<PAGE>
- -------------------------------------------------------------------------------
THE SENTINEL FUNDS
NATIONAL LIFE DRIVE
MONTPELIER, VERMONT 05604
800-282-3863
- -------------------------------------------------------------------------------
PROSPECTUS DATED APRIL 1, 1996, AS AMENDED ON APRIL 17, 1996
Table of Contents
<TABLE>
<S> <C>
Fund Expenses.................. 3
Financial Highlights........... 8
Purchase Options............... 12
The Funds...................... 14
Investment Objectives and Poli-
cies.......................... 14
Management of the Funds........ 26
Custodian...................... 29
The Distributor................ 29
Distribution Plans............. 30
How to Purchase Shares......... 31
</TABLE>
<TABLE>
<S> <C>
How to Redeem Shares........... 37
Tax Deferred Retirement Plans.. 42
Determination of Net Asset Val-
ue............................ 42
Dividends and Capital Gains
Distributions................. 43
Taxes.......................... 44
Shareholder Services........... 49
Performance Data............... 50
Organization of the Funds...... 52
Applications
</TABLE>
- -------------------------------------------------------------------------------
Each of the twelve funds in the Sentinel Family of Funds (individually, a
"Fund", and collectively, the "Funds") has a separate investment objective and
policies. The investment objectives of the Funds are as follows:
. Sentinel U.S. Treasury Money Market Fund (the "Treasury Fund")-seeks as
high a level of current income as is consistent with the preservation of
capital and the maintenance of liquidity, by investing solely in short-
term direct obligations of the U.S. Treasury. An investment in the
Treasury Fund is neither insured nor guaranteed by the U.S. government.
The Treasury Fund seeks to maintain a constant $1.00 per share net asset
value; however, there can be no assurance that the Treasury Fund will be
able to maintain a stable net asset value of $1.00 per share.
- -------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Funds (as
defined herein) that a prospective investor should know before investing. This
Prospectus should be read carefully and retained for future reference.
Additional information about the Funds is contained in the Statement of
Additional Information, dated April 1, 1996 (the "Statement of Additional
Information"), which has been filed with the Securities and Exchange
Commission. The Statement of Additional Information is available upon request
and without charge from Sentinel Group Funds, Inc. (the "Company") at the
address or telephone number shown above. The Statement of Additional
Information is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
. Sentinel Common Stock Fund (the "Common Stock Fund")--seeks a combination
of long-term growth of capital and income, current return and relatively
low risk through investment in common stocks of many well-established
companies.
. Sentinel Balanced Fund (the "Balanced Fund")--seeks a conservative
combination of stability, income and long-term growth of capital through
investments in both stocks and bonds, with at least 25% of its net assets
in fixed-income senior securities.
. Sentinel Growth Fund (the "Growth Fund")--seeks long-term growth of
capital through equity participation in companies having growth potential
believed by the Advisor to be more favorable than that of the U.S.
economy as a whole, with a focus on relatively well-established
companies.
. Sentinel Emerging Growth Fund (the "Emerging Growth Fund")--seeks long-
term capital appreciation. Assets normally will be invested primarily in
common stocks of small and medium-sized corporations believed by Sentinel
Advisors Company (the "Advisor") to have superior growth potential.
. Sentinel World Fund (the "World Fund")--seeks long-term growth of capital
principally through investments in a diversified portfolio of marketable
equity securities of established non-U.S. companies.
. Sentinel Bond Fund (the "Bond Fund")--seeks as high a level of continuing
income as is consistent with the preservation of capital through
investments primarily in investment grade fixed-income securities.
. Sentinel Government Securities Fund (the "Government Securities Fund")--
seeks as high a level of current income as is consistent with the
preservation of capital through investments primarily in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
. Sentinel Short-Intermediate Government Fund (the "Short-Intermediate
Government Fund")--seeks as high a level of current income as is
consistent with the preservation of capital through investments primarily
in securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities. The Fund will invest at least 65% of its assets in
such government securities which have an average maturity of from 2 to 5
years.
. Sentinel Tax-Free Income Fund (the "Tax-Free Income Fund")--seeks as high
a level of current income exempt from federal income taxes as is
consistent with the preservation of capital through investments primarily
in a diversified portfolio of investment grade municipal bonds.
. Sentinel New York Tax-Free Income Fund (the "New York Fund")--seeks as
high a level of current interest income exempt from federal and New York
State and City personal income taxes as is consistent with liquidity and
capital preservation.
. Sentinel Pennsylvania Tax-Free Trust (the "Pennsylvania Fund")--seeks as
high a level of current interest income exempt from federal and
Pennsylvania personal income taxes as is consistent with liquidity and
capital preservation.
2
Prospectus
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Funds may expect to incur:
SHAREHOLDER TRANSACTION EXPENSES (as a percentage of offering price)
Class A Shares:
Sales Charge Imposed on Purchases--
<TABLE>
<S> <C>
Common Stock, Balanced, Growth, Emerging Growth and World
Funds......................................................... 5.00% maximum
Bond, Government Securities, Tax-Free Income, New York and
Pennsylvania Funds............................................ 4.00%
Short-Intermediate Government Fund............................. 1.00%
Treasury Fund.................................................. None
Sales Charge Imposed on Reinvested Dividends................... None
Redemption Fees................................................ None*
Exchange Fees.................................................. None**
</TABLE>
- --------
* If a shareholder chooses to redeem by means of a wire transfer, a wire
charge not normally in excess of $25.00 will be assessed. In addition, a
deferred sales charge of up to 1% is assessed on certain redemptions of
Class A shares made within two years of purchase, if they were purchased
without an initial sales charge as part of an investment of $1,000,000 or
more. See "How to Purchase Shares--Class A Shares--Sales Charges", below.
** If a shareholder exchanges Class A shares of the Treasury Fund for Class
A shares of another Fund, and such Treasury Fund shares were not acquired
in an exchange from another Fund's Class A shares, then a fee equal to
the sales charge imposed on purchases of the new Fund will be assessed.
Class B Shares (available for the Common Stock, Balanced, Emerging Growth,
World, Bond, Tax-Free Income and Treasury Funds):
<TABLE>
<S> <C>
Sales Charge Imposed on Purchases............................ None
Sales Charge Imposed on Reinvested Dividends................. None
Contingent Deferred Sales Charge............................. 4.00% maximum***
Exchange Fees................................................ None****
</TABLE>
- --------
*** The maximum CDSC is imposed on shares redeemed in the first year after
purchase. For shares held longer than one year, the CDSC declines
according to the schedules set forth under "How to Redeem Shares--Class B
Shares--CDSC", below.
**** Class B shares may be exchanged only for Class B shares of the other
Funds that offer Class B shares as of the date of the exchange.
3
Prospectus
<PAGE>
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Class A:
<TABLE>
<CAPTION>
COMMON EMERGING
STOCK BALANCED GROWTH GROWTH WORLD
FUND FUND FUND FUND FUND
-------- -------- ------------ -------- -----
<S> <C> <C> <C> <C> <C>
Management Fees......... .55% .65% .65% .65% .65%
Rule 12b-1 Fees
(includes service fee
and distribution
fee)(a)................ .27 .30 .27 .30 .30
Other Expenses:
Accounting and
Administrative Costs. .05 .05 .05 .05 .05
Other................. .23(d) .29(d) .57(d) .60(d) .63(d)
Total Other Expenses.... .28(d) .34(d) .62(d) .65(d) .68(d)
---- ---- ---- ---- ----
Total Fund Operating
Expenses Before Expense
Offset(b).............. 1.10%(d) 1.29%(d) 1.54%(d) 1.60%(d) 1.63%(d)
==== ==== ==== ==== ====
<CAPTION>
GOVERN. SHORT-INT.
BOND SECUR. GOVERNMENT TREASURY
FUND FUND FUND FUND
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Management Fees......... .53% .53% .53% .40%
Rule 12b-1 Fees
(includes service fee
and distribution
fee)(a)................ .20 .20 .35 None
Other Expenses:
Accounting and
Administrative Costs. .05 .05 .00 .05
Other................. .25(d) .26(d) .19(d) .37(d)
Total Other Expenses.... .30(d) .31(d) .19(d) .42(d)
---- ---- ---- ----
Total Fund Operating
Expenses Before Expense
Offset(b).............. 1.03%(d) 1.04%(d) 1.07%(c)(d) .82%(d)
==== ==== ==== ====
<CAPTION>
TAX-FREE
INCOME N.Y. PENNSYLVANIA
FUND FUND FUND
-------- -------- ------------
<S> <C> <C> <C>
Management Fees......... .53% .53% .55%
Rule 12b-1 Fees
(includes service fee
and distribution
fee)(a)................ .20 .19 .20
Other Expenses:
Accounting and
Administrative Costs. .05 .05 .00
Other................. .21(d) .52(d) .03(d)
Total Other Expenses.... .26(d) .57(d) .03(d)
---- ---- ----
Total Fund Operating
Expenses Before Expense
Offset(b).............. .99%(c)(d) 1.29%(d) .78%(c)(d)
==== ==== ====
</TABLE>
4
Prospectus
<PAGE>
Class B:
<TABLE>
<CAPTION>
COMMON EMERGING
STOCK BALANCED GROWTH WORLD
FUND FUND FUND FUND
------ -------- -------- -----
<S> <C> <C> <C> <C>
Management Fees................................. .55% .65% .65% .65%
Rule 12b-1 Fees (includes service fee and
distribution fee).............................. 1.00 1.00 1.00 1.00
Other Expenses:
Accounting and Administrative Costs........... .05 .05 .05 .05
Other......................................... .25 .35 .87 .78
Total Other Expenses............................ .30 .40 .92 .83
---- ---- ---- ----
Total Fund Operating Expenses Before Expense
Offset......................................... 1.85% 2.05% 2.57% 2.48%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
TAX-FREE
BOND TREASURY INCOME
FUND FUND FUND
---- -------- --------
<S> <C> <C> <C>
Management Fees........................................ .53% .40% .53%
Rule 12b-1 Fees (includes service fee and distribution
fee).................................................. 1.00 None 1.00
Other Expenses:
Accounting and Administrative Costs.................. .05 .05 .05
Other................................................ .41 .81 .32
Total Other Expenses................................... .46 .86 .37
---- ---- ----
Total Fund Operating Expenses Before Expense Offset.... 1.99% 1.26% 1.90%
==== ==== ====
</TABLE>
- --------
(a) Assumes distribution history as of November 30, 1995. The maximum annual
Rule 12b-1 fee for Common Stock Fund Class A shares, Balanced Fund Class A
shares, Growth Fund Class A shares, Emerging Growth Fund Class A shares
and World Fund Class A shares, is .30% of average daily net assets of each
such Fund, of which the service fee portion could be as much as .20%; the
maximum annual Rule 12b-1 fee for Bond Fund Class A shares, Government
Securities Fund Class A shares, Tax-Free Income Fund Class A shares, New
York Fund Class A shares and Pennsylvania Fund Class A shares is .20% of
average daily net assets of each such Fund, of which the service fee
portion could be as much as .10%; and the maximum annual Rule 12b-1 fee
for the Short-Intermediate Government Fund Class A shares is .35% of
average daily net assets, of which the service fee portion will be .25%.
(b) Sentinel Administrative Service Company ("Sentinel Service") has
voluntarily agreed to refund its fee to the extent necessary to prevent
the overall aggregate Class A expense ratio of the Funds (excluding World
Fund) from exceeding 1.30% of aggregate average daily net assets in any
fiscal year. For the year ended November 30, 1995, such aggregate expense
ratio was 1.11%, and no reimbursement was required. Although Sentinel
Service has no present intention to do so, this arrangement may be
terminated at any time.
(c) Sentinel Service has voluntarily agreed for an indefinite period to
reimburse World Fund Class A shares, the Pennsylvania Fund Class A shares,
the Short-Intermediate Government Fund Class A shares and the Treasury
Fund Class A shares for expenses necessary to limit those Funds' overall
expense ratios to 2.00%, 0.75% (effective May 15, 1995), 1.00% and .85%,
respectively, in each case after expense offset. For the fiscal year ended
November 30, 1995, the aggregate expense after expense offset ratios of
World Fund Class A shares and the Treasury Fund Class A shares were 1.56%
and 0.81%, respectively, and no reimbursements were required. For the
Pennsylvania Fund Class A Shares a reimbursement of $116,978
Prospectus
5
<PAGE>
was paid in fiscal 1995. In the absence of the above reimbursement
arrangement, the Pennsylvania Fund Class A shares's Accounting and
Administrative Costs, Other Expenses, Total Other Expenses and Total Fund
Operating Expenses would have been .05%, .56%, .61% and 1.36%,
respectively, before expense offset, and .05%, .52%, .57% and 1.32%,
respectively, after expense offset. The reimbursement arrangement for the
Pennsylvania Fund Class A shares was in effect for only a portion of fiscal
1995. The above table assumes that this reimbursement arrangement, which
caps expenses at 0.75% after expense offset, will be in place for all of
fiscal 1996. The dollar amount of the reimbursement paid to the Short-
Intermediate Government Fund Class A shares during the 1995 fiscal year by
Sentinel Service was $42,857. In the absence of the above reimbursement
arrangement, Short-Intermediate Government Fund Class A shares's Accounting
and Administrative Costs, Other Expenses, Total Other Expenses and Total
Fund Operating Expenses would have been, on an annualized basis, .05%,
.45%, .50%, and 1.38%, respectively, before expense offset, and .05%, .38%,
.43% and 1.31%, respectively, after expense offset. Although Sentinel
Service has no present intention to do so, these arrangements may be
terminated at any time. Prior to March 27, 1995 Sentinel Service had a
voluntary agreement to reimburse the Sentinel Tax-Free Income Fund class
and share expenses in excess of .75%. For the fiscal year ended November
30, 1995 the aggregate expense ratio, after expense offset, after taking
into account this reimbursement was actually .90%. The reimbursement
totalled $66,467. Taking into account this reimbursement, Other Expenses,
Total Other Expenses and Total Fund Operating Expenses were .12%, .17% and
.90%, respectively, after expense offset.
(d) Expense ratios after expense offset are as follows:
<TABLE>
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
----- ----------- ------------------
<S> <C> <C> <C>
Common Stock Fund.......................... .22% .27% 1.09%
Balanced Fund.............................. .27 .32 1.27
Growth Fund................................ .53 .58 1.50
Emerging Growth Fund....................... .56 .61 1.56
World Fund................................. .56 .61 1.56
Bond Fund.................................. .21 .26 .99
Government Securities Fund................. .25 .30 1.03
Short-Int. Gov't Fund...................... .12 .12 1.00
Treasury Fund.............................. .36 .41 .81
Tax-Free Income Fund....................... .18 .23 .96
New York Fund.............................. .45 .50 1.22
Pennsylvania Fund.......................... .00 .00 .75
</TABLE>
The following examples illustrate the expenses that an investor would pay on
a $1,000 investment in each of the Funds over various time periods assuming
the operating expense ratio as set forth in the tables above for each class of
shares of each Fund and a 5% annual rate of return.
Class A:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock Fund............................... $61 $83 $107 $176
Balanced Fund................................... 62 88 116 196
Growth Fund..................................... 64 95 128 220
Emerging Growth Fund............................ 65 97 131 226
World Fund...................................... 65 97 131 226
Bond Fund....................................... 60 80 102 165
Government Securities Fund...................... 60 81 104 170
Short-Int. Gov't Fund........................... 20 42 65 131
Treasury Fund................................... 8 26 45 100
Tax-Free Income Fund............................ 59 79 100 162
New York Fund................................... 62 87 114 190
Pennsylvania Fund............................... 57 73 90 138
</TABLE>
Prospectus
6
<PAGE>
Class B (assuming redemption at the end of the period):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock Fund............................... $59 $88 $120 $179
Balanced Fund................................... 61 94 130 200
Emerging Growth Fund............................ 66 110 157 243
World Fund...................................... 65 107 152 238
Bond Fund....................................... 60 92 127 182
Treasury Fund................................... 53 70 89 128
Tax-Free Income Fund............................ 59 90 123 172
</TABLE>
Class B (assuming no redemption at the end of the period):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock Fund............................... $19 $58 $100 $179
Balanced Fund................................... 21 64 110 200
Emerging Growth Fund............................ 26 80 137 243
World Fund...................................... 25 77 132 238
Bond Fund....................................... 20 62 107 182
Treasury Fund................................... 13 40 69 128
Tax-Free Income Fund............................ 19 60 103 172
</TABLE>
These examples should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown and the 5%
annual rate used in this example is a hypothetical rate of return.
The purpose of the foregoing tables is to assist the investor in
understanding the various expenses that an investor in the Funds will bear
directly or indirectly. The expense ratios set forth above, in the case of the
Class A shares, are based on costs actually borne by the Funds in the fiscal
year ended November 30, 1995, using average net assets of each Fund for the
fiscal year ended November 30, 1995. In the case of the Class B shares,
estimates of future costs are used. In general, all of the Funds share
expenses that are not specifically incurred by particular Funds in proportion
to the net assets of each Fund, except that expenses which vary by the number
of accounts, such as transfer agent costs and shareholder reports and mailing
costs, are allocated in proportion to the number of accounts in each Fund. The
Rule 12b-1 Fees shown in the foregoing tables include both service fee and
distribution fee components. See "Distribution Plans" on page 30 for more
information on these fees.
Prospectus
7
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout each of the periods).
The following information, insofar as it relates to the five fiscal years in
the period ended November 30, 1995, other than for the Pennsylvania Fund, has
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. For the Pennsylvania Fund, the following information
for the eleven month period ended November 30, 1993 and for the years ended
November 30, 1994 and 1995 has been audited by Price Waterhouse LLP, whose
report thereon was unqualified. The following information with respect to the
Pennsylvania Fund for the two years in the period ended December 31, 1992 has
been audited by Coopers & Lybrand, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with
the financial statements and notes thereto incorporated by reference in the
Statement of Additional Information. No information is presented for any of the
Class B shares of the Funds because none of them had commenced operations as of
November 30, 1995. The Annual Report of the Funds may be obtained by
shareholders without charge by calling the Company at (800) 282-3863.
<TABLE>
<CAPTION>
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
Income from Investment Operations Less Distributions
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
Net realized
Net and Distributions
Fiscal asset Net unrealized Total Dividends from
Year value at investment gain from from net realized
(period beginning income (loss) on investment investment gains on Total
Fund ended) of period (loss) investments operations income investments distributions
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 11/30/86 $19.58 $0.83 $5.72 $6.55 $0.83 $- $0.83
Stock 11/30/87 25.30 0.87 (2.87) (2.00) 0.73 1.08 1.81
11/30/88 21.49 0.85 3.17 4.02 0.83 1.55 2.38
11/30/89 23.13 0.91 4.60 5.51 0.99 1.20 2.19
11/30/90 26.45 0.93 (1.50) (0.57) 1.00 1.27 2.27
11/30/91 23.61 0.90 3.90 4.80 0.93 0.70 1.63
11/30/92 26.78 0.90 3.44 4.34 0.91 0.50 1.41
11/30/93 29.71 0.79 1.66 2.45 0.82 1.71 2.53
11/30/94 29.63 0.83 (1.35) (0.52) 0.80 0.06 0.86
11/30/95 28.25 0.72 8.09 8.81 0.74 1.11 1.85
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
Balanced 11/30/86 $10.83 $0.67 $ 2.06 $ 2.73 $0.67 $- $0.67
11/30/87 12.89 0.70 (1.27) (0.57) 0.59 0.41 1.00
11/30/88 11.32 0.71 0.91 1.62 0.72 - 0.72
11/30/89 12.22 0.80 1.33 2.13 0.78 0.04 0.82
11/30/90 13.53 0.79 (0.56) 0.23 0.83 0.35 1.18
11/30/91 12.58 0.77 1.37 2.14 0.78 0.05 0.83
11/30/92 13.89 0.70 0.97 1.67 0.71 0.03 0.74
11/30/93 14.82 0.59 0.81 1.40 0.59 0.36 0.95
11/30/94 15.27 0.58 (1.12) (0.54) 0.56 0.09 0.65
11/30/95 14.08 0.58 2.78 3.36 0.59 0.01 0.60
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
Growth 11/30/86 $14.17 $ 0.30 $ 2.88 $ 3.18 $0.28 $- $0.28
11/30/87 17.07 0.28 (1.20) (0.92) 0.16 2.64 2.80
11/30/88 13.35 0.17 1.36 1.53 0.25 3.18 3.43
11/30/89 11.45 0.16 2.99 3.15 0.18 - 0.18
11/30/90 14.42 0.18 (0.37) (0.19) 0.17 - 0.17
11/30/91 14.06 0.20 1.93 2.13 0.20 - 0.20
11/30/92 15.99 0.11 3.07 3.18 0.16 0.45 0.61
11/30/93 18.56 0.04 (0.28) (0.24) 0.04 0.77 0.81
11/30/94 17.51 0.05 (0.92) (0.87) 0.03 0.46 0.49
11/30/95 16.15 0.07 3.33 3.40 0.05 2.57 2.62
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
Emerging 9 mo. to
Growth 11/30/93(A) $ 6.49 $(0.06) $ 0.44 $ 0.38 $- $- $-
11/30/94 6.87 (0.04) 0.18 0.14 - 1.48 1.48
11/30/95 5.53 0.02 0.56 0.58 - 0.91 0.91
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
World 9 Mo. to
11/30/93(A) $ 9.56 $0.02 $2.28 $2.30 $- $- $-
11/30/94 11.86 0.08 0.89 0.97 0.03 0.06 0.09
11/30/95 12.74 0.14 1.14 1.28 0.09 0.15 0.24
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
Bond 11/30/86 $ 6.41 $0.62 $ 0.52 $ 1.14 $0.62 $- $0.62
11/30/87 6.93 0.58 (0.60) (0.02) 0.57 0.35 0.92
11/30/88 5.99 0.55 0.03 0.58 0.55 - 0.55
11/30/89 6.02 0.56 0.18 0.74 0.55 - 0.55
11/30/90 6.21 0.52 (0.18) 0.34 0.52 - 0.52
11/30/91 6.03 0.50 0.40 0.90 0.50 - 0.50
11/30/92 6.43 0.46 0.13 0.59 0.46 - 0.46
11/30/93 6.56 0.41 0.46 0.87 0.41 0.12 0.53
11/30/94 6.90 0.39 (0.70) (0.31) 0.39 0.35 0.74
11/30/95 5.85 0.42 0.64 1.06 0.42 - 0.42
- -------- -------------- --------- ---------- ------------ ---------- ---------- ------------- -------------
</TABLE>
Prospectus
8
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------ ----------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------ ----------------------------------------------------------------
RATIO OF
EXPENSES TO RATIO OF NET NET ASSETS
NET ASSET RATIO OF AVERAGE NET INVESTMENT AT END
VALUE AT TOTAL NET EXPENSES ASSETS BEFORE INCOME TO PORTFOLIO OF PERIOD
END OF RETURN* TO AVERAGE EXPENSE AVG. NET TURNOVER (000
PERIOD (%) NET ASSETS(%) REDUCTION** (%) ASSETS (%) RATE (%) OMITTED)
- ------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$25.30 33.8 0.64 0.64 3.49 8 $ 506,248
21.49 (9.0) 0.62 0.62 3.28 9 459,296
23.13 19.8 0.87 0.87 3.75 7 490,168
26.45 25.6 0.80 0.80 3.69 11 591,136
23.61 (2.4) 0.76 0.76 3.82 6 543,047
26.78 21.1 0.74 0.74 3.41 9 620,179
29.71 16.7 0.72 0.72 3.13 5 688,309
29.63 8.8 0.93 0.93 2.68 9 897,836
28.25 (1.8) 1.02 1.02 2.82 15 839,335
35.21 32.8 1.09 1.10 2.29 22 1,057,944
<CAPTION>
- ------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12.89 25.6 0.68 0.68 5.44 58 $ 47,105
11.32 (5.3) 0.67 0.67 5.38 32 62,282
12.22 14.6 0.97 0.97 5.74 52 67,019
13.53 18.1 0.96 0.96 6.16 71 74,417
12.58 1.8 0.91 0.91 6.17 40 74,808
13.89 17.5 0.85 0.85 5.70 32 90,580
14.82 12.4 0.81 0.81 4.86 38 120,700
15.27 9.7 1.14 1.14 3.88 72 229,632
14.08 (3.6) 1.21 1.21 3.97 66 226,328
16.84 24.4 1.27 1.29 3.77 110 267,103
<CAPTION>
- ------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$17.07 22.5 0.77 0.77 1.79 102 $ 55,802
13.35 (6.5) 0.76 0.76 1.68 98 49,233
11.45 11.7 1.12 1.12 1.44 69 47,350
14.42 27.7 1.24 1.24 1.18 24 51,665
14.06 (1.4) 1.20 1.20 1.22 15 49,580
15.99 15.2 1.08 1.08 1.22 25 55,598
18.56 20.5 1.05 1.05 0.63 28 63,664
17.51 (1.3) 1.31 1.31 0.22 12 57,833
16.15 (5.1) 1.43 1.43 0.30 58 50,447
16.93 24.9 1.50 1.54 0.42 84 60,446
<CAPTION>
- ------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 6.87 5.9# 1.52+ 1.52+ (1.01)+ 61 $ 105,176
5.53 2.0 1.58 1.58 (0.74) 46 88,420
5.20 12.2 1.56 1.60 0.26 79 89,321
<CAPTION>
- ------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$11.86 24.1# 2.00+ 2.12+ 0.41(1)+ 66 $ 16,872
12.74 8.2 1.58 1.58 0.62 30 41,970
13.78 10.2 1.56 1.63 0.79 32 47,702
<CAPTION>
- ------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 6.93 15.7 0.68 0.68 9.01 88 $ 22,913
5.99 (0.7) 0.66 0.66 9.03 139 24,409
6.02 10.0 0.92 0.92 8.97 133 27,858
6.21 12.9 0.87 0.87 9.07 165 31,668
6.03 5.8 0.83 0.83 8.55 108 35,389
6.43 15.6 0.81 0.81 8.06 77 43,447
6.56 9.5 0.78 0.78 7.03 83 58,106
6.90 13.7 0.92 0.92 5.98 147 83,387
5.85 (4.9) 0.98 0.98 6.34 133 80,478
6.49 18.8 0.99 1.03 6.81 237 108,755
<CAPTION>
- ------------------ ----------------------------------------------------------------
</TABLE>
(footnotes on following page)
Prospectus
9
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
- ------------------------ -------------------------------------------- --------------------------------------
NET REALIZED
NET AND DISTRIBUTIONS
FISCAL ASSET NET UNREALIZED TOTAL DIVIDENDS FROM
YEAR VALUE AT INVESTMENT GAIN FROM FROM NET REALIZED
(PERIOD BEGINNING INCOME (LOSS) ON INVESTMENT INVESTMENT GAINS ON TOTAL
FUND ENDED) OF PERIOD (LOSS)(2) INVESTMENTS OPERATIONS INCOME INVESTMENTS DISTRIBUTIONS
- ------------------------ -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government 3 mo. to
Securities 11/30/86(B) $10.00 $0.19 $ 0.04 $ 0.23 $0.19 $ -- $0.19
11/30/87 10.04 0.80 (0.70) 0.10 0.79 -- 0.79
11/30/88 9.35 0.78 (0.03) 0.75 0.79 -- 0.79
11/30/89 9.31 0.81 0.26 1.07 0.81 -- 0.81
11/30/90 9.57 0.78 (0.03) 0.75 0.78 -- 0.78
11/30/91 9.54 0.74 0.50 1.24 0.74 -- 0.74
11/30/92 10.04 0.70 0.14 0.84 0.70 -- 0.70
11/30/93 10.18 0.62 0.42 1.04 0.60 0.17 0.77
11/30/94 10.45 0.59 (1.04) (0.45) 0.58 0.11 0.69
11/30/95 9.31 0.63 0.99 1.62 0.63 -- 0.63
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Int. 8 Mo. to
Government 11/30/95(C) $ 9.64 $0.40 $ 0.20 $ 0.60 $0.40 $ -- $0.40
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury 9 mo. to
11/30/93(A) $ 1.00 $0.02 $ 0.00 $ 0.02 $0.02 $ -- $0.02
11/30/94 1.00 0.03 0.00 0.03 0.03 -- 0.03
11/30/95 1.00 0.05 0.00 0.05 0.05 -- 0.05
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free 2 mo. to
Income 11/30/90(E) $12.00 $0.10 $ 0.26 $ 0.36 $0.10 $ -- $0.10
11/30/91 12.26 0.79 0.42 1.21 0.79 -- 0.79
11/30/92 12.68 0.76 0.47 1.23 0.76 0.02 0.78
11/30/93 13.13 0.73 0.79 1.52 0.73 0.11 0.84
11/30/94 13.81 0.68 (1.34) (0.66) 0.68 0.12 0.80
11/30/95 12.35 0.67 1.27 1.94 0.67 -- 0.67
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New York 8 Mo. to
Fund 11/30/95(C) $11.19 $0.36 $ 0.53 $ 0.89 $0.36 $ -- $0.36
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania 2.5 mo. to
Fund 12/31/86(D) $12.50 $0.19 $ 0.19 $ 0.38 $0.19 $0.03 $0.22
12/31/87 12.66 0.85 (1.17) (0.32) 0.85 -- 0.85
12/31/88(3) 11.49 0.82 0.58 1.40 0.82 -- 0.82
12/31/89 12.07 0.66 0.33 0.99 0.72 -- 0.72
12/31/90 12.34 0.72 (0.03) 0.69 0.78 -- 0.78
12/31/91 12.25 0.71 0.52 1.23 0.74 -- 0.74
12/31/92 12.74 0.73 0.43 1.16 0.75 -- 0.75
11 mo. to
11/30/93 13.15 0.69 0.42 1.11 0.69 -- 0.69
11/30/94 13.57 0.64 (1.28) (0.64) 0.64 -- 0.64
11/30/95 12.29 0.66 1.11 1.77 0.66 -- 0.66
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
</TABLE>
(A) Commenced operations March 1, 1993.
(B) Commenced operations September 2, 1986.
(C) Commenced operations March 27, 1995
(D) Commenced operations October 14, 1986.
(E) Commenced operations October 1, 1990.
+ Annualized.
* Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at the net asset value during the period, and a redemption on
the last day of the period. Initial sales charge is not reflected in the
calculation of total investment return.
# Not annualized.
** Expense reductions are comprised of (i) voluntary expense reimbursements,
in the cases of the World Fund in fiscal 1993, the Tax-Free Income Fund in
all fiscal years shown, and the Pennsylvania Fund in the periods ended
December 31, 1986, 1987 and 1988 and November 30, 1995 and (ii) in fiscal
1995 only, credits received from the custodian and dividend paying agent on
cash balances.
(1) Ratios of net investment income to average net assets would have been .29%
in fiscal 1993, in the absence of a voluntary expense reimbursement.
(2) Prior to March 1, 1993, the Pennsylvania Fund's investment advisor was
ProvidentMutual Management Co., Inc. ("PMMC") and the distributor was
ProvidentMutual Financial Services ("PMFS"). For the years ended December
31, 1988 and 1987, PMMC waived advisory fees of $97,538 and
Prospectus
10
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------- ------------------------------------ ------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------- ------------------------------------ ------------------------
RATIO OF RATIO OF RATIO OF
NET EXPENSES TO NET NET ASSETS
NET ASSET EXPENSES AVERAGE NET INVESTMENT AT END
VALUE AT TOTAL TO AVERAGE ASSETS BEFORE INCOME TO PORTFOLIO OF PERIOD
END OF RETURN* NET EXPENSE AVG. NET TURNOVER (000
PERIOD (%) ASSETS(%) REDUCTION**(%) ASSETS(%) RATE(%) OMITTED)
- -------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.04 2.3# 0.66+ 0.66+ 6.68+ 7+ $ 10,186
9.35 1.2 0.67 0.67 8.31 57 23,057
9.31 8.2 0.90 0.90 8.20 41 31,007
9.57 12.1 0.82 0.82 8.59 25 34,644
9.54 8.3 0.78 0.78 8.25 22 41,134
10.04 13.5 0.77 0.77 7.52 14 45,734
10.18 8.6 0.76 0.76 6.90 79 68,293
10.45 10.6 0.98 0.98 6.06 97 134,749
9.31 (4.5) 1.00 1.00 5.95 149 104,457
10.30 17.9 1.03 1.04 6.50 367 108,100
<CAPTION>
- -------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 9.84 6.3# 1.00+ 1.38+ 6.07(6)+ 58 $ 28,417
<CAPTION>
- -------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 1.7# 0.85+ 0.87+ 2.20+(7) -- $ 72,252
1.00 3.1 0.81 0.81 3.01 -- 75,301
1.00 5.0 0.81 0.82 4.83 -- 80,664
<CAPTION>
- -------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 12.26 3.0+ 0.00 0.52+ 4.98+(5) -- $ 13,824
12.68 10.2 0.38 0.73 6.37(5) 29 35,277
13.13 10.0 0.50 0.72 5.93(5) 48 55,538
13.81 11.9 0.64 0.90 5.41(5) 39 111,968
12.35 (5.1) 0.75 0.94 5.11(5) 92 99,935
13.62 16.0 0.90 0.99 5.06(5) 112 110,506
<CAPTION>
- -------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
$11.72 8.1# 1.22+ 1.29+ 4.60+ 32 $ 5,332
<CAPTION>
- -------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
$12.66 3.0# 0.00 0.46 6.94+(4) 22+ $ 14,704
11.49 (2.5) 0.45 1.55 7.24(4) 54 26,590
12.07 12.5 0.86 1.44 6.93(4) 48 29,611
12.34 8.5 1.16 1.16 6.43 50 29,435
12.25 5.9 1.34 1.34 5.90 27 30,536
12.74 10.3 1.27 1.27 5.71 8 32,667
13.15 9.4 1.16 1.16 5.62 1 33,669
13.57 8.1# 1.24+ 1.24+ 5.07+ 23 34,448
12.29 (4.9) 1.30 1.30 4.84 56 31,172
13.40 14.8 0.97 1.36 5.14(4) 80 34,975
<CAPTION>
- -------------------- ------------------------------------ ------------------------
</TABLE>
$139,071, respectively, and PMFS waived distribution fees of $72,170 and
$57,946, respectively. In addition, PMFS absorbed operating expenses of the
Fund totaling $55,118 for the year ended December 31, 1987. During the
period October 14, 1986 (commencement of operations) to December 31, 1986,
PMMC waived its entire fee of $15,188, and PMFS waived its entire fee of
$6,328 and absorbed operating expenses totaling $15,479. Had fees not been
waived and expenses not absorbed, the ratio of expenses to average net
assets for the fiscal years ended December 31, 1988 and 1987, and for the
period ended December 31, 1986, would have been 1.44%, 1.55% and 0.46%,
respectively.
(3) The Pennsylvania Fund changed investment advisors from The Meritor
Investment Company to PMMC on December 28, 1988, and entered into its
current Investment Advisory Agreement with the Advisor on March 1, 1993.
(4) Ratio of net investment income to average net assets would have been 4.78%
for fiscal 1995, 6.35% in 1988, 6.14% in 1987 and 6.48% in 1986, in the
absence of a voluntary expense reimbursement.
(5) Ratio of net investment income to average net assets would have been 5.00%
in fiscal 1995, 4.92% in fiscal 1994, 5.14% in fiscal 1993, 5.71% in
fiscal 1992, 6.02% in fiscal 1991 and 4.46% in fiscal 1990, in the absence
of a voluntary expense reimbursement.
(6) Ratio of net investment income to average net assets would have been 5.76%
in fiscal 1995, in the absence of a voluntary expense reimbursement.
(7) Ratio of net investment income to average net asset would have been 2.18%
in 1993, in the absence of a voluntary expense reimbursement.
11
Prospectus
<PAGE>
PURCHASE OPTIONS
The Common Stock, Balanced, Emerging Growth, World, Bond and Tax-Free Income
Funds currently offer two classes of shares. Investors in these Funds may
choose Class A shares, which are generally sold subject to an initial sales
charge, or Class B shares, which are sold subject to a contingent deferred
sales charge ("CDSC") as described below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
----- --------------- ----------- --------------------- ------------------
<S> <C> <C> <C> <C>
A Maximum 5.00% Maximum of 0.20%(3) Maximum of 0.30%(4) No
initial sales charge
(4.00% for Bond and
Tax-Free Income
Funds)(2)
- ----------------------------------------------------------------------------------------------
B CDSC for a maximum 0.25% 1.00% Class B Shares convert
of 6 years(5) to Class A Shares
automatically after the
applicable CDSC
period(5)(6)
- ----------------------------------------------------------------------------------------------
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the current net asset value or cost of the shares
being redeemed. See "How to Purchase Shares--Class A Shares--Sales
Charges" and "How to Redeem Shares--Class B Shares--CDSC".
(2) Reduced for purchases of $100,000 or more and waived for purchases of
Class A Shares by certain investors. Class A share purchases of $1,000,000
or more are not subject to an initial sales charge but, if the initial
sales charge is waived, will be subject to a 1.0% CDSC and 0.5% CDSC for
the first and second year, respectively, after the purchase. Following the
second year after purchase, no CDSC will apply. See "How to Purchase
Shares--Class A Shares--Sales Charges" and "How to Redeem Shares--Class A
Shares Purchased in Amounts over $1,000,000--CDSC".
(3) The maximum service fee for Class A Shares of the Bond Fund and Tax-Free
Income Fund is 0.10%.
(4) The maximum distribution fee for Class A Shares of the Bond Fund and the
Tax-Free Income Fund is 0.20%.
(5) The applicable CDSC period is reduced to 5 years for aggregate purchases
from $250,000 to $499,999 and to 4 years for aggregate purchases of
$500,000 to $999,999. Investors with aggregate purchases in excess of
$1,000,000 are only offered Class A Shares. The CDSC may be waived in
certain circumstances. See "How to Redeem Shares--Class B Shares--CDSC"
and "How to Redeem Shares--Class B Shares--Waiver or Reduction of the
CDSC".
(6) The conversion and holding periods for dividend reinvestment shares are
the same as those for the initial shares to which they relate.
The Growth, Government Securities, New York and Pennsylvania Funds currently
only offer Class A Shares as described below.
<CAPTION>
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
----- --------------- ----------- --------------------- ------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% Maximum of 0.10% Maximum of 0.20% No
initial sales charge (0.20% for Growth (0.30% for Growth
(5.00% for Growth Fund) Fund)
Fund)(2)
</TABLE>
- --------
(1) See footnote (1) to the preceding chart.
(2) See footnote (2) to the preceding chart.
Prospectus
12
<PAGE>
The Short-Intermediate Government Fund currently only offers Class A Shares
as described below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
----- --------------- ----------- --------------------- ------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% Maximum of 0.25% Maximum of 0.35% No
initial sales
charge(2)
- -----------------------------------------------------------------------------------------
</TABLE>
- --------
(1) See footnote (1) to the preceding chart.
(2) Purchases of such shares of up to $999,999 are subject to a 1.0% initial
sales charge, while purchases of $1,000,000 or more are not subject to an
initial sales charge. If the initial sales charge is waived because a
purchase is $1,000,000 or more the shares will be subject to a 1.0% CDSC
and 0.5% CDSC for the first and second year, respectively, after the
purchase. Following the second year after purchase, no CDSC will apply.
See "How to Purchase Shares--Class A Shares--Sales Charges" and "How to
Redeem Shares--Class A Shares Purchased in Amounts over $1,000,000--CDSC".
The Treasury Fund offers Class A and Class B Shares. Initial purchases of
Class A Shares of the Treasury Fund are not subject to any initial sales
charge, CDSC or Rule 12b-1 fees. Class B Shares may not be purchased directly
or acquired in exchange for shares of the Growth, Government Securities,
Short- Intermediate Government, New York and Pennsylvania Funds and may be
acquired only in exchange for Class B Shares of another Fund. The period of
time that shares are held in Class B Shares of the Treasury Fund, however,
will not count toward satisfaction of the holding or conversion periods for
reduction of any CDSC imposed on such shares or the conversion of Class B
Shares to Class A Shares, respectively. See "How to Purchase Shares--Class B
Shares".
Prospectus
13
<PAGE>
THE FUNDS
Sentinel Group Funds, Inc. (the "Company") is a managed,
open-end investment company that consists of eleven separate
series funds, each of which continuously offers shares to
investors. All of the Funds in Sentinel Group Funds, Inc.,
except the New York Fund, are diversified. The New York Fund
is a non-diversified series of the Company. The Pennsylvania
Fund is a separate open-end, non-diversified, managed in-
vestment company.
Sentinel Advisors Company (the "Advisor") serves as the
investment advisor to all of the Funds and Sentinel Finan-
cial Services Company (the "Distributor") serves as the dis-
tributor for all of the Funds. See "Management of the Funds"
and "The Distributor" below.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Funds has distinct investment objectives and
policies. Investment objectives are fundamental policies of
each Fund that may only be changed by majority vote of the
outstanding shares of that Fund. There can be no assurance
that these objectives will be achieved.
Set forth below is a description of each Fund's investment
objectives and policies and information on the person who is
primarily responsible for the day-to-day management of the
portfolio of each Fund.
THE FUND . The Common Stock Fund seeks a combination of long-term
INVESTS FOR growth of capital and income, current return and relatively
GROWTH OF low risk by investing in the common stocks of a diversified
CAPITAL AND group of well-established companies. The Advisor will select
INCOME WITH securities based on the issuing companies' quality and its
RELATIVELY LOW appraisal of a stock's price in relation to its value. When
RISK appropriate, the Fund may also invest in preferred stocks or
debentures convertible into common stocks.
THE FUND . The Balanced Fund seeks a conservative combination of
INVESTS FOR stability, income and long-term growth of capital by invest-
STABILITY, ing in a diversified portfolio of stocks and bonds. The per-
INCOME AND centage invested in each type of security will depend on
GROWTH whether the Advisor believes stocks or bonds offer a better
value at the time of allocation. A greater proportion in-
vested in bonds ordinarily provides greater price stability,
and a greater proportion in common stocks usually provides
enhanced potential for growth of income and principal. The
Fund will invest at least 25% of its total assets in fixed-
income securities. When determining this percentage, con-
vertible bonds and/or preferred stocks will be considered
common stocks, unless these securities are held primarily
for income. The bond portion of the Balanced Fund will be
invested in accordance with the same investment policies as
set forth below for the Bond Fund. As of November 30, 1995,
the portfolio securities in the bond portion of the Balanced
Fund had an average rating of A1; the average effective
portfolio maturity for the bond portion of the Fund was 9.3
years.
THE FUND . The Growth Fund seeks to achieve long-term growth of
INVESTS IN capital by investing primarily in common stocks of companies
STOCKS OF which the Advisor believes have more growth potential than
GROWING the U.S. economy as a whole. The Growth Fund will focus on
COMPANIES, WITH securities of well-established companies. Such companies
A FOCUS ON will have, in the Advisor's judgment, favorable growth po-
WELL- tential and experienced managements. Normally, the Fund will
ESTABLISHED be fully invested in common stocks and other securities con-
COMPANIES
Prospectus
14
<PAGE>
vertible into common stocks; however, the Fund may temporar-
ily retain cash or invest in fixed-income securities, if
deemed appropriate by the Advisor. Income is not a factor in
selecting investments.
The Growth Fund emphasizes securities believed to have su-
perior potential for growth rather than wide diversifica-
tion. Up to 25% of the value of the Growth Fund's assets may
be invested in securities of companies within a single in-
dustry.
. The Emerging Growth Fund seeks long-term capital appre- THE FUND
ciation by investing primarily in a diversified portfolio of INVESTS IN
common stocks, or securities convertible into common stock, STOCK OF
issued by small and medium-sized companies. The Fund may GROWING
also invest in larger, more established companies. Companies COMPANIES, WITH
selected for the Fund are believed to have superior growth A FOCUS ON
potential and are judged to represent attractive relative SMALL AND MID-
values. Income is not a factor in selecting investments. SIZED COMPANIES
The median market capitalization of the Fund's portfolio
companies generally will not exceed $1 billion. Up to 25% of
the Fund's assets may be invested in securities within a
single industry. The Fund may temporarily retain cash or in-
vest in fixed-income securities, if deemed appropriate by
the Advisor.
The Fund's policy is to avoid short-term trading. However,
the Advisor may sell a security without regard to holding
period if the Advisor believes it is in the Fund's best in-
terest to do so.
The Fund's turnover rate is not expected to exceed 100%
annually. The Fund is intended for long-term investors will-
ing to accept a higher-than-average level of volatility in
order to seek above-average gains.
. The World Fund seeks long-term growth of capital by in- THE FUND
vesting primarily in a diversified portfolio of marketable INVESTS
equity securities of established non-U.S. companies. Normal- PRIMARILY IN
ly, at least 75% of the Fund's total assets will be invested STOCKS OF NON-
in securities of non-U.S. issuers selected by INVESCO Capi- U.S. COMPANIES
tal Management, Inc. (the "Sub-Advisor") primarily for long-
term capital growth. The remaining 25% may be invested in
companies organized in the United States that have their
principal activities and interests (i.e., 50% of assets
and/or 50% of revenues) outside of the United States. The
Fund may also invest in convertible or debt securities rated
Baa or higher by Moody's Investors Service, Inc. ("Moody's")
or BBB or higher by Standard & Poor's Ratings Group ("Stan-
dard & Poor's").
The Fund generally will not invest more than 25% of its
total assets in any one country; however, the Fund may in-
vest up to 40% of its assets in any one country if in the
judgment of the Sub-Advisor, economic and business condi-
tions make it appropriate to do so.
It is anticipated that the majority of the Fund's portfo-
lio transactions will be executed on established stock ex-
changes or in the over-the-counter markets in the countries
in which portfolio investments are being made. The Fund also
expects to purchase American Depositary Receipts ("ADRs"),
and European Depositary Receipts in bearer form, which are
designed for use in European securities markets. ADRs repre-
sent foreign securities traded on U.S. exchanges or in the
over-the-counter markets. To expedite settlement of portfo-
lio transactions and minimize currency value fluctuations,
the Fund may purchase foreign currencies and/or engage in
forward foreign currency transactions. You can obtain more
information
Prospectus
15
<PAGE>
about these strategies by reading the section entitled, "In-
vestment Objectives and Policies--Considerations Applicable
to the World Fund--Foreign Currency Transactions" in the
Statement of Additional Information. Normally, however, the
Fund does not hedge its foreign currency exposure.
Under abnormal economic or market conditions abroad, the
Fund may assume a temporary defensive posture by investing
all, or a major portion, of its assets in U.S. government
obligations or investment-grade fixed income securities of
companies organized in the United States.
Investors should note that investing in foreign securities
involves certain special risk considerations which normally
are not associated with investing in U.S. securities,
including, but not necessarily limited to, those described
on page 23 below.
THE FUND . The Bond Fund seeks as high a level of continuing income
INVESTS FOR as is consistent with capital preservation. The Fund will
CONTINUING invest its assets exclusively in fixed-
INCOME income securities. At least 80% of the Fund's assets,
CONSISTENT WITH exclusive of cash items such as commercial paper,
CAPITAL certificates of deposit and banker's acceptances, will be
PRESERVATION invested in one or more of the following types of
securities:
1. Debt securities which at the time of purchase are
rated within the four highest rating categories of
Moody's, Standard & Poor's or any other nationally
recognized statistical rating organization;
2. Debt securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities ("U.S.
Government Securities");
3. Debt securities (payable in U.S. dollars) issued or
guaranteed by the government of Canada or of a
province of Canada, or any instrumentality or
subdivision thereof; and
4. Debt obligations of, or guaranteed by, domestic banks
or bank holding companies, even though not rated by
Moody's or Standard & Poor's, if the Advisor believes
they have investment qualities comparable to
securities which may be purchased under (1) above.
The remainder of the Fund's assets may be invested in
other fixed-income investments not described above, such as
straight or convertible debt securities and straight or con-
vertible preferred stocks. Generally, the Fund will invest
no more than 5% of its total assets in either (i) securities
rated lower than BBB by Standard & Poor's or Baa by Moody's,
or (ii) unrated securities whose credit quality, in the Ad-
visor's opinion, is below the credit quality of securities
rated BBB by Standard & Poor's or Baa by Moody's. See "Ap-
pendix A--Description of Bond Ratings" in the Statement of
Additional Information for more information concerning rat-
ings of debt securities. As of November 30, 1995, the port-
folio securities in the Bond Fund had an average credit
quality of A2; the average effective portfolio maturity for
the Fund was 9.5 years.
The Bond Fund may not invest more than 25% of its total
assets in any one industry, except for U.S. Government Secu-
rities. In applying this limitation, utility companies will
be divided according to their services, and financial serv-
ices companies will be classified according to the end users
of their services. For example, gas, gas transmission, elec-
tric, electric and gas, and telephone will each be consid-
ered a separate industry, as will auto finance, bank fi-
nance, and diversified finance.
Prospectus
16
<PAGE>
. The Government Securities Fund seeks as high a level of THE FUND
current income as is consistent with capital preservation by INVESTS
investing primarily in U.S. Government Securities. To a lim- PRIMARILY IN
ited extent, the Fund may also invest in repurchase agree- U.S. GOVERNMENT
ments with respect to these securities. In addition, the SECURITIES
Fund may invest up to 20% of its net assets in high quality
money market instruments which are not issued or guaranteed
by the U.S. government or its agencies or instrumentalities.
These include bank money market instruments, commercial pa-
per or other short-term corporate obligations listed in the
highest rating categories by nationally recognized statisti-
cal rating organizations. Money market instruments may be
used as a means of making short-term investments.
The Fund may also use repurchase agreements as a means of
making short-term investments, and will invest only in re-
purchase agreements with durations of seven days or less,
only where the collateral securities are U.S. Government Se-
curities, and in aggregate amounts of not more than 25% of
the Fund's net assets. Further information concerning repur-
chase agreements is set forth on page 23, below.
U.S. Government Securities include the following: U.S. GOVERNMENT
SECURITIES
1. U.S. Treasury Bills, Notes and Bonds. These are obli- INCLUDE A WIDE
gations issued directly by the U.S. Treasury and have ARRAY OF
maturities of less than one year for Bills, one to INVESTMENTS
ten years for Notes, and ten to 30 years for Bonds.
2. Obligations guaranteed by the U.S. government. These
include securities issued or guaranteed by certain
agencies and instrumentalities of the U.S. government
as to which the U.S. government guarantees repayment
of principal and payment of interest. These securi-
ties include fully modified pass-through mortgage-
backed certificates whose principal and interest are
guaranteed by the Government National Mortgage Asso-
ciation ("GNMA Certificates").
3. Obligations of U.S. government agencies and
instrumentalities. These include obligations issued
or guaranteed by U.S. government agencies and instru-
mentalities, supported by any of the following: (i)
the right of the issuer to borrow an amount limited
to a specific line of credit from the U.S. Treasury;
(ii) discretionary authority of the U.S. government
to purchase certain obligations of the agency or in-
strumentality; or (iii) the full faith and credit of
the agency or instrumentality.
The Fund is not required to maintain a set amount in any
of the various types of U.S. Government Securities described
above. The types of U.S. Government Securities selected for
purchase will depend on market conditions and the Advisor's
outlook for interest rates and the economy. As of November
30, 1995, the Fund's average effective portfolio maturity
was 7.0 years.
At times, the Fund may make investments in GNMA Certifi- THE FUND MAY
cates and other mortgaged-backed U.S. Government Securities INVEST
("Mortgage-Backed Securities"). Each GNMA Certificate is SUBSTANTIALLY
backed by a pool of mortgage loans insured by the Federal IN MORTGAGE-
Housing Administration and/or the Veterans Administration. BACKED
GNMA Certificates provide for the payment of fixed monthly SECURITIES
installments of principal and interest to the registered
holder of the security. As noted above, timely repayment of
principal and payment of interest is guaranteed by the full
faith and credit of the U.S. government.
Prospectus
17
<PAGE>
In addition to GNMA Certificates, the Fund may invest in
mortgage-backed securities issued by the Federal National
Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA, a federally- chartered
and privately-owned corporation, issues pass-through securi-
ties and certificates representing an interest in a pool of
FNMA pass-through securities which are guaranteed as to the
repayment of principal and payment of interest by FNMA.
FHLMC, a corporate instrumentality of the United States, is-
sues participation certificates which represent an interest
in mortgages from FHLMC's portfolio and securities repre-
senting an interest in a pool of FHLMC participation certif-
icates. FHLMC guarantees the timely payment of interest and
the ultimate collection of principal. As is the case with
GNMA Certificates, the actual maturity of and realized yield
on particular FNMA and FHLMC mortgage-backed securities will
vary based on the prepayment experience of the underlying
pool of mortgages. Securities guaranteed by FNMA and FHLMC
are not backed by the full faith and credit of the United
States.
While the maximum life of a Mortgage-Backed Security is
typically 30 years, its average life varies with the maturi-
ties of the underlying mortgage instruments. Average life is
likely to be substantially less than the original maturity
of the mortgage pools underlying the Mortgage-Backed Securi-
ty, due to prepayments, refinancing or foreclosure of these
mortgage loans. Prepayments are passed through to the regis-
tered holder along with regularly scheduled repayments of
principal and payments of interest.
In general, if prevailing interest rates are significantly
below the rates on mortgages underlying the Mortgage-Backed
Securities, the Mortgage-Backed Securities are likely to
have higher prepayment rates than if prevailing rates are at
or above the interest rates on the underlying mortgages.
Prepayment possibilities reduce the potential of Mortgage-
Backed Securities to appreciate in market value during peri-
ods of falling interest rates, while the risk of decline in
market value during periods of rising interest rates may be
comparable to other debt securities of similar maturities.
The Fund does not intend to enter into options or futures
transactions with respect to U.S. Government Securities,
lend its securities to others, or enter into reverse repur-
chase agreements. With respect to repurchase agreements, the
Fund might incur time delays or losses in the event of the
failure of the other party to the agreement to repurchase
the securities.
THE FUND . The Short-Intermediate Government Fund seeks as high a
INVESTS level of current income as is consistent with capital
PRIMARILY IN preservation by investing primarily in U.S. Government
U.S. GOVERNMENT Securities. This Fund will invest at least 65% of its assets
SECURITIES WITH in U.S. Government Securities with average maturities of
LIMITED from 2 to 5 years. The remainder of the Fund's assets may be
MATURITIES invested in U.S. Government Securities with other
maturities, and the Fund may also invest to a limited extent
in repurchase agreements with respect to these securities.
In addition, like the Government Securities Fund, the Short-
Intermediate Government Fund may invest up to 20% of its net
assets in high quality money market instruments which are
not issued or guaranteed by the U.S. government or its
agencies or instrumentalities.
The Fund may also use repurchase agreements as a means of
making short-term investments, in the same way as described
for the Government Securities Fund above.
Prospectus
18
<PAGE>
U.S. Government Securities include the types of securities
described above under "The Government Securities Fund".
The Fund is not required to maintain a set amount in any
of the various types of U.S. Government Securities. The
types of U.S. Government Securities selected for purchase
will depend on market conditions and the Advisor's outlook
for interest rates and the economy. At times, the Fund may
make investments in Mortgage-Backed Securities, as described
above under "The Government Securities Fund". As of November
30, 1995, the Fund's average effective portfolio maturity
was 4.0 years.
The Fund does not intend to enter into options or futures
transactions with respect to U.S. Government Securities,
lend its securities to others, or enter into reverse repur-
chase agreements. With respect to repurchase agreements, the
Fund might incur time delays or losses in the event of the
failure of the other party to the agreement to repurchase
the securities.
The Fund is not guaranteed or insured by the U.S. Govern-
ment, and the value of the Fund's shares will fluctuate.
. The Treasury Fund seeks as high a level of current in- THE FUND
come as is consistent with capital preservation and the INVESTS SOLELY
maintenance of liquidity by investing solely in short-term IN SHORT-TERM
obligations of the U.S. Treasury. Such obligations include U.S. TREASURY
U.S. Treasury Bills, U.S. Treasury Notes and U.S. Treasury SECURITIES
Bonds with remaining maturities of 397 days or less. Securi-
ties that comprise the Fund may earn less income than longer
term securities or lower quality securities that have less
liquidity, greater market risk and greater market value
fluctuations.
The Fund will seek to maintain a net asset value of $1.00
per share, by using the amortized cost method of valuing its
securities. In accordance with rules adopted by the Commis-
sion, the Fund is required to maintain a dollar-weighted av-
erage portfolio maturity of 90 days or less and to purchase
only instruments having remaining maturities of 397 days or
less. For more information about the amortized cost method,
see "Determination of Net Asset Value" herein and in the
Statement of Additional Information.
In many states, the Fund's income dividends may be exempt INCOME MAY BE
from state and local income taxes, but subject to federal EXEMPT FROM
income taxes. For more information on state and local tax STATE AND LOCAL
exemption, see "Taxes" herein. TAXES
. The Tax-Free Income Fund seeks as high a level of cur- THE FUND
rent income, exempt from federal income taxes, as is consis- INVESTS FOR
tent with capital preservation, by investing primarily in a CURRENT INCOME
diversified portfolio of municipal bonds. These investments EXEMPT FROM
may include obligations of states, territories and posses- FEDERAL INCOME
sions of the United States and their political subdivisions, TAXES
agencies, authorities and instrumentalities. The payments
from these investments, in the opinion of the issuer's bond
counsel, are exempt in their entirety from federal income
tax.
At least 80% of the total assets of the Tax-Free Income THE FUND
Fund will, at all times, be invested in municipal bonds CONSISTS
rated within the four highest rating categories, or obliga- PRIMARILY OF
tions of issuers having an issue of outstanding municipal INVESTMENT
bonds rated within the four highest rating categories of ei- GRADE MUNICIPAL
ther Moody's or Standard & Poor's, except to the extent the BONDS
Fund is invested in defensive investments, as described be-
low. See
Prospectus
19
<PAGE>
"Appendix A--Description of Bond Ratings" in the Statement
of Additional Information for more information regarding
ratings of debt securities.
The Fund also may invest in unrated municipal bonds, if
the Advisor believes the credit characteristics are at least
equivalent to those of municipal bonds ranked in the fourth
highest rating category of either Moody's or Standard &
Poor's. Although this is not a fundamental policy, no more
than 5% of the Fund's total assets may be invested in secu-
rities rated below investment-grade or unrated securities
that the Advisor believes are not equivalent in credit qual-
ity to municipal bonds in the fourth highest rating catego-
ry. As of November 30, 1995, the portfolio securities of the
Tax-Free Income Fund had an average rating of AA3; the aver-
age effective portfolio maturity of the Fund was 13.3 years.
THE FUND SEEKS . The New York Fund seeks as high a level of current in-
HIGH CURRENT terest income exempt from federal income taxes and New York
INCOME EXEMPT State and New York City personal income taxes as is consis-
FROM FEDERAL tent with liquidity and capital preservation, by investing
AND NEW YORK substantially all of its assets in obligations issued by or
STATE AND CITY on behalf of the State of New York and its political subdi-
INCOME TAXES visions, agencies, authorities, and instrumentalities ("New
York Obligations"), the interest on which, in the opinion of
the issuer's bond counsel, is exempt from federal income tax
and New York State and City personal income tax. The New
York Fund normally will invest substantially all of its net
assets in New York Obligations with maturities of more than
one year at the time of investment. The Fund may, however,
invest up to 20% of its net assets in short-term New York
Obligations.
THE FUND At least 80% of the total assets of the New York Fund
CONSISTS will, at all times, be invested in municipal bonds rated
PRIMARILY OF within the four highest rating categories, or obligations of
INVESTMENT issuers having an issue of outstanding municipal bonds rated
GRADE MUNICIPAL within the four highest rating categories of either Moody's
BONDS or Standard & Poor's, except to the extent the New York Fund
is invested in defensive investments, as described below.
See "Appendix A--Description of Bond Ratings" to the State-
ment of Additional Information for more information regard-
ing ratings of debt securities.
The New York Fund also may invest in unrated municipal
bonds, if the Advisor believes the credit characteristics
are at least equivalent to those of municipal bonds ranked
in the fourth highest rating category of either Moody's or
Standard & Poor's. Although this is not a fundamental poli-
cy, no more than 5% of the New York Fund's total assets may
be invested in securities rated below investment-grade or
unrated securities that the Advisor believes are not equiva-
lent in credit quality to municipal bonds in the fourth
highest rating category. As of November 30, 1995, the port-
folio securities of the New York Fund had an average rating
of A3; the average effective maturity of the Fund was 11.6
years.
Due to the New York Fund's concentration in New York Obli-
gations, the Fund is more susceptible to factors adversely
affecting issuers of New York Obligations than a municipal
bond fund which is diversified nationally. Because the Fund
invests at least 80% of its assets in New York Obligations,
its net asset value is particularly sensitive to changes in
the economic condition and governmental policies of the
State of New York. For example, the economic condition of a
significant industry within New York may have a correspond-
ing effect on specific issuers within New York or on antici-
pated revenue to the State. Other factors that may nega-
tively affect economic conditions in New York include
adverse changes in employment rates, federal revenue sharing
or laws with respect to tax-exempt fi-
Prospectus
20
<PAGE>
nancing. In recent years, New York State, New York City and
other New York public bodies have encountered financial dif-
ficulties, and New York City is currently encountering fi-
nancial difficulties, which could have an adverse effect
with respect to the performance of the Fund. On January 17,
1995, Standard & Poor's placed the City's general obligation
bonds on Credit Watch with negative implications. The Advi-
sor does not believe, however, that the current economic
conditions in New York will have a significant adverse ef-
fect on the Fund's ability to invest in high quality New
York Obligations. For additional information pertinent to
investment in New York Obligations, see "Appendix B--Eco-
nomic Conditions in New York" to the Statement of Additional
Information.
. The Pennsylvania Fund seeks as high a level of current THE FUND SEEKS
interest income exempt from federal income taxes and Penn- HIGH CURRENT
sylvania personal income taxes as is consistent with liquid- INCOME EXEMPT
ity and capital preservation, by investing substantially all FROM FEDERAL
of its assets in obligations issued by or on behalf of the AND
Commonwealth of Pennsylvania (the "Commonwealth" or "Penn- PENNSYLVANIA
sylvania") and its political subdivisions, agencies, author- INCOME TAXES
ities, and instrumentalities ("Pennsylvania Obligations"),
the interest on which, in the opinion of the issuer's bond
counsel, is exempt from federal income tax and Pennsylvania
personal income tax. A general discussion of municipal bonds
is contained in the description of the New York Fund, above.
Under prior Pennsylvania law, in order for the Pennsylva-
nia Fund to qualify to pass through to investors income ex-
empt from Pennsylvania personal income tax, the Pennsylvania
Fund was required to adhere to certain investment restric-
tions. In order to comply with this and other Pennsylvania
law requirements previously in effect, the Pennsylvania
Fund's Declaration of Trust provides that the Fund will in-
vest for income earnings rather than trading for profit, and
that the Fund have no power to vary its portfolio invest-
ments except to (i) eliminate unsafe investments and invest-
ments not consistent with the preservation of the capital or
tax status of the investments of the Fund; (ii) honor re-
demption orders, meet anticipated redemption requirements
and negate gains from discount purchases; (iii) maintain a
constant net asset value per unit pursuant to, and in com-
pliance with, an order or rule of the U.S. Securities and
Exchange Commission (the "Commission"); (iv) reinvest the
earnings from securities in like securities; or (v) defray
normal administrative expenses (the "Pennsylvania Require-
ments"). Pennsylvania has enacted legislation which elimi-
nated the necessity for the foregoing investment restric-
tions. The Fund is in the process of soliciting shareholder
approval to amend the Declaration of Trust to eliminate the
Pennsylvania Requirements, and upon the completion of this
process, if the shareholders grant their approval, the Penn-
sylvania Requirements will no longer apply. However, until
the Declaration of Trust is amended, the Pennsylvania Fund
continues to be governed by such investment restrictions.
The Pennsylvania Fund normally will invest substantially
all of its net assets in Pennsylvania Obligations with matu-
rities of more than one year. The Fund may, however, invest
up to 20% of its net assets in short-term Pennsylvania Obli-
gations. All of the Pennsylvania Obligations in which the
Pennsylvania Fund invests will be rated in the top four rat-
ing categories by Moody's or Standard & Poor's or, if
unrated, possess equivalent investment characteristics, as
determined by the Advisor. See "Appendix A--Description of
Bond Ratings" to the Statement of Additional Information for
more information regarding ratings of debt securities. As of
November 30, 1995, the portfolio securities of the Pennsyl-
vania Fund had an average rating of AA3; the average effec-
tive portfolio maturity for the Fund was 12.0 years.
21
Prospectus
<PAGE>
THE FUND At least 75% of the Pennsylvania Fund's assets will be in-
CONSISTS vested in (a) municipal obligations rated "A" or higher by
PRIMARILY OF Moody's or by Standard & Poor's or, if not rated, that, in
HIGH-GRADE the opinion of the Advisor, possess equivalent investment
MUNICIPAL BONDS characteristics; (b) municipal notes rated "SP-1" or higher
by Standard & Poor's or "MIG-2" or higher by Moody's or, if
not rated, that, in the opinion of the Advisor, possess
equivalent investment characteristics; and (c) tax-exempt
commercial paper rated "A-1" or higher by Standard & Poor's
or "Prime-1" by Moody's or, if not rated, that, in the opin-
ion of the Advisor, possess equivalent investment character-
istics. The Pennsylvania Fund cannot invest in municipal ob-
ligations or notes rated lower than "BBB" by Standard &
Poor's or "Baa" by Moody's or unrated securities that pos-
sess investment characteristics equivalent to these securi-
ties, in the opinion of the Advisor.
Due to the Pennsylvania Fund's concentration in Pennsylva-
nia Obligations, the Fund is more susceptible to factors ad-
versely affecting issuers of Pennsylvania Obligations than a
municipal bond fund which is diversified nationally. Because
the Fund invests at least 80% of its assets in Pennsylvania
Obligations, its net asset value is particularly sensitive
to changes in the economic condition and governmental poli-
cies of Pennsylvania. For example, the economic condition of
a significant industry within Pennsylvania may have a corre-
sponding effect on specific issuers within Pennsylvania or
on anticipated revenue to the Commonwealth.
Other factors that may negatively affect economic condi-
tions in Pennsylvania include adverse changes in employment
rates, federal revenue sharing or laws with respect to tax-
exempt financing. For additional information pertinent to
investment in Pennsylvania Obligations, see "Appendix C--
Economic Conditions in Pennsylvania" to the Statement of Ad-
ditional Information.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * *
22
Prospectus
<PAGE>
FURTHER INFORMATION RELEVANT TO THE INVESTMENT PRACTICES OF
THE FUNDS AND ASSOCIATED RISKS
Information Relevant to All Funds
Depending upon the Advisor's appraisal of the availability PERIODICALLY
of attractive securities and upon its judgment with respect THE FUNDS MAY
to market conditions, a Fund may be less than fully invest- BE LESS THAN
ed. FULLY INVESTED
There can be no assurance that a Fund's objective will be
attained.
None of the Funds may invest in illiquid securities, or
engage in short sales of securities.
All of the Funds, except the Treasury Fund, may also in-
vest in repurchase agreements, provided the counterparty
maintains the value of the underlying securities at a value
not less than the repurchase price stated in the agreement.
Under a repurchase agreement, a Fund purchases fixed-income
securities and simultaneously agrees to resell these hold-
ings to the counterparty at a prearranged time and specific
price. If the counterparty defaults on its repurchase obli-
gation, the Fund would suffer a loss to the extent that the
proceeds from a sale of the underlying securities would be
less than the repurchase price stated in the agreement.
Bankruptcy or insolvency of such a defaulting counterparty
may cause a Fund to delay or limit its rights concerning
these securities. For more information about repurchase
agreements, please refer to the Statement of Additional In-
formation.
Information Relevant to the Equity Funds
Investments in equity securities of small and medium-sized
companies typically involve more risk than investments in
equity securities of larger companies, because they gener-
ally have limited financial resources and narrower product
lines and may have less seasoned managers, and their securi-
ties may trade less frequently and in lower share volumes,
making them subject to wider price fluctuations.
Investing in foreign equity securities involves certain
special risk considerations which normally are not associ-
ated with investing in U.S. securities, including, but not
necessarily limited to, those listed below. The Fund may be
affected favorably or unfavorably by changes in currency
rates or exchange control regulations and may incur costs in
connection with conversions between various currencies. For-
eign companies generally release less financial information
than comparable U.S. companies. Furthermore, foreign compa-
nies generally are not subject to uniform accounting, audit-
ing and financial reporting requirements. In general, secu-
rities listed on foreign stock exchanges are less liquid and
more volatile than securities listed on U.S. stock ex-
changes, due to, for example, substantially lower trading
volume. Such lower volume could result in the World Fund's
obtaining lower sales prices in the event of forced liquida-
tion of securities to meet unanticipated cash requirements.
Fixed commissions on foreign stock exchanges are generally
higher than negotiated commissions on U.S. stock exchanges,
and there is less supervision and regulation of such ex-
changes. When investing in foreign countries, there is the
possibility of expropriation of assets, confiscatory taxa-
tion, difficulty with the execution of judgments against
foreign issuers, imposition of the withholding of taxes
prior to payment of dividends or other distributions, polit-
ical or social instability, or diplomatic developments that
could affect U.S. investments in those countries.
23
Prospectus
<PAGE>
Information Relevant to the Fixed-Income Funds
The market prices of debt securities, including those is-
sued by the U.S. government, are inversely affected by in-
terest rate changes. As a result, the net asset value of the
shares of Funds holding debt securities will fluctuate with
conditions in the debt securities market. Debt securities
with longer maturities and longer effective durations (a
measure of an instrument's sensitivity to changes in inter-
est rates) generally have higher yields and are subject to
greater price fluctuation due to interest rate changes than
debt securities with shorter maturities or shorter effective
durations.
The Bond, New York and Tax-Free Income Funds, and the bond
portion of the Balanced Fund, may invest without limitation
in debt securities in the fourth highest rating category of
Moody's and Standard & Poor's. The Pennsylvania Fund may in-
vest up to 25% of its assets in such debt securities. While
considered "investment-grade", these securities may have
more speculative characteristics and may be more likely to
be downgraded than securities rated in the three highest
rating categories. If a debt security in any of the Funds is
downgraded below investment-grade, the Advisor will deter-
mine whether selling the security is in the shareholders'
best interest. To arrive at this decision, the Advisor will
consider several factors, including price, credit risk, mar-
ket conditions and the prospective trend in interest rates.
In the fiscal year ended November 30, 1995, the Government
Fund had portfolio turnover of 367%, the Bond Fund had port-
folio turnover of 237%, the Tax-Free Income Fund had portfo-
lio turnover of 112%, and the Balanced Fund had overall
portfolio turnover of 110% (resulting from portfolio turn-
over of 29% for the equity portion, and 216% for the bond
portion). These Funds are actively managed, and their port-
folios are constantly monitored and adjusted in an attempt
to increase income, protect the income stream or improve the
quality of the portfolios. This investment policy results in
portfolio turnover that is considered high, but this need
not adversely affect performance, because the Funds gener-
ally do not pay commissions; they deal directly with dealers
acting as principals when buying or selling. Although the
price of the securities may include a profit to the dealer,
the Funds will only execute these transactions when the Ad-
visor believes it will help the Funds to achieve their in-
vestment objectives. High portfolio turnover (i.e., greater
than 100% per year) may result in earlier recognition of
capital gains or capital losses for tax purposes than would
otherwise be the case.
The assets of the Bond, New York, Pennsylvania, Tax-Free
Income, Government Securities and Short-Intermediate Govern-
ment Funds and the bond portion of the Balanced Fund may in-
clude securities that have been purchased on a when-issued
or delayed-delivery basis. Delivery of and payment for these
securities could take place a month or more after the date
of the transaction. During this time, the value of the pur-
chase commitment will fluctuate with the market for compara-
ble securities. However, when the Fund makes a commitment to
purchase the securities, the payment and interest terms of
these issues are fixed. A Fund will make these commitments
only with the intention of acquiring the securities, but may
sell those holdings before settlement date if, in the Advi-
sor's opinion, such action would benefit shareholders. When
a Fund purchases securities on a when-issued or delayed-de-
livery basis, it will provide its custodian with enough as-
sets to pay the purchase price of these securities upon de-
livery. Payment would be in the form of cash, cash
equivalents, or short-term, high grade, fixed-income securi-
ties. This
24
Prospectus
<PAGE>
policy ensures that the use of when-issued or delayed-deliv-
ery purchases does not have the effect of leveraging the
portfolio.
The Bond, Government Securities, Short-Intermediate Gov-
ernment and Balanced Funds may also enter into "dollar
rolls". A dollar roll occurs when a Fund sells mortgage-
backed or U.S. Treasury securities for delivery in the cur-
rent month and simultaneously contracts to repurchase sub-
stantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll peri-
od, a Fund foregoes principal and interest paid on the mort-
gage-backed or U.S. Treasury securities. A Fund is compen-
sated by the difference between the current sales price and
the lower forward price for the future purchase (often re-
ferred to as the "drop") as well as by the interest earned
on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll in which the proceeds of a
dollar roll are held in a segregated account with liquid,
short-term, high grade debt securities. Dollar rolls in
which the Funds may invest will be limited to covered rolls.
Information Relevant to the Tax-Exempt Funds
Interest income on certain "private activity" bonds is a
preference item for shareholders subject to the alternative
minimum tax ("AMT"). Municipal bonds whose interest is a
preference item for AMT purposes will comprise less than 20%
of each of the Tax-Free Income and New York Funds' total as-
sets. From their inceptions through April 1, 1996, the Tax-
Free Income and New York Funds did not hold private activity
bonds. However, past investment strategies are not necessar-
ily indicative of the Funds' future investment program. The
Pennsylvania Fund does not presently intend to purchase
bonds subject to the AMT. For more information on private
activity bonds, refer to the section entitled "Taxes" below.
Any gain or loss from the sale of a tax-exempt security
will generally be treated as either a short-term or long-
term capital gain or loss for the Fund, depending on the
holding period. Capital gains distributions are fully tax-
able.
Should the Advisor anticipate a rise in interest rates, STRATEGIES TO
and a corresponding decline in value of long-term municipal PROTECT
bonds, the Tax-Free Income, New York and Pennsylvania Funds SHAREHOLDER
may invest temporarily in short-term debt obligations, in- CAPITAL IN
cluding taxable investments, to help protect shareholder TIMES OF MARKET
capital. Such investments may include notes issued by or on WEAKNESS
behalf of municipal issuers; U.S. Government Securities; in-
struments of domestic banks; repurchase agreements; domestic
commercial paper; and other cash-type investments.
Under these conditions, the Pennsylvania Fund will limit
its investments in securities other than Pennsylvania obli-
gations to 20% of its assets. With respect to non-governmen-
tal issuers the Pennsylvania Fund will limit these invest-
ments to obligations of issuers whose quality rating at the
time of purchase is within the two highest categories of ei-
ther Standard & Poor's or Moody's.
The interest on municipal obligations issued by states
other than New York or Pennsylvania, for the New York and
Pennsylvania Funds, respectively, is exempt only from fed-
eral income tax. Interest on certain qualifying U.S. Govern-
ment Securities, but not all such securities, is exempt only
from state personal income tax. Interest on instruments of
domestic banks, repurchase agreements, domestic commercial
paper, and other cash-type investments are generally fully
subject to both federal and any applicable state income tax-
es.
25
Prospectus
<PAGE>
The New York and Pennsylvania Funds are subject to the
risks relating to concentration in New York Obligations or
Pennsylvania Obligations, as described on pages 20-21 and 22
above.
The New York, Pennsylvania and Tax-Free Income Funds may
purchase and sell certain exchange-traded financial futures
contracts and related options for the following reasons:
. to hedge against adverse changes in interest rates;
. to protect against depreciation of municipal bond
investments; or
. to hedge against increases in the cost of prospective
municipal bond investments.
None of the New York, Pennsylvania or Tax-Free Income
Funds will purchase and sell financial futures contracts or
related options if, immediately after purchase, the sum of
the amount of initial margin on existing futures positions
and premiums paid for outstanding options exceeds 5% of the
Fund's total assets.
Risks Associated with Options and Futures
Transactions. Options and futures transactions involve cer-
tain risks; however, the Advisor believes that since the New
York, Pennsylvania and Tax-Free Income Funds will engage in
these transactions for hedging purposes only, these portfo-
lio strategies will not subject these Funds to the risks
frequently associated with the speculative use of options
and futures transactions. However, there are certain risks
related to futures transactions used for hedging purposes
that you should understand. These include: (i) incorrect
forecasts of interest rates by the Advisor, which may result
in the hedge being ineffective; (ii) possible lack of a liq-
uid secondary market for a financial futures contract, which
may result if the particular market exceeds its daily price
fluctuation limit, or for other reasons, in which case the
New York, Pennsylvania or Tax-Free Income Fund may be ad-
versely affected by its inability to close out its futures
position; and (iii) imperfect correlation between the change
in the market value of a Fund's municipal bonds and the
prices paid for futures contracts, which may result in the
hedge being ineffective. From their inceptions through April
1, 1996, none of the New York, Pennsylvania or Tax-Free In-
come Funds has engaged in any of the hedging transactions
described above. For further information on financial
futures contracts and options, please refer to "Investment
Objectives and Policies" in the Statement of Additional In-
formation.
MANAGEMENT OF THE FUNDS
Board of Directors--Board of Trustees
The Board of Directors of the Company and the Board of
Trustees of the Pennsylvania Fund (together, the "Boards")
consist of ten individuals, two of whom are "interested per-
sons" of the Funds as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). The Boards are respon-
sible for the overall supervision of the operations of the
Funds and performs the various duties imposed on the direc-
tors of investment companies by the 1940 Act.
Investment Advisor
THE ADVISOR'S The Advisor is a Vermont general partnership whose general
INDIRECT OWNERS partners are affiliates of three of the nation's major in-
ARE MAJOR surance companies, with aggregate assets of over $18 bil-
INSURANCE lion. The partners are:
COMPANIES WITH
COMBINED ASSETS . Sentinel Advisors, Inc., an indirect wholly-owned
OF OVER $18 subsidiary of National Life Insurance Company
BILLION. ("National Life"),
26
Prospectus
<PAGE>
. ProvidentMutual Management Co., Inc., an affiliate of
Provident Mutual Life Insurance Company ("Provident
Mutual"),
. HTK of Delaware, Inc., an affiliate of The Penn Mutual
Life Insurance Company ("Penn Mutual"), and
. Sentinel Management Company, a Vermont general
partnership whose general partners are affiliates of
National Life, Provident Mutual and Penn Mutual.
The principal business address of the Advisor is National
Life Drive, Montpelier, Vermont 05604. Subject to the direc-
tion and control of the Boards, the Advisor makes the in-
vestment decisions for the Funds and provides certain admin-
istrative and related services. For these services to the
Funds, the Advisor receives a fee, based on the aggregate
average daily value of net assets of the Funds at the fol-
lowing annual rates:
(1) With respect to the Emerging Growth, Growth,
World and Balanced Funds: 0.70% per annum on the
first $200 million of average daily net assets of
such Funds in the aggregate; 0.65% per annum on
the next $100 million of such assets; 0.60% per
annum on the next $100 million of such assets;
and 0.55% per annum on such assets in excess of
$400 million.
(2) With respect to the Common Stock Fund: 0.55% per
annum on the average daily net assets of the
Fund.
(3) With respect to the Bond, New York, Tax-Free
Income, Government Securities and Short-
Intermediate Government Funds: 0.55% per annum on
the first $200 million of average daily net
assets of such funds in the aggregate; 0.50% per
annum on the next $200 million of such assets;
and 0.45% per annum on such assets in excess of
$400 million.
(4) With respect to the Pennsylvania Fund: 0.55% per
annum on the first $50 million of average daily
net assets of such funds in the aggregate; 0.50%
per annum on the next $50 million of such assets;
and 0.45% per annum on such assets in excess of
$100 million.
(5) With respect to the Treasury Fund: 0.40% per
annum on the first $300 million of average daily
net assets of the Fund; and 0.35% per annum on
such assets in excess of $300 million.
Portfolio Managers
The Common Stock Fund and the Emerging Growth Fund are
managed by teams of investment professionals led by Keniston
P. Merrill. Mr. Merrill is Chairman of the Board of the Com-
pany and the Pennsylvania Fund and has been associated with
the Advisor and its predecessor since 1982, serving as
Chairman and Chief Executive Officer since 1986. He has a
total of 38 years experience as an investment professional.
The portfolio manager for the Growth Fund is Robert L.
Lee, Vice President of the Advisor. Mr. Lee is a Chartered
Financial Analyst. Mr. Lee assumed respon-
27
Prospectus
<PAGE>
sibility for the Fund in November, 1993, when he joined the
Advisor. Prior to that time he was a Vice President at
Shawmut National Corporation.
The Balanced Fund's portfolio manager is Rodney A. Buck,
Senior Vice President of the Advisor. Mr. Buck is a Chart-
ered Financial Analyst, and has been the Fund's portfolio
manager since 1982. He is also Chairman and Chief Executive
Officer of National Life Investment Management Company,
Inc., and Senior Vice President and Chief Investment Officer
of National Life. Mr. Buck has been employed by the Advisor
or its affiliates since 1972.
The portfolio manager for the Bond Fund and the Treasury
Fund is Richard D. Temple, Vice President of the Advisor. He
has been the Bond Fund's portfolio manager since 1985 and
has been employed by the Advisor or its affiliates since
1969.
The portfolio manager of the Government Securities and
Short-Intermediate Government Funds is David M. Brownlee,
Vice President of the Advisor. Mr. Brownlee is a Chartered
Financial Analyst. Prior to joining the Advisor in 1993, Mr.
Brownlee was a Managing Director at Aetna Life and Casualty.
The portfolio manager of the Tax-Free Income, New York and
Pennsylvania Funds is Kenneth J. Hart, Vice President of the
Advisor. Mr. Hart has been with the Advisor since 1990, and
prior to that he was employed by Sentinel Administrative
Service Corporation and Shearson Lehman Brothers.
Sub-Advisor
INVESCO CAPITAL With respect to the World Fund only, the Advisor has en-
MANAGEMENT, tered into a sub- advisory agreement with the Sub-Advisor,
INC. SERVES AS INVESCO Capital Management Inc. Pursuant to such agreement,
SUB-ADVISOR TO the Sub-Advisor provides the Advisor with a continuous in-
THE WORLD FUND vestment program consistent with the World Fund's stated in-
vestment objectives and policies. The sub-advisory agreement
provides for a fee from the Advisor to the Sub-Advisor of
the greater of (a) a monthly fee equal to 0.03125% (0.375%
per annum) of the average daily net assets of the Fund up to
$500 million and 0.025% (0.30% per annum) of such average
net assets in excess of $500 million, or (b) $20,000 per an-
num. This agreement became effective April 1, 1996, and will
be presented to the shareholders of the World Fund for their
approval before July 31, 1996. The previous sub-advisor to
the World Fund, under an agreement with terms substantially
similar to those of the present sub-advisory agreement, was
Cashman Farrell and Associates, which resigned as sub-advi-
sor effective March 31, 1996, as the result of the partners
of the firm deciding to dissolve the firm. The effective fee
rate paid by the Advisor to Cashman Farrell and Associates
for the fiscal year ended November 30, 1995 was 0.375% per
annum.
The Sub-Advisor is located at 1315 Peachtree Street, At-
lanta, GA 30309.
The World Fund's portfolio manager since June 1994 has
been Erik B. Granade, International Equity Portfolio Manager
of the Sub-Advisor. Mr. Granade is a Chartered Financial An-
alyst. He was associated with Cashman Farrell and Associates
from June 1994 to March 31, 1996, when he moved to the Sub-
Advisor. Prior to June 1994 he was an International Portfo-
lio Manager with Provident Capital Management, Inc.
28
Prospectus
<PAGE>
Administration
In accordance with Fund Services Agreements with the
Funds, Sentinel Service serves as the transfer agent for the
Funds and also provides the Funds with certain fund account-
ing, financial administration and shareholder relations
services. To perform the transfer agency function, Sentinel
Service utilizes the computer system of DST Systems, Inc.,
("DST") on a remote basis through Investors Fiduciary Trust
Company ("IFTC").
The Fund Services Agreements provides for the Company and
the Pennsylvania Fund to pay to Sentinel Service fixed fees
of $842,500 per year and $84,000 per year, respectively, for
fund accounting and financial administration services. They
also provide for annual fees payable by the Company and the
Pennsylvania Fund for transfer agency and shareholder rela-
tions services of $2,563,000 and $37,000, respectively, plus
an amount equal to an annual rate of $15 per shareholder ac-
count in excess of 106,500 and 1,500, respectively, as of
the last day of the month preceding the installment due
date. The fixed fees are subject to increase under inflation
clauses approved by the Boards. The Funds must pay for re-
mote access to the computer system of DST. Generally this is
a fixed annual charge per shareholder account, plus certain
out-of-pocket expenses, minus certain credits. The fees, as
a percentage of net assets for transfer agency and share-
holder servicing are somewhat higher than industry norms.
However, the Boards believe that such fees are warranted in
light of the level of service provided.
In addition, Sentinel Service has voluntarily agreed to
refund its fee to the extent necessary to prevent the over-
all aggregate expense ratio of the Class A shares of the
Funds (excluding the World Fund) from exceeding 1.30%, after
expense offset, of average aggregate daily net assets in any
fiscal year. However, the expense ratios of the individual
Funds vary, and no reimbursement need be made under this
agreement if an individual Fund's expense ratio exceeds
1.30%, as long as the overall expense ratio of the Funds
(excluding the World Fund) is less than 1.30%. For the fis-
cal year ended November 30, 1995, the overall aggregate ex-
pense ratio of the Funds (excluding the World Fund), was
1.11%, and no reimbursement was made under this agreement.
Sentinel Service has also voluntarily agreed to reimburse
the Pennsylvania Fund, the Short-Intermediate Government
Fund, the Treasury Fund and the World Fund for expenses nec-
essary to limit such Funds' individual expense ratios to
0.75%, 1.00%, 0.85% and 2.00%, respectively, in each case
after expense offset. Although Sentinel Service has no pres-
ent intention to do so, these arrangements may be terminated
at any time.
Sentinel Service is also a Vermont general partnership of
which affiliates of National Life, Provident Mutual and Penn
Mutual are the general partners.
CUSTODIAN
IFTC serves as the Custodian and Dividend Paying Agent for
the Funds. IFTC is an affiliate of State Street Bank.
THE DISTRIBUTOR
The Distributor, Sentinel Financial Services Company,
whose address is National Life Drive, Montpelier, Vermont
05604, serves as national distributor for the Funds under
the terms of agreements which became effective March 1,
1993. The Distributor has the exclusive right to distribute
shares of the Funds through broker-dealers with whom it has
selling agreements. The Distributor is a general
29
Prospectus
<PAGE>
partnership of which affiliates of National Life, Provident
Mutual and Penn Mutual are the general partners.
DISTRIBUTION PLANS
On March 1, 1993, each of the Funds, except for the Trea-
sury, Short-Intermediate Government and New York Funds,
adopted a distribution plan pursuant to Rule 12b-1 under the
1940 Act, applicable to their Class A shares. On March 27,
1995, the Short-Intermediate Government Fund adopted a sup-
plemental distribution plan pursuant to Rule 12b-1 under the
1940 Act, applicable only to it and both the Short-Interme-
diate Government Fund and the New York Fund became subject
to the existing distribution plan for all of the other
Funds. Effective April 1, 1996, the Emerging Growth, World,
Common Stock, Balanced, Bond and Tax-Free Income Funds
adopted a Class B Distribution Plan applicable only to the
Class B shares of these Funds. These distribution plans are
herein referred to as the "Plans". Neither the Class A nor
the Class B shares of the Treasury Fund is a participant in
the Plans and none of the fees paid by the other Funds pur-
suant to the Plans will be used to reimburse the Distributor
for expenses incurred in connection with the distribution of
Treasury Fund shares.
Under the Plans applicable to the Class A shares, each
participating Fund will pay to the Distributor a monthly fee
at the maximum annual rate of (a) .30% of average daily net
assets in the case of the Emerging Growth, Growth, World,
Common Stock and Balanced Funds, (b) .20% of average daily
net assets in the case of the Bond, New York, Pennsylvania,
Tax-Free Income and Government Securities Funds, or (c) .35%
of average daily net assets in the case of the Short-Inter-
mediate Government Fund. Such fees will be used to reimburse
the Distributor for expenses incurred in connection with
distribution and promotion of the shares of each participat-
ing Fund, including salaries and expenses of the Distribu-
tor's wholesale sales force, home office management and mar-
keting personnel, expenses incurred by the Distributor for
the occupancy of its office space in Montpelier, Vermont,
expenses incurred by the Distributor with respect to equip-
ment and supplies, expenses incurred for the preparation,
printing and distribution of sales literature used in con-
nection with the offering of such shares to the public, ex-
penses incurred in advertising, promoting and selling shares
of such Fund to the public, expenses incurred for the prepa-
ration, printing and distribution of the Prospectus and
Statement of Additional Information, and any supplement
thereto used in connection with the offering of such Fund's
shares to the public, or any reports and other communica-
tions for distribution to existing shareholders, and service
fees paid to securities dealers who have executed a selling
agreement with the Distributor.
Under the Plan applicable to the Class B shares, the Class
B shares of each of the Emerging Growth, World, Common
Stock, Balanced, Bond and Tax-Free Income Funds will pay to
the Distributor a monthly fee at an annual rate of up to a
total of 1.00% of average daily net assets, of which up to
0.25% shall be for service fees to broker-dealers, and the
remaining 0.75% shall be for the recovery of the initial
sales commissions paid by the Distributor at the time of
sales of Class B shares, together with the cost of financing
such payments, and for the other types of distribution,
sales and marketing expenditures detailed in the preceding
paragraph for the Plans applicable to the Class A shares.
These asset-based fees, excepting the service fee compo-
nent, are subject to aggregate limits imposed by the Na-
tional Association of Securities Dealers, Inc.
30
Prospectus
<PAGE>
To dealers, the Distributor pays, in the case of the Class
A shares of the Emerging Growth, Growth, World, Common Stock
and Balanced Funds, .20% per annum of average net assets
owned by clients of the dealer who acquired such shares on
or after March 1, 1993; in the case of the Class A shares of
the Bond, New York, Pennsylvania, Tax-Free Income and Gov-
ernment Securities Funds, .10% per annum of the Funds' aver-
age net assets owned by clients of the dealer who acquired
such shares on or after March 1, 1993, or, in each case, who
acquired their shares in the acquisitions of ProvidentMutual
Fund or Independence Capital Group of Funds assets by the
Funds; and in the case of the Short-Intermediate Government
Fund, .25% per annum of the average net assets owned by cli-
ents of the dealer. In the case of Class B shares of the
Emerging Growth, World, Common Stock, Balanced, Bond and
Tax-Free Income Funds, the Distributor pays to dealers a
service fee which varies based on the total assets in Class
B shares of such Funds for which each registered representa-
tive of such dealer is the original registered representa-
tive of record at the time an account is opened, as follows:
<TABLE>
<CAPTION>
ASSETS IN CLASS B SHARES
OF THE FUNDS FOR WHICH A ANNUAL
PARTICULAR INDIVIDUAL IS THE ORIGINAL BROKER-DEALER
REGISTERED REPRESENTATIVE OF RECORD SERVICE FEE
------------------------------------- -------------
<S> <C>
$0-$99,999................................. 0
$100,000--$199,999......................... 0.10%
$200,000--$999,999......................... 0.25%
$1,000,000 and over........................ 0.50%
</TABLE>
A selling dealer may elect to be paid a service fee on
such Class B shares of .25% per annum, instead of the above
arrangement. In no case will the Class B shares of any Fund
pay service fees which total more than 0.25% per year. To
the extent the above schedule requires a payment from the
Distributor in an amount exceeding 0.25% of average daily
assets of the Class B shares of any Fund, then the Distribu-
tor will make such payment and will not be entitled to re-
cover the excess over 0.25% from the Funds under the Plans.
The Class B share service fee for the first year after a
purchase will be used to, recover a portion of the cost of
the dealer concession paid by SFSC to the selling dealer,
which portion of the dealer concession is considered the
service fee for the first year.
The portion of the distribution fee consisting of service
fees to dealers will be paid out of the general assets of
the related Fund and therefore affects all shareholders of
each such Fund equally, regardless of whether a service fee
payment is made in respect to a particular shareholder's
shares. The degree to which each Fund is affected will de-
pend on the percentages of the shares of such Fund which are
or are not subject to service fee payments. The Distributor
will not be reimbursed for any unreimbursed eligible ex-
penses from any other Fund, or in any future year for reim-
bursable expenses for any Fund that exceed the applicable
0.35%, 0.30%, 0.20% or 1.00% maximums.
HOW TO PURCHASE SHARES
You can purchase shares of the Funds through any securi- OPENING AN
ties dealer who has a sales agreement with the Distributor. ACCOUNT IS EASY
If you already have an account with Sentinel you can pur-
chase shares by mailing your check directly to Sentinel
Service.
Alternative Purchase Options
The Emerging Growth, World, Common Stock, Balanced, Bond
and Tax-Free Income Funds offer prospective investors a
choice of two classes of shares, Class A
31
Prospectus
<PAGE>
and Class B, which incur sales charges in different forms
and amounts and which bear different levels of expenses.
These alternative purchase arrangements are designed to ena-
ble the investor to choose the method of purchasing Fund
shares that is most beneficial to the investor based on all
factors to be considered, which may include: the amount and
intended length of the investment, the type of Fund, and
whether the investor intends to utilize the exchange privi-
lege. Generally, when making an investment decision, invest-
ors should at least consider the anticipated life of an in-
tended investment in the Funds, the accumulated distribution
fees plus CDSC on Class B shares, the initial sales charge,
if any, plus accumulated distribution fees on Class A
shares, the possibility that the anticipated higher return
on Class A shares due to the lower ongoing charges will off-
set the initial sales charge paid on such shares, and the
automatic conversion of Class B shares to Class A shares at
certain specified times.
In determining which class of shares to purchase, an in-
vestor should always consider whether any waiver or reduc-
tion of a sales charge or a CDSC is available. See generally
"Class A Shares--Reduced Sales Charges" and "How to Redeem
Shares--Class B Shares--Waiver or Reduction of the CDSC" be-
low.
There is no size limit on purchases of Class A shares. The
maximum purchase of Class B shares accepted is $999,999. The
Funds may refuse any order to purchase shares.
The Growth, New York, Pennsylvania, Government Securities,
and Short-Intermediate Government Funds offer only Class A
shares. Class B shares of the Treasury Fund are offered only
for exchanges from the Class B shares of other Funds, and
are not offered for initial purchase. See "Shareholder Serv-
ices--Exchange Privilege" below.
Class A Shares
For all purchases of Class A shares, you pay the public
offering price, which equals the net asset value per share
(next computed following receipt of your order by Sentinel
Service), plus a sales charge (except that in the case of
the Treasury Fund, there is no sales charge).
The sales charge ranges from 5.0% to 0.0% of the offering
price (5.3% to 0.0% of the net amount invested). The size of
your purchase will determine the amount of your sales
charge.
Class A Shares--Sales Charges
The table below shows the schedule of sales charges for
the Common Stock, Balanced, Growth, Emerging Growth and
World Funds:
<TABLE>
<CAPTION>
SALES DEALER
SALE SIZE CHARGE REALLOWANCE
--------- ------ -----------
<S> <C> <C>
$0 to $99,999........................ 5.00% 4.50%
$100,000 to $249,999................. 4.00% 3.75%
$250,000 to $499,999................. 2.50% 2.25%
$500,000 to $999,999................. 2.00% 1.75%
$1,000,000 or more................... 0 0
</TABLE>
32
Prospectus
<PAGE>
The schedule of sales charges for the Bond, Government Se-
curities, Tax-Free Income, New York and Pennsylvania Funds
is set forth in the table below:
<TABLE>
<CAPTION>
SALES DEALER
SALE SIZE CHARGE REALLOWANCE
--------- ------ -----------
<S> <C> <C>
$0 to $99,999........................ 4.00% 4.00%
$100,000 to $249,000................. 3.50% 3.25%
$250,000 to $499,999................. 2.50% 2.25%
$500,000 to $999,999................. 2.00% 1.75%
$1,000,000 or more................... 0 0
</TABLE>
For the Short-Intermediate Government Fund, the sales
charge for sales of up to $999,999 is 1.00%, with a dealer
reallowance of 0.75%. For sales of $1,000,000 and over,
there is no initial sales charge. There is no sales charge
on purchases of shares of the Treasury Fund.
In cases in which there is no sales charge because the
sale is in an amount of $1,000,000 or more, the Distributor
will pay dealers compensation of 1.00% for sales of up to
$4,999,999, and in an individually negotiated amount for
sales of $5,000,000 and over. See "How to Redeem Shares--
Class A Shares Purchased in Amounts Over $1,000,000--CDSC",
below.
Equity Services, Inc., PML Securities Company, Janney
Montgomery Scott Inc., and Hornor, Townsend & Kent, Inc.,
which are wholly-owned subsidiaries of the partners of the
Advisor, receive a dealer reallowance equal to the entire
sales charge on their sales of Fund shares. As a result,
they may be considered underwriters of such shares. Because
the Funds calculate the offering price per share by rounding
to the nearest whole cent, the entire sales charge may be
slightly more or less than the sales charge percentages set
forth above.
Class B Shares
For all purchases of Class B shares, you pay the current
net asset value. There is no initial sales charge. A CDSC
will be imposed on Class B shares (including Class B shares
of the Treasury Fund), if you redeem shares during the ap-
plicable CDSC period, and no waiver of the CDSC applies. See
"How to Redeem Shares--Class B Shares--CDSC" and "How to Re-
deem Shares--Class B Shares--Waiver or Reduction of the
CDSC", below.
Class B shares are subject to higher distribution fees
than Class A shares for a fixed period after their purchase.
See "Distribution Plans" above. After such period, the Class
B shares automatically convert to Class A shares and are no
longer subject to such higher distribution fees. The holding
period for Class B shares after which they automatically
convert to Class A shares varies depending on the amount of
the initial purchase payment. For purchase payments up to
$249,999, the automatic conversion occurs at the end of the
sixth year; for purchase payments from $250,000 to $499,999,
the automatic conversion occurs at the end of the fifth
year; and for purchase payments from $500,000 to $999,999,
the automatic conversion occurs at the end of the fourth
year. The holding period for Class B shares will include the
holding period of Class B shares of another Fund from which
they were exchanged.
Because the CDSC may be lower and the conversion to Class
A shares may be faster for purchase amounts of $250,000 and
over, it may be advantageous for a
33
Prospectus
<PAGE>
shareholder to use a Right of Accumulation or a Letter of
Intent in connection with the purchase of Class B shares.
These privileges are described below under "How to Redeem
Shares--Waiver or Reduction of the CDSC".
For sales of Class B shares made and services rendered to
Class B shareholders, the Distributor intends to make pay-
ments to selling broker-dealers, at the time a shareholder
purchases Class B shares, of amounts equal to the following
percentages of the purchase amount, for each of the Funds
offering initial purchases of Class B shares:
<TABLE>
<CAPTION>
AMOUNT OF BROKER-DEALER
PURCHASE PAYMENT PAYMENT
---------------- -------------
<S> <C>
Up to $249,999............................. 4.0%
$250,000 to $499,999....................... 2.5%
$500,000 to $999,999....................... 2.0%
</TABLE>
The Class B shares of the Treasury Fund are only available
through exchange from the Class B shares of another Fund.
The Class B shares of the Treasury Fund do not bear the
higher ongoing distribution expenses normally associated
with the Class B shares. However, time during which assets
have been exchanged from the Class B shares of another Fund
into the Class B shares of the Treasury Fund will not count
either toward the time that must elapse before Class B
shares are automatically converted to Class A shares of the
same Fund, or toward the time that results in a declining
CDSC. See "How to Redeem Shares--Class B Shares--CDSC", be-
low.
Class A Shares--Reduced Sales Charges
YOU CAN RECEIVE Quantity discounts begin with investments in Class A
A REDUCED SALES shares of $100,000 or more. This applies to purchases of
CHARGE FOR A Class A shares one or more of the Funds at one time, or to
NUMBER OF purchases of either Class A shares or Class B shares com-
REASONS bined over time, under the "Right of Accumulation", in each
case by you, your spouse and children under the applicable
age of majority, a trustee or other fiduciary account for
these same persons. Additionally, accounts for charitable,
religious, educational and similar corporations, associa-
tions, or foundations exempt under Section 501(c)(3) or (13)
of the Code, retirement plans set up under the Self-Employed
Individuals Tax Retirement Act of 1962, and Individual Re-
tirement Accounts ("IRA's") set up under the Employee Re-
tirement Income Security Act of 1974, as amended, may be
linked to an individually owned account for this privilege.
However, a shareholder may not link individually registered
accounts with a participant account in any plan which has
multiple accounts linked. To take advantage of this privi-
lege, you must advise your representative at the time of
purchase that you are eligible and must provide the fund
name(s), registration of account(s), and account number(s).
This privilege is not extended to Section 403(b) plans es-
tablished after March 1, 1993.
The Letter of Intent (the "LOI") lowers your costs on
Class A share investments of $100,000 or more or Class B
share investments of $250,000 or more spread over 13 months
or, in the case of corporate qualified plans, spread over 30
months. The LOI is not a binding commitment by you to pur-
chase, or the Fund to sell, additional shares. All purchases
made for your account within 13 months, or when applicable,
30 months, from the date of the LOI, except reinvested divi-
dends and distributions, will be made at the reduced sales
charge for the amount checked on the investment application.
Any dividends and distributions will be reinvested
34
Prospectus
<PAGE>
without a sales charge and will not be considered in deter-
mining whether the LOI has been completed.
Any purchases of the Sentinel Family of Funds (except the
Treasury Fund) made by you within the 90 days preceding the
date of your LOI may be included under it. You may also com-
bine the value at the current offering price of any shares
you own of other Funds in order to determine the quantity
discount which would apply under the LOI.
The minimum initial investment under a LOI is 2% of the
amount indicated in the LOI, and there must be sufficient
shares in at least one account owned by you to meet this
minimum. Shares representing this amount will be held in es-
crow by Sentinel Service and released at the end of the 13-
or 30-month period or upon completion of the LOI if request-
ed. When multiple accounts are involved, the escrow will be
placed on the largest account, unless otherwise specified,
but all such escrowed shares must be held in one account.
If however, such total purchases are less than the LOI
amount indicated on the application, and if within 20 days
after notification of the amount of the sales charge due,
you do not pay such amount due, you irrevocably constitute
and appoint Sentinel Service your attorney-in-fact with full
power of substitution in the premises to surrender for re-
demption any or all escrow shares to the extent necessary to
pay such amount due and to release the balance of escrow
shares, if any, to you. The sale of shares for this purpose
will be a taxable event.
In addition, any group of investors which notifies the
Distributor that it will act as a group in purchasing Fund
shares, in such a way as to result in reduced selling ex-
penses, will be entitled to be treated as if it were a sin-
gle entity for purposes of the reduced sales charges for
quantity purchases, the Right of Accumulation, and the Let-
ter of Intent.
Certain investors, subject to limitations, may purchase
Fund shares at net asset value. Such investors include cur-
rent and former Directors of the Funds and predecessors to
the Funds; certain current and retired directors, officers,
employees and retirees of the general partners of the Advi-
sor and their affiliates; directors, officers, employees and
clients of the Sub-Advisor; members of the immediate fami-
lies of all of the above-referenced individuals; registered
representatives of securities dealers that have entered into
a sales agreement with the Distributor, and who notify the
Distributor of such status at the time of the purchase, and
members of their immediate families; non-profit organiza-
tions with which any of the above-referenced persons are ac-
tively involved; clients of dealers, brokers, registered in-
vestment advisors or registered investment advisor
representatives who have entered into an agreement with the
Distributor providing specifically for the use of shares of
a Fund in particular investment programs or products (where
such program or product already imposes a fee) made avail-
able to clients of such dealer, broker, registered invest-
ment advisor or registered investment advisor representa-
tive; purchasers who are investing section 403(b) loan
principal repayments; purchasers who notify the Distributor
that the funds being used for such purchase consist of re-
demption proceeds from other mutual fund shares for which a
sales charge or CDSC has been paid, and such funds in fact
come from such source; and investments being transferred
from individually managed trust accounts at American Guar-
anty & Trust Company ("AG&T"). If there is more than one
person on an account registration, all persons named in the
account registration must qualify.
35
Prospectus
<PAGE>
You must notify the Distributor at the time of purchase if
you qualify for a front-end sales charge waiver.
Other Matters Relating to Distribution of Fund Shares
The Distributor will reimburse all broker-dealers who
agree with the Distributor to undertake activities designed
to specifically promote the Funds, for costs incurred by
such broker-dealers in the course of such activities. The
Advisor has adopted a policy under which sales of shares of
the Funds may be considered as a factor in the selection of
broker-dealers to execute portfolio transactions for the
Funds, subject to the conditions that commissions paid to
such broker-dealers be no higher than would otherwise be
paid, and that the prices be, in the judgment of the Advi-
sor, the best then available.
Sentinel Financial Services Company ("SFSC"), the Fund's
principal underwriter, is sponsoring a sales contest during
the period April 1, 1996 to December 31, 1996, in which reg-
istered representatives of all broker-dealers who have
elected to participate in the contest can qualify for a trip
to a resort to be announced by achieving sales of shares of
the Funds (other than Sentinel U.S. Treasury Money Market
Fund), and sales of capital management accounts with Ameri-
can Guaranty & Trust Company, SFSC's trust company affili-
ate, aggregating at least $1,000,000, and may bring a guest
at SFSC's expense by achieving such sales of at least
$1,500,000. In addition, branch managers of all branch of-
fices which achieve such sales of at least $4,000,000, can
also qualify for the trip, and may bring a guest at SFSC's
expense.
OPEN AN ACCOUNT Accounts may be opened with only $50 using the Automatic
WITH AS LITTLE Investment Plan. Otherwise, the minimum initial investment
AS $50 in any Fund is $1,000, except as otherwise provided in the
Statement of Additional Information. The minimum subsequent
investment is $50. The Funds reserve the right to reject any
order and may charge a fee of $25 for each check returned
unpaid due to insufficient funds.
Purchasing Shares by Check
Make your checks payable to "Sentinel Administrative Serv-
ice Company" and remit to:
Sentinel Administrative Service Company
P.O. Box 1499
Montpelier, VT 05601-1499
All checks must be drawn in U.S. dollars on a U.S. bank.
The Funds reserve the right to withhold the proceeds of a
redemption of shares purchased by check until such check has
cleared, which may take up to 15 days after the purchase
date.
A purchase made by check is effected on the day when fed-
eral funds are made available to a Fund, usually within one
business day after Sentinel Service receives the check. Fed-
eral funds are monies held by a commercial bank on deposit
in one of the U.S. Federal Reserve branch banks (the "Fed-
eral Reserve Banks").
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 36
<PAGE>
Purchasing Shares by Wire
You may purchase shares by wiring federal funds directly ANOTHER EASY
to Sentinel Service when the New York Stock Exchange WAY TO BUY
("NYSE") and Federal Reserve Banks are open for business. SHARES
To make your initial purchase by wire, call our toll-free
number noted below and obtain an account number. If you
don't have an application, request one. Complete the appli-
cation and return it promptly to Sentinel Service.
Your bank may charge you a fee to wire funds. Payments
made by wire and received by Sentinel Service on any busi-
ness day are available to the fund on the next business day.
Dealer Wire Purchase Orders
As a convenience to shareholders, the Distributor will,
acting for the funds without charge, ordinarily accept or-
ders from dealers who have sales agreements with the funds
for the purchase of shares at the applicable offering price.
HOW TO REDEEM SHARES
If your shares are held by Sentinel Service, you can re- FOLLOW THESE
deem your shares by providing Sentinel Service with the ap- EASY STEPS TO
propriate instructions by mail or otherwise. REDEEM SHARES
If you are the shareholder of record and have a certifi-
cate representing ownership in a Fund, you can redeem your
shares by either:
. Surrendering the certificate in person, to
Sentinel Service (National Life Drive,
Montpelier, Vermont),
or
. Mailing a certificate to
Sentinel Administrative Service Company
P.O. Box 1499, Montpelier, VT 05601-1499
We suggest sending certificates by certified mail.
Sentinel Service is required to redeem your shares at net
asset value, less any applicable CDSC, as of the close of
business on the day such surrender or appropriate instruc-
tions are received, in "good order," prior to 4:00 p.m. on a
day that the NYSE is open for business.
"Good order" means that the instructions must be signed by IMPORTANT
the registered owner(s) exactly as the shares are registered INFORMATION FOR
and the signature(s) must be guaranteed by an eligible guar- REDEEMING
antor institution which meets Sentinel Service's require- SHARES
ments, unless an exception listed below applies. The seal or
stamp of a notary public is not acceptable. You are not re-
quired to provide a signature guarantee when:
. the proceeds of the redemption do not exceed $50,000
in any one day and the proceeds check is made payable
to the registered owner(s) and mailed to the record
address (provided the record address has not been
changed within the past 30 days), or
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
37 Prospectus
<PAGE>
. the proceeds of the redemption are payable to one of
the Advisor's parent corporations or an affiliate.
Class B Shares--CDSC
If you redeem Class B shares, a CDSC may be imposed.
Whether a CDSC is imposed and the amount of the CDSC depends
on the amount of your purchases and the number of years
since you made the purchase from which an amount is being
redeemed. Partial redemption requests will be increased by
the amount of CDSC due. CDSC balances due for full redemp-
tions will be deducted from the redemption proceeds. Pur-
chases are subject to the CDSC according to the following
schedules:
For purchase amounts of up to $249,999:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
------------------- ---------------
<S> <C>
First.................................... 4%
Second................................... 4%
Third.................................... 3%
Fourth................................... 2%
Fifth.................................... 2%
Sixth.................................... 1%
</TABLE>
For purchase amounts from $250,000 to $499,999:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
------------------- ---------------
<S> <C>
First.................................... 3.5%
Second................................... 3%
Third.................................... 2%
Fourth................................... 1%
Fifth.................................... 1%
</TABLE>
For purchase amounts from $500,000 to $999,999:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
------------------- ---------------
<S> <C>
First.................................... 3%
Second................................... 2%
Third.................................... 1%
Fourth................................... 1%
</TABLE>
In determining whether a CDSC is payable, redemptions are
taken first from any shares acquired through reinvestment of
distributions, or any other shares as to which a waiver of
the CDSC is applicable. The purchase payment from which a
redemption is made is the earliest purchase payment from
which a redemption or exchange has not already been fully
effected. The amount of the CDSC will be equal to the appli-
cable CDSC percentage multiplied by the lower of the pur-
chase price or the net asset value of the shares being re-
deemed. Any CDSC imposed on a redemption of Class B shares
is paid to the Distributor.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 38
<PAGE>
If you exchange Class B shares into Class B shares of the
Treasury Fund, the time during which these assets are held
in the Class B shares of the Treasury Fund will not count
either toward the time that must elapse before Class B
shares are automatically converted to Class A shares of the
same Fund, or toward the time that results in a declining
CDSC. Therefore, if such Class B shares of the Treasury Fund
are ultimately redeemed, a CDSC will apply in the amount
that would have been applicable on the date the assets were
exchanged into the Class B shares of the Treasury Fund, re-
gardless of how long the Class B shares of the Treasury Fund
were held. Also, if the Class B shares of the Treasury Fund
are then further exchanged into Class B shares of another
Fund, and such shares are ultimately redeemed, a CDSC will
apply in the amount that would have been applicable if the
total holding period for the shares was the period during
which Class B shares of Funds other than the Treasury Fund
were held. In such a case, the automatic conversion into
Class A shares of the same Fund will occur only after Class
B shares of Funds other than the Treasury Fund have been
held for the six, five or four year period, as applicable.
Class B Shares--Waiver or Reduction of the CDSC
You are subject to a reduced CDSC for quantity purchases,
as indicated above, or when you buy shares in connection
with the Right of Accumulation or a Letter of Intent. The
Right of Accumulation will apply to purchases of Class B
shares when you and members of your family own Class A
shares and Class B shares in the aggregate of more than
$250,000. See "How to Purchase Shares--Class A Shares--Re-
duced Sales Charges" for more information on the Right of
Accumulation and the Letter of Intent.
The CDSC applicable to Class B shares may be waived in the
following situations when the Funds have been notified at
the time of redemption:
The Distributor may require documentation prior to waiver
of the CDSC, including, without limitation, certification by
plan administrators, applicable tax forms, or death certifi-
cates.
1. Redemptions of shares acquired from the reinvestment
of income distributions and/or capital gains
distributions;
2. Redemptions from the account of a shareholder
(including one who owns the shares as joint tenant
with his or her spouse) following his or her death,
provided the redemption is requested within one year
of the shareholder's death;
3. Redemptions which result from ERISA or IRS
requirements that mandate that a distribution be made
from a qualified retirement plan or individual
retirement account;
4. Redemptions that occur as a result of a loan taken
from an account established as a retirement plan
account for an employee of a tax-exempt organization
under section 403(b)(7) of the Code; and
5. Redemptions in amounts up to 10% annually of the
account's then current net asset value annually.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
39 Prospectus
<PAGE>
Class A Shares Purchased in Amounts Over $1,000,000--CDSC
In the case of a purchase of Class A shares with no front-
end sales charge because the sale is in an amount of
$1,000,000 or more, if the shares purchased are redeemed
within one year of the purchase, a CDSC will be imposed in
the amount of 1.00%. If the shares are redeemed during the
second year after the purchase, a CDSC of 0.50% will be im-
posed. After the second year, no CDSC will apply. As with
the CDSC payable on redemptions of Class B shares, the CDSC
is imposed on the lower of the cost or the current net asset
value of the shares redeemed. Partial redemption requests
will be increased by the amount of CDSC due. CDSC balances
due for full redemptions will be deducted from the redemp-
tion proceeds. The Distributor receives the entire amount of
any CDSC paid. The CDSC is currently waived in all of the
same circumstances as specified under "Class B Shares--
Waiver or Reduction of the CDSC" above. In determining
whether a CDSC is payable, the Funds will first redeem
shares not subject to any charge.
Other Information on Redeeming Shares
Normally, Sentinel Service will mail you payment for such
shares within seven days after it receives all documents re-
quired to process the redemption. Exceptions to this policy
include any period in which the right of redemption is sus-
pended or date of payment is postponed because the NYSE is
closed, trading on such Exchange is restricted, or the Secu-
rities and Exchange Commission (the "Commission") deems an
emergency to exist.
Additional documentation may be required to redeem shares
that are registered in the name of a corporation, trust,
company retirement plan, agent or fiduciary, or if a share-
holder is deceased. The Funds reserve the right to withhold
the proceeds of redemptions where shares to be redeemed have
been purchased by check within 15 calendar days prior to the
date the redemption request is received. The Funds will not
withhold redemption proceeds if they (or Sentinel Service)
have been advised and have confirmed that such check has
been cleared for payment.
If you write a check to redeem Class A shares (see "Share-
holder Services--Check Writing Privileges" below) in the
Government Securities, Bond, New York, Pennsylvania, Tax-
Free Income, Short-Intermediate Government or Treasury
Funds, Sentinel Service normally will not honor the redemp-
tion check if those shares have been purchased less than 15
calendar days prior to the date the redemption request is
presented to Sentinel Service.
Distributions from retirement plans may be subject to
withholding by the Internal Revenue Service ("IRS") under
the Internal Revenue Code of 1986, as amended (the "Code").
Due to the expense of maintaining accounts with small bal-
ances, the Funds reserve the right to liquidate and to
charge an annual maintenance fee of up to $25 to any account
that has a current value less than $1,000 and that has been
open for at least 24 months.
401(k), pension and profit-sharing plans which elect to
have individually registered accounts for the benefit of
plan participants will be assessed an annual
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 40
<PAGE>
service fee for each participant account. The fee will be
deducted automatically from each participant account in June
of each year unless prepaid. The fee assessed will vary
based upon the average account value of all participant ac-
counts within the plan, and will be as set forth below:
<TABLE>
<CAPTION>
FEE PER
AVERAGE PARTICIPANT
ACCOUNT VALUE ACCOUNT
------------- -----------
<S> <C>
0-$1000...................................... $20.00
$1000-$2999.................................. $10.00
$3000 and over............................... No fee
</TABLE>
Dealer Wire Redemption Orders
For the convenience of shareholders, the Distributor, act-
ing for the Funds without charge, ordinarily accepts orders
from dealers who have sales agreements with the Funds for
the repurchase of shares based on net asset value, less any
applicable CDSC. (The net asset value may be more or less
than your initial cost. It is computed as described below on
days on which the NYSE is open.) Such orders to repurchase
shares of the Funds are confirmed on the same basis as or-
ders to purchase. Brokers are not prohibited from charging
for their service for such a redemption.
Telephone Redemption
Unless otherwise specified when opening your account or by YOU CAN REDEEM
subsequently submitting a Telephone Authorization and Re- BY TELEPHONE
quest with a proper signature guarantee and supporting docu-
ments where applicable, you may redeem up to $1,000,000 from
your account each business day.
In such instances, you may request that the proceeds be
sent directly to a predesignated commercial bank account. If
you do not provide the name of a bank, the proceeds will be
sent automatically to the address of record, provided the
address has not been changed within the preceding 30 days.
You must furnish a signature guarantee when making any
change in redemption instructions. To redeem shares by tele-
phone, please call Sentinel Service.
If proceeds are wired to your bank, a fee normally not
greater than $25 will be deducted from the proceeds. Neither
the Funds, the Advisor nor Sentinel Service is responsible
for the authenticity of exchange or redemption instructions
received by telephone, and they are not liable in the event
of an unauthorized telephone exchange or redemption, pro-
vided that, in the case of the Funds, the Funds have fol-
lowed procedures reasonably designed to prevent such losses
taking into account the cost of such procedures and the po-
tential risk of loss. In processing telephone exchange or
redemption requests, the Funds will determine that reason-
able procedures are employed to confirm that such telephone
instructions are genuine, and if such procedures are not em-
ployed, the Funds may be liable for any resulting losses.
Such procedures include receiving all calls for telephone
redemptions and exchanges on a recorded telephone line, and
screening callers through a series of questions regarding
specific account information.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
41 Prospectus
<PAGE>
NO FEES FOR No fees are charged for telephone redemptions; however,
TELEPHONE service fees described above may apply, and the CDSC de-
REDEMPTIONS scribed above under "How to Redeem Shares" may apply.
TAX-DEFERRED RETIREMENT PLANS
THE FUNDS CAN The federal tax laws provide for a variety of retirement
BE USED IN MANY plans offering tax benefits. Fund shares may be purchased by
TYPES OF PLANS all types of tax-deferred retirement plans, including Keogh
Plans, Individual Retirement Accounts ("IRAs"), Simplified
Employee Pension Plans; Section 403(b) Plans, Section 457
Plans, and other corporate pension and profit-sharing plans.
American Guaranty & Trust Company, a Delaware trust com-
pany and an affiliate of the Advisor, will act as a custo-
dian for IRAs and 403(b) plans, if desired, and will charge
an annual fee of $15 per individual (individuals with more
than one account will be charged only one fee). This fee
will be deducted automatically from the account in November
of each year unless prepaid (in the case of more than one
account owned by the same person, the fee will be deducted
from the largest account). Sentinel Service will act as
agent for the custodian and will receive from the custodian
$12 of the above annual fee per participant. A fee of $25 is
assessed for transferring assets. Consult your tax advisor
for details regarding deductibility of contributions to
IRAs.
The Funds intend to enter into agreements with third par-
ties who will provide administrative services to section
403(b) plans, which are qualified retirement savings plans
for employees of governmental and charitable institutions.
The Funds may assess an annual fee in an amount of up to
$100 to accounts in 403(b) plans which have elected to ob-
tain administrative services from third party administrators
pursuant to the agreements between such administrators and
the Funds. Such third party administrators may include both
affiliates of the Advisor and nonaffiliates.
DETERMINATION OF NET ASSET VALUE
HOW THE VALUE Net asset value for each Fund is calculated once each
OF FUND SHARES business day at 4:00 p.m., Eastern Time, and becomes effec-
IS DETERMINED tive immediately upon its determination. The net asset value
per share is computed by dividing the total value of the as-
sets of each Fund, less its liabilities, by the total number
of each Fund's outstanding shares. Securities that comprise
the Funds are valued as shown below:
. Equity securities are valued at the latest transaction
prices on the principal stock exchanges on which they
are traded.
. Unlisted and listed securities for which there were no
sales during the day are valued at the mean between the
latest available bid and asked prices.
. Fixed-income securities are valued daily on the basis
of valuations furnished by an independent pricing
service.
. Financial futures are valued at the settlement price
established each day by the board of trade or exchange
on which they are traded.
. Exchange-traded options are valued at the last sale
price unless there is no timely sale price, in which
event current prices provided by market makers are
used.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 42
<PAGE>
The Treasury Fund's assets are valued on the basis of am-
ortized cost, which involves valuing a portfolio instrument
at its cost initially and thereafter assuming a constant am-
ortization to maturity of any discount or premium regardless
of the impact of fluctuating interest rates on the market
value of the instrument.
The per share net asset value of Class A shares generally
will be higher than the per share net asset value of Class B
shares, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees
applicable with respect to Class B shares. It is expected,
however, that the per share net asset value of the classes
will tend to converge (although not necessarily meet) imme-
diately after the payment of dividends or distributions
which will differ by approximately the amount of the expense
accrual differentials between the classes.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS WHEN THE FUNDS
PAY DIVIDENDS
Each Fund pays dividends substantially equivalent to its
net investment income in accordance with the following
schedule.
<TABLE>
<CAPTION>
FUND DIVIDENDS PAID
---- --------------
<S> <C>
Growth Fund............................... Annually
Emerging Growth Fund...................... Annually
World Fund................................ Annually
Common Stock Fund......................... Quarterly
Balanced Fund............................. Quarterly
Bond Fund................................. Monthly
Government Securities Fund................ Monthly
Short-Intermediate Government Fund........ Monthly
Tax-Free Income Fund...................... Monthly
New York Fund............................. Monthly
Pennsylvania Fund......................... Monthly
</TABLE>
The Treasury Fund's net income is determined as of the
close of business, 4:00 p.m. Eastern Time, on each day the
NYSE is open. The Fund declares dividends of all of its
daily net income to shareholders of record as of the close
of business the preceding business day. Dividends are de-
clared and accrued each day the NYSE is open and are payable
monthly. The amount of the dividend may fluctuate daily and
may be omitted on days when net realized losses on securi-
ties in the portfolio or expenses exceed the Fund's income.
Distributions of any net realized gains for a fiscal year
are paid in December, following the November 30th fiscal
year-end. Income dividends and capital gains distributions
will be reinvested automatically in Fund shares at net asset
value at the close of business on the designated record
date, unless you elect otherwise (see "Shareholder Servic-
es--Distribution Options" below).
Allocation of Income, Gains, Losses and
Expenses. Allocation of income, gains and losses of each
Fund shall be allocated pro rata according to the net assets
of each class.
Allocation of expenses not allocated to a specific class
of each Fund other than the Treasury Fund shall be allocated
according to the net assets or number of
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
43 Prospectus
<PAGE>
shareholder accounts, each on a pro rata basis, of each
class. Allocations in the case of the Treasury Fund, except
for class specific expenses, shall be made (i) to each share
without regard to class, provided that the Fund has received
undertakings from the Advisor or any other provider of serv-
ices to the Fund, agreeing to waive or reimburse the Fund
for payments to such service provider by one or more clas-
ses, as allocated as described above, to the extent neces-
sary to assure that all classes of the Funds maintain the
same net asset value per share, or (ii) on the basis of rel-
ative net asset value.
TAXES
HOW INCOME AND General. Each Fund intends to continue to qualify for the
GAINS ARE TAXED special tax treatment afforded regulated investment compa-
nies under the code. Qualifying funds (but not their share-
holders) are free from federal income tax on net ordinary
income and net realized capital gains distributed to share-
holders. The funds intend to distribute substantially all of
this income and gain.
Unless your shares are held in a tax-deferred retirement
plan, or in the New York, Pennsylvania or Tax-Free Income
Funds, which are discussed below, you are subject to ordi-
nary income tax for federal income tax purposes on dividends
from investment income and distributions made from an excess
of net short-term capital gains over net long-term capital
losses (together referred to as "ordinary income divi-
dends"). Distributions made from an excess of net long-term
capital gains over net short-term capital losses (including
gains or losses from certain transactions in options and
futures) ("capital gain dividends") are taxable as long-term
capital gains for federal income tax purposes, regardless of
the length of time you have owned your shares. Distributions
in excess of a fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capi-
tal gains to such holder for federal income tax purposes
(assuming the shares are held as a capital asset).
Any loss incurred on the sale or exchange of shares of a
fund held for six months or less will be treated as a long-
term capital loss for federal income tax purposes to the ex-
tent of any capital gain dividends received with respect to
such shares. In addition, with respect to the New York,
Pennsylvania and Tax-Free Income Funds such loss will be
disallowed to the extent of any "exempt-interest dividends"
paid, as defined in section 852(b)(5) of the code.
No gain or loss will be recognized by Class B shareholders
for federal income tax purposes on the conversion of their
Class B shares into Class A shares. A shareholder's basis in
the Class A shares acquired will be the same as such share-
holder's basis in the Class B shares converted, and the
holding period of the acquired Class A shares will include
the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90
days of acquiring the shares, then the loss the shareholder
can recognize on the exchange for federal income tax pur-
poses will be reduced (or the gain increased) to the extent
of the sales charge the shareholder would have owed in the
absence of the exchange privilege. Instead, such sales
charge will be treated as an amount paid for the new shares.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 44
<PAGE>
A loss realized on a sale or exchange of shares of a Fund
will be disallowed for federal income tax purposes if other
shares of the same fund are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a
61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
Dividends generally are taxable to shareholders even
though they are reinvested in additional shares (unless they
are designated as exempt-interest dividends). Each fund will
provide its shareholders with a written notice designating
the amounts of any ordinary income dividends or capital gain
dividends no later than 60 days after the close of its tax-
able year.
A portion of a fund's ordinary income dividends may be el-
igible for the dividends received deduction allowed to cor-
porations under the code, if certain requirements are met.
If a fund pays a dividend in January which was declared in
the previous October, November or December to shareholders
of record on a specified date in one of these months, then
the dividend will be treated for tax purposes as if it were
paid by the fund and received by its shareholders on Decem-
ber 31st of the year in which the dividend was declared.
Under certain provisions of the Code, some shareholders
may be subject to a 31% withholding tax on certain ordinary
income dividends and on capital gain dividends and redemp-
tion payments ("backup withholding"). Generally, sharehold-
ers subject to backup withholding include the following:
. Those for whom no certified taxpayer
identification number is on file with Sentinel
Service,
. Those who have furnished Sentinel Service with
an incorrect certified taxpayer identification
number, and
. Those identified by the IRS.
When establishing an account, you must certify, under pen-
alty of perjury, that your taxpayer identification number is
correct and that you are not otherwise subject to backup
withholding.
Ordinary income dividends paid to nonresident alien share-
holders or foreign entities will be subject to a 30% United
States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a re-
duced rate of withholding or a withholding exemption is pro-
vided under applicable treaty law. If you are a nonresident
alien shareholder, consult your tax advisor concerning the
applicability of the United States withholding tax.
By law, interest income from obligations of the U.S. Trea-
sury is exempt from state and local taxes. Many states with
income taxes permit this exemption to be passed through to
dividends of regulated investment companies that invest in
such securities. Therefore, many shareholders can expect to
receive Treasury Fund dividends and a significant portion of
Government Securities Fund and Short-Intermediate Government
Fund dividends free of state and local taxes. If you have a
taxable account and live in a state that imposes income tax-
es, consult with your
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
45 Prospectus
<PAGE>
tax advisor to determine whether all or part of the divi-
dends from the Treasury Fund, the Government Securities Fund
or the Short-Intermediate Government Fund are exempt from
state and local taxation. In any case, such income will not
be exempt from federal income tax. Furthermore, capital
gains, if any, realized by such Funds will not be exempt
from federal taxes or, generally, from state and local tax-
es.
Dividends and/or interest received by the World Fund and
to a lesser extent, the Bond Fund and to a much smaller de-
gree, the Balanced Fund and the Common Stock Fund may give
rise to withholding and other taxes imposed by foreign coun-
tries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. Sharehold-
ers of the World Fund may be able to claim United States
foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code.
For example, certain retirement accounts cannot claim for-
eign tax credits on investments in foreign securities held
in the World Fund. If more than 50% in value of the World
Fund's total assets at the close of its taxable year con-
sists of securities of foreign corporations, the Fund will
be eligible, and intend, to file an election with the Inter-
nal Revenue Service pursuant to which shareholders of such
fund will be required to include their proportionate shares
as taxes paid by them, and deduct such proportionate shares
in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their United States in-
come taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize de-
ductions. A shareholder that is a nonresident alien individ-
ual or a foreign corporation may be subject to United States
withholding tax on the income resulting from the World
Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such United
States tax for the foreign taxes treated as having been paid
by such shareholder. The World Fund will report annually to
its shareholders the amount per share of such withholding
taxes.
Under Code Section 988, gains or losses of the World Fund
from certain debt instruments, from certain forward con-
tracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will generally
be treated as ordinary income or loss. Such Code Section 988
gains or losses will generally increase or decrease the
amount of the World Fund's investment company taxable income
available to be distributed to shareholders as ordinary in-
come. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the
World Fund would not be able to make any ordinary income
dividend distributions, and all or a portion of distribu-
tions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital
to shareholders, thereby reducing the basis of each share-
holder's fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the
shareholder's fund shares and resulting in a capital gain
for any shareholder who received a distribution greater than
the shareholder's tax basis in fund shares (assuming the
shares were held as a capital asset).
The foregoing description relates only to federal income
taxes. You should consult with your tax advisor as to the
availability of any exemptions from state or local taxes.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 46
<PAGE>
New York, Pennsylvania and Tax-Free Income Funds: Each of
the New York, Pennsylvania and Tax-Free Income Funds intend
to invest a sufficient portion of its assets in municipal
bonds and notes to qualify to pay "exempt interest divi-
dends" to shareholders. Such dividends are excludable from
gross income for federal income tax purposes. Exempt-inter-
est dividends are included, however, in determining the por-
tion, if any, of an individual's Social Security benefits
and Railroad Retirement benefits subject to federal income
taxes. All or a portion of the New York, Pennsylvania and
Tax-Free Income Funds' gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will
be treated as ordinary income for federal income tax pur-
poses rather than capital gain. This rule may increase the
amount of ordinary income dividends received by shareholders
of these Funds.
Interest on indebtedness incurred or continued to purchase
or carry shares of a regulated investment company paying ex-
empt-interest dividends will not be deductible by the share-
holder for federal income tax purposes to the extent attrib-
utable to exempt-interest dividends.
The Code subjects interest received on certain otherwise
tax-exempt securities to an AMT. The AMT applies to interest
received on private activity bonds issued after August 7,
1986. Private activity bonds are bonds which, although tax-
exempt, are used for purposes other than those generally
performed by governmental units and which benefit non-gov-
ernmental entities (e.g. bonds used for commercial or hous-
ing purposes). Income received on such bonds is classified
as an item of "tax preference" which would subject investors
in such bonds, including shareholders of the New York, Penn-
sylvania and Tax-Free Income Funds, to an AMT.
Each of the New York, Pennsylvania and Tax-Free Income
Funds may purchase private activity bonds and will report to
shareholders within 60 days after their taxable year-end on
the portion of its dividends declared during the year which
is a tax preference item for AMT purposes.
The Code further provides that corporations are subject to
an AMT based in part on certain differences between taxable
income as adjusted for other tax preferences and the corpo-
ration's adjusted current earnings. Because an exempt-inter-
est dividend paid by the New York, Pennsylvania or Tax-Free
Income Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay AMT on exempt
interest dividends paid by any such Fund.
The Code provides that every person required to file a tax
return must include on such return the amount of exempt-in-
terest dividends received from the New York, Pennsylvania
and Tax-Free Income Funds during the taxable year.
Persons who may be substantial users (or "related persons"
of substantial users) of facilities financed by industrial
development bonds or private activity bonds held by the New
York, Pennsylvania or Tax-Free Income Fund should consult
their tax advisors before purchasing Fund shares.
The New York Fund intends to invest primarily in New York
Obligations. Distributions from the New York Fund which are
attributable to interest income
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
47 Prospectus
<PAGE>
received from such obligations also will be exempt from New
York State and New York City personal income tax.
The Pennsylvania Fund intends to invest primarily in Penn-
sylvania Obligations. Distributions from the Pennsylvania
Fund which are attributable to interest income received from
such obligations also will be exempt from Pennsylvania per-
sonal income tax.
Distributions from the New York and Pennsylvania Funds
which are attributable to interest received from qualifying
obligations of the U.S. government, its agencies and instru-
mentalities similarly will be exempt from New York State and
New York City or from Pennsylvania personal income tax, re-
spectively. Distributions from these Funds may, however, be
subject to taxation at a local level within either New York
State (but outside New York City) or Pennsylvania.
Exempt-interest dividends paid to a corporate shareholder
in the New York Fund will be subject to New York State cor-
poration franchise tax and New York City general corporation
tax.
To the extent exempt-interest dividends paid to a share-
holder of the Pennsylvania Fund are excluded from taxable
income for federal corporate income tax purposes (determined
before net operating loss carryovers and special deduc-
tions), they will not be subject to the Pennsylvania corpo-
rate net income tax. However, an investment in the Pennsyl-
vania Fund by a corporate shareholder may not qualify as an
exempt asset for purposes of apportionment of the Pennsylva-
nia capital stock/foreign franchise tax.
Distributions from the Pennsylvania Fund will be exempt
from the Philadelphia School District investment income tax
for individual residents of the City of Philadelphia to the
extent that such distributions are attributable to interest
received from Pennsylvania Obligations or from qualifying
obligations of the U.S. Government, its agencies and instru-
mentalities, or to the extent such distributions are desig-
nated as capital gain dividends for federal income tax pur-
poses.
Shares of the Pennsylvania Fund will be exempt from Penn-
sylvania county personal property tax to the extent Pennsyl-
vania Fund assets are comprised of Pennsylvania Obligations
and qualifying obligations of the U.S. government, its agen-
cies and instrumentalities on the annual assessment date.
If the New York and Pennsylvania Funds invest in obliga-
tions and allowable investments other than New York Obliga-
tions and Pennsylvania Obligations, respectively, a portion
of the income distributed to shareholders may be subject to
federal, state and local taxes.
Shareholders of the New York and Pennsylvania Funds who
are subject to taxation by states other than New York or
Pennsylvania will realize a lower after-tax return than New
York or Pennsylvania shareholders, respectively, since the
dividends distributed by the New York and Pennsylvania Funds
generally will not be exempt, to any significant degree,
from income taxation by such other states. The New York and
Pennsylvania Funds will inform shareholders annually as to
the
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 48
<PAGE>
portion of such Fund's distributions which constitutes ex-
empt-interest dividends and the portion which is exempt from
New York or Pennsylvania personal income taxes.
Consult with your tax advisor regarding specific questions CONSULT WITH
about federal, foreign, state or local taxes. Foreign in- YOUR TAX
vestors should consider applicable foreign taxes in their ADVISOR ABOUT
evaluation of an investment in the Funds. TAX
IMPLICATIONS OF
The foregoing is a general and abbreviated summary of the CERTAIN
applicable provisions of the Code and U.S. Treasury regula- DISTRIBUTIONS
tions, and relevant state and local tax laws presently in
effect. For the complete provisions, refer to the pertinent
Code sections and the U.S. Treasury regulations promulgated
thereunder, and relevant state and local tax laws. The Code
and U.S. Treasury Regulations, and relevant state and local
tax laws are subject to change by legislative, judicial or
administrative action, either prospectively or retroactive-
ly.
SHAREHOLDER SERVICES
When you establish a new account, all dividends and any MANY CONVENIENT
capital gains distributions are reinvested at net asset SHAREHOLDER
value and without charge to purchase additional shares, un- SERVICES ARE
less you elect another option. Many other features are AVAILABLE
available to you, as described below. Minimum account values
apply for some.
Distribution Options: Several options for receiving divi-
dends and capital gains distributions are available, includ-
ing the ability to reinvest dividends and distributions from
shares of one Fund into shares of the same class in another
Fund.
Automatic Investment Plan: This feature affords you the
opportunity to dollar-cost average using periodic electronic
funds transfer from your bank account to the Fund(s) of your
choice.
Telephone Investment Service: This feature enables you to
purchase fund shares via electronic funds transfers from
your bank account simply by phoning Sentinel Service.
Check Writing Privileges: Check writing is offered without
charge to holders of Class A shares of the bond, New York,
Pennsylvania, Tax-Free Income, Government Securities, Short-
Intermediate Government and Treasury Funds.
Exchange Privilege: Once every 15 days, you may exchange
shares of one Fund for shares of the same class of another
Fund, without charge, by phoning Sentinel Service or by pro-
viding appropriate instructions in writing to Sentinel Serv-
ice. Because Class B Shares in the Growth, New York, Penn-
sylvania, Government Securities and Short-Intermediate
Government Funds are not currently offered, holders of Class
B Shares in the other Funds may not exchange into these
Funds. Funds are only available for exchange for residents
of states in which such Funds are registered. In the case of
purchases of less than $1 million of the Short-Intermediate
Government Fund, however, shares purchased (other than by
exchange from another Fund other than the Treasury Fund)
must remain in the account for 90 days before they are eli-
gible for the exchange privilege. Also, where
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
49 Prospectus
<PAGE>
Class A shares in the Treasury Fund, which were not acquired
in exchange for shares of another Fund, are exchanged for
Class A shares of another Fund, you will be required to pay
a sales charge equal to what the sales charge would have
been for an initial purchase of the shares into which Trea-
sury Fund shares are being exchanged. In determining the
holding period for Class B shares, the holding period for
shares which have been exchanged into the then currently
held shares will be included, except that the time that an
investment is in the Class B shares of the Treasury Fund
will not count toward the time necessary to reduce or elimi-
nate any applicable CDSC, or to be converted into Class A
shares.
New purchases must remain in an account for 15 days before
they can be exchanged to another Fund. All shareholders au-
tomatically receive the privilege to make exchanges over the
telephone by calling Sentinel Service. See "How to Redeem
Shares--Telephone Redemption" above for a statement of the
Funds' liability disclaimer policy for unauthorized tele-
phone instructions. Although the funds and Sentinel Service
will attempt in good faith to provide adequate telephone ex-
change service at all times, telephone exchanges may be dif-
ficult to implement in times of drastic economic change. In
the event you cannot contact Sentinel Service by telephone,
you may effect an exchange by sending a written request to
Sentinel Administrative Service Company, P.O. Box 1499,
Montpelier, VT 05601-1499. Please be certain to specify
which account options are desired on any newly established
account. There is currently no limitation on the number of
times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accor-
dance with the rules of the Commission (the current rules of
the Commission require 60 days advance notice to sharehold-
ers prior to the modification or termination of the exchange
privilege).
Systematic Exchange: This feature enables you to sell a
specified number or dollar-value of shares in one of the
Funds periodically and use the proceeds to purchase the same
class of shares in another Fund.
Transfers: When you need to change ownership of or the
name on an account, a Sentinel Service representative will
provide you with the necessary assistance.
Systematic Withdrawal Plan: If you want to have regular
withdrawals from your account, this feature will enable you
to have shares sold regularly with the proceeds directed as
you elect. Each withdrawal constitutes a taxable event.
Reinstatement Privilege: If you redeem shares or receive
dividends or capital gains distributions in cash and subse-
quently want to reinvest your proceeds, you may do so within
365 days at net asset value, without paying any additional
sales charge.
To learn more about these services or to find out how to
add any of them to your account, please refer to the Share-
holder Services Guide and/or the Statement of Additional In-
formation.
PERFORMANCE DATA
HOW THE FUNDS Periodically, the Funds include average annual total re-
COMPUTE TOTAL turn in advertisements or in information distributed to ex-
RETURN isting and prospective shareholders.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 50
<PAGE>
Average annual total return quotations are calculated by
determining the average annual compounded rates of return
(based on net investment income and any capital gains or
losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable
value of such investment at the end of each period.
Included in the calculation are all applicable recurring
and nonrecurring expenses, and it is assumed that all divi-
dends and distributions are reinvested.
To better illustrate the performance of money already in-
vested in the Funds, the Funds may also periodically adver-
tise total return for specified periods without subtracting
sales charges.
Periodically, the Bond, New York, Pennsylvania, Tax-Free HOW THE FUNDS
Income, Government Securities, Short-Intermediate Government COMPUTE YIELD
and Treasury Funds may also quote yields in advertisements.
Yields are computed by dividing net investment income for a
recent 30-day (or one month) period by the product of the
average daily number of shares outstanding during that pe-
riod and the maximum offering price per share on the last
day of the period. The result is then annualized. (The
amount of income generated during the 30-day period is as-
sumed to be earned, reinvested at a constant rate at the end
of such period and compounded semi-annually.)
The Funds listed above may also show comparable yields to
those shareholders already invested in the Funds by using
the net asset value per share instead of maximum offering
price in the above calculations. This has the effect of
raising the quoted yields.
The Emerging Growth, Growth, Common Stock and Balanced
Funds may compare their performance to the following indi-
ces:
. The Dow Jones Industrial Average
. The Standard & Poor's 500 Stock Index
. The Russell 2000 Index
The World Fund may compare its performance to the "EAFE"
(Europe, Australia, Far East) Index.
The Bond, New York, Pennsylvania, Tax-Free Income, Govern-
ment Securities, Short-Intermediate Government, and Treasury
Funds may compare their performance to the following indi-
ces:
. Lehman Aggregate Bond Index
. Lehman Municipal Bond Index
. Lehman Government Bond Index
. IBC/Donoghue's Money Fund Report
In addition, the New York, Pennsylvania and Tax-Free In-
come Funds may quote tax-equivalent yields in advertise-
ments.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
51 Prospectus
<PAGE>
HOW THE FUNDS To determine the tax-equivalent yield of the Tax-Free In-
COMPUTE TAX come Fund, divide the tax-exempt part of the Fund's yield by
EQUIVALENT an amount which is one minus a stated tax rate, and add the
YIELD result to that part, if any, of the Fund's yield that is
taxable.
To determine the tax-equivalent yields of the New York or
Pennsylvania Funds, the yield as calculated above is in-
creased by the amount necessary to reflect the payment of
federal and either New York State and City or Pennsylvania
state taxes, as applicable, at a stated tax rate.
Note: The tax-equivalent yields for the New York, Pennsyl-
vania and Tax-Free Income Funds will always be higher than
their yields. (For more information on performance data,
please refer to "Total Return, Yield and Tax-Equivalent
Yield Information" in the Statement of Additional Informa-
tion.)
ORGANIZATION OF THE FUNDS
HISTORICAL All of the Funds except the Pennsylvania Fund are series
INFORMATION of the Company. The Company was originally incorporated in
ABOUT THE FUNDS Delaware as Group Securities, Inc. in 1933. The Company sold
its first shares to the public in January 1934, and became a
Maryland corporation in 1973.
The Company's stock is fully paid and non-assessable. Each
share of the Company entitles its shareholders to one vote
for each dollar of net asset value per share for all purpos-
es.
In the case of dissolution or other liquidation of the
Company, shareholders are entitled to receive (ratably per
share) the net assets of each Fund in which they are invest-
ed, with any general assets distributed ratably per share,
regardless of the Fund. Voting rights are non-cumulative.
The Pennsylvania Fund is a separate trust formed under
Pennsylvania law in 1986. Its shares of beneficial interest
are fully paid and non-assessable. Each share of beneficial
interest is entitled to one vote for all purposes. Voting
rights are non-cumulative. The Fund became a member of the
Sentinel Family of Funds on March 1, 1993, when the Advisor
and the Distributor assumed responsibility for the Fund.
Previously, the Fund was known as "ProvidentMutual Pennsyl-
vania Tax-Free Trust".
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
Prospectus 52
<PAGE>
The Sentinel Funds
National Life Drive
Montpelier, VT 05604
Investment Advisor
Sentinel Advisors Company
National Life Drive
Montpelier, VT 05604
Principal Underwriter
Sentinel Financial Services Company
National Life Drive
Montpelier, VT 05604
Counsel
Brown & Wood
One World Trade Center
New York, NY 10048
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Funds' Custodian and Dividend Paying Agent
*Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
Transfer Agent, Shareholder Servicing Agent and Administra-
tor
Sentinel Administrative Service Company
*National Life Drive
Montpelier, VT 05604
800-282-FUND (3863)
- --------
* All mail and correspondence should be sent to Sentinel Administrative Service
Company, P.O. Box 1499, Montpelier, VT 05601-1499
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICE 1-800-282-FUND (3863)
53 Prospectus
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1996
THE SENTINEL FUNDS
NATIONAL LIFE DRIVE
MONTPELIER, VERMONT 05604
(800) 282-FUND (3863)
Sentinel Common Stock Fund (the "Common Stock Fund")
Sentinel Balanced Fund (the "Balanced Fund")
Sentinel Growth Fund (the "Growth Fund")
Sentinel Emerging Growth Fund (the "Emerging Growth Fund")
Sentinel World Fund (the "World Fund")
Sentinel Bond Fund (the "Bond Fund")
Sentinel Government Securities Fund (the "Government Securities Fund")
Sentinel Short-Intermediate Government Fund (the "Short-Intermediate Government
Fund")
Sentinel U.S. Treasury Money Market Fund (the "Treasury Fund")
Sentinel Tax-Free Income Fund (the "Tax-Free Income Fund")
Sentinel New York Tax-Free Income Fund (the "New York Fund")
Sentinel Pennsylvania Tax-Free Trust (the "Pennsylvania Fund")
Each of SENTINEL GROUP FUNDS, INC. (the "Company") and the Pennsylvania Fund is
a managed, open-end investment company, which continuously offers its shares to
investors. The Company consists of eleven separate and distinct funds, ten of
which are diversified (the New York Fund being non-diversified), and the
Pennsylvania Fund is a separate, non-diversified fund.. The eleven funds of the
Company and the Pennsylvania Fund are referred to hereinafter collectively as
the "Funds", and individually as a "Fund". The Funds are described in a
Prospectus of the Funds dated April 1, 1996 (the "Prospectus"). Each of the
Funds has different investment objectives and risk characteristics.
Sentinel Advisors Company (the "Advisor") acts as the investment advisor to the
Funds. Shares of the Funds are distributed by Sentinel Financial Services
Company ("SFSC"). Both the Advisor and SFSC are partnerships whose partners are
affiliates of National Life Insurance Company ("National Life"), Provident
Mutual Life Insurance Company ("Provident Mutual") and The Penn Mutual Life
Insurance Company ("Penn Mutual").
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Prospectus. The Prospectus, which has been filed with
the Securities and Exchange Commission (the "SEC"), can be obtained upon request
and without charge by writing to the Funds at the above address. This Statement
of Additional Information has been incorporated by reference into the
Prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Funds.................................................. 3
Investment Objectives and Policies......................... 3
Investment Restrictions.................................... 14
Management of the Funds.................................... 16
The Investment Advisory Contract........................... 20
The Distribution Contracts................................. 22
The Distribution Plans..................................... 23
The Fund Services Agreements............................... 24
Portfolio Transactions and Brokerage Commissions........... 25
Portfolio Turnover......................................... 27
Capitalization............................................. 27
How To Purchase Shares and Reduce Sales Charges............ 28
Issuance of Shares at Net Asset Value...................... 29
How to Redeem Shares....................................... 29
Determination of Net Asset Value........................... 29
Computation of Maximum Offering and Redemption Prices...... 30
Dividends and Capital Gains Distributions.................. 31
Taxes...................................................... 32
Shareholder Services....................................... 37
Tax-Deferred Retirement Plans.............................. 39
Total Return, Yield and Tax-Equivalent Yield Information... 39
General Information........................................ 42
Financial Statements....................................... 42
Appendix A - Description of Bond Ratings................... 43
Appendix B - Economic Conditions in New York............... 47
Appendix C - Economic Conditions in Pennsylvania........... 54
</TABLE>
2
<PAGE>
THE FUNDS
Originally incorporated in the State of Delaware on December 5, 1933 as
Group Securities, Inc., the Company became a Maryland corporation on February
28, 1973. On November 30, 1973, the Company's name was changed to USLIFE Funds,
Inc. On September 30, 1976, the Company's name was changed to Sentinel Group
Funds, Inc.
On March 31, 1978, Sentinel Bond Fund, Inc. (formerly Sentinel Income Fund,
Inc.) and Sentinel Growth Fund, Inc., both managed, open-end, diversified
investment companies incorporated in Maryland on October 24, 1968, were merged
into the Company as separate classes of stock. On March 27, 1986, the Board of
Directors created, as a new class of stock of the Company, the Government
Securities Fund. The Board of Directors created the Tax-Free Income Fund as a
new class of the Company's stock on June 14, 1990.
The Pennsylvania Fund is a trust formed under the laws of Pennsylvania in
1986. The Fund became a member of the Sentinel Family of Funds on March 1,
1993. On that date the Advisor and SFSC became the investment advisor and
distributor, respectively, to the Fund. Immediately prior to March 1, 1993, the
investment advisor to the Fund was ProvidentMutual Management Co., Inc.
("PMMC"), and its distributor was ProvidentMutual Financial Services, Inc., both
of which are affiliates of Provident Mutual.
On March 1, 1993, the Company completed the acquisition of substantially all
of the assets of eight ProvidentMutual Funds, and Sentinel Cash Management Fund,
Inc., ("SCMF") in exchange solely for common stock of the corresponding Funds of
the Company that acquired such assets. In order to facilitate the acquisitions,
on August 13, 1992 the Board of Directors authorized the creation of three new
classes of stock of the Company, namely, the Emerging Growth, World and Treasury
Funds. On the same date, the Investment Advisory Agreement between the Company
and Sentinel Advisors, Inc., ("Sentinel Advisors"), an indirect wholly-owned
subsidiary of National Life, and the Distribution Agreement between the Company
and Equity Services, Inc. ("ESI"), also an indirect wholly-owned subsidiary of
National Life, terminated, and were replaced by the arrangements described in
the Prospectus under "Management of the Funds" and "How to Purchase Shares".
On March 27, 1995, the Company completed the acquisition of substantially
all of the assets of seven funds of The Independence Capital Group of Funds,
Inc., in exchange solely for common stock of the corresponding Funds of the
Company that acquired such assets. In order to facilitate the acquisitions, on
December 15, 1994, the Board of Directors authorized the creation of two new
classes of stock of the Company, namely, the New York and Short-Intermediate
Government Funds.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and certain fundamental policies of each of the
Funds are set forth in the Prospectus.
General Considerations
- ----------------------
Each Fund's fundamental policies and investment objectives as they affect
each such Fund cannot be changed without the approval of the lesser of (i) 67
percent or more of the voting securities of each such Fund present at a meeting
if the holders of more than 50 percent of the outstanding voting securities of
each such Fund are present or represented by proxy, or (ii) more than 50 percent
of the outstanding voting securities of each such
3
<PAGE>
Fund. With respect to the submission of a change in fundamental policy or
investment objective of each such Fund, such matter shall be deemed to have been
effectively acted upon with respect to any such Fund if a majority of the
outstanding voting securities of such Fund vote for the approval of such
matters, notwithstanding (1) that such matter has not been approved by a
majority of the outstanding voting securities of any other Fund affected by such
matter and (2) that such matter has not been approved by a majority of the
outstanding voting securities of the Company. Fundamental policies adopted with
respect to each Fund, except the Pennsylvania Fund and the New York Fund,
provide that no Fund shall concentrate its investments in a particular industry
or group of industries nor will it purchase a security if, as a result of such
purchase, more than 25% of its assets will be invested in a particular industry.
Considerations Applicable to the Fixed-Income Funds
- ---------------------------------------------------
Each of the Bond Fund, the New York Fund, the Tax-Free Income Fund, and the
fixed income portion of the Balanced Fund may invest up to 5% of its total
assets in debt securities which are rated below "investment grade", i.e., lower
than "Baa" by Moody's Investors Service, Inc. ("Moody's") or lower than "BBB" by
Standard & Poor's Ratings Group ("Standard & Poor's") or which, in the Advisor's
judgment, possess similar credit characteristics. See Appendix A - "Description
of Bond Ratings" for additional information regarding ratings of debt
securities. The Advisor considers the ratings assigned by Standard & Poor's or
Moody's as one of several factors in its independent credit analysis of issuers.
Such securities are considered by Standard & Poor's and Moody's to have varying
degrees of speculative characteristics. Consequently, although securities rated
below investment grade can be expected to provide higher yields, such securities
may be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments in
such securities will be made only when in the judgment of the Advisor, such
securities provide attractive total return potential relative to the risk of
such securities, as compared to higher quality debt securities. The Funds do
not intend to purchase debt securities that are in default or which the Advisor
believes will be in default.
Each of the Funds to a limited extent may enter into repurchase agreements
with selected banks and broker-dealers under which the Fund purchases securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
("U.S. Government Securities") and agrees to resell the securities at an agreed
upon time and an agreed upon price. The difference between the amount a Fund
pays for securities and the amount it receives upon resale is interest income to
a Fund. Failure of the seller to repurchase the securities as agreed may result
in a loss to a Fund if the market value of the securities has fallen to less
than the repurchase price. In the event of such a default, a Fund may also
experience certain costs and be delayed or prevented from recovering or
liquidating the collateral securities, which could result in further loss to a
Fund. The Funds will use repurchase agreements as a means of making short-term
investments of seven days or less and in aggregate amounts of not more than 25%
of the net assets of the Fund. All repurchase agreements used by the Funds will
provide that the value of the collateral underlying the repurchase agreement
always will be at least equal to 102% of the repurchase price. The Advisor will
monitor on a continuing basis the creditworthiness of all parties with which it
might enter into repurchase agreements and will enter into repurchase agreements
only if it determines that the credit risk of such a transaction is minimal.
Considerations Applicable to the Tax-Exempt Funds
- -------------------------------------------------
As described in the Prospectus, the Tax-Free Income Fund, the Pennsylvania
Fund and the New York Fund (together, the "Tax-Exempt Funds") may purchase and
sell exchange-traded financial futures contracts ("financial futures contracts")
to hedge their portfolios of municipal bonds against declines in the value of
such securities and to hedge
4
<PAGE>
against increases in the cost of securities they intend to purchase. To hedge
their portfolios, the Tax-Exempt Funds may take an investment position in a
financial futures contract which will move in the opposite direction from the
portfolio position being hedged. While the use of hedging strategies is intended
to moderate capital changes in portfolio holdings and thereby reduce the
volatility of the net asset value of Fund shares, the Tax-Exempt Funds
anticipate that their net asset values will fluctuate. Set forth below is
information concerning financial futures transactions.
Description of Financial Futures Contracts A financial futures contract is
------------------------------------------
an agreement between two parties to buy and sell a security, or in the case of
an index-based financial futures contract, to make and accept a cash settlement
for a set price on a future date. A majority of transactions in financial
futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Financial futures contracts
have been designed by boards of trade which have been designated "contracts
markets" by the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the financial futures contract. Subsequent
payments to and from the broker, called "variation margin", are required to be
made on a daily basis as the price for the futures contract fluctuates and makes
the long and short positions in the futures contract more or less valuable, a
process known as "mark to the market". At any time prior to the settlement date
of the futures contract, the position may be closed out by taking an opposite
position which will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the position realizes a
loss or a gain. In addition, a nominal commission is paid on each completed
sale transaction.
The Tax-Exempt Funds may deal in financial futures contracts based on a
long-term municipal bond index developed by the Chicago Board of Trade (the
"CBT") and The Bond Buyer (the "Municipal Bond Index"). The Municipal Bond
Index is comprised of 40 tax-exempt municipal revenue bonds and general
obligations bonds. Each bond included in the Municipal Bond Index must be rated
"A" or higher by Moody's or Standard & Poor's and must have a remaining maturity
of 19 years or more. Twice a month new issues satisfying the eligibility
requirements are added to, and an equal number of old issues are deleted from,
the Municipal Bond Index. The value of the Municipal Bond Index is computed
daily according to a formula based on the price of each bond in the Municipal
Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
futures contracts through a clearing corporation, a non-profit organization
managed by the exchange membership which is also responsible for handling daily
accounting of deposits or withdrawals of margin.
The Tax-Exempt Funds may purchase and sell financial futures contracts on
U.S. Government Securities as a hedge against adverse changes in interest rates
as described below. With respect to U.S. Government Securities, currently there
are financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, Government National Mortgage Association ("GNMA") Certificates
and three-month U.S. Treasury bills. The Tax-Exempt Funds may purchase and
write call and put options on financial futures contracts on U.S. Government
Securities in connection with their hedging strategies.
5
<PAGE>
The Tax-Exempt Funds also may engage in other financial futures contracts
transactions, such as financial futures contracts on other municipal bond
indices which may become available, if the Advisor should determine that there
is normally a sufficient correlation between the prices of such financial
futures contracts and the municipal bonds in which the Tax-Exempt Funds invest
to make such hedging appropriate.
Futures Strategies A Tax-Exempt Fund may sell a financial futures contract
------------------
(i.e., assume a short position) in anticipation of a decline in the value of
their investments in municipal bonds resulting from an increase in interest
rates or otherwise. The risk of decline could be reduced without employing
futures as a hedge by selling such municipal bonds and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs in the form of
dealer spreads and typically would reduce the average yield of the Funds'
portfolio securities as a result of the shortening of maturities. The sale of
financial futures contracts provides an alternative means of hedging against
declines in the value of their investments in municipal bonds. As such values
decline, the value of the Funds' positions in the financial futures contracts
will tend to increase, thus offsetting all or a portion of the depreciation in
the market value of the Funds' municipal bond investments which are being
hedged. While the Tax-Exempt Funds will incur commission expenses in selling
and closing out financial futures contract positions, commissions on financial
futures contract transactions are lower than transaction costs incurred in the
purchase and sale of municipal bonds. In addition, the ability to trade in the
standardized contracts available in the futures markets may offer a more
effective defensive position than a program to reduce the average maturity of
the portfolio securities, due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to the Funds.
Employing futures as a hedge also may permit the Tax-Exempt Funds to assume a
defensive posture without reducing the yield on their investments beyond any
amounts required to engage in futures trading.
When the Tax-Exempt Funds intend to purchase municipal bonds, they may
purchase financial futures contracts as a hedge against any increase in the cost
of such municipal bonds, resulting from a decrease in interest rates or
otherwise, that may occur before such purchases can be effected. Subject to the
degree of correlation between the municipal bonds and the financial futures
contracts, subsequent increases in the cost of municipal bonds should be
reflected in the value of the futures held by the Tax-Exempt Funds. As such
purchases are made, an equivalent amount of financial futures contracts will be
closed out. Due to changing market conditions and interest rate forecasts,
however, a financial futures contract position may be terminated without a
corresponding purchase of portfolio securities.
Call Options on Financial Futures Contracts The Tax-Exempt Funds also may
-------------------------------------------
purchase and sell exchange-traded call and put options on financial futures
contracts on U.S. Government Securities. The purchase of a call option on a
financial futures contract is analogous to the purchase of a call option on an
individual security. Depending on the pricing of the option compared to either
the financial futures contract on which it is based, or the price of the
underlying debt securities, it may or may not be less risky than ownership of
the financial futures contract or the underlying debt securities. Like the
purchase of a financial futures contract, a Tax-Exempt Fund will purchase a call
option on a financial futures contract to hedge against a margin advance when it
is not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, the Tax-Exempt Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund's portfolio holdings.
6
<PAGE>
Put Options on Financial Futures Contracts The purchase of a put option on
------------------------------------------
a financial futures contract is analogous to the purchase of a protective put
option on a portfolio security. The Tax-Exempt Funds may purchase put options
on financial futures contracts to hedge the Funds' portfolios against the risk
of rising interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration is
higher than the exercise price, the Tax-Exempt Funds will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of municipal bonds which the Funds intend to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to financial futures contracts. Premiums received from the writing
of an option will be included in initial margin. The writing of an option on a
financial futures contract involves risks similar to those relating to financial
futures contracts.
Restrictions on Use of Futures Transactions Regulations of the CFTC
-------------------------------------------
applicable to the Tax-Exempt Funds provide that the Tax-Exempt Funds may
purchase and sell financial futures contracts and options thereon either (a) for
bona fide hedging purposes or (b) for non-hedging purposes, provided that the
aggregate initial margins and premiums required to establish positions in such
contracts and options do not exceed 5% of the liquidation value of a Tax-Exempt
Fund's portfolio assets after taking into account any unrealized profits and
losses on such contracts or options. (However, as stated above, the Tax-Exempt
Funds intend to engage in futures and options transactions for hedging purposes
only.) Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When the Tax-Exempt Funds purchase a financial futures contract or a call
option with respect thereto or write a put option on a financial futures
contract, an amount of cash, cash equivalents or short-term, high-grade, fixed-
income securities will be deposited in a segregated account with the Funds'
custodian so that the amount so segregated, plus the amount of initial and
variation margin held in the account of their broker, equals the market value of
the financial futures contract, thereby ensuring that the use of such futures is
unleveraged.
Risk Factors in Futures and Options Transactions Investment in financial
------------------------------------------------
futures contracts involves the risk of imperfect correlation between movements
in the price of the financial futures contract and the price of the security
being hedged. The hedge will not be fully effective when there is imperfect
correlation between the movements in the prices of two financial instruments.
For example, if the price of the financial futures contract moves more than the
price of the hedged security, the Tax-Exempt Funds will experience either a loss
or gain on the financial futures contract which is not completely offset by
movements in the price of the hedged securities. To compensate for imperfect
correlations, the Tax-Exempt Funds may purchase or sell financial futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the price of the hedged securities is historically greater than
that of the financial futures contracts. Conversely, the Tax-Exempt Funds may
purchase or sell fewer financial futures contracts if the volatility of the
price of the hedged securities is historically less than that of the financial
futures contracts.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the bonds held by the Tax-
Exempt Funds. As a result, each Fund's ability to hedge effectively all or a
portion of the value of its municipal bonds through the use of such financial
futures contracts will depend in part on
7
<PAGE>
the degree to which price movements in the index underlying the financial
futures contract correlate with the price movements of the municipal bonds held
by that Fund. The correlation may be affected by disparities in the average
maturity, ratings, geographic mix or structure of such Fund's investments as
compared to those comprising the Municipal Bond Index, and general economic or
political factors. In addition, the correlation between movements in the value
of the Municipal Bond Index may be subject to change over time as additions to
and deletions from the Municipal Bond Index alter its structure. The correlation
between financial futures contracts on U.S. Government Securities and the
municipal bonds held by the Tax-Exempt Funds may be adversely affected by
similar factors and the risk of imperfect correlation between movements in the
prices of such financial futures contracts and the prices of the municipal bonds
held by the Tax-Exempt Funds may be greater.
The Tax-Exempt Funds expect to liquidate a majority of the financial futures
contracts they enter into through offsetting transactions on the applicable
contract market. There can be no assurance, however, that a liquid secondary
market will exist for any particular financial futures contract at any specific
time. Thus, it may not be possible to close out a financial futures contract
position. In the event of adverse price movements, the Tax-Exempt Funds would
continue to be required to make daily cash payments of variation margin. In
such situations, if a Fund has insufficient cash, it may be required to sell
portfolio securities to meet daily variation margin requirements at a time when
it may be disadvantageous to do so. The inability to close out financial
futures contract positions also could have an adverse impact on a Fund's ability
to hedge effectively its investments in municipal bonds. The Tax-Exempt Funds
will enter into a financial futures contract position only if, in the judgment
of the Advisor, there appears to be an actively traded secondary market for such
financial futures contracts.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open financial futures contract positions. Prices
have in the past reached or exceeded the daily limit on a number of consecutive
trading days.
The successful use of transactions in futures and related options also
depends on the ability of the Advisor to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a financial futures
contract or option is held by the Tax-Exempt Funds or such rates move in a
direction opposite to that anticipated, a Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, a Fund's total return for such period may
be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a financial
futures contract position, futures transactions involve substantial leverage.
As a result, relatively small movements in the price of the financial futures
contracts can result in substantial unrealized gains or losses. Because the
Tax-Exempt Funds will engage in the purchase and sale of financial futures
contracts solely for hedging purposes, however, any losses incurred in
connection therewith should, if the hedging strategy is successful, be offset in
whole or in part by increases in the value of securities held by the Funds or
decreases in the price of securities that the Funds intend to acquire.
The amount of risk the Tax-Exempt Funds assume when they purchase an option
on a financial futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option on a
8
<PAGE>
financial futures contract also entails the risk that changes in the value of
the underlying financial futures contract will not be fully reflected in the
value of the option purchased.
Municipal Bond Index financial futures contracts only recently have been
approved for trading and therefore have little trading history. It is possible
that trading in such financial futures contracts will be less liquid than
trading in other futures contracts. The trading of financial futures contracts
also is subject to certain market risks, such as inadequate trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
Tax-Exempt Obligations The Tax-Exempt Funds may invest in municipal
----------------------
obligations that constitute "private activity bonds" under the Internal Revenue
Code of 1986, as amended (the "Code") which subjects certain private activity
bonds to an alternative minimum tax ("AMT"). The provisions of the Code
relating to private activity bonds generally apply to bonds issued after August
15, 1986, with certain transitional rule exemptions. Private activity bonds are
eligible for purchase by the Tax-Exempt Funds provided that the interest paid
thereon qualifies as exempt from federal income taxes (and in the case of the
New York and Pennsylvania Funds, New York State and City, and Pennsylvania,
personal income taxes, respectively). It is the position of the SEC and the
Funds that municipal obligations that generate income subject to the AMT should
not be counted as tax-exempt for the purpose of determining whether 80% of a
Fund's net assets are invested in tax-exempt obligations.
Tax-exempt obligations held by the Tax-Exempt Funds generally will consist
of investment grade municipal obligations with maturities of longer than one
year. Long-term obligations normally are subject to greater market fluctuations
as a result of changes in interest rates and market conditions than are short-
term obligations. The two principal classifications of municipal obligations
which may be held by the Tax-Exempt Funds are "general obligation" bonds and
"revenue" bonds. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power in support of the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Tax-exempt private activity bonds (including
industrial development bonds) are in most cases revenue bonds and are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds usually is related directly to the credit
standing of the corporate user of the facility involved. In addition, the Tax-
Exempt Funds may invest in short-term municipal obligations (commonly referred
to as municipal notes). Municipal notes often are used to provide for short-
term capital needs and generally have maturities of one year or less. Municipal
notes include variable and floating rate demand obligations, tax anticipation
notes, revenue anticipation notes, construction loan notes and bond anticipation
notes.
The Pennsylvania Fund will attempt to invest 100% of its assets in
Pennsylvania Obligations (as defined in the Prospectus), and the New York Fund
will attempt to invest 100% of its assets in New York Obligations (as defined in
the Prospectus). As a matter of fundamental policy, the Pennsylvania and New
York Funds, under normal market conditions, will invest at least 80% of their
net assets in tax-exempt Pennsylvania Obligations or New York Obligations,
respectively, in each case which are rated within the top four rating categories
by a nationally recognized statistical rating organization or, if not rated,
which, in the opinion of the Advisor, possess equivalent investment
characteristics. The fourth grade is considered medium-grade and has
speculative characteristics. The Pennsylvania Fund may invest up to 25% of its
assets in securities rated at this fourth grade, and the New York Fund may
invest without limitation in securities rated at this fourth grade. These bond
ratings are described in Appendix A to this Statement of Additional Information.
9
<PAGE>
During temporary defensive periods when, in the Advisor's opinion, suitable
Pennsylvania or New York Obligations are unavailable, or the Advisor anticipates
an increase in interest rates, the Pennsylvania and New York Funds may invest
not more than 20% of their assets in obligations the interest on which is exempt
only from federal income taxes (such as obligations issued by states other than
Pennsylvania or New York) or is exempt only from Pennsylvania or New York
personal income taxes (such as obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities). Moreover, under such
conditions, all three Tax-Exempt Funds may make temporary investments in high-
quality obligations the interest on which is not exempt from either federal or
any state personal income taxes. Such investments will consist of debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the two highest categories of either Standard
& Poor's or Moody's, certificates of deposit, banker's acceptances, or
repurchase agreements.
Variable or Floating Rate Notes The Tax-Exempt Funds may invest in
-------------------------------
variable or floating rate demand obligations, which are securities that provide
for adjustment in their interest rates at intervals ranging from daily to up to
one year based upon prevailing market rates for similar investments and an
adjustment formula that is intended to maintain the market value of the security
at par. These obligations normally have a stated maturity in excess of one year
but permit the holder to demand repayment of principal plus payment of accrued
interest at any time upon a specified number of days' notice. The Tax-Exempt
Funds will have the right to receive repayment of principal and payment of
accrued interest within seven days. Some notes may be rated by credit rating
agencies but unrated notes purchased by the Funds, in the Advisor's opinion,
will be of comparable quality at the time of purchase to instruments that are
rated as high quality. Where necessary to ensure that an unrated note is of
high quality, the Funds will require that the issuer's obligation to pay the
principal of the note be backed by an unconditional domestic or foreign bank
letter or line of credit, guarantee or commitment to lend. In such a case, the
quality of the bank will be looked to for purposes of satisfying the Funds'
quality standards. In addition, the Advisor will consider that foreign banks
are not subject to the same regulations as are domestic banks and may be
involved in different business activities and have different risks. Although
there may be no active secondary market for a particular instrument, the Funds
may, upon notice, exercise a note's demand feature or resell the note at any
time to a third party. If a significant portion of a Fund's assets were
invested in notes of a single issuer, however, the issuer's ability to meet the
demand feature could affect that Fund's liquidity. Included in the variable and
floating rate demand instruments that the Tax-Exempt Funds may purchase are
participations in municipal obligations purchased from and owned by financial
institutions, primarily banks, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income taxes and in the case of the New
York and Pennsylvania Funds, New York State and City, and Pennsylvania, personal
income taxes, respectively. In determining average weighted portfolio maturity,
an instrument will be deemed to have a maturity equal to the longer of the
period remaining to the next interest rate adjustment or the demand notice
period.
Municipal Bond Insurance Certain of the municipal obligations held in the
------------------------
portfolios of the Tax-Exempt Funds may be insured. Different types of such
insurance include a "New Issue Insurance Policy", a "Mutual Fund Insurance
Policy" or a "Secondary Market Insurance Policy".
A New Issue Insurance Policy is obtained by the issuer of the securities,
and all premiums for such a policy are paid in advance by the issuer. Such
policies are generally used by an issuer to increase the credit rating of a
lower-rated security, and therefore may increase both the purchase price and the
subsequent resale value of a security for a Fund's portfolio. They are non-
cancellable and continue in force as long as the securities are outstanding and
the respective insurers remain in business. Premiums for issuer insurance are
paid in advance by the issuer and are reflected in a somewhat higher purchase
price paid by the Tax-Exempt Funds for these obligations. The creditworthiness
of the issuer
10
<PAGE>
will be evaluated in order to determine its ability to meet its obligations to
pay interest and repay principal. The insurance covers the event that the issuer
defaults on an interest payment or principal repayment; if this occurs, the
insurer will be notified and will make payment to the bondholders. There is,
however, no guarantee that the insurer will meet its obligations. These
insurance policies do not protect bondholders from adverse changes in interest
rates.
A Mutual Fund Insurance Policy is used to guarantee specific bonds only
while owned by a mutual fund. If a Fund were to purchase such a policy, payment
of the annual premiums would reduce such Fund's current yield. The Tax-Exempt
Funds have no plans to purchase a Mutual Fund Insurance Policy at this time.
A Secondary Market Insurance Policy is purchased by an investor subsequent
to a security's issuance and generally insures a particular security for the
remainder of its term. The Tax-Exempt Funds may purchase securities which
already have been insured under a Secondary Market Insurance Policy by a prior
investor, or such Funds may purchase such a policy from a vendor providing such
a service.
Other Matters Specific to the New York Fund. The New York Fund is a non-
-------------------------------------------
diversified series of the Company under the Investment Company Act of 1940, as
amended (the "1940 Act"). Therefore, the New York Fund could invest all of its
assets in securities of a single issuer. However, as the Fund intends to comply
with Subchapter M of the Code, at least 50% of its total assets must be
comprised of individual issues, each of which represents no more than 5% of such
Fund's total assets. Those issues which represent more than 5% of the New York
Fund's total assets must be limited in the aggregate to 50% of such Fund's total
assets, provided, however, that no more than 25% of the Fund's total assets may
be invested in any one issuer. For these purposes, a security is considered to
be issued by the governmental entity (or entities) whose assets or revenues back
the security, or with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, a security is considered to
be issued by such non-governmental user. In accordance with SEC regulations,
the guarantor of a guaranteed security may be considered to be an issuer in
connection with such guarantee. Since investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio, the New York
Fund is more susceptible to economic, political and regulatory developments and
the change in value of any one security will affect the overall value of a non-
diversified portfolio and thereby subject its net asset value per share to
greater fluctuations.
Because the New York Fund invests at least 80% of its assets in New York
Obligations, its net asset value is particularly sensitive to changes in the
economic conditions and governmental policies of the State of New York. See
Appendix B - "Economic Conditions in New York" for additional information
regarding these factors.
Other Matters Specific to the Pennsylvania Fund. The Pennsylvania Fund is
-----------------------------------------------
registered as a non-diversified, open-end investment company under the 1940 Act.
Therefore, the Pennsylvania Fund could invest all of its assets in securities of
a single issuer. However, as the Pennsylvania Fund also intends to comply with
Subchapter M of the Code, it must observe the same diversification restrictions
set forth in the preceding section for the New York Fund. Since investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio, the Pennsylvania Fund is also more susceptible to
economic, political and regulatory developments, and the change in value of any
one security will affect the overall value of a non-diversified portfolio and
thereby subject the Pennsylvania Fund's net asset value per share to greater
fluctuations.
11
<PAGE>
Because the Pennsylvania Fund invests at least 80% of its assets in
Pennsylvania Obligations, its net asset value is particularly sensitive to
changes in the economic conditions and governmental policies of the Commonwealth
of Pennsylvania ("Pennsylvania"). See Appendix C - "Economic Conditions in
Pennsylvania" for additional information regarding these factors.
Under prior Pennsylvania law, in order for the Pennsylvania Fund to qualify
to pass through to investors income exempt from Pennsylvania personal income
tax, the Pennsylvania Fund was required to adhere to certain investment
restrictions. In order to comply with this and other Pennsylvania law
requirements previously in effect, the Pennsylvania Fund's Declaration of Trust
provides that the Pennsylvania Fund will invest for income earnings rather than
trading for profit, and that the Pennsylvania Fund have no power to vary its
portfolio investments except to (i) eliminate unsafe investments and investments
not consistent with the preservation of the capital or tax status of the
investments of the Pennsylvania Fund; (ii) honor redemption orders, meet
anticipated redemption requirements and negate gains from discount purchases;
(iii) maintain a constant net asset value per unit pursuant to, and in
compliance with, an order or rule of the SEC; (iv) reinvest the earnings from
securities in like securities; or (v) defray normal administrative expenses.
Pennsylvania has enacted legislation which eliminated the necessity for the
foregoing investment restrictions. The Fund is in the process of soliciting
shareholder approval to amend the Declaration of Trust to eliminate the
Pennsylvania Requirements, and upon the completion of this process, if the
shareholders grant their approval, the Pennsylvania Requirements will no longer
apply. However, until the Declaration of Trust is amended, the Pennsylvania
Fund continues to be governed by such investment restrictions.
The Pennsylvania Fund's portfolio turnover rate generally will not exceed
100%. A portfolio turnover rate of 100% or higher will result in higher
transaction costs, which must be borne directly by the Pennsylvania Fund and
ultimately by its shareholders. High portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes.
In addition, the Pennsylvania Fund does not intend to (i) invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein, or (ii)
invest in securities issued by companies which, together with any predecessor,
have been in continuous operation for fewer than three years. The Pennsylvania
Fund would seek to notify shareholders before changing any of these policies.
Considerations Applicable to the World Fund
- -------------------------------------------
Foreign Currency Transactions The value of the assets of the World Fund as
-----------------------------
measured in U.S. dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the Fund
may incur costs in connection with conversions between various currencies.
The Fund will conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through the use of forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract will involve
an obligation by the World Fund to purchase or sell a specific amount of
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirements, and no
commissions are charged at any stage for trades. Neither type of foreign
currency
12
<PAGE>
transaction will eliminate fluctuations in the prices of the Fund's portfolio
securities or prevent loss if the prices of such securities should decline.
The World Fund may enter into forward foreign currency exchange contracts
only under two circumstances. First, when the Fund enters into a contract for
the purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. The World Fund will
then enter into a forward contract for the purchase or sale, for a fixed amount
of dollars, of the amount of foreign currency involved in the underlying
securities transactions; in this manner the Fund will be better able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the securities are purchased or sold and the date on
which payment is made or received.
Second, when the Advisor or the Sub-Advisor (as defined in the Prospectus)
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, it may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. The precise matching of the forward contract amounts and
the value of the securities involved generally will not be possible since the
future value of those securities may change between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. The Advisor does not intend
to enter into such forward contracts under this second circumstance on a regular
or continuous basis. The World Fund also will not enter into such forward
contracts or maintain a net exposure to such contracts when the consummation of
the contracts would obligate the World Fund to deliver an amount of foreign
currency in excess of the value of the World Fund's securities or other assets
denominated in that currency. The Advisor believes that it is important to have
the flexibility to enter into such forward contracts when it determines that to
do so is in the best interest of the World Fund. The World Fund's custodian
bank segregates cash or equity or debt securities in an amount not less than the
value of the World Fund's total assets committed to forward foreign currency
exchange contracts entered into under the second circumstance. If the value of
the securities segregated declines, additional cash or securities are added so
that the segregated amount is not less than the amount of the World Fund's
commitments with respect to such contracts. Under normal circumstances, the
World Fund expects that any appreciation (depreciation) on such forward exchange
contracts will be offset approximately by the (depreciation) appreciation in
translation of the underlying foreign investment arising from fluctuations in
foreign currency exchange rates.
The World Fund will recognize the unrealized appreciation or depreciation
from the fluctuation in a foreign currency forward contract as an increase or
decrease in the Fund's net assets on a daily basis, thereby providing an
appropriate measure of the World Fund's financial position and changes in
financial position.
Foreign Securities for Funds other than the World Fund
- ------------------------------------------------------
Before foreign securities are purchased for Funds other than the World Fund,
the differences between them and U.S. securities are considered. This includes
possible differences in taxation, regulation, trading volume and currency
controls, the possibility of expropriation and lack of uniform accounting and
reporting standards. While there may be investment opportunities in foreign
securities, there also may be investment risks not usually associated with U.S.
securities. At November 30, 1995, the Common Stock Fund had 2.4%, the Balanced
Fund had 4.2%, the Bond Fund had 12.3% of its net assets invested in foreign
securities; the Emerging Growth, Growth, Tax-Free Income,
13
<PAGE>
Pennsylvania, New York, Treasury, Government Securities and Short-Intermediate
Government Funds had no such investments as of that date.
INVESTMENT RESTRICTIONS
The Company. Certain By-Laws of the Company, which may be changed only by a
shareholder vote, prohibit the purchase of the securities of any company not in
operation continuously for at least three years (including any predecessor
company) and, except for U.S. Government Securities and obligations of the
government of Canada, forbid the purchase of the securities of any one issuer,
if the market value of such securities exceeds 5% of the total market value of
all of the Company's securities and cash.
The Company's Board of Directors has also adopted a policy under which each
of the Common Stock Fund, Balanced Fund, Growth Fund and Bond Fund cannot
purchase securities of any one issuer if the market value of such securities
exceeds 5% of the total market value of each such Fund's securities and cash.
It is also a fundamental policy of the Company that it may not borrow money,
except from banks in an amount up to 5% of a Fund's total assets for temporary
or emergency purposes or to meet redemption requests which might otherwise
require the untimely disposition of securities, and it may not purchase
securities on margin. Also, the Company may not lend its cash or securities,
may not deal in real estate, may not act as underwriter of securities issued by
others, and may not purchase from or sell to any officer, director or employee
of the Company, or the Advisor or underwriter, or any of their officers or
directors, any securities other than shares of the Company's capital stock.
None of its Funds may deal in options, commodities or commodities contracts
except to the extent the Tax-Exempt Funds may enter into futures transactions
and related options for hedging purposes as described above. None of the Funds
may invest in oil, gas or other mineral exploration or development programs or
leases. None of the Funds will invest more than 5% of its net assets in
warrants valued at the lower of cost or market, or more than 2% of its net
assets in warrants which are not listed on either the New York Stock Exchange or
the American Stock Exchange.
The Company's By-Laws also prohibit the purchase or retention of the
securities of any one issuer if officers and directors of the Company, its
advisor or underwriter owning individually more than .5% of the securities of
such issuer together own more than 5% of the securities of such issuer.
The Company may not purchase more than 10% of the voting securities of any
issuer. The Company may not invest in companies for purposes of exercising
control or management and may not invest in any securities of any issuer which
the Company is restricted from selling to the public without registration under
the Securities Act of 1933. It also may not purchase for any Fund securities of
any issuer beyond a market value of 5% of such Fund's net assets, and may not
invest in securities which are not readily marketable. The Company may not make
short sales of securities.
Although not a fundamental policy, so long as the Common Stock Fund is used
as the underlying investment vehicle for a National Life separate account, it is
the view of management that its investment policies will be affected by
insurance laws of certain states, principally New York, which, among other
things, may limit most of the Common Stock Fund's investment in common stocks to
the common stocks of listed companies meeting certain earnings tests. These
essentially are qualitative limitations imposed upon the investments of life
insurance companies in order to reduce the risk of loss.
Restrictions and policies established by resolution of the directors may be
changed by the Board, with any material changes to be reported to shareholders.
Those presently in
14
<PAGE>
effect provide that under circumstances that the directors with the advice of
independent investment counsel determine to be extraordinary, assets of all
Funds may be invested entirely or in part in U.S. Government Securities or an
agency thereof, or held as cash deposits in a bank or trust company having
resources of not less than $2,000,000. The securities of foreign companies or
governments may be selected as being suitable for one or more of the Funds.
The Pennsylvania Fund. The following investment limitations are applicable
---------------------
to the Pennsylvania Fund, and may not be changed without a vote of the
Pennsylvania Fund's shareholders.
The Pennsylvania Fund may not:
1. Purchase or sell real estate, except that the Fund may invest in
municipal obligations which are secured by real estate or interests therein.
2. Make loans, except that the Fund may purchase or hold debt instruments
and enter into repurchase agreements pursuant to its investment objective and
policies.
3. Underwrite the securities of other issuers, except to the extent that
the acquisition or disposition of municipal obligations or other securities
directly from the issuer thereof in accordance with the Fund's investment
objective and policies might be deemed to be an underwriting.
4. Purchase securities of companies for the purpose of exercising control.
5. Acquire any other investment company or investment company security,
except in connection with a merger, consolidation, reorganization or acquisition
of assets.
6. Purchase securities on margin, make short sales of securities or
maintain a short position, provided that the Fund may enter into futures
contracts.
7. Issue senior securities except insofar as borrowing in accordance with
the Fund's investment objective and policies might be considered to result in
the issuance of a senior security; provided that the Fund may enter into futures
contracts.
8. Invest in or sell interests in oil, gas or other mineral exploration
development programs.
9. Invest in private activity bonds where the payment of principal and
interest are the responsibility of a company (including its predecessors) with
less than three years of continuous operations.
The above investment limitations are considered at the time that portfolio
securities are purchased.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in asset value
will not constitute a violation of the restriction.
In order to permit the sale of Pennsylvania Fund shares in certain states,
the Pennsylvania Fund may make commitments more restrictive than the investment
policies and limitations described above. Should the Pennsylvania Fund
determine that any such commitment is no longer in the best interests of the
Fund, it will revoke the commitment by terminating sales of its shares in the
state involved.
15
<PAGE>
MANAGEMENT OF THE FUNDS
Management is made up of (i) the Company's Board of Directors and the
Pennsylvania Fund's Board of Trustees, which consist of the same ten individuals
and which are responsible for the Funds' operations; (ii) the officers of the
Company and the Pennsylvania Funds, who are responsible to the Boards; and (iii)
the Advisor which, under agreements with the Company and the Pennsylvania Fund,
supervises and assists in the management of the Funds and the purchase and sale
of securities. In addition, the Advisor has retained the services of the Sub-
Advisor with respect to the World Fund. See the "The Investment Advisory
Contracts", below. Set forth below is information regarding the
directors/trustees and officers of the Company and the Pennsylvania Fund, their
ages, and their principal occupations during the past five years. As of March
1, 1996, the Company's and the Pennsylvania Fund's directors/trustees and
officers as a group owned less than 1% of the outstanding shares of each Fund.
In addition, as of such date, National Life and its affiliates, each of whose
address is National Life Drive, Montpelier, Vermont 05604, except for American
Guaranty & Trust Company, whose address is 220 Continental Drive, Newark,
Delaware 19713 owned of record and beneficially 28,249,928.654 shares amounting
to 14.5% of the outstanding shares of the Company (0.95% of the voting
power) which included 2,298,363.671 shares of the Common Stock Fund amounting to
.07% of such class, 1,831,447.079 shares of the Balanced Fund amounting to 11
of such class, 785,989.065 shares of the Growth Fund amounting to 19% of such
class, 663,229.427 shares of the Emerging Growth Fund amounting to 3% of such
class, 873,755.323 shares of the World Fund amounting to 22% of such class,
2,928,687.333 shares of the Bond Fund amounting to 17% of such class,
1,006,139.580 shares of the Government Securities Fund amounting to .09% of
such class, 333,412,916 shares of Short-Intermediate Fund amounting to .090% of
such class, 16,804,039.380 shares of the Treasury Fund amounting to 22% of
such class, 626,899.651 shares of the Tax-Free Income Fund amounting to .08% of
such class, 5,712.317 shares of the New York Fund amounting to .01% of such
class. National Life and its affiliates also owned 92,252.912 shares of the
Pennsylvania Fund amounting to .035% of the outstanding shares on such date. As
of March 1, 19965, Penn Mutual and its affiliates (other than those entities
which are also affiliates of National Life) owned 899,988.739 shares of the
Company, amounting to .5% of the outstanding shares (0.3% of the voting
power), including 841,090.683 shares of the Bond Fund, amounting to 5.0% of the
class, and 58,898.056 shares of the Short-Intermediate Government Fund,
amounting to 1.6% of the class. Provident Mutual and its affiliates (other than
those entities who are also affiliates of National Life) did not own shares of
any of the Funds at such date.
KENISTON P. MERRILL* - CHAIRMAN AND DIRECTOR/TRUSTEE
National Life Drive
Montpelier, Vermont 05604
Age 59
Sentinel Advisors Company - Chairman and Chief Executive Officer, 1993 to
present; Sentinel Advisors, Inc. - Chairman and Chief Executive Officer, 1986
to 1993, President and Chief Operating Officer, 1982 to 1986, Director, 1982 to
present; National Life - Executive Vice President and Chief Investment Officer,
February, 1994 to 1995, Senior Vice President and Chief Investment Officer, 1989
to February, 1994, Senior Vice President-Investments, 1986 to 1989, Vice
President, 1982 to 1986; National Life Investment Management Company, Inc. -
Chairman and Chief Executive Officer, 1990 to 1995, President and Chief
Executive Officer, 1986 to 1990, Director, 1982 to present; Sentinel Cash
Management Fund, Inc. - Chairman and Director, 1990 to 1993, President and
Director, 1987 to 1990 American Guaranty & Trust Company - Director, 1993 to
present.
16
<PAGE>
JOSEPH M. ROB~ - PRESIDENT
National Life Drive
Montpelier, Vermont 05604
Age 53
Sentinel Management Company - Chief Executive Officer, 1993 to present; Sentinel
Financial Services Company - Chief Executive Officer, 1993 to present; Sentinel
Administrative Services Company - Chief Executive Officer, 1993 to present; ESI
- - Chairman, Chief Executive Officer, and Director, 1985 to present, President,
1986 to present; Sentinel Administrative Service Corporation - Chairman of the
Board, 1988 to 1993; Sentinel Cash Management Fund, Inc. - President, 1990 to
1993, Vice President, 1985 to 1990; American Guaranty & Trust Company -
Chairman, 1993 to present; Life Insurance Company of the Southwest - Director,
1996 to present.
RICHARD J. BORDA - DIRECTOR/TRUSTEE
P. O. Box 6091
Carmel, California 93923
Age 64
National Life - Former Vice Chairman of the Board, 1985 to 1990, Director, 1975
to 1991; Sentinel Cash Management Fund, Inc. - Chairman, 1987 to 1990, President
1985 to 1987, Director, 1985 to 1993; National Life Investment Management
Company, Inc. - Chairman, 1986 to 1990, President, 1985 to 1986, Director, 1985
to 1990; Sentinel Advisors, Inc. - Chairman, Chief Executive Officer, 1985 to
1986, Director, 1985 to 1987, 1988 to 1990; ESI - Director, 1985 to 1987, 1988
to 1990; The Monterey Institute for International Studies - Vice Chairman,
Director and Trustee, 1991 to present; Air Force Aid Society - President, 1980
to 1995.
DR. KALMAN J. COHEN - DIRECTOR/TRUSTEE
2312 Honeysuckle Court
Chapel Hill, North Carolina 27514-1711
Age 65
Distinguished Bank Research Professor Emeritus, The Fuqua School of Business,
Duke University, 1993 to present; Distinguished Bank Research Professor, 1974 to
1993; USLIFE Income Fund, Inc. - Director, 1973 to present; Sentinel Cash
Management Fund, Inc. - Director, 1981 to 1993.
RICHARD D. FARMAN - DIRECTOR/TRUSTEE
555 West Fifth Street, 29th Floor
Los Angeles, California 90013-1011
Age 60
President, Chief Operating Officer and Director, Pacific Enterprises, 1993 to
present; Chairman and Chief Executive Officer, Southern California Gas Company,
1989 to 1993; Chairman, KCET Public Service Television; Director and Executive
Committee Member, Los Angeles Area Chamber of Commerce; Director, Union Bank;
Past Chairman and Director, American Gas Association; Director, Interstate
Natural Gas Association of America.
17
<PAGE>
JOHN D. FEERICK - DIRECTOR/TRUSTEE
140 West 62nd Street
New York, New York 10023
Age 59
Fordham University School of Law - Dean, 1982 to present; Sentinel Cash
Management Fund, Inc. - Director, 1984 to 1993; American Home Products
Corporation - Director, 1987 to present; The Association of the Bar of the City
of New York - President, 1992 to 1994; New York State Commission on Government
Integrity - Chairman, 1987 to 1990..
RICHARD I. JOHANNESEN, JR. - DIRECTOR/TRUSTEE
87 Whitney Lane
Stowe, Vermont 05672
Age 61
Retired; Former Vice President and Manager - Bond Market Research Department,
Salomon Brothers Inc
ROBERT B. MATHIAS - DIRECTOR/TRUSTEE
7469 East Pine Avenue
Fresno, California 93727
Age 65
Sports Consultant; formerly Executive Director, National Fitness Foundation;
former U.S. Congressman; ProvidentMutual Investment Shares, Inc. - Director,
1990 to 1993; ProvidentMutual Growth Fund, Inc. - Director, 1990 to 1993.
DEBORAH G. MILLER - DIRECTOR
3 Bates Street
Cambridge, Massachusetts 02140
Age 46
Digital Equipment Corporation - Vice President-Americas Systems Business Unit,
1995 to present; Miller Van Buren, Inc. - Chief Executive Officer, 1994 to 1995;
Silicon Graphics - Vice President, 1991 to 1994; International Business Machines
Corporation - General Manager, 1984 to 1987.
STANLEY R. REBER~ - DIRECTOR/TRUSTEE
1600 Market Street
Philadelphia, Pennsylvania 19103
Age 52
Provident Mutual Life Insurance Company - Executive Vice President, 1988 to
present; prior thereto, Senior Vice President; President and Director of Market
Street Fund, Inc.; President, CEO and Director of Sigma American Corporation;
Director of Providentmutual Life and Annuity Company of America, Providentmutual
Investment Management Company, Providentmutual Holding Company, PML Securities
Company, Software Development Corp., and Provestco, Inc.
SUSAN M. STERNE - DIRECTOR/TRUSTEE
5 Glen Court
Greenwich, Connecticut 06830-4505
Age 50
Economic Analysis Associates, Inc. - President and Chief Economist, 1979 to
present; Sentinel Cash Management Fund, Inc. - Director, 1990 to 1993.
18
<PAGE>
JOHN M. GRAB, JR., C.P.A.~ - VICE PRESIDENT
National Life Drive
Montpelier, Vermont 05604
Age 49
Sentinel Management Company - Senior Vice President, 1993 to present; Sentinel
Administrative Service Company - Senior Vice President, 1993 to present;
Sentinel Administrative Service Corporation - Senior Vice President and Chief
Financial Officer, 1988 to 1993; ESI - Senior Vice President and Chief Financial
Officer, 1988 to present; American Institute of Certified Public Accountants;
The Vermont Society of Certified Public Accountants.
MARVIN ABER~ - VICE PRESIDENT AND TREASURER
National Life Drive
Montpelier, Vermont 05604
Age 59
Sentinel Administrative Service Company - Vice President, 1993 to present; ESI -
Vice President, 1988 to present, Treasurer, 1974 to 1988; Sentinel
Administrative Service Corporation - Vice President, 1988 to 1993; National Life
Investment Management Company, Inc., - Treasurer, 1980 to 1988; Sentinel Cash
Management Fund, Inc. - Treasurer, 1981 to 1993, Assistant Secretary, 1984 to
1993.
D. RUSSELL MORGAN~ - SECRETARY
National Life Drive
Montpelier, Vermont 05604
Age 40
National Life - Counsel, 1994 to present; Associate Counsel, 1990 to 1994,
Assistant Counsel, 1986 to 1990, Attorney 1985 to 1986; Sentinel Cash Management
Fund, Inc. - Secretary, 1986 to 1993; ESI - Counsel, 1986 to present; Sentinel
Advisors, Inc. - Counsel, 1986 to 1993; Sentinel Advisors Company - Sentinel
Financial Services Company - Sentinel Administrative Service Company - Counsel,
1993 to present; Life Insurance Company of the Southwest - Director, 1996 to
present; LSW National Holdings, Inc. - Secretary, 1996 to present.
*As of March 1, 1996, National Life, with which Mr. Merrill is affiliated,
together with National Life's affiliates, owned of record and beneficially the
number of shares of the Funds described on page 16 of this Statement of
Additional Information.
~"Interested Persons" (as defined in the 1940 Act).
The officers and directors/trustees of the Funds who are employees of
National Life, Provident Mutual, Penn Mutual, or their respective subsidiaries
do not receive any compensation from the Funds. The Company pays to each
director who is not an affiliate of the Advisor an annual fee of $16,000 plus
$1,500 for each meeting of the Board of Directors attended by the director, and
the Pennsylvania Fund pays to each such trustee an annual fee of $2,500 plus
$200 for each meeting of the Board of Trustees attended by such trustee. The
Company and the Pennsylvania Fund also reimburse directors/trustees for travel
and other out-of-pocket expenses incurred by them in connection with attending
such meetings. The aggregate remuneration paid by the Funds during the fiscal
year ended November 30, 1995 to the officers and directors/trustees of the Funds
as a group was $224,568.
The following table sets forth for the fiscal year ended November 30, 1995
compensation paid by the Company and by the Pennsylvania Fund to the
Directors/Trustees who are not affiliated with the Advisor:
19
<PAGE>
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Compensation
Compensation Benefits from Fund
Aggregate From Accrued as and Sentinel
Name of Compensation Pennsylvania Part of Fund Pennsylvania
Trustee from Company Tax-Free Trust Expense Tax-Free Trust
- ------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Kalman J. Cohen $19,875 $3,500 None $23,375
Richard J. Borda $19,875 $3,500 None $23,375
Richard D. Farman $17,375 $3,300 None $20,675
John D. Feerick $19,875 $3,500 None $23,375
Richard I. Johannesen $19,875 $3,500 None $23,375
Robert B. Mathias $19,875 $3,500 None $23,375
Deborah G. Miller* None None None None
Susan M. Sterne $18,875 $3,300 None $22,175
</TABLE>
* Ms. Miller was elected to the Board of Directors of the Company on November
16, 1995. She also has been nominated to run for election to the Board of
Trustees of the Pennsylvania Fund, but the shareholders of the Pennsylvania Fund
have not yet held their meeting at which her nomination will be voted upon.
Code of Ethics
- --------------
The Boards of the Funds have adopted a Code of Ethics pursuant to Rule 17j-1
under the 1940 Act, and the Advisor has adopted a similar Code of Ethics
(together, the "Codes of Ethics"). The Codes of Ethics significantly restrict
the personal investing activities of all employees of the Advisor.
The Codes of Ethics require that all employees preclear any personal
securities transaction (with limited exceptions, such as mutual funds and
government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable to
the proposed transaction. The substantive restrictions include a ban on
acquiring any securities in an initial public offering, and a prohibition on
profiting from short-term trading in securities. In addition, no employee may
purchase or sell any security which at the time is being purchased or sold by
any mutual fund advised by the Advisor. Furthermore, the Codes of Ethics
provide for seven day trading "blackout periods" which prohibit trading by
employees of the Advisor in proximity to periods of trading by mutual funds
managed by the Advisor in the same (or equivalent) security.
THE INVESTMENT ADVISORY CONTRACTS
The Advisor provides general supervision of the Funds' investments as well
as certain administrative and related services. As compensation in full for
services rendered under its advisory agreement, the Company will pay to the
Advisor a monthly fee determined as follows: (1) With respect to the Emerging
Growth, Growth, World and Balanced Funds: 0.70% per annum on the first $200
million of aggregate average daily net assets of such funds in the aggregate;
0.65% per annum on the next $100 million of such assets; 0.60% per annum on the
next $100 million of such assets; and 0.55% per annum on such assets in excess
of $400 million. (2) With respect to the Common Stock Fund: 0.55% per annum on
the aggregate average daily net assets of the Fund. (3) With respect to the
Bond, New York, Tax-Free Income, Government Securities and Short-Intermediate
Government Funds: 0.55% per annum on the first $200 million of aggregate average
daily net assets of such funds in the aggregate; 0.50% per annum on the next
$200 million of such assets; and 0.45% per annum on such assets in excess of
$400 million. (4) With respect to the
20
<PAGE>
Treasury Fund: 0.40% per annum on the first $300 million of aggregate average
daily net assets; and 0.35% per annum on such assets in excess of $300 million.
For the fiscal year ended November 30, 1995, such fees aggregated $10,156,497,
for the fiscal year ended November 30, 199, such fees aggregated $9,511,387, and
for the period from March 1, 1993 to November 30, 1993, such fees aggregated
$7,158,651.
Prior to March 1, 1993, the compensation for such services under the
Company's former advisory agreement provided for payment of a monthly fee based
on an annual rate of .5 of 1% of the aggregate average daily value of the net
assets of the Company up to $250 million, .475 of 1% of such value between $250
million and $375 million, .45 of 1% of such value between $375 million and $500
million, .425 of 1% of such value between $500 million and $750 million, and .4
of 1% of such value above $750 million. Such compensation is accrued on a daily
basis and paid monthly, and amounted to $1,170,779 for the period from December
1, 1992 through February 28, 1993.
As compensation in full for services rendered under its advisory agreement,
the Pennsylvania Fund pays to the Advisor a monthly fee of 0.55% per annum on
the first $50 million of aggregate average daily net assets of the Fund; 0.50%
per annum on the next $50 million of such assets; and 0.45% per annum on such
assets in excess of $100 million. For the fiscal year ended November 30, 1995,
the fiscal year ended November 30, 1994, and the period from March 1, 1993 to
November 30, 1993, the Pennsylvania Fund paid advisory fees of $182,103,
$182,041 and $141,868, respectively.
The Pennsylvania Fund's fee schedule prior to March 1, 1993 under its
previous advisory contract with PMMC was .5 of 1% of average net assets, and
fees amounted to $27,038 for the period from January 1, 1993 through February
28, 1993.
Under the Company's advisory agreement, fees are allocated to the various
Funds of the Company which share common fee schedules in proportion to such
Funds' net assets. Each advisory agreement provides a guarantee by the Advisor
that if expenses (including the management fee but excluding interest, taxes,
brokerage fees and, where permitted, extraordinary expenses) borne by a Fund in
any fiscal year exceed the expense limitations applicable to such Fund imposed
by various state securities regulations as such limitations may be lowered or
raised from time to time, the Advisor will reimburse such Fund for any excess.
Currently, the most stringent state expense limitation is 2.5% of the first
$30,000,000 of average net assets, 2.0% of the next $70,000,000 of average net
assets and 1.5% of the remaining average net assets of each Fund. The Advisor
has agreed to reimburse each Fund for any expenses in excess of such limitation
annually before publication of such Fund's Annual Report. Each of the Funds'
expenses during the past fiscal year were below the prescribed limitation and
therefore no reimbursement was necessary.
The Company's advisory agreement, which was approved by the Company's
shareholders on November 30, 1992, must be approved annually by vote of the
Board of Directors of the Company or by the vote of a majority of the
outstanding voting securities of the applicable Fund, but in either event it
must also be approved by a vote of a majority of the directors who are not
parties to the contract, or "interested persons", as defined in the 1940 Act, of
any such party cast in person at a meeting called for the purpose of voting on
such approval. With respect to the submission of the Company's advisory
agreement for approval by the shareholders, such matters shall be deemed to be
acted upon effectively with respect to any class of the Company if a majority of
the outstanding voting securities of such class vote for approval of such
matter, notwithstanding (A) that such matter has not been approved by a majority
of the outstanding voting securities of any other class affected by such matter,
and (B) that such matter has not been approved by a vote of a majority of the
outstanding voting securities of the Company.
21
<PAGE>
The Pennsylvania Fund's advisory agreement, which was approved by the
shareholders of the Fund on February 19, 1993, must be approved annually by vote
of the Board of Trustees or by the vote of a majority of the outstanding voting
securities of the Pennsylvania Fund, but in either event it must also be
approved by a vote of a majority of the trustees who are not parties to the
contract, or "interested persons", as defined in the 1940 Act, of any such party
cast in person at a meeting called for the purpose of voting on such approval.
Each advisory agreement will terminate automatically in the event of its
assignment and is terminable at any time without penalty by the Board, or, with
respect to a particular Fund, by a majority of the Fund's outstanding voting
securities on not more than 60 days' written notice to the Advisor and by the
Advisor on 60 days' written notice to the Fund.
As described in the Prospectus, with respect to the World Fund only, the
Advisor has entered into a sub-advisory agreement with the Sub-Advisor. In
accordance with this sub-advisory agreement, the Sub-Advisor provides the World
Fund with a continuous investment program consistent with its stated investment
objectives and policies. The Advisor pays to the Sub-Advisor a fee equal to the
greater of (i) 0.375% per annum of the World Fund's aggregate average daily net
assets up to $500 million, and 0.30% per annum of such net assets in excess of
$500 million, or (ii) $20,000 per year. Such fee is paid monthly in arrears.
The sub-advisory agreement must be approved annually in one of the same ways as
for the Company's advisory agreement as described above. The sub-advisory
agreement also may be terminated by either the Sub-Advisor or by action of the
Board of Directors of the Company or the shareholders of the World Fund on 60
days' written notice, without penalty, and terminates automatically in the event
of its assignment. The fees paid to the Sub-Advisor by the Advisor under the
sub-advisory agreement were $165,408, $122,288 and $23,413, for the fiscal years
ended November 30, 1995 and 1994 and for the period from March 1, 1993 through
November 30, 1993, respectively.
THE DISTRIBUTION CONTRACTS
SFSC acts as the principal underwriter of shares of the Funds, and the Funds
receive the net asset value, as determined for the purpose of establishing the
offering price, of each share sold. SFSC has advised the Funds that it allows
dealer concessions as shown in the Prospectus, except that items of a
promotional nature amounting in value to not more than $100 may be given from
time to time as a sales incentive to registered representatives. SFSC has
advised the Funds that its receipts from the sale of shares, before expenses and
after allowance by it of the dealer concession, were $127,814, $121,401 and
$128,378 for the fiscal years ended November 30, 1995 and 1994, and the period
from March 1, 1993 through November 30, 1993, respectively. During such
periods, ESI received reallowances of $2,332,813, $2,733,451 and $3,116,854,
respectively, PML Securities Company received reallowances of $799,854,
$1,102,934 and $866,142, respectively. During the period from March 27, 1995 to
November 30, 1995, Janney Montgomery Scott, Inc. and Hornor Townsend & Kent,
Inc. received reallowances of $148,021 and $156,325, respectively.
ESI was the principal underwriter for the Company's shares prior to March 1,
1993. ESI has advised the Company that its receipts from the sale of shares,
before expenses and after allowance by it of the dealer concession for the
period from December 1, 1992 through February 28, 1993 were $907,199..
ProvidentMutual Financial Services, Inc. ("PMFSI") was the principal
underwriter for the Pennsylvania Fund prior to March 1, 1993. PMFSI has advised
the Pennsylvania Fund that its receipts from the sale of shares, before expenses
and after allowance by it of the
22
<PAGE>
dealer concession for the period from January 1, 1993 through February 28, 1993
were $1,934.
The distribution contracts of the Company and the Pennsylvania Fund may be
terminated by either party thereto on 60 days' written notice, without penalty,
and they terminate automatically in the event of their assignment. The
distribution contracts must be approved annually in one of the same ways as
described above for the advisory agreements.
THE DISTRIBUTION PLANS
The Company and the Pennsylvania Fund have adopted several plans pursuant to
Rule 12b-1 under the 1940 Act. One such plan applies to the Class A shares of
the Company's Funds (other than the Treasury Fund). In addition, the Short-
Intermediate Government Fund has a separate Supplemental Distribution Plan
applicable only to it. The Pennsylvania Fund has a Distribution Plan applicable
only to it. Finally, the Class B shares of the Emerging Growth, World, Common
Stock, Balanced, Bond and Tax-Free Income Funds have adopted a Class B
Distribution Plan, effective April 1, 1996 (all of these plans are collectively
hereinafter referred to as the "Plans"). See "Distribution Plans" in the
Prospectus.
The Class A shares of each Fund (except for the Treasury Fund) paid fees
under the Class A Plan in the amounts set forth below for the periods indicated:
FUND TOTAL 12B-1 FEES
<TABLE>
<CAPTION>
Year Ended Year Ended March 1, 1993 to
November 30, 1995 November 30, 1994 November 30, 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
Common Stock $2,545,000 $1,161,000 $1,075,000
Balanced 741,076 544,500 331,000
Growth 145,000 83,500 87,300
Emerging Growth 281,355 290,100 232,338
World 132,778 96,797 21,250
Bond 196,750 141,500 98,000
Government Securities 210,478 240,000 191,400
Short-Int. Gov't (1) 48,200 - -
Tax-Free Income 211,125 211,325 136,600
New York (2) 6,666 - -
Pennsylvania 66,219 62,300 55,740
</TABLE>
(1) Commenced operations on March 24, 1995
(2) Commenced operations on March 27, 1995
The Plan applicable to the Class B shares of the Emerging Growth, World,
Common Stock, Balanced, Bond and Tax-Free Income Funds became effective on April
1, 1996. It is expected that the amounts payable to SFSC under this Class B
Plan will be equal to 1.00% of the net assets of the Class B shares of the
relevant Funds. SFSC will use such payments to recoup the cost of commissions
paid to brokers at the time of sale of the Class B shares, service fees to
brokers with respect to the Class B shares, and the same types of other
marketing expenses for which SFSC receives reimbursement under the Plans
applicable to the Class A shares.
The Boards of the Funds believe that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and for
the Funds to take
23
<PAGE>
advantage of buying opportunities without having to make unwarranted
liquidations of portfolio securities. Since SFSC receives no other compensation
from the Funds, the Boards believe it would benefit the Funds to have monies
available for the direct distribution activities of SFSC in promoting the sale
of shares of the Funds.
The Plans have been approved by the Company Boards of Directors and the
Pennsylvania Fund's Board of Trustees, including all of the directors/trustees
who are not interested persons as defined in the 1940 Act. The Plans must be
renewed annually by the Boards, including a majority of the directors/trustees
who are not interested persons and who have no direct or indirect financial
interest in the operation of the Plans. It is also required that the selection
and nomination of such directors/trustees be done by the disinterested
directors/trustees. The Plans and any distribution agreement may be terminated
at any time, without penalty, by such directors/trustees on 60 days' written
notice. SFSC or any dealer may also terminate their respective distribution
agreement at any time upon written notice.
The Plans and any distribution agreement may not be amended to increase
materially the amount spent for distribution expenses or in any other material
way without approval by a majority of the Funds' outstanding shares, and all
such material amendments to any Plan or any distribution agreement also shall be
approved by a vote of a majority of the disinterested directors/trustees, cast
in person at a meeting called for the purpose of voting on any such amendment.
SFSC is required to report in writing to the Board of Directors of the
Company and the Board of Trustees of the Pennsylvania Fund at least quarterly on
the amounts and purpose of any payments made under the Plans and any
distribution agreement, as well as to furnish the Boards with such other
information as reasonably may be requested in order to enable the Boards to make
informed determinations of whether the Plans should be continued.
THE FUND SERVICES AGREEMENTS
Sentinel Administrative Service Company ("Sentinel Service"), in accordance
with its Fund Services Agreements with the Funds, provides the Funds with
certain fund accounting, financial administration, transfer agency and
shareholder relations services. Sentinel Service performs the transfer agency
responsibilities utilizing, through Investors Fiduciary Trust Company ("IFTC"),
the computer system of DST Systems, Inc. ("DST") on a remote basis.
For these services, the Fund Services Agreements provide for the Funds to
pay to Sentinel Service fixed fees totalling $926,500 per year for fund
accounting and financial administration services. The Agreements also provide
for an annual fee for transfer agency and shareholder relations services to the
Company and the Pennsylvania Fund of $2,563,000 and $37,000, respectively, plus
amounts equal to annual rates of $15 per shareholder account in excess of
106,500 and 1,500, respectively, in each case as of the last day of the month
preceding the installment due date. Each Fund also is responsible for the
charges for remote access to the computer system of DST. Generally, this is a
fixed annual charge per shareholder account, plus certain out-of-pocket
expenses, minus certain credits. The fixed fees are subject to increase under
inflation clauses for fiscal years beginning December 1, 1994, and thereafter,
to the extent approved by the Board of Directors or Board of Trustees. Fees
are payable monthly in arrears.
Total fees payable to Sentinel Service under the Fund Services Agreements
for the years ended November 30, 1995 and 1994 and for the period from March 1,
1993 through November 30, 1993 were $3,470,333, $3,358,000 and $2,518,500,
respectively. Total fees payable to Sentinel Service's predecessor under the
Company's
24
<PAGE>
prior Fund Services Agreement for the period from December 1, 1992 through
February 28, 1993 were $482,239.
Sentinel Service is a Vermont general partnership of which affiliates of
National Life, Provident Mutual and Penn Mutual are the general partners.
The Company's Fund Services Agreement was approved by the Company's
shareholders on November 30, 1992, and the Pennsylvania Fund's Fund Services
Agreement was approved by that Fund's shareholders on February 19, 1993. The
agreements were approvedd by the Company's Board of Directors and the
Pennsylvania Fund's Board of Trustees on August 13, 1992 and August 14, 1992,
respectively. Each agreement must be approved annually by vote of the Board or
by the vote of a majority of the outstanding voting securities of each Fund, but
in either event it must also be approved by a vote of a majority of the
directors/trustees who are not parties to the contract, or interested persons,
as defined in the 1940 Act, of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Fund Services Agreements
will terminate automatically in the event of their assignment and are terminable
at any time without penalty by the applicable Board or, as to a particular Fund,
by a majority of the applicable Fund's outstanding voting securities on not more
than 60 days' written notice to Sentinel Service and by Sentinel Service on 60
days' notice to the Fund.
PORTFOLIO TRANSACTIONS
AND BROKERAGE COMMISSIONS
The Funds' policy in the case of listed securities is to place its orders
with firms that are members of a stock exchange on which such securities are
listed or traded and in the case of securities traded in the over-the-counter
market to deal directly with dealers who are primary market makers in such
securities, without the use of a broker unless the Funds can obtain better price
or execution through the use of a broker. Purchases are made for investment and
not for trading purposes, except for the Bond Fund where trading may be an
important factor. Subject to the direction and control of the Boards and in
accordance with its advisory agreements, the Advisor supervises the investments
of the Funds and, as an essential feature thereof, places orders for the
purchase and sale of portfolio securities and supervises their execution,
including negotiating the amount of the commission rate paid, in each case at
prices it believes to be the best then available, taking into consideration such
factors as price, commission, size of order, difficulty of execution and skill
required of the executing broker-dealer as well as the extent to which a broker
capable of satisfactory execution may provide research information and
statistical and other services to the Advisor. Sales of shares of the Funds may
also be considered as a factor in the selection of broker-dealers to execute
portfolio transactions for the Funds, subject to the conditions that
commissions paid to such broker-dealers be no higher than would otherwise be
paid, and that the prices be, in the judgment of the Advisor, the best then
available.
In making such purchases and sales, the brokerage commissions are paid by
the Funds. The Funds may also buy or sell securities from, or to, dealers
acting as principals.
Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), which was enacted by Congress in connection with the elimination of fixed
commission rates on May 1, 1975, provides that, except as agreements such as
investment advisory contracts otherwise provide, money managers such as the
Advisor will not be deemed to have acted unlawfully or to have breached a
fiduciary duty if, subject to certain conditions, a broker-dealer is paid in
return for brokerage and research services an amount of commission for effecting
transactions for accounts, such as the Funds, in excess of the amount of
commission another broker-dealer would charge for effecting the transaction. In
order to cause the Funds to pay such greater commissions,
25
<PAGE>
the Advisor has to determine in good faith that the greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the broker-dealer viewed in terms of either a particular transaction
or the Advisor's overall responsibilities to the Funds and to its other clients.
Brokerage and research services, as provided in Section 28(e) of the 1934
Act, include advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts and effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody).
Although research and market and statistical information from brokers and
dealers can be useful to the Funds and to the Advisor, it is the opinion of the
management of the Funds that such information is only supplementary to the
Advisor's own research effort since the information must still be analyzed,
weighed and reviewed by the Advisor's staff.
Except for implementing the policy stated above, there is no commitment to
place portfolio transactions with brokers or dealers who provide investment
research. The Advisor has advised the Funds that it is not feasible to assign
any precise value to services provided by such brokers and dealers to it, nor
does the use of such services reduce its expense by any measurable or
significant amount. For the years ended November 30, 1995, 1994, and 1993, the
Funds paid total brokerage commissions of $1,102,148, $909,949, and $594,064,,
respectively. Brokerage commissions paid by each Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
Fund 11/30/95 11/30/94 11/30/93
- ---- --------- --------- ---------
<S> <C> <C> <C>
Common Stock $ 650,368 $ 414,244 $ 291,505
Balanced 109,898 115,112 69,761
Growth 108,107 105,150 20,662
Emerging Growth(1) 126,348 131,104 161,872
World(1) 107,427 144,339 50,264
Bond --- --- ---
Government Securities --- --- ---
Short-Int. Gov't (2) --- N/A N/A
Treasury (1) --- --- N/A
Tax-Free Income --- --- ---
New York (3) --- N/A N/A
Pennsylvania (4) --- --- ---
</TABLE>
(1) Commenced operations on March 1, 1993.
(2) Commenced operations on March 24, 1995.
(3) Commenced operations on March 27, 1995.
(4) For the fiscal years ended November 30, 1995 and 1994 and the eleven months
ended November 30, 1993.
Such commissions were allocated on the basis of research and statistical or
other services provided by the dealer, although selling group dealers may have
participated therein. Of the total commissions paid by the Funds, approximately
100% was allocated in 1995, 1994, and 1993 to brokers or dealers whose
furnishing of research information was a factor in their selection.
26
<PAGE>
PORTFOLIO TURNOVER
Purchases for the Emerging Growth, Growth, Common Stock, World, Balanced and
Pennsylvania Funds are made for long-term investment, and not for short-term
trading profits. However, during rapidly changing conditions, there necessarily
may be more portfolio changes than in a more stable period and these may result
in short-term gains or short-term losses. The rates of portfolio turnover for
each of the Funds during the fiscal years ended November 30, 1995, 1994 and
1993, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Fund 11/30/95 11/30/94 11/30/93
- ---- ---------- ---------- ----------
<S> <C> <C> <C>
Common Stock 22% 15% 9%
Balanced 110% 66% 72%
Growth 84% 58% 12%
Emerging Growth(1) 79% 46% 61%
World(1) 32% 30% 66%
Bond 237% 133% 147%
Government Securities 367% 149% 97%
Short-Int. Gov't(2) 77% N/A N/A
Treasury(1) N/A N/A N/A
Tax-Free Income 112% 92% 39%
New York(3) 43% N/A N/A
Pennsylvania(4) 80% 56% 23%
</TABLE>
(1) Commenced operations on March 1, 1993.
(2) Commenced operations on march 24, 1995.
(3) Commenced operations on March 27, 1995.
(4) For the fiscal years ended November 30, 1995 and 1994 and the eleven months
ended November 30,1993.
In pursuit of the investment objectives of the Bond, Government Securities,
Short-Intermediate Government, Tax-Free Income and New York Funds, it is
expected that assets will be managed actively. In order to maximize income and
protect the income stream or improve the quality of the portfolio, in light of
market and economic conditions as interpreted or anticipated by the Advisor,
these Funds' portfolios will be monitored constantly and will be adjusted when
deemed appropriate in furtherance of the Funds' investment objectives.
Portfolio turnover is the ratio of the lesser of annual purchases or sales of
portfolio securities to average monthly market value, not including short-term
securities. One of the requirements under the Code for qualification as a
regulated investment company is that less than 30% of a Fund's gross income may
be derived from gains from the sale or disposition of securities held for less
than three months. Accordingly, a Fund may be restricted in effecting portfolio
turnover transactions with regard to items that have been held in such Fund for
less than three months.
CAPITALIZATION
Shares of the Company's common stock and shares of beneficial interest in
the Pennsylvania Fund are fully paid and non-assessable. Each such share is
freely assignable to another bona fide investor by way of pledge (as, for
example, for collateral purposes), gift, settlement of an estate and, also, by
an investor who has held such Fund shares for not less than 30 days. Each share
of the Company is entitled to one vote per dollar of net asset value per share,
on matters on which all Funds of the Company vote as a single class. Each share
of the Pennsylvania Fund entitles the holder to one vote for all purposes.
27
<PAGE>
The proceeds from the sale of shares of each Fund or class of shares of the
Company and all income, earnings and profits therefrom irrevocably appertain to
the Fund or class of shares. Each such Fund or class of shares records all
liabilities (including accrued expenses) in respect of such Fund or class of
shares, as well as a share of such liabilities (including general liabilities of
the Company) in respect to two or more Funds or classes of shares, in proportion
to their average net assets, or in proportion to the number of their respective
shareholders. The Company's Board has adopted a "Rule 18f-3 Plan" under which
the methods of allocating income and expenses among classes of shares of each
Fund which has both Class A and Class B shares is specified, and the Company
intends to comply fully with the provisions of Rule 18f-3 under the 1940 Act in
allocating income and expenses among the classes of Funds offering both Class A
and Class B shares. If any reasonable doubt exists as to the Fund or class of
shares to which any asset or liability appertains, the Board may resolve such
doubt by resolution.
In the case of dissolution or liquidation of the Company, the shareholders
of each Fund of the Company are entitled to receive ratably per share the net
assets of such Fund, with any general assets of the Company distributed ratably
per share, regardless of the Fund.
Voting rights are non-cumulative, meaning that the holders of more than 50%
of the shares voting for the election of directors/trustees can elect 100% of
the directors/trustees being voted upon if they choose to do so, and, in such
event the holders of the remaining minority of the shares voting for the
election of directors/trustees will not be able to elect any person or persons
to the Board. As of March 1, 1996, none of the approximately 100,398
shareholders owns as much as 5% of the voting stock of any Fund except National
Life and its affiliates, whose holdings are set forth on page __ of this
Statement of Additional Information, and except for the following shareholders
of the New York Fund: Mr. Louis P. Dicerbo, 261 Madison Avenue, New York, New
York 10016-2303 - 127,417.778 shares amounting to 27.50% of the class; Ms.
Arlene Federico, 39 Fruitledge Road, Brookville, New York 11545-3315 -
50,895.374 shares amounting to 11% of the class; and Ms. Donna Bernstein, 15
Parkway Drive, Roslyn Heights, New York 11577-2705 - 30,113.821 shares amounting
to 6.50% of the class.
HOW TO PURCHASE SHARES
AND
REDUCE SALES CHARGES
Shares of the Funds may be purchased at the public offering price from any
authorized investment dealer as described in the Prospectus. The public
offering price of Class A shares, which are offered by every Fund, is the sum of
the current net asset value per share plus a sales charge which ranges from 5.0%
to 0% of the purchase price. The public offering price of Class B shares, which
are offered by the Common Stock, Balanced, Emerging Growth, World, Bond, and
Tax-Free Income Funds, is equal to the current net asset value per share. A
contingent deferred sales charge ("CDSC") may apply to redemptions of Class B
shares, or to redemptions of Class A shares where the initial sales charge was
zero based on a purchase of $1,000,000 or more. See "How to Purchase Shares" in
the Prospectus.
THE GROUP PURCHASE PROGRAM - Clients of a single registered representative
--------------------------
or group of affiliated registered representatives who make purchases by opening
new accounts within a 60-day period and whose funds for such purchases all
originate from a single other source may aggregate such purchases for purposes
of determining the applicable sales charge level or CDSC schedule for such
purchases.
28
<PAGE>
ISSUANCE OF SHARES AT NET ASSET VALUE
Subject to the applicable provisions of the 1940 Act, certain investors may
purchase Class A shares of the Funds at net asset value. Such investors are
listed in the Prospectus. See "How to Purchase Shares - Reduced Sales Charges"
in the Prospectus.
HOW TO REDEEM SHARES
The Funds normally will buy back your shares on demand on any business day
(as defined below). Class A shares are repurchased at current net asset value;
a CDSC may be payable on redemptions of Class B shares, and will be deducted
from the redemption proceeds. For further information, please refer to the
Prospectus.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund or class of shares is computed by
dividing the total value of the assets of that Fund or class of shares, less its
liabilities, by the total number of such Fund's or class of shares' outstanding
shares. Equity securities which are traded on a national securities exchange
are valued at the last reported sale price each business day at the regular
close of trading, currently 4:00 p.m., Eastern time. Equity securities for
which there were no sales during the day are valued at the mean between the
latest available bid and asked prices. Fixed-income securities are valued daily
on the basis of valuations furnished by a pricing service which determines
valuations for normal institutional-sized trading units of debt securities,
without exclusive reliance upon quoted prices. These valuations by the pricing
service are believed to reflect more accurately the fair market value of such
securities. Net asset value is calculated once each business day, at 4:00 p.m.
Eastern time, and becomes effective immediately upon its determination. Orders
to purchase shares of the Funds received by dealers prior to 4:00 p.m., Eastern
time will be confirmed on the basis of such closing price, provided they are
received by the Distributor prior to the close of its business day. Orders
received by dealers after 4:00 p.m., Eastern time will be confirmed on the same
basis as previously stated with respect to the next business day. "Business
day" means a day on which the New York Stock Exchange is open. The New York
Stock Exchange is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Treasury Fund values its portfolio securities based on their amortized
cost in accordance with SEC regulations. The amortized cost method of valuation
involves valuing a security at its cost at the time of purchase and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. During such periods the yield to investors in the Treasury Fund
may differ somewhat from that obtained in a similar investment company which
uses mark-to-market value for all of its portfolio securities. For example, if
the use of amortized cost resulted in a lower (higher) aggregate portfolio value
on a particular day, a prospective investor in the Treasury Fund would be able
to obtain a somewhat higher (lower) yield than would result from investment in
such a similar company which utilizes mark-to-market values and existing
investors would receive less (more) investment income. The purpose of this
method of calculation is to attempt to maintain a constant net asset value per
share of $1.00.
In accordance with the SEC rule permitting the use of the amortized cost
method of valuation, the Treasury Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, and must purchase instruments having
remaining maturities of 397 days (13 months) or less. In addition, the
Directors of the Company have established
29
<PAGE>
procedures designed to stabilize, to the extent reasonably possible, the
Treasury Fund's price per share as computed for the purpose of sales and
redemptions at $1.00. The Company's Directors will review periodically the
Treasury Fund's portfolio holdings to determine whether a deviation exists
between the net asset value calculated using market quotations and that
calculated on an amortized cost basis. In the event the directors determine that
a deviation exists which may result in material dilution or other unfair results
to existing shareholders, the Treasury Fund will take such corrective action as
it regards as necessary and appropriate, including (i) the reduction of the
number of outstanding shares of the Treasury Fund by having each shareholder
proportionately contribute shares to the Treasury Fund's capital, (ii) the sale
of portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, (iii) the withholding of dividends or
(iv) the establishment of a net asset value per share by using available market
quotations. If the number of outstanding shares is reduced in order to maintain
a constant net asset value of $1.00 per share, the shareholders will contribute
proportionately to the Treasury Fund's capital the number of shares which
represent the difference between the amortized cost valuation and the market
valuation of the portfolio. Each shareholder will be deemed to have agreed to
such contribution by such shareholder's investment in the Treasury Fund.
Since the net income of the Treasury Fund is determined and declared as a
dividend immediately prior to each time the asset value of the Treasury Fund is
determined, the net asset value per share of the Treasury Fund normally remains
at $1.00 per share immediately after each such dividend declaration. Any
increase in the value of a shareholder's investment in the Treasury Fund,
representing the reinvestment of dividend income, is reflected by an increase in
the number of shares of the Treasury Fund in that shareholder's account and any
decrease in the value of a shareholder's investment may be reflected in the
number of shares in the account. See "Taxes" below.
COMPUTATION OF MAXIMUM OFFERING AND REDEMPTION PRICES
AT NOVEMBER 30, 1995
Class A Shares:
(Reduced offering prices apply on purchases of $100,000 or more of shares of the
Funds, as described in the prospectus.)
<TABLE>
<CAPTION>
==========================================================================================
Common Emerging
Stock Balanced Growth Growth World
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Net assets $1,057,943,793 $267,102,751 $60,446,369 $89,321,170 $47,701,988
Shares outstanding 30,044,511 15,864,676 3,570,991 17,190,516 3,462,116
Net asset value per
share (redemption
price) $ 35.21 $ 16.84 $ 16.93 $ 5.20 $ 13.78
Maximum offering
price per share* $ 37.06 $ 17.73 $ 17.82 $ 5.47 $ 14.51
==========================================================================================
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
===============================================================================
Government Short-Int.
Bond Securities Gov't. Treasury
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
Net assets $108,754,551 $108,100,188 $28,416,665 $80,663,911
Shares outstanding 16,767,832 10,491,866 2,887,563 80,663,911
Net asset value per
share (redemption
price) $ 6.49 $ 10.30 $ 9.84 $ 1.00
Maximum offering price* $ 6.83 $ 10.84 $ 9.94 $ 1.00
_______________________________________________________________________________
</TABLE>
================================================================================
<TABLE>
<CAPTION>
===================================================================
Tax-Free
Income New York Pennsylvania
Fund Fund Fund
<S> <C> <C> <C>
Net assets $110,505,745 $5,332,403 $34,975,097
Shares outstanding 8,115,609 455,023 2,610,707
Net asset value per
share (redemption
price) $ 13.62 $ 11.72 $ 13.40
Maximum offering price* $ 14.34 $ 12.34 $ 14.11
__________________________________________________________________
</TABLE>
*For all Funds except the Treasury Fund and the Short-Intermediate Government
Fund, the maximum offering price is 1000/950 times the net asset value per
share. For the Treasury Fund, the maximum offering price per share is equal to
the net asset value per share. For the Short-Intermediate Government Fund, the
maximum offering price is the net asset value per share times 1000/990.
Class B Shares:
- --------------
In the case of Class B shares, which are offered for the Common Stock,
Balanced, Emerging Growth, World, Bond, Treasury and Tax-Free Income Funds, the
maximum offering price is equal to the net asset value per share.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends, as explained in the Prospectus, are paid annually for the Class A
and B shares of the Emerging Growth, World and the Growth Funds, quarterly for
the Class A and Class B shares of the Balanced and Common Stock Funds, and
monthly for the Class A and B shares of the Bond, Tax-Free Income, Government
Securities, Short-Intermediate Government, Pennsylvania and New York Funds.
Distributions of any net realized gains on sales of investments of any Fund for
a fiscal year ordinarily are paid in the month of December immediately following
the November 30th fiscal year-end. Dividends for the Treasury Fund are declared
daily and paid monthly, as described in the Prospectus.
31
<PAGE>
Except where the shareholder, in the manner described below, has elected
otherwise, any income dividends or capital gains distributions of a Fund will be
made in shares of such Fund at the net asset value at the close of business on
the designated record date, resulting in the automatic reinvestment of cash
dividends and distributions. Such an acquisition of shares involves no sales
charge. Unless the shareholder is participating in a Systematic Withdrawal
Plan, the shareholder may elect to receive in cash either both income dividends
and capital gains distributions or only income dividends. Such election may be
made by written notice to Sentinel Service and will take effect for
distributions for which the record date is more than ten days after the receipt
by Sentinel Service of such written notice. The election will remain in effect
until revoked by similar notice.
TAXES
General
- -------
Each Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. Under that
section, if it so qualifies, a Fund will not be subject to federal income tax on
the part of its net ordinary income and net realized capital gains which it
distributes to Class A and Class B shareholders. The Company intends to
distribute substantially all of such income.
As discussed in the Prospectus, the Company consists of eleven separate
Funds. Each such Fund is treated as a separate corporation for federal income
tax purposes. Each such Fund is thus considered to be a separate entity in
determining its treatment under the rules for RICs described in the Prospectus.
Losses in one Fund do not offset gains in another Fund, and the requirements
(other than certain organizational requirements) for qualifying for RIC status
are determined at the Fund level rather than at the Company level.
Dividends paid by a Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred to
hereafter as "ordinary income dividends"), are taxable to shareholders as
ordinary income for federal income tax purposes, except that "exempt-interest
dividends" (as defined in Section 852(b)(5) of the Code) not subject to federal
income tax are expected to be paid by the Tax-Free Income Fund, "exempt-interest
dividends" not subject to either federal income tax or Pennsylvania personal
income tax are expected to be paid by the Pennsylvania Fund, and "exempt-
interest dividends" not subject to either federal income tax or New York State
and City personal income tax are expected to be paid by the New York Fund, as
described in the Prospectus. Distributions made from net long-term capital
gains over short-term capital losses (hereinafter referred to as "capital gain
dividends") are taxable to shareholders as long-term capital gains for federal
income tax purposes, regardless of the length of time the shareholder has owned
such Fund's shares. A capital gain dividend with respect to shares held for six
months or less, however, will cause any loss on a subsequent sale or exchange of
such shares to be treated as long-term capital loss to the extent of such long-
term capital gains dividend. Distributions in excess of a Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder for federal income tax purposes (assuming the shares are held as a
capital asset).
With the exception of exempt-interest dividends paid by the Tax-Exempt
Funds, dividends are taxable to shareholders for federal income tax purposes
even though they are reinvested in additional shares of the Funds. Not later
than 60 days after the close of its taxable year, each Fund will provide its
shareholders with a written notice designating the amount of any capital gain
dividends, tax-exempt dividends and the portion of the Fund's ordinary income
dividends eligible for the dividends received deduction allowed to corporations
under the Code. Distributions by the Tax-Exempt Funds, however, whether from
exempt-interest income, ordinary income or capital gains, will not be eligible
for the
32
<PAGE>
dividends received deduction allowed to corporations under the Code. For this
purpose, the Funds will allocate any dividends eligible for dividends received
deduction between the Class A and Class B shareholders according to a method
(which they believe is consistent with the 18f-3 Plan filed with the SEC) which
authorizes the issuance and sale of multiple classes of shares) that is based on
the gross income allocable to the Class A and Class B shares during the taxable
year, or such other method as the Internal Revenue Service may prescribe. If a
Fund pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as having been
paid by the RIC and received by its shareholders on December 31st of the year in
which the dividend was declared.
If the value of assets held by the Treasury Fund declines, the Board of
Directors may authorize a reduction in the number of outstanding shares in
shareholders' accounts so as to preserve a net asset value of $1.00 per share.
After such a reduction, the basis of eliminated shares will, for federal income
tax purposes, be added to the basis of shareholders' remaining Fund shares, and
any shareholders disposing of shares at that time may recognize a capital loss.
Distributions, including distributions reinvested in additional shares of the
Fund, will nonetheless be fully taxable for federal income tax purposes, even if
the number of shares in shareholders' accounts has been reduced as described
above.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Company, or who, to the
Company's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities,
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisors concerning the applicability of the United States
withholding tax.
Dividends and interest received by the World Fund (and to a lesser extent,
some of the other Funds) may give rise to withholding and other taxes imposed by
foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of the World Fund may
be able to claim United States foreign tax credits with respect to such taxes,
subject to certain conditions and limitations contained in the Code. If more
than 50% in value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be eligible, and
intends, to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their United States income tax returns as gross
income, treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their United States income taxes. No
deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to United States
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
United States tax for the foreign taxes treated as having been paid by such
shareholder. Additionally, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. The World Fund
(and other Funds to the extent applicable) will
33
<PAGE>
report annually to shareholders the amount per share of such withholding taxes.
For this purpose, the World Fund will allocate foreign taxes and foreign source
income between the Class A and Class B shares according to a method similar to
that described above for the allocation of dividends eligible for the dividends
received deduction.
If a shareholder exercises an Exchange Privilege as described below within
90 days of acquiring such shares, then the loss such shareholder can recognize
on the exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Company reduces any sales charge such shareholder would have
owed the Company for the shares of the new Fund in the absence of the Exchange
Privilege. Instead, such sales charge will be treated as an amount paid for the
new shares.
A loss realized on a sale or exchange of shares of a Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
The Code requires each Fund to pay a non-deductible 4% excise tax to the
extent it does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains and
foreign currency gains, determined on a November 30th year end, plus certain
undistributed amounts from previous years. The Company anticipates that the
Funds will make sufficient timely distributions to avoid the imposition of the
excise tax.
At November 30, 1995, the Balanced, Bond, Tax-Free Income, New York,
Government Securities and Short-Intermediate Government Funds had capital loss
carryforwards for federal income tax purposes of $124,351, $3,436,516, $143,804,
$51,369, $3,586,497 and $1,090,062, respectively.
Tax-Exempt Funds
- ----------------
The Tax-Exempt Funds intend to continue to qualify to pay exempt-interest
dividends. The relevant Code provision states that if, at the close of each
quarter of the respective Fund's taxable year, at least 50% of the value of its
total assets consists of obligations exempt from federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), such Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by a Tax-Exempt Fund which are
attributable to interest on tax-exempt obligations and designated by the Company
as exempt-interest dividends in a written notice mailed to shareholders within
60 days after the close of the Fund's taxable year. For this purpose, the Tax-
Free Income Fund will allocate interest from tax-exempt obligations (as well as
ordinary income, capital gains and tax preference items discussed below) between
the Class A and Class B shareholders according to a method (which it believes is
consistent with the 18f-3 Plan filed with the SEC which authorizes the issuance
and sale of multiple classes of shares) that is based on the gross income
allocable to the Class A and Class B shares during the taxable year, or such
other method as the Internal Revenue Service may prescribe. Exempt-interest
dividends may be treated by shareholders for all purposes as items of interest
excludable from their federal gross income under Code Section 103(a). Exempt-
interest dividends are included, however, in determining the portion, if any, of
a person's social security benefits and railroad retirement benefits subject to
federal income taxes. Interest on indebtedness incurred or continued to purchase
or carry shares of a RIC paying exempt-interest dividends will not be deductible
by the shareholder for federal income tax purposes to the extent attributable to
exempt-interest dividends. Each shareholder is advised to consult a tax advisor
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if such shareholder were to be treated as a "substantial
user" or
34
<PAGE>
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds", if any, held by the Tax-Exempt Funds.
Under the Revenue Reconciliation Act of 1993, all or a portion of the Tax-
Exempt Funds' gain from the sale or redemption of tax-exempt obligations
purchased at a market discount will be treated as ordinary income rather than
capital gain. This rule may increase the amount of ordinary income dividends
received by shareholders of these Funds. In addition, any loss upon the sale or
exchange of Tax-Exempt Fund shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder.
The Code subjects interest received on certain otherwise tax-exempt
securities to an AMT. The AMT applies to interest received on private activity
bonds issued after August 7, 1986. Private activity bonds are bonds which,
although tax-exempt, are used for purposes other than those generally performed
by governmental units and which benefit non-governmental entities (e.g., bonds
used for industrial development or housing purposes). Income received on such
bonds is classified as an item of "tax preference" which could subject investors
in such bonds, including shareholders of the Funds, to an AMT. The Tax-Exempt
Funds may purchase such private activity bonds, and will report to shareholders
within 60 days after the Tax-Exempt Funds' respective taxable year-ends the
portion of such Fund's dividends declared during the year which constitutes an
item of tax preference for AMT purposes. The Code further provides that
corporations are subject to an AMT based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings", which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by a
Tax-Exempt Fund will be included in adjusted current earnings, a corporate
shareholder may be required to pay the AMT on exempt-interest dividends paid by
such Funds.
The Code provides that every person required to file a tax return must
include on such return the amount of exempt-interest dividends received from the
Tax-Exempt Funds during the taxable year.
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's AMT income (computed without regard to the alternative tax net
operating loss deduction) at a rate of $12 per $10,000 (0.12%) of AMT income in
excess of $2,000,000. The tax is imposed for taxable years beginning after
December 31, 1986 and before January 1, 1996, unless extended. The tax will be
imposed even if the corporation is not required to pay an AMT because the
corporation's regular income tax liability exceeds its minimum tax liability.
The Code provides, however, that RICs (such as the Tax-Exempt Funds) are not
subject to the Environmental Tax. However, exempt-interest dividends paid by
the Tax-Exempt Funds that create alternative minimum taxable income for
corporate shareholders (as described above) may subject corporate shareholders
of such Funds to the Environmental Tax.
Tax Treatment of Options and Futures Transactions
- -------------------------------------------------
The Tax-Exempt Funds may purchase or sell financial futures contracts and
call and put options on financial futures contracts. In general, unless an
election is available to a fund or an exception applies, such options and
futures contracts that are "Section 1256 contracts" will be "marked to market"
for federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as having been sold for its
fair market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Funds may alter the timing and character of distributions to
shareholders. The mark-to-market rules
35
<PAGE>
outlined above, however, will not apply to certain transactions entered into by
the Funds solely to reduce the risk of changes in price or interest rates with
respect to its investments.
A forward foreign exchange contract held by the World Fund that is a Section
1256 contract will be marked to market, as described above. However, the
character of gain or loss from such a contract will generally be ordinary under
Code Section 988. The World Fund may, nonetheless, elect to treat the gain or
loss from certain forward foreign exchange contracts as capital. In this case,
gain or loss realized in connection with a forward foreign exchange contract
that is a Section 1256 contract will be characterized as 60% long-term and 40%
short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Tax-Exempt Funds' transactions in financial futures contracts or
options thereon and the World Fund's transactions in forward foreign exchange
contracts. Under Section 1092, the Tax-Exempt Funds may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in financial futures contracts or options thereon. The World Fund likewise may
be required to postpone recognition of losses in connection with its forward
foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Tax-Exempt
Funds may be restricted in effecting closing transactions within three months
after entering into an options or financial futures contract.
Foreign Currency Transactions
- -----------------------------
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether a Fund qualifies as a RIC.
It is currently unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options, foreign currency futures
and forward foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the World Fund.
Under the Code Section 988, special rules are provided for certain
transactions in a currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U. S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the World Fund may
elect capital gain or loss treatment for such transactions. In general,
however, Code Section 988 gains or losses will increase or decrease the amount
of the World Fund's investment company taxable income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable year,
the World Fund would not be able to make any ordinary income dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, and resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder's basis in World Fund shares
(assuming the shares were held as a capital asset). These rules, however, will
not apply to certain transactions entered into by the World Fund solely to
reduce the risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions,
36
<PAGE>
reference should be made to the pertinent Code section and the Treasury
Regulations promulgated thereunder. The Code and the Treasury Regulations are
subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government Securities. State law varies as to
whether dividend income attributable to U.S. Government Securities is exempt
from state income taxes.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment in
the Funds.
SHAREHOLDER SERVICES
--------------------
Open Account An open account is established automatically for each new
------------
investor, unless elected otherwise, in which all income dividends and any
capital gains distributions are reinvested in additional shares, without charge,
at the then current net asset value. Purchases made in this account will be
made at the offering price on the day federal funds are available to the Funds
as described in the Prospectus.
The Funds reserve the right at any time to vary the initial and subsequent
investment minimums of any Fund and to reject any purchase order.
Policyowners of National Life, Provident Mutual or Penn Mutual who invest
policy dividends may open an account in any of the Funds with a minimum initial
purchase of $50 or more of policy dividends and subsequent assignment of
dividends to the Funds.
Stock certificates will be issued upon written request and without charge.
Except for confirmation of purchases made under the Open Account, the cost
of these shareholder services are borne by the Funds.
Automated Clearing House ("ACH") The ACH Network expedites the transfer of
--------------------------------
monies by electronically transmitting funds between member financial
institutions. To take advantage of this convenient fund transfer method, you
must provide Sentinel Service with a pre-designated destination. There is no
charge for this service.
Distribution Options Shareholders of the Funds may elect to reinvest
--------------------
automatically their income dividends and any capital gains distributions in
additional full and fractional shares of any one of the other Funds at the net
asset value of the selected Fund at the close of business on the valuation date
for the dividend, without the payment of any charge. Before exercising this
option, shareholders should read the portions of the Prospectus relating to the
selected Fund's objectives and policies. The target and original accounts for
dividends must be in different Funds.
Automatic Investment Plan See the Prospectus for information and an
-------------------------
application. The minimum initial investment and subsequent investment is $50.
Telephone Investment Service See the Prospectus for information and an
----------------------------
application.
37
<PAGE>
Check Writing Service (Bond, Government Securities, Short-Intermediate
----------------------------------------------------------------------
Government, Treasury, Tax-Free Income, New York and Pennsylvania Funds) A
- ------------------------------------------------------------------------
special feature of the Class A shares of these Funds is the Check Writing
privilege available through IFTC. Any shareholder who would like to draw checks
on his account should check the box on the application captioned "Check Writing
Service" or subsequently, make a written request to the Funds. Checks then will
be provided by IFTC. These checks may be made payable in any amount not less
than $500, except for the Treasury Fund which has a minimum amount of not less
than $250. Withdrawals by check may not be made until shares have been in the
account for at least fifteen (15) days. The price at which shares will be
redeemed to cover a check will be the net asset value determined on the day the
check clears. Potential fluctuations in net asset value of the Funds' shares
should be taken into account when writing checks. If a dividend or capital
gains distribution is paid during the period between writing and clearing of a
check, the shareholder will be entitled to the dividend or distribution, but the
net asset value of the shares will be reduced by the amount of the dividend
payment. Because shareholders cannot determine the exact redemption price of
their shares at the time a check is written, closing an account through check
writing is not possible.
There is no fee for check writing, but, upon notice, a fee for this service
may be charged in the future. Fees are charged for stop payments, insufficient
funds or other valid reasons.
Exchange Privilege Any shareholder may redeem an investment, in whole or in
------------------
part, at any time and simultaneously use the proceeds to purchase the same class
of shares of another of the Funds, without paying an additional sales charge,
provided the shares to be redeemed have been registered in the shareholder's
name, the shares being exchanged have been in the account for a minimum of 15
days (90 days, in the case of funds of less than $1 million initially invested
in the Short-Intermediate Government Fund or exchanged into such Fund from funds
initially invested in the Treasury Fund), and the minimum initial purchase
requirement of the Fund to be purchased is met. This privilege also permits a
shareholder whose financial needs have changed to transfer an investment from a
National Life Variable Annuity account (presently the only such entity in the
Variable Annuity Account I). Such transfers from a National Life Variable
Annuity account are made without a sales charge on the basis of respective net
asset values after payment of a fee of $75 (in addition to any applicable
transfer taxes) to Sentinel Service for such transfer.
An exchange is a taxable transaction for income tax purposes and any gain or
loss realized is recognizable for such purposes.
Reinstatement Privilege Shareholders who have redeemed all or part of their
-----------------------
shares may reinvest all or part of the redemption proceeds at the current net
asset value without charge if a written request is received or is postmarked
within one year after the redemption. Short-Intermediate Government Fund
shareholders who have held their shares for 90 days or less, however, may only
use the reinstatement privilege to reinvest in the Short-Intermediate Government
Fund. The privilege may be exercised only once by a shareholder as to any of
the Funds except where the sole purpose of the transaction is to transfer the
shareholder's interest or a portion thereof in the Funds to a trustee or
custodian for such shareholder's Self-Employed Retirement Plan or IRA. If the
shareholder realizes a gain on redemption, the transaction is taxable and
reinvestment will not alter any capital gains tax payable. If the shareholder
realizes a loss on redemption and subsequently uses the reinstatement privilege,
some or all of the loss may not be allowed as a tax deduction depending upon the
amount reinvested.
If the reinstatement is made for the purpose of effecting a rollover into an
IRA, as described in Section 408(d)(3) of the Code, of a distribution from a tax
sheltered retirement plan which had been invested in shares of the Funds, such
reinvestment of
38
<PAGE>
redemption proceeds may be made any time within 60 days from the date on which
the investor received the distribution.
TAX-DEFERRED RETIREMENT PLANS
IRAs Section 408 of the Code permits certain taxpayers having earned income
----
to deduct up to $2,000 per year for contributions to an IRA. Consultation with
an attorney or qualified tax advisor is recommended. All dividends and
distributions are reinvested in additional shares at the net asset value.
Distribution may begin at age 59 1/2 and must begin by April 1st of the year
following the year in which you reach age 70 1/2. If distribution, other than
for death or disability, is made from the account before age 59 1/2, the amount
of a distribution is subject to a penalty tax, as is failure to commence
distribution as previously discussed. Distributions received are subject to
ordinary income tax.
To establish an IRA, you may request American Guaranty & Trust Company
("AG&T"), a Delaware trust company which is an affiliate of the Advisor, to act
as Custodian and to purchase shares of the Funds. This may be done by using
Internal Revenue Service Form 5305-A as adapted for this purpose, available from
SFSC. Shares of the Company also may be purchased under other IRA's which
qualify under Section 408 of the Code.
An IRA may be established with an initial contribution of $1,000.
Subsequent contributions may be made in amounts of $50 or more. The
Custodian's basic annual fee per participant account is $15 which can be paid in
cash or will be deducted from the account.
Prototype Pension and Profit-Sharing Plans for Corporations Corporations
-----------------------------------------------------------
and associations taxable as corporations may establish retirement plans which
qualify for special tax treatment under Section 401(a) of the Code. The
employer adopting such Prototype Plans names the trustees. Consultation with an
attorney regarding these plans is recommended.
Retirement Plan for Employees of Educational and Charitable Organizations
-------------------------------------------------------------------------
The Employee Retirement Income Security Act of 1974 permits an employee of a
public school system or certain types of charitable organizations to enter into
a deferred compensation arrangement, in accordance with Section 403(b) of the
Code. To fund this arrangement mutual fund shares may be held in a custodial
account. For those employees who wish to purchase shares of the Company in
conjunction with such an arrangement, SFSC offers a Custodial Agreement with
services furnished by AG&T and its agent, Sentinel Service. These entities in
the aggregate receive an annual fee of $15.00 per participant account which can
be paid in cash or deducted from the account. Sentinel Service, acting as agent
in performing certain administrative functions, will receive from AG&T $12 of
the $15 annual fee. The minimum initial investment must be at least $50 for
each member of the group, and subsequent contributions for each group member
must be made in amounts of $50 or more. Dividends and distributions
automatically are reinvested. For further details, including tax consequences
and redemption information, see the Custodial Agreement and related information
available through SFSC.
TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD INFORMATION
Each of the Funds (except the Treasury Fund) from time to time may include
its average annual total return in advertisements or information furnished to
present or prospective shareholders. The average annual total return for each
of the Funds for the one, five and ten year periods ended November 30, 1995
were:
39
<PAGE>
Average Annual Total Return for the
-----------------------------------
<TABLE>
<CAPTION>
One Year Ended Five Years Ended Ten Years Ended
November 30, 1995 November 30, 1995 November 30, 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Common Stock Fund 26.18% 13.75% 13.03%
Balanced Fund 18.20% 10.53% 10.44%
Growth Fund 18.62% 9.03% 9.52%
Emerging
Growth Fund 6.54% 5.24%(1) N/A
World Fund 4.71% 13.12%(1) N/A
Bond Fund 12.81% 9.07% 9.13%
Government
Securities Fund 12.02% 7.85% 7.67%(2)
Short-Intermediate
Government Fund 5.25%(3) N/A N/A
Tax-Free Income Fund 10.20% 7.25% 7.64%(4)
New York Fund 2.68%(5) N/A N/A
Pennsylvania Fund 9.00 6.30% 6.36%(6)
</TABLE>
(1) For the period from March 1, 1993 (commencement of operations) through
November 30, 1995.
(2) For the period from September 2, 1986, when Sentinel Government Securities
Fund commenced operations, through November 30, 1995.
(3) For the period from March 24, 1995 (commencement of operations) through
November 30, 1995.
(4) For the period from October 1, 1990, when Sentinel Tax-Free Income Fund
commenced operations, through November 30, 1995.
(5) For the period from March 27, 1995 (commencement of operations) through
November 30, 1995.
(6) For the period from October 14, 1986 (commencement of operations) through
November 30, 1995.
The above amounts were computed by assuming a hypothetical initial payment
of $1,000. From this $1,000 the maximum sales load of $50 (5.0% of the public
offering price) was deducted (except for the Short-Intermediate Government,
where the maximum sales load is 1.0% of the public offering price). It then was
assumed that all of the dividends and distributions by each of the Funds over
the relevant time period were reinvested. It then was assumed that at the end
of the one-, five- or ten-year period, after taking into account all applicable
recurring and nonrecurring expenses, the entire amount was redeemed. The
average annual total return then was calculated by calculating the
40
<PAGE>
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption (i.e., the average annual compound rate of
return).
Each Fund's average annual total return and current yield will vary
depending upon market conditions, the securities comprising such Fund's
portfolio, such Fund's operating expenses and the amount of net capital gains or
losses realized by such Fund during the period. An investment in any of the
Funds will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
Each of the Funds also from time to time may advertise its total return for
specified periods without subtracting the sales load, to illustrate better the
performance of money already invested in the Fund during those periods.
On occasion, the Funds may compare their average annual total return figures
to mutual fund averages such as those compiled by Lipper Analytical Services,
Inc., and to market indices such as the Dow Jones Industrial Average, the
Standard & Poor's 500, and the Shearson Lehman Aggregate Bond Index.
The Bond, Tax-Free Income, Pennsylvania, New York, Government Securities and
Short-Intermediate Government Funds' annualized yields for the 30-day period
ended November 30, 1995 were 5.79%, 4.07%, 4.20%, 3.75%, 4.75% and 5.94%,
respectively. The average daily number of shares outstanding during the period
that were eligible to receive dividends were 16,781,554, 8,109,471, 2,607,725,
459,595, 10,437,064 and 2,702,350, respectively. Income was computed by
totalling the interest earned on all debt obligations during the 30-day period
and subtracting from that amount the total of all recurring expenses incurred
during the period. The 30-day yield then was annualized on a bond equivalent
basis assuming semi-annual reinvestment and compounding of net investment
income.
These Funds may also show yield to those already invested in the Funds by
using the net asset value per share instead of the maximum offering price per
share in the above calculations, which has the effect of raising the quoted
yields. Using net asset values, the yields of the Bond, Tax-Free Income,
Pennsylvania, New York, Government Securities and Short-Intermediate Government
Funds as of November 30, 1995 were 6.09%, 4.29%, 4.42%, 3.95%, 5.00%, and 6.00%,
respectively. In addition, the Tax-Free Income, Pennsylvania and New York Funds
may quote tax-equivalent yield in advertisements. The calculation of tax-
equivalent yield is described in the Prospectus. As of November 30, 1995, the
tax-equivalent yield of the Tax-Free Income Fund was 6.70%, the tax-equivalent
yield of the Pennsylvania Fund was 7.10%, and the tax-equivalent yield of the
New York Fund was 6.98%. For purposes of the above tax-equivalent yield
calculations the assumed federal tax rate is 36%.
The Treasury Fund normally computes its annualized yield by determining the
net income for a seven-day base period for a hypothetical pre-existing account
having a balance of one share at the beginning of the base period, dividing the
net income by the net asset value of the account at the beginning of the base
period to obtain the base period return, multiplying the result by 365 and then
dividing by seven. In accordance with regulations adopted by the SEC, the
Treasury Fund is required to disclose its annualized yield for certain seven-day
base periods in a standardized manner which does not take into consideration any
realized or unrealized gains or losses on portfolio securities. The SEC also
permits the calculation of a standardized effective or compounded yield. This
is computed by compounding the unannualized base period return which is done by
adding one to the base period return, raising the sum to a power equal to 365
divided by seven and subtracting one from the result.
The yield quoted should not be considered a representation of the yield of
the Treasury Fund in the future since the yield is not fixed. Actual yields
will depend not only
41
<PAGE>
on the type, quality and maturities of the investments held by the Treasury Fund
and changes in interest rates on such investments, but also on changes in the
Treasury Fund's expenses during the period.
Yield information may be useful in reviewing the performance of the Treasury
Fund and for providing a basis for comparison with other investment
alternatives. However, the Treasury Fund's yield fluctuates, unlike bank
deposits or other investments which typically pay a fixed yield for a stated
period of time.
GENERAL INFORMATION
Copies of the Articles of Incorporation and the By-Laws of the Company, the
Declaration of Trust and the Code of Regulations of the Pennsylvania Fund, and
various agreements referred to in the Prospectus and this Statement of
Additional Information are filed with the registration statement at the SEC to
which reference is made for their full terms. Such documents and other
information filed with the SEC may be obtained from the SEC upon payment of the
fees prescribed by the Rules of the SEC. All cash and securities of the Funds,
except for U.S. Government Securities which are represented only in book entry
form at the Federal Reserve Bank, are held by IFTC or in a central depository
system in the name of Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105 as the Funds' Custodian. IFTC is also Dividend
Disbursing Agent for the Funds' shares. Sentinel Service is Transfer Agent and
Registrar for the Funds' shares. All correspondence regarding the Funds should
be mailed to Sentinel Administrative Service Company, P.O. Box 1499, Montpelier,
VT 05601-1499.
The independent accountants for the Funds are Price Waterhouse LLP, located
at 1177 Avenue of the Americas, New York, New York 10036. The independent
accountants are responsible for auditing the annual financial statements of the
Company and the Pennsylvania Fund.
Counsel for the Funds is Brown & Wood, One World Trade Center, New York, New
York 10048-0557.
FINANCIAL STATEMENTS
Audited financial statements for the Company and for the Pennsylvania Fund
are incorporated by reference to the Funds' 1995 Annual Report to Shareholders.
42
<PAGE>
APPENDIX A
Description of Bond Ratings -
---------------------------
Moody's describes its ratings for corporate and municipal bonds as follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
`gilt edge'. Interest payments are protected by a large or 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 generally are 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 some time in the future.
Baa - Bonds which are rated Baa are considered 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 rated 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 to
a high degree. Such issues often are 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.
Rating Requirements: Moody's may apply numerical modifiers 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
43
<PAGE>
A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard and Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
I. - Likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
II - Nature of and provisions of the obligation;
III - Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy or other laws affecting creditors' rights.
Standard & Poor's describes its ratings for corporate and municipal bonds
as follows:
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only to a small degree.
A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than are bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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
bonds in this category than in higher-rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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.
44
<PAGE>
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 is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C - The rating C is typically 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.
- ------------------------------
CI - The rating CI is reserved to income bonds on which no interest is being
paid.
D - Debt rated D is in default. The D rating category is also used when
interest payments or principal repayments are expected to be in default at the
payment date, and payment of interest and/or repayment of principal is in
arrears. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
NR - Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Indicates that continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
Provisional Ratings - The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the Legal Investment Laws of various states
---------------------
45
<PAGE>
may impose certain rating or other standards for obligations eligible for
- ---
investment by savings banks, trust companies, insurance companies and
fiduciaries generally.
46
<PAGE>
APPENDIX B
Economic Conditions in New York
- -------------------------------
The information set forth below is derived from the official statements
prepared in connection with the issuance of New York Obligations and other
sources that are generally available to investors. The following information is
provided as general information intended to give a recent historical description
and is not intended to indicate future or continuing trends in the financial or
other conditions of New York City (the "City ") or New York State (the "State"
or "New York"). The New York Fund has not independently verified this
information.
In recent years, the State, some of its agencies, instrumentalities, and
public authorities and certain of its municipalities have faced serious
financial difficulties that could have an adverse effect on the sources of
payment for or the market value of the New York Obligations in which the New
York Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of the City
has a significant effect on the fiscal health of the State. The national
economic downturn which began in July 1990 adversely affected the local economy,
which had been declining since late 1989. As a result, the City experienced job
losses in 1990 and 1991 and real Gross City Product ("GCP") fell in those two
years. Beginning in calendar year 1992, the improvement in the national economy
helped stabilize conditions in the City. Employment losses moderated toward
year-end and real GCP increased, boosted by strong wage gains. However, after
noticeable improvements in the City's economy during the calendar year 1994, the
City's current four-year financial plan assumes that economic growth will slow
in calendar years 1995 and 1996 with local employment increasing modestly.
During the 1995 fiscal year, the City experienced substantial shortfalls in
payments of non-property taxes from those forecasted.
For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City was required to close substantial budget gaps in
recent fiscal years in order to maintain balanced operating results. For the
City's 1995 fiscal year, the City adopted a budget which halted the trend in
recent years of substantial increases in City spending from one year to the
next. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional reductions in City
services or entitlement programs or tax or other revenue increases which could
adversely affect the City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's four-year financial plan, including the City's current financial plan
for the 1996 through 1999 fiscal years (the "1996-1999 Financial Plan" or "City
Financial Plan"). The City's projections set forth in the City Financial Plan
are based on various assumptions and contingencies which are uncertain and which
may not materialize. Changes in major assumptions could significantly affect
the City's ability to balance its budget as required by State law and to meet
its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1996 through 1999 contemplates the
issuance of $11.8 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure
47
<PAGE>
and physical assets and to make capital investments. In addition, the City
issues revenue notes and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City bonds and
notes will be subject to prevailing market conditions, and no assurance can be
given that such sales will be completed. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
1996-1999 Financial Plan. On January 31, 1996, the City published the City
Financial Plan for the 1996 through 1999 fiscal years, which is a modification
to the City Financial Plan submitted by the City to the New York State Financial
Control Board (the "Control Board") on July 11, 1995 (the "July Financial
Plan"). The July Financial Plan set forth proposed actions by the City
including spending reductions for its Medicaid and welfare programs, City agency
spending reductions, additional State and federal aid, revenue initiatives and
labor, pension and debt service savings to close a previously projected gap of
approximately $3.1 billion for the 1996 fiscal year (July 1, 1995-June 30,
1996). The City Financial Plan published on January 31, 1996 takes into account
actual receipts and expenditures and changes in forecast revenues and
expenditures since the July Financial Plan and projects revenues and
expenditures for the 1996 fiscal year balanced in accordance with GAAP. Changes
to the July Financial Plan made in the City Financial Plan for the 1996 fiscal
year include actions to offset an additional $759 million budget gap due
primarily to the failure of certain expected lease payments and labor savings to
materialize and shortfalls in anticipated state and federal aid, savings
associated with certain cost-cutting actions and tax revenues. The additional
gap closing measures for the 1996 fiscal year include additional expenditure
reductions, debt service savings and the sale of certain City assets. The City
Financial Plan also sets forth projections for the 1997 through 1999 fiscal
years and outlines a proposed gap-closing program to close projected budget gaps
of $2.0 billion, $3.3 billion and $4.1 billion for the 1997 through 1999 fiscal
years, respectively, after successful implementation of the gap-closing program
for the 1996 fiscal year.
The City's projections set forth in the City Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, employment growth, wage increases
for City employees consistent with those assumed in the City Financial Plan,
continuation of interest earnings assumptions for pension fund assets, the
ability of the City's hospital and education entities to maintain balanced
budgets, provision of State and federal aid and mandate relief, the impact of
proposed federal and State welfare reforms on City revenues and adoption of the
budget by the City Council in substantially the form submitted by the Mayor.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions, sell the assets and obtain the savings
outlined in the City Financial Plan. In addition, the City may incur
expenditures which exceed those projected in the City Financial Plan. There can
be no assurance that additional gap-closing measures will not be required to
enable the City to achieve a balanced budget in a particular fiscal year.
Certain of the proposed actions are subject to negotiation with the City's
municipal unions. Various other actions proposed for the 1997 through 1999
fiscal years are subject to approval by the Governor and the State Legislature
and the proposed reductions in spending for entitlement programs may be subject
to legal challenge.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or
48
<PAGE>
spending increases beyond its projections during its 1995-1996 fiscal year or
subsequent fiscal years, such developments could result in reductions in
anticipated State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow and
additional City expenditures as a result of such reductions or delays. In
addition, federal budget negotiations for the 1996 federal fiscal year could
result in a delay or reduction in the receipt of federal grants in the City's
1996 fiscal year.
The City's financial plans have been the subject of extensive public
comment and criticism. On February 29, 1996 the City Comptroller issued a
report stating that the City Financial Plan includes budget risks of up to $528
million for the 1996 fiscal year. The City Comptroller's report also identified
budget risks of $2.15 billion for the City's 1997 fiscal year, not including the
impact of probable State and federal reductions in aid, the extent of which are
currently unknown. On March 6, 1996, the Office of the State Deputy Comptroller
of New York (OSDC) issued a report which reviewed the City Financial Plan and
concluded that potential budget risks of $507 million exist for the 1996 fiscal
year. The OSDC report stated that projected budget gaps could exceed $2.5
billion in the 1997 fiscal year. It is reasonable to expect that such reports
will continue to be issued and to engender public comment.
Ratings. As of March 21, 1996, Moody's rated the City's outstanding general
obligation bonds "Baal", Standard & Poor's rated such bonds "BBB+" and Fitch
Investors Service, Inc. ("Fitch") rated such bonds "A-". On July 10, 1995,
Standard and Poor's revised downwards its ratings on outstanding general
obligation bonds of the City from "A-" to "BBB+". Standard & Poor's stated that
the downgrade was a reflection of the City's inability to eliminate a structural
budget imbalance due to persistent softness in the City's economy, weak job
growth, a trend of using nonrecurring budget devices, optimistic projections of
State and federal aid and high levels of debt service. Such ratings reflect
only the view of Moody's, Standard & Poor's and Fitch, from which an explanation
of the significance of such ratings may be obtained. There is no assurance that
such ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of City bonds.
Outstanding Indebtedness. As of December 31, 1995 the City had
approximately $24.4 billion of long-term debt and as of June 30, 1995, the New
York City Municipal Water Finance Authority (the "Water Authority") has
approximately $6.05 billion of net long-term debt.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and
federal regulations require the City's water supply to meet certain standards to
avoid filtration. The City's water supply now meets all technical standards and
the City's current efforts are directed toward protection of the watershed area.
The City has taken the position that increased regulatory, enforcement and other
efforts to protect its water supply, relating to such matters as land use and
sewage treatment, will preserve the high quality of water in the upstate water
supply system and prevent the need for filtration. The U.S. Environmental
Protection Agency has granted the City a waiver of filtration regulations
through 1999. If filtration of the City's water supply is ultimately required,
the capital expenditure required could be between $4 billion and $5 billion.
Such an expenditure could cause significant increases in City water and sewer
charges.
49
<PAGE>
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. As of June 30, 1995, the City estimated its
potential future liability on account of all outstanding claims to be
approximately $2.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy began to expand in 1991 and
has added over 7 million jobs since early 1992. Although the State has added
approximately 185,000 jobs since November 1992, employment growth in the State
has been hindered during recent years by significant cutbacks in the computer
and instrument manufacturing, utility, defense and banking industries.
The State expected New York's economy to continue to expand modestly during
1995, but there was expected to be a pronounced slow-down during the course of
the year. On an average annual basis, employment growth was expected to be
about the same as 1994. Both personal income and wages were expected to record
moderate gains in 1995. The annual rates of job growth and growth in personal
income and wages are expected to slow gradually during 1996.
State Financial Plan for the 1995-1996 Fiscal Year. The State's budget for
its 19951996 fiscal year (April 1, 1995-March 31, 1996) was enacted by the State
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the State Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including all necessary appropriations for debt service.
The 1995-1996 fiscal year budget includes a planned three-year 20% reduction in
the State's personal income tax and is the first budget in over 50 years which
projects a decline in General Fund disbursements and spending on State
operations. On June 20, 1995, the State published the State Financial Plan for
the 1995-1996 fiscal year based on the enacted 1995-1996 budget and issued its
first and second quarterly updates of the State Financial Plan in July and
October 1995, respectively (the "State Financial Plan").
The State Financial Plan projects a General Fund balanced on a cash basis
with total projected receipts of $32.76 billion and total projected
disbursements of $32.75 billion. The State Financial Plan includes gap-closing
actions to offset a previously projected budget gap of $5 billion, the largest
in the State's history. Such gap-closing actions include, among others,
substantial reductions in social and medical entitlement programs, reductions in
State services and capital programs and increased lottery revenues. There can
be no assurance that additional gap-closing measures will not be required and
there is no assurance that any such measures will enable the State to achieve a
balanced budget for its 1995-1996 fiscal year.
On December 15, 1995, the Governor released the Executive Budget for the
State's 1996-1997 fiscal year (the "Executive Budget") which the State
Legislature must enact and the Governor must sign in order to become law. The
Executive Budget, as amended, projects balance on a cash basis but identifies a
potential budget gap of approximately $3.9 billion due primarily to the effect
of current and prior year tax reductions and the use of nonrecurring revenues in
the 1995-1996 State Financial Plan. Proposed gap-closing actions in the
Executive Budget include cost containment and spending reductions in State
Medicaid, welfare, health, mental health and education programs. The Executive
Budget
50
<PAGE>
also anticipates a significant increase in federal aid to the State related to
changes in the Medicaid program that are expected to be enacted by Congress and
approved by the President. There can be no assurance that the Executive Budget
will be enacted as proposed, the cost containment and spending reduction
programs can be implemented as proposed or the anticipated increase in federal
aid will materialize as expected.
The State Financial Plan and the Executive Budget are based upon forecasts
of national and State economic activity. Economic forecasts have frequently
failed to predict accurately the timing and magnitude of changes in the national
and State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, federal
financial and monetary policies, the availability of credit and the condition of
the world economy, which could have an adverse effect on the State. There can
be no assurance that the State economy will not experience worse-than-predicted
results in the 1995-1996 and 1996-1997 fiscal years, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years. There can be no
assurance, however, that the State's actions will be sufficient to preserve
budget balances in the then current or future fiscal years.
The State Financial Plan contains actions that provide nonrecurring
resources or savings as well as actions that impose baseline losses of receipts.
The Division of the Budget estimates the net amount of nonrecurring resources
used in the State Financial Plan to be at least $600 million. In addition to
these nonrecurring actions, the adoption of the three-year 20% reduction in the
State's personal income tax in combination with business tax reductions enacted
in 1994 will reduce State tax receipts by as much as $5.6 billion by the 1997-
1998 fiscal year.
Uncertainties with regard to both the economy and potential decisions at
the federal level add further pressure on future budget balance in New York
State. Specific budget proposals being discussed at the federal level but not
included in the State's current economic forecast would (if enacted) have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states.
The State anticipates that its capital programs will be financed, in part,
by State and public authorities borrowings in the 1995-1996 fiscal year. The
State expects to issue $248 million in general obligations bonds (including $70
million for purposes of redeeming outstanding Bond Anticipation Notes ("BANs")),
$186 million in general obligation commercial paper and up to $47 million in
certificates of participation during the State's 1995-1996 fiscal year for
equipment purchases. Borrowings by public authorities pursuant to lease-
purchase and contractual-obligation financings for capital programs of the State
are projected to total $2.7 billion. Additionally, the Local Government
Assistance Corporation ("LGAC") issued net proceeds of $529 million during the
State's 1995-1996 fiscal year.
1994-1995 Fiscal Year. In July, 1995, the State Comptroller issued its
audit of the State's 1994-1995 fiscal year prepared in accordance with generally
accepted auditing standards. The State completed its 1994-1995 fiscal year with
a General Fund operating deficit of $1.426 billion, as compared with an
operating surplus of $914 million for the previous fiscal year. The 1994-1995
fiscal year deficit was caused by several factors,
51
<PAGE>
including the use of $1.026 billion of the 1993-1994 fiscal year surplus in the
1994-1995 fiscal year and the adoption of changes in accounting methodologies by
the State Comptroller.
Local Government Assistance Corporation. In 1990, as part of a state fiscal
reform program, legislation was enacted creating LGAC, a public benefit
corporation empowered to issue long-term obligations to fund certain payments to
local governments traditionally funded through the State's annual seasonal
borrowing. As of June 1995, LGAC has issued bonds to provide net proceeds of
$4.7 billion completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs without relying on short-term seasonal
borrowing.
Financing Activities. State financing activities include general obligation
debt of the State and State-guaranteed debt, to which the FULL faith and credit
of the State has been pledged, as well as lease-purchase and contractual-
obligation financings, moral obligation financings and other financings through
public authorities and municipalities, where the State's obligation to make
payments for debt service is generally subject to annual appropriation by the
State Legislature.
As of March 31, 1995, the total amount of outstanding general obligation
debt was approximately $5.181 billion, including $149 million in BANs; the total
amount of moral obligation debt was approximately $7.01 billion; and $17.98
billion of bonds issued primarily in connection with lease-purchase and
contractual-obligation financing of State capital programs were outstanding.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of September 30,
1994, the latest data available, there were 18 public authorities that had
outstanding debt of $100 million or more and the aggregate outstanding debt,
including refunding bonds, of these 18 public authorities was $70.3 billion.
The State's access to the public credit markets could be impaired and the market
price of its outstanding debt may be adversely affected, if any of its public
authorities were to default in their respective obligations.
Ratings. Currently, Moody's, Standard & Poor's and Fitch rate New York
State's outstanding general obligation bonds "A", "A-" and "A+", respectively.
Ratings reflect only the respective views of such organizations, and explanation
of the significance of such ratings must be obtained from the rating agency
furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the New York State Obligations in which the New York Fund
invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and federal laws.
Several cases challenge the rationality and the retroactive application of
State regulations recalibrating nursing home Medicaid rates. In 1994, the New
York Court of Appeals held invalid the State Department of Health's retroactive
application to rate years 1989 through 1991 of the nursing home Medicaid
reimbursements rate recalibration adjustment. A case challenging the new
recalibration regulations for rate years commencing 1992 is pending.
52
<PAGE>
In Trustees of and The Pension, Hospitalization Benefit Plan of the
Electrical Industry, et al., v. Cuomo, et al., commenced November 25, 1992 in
the United States District Court for the Eastern District of New York, plaintiff
employee welfare benefit plans seek a declaratory judgment nullifying on the
ground of Federal preemption provisions of Section 2807-c of the Public Health
Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans. By order and stipulation of the
District Court dated September 21, 1995, the action has been discontinued.
In McCall, et al. v. State of New York, et al., commenced July 5, 1995
(Supreme Court, Albany County), an action for a declaratory judgment and
injunctive relief, plaintiffs (including the State Comptroller) contend that
certain provisions of Ch. 119 L. 1995 are unconstitutional. Ch. 119 L. 1995
provides enhanced supplemental pension allowances for members of the State and
local retirement systems. Plaintiffs contend that Section 13 of Ch. 119 L.
1995, which provides that money in a Supplemental Reserve Fund shall be used as
a credit in the State's 1995-96 fiscal year against prior State and local
pension contributions, violates Article V (S)7 of the State Constitution. This
constitutional provision bars the diminishment or impairment of benefits of
membership in the retirement systems.
Adverse developments in these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced State
Financial Plan. The State believes that the State Financial Plan includes
sufficient reserves for the payment of judgments that may be required during the
1995-1996 fiscal year. There can be no assurance, however, that an adverse
decision in any of these proceedings would not exceed the amount of the State
Financial Plan reserves for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced State Financial Plan.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1995-1996 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1995-1996 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers Board")
by the State in 1984. The Yonkers Board is charged with oversight of the fiscal
affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State resources in
amounts that cannot yet be determined.
53
<PAGE>
APPENDIX C
Economic Conditions in Pennsylvania
The information set forth below is derived from official statements prepared
in connection with the issuance of bonds and notes of the Commonwealth of
Pennsylvania (the "Commonwealth") and other sources that are generally available
to investors. The information is provided as general information intended to
give a recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of the Commonwealth or of
local government units located in the Commonwealth. The Fund has not
independently verified this information.
Because the Fund invests at least 80% of its assets in Pennsylvania
Obligations, its net asset value is particularly sensitive to changes in the
economic condition and governmental policies of the Commonwealth. For example,
the economic condition of a significant industry within Pennsylvania may have a
corresponding effect on specific issuers within Pennsylvania or on anticipated
revenue to the Commonwealth.
Many factors affect the financial condition of the Commonwealth and its
political subdivisions, such as social, environmental and economic conditions,
many of which are not within the control of such entities. Pennsylvania and
certain of its counties, cities and school districts and public bodies (most
notably the City of Philadelphia) have from time to time in the past encountered
financial difficulties which have adversely affected their respective credit
standings. Such difficulties could affect outstanding obligations of such
entities, including obligations held by the Fund.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
Financial conditions during the fiscal years 1990 through 1994 were
distinguished by slow economic growth and a rapid expansion of the costs of
certain governmental programs that together produced a significant stress on the
Commonwealth's budget. This period was marked by public health and welfare
costs growing at a rate double the growth rate for all state expenditures.
During this period, public health and welfare costs rose by an average annual
rate of 9.4% while tax revenues were growing at an average annual rate of 5.8%.
Consequently, spending on other budget programs was restrained to a growth rate
of 4.7% and sources of revenues other than taxes (including transfers from other
Commonwealth funds and hospital and nursing home pooling of contributions to use
as federal matching funds) became larger components of fund revenues.
Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth reported
an increase in the fiscal year-end unappropriated balance. The fiscal 1995
unappropriated surplus (prior to reserves for transfer to the Tax Stabilization
Fund) was $540 million, an increase of $204.2 million over the fiscal 1994
unappropriated surplus (prior to transfers). Commonwealth revenues totalled
$16,224.6 million, $459.4 million (2.9%) above the estimate of revenues used at
the time the budget was enacted. The higher than estimated revenues from tax
sources were due to faster economic growth in the national and state economy
than had been projected when the budget was adopted. Expenditures from
Commonwealth revenues (excluding pooled financing expenditures), including $65.5
million of supplemental appropriations enacted at the close of the 1995 fiscal
year, totalled $15,674 million, representing an increase of 5% over spending
during fiscal 1994.
54
<PAGE>
The enacted fiscal 1996 budget provides for expenditures from Commonwealth
revenues of $16,161.7 million, a 2.7% increase over total appropriations from
Commonwealth revenues in fiscal 1995. The fiscal 1996 budget is based on
anticipated Commonwealth revenues, net of enacted tax changes but prior to tax
refunds, of $16.27 billion, an increase over actual fiscal 1995 Commonwealth
revenues of .3%. Excluding the estimated effects of the tax changes enacted in
1994 and 1995, Commonwealth revenues for fiscal 1996 are estimated to increase
by approximately 2.9%. Tax changes (reductions) enacted with the fiscal 1996
budget totalled $282.9 million, representing an approximate 1.7% of base
revenues. The largest dollar value changes were in the corporate net income tax
where the scheduled 1997 reduction of the tax rate to 9.99% was accelerated to
the 1995 tax year; a double weighing was provided for the sales factor of the
corporate net income tax apportionment calculation; and the maximum allowance
for the net operating loss deduction was increased from $500,000 to $1 million.
The fiscal 1996 cost of these corporate net income tax changes is estimated to
be $210.8 million. Other major components of the tax reduction include a $12.1
million decrease for the capital stock and franchise tax from an increase in the
exemption amount; $24.7 million from the repeal of the tax on annuities; and
$27.9 million from an acceleration of the scheduled phase-out of the inheritance
tax on transfers of certain property to a surviving spouse. A 90 day amnesty
program was also authorized in the tax bill and was available to taxpayers from
mid-October 1995 through mid-January 1996.
In his budget address on February 6, 1996, Governor Ridge proposed a budget
for fiscal 1997 which is $30 million (.2%) less than the fiscal 1996 amount.
The proposed budget contemplates expenditures (from the General Fund) of
approximately $16,190 million. The proposed budget also includes approximately
$60.2 million of tax reductions, including the creation of a jobs creation tax
credit (to be implemented over two years with an annual cap of $30 million), an
exemption from the sales and use tax for certain computer services purchased for
manufacturing, agricultural or public utility operations (effective July 1,
1996) and a reduction in the capital stock/foreign franchise tax rate of .25
mills to 12.5 mills (effective January 1, 1996).
Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed recently as the industrial composition of
the Commonwealth diversified when the coal, steel and railroad industries began
to decline. A more diversified economy was necessary as the traditionally
strong industries in the Commonwealth declined due to a long-term shift in jobs,
investment and workers away from the northeast part of the nation. The major
sources of growth in Pennsylvania are in the service sector, including trade,
medical and the health services, education and financial institutions.
Nonagricultural employment in the Commonwealth declined by 5.1% during the
recessionary period from 1980 to 1983. In 1984, the declining trend was
reversed as employment grew by 2.9% over 1983 levels. From 1983 to 1990,
Commonwealth employment continued to grow each year, increasing an additional
14.3%. For the last three years, employment in the Commonwealth has increased
2.0%. The unemployment rate in Pennsylvania as of October, 1995 stood at a
seasonally adjusted rate of 5.1%. The seasonally adjusted national unemployment
rate for October, 1995 was 5.5%.
The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate-approved debt, (iii)
debt for capital projects subject to an aggregate debt limit of 1.75 times the
annual average tax revenues of the preceding five fiscal years and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts. As of
June 30, 1995, the Commonwealth had $5,045 million of general obligation debt
outstanding.
55
<PAGE>
Other state-related obligations include "moral obligations". Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
("PHFA"), a state agency which provides financing for housing for lower and
moderate income families, and The Hospitals and Higher Education Facilities
Authority of Philadelphia, a municipal authority organized by the City of
Philadelphia to, among other things, acquire and prepare various sites for use
as intermediate care facilities for the mentally retarded. PHFA's bonds, but
not its notes, are partially secured by a capital reserve fund required to be
maintained by PHFA in an amount equal to the maximum annual debt service on its
outstanding bonds in any succeeding calendar year. PHFA is not permitted to
borrow additional funds as long as any deficiency exists in the capital reserve
fund.
Certain state-created agencies have statutory authorization to incur debt
for which state appropriations to pay debt service thereon is not required. The
debt of these agencies is supported by assets of, or revenues derived from, the
various projects financed and is not an obligation of the Commonwealth. Some of
these agencies, however, are indirectly dependent on Pennsylvania
appropriations. In addition, the Commonwealth maintains pension plans covering
state employees, public school employees and employees of certain state-related
organizations. For their fiscal years ended in 1994 the State Employees'
Retirement System had a $249 million surplus and the Public School Employees'
Retirement System had a total unfunded actuarial accrued liability of $3,797
million.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority ("PICA") to assist Philadelphia in remedying fiscal emergencies was
enacted by the Pennsylvania General Assembly and approved by the Governor in
June, 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on April 17, 1995, as
modified in July, 1995.
To date, PICA has issued $1.42 billion of its Special Tax Revenue Bonds.
This financial assistance has included the refunding of certain general
obligation bonds, funding of capital projects and the liquidation of the
cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1994 reflects a
surplus of approximately $15.4 million, up from approximately $3 million as of
June 30, 1993. Preliminary unaudited financial statements as of June 30, 1995
projected a surplus approximating $59.6 million and published news accounts
indicate that the official surplus was $80.5 million.
There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the
Commonwealth are pending, some of which, if decided adversely to the
Commonwealth, could have a material adverse impact on governmental operations.
56
