below.)
COMMERCIAL PAPER (CP) RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
LONG-TERM DEBT RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's
Investor Service, Inc. (Moody's) short-term ratings are designated Moody's
Investment Grade (MIG or VMIG). (See below.) The purpose of the MIG or VMIG
ratings is to provide investors with a simple system by which the relative
investment qualities of short-term obligations may be evaluated.
MIG1--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.
MIG2--This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Short-term ratings on issues with demand features are differentiated by the use
of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. In this case, two ratings are usually assigned, (for example,
Aaa/VMIG-1); the first representing an evaluation of the degree of risk
associated with scheduled principal and interest payments, and the second
representing an evaluation of the degree of risk associated with the demand
feature. The VMIG rating can be assigned a 1 or 2 designation using the same
definitions described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1--Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: 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 earning coverage of fixed financial
charges and high internal cash generation, well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
LONG-TERM DEBT RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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 which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
NR--Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to securities
rated A-1 or P-1.
NR(1)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AAA by S&P or Aaa by Moody's.
NR(2)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AA by S&P or Aa by Moody's.
NR(3)--The underlying issuer/obligor/guarantor has other outstanding debt rated
A by S&P or Moody's.
FITCH IBCA, INC. SHORT-TERM DEBT RATING DEFINITIONS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment, only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
STANDARD & POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS AAA--Bonds
which are rated AAA are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as gilt 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 which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA 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 which are rated B 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.
CAA--Bonds which are rated CAA 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 which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and ample
asset protection;
o Broad margins in earning coverage of fixed financial charges and high internal
cash generation; and
o Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
STRATEVEST FUNDS
<R>Stratevest Large Cap Value Fund
Stratevest Large Cap Core Fund
Stratevest Large Cap Growth Fund
Stratevest Mid Cap Core Fund
Stratevest Vermont Municipal Bond Fund
Stratevest Intermediate Bond Fund
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
INVESTMENT ADVISER
Stratevest Group, N.A.
111 Main Street
Burlington, Vermont 05401
DISTRIBUTOR
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7002
ADMINISTRATOR
Federated Services Company
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, Massachusetts 02266-8600</R>
CUSTODIAN
Forum Trust, LLC
Two Portland Square
Portland, Maine 04101
PORTFOLIO ACCOUNTANT
Forum Financial LLP
Two Portland Square
Portland, Maine 04101
INDEPENDENT AUDITORS
KPMG LLP
99 High Street
Boston, Massachusetts 02110
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