<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1998
Securities Act File No. 2-10685
Investment Company Act File No. 811-214
- --------------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D.C. 20549
Form N-1A
Registration Statement under the Securities Act of 1933 [x]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 81 [x]
and/or
Registration Statement under the Investment Company [x]
Act of 1940
Amendment No. [x]
(Check Appropriate Box or Boxes)
------------------
Sentinel Group Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
National Life Drive
Montpelier, Vermont 05604
(Address of Principal Executive Offices) (Zip Code)
(802) 229-3900
(Registrant's Telephone Number, including Area Code)
------------------
D. Russell Morgan, Esq. Copy to:
c/o Sentinel Group Funds, Inc. John A. MacKinnon, Esq.
National Life Drive Brown & Wood llp
Montpelier, Vermont 05604 One World Trade Center
(Name and Address of Agent for Service) New York, New York 10048-0557
------------------
It is proposed that this filing will become effective (check
appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
------------------
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on January 29, 1997.
- --------------------------------------------------------------------------------
<PAGE>
SENTINEL GROUP FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A Item No.
- -------------
PART A
- ------
<S> <C> <C>
Item 1. Cover Page ................................ Prospectus Cover Page
Item 2. Synopsis .................................. Fund Expenses
Item 3. Condensed Financial Information ........... Financial Highlights; Performance Data
Item 4. General Description of Registrant ......... Investment Objectives and Policies; Organization
of the Funds
Item 5. Management of the Fund .................... Fund Expenses; Management of the Funds;
Prospectus Back Cover Page
Item 5A. Management's Discussion of
Fund Performance ........................ Not Applicable
Item 6. Capital Stock and Other Securities ........ Taxes; Shareholder Services; Dividends and Capital
Gains Distributions; Shareholder Inquiries;
Organization of the Funds; Prospectus Inside Back
Cover Page
Item 7. Purchase of Securities Being
Offered ................................. Fund Expenses; Distribution Plans; How to
Purchase Shares; Determination of Net Asset
Value; Shareholder Services; Prospectus Inside
Back Cover Page
Item 8. Redemption or Repurchase .................. Fund Expenses; How to Redeem Shares
Item 9. Pending Legal Proceedings ................. Not Applicable
PART B
- ------
Item 10. Cover Page ................................ Statement of Additional Information Cover Page
Item 11. Table of Contents ......................... Statement of Additional Information Cover Page
Item 12. General Information and History ........... Not Applicable
Item 13. Investment Objectives and Policies ........ Investment Objectives and Policies; Investment
Restrictions; Portfolio Turnover
Item 14. Management of the Fund .................... Management of the Funds
Item 15. Control Persons and Principal
Holders of Securities ................... Management of the Funds
Item 16. Investment Advisory and Other
Services ................................ Statement of Additional Information Cover Page;
The Funds; The Investment Advisory Contract; The
Distribution Contract; The Distribution Plans; The
Fund Services Agreement; General Information
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Item 17. Brokerage Allocation and Other
Practices ............................... Portfolio Transactions and Brokerage Commissions
Item 18. Capital Stock and Other Securities ........ Capitalization; How to Redeem Shares; Dividends
and Capital Gains Distributions
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered ............. Capitalization; How to Purchase Shares and Reduce
Sales Charges; Issuance of Shares at Net Asset
Value; Determination of Net Asset Value;
Shareholder Services; Tax- Deferred Retirement
Plans
Item 20. Tax Status ................................ Taxes
Item 21. Underwriters .............................. The Distribution Contract; Portfolio Transactions
and Brokerage Commissions; How to Purchase
Shares and Reduce Sales Charges
Item 22. Calculation of Performance Data ........... Performance Data; Total Return, Yield and Tax-
Equivalent Yield Information
Item 23. Financial Statements ...................... Independent Auditor's Report; Statement of Assets
and Liabilities
</TABLE>
PART C
- ------
Items 24-32. Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration
Statement.
<PAGE>
- -------------------------------------------------------------------------------
THE SENTINEL FUNDS
[LOGO] NATIONAL LIFE DRIVE
MONTPELIER, VERMONT 05604
800-282-3863
- -------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 30, 1998
Table of Contents
<TABLE>
<S> <C>
Fund Expenses.................. How to Purchase Shares.........
Annual Fund Operating Expenses. How To Redeem Shares...........
Financial Highlights........... Tax Deferred Retirement Plans..
Purchase Options............... Determination of Net Asset Val-
The Funds...................... ue............................
Investment Objectives and Poli- Dividends and Capital Gains
cies.......................... Distributions.................
Further Information Relative to Taxes..........................
the Investment Practices of Shareholder Services...........
the Funds..................... Performance Data...............
Management of the Funds........ Organization of the Funds......
Custodian...................... Applications...................
The Distributor................
Distribution Plans.............
</TABLE>
- --------------------------------------------------------------------------------
Each of the thirteen 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 "Money Market Fund")--seeks
as high a level of current income as is consistent with the safety of
principal and the maintenance of liquidity, by investing solely in short-
term direct obligations of the U.S. Treasury. AN INVESTMENT IN THE MONEY
MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE
MONEY MARKET FUND SEEKS TO MAINTAIN A CONSTANT $1.00 PER SHARE NET ASSET
VALUE; HOWEVER, THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET FUND WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
. Sentinel High Yield Bond Fund (the "High Yield Fund")--seeks high current
income and total return by investing primarily in lower rated corporate
debt securities. THE HIGH YIELD FUND MAY INVEST WITHOUT LIMITATION IN
LOWER QUALITY DEBT SECURITIES, SOMETIMES CALLED "JUNK BONDS". INVESTORS
IN THIS FUND SHOULD CONSIDER THAT THESE SECURITIES CARRY GREATER RISKS,
SUCH AS THE RISK OF DEFAULT, THAN OTHER DEBT SECURITIES. Please refer to
page for further information on the risks of investing in these
securities.
...............................................................................
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 March 30, 1998 (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, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
<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 Sentinel Advisors Company (the "Advisors") to be more
favorable than that of the U.S. economy as a whole, with a focus on
relatively well-established companies.
. SENTINEL SMALL COMPANY FUND (the "Small Company Fund")--seeks long-term
capital appreciation. Assets normally will be invested primarily in
common stocks of small and medium-sized corporations believed by 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 safety of
principal through investments primarily in securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
. SENTINEL SHORT MATURITY GOVERNMENT FUND (the "Short Maturity Government
Fund")--seeks as high a level of current income as is consistent with
safety of principal 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 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
2
Prospectus
<PAGE>
FUND EXPENSES
The following tables illustrate 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, Small Company and World Funds.. 5.00% maximum
High Yield, Bond, Government Securities, Tax-Free Income, New
York and Pennsylvania Funds................................... 4.00% maximum
Short Maturity Government Fund................................. 1.00%
Money Market Fund.............................................. None
Sales Charge Imposed on Reinvested Dividends................... None
Redemption Fees................................................ None/1/
Exchange Fees.................................................. None/2/
</TABLE>
- --------
/1/ 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.
/2/ If a shareholder exchanges Class A shares of the Money Market Fund for
Class A shares of another Fund, and such Money Market 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, Growth, Small
Company, World, High Yield, Bond and Money Market Funds):
<TABLE>
<S> <C>
Sales Charge Imposed on Purchases............................ None
Sales Charge Imposed on Reinvested Dividends................. None
Contingent Deferred Sales Charge ("CDSC").................... 4.00% maximum/3/
Exchange Fees................................................ None/4/
</TABLE>
- --------
/3/ 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.
/4/ 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.
Class C Shares (available for the Common Stock, Balanced, World and High
Yield Funds):
<TABLE>
<S> <C>
Sales Charge Imposed on Purchases.......... None
Sales Charge Imposed on Reinvested
Dividends................................. None
CDSC....................................... 1.00% for one year after purchase
Exchange Fees.............................. None/5/
</TABLE>
- --------
/5/ Class C shares may be exchanged only for Class C shares of the other Funds
that offer Class C shares as of the date of the exchange, and for Class A
shares of the Money Market Fund.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
3 Prospectus
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Class A:
<TABLE>
<CAPTION>
COMMON SMALL
STOCK BALANCED GROWTH COMPANY WORLD
FUND FUND FUND FUND FUND
------ -------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Management Fees........... .55% .63% .63% .63% .63%
Rule 12b-1 Fees (includes
service fee
and distribution fee)(a). .29 .30 .30 .30 .30
Other Expenses:
Accounting and
Administrative
Costs.................. .04 .04 .04 .04 .04
Other................... .17(c) .20(c) .35(c) .39(c) .35(c)
Total Other Expenses...... .21(c) .24(c) .39(c) .43(c) .39(c)
---- ---- ---- ---- ----
Total Fund Operating
Expenses Before Expense
Offset................... 1.05%(c) 1.17%(c) 1.32%(c) 1.36%(c) 1.32%(c)
==== ==== ==== ==== ====
<CAPTION>
SHORT
HIGH GOVERNMENT MATURITY
YIELD BOND SECURITIES GOVERNMENT
FUND FUND FUND FUND
------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Management Fees........... 0.75% .53 % .53% .53%
Rule 12b-1 Fees (includes
service fee
and distribution fee)(a). 0.20 .20 .20 .35
Other Expenses:
Accounting and
Administrative
Costs.................. 0.04 .04 .04 .00
Other................... 0.27(c) .22(c) .22(c) .14(c)
Total Other Expenses...... 0.31(c) .26(c) .26(c) .14(c)
---- ---- ---- ----
Total Fund Operating
Expenses Before Expense
Offset................... 1.26%(c) .99%(c) .99%(c) 1.02%(b)(c)
==== ==== ==== ====
<CAPTION>
MONEY TAX FREE
MARKET INCOME NEW YORK PENNSYLVANIA
FUND FUND FUND FUND
------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Management Fees........... .40% .53% .00% .55%
Rule 12b-1 Fees (includes
service fee
and distribution fee)(a). None .20 .00 .20
Other Expenses:
Accounting and
Administrative
Costs.................. .04 .00 .00 .00
Other................... .33(c) .07(c) .06(c) .19(c)
Total Other Expenses...... .37(c) .07(c) .06(c) .19(c)
---- ---- ---- ----
Total Fund Operating
Expenses Before Expense
Offset................... .77 .80(b)(c)(d) .06(b)(c)(d) .94(b)(c)(d)
==== ==== ==== ====
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 4
<PAGE>
Class B:
<TABLE>
<CAPTION>
COMMON SMALL
STOCK BALANCED COMPANY GROWTH
FUND FUND FUND FUND
------ -------- ------- ------
<S> <C> <C> <C> <C>
Management Fees....................... .55% .63% .63% .63%
Rule 12b-1 Fees (includes service fee
and distribution fee)(a)............. 1.00 1.00 1.00 1.00
Other Expenses:
Accounting and Administrative
Costs.............................. .04 .04 .04 .04
Other............................... .21(c) .22(c) .69(c) .46(c)
Total Other Expenses.................. .25(c) .26(c) .73(c) .50(c)
---- ---- ---- ----
Total Fund Operating Expenses Before
Expense Offset....................... 1.80%(c) 1.89%(c) 2.36%(c) 2.13%(c)
==== ==== ==== ====
<CAPTION>
HIGH MONEY
WORLD YIELD BOND MARKET
FUND FUND FUND FUND
------ -------- ------- ------
<S> <C> <C> <C> <C>
Management Fees....................... .63% .75% .53% .40%
Rule 12b-1 Fees (includes service fee
and distribution fee)(a)............. 1.00 .28 1.00 None
Other Expenses:
Accounting and Administrative
Costs.............................. .04 .04 .04 .04
Other............................... .51(c) .27(c) .33(c) .29(c)
Total Other Expenses.................. .55(c) .31(c) .37(c) .33(c)
---- ---- ---- ----
Total Fund Operating Expenses Before
Expense Offset....................... 2.18%(c) 1.34%(c) 1.90%(c) .73%(c)
==== ==== ==== ====
Class C:
<CAPTION>
COMMON HIGH
STOCK BALANCED WORLD YIELD
FUND FUND FUND FUND
------ -------- ------- ------
<S> <C> <C> <C> <C>
Management Fees....................... .55% .63% .63% .75%
Rule 12b-1 Fees (includes service fee
and distribution fee)(a)............. 1.00 1.00 1.00 1.00
Other Expenses:
Accounting and Administrative
Costs.............................. .04 .04 .04 .04
Other............................... .21(c) .22(c) .51(c) .27(c)
Total Other Expenses.................. .25(c) .26(c) .55(c) .31(c)
---- ---- ---- ----
Total Fund Operating Expenses Before
Expense Offset....................... 1.80%(c) 1.89(c)% 2.18(c) 2.06%(c)
==== ==== ==== ====
</TABLE>
- --------
(a) Assumes distribution history as of November 30, 1997. The maximum annual
Rule 12b-1 fee for Common Stock Fund Class A shares, Balanced Fund Class A
shares, Growth Fund Class A shares, Small Company 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 the High Yield Fund Class A shares, 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 Maturity Government Fund Class A
shares is .35% of average daily net assets, of which the service fee
portion will be .25%.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
5 Prospectus
<PAGE>
(b) Sentinel Administrative Service Company ("Sentinel Service") has
voluntarily agreed for an indefinite period to reimburse the Tax-Free
Income Fund Class A shares, the Pennsylvania Fund Class A shares, the
Short Maturity Government Fund Class A shares and the New York Fund Class
A shares for expenses necessary to limit those Funds' overall expense
ratios to 0.75% (effective December 16, 1997), 0.90% (effective March 31,
1997), 1.00% and zero (effective March 31, 1997), respectively, in each
case after expense offset. For the Pennsylvania Fund Class A shares, which
were reimbursed down to an expense ratio after expense offset of 0.75%
from December 1, 1996 through March 30, 1997, and 0.90% from March 31,
1997 to November 30, 1997, a reimbursement of $152,810 was paid in fiscal
1997. In the absence of the above reimbursement arrangement, the
Pennsylvania Fund Class A shares Accounting and Administrative Costs,
Other Expenses, Total Other Expenses and Total Fund Operating Expenses
would have been .24%, .35%, .59% and 1.34%, respectively, before expense
offset, and . 24%, .31%, .55% and 1.30%, respectively, after expense
offset. The dollar amount of the reimbursement paid to the Short Maturity
Government Fund Class A shares during the 1997 fiscal year by Sentinel
Service was $68,091. In the absence of the above reimbursement
arrangement, Short Maturity Government Fund Class A shares' Accounting and
Administrative Costs, Other Expenses, Total Other Expenses and Total Fund
Operating Expenses would have been, on an annualized basis, .04%, .26%,
.30% and 1.18%, respectively, before expense offset, and .04%, .24%, .28%
and 1.16%, respectively, after expense offset. For the New York Fund Class
A shares, the above reimbursement policy was initiated on March 31, 1997,
and the dollar amount of the reimbursement paid to the New York Fund Class
A shares during the 1997 fiscal year by Sentinel Service was $47,242. In
the absence of the above reimbursement arrangement, the New York Fund
Class A shares' Management Fee, Rule 12b-1 Fee, Accounting and
Administrative Costs, Other Expenses, Total Other Expenses and Total Fund
Operating Expenses would have been .53%, .20%, .04%, .32%, .36% and 1.09%,
respectively, before expense offset, and .53%, .20%, .04%, .26%, .30% and
1.03%, respectively, after expense offset. For the Tax-Free Income Fund
Class A shares, the above reimbursement policy was not in effect during
fiscal 1997, and the actual Management Fee, Rule 12b-1 Fee, Accounting and
Administrative Costs, Other Expenses, Total Other Expenses and Total Fund
Operating Expenses were .53%, .20%, .04%, .18%, .22% and .95%,
respectively, before expense offset, and .53%, .20%, .04%, .14%, .18% and
.91%, respectively, after expense offset. Although Sentinel Service has no
present intention to do so, these arrangements may be terminated at any
time.
(c) Expense ratios after expense offset are as follows:
Class A:
<TABLE>
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
----- ----------- ------------------
<S> <C> <C> <C>
Common Stock Fund.......................... .16% .21% 1.04%
Balanced Fund.............................. .19 .23 1.16
Growth Fund................................ .32 .36 1.29
Small Company Fund......................... .37 .41 1.34
World Fund................................. .32 .36 1.29
High Yield Fund............................ .21 .25 1.20
Bond Fund.................................. .20 .24 .97
Government Securities Fund................. .21 .25 .98
Short Maturity Gov't Fund.................. .12 .12 1.00
Money Market Fund.......................... .32 .36 .76
Tax-Free Income Fund....................... .03 .03 .76
New York Fund.............................. .00 .00 .00
Pennsylvania Fund.......................... .15 .15 .90
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 6
<PAGE>
Class B:
<TABLE>
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
----- ----------- ------------------
<S> <C> <C> <C>
Common Stock Fund.......................... .20% .24% 1.79%
Balanced Fund.............................. .21 .25 1.88
Growth Fund................................ .43 .47 2.10
Small Company Fund......................... .68 .72 2.35
World Fund................................. .49 .53 2.16
High Yield Fund............................ .23 .27 1.30
Bond Fund.................................. .30 .34 1.87
Money Market Fund.......................... .29 .33 .73
</TABLE>
Class C:
<TABLE>
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
----- ----------- ------------------
<S> <C> <C> <C>
Common Stock Fund.......................... .20% .24% 1.79%
Balanced Fund.............................. .21 .25 1.88
World Fund................................. .49 .53 2,16
High Yield Fund............................ .23 .27 2.00
</TABLE>
(d) Expense ratios are projections based on actual net assets as of November
30, 1997 and adjusted to reflect expense limitations as of December 16,
1997 described in Note (b) above.
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............................... $ 60 $ 81 $ 105 $ 171
Balanced Fund................................... 61 85 111 184
Growth Fund..................................... 62 89 117 198
Small Company Fund.............................. 63 90 120 203
World Fund...................................... 62 89 117 198
High Yield Fund................................. 52 77 103 180
Bond Fund....................................... 49 70 91 154
Government Securities Fund...................... 50 70 92 155
Short Maturity Government Fund.................. 20 42 65 131
Money Market Fund............................... 8 24 42 94
Tax-Free Income Fund............................ 47 63 80 129
New York Fund................................... 40 40 40 40
Pennsylvania Fund............................... 49 68 88 146
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
7 Prospectus
<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............................... $ 58 $ 86 $ 117 $ 173
Balanced Fund................................... 59 89 122 184
Growth Fund..................................... 61 96 133 203
Small Company Fund.............................. 64 103 146 220
World Fund...................................... 62 98 136 207
High Yield Fund................................. 53 71 91 152
Bond Fund....................................... 59 89 121 174
Money Market Fund............................... 47 53 61 92
Class B (assuming no redemption at the end of the period):
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock Fund............................... $ 18 $ 56 $ 97 $ 173
Balanced Fund................................... 19 59 102 184
Growth Fund..................................... 21 66 113 203
Small Company Fund.............................. 24 73 126 220
World Fund...................................... 22 68 116 207
High Yield Fund................................. 13 41 71 152
Bond Fund....................................... 19 59 101 174
Money Market Fund............................... 7 23 41 92
Class C:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock Fund............................... $ 28 $ 56 $ 97 $ 211
Balanced Fund................................... 29 59 102 220
World Fund...................................... 32 68 116 249
High Yield Fund................................. 30 63 108 233
Class C (assuming no redemption at end of period):
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock Fund............................... $ 18 $ 56 $ 97 $ 211
Balanced Fund................................... 19 59 102 220
World Fund...................................... 22 68 116 249
High Yield Fund................................. 20 63 108 233
</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 and Class B shares, are based on costs actually borne by the Funds in
the fiscal year ended November 30, 1997, using average net assets of each Fund
for the fiscal year ended November 30, 1997, except for the New York Fund
Class A shares and the Pennsylvania Fund Class A shares, which take into
account changes in reimbursement policy effective March 31, 1997, the Tax-Free
Income Fund Class A shares, which take into account a reimbursement policy
adopted December 16, 1997, and the High Yield Fund, for which the
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 8
<PAGE>
expense ratios of the Class A and Class B shares are based on annualized costs
for the period from June 20, 1997 (commencement of operations) to November 30,
1997. In the case of the Class C shares, the expense ratios are based on
estimates of annualized costs anticipated to be borne by the Class C shares of
the Funds during the period from March 30, 1998 (commencement of offering of
Class C shares) to November 30, 1998. 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 for more
information on these fees.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
9 Prospectus
<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, 1997, has been audited by Price Waterhouse LLP,
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 the Class B shares of the Growth
Fund or any of the Class C shares of the Funds because none of them had
commenced operations as of November 30, 1997. The Annual Report of the Funds
may be obtained by shareholders without charge by calling the Company at (800)
282-3863.
<TABLE>
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
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 11/30/88 $ 21.49 $ 0.85 $ 3.17 $ 4.02 $ 0.83 $ 1.55 $ 2.38
Stock--A 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
11/30/96 35.21 0.59 8.18 8.77 0.61 2.77 3.38
11/30/97 40.60 0.57 7.03 7.60 0.57 3.54 4.11
- --------------------- -------------------------------------------- --------------------------------------
Balanced--A 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
11/30/96 16.84 0.54 2.13 2.67 0.54 0.42 0.96
11/30/97 18.55 0.56 2.18 2.74 0.55 0.45 1.00
- --------------------- -------------------------------------------- --------------------------------------
Growth--A 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
11/30/96 16.93 0.03 3.23 3.26 0.07 2.55 2.62
11/30/97 17.57 (0.02) 4.00 3.98 0.02 2.80 2.82
- --------------------- -------------------------------------------- --------------------------------------
Small 9 Mo. to
Company--A 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
11/30/96 5.20 0.01 0.95 0.96 0.03 0.96 0.99
11/30/97 5.17 0.02 1.16 1.18 0.01 0.04 0.05
- --------------------- -------------------------------------------- --------------------------------------
World--A 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
11/30/96 13.78 0.12 1.99 2.11 0.13 0.07 0.20
11/30/97 15.69 0.11 1.80 1.91 0.11 0.24 0.35
- --------------------- -------------------------------------------- --------------------------------------
High Yield 5 Mo. to
Fund--A 11/30/97(E) $ 10.00 $ 0.32 $ 0.41 $ 0.73 $ 0.32 $ -- $ 0.32
- --------------------- -------------------------------------------- --------------------------------------
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 10
<PAGE>
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
RATIO OF
EXPENSES TO RATIO OF NET
NET ASSET RATIO OF AVERAGE NET INVESTMENT AVERAGE NET ASSETS
VALUE AT TOTAL NET EXPENSES ASSETS BEFORE INCOME TO PORTFOLIO COMMISSION AT END
END OF RETURN* TO AVERAGE EXPENSE AVG. NET TURNOVER RATE PAID OF PERIOD
PERIOD (%) NET ASSETS (%) REDUCTION**(%) ASSETS (%) RATE (%) PER SHARE (000 OMITTED)
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$23.13 19.8 0.87 0.87 3.75 7 N/A $ 490,168
26.45 25.6 0.80 0.80 3.69 11 N/A 591,136
23.61 (2.4) 0.76 0.76 3.82 6 N/A 543,047
26.78 21.1 0.74 0.74 3.41 9 N/A 620,179
29.71 16.7 0.72 0.72 3.13 5 N/A 688,309
29.63 8.8 0.93 0.93 2.68 9 N/A 897,836
28.25 (1.8) 1.02 1.02 2.82 15 N/A 839,335
35.21 32.8 1.09 1.10 2.29 22 N/A 1,057,944
40.60 27.2 1.06 1.07 1.64 22 .0600 1,306,592
44.09 20.9 1.04 1.05 1.41 24 $.0600 1,509,999
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$12.22 14.6 0.97 0.97 5.74 52 N/A $ 67,019
13.53 18.1 0.96 0.96 6.16 71 N/A 74,417
12.58 1.8 0.91 0.91 6.17 40 N/A 74,808
13.89 17.5 0.85 0.85 5.70 32 N/A 90,580
14.82 12.4 0.81 0.81 4.86 38 N/A 120,700
15.27 9.7 1.14 1.14 3.88 72 N/A 229,632
14.08 (3.6) 1.21 1.21 3.97 66 N/A 226,328
16.84 24.4 1.27 1.29 3.77 110 N/A 267,103
18.55 16.6 1.20 1.22 3.13 83 .0600 297,288
20.29 15.4 1.16 1.17 2.93 63 $.0600 314,948
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
11.45 11.7 1.12 1.12 1.44 69 N/A $ 47,350
14.42 27.7 1.24 1.24 1.18 24 N/A 51,665
14.06 (1.4) 1.20 1.20 1.22 15 N/A 49,580
15.99 15.2 1.08 1.08 1.22 25 N/A 55,598
18.56 20.5 1.05 1.05 0.63 28 N/A 63,664
17.51 (1.3) 1.31 1.31 0.22 12 N/A 57,833
16.15 (5.1) 1.43 1.43 0.30 58 N/A 50,447
16.93 24.9 1.50 1.54 0.42 84 N/A 60,446
17.57 22.6 1.40 1.43 0.16 98 .0600 69,816
18.73 27.3 1.29 1.32 (0.15) 161 $.0600 88,184
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.87 5.9# 1.52+ 1.52+ (1.01)+ 61 N/A $ 105,176
5.53 2.0 1.58 1.58 (0.74) 46 N/A 88,420
5.20 12.2 1.56 1.60 0.26 79 N/A 89,321
5.17 22.0 1.47 1.51 0.23 60 .0600 99,393
6.30 23.0 1.34 1.36 0.38 45 $.0600 115,532
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.86 24.1# 2.00+ 2.12+ 0.41(1)+ 66 N/A $ 16,872
12.74 8.2 1.58 1.58 0.62 30 N/A 41,970
13.78 10.2 1.56 1.63 0.79 32 N/A 47,702
15.69 15.5 1.43 1.48 0.94 14 .0455 71,458
17.25 12.5 1.29 1.32 1.14 21 $.0411 89,740
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$10.41 7.3* 1.20+ 1.26+ 7.80+ 133 N/A $ 11,084
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
11
Prospectus
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
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>
Bond--A 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
11/30/96 6.49 0.41 (0.14) 0.27 0.41 -- 0.41
11/30/97 6.35 0.40 0.01 0.41 0.40 -- 0.40
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government 11/30/88 $ 9.35 $0.78 $(0.03) $ 0.75 $0.79 $ -- $0.79
Securities--A 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
11/30/96 10.30 0.61 (0.30) 0.31 0.61 -- 0.61
11/30/97 10.00 0.59 0.09 0.68 0.59 -- 0.59
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short 8 Mo. to
Maturity 11/30/95(B) $ 9.64 $0.40 $ 0.20 $ 0.60 $0.40 $ -- $0.40
Gov't.--A 11/30/96 9.84 0.57 (0.03) 0.54 0.57 -- 0.57
11/30/97 9.81 0.56 0.01 0.57 0.56 -- 0.56
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury--A 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
11/30/96 1.00 0.04 0.00 0.04 0.04 -- 0.04
11/30/97 1.00 0.04 -- 0.04 0.04 -- 0.04
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free--A 2 Mo. to
11/30/90(C) $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
11/30/96 13.62 0.65 (0.09) 0.56 0.65 -- 0.65
11/30/97 13.53 0.65 0.24 0.89 0.65 0.13 0.78
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New York 8 Mo. to
Fund--A 11/30/95(B) $11.19 $0.36 $ 0.53 $ 0.89 $0.36 $ -- $0.36
11/30/96 11.72 0.53 -- 0.53 0.53 -- 0.53
11/30/97 11.72 0.60 0.25 0.85 0.60 0.09 0.69
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Fund--A 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
11/30/96 13.40 0.66 (0.03) (0.63) 0.66 0.08 0.74
11/30/97 13.29 0.64 0.13 0.77 0.64 0.08 0.72
<CAPTION>
- ------------------------------- -------------------------------------------- --------------------------------------
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
12
Prospectus
<PAGE>
<TABLE>
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
RATIO OF
EXPENSES TO RATIO OF NET
NET ASSET RATIO OF AVERAGE NET INVESTMENT PORTFOLIO AVERAGE NET ASSETS
VALUE AT TOTAL NET EXPENSES ASSETS BEFORE INCOME TO TURNOVER COMMISSION AT END
END OF RETURN* TO AVERAGE EXPENSE AVG. NET RATE RATE PAID OF PERIOD
PERIOD (%) NET ASSETS (%) REDUCTION**(%) ASSETS (%) (%) PER SHARE (000 OMITTED)
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.02 10.0 0.92 0.92 8.97 133 N/A $ 27,858
6.21 12.9 0.87 0.87 9.07 165 N/A 31,668
6.03 5.8 0.83 0.83 8.55 108 N/A 35,389
6.43 15.6 0.81 0.81 8.06 77 N/A 43,447
6.56 9.5 0.78 0.78 7.03 83 N/A 58,106
6.90 13.7 0.92 0.92 5.98 147 N/A 83,387
5.85 (4.9) 0.98 0.98 6.34 133 N/A 80,487
6.49 18.8 0.99 1.03 6.81 237 N/A 108,755
6.35 4.5 0.98 1.00 6.46 176 N/A 99,408
6.36 6.7 0.97 0.99 6.37 130 N/A 88,756
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.31 8.2 0.90 0.90 8.20 41 N/A $ 31,007
9.57 12.1 0.82 0.82 8.59 25 N/A 34,644
9.54 8.3 0.78 0.78 8.25 22 N/A 41,134
10.04 13.5 0.77 0.77 7.52 14 N/A 45,734
10.18 8.6 0.76 0.76 6.90 79 N/A 68,293
10.45 10.6 0.98 0.98 6.06 97 N/A 134,749
9.31 (4.5) 1.00 1.00 5.95 149 N/A 104,457
10.30 17.9 1.03 1.04 6.50 367 N/A 108,100
10.00 3.2 1.00 1.01 6.18 614 N/A 92,299
10.09 7.2 0.98 0.99 6.15 249 N/A 75,810
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.84 6.3# 1.00+ 1.38+ 6.07(6)+ 58 N/A $ 28,417
9.81 5.6 1.00 1.20 6.09(6) 120 N/A 36,474
9.82 6.0 1.00 1.18 6.20(6) 61 N/A 45,044
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 1.7# 0.85+ 0.87+ 2.20(7) -- N/A $ 72,252
1.00 3.1 0.81 0.81 3.01 -- N/A 75,301
1.00 5.0 0.81 0.82 4.83 -- N/A 80,664
1.00 4.6 0.78 0.78 4.38 -- N/A 80,804
1.00 4.6 0.76 0.77 4.46 -- N/A 85,911
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$12.26 3.0# 0.00 0.52+ 4.98(5)+ -- N/A $ 13,824
12.68 10.2 0.38 0.73 6.37(5) 29 N/A 35,277
13.13 10.0 0.50 0.72 5.93(5) 48 N/A 55,538
13.81 11.9 0.64 0.90 5.41(5) 39 N/A 111,968
12.35 (5.1) 0.75 0.94 5.11(5) 92 N/A 99,935
13.62 16.0 0.90 0.99 5.06(5) 112 N/A 110,506
13.53 4.3 0.94 0.97 4.86 112 N/A 99,967
13.64 6.9 0.91 0.95 4.84 47 N/A 87,935
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.72 8.1# 1.22+ 1.29+ 4.60+ 32 N/A $ 5,332
11.72 4.8 1.04 1.10 4.65 48 N/A 5,749
11.88 7.7 0.30 1.09 5.31(8) 21 N/A 7,704
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$12.07 12.5 0.86(2) 1.44(2) 6.93(4) 48 N/A $ 29,611
12.34 8.5 1.16 1.16 6.43 50 N/A 29,435
12.25 5.9 1.34 1.34 5.90 27 N/A 30,536
12.74 10.3 1.27 1.27 5.71 8 N/A 32,667
13.15 9.4 1.16 1.16 5.62 1 N/A 33,669
13.57 8.1# 1.24+ 1.24+ 5.07+ 23 N/A 34,448
12.29 (4.9) 1.30 1.30 4.84 56 N/A 31,172
13.40 14.8 0.97 1.36 5.14(4) 80 N/A 34,975
13.29 5.0 0.75 1.37 5.07(4) 56 N/A 35,545
13.34 6.1 0.85 1.34 4.86(4) 28 N/A 34,844
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
13
Prospectus
<PAGE>
<TABLE>
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
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 8 Mo. to
Stock--B 11/30/96(D) $35.43 $ 0.22 $5.05 $5.27 $0.13 $-- $0.13
11/30/97 40.57 0.27 6.99 7.26 0.26 3.54 3.80
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced--B 8 Mo. to
11/30/96(D) $17.09 $ 0.26 $1.37 $1.63 $0.14 $-- $0.14
11/30/97 18.58 0.42 2.18 2.60 0.41 0.45 0.86
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Small 8 Mo. to
Company--B 11/30/96(D) $ 4.82 $(0.03) $0.33 $0.30 $ -- $-- $ --
11/30/97 5.12 (0.03) 1.13 1.10 -- 0.04 0.04
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
World--B 8 Mo. to $
11/30/96(D) $14.49 $(0.08) $1.17 $1.09 $ -- $-- $ --
11/30/97 15.58 0.01 1.74 1.75 0.04 0.24 0.28
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield 5 Mo. to
Fund--B 11/30/97(E) $10.00 $ 0.32 $0.39 $0.71 $0.31 -- $0.31
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bond--B 8 Mo. to
11/30/96(D) $ 6.30 $ 0.21 $0.06 $0.27 $0.21 $-- $0.21
11/30/97 6.36 0.34 0.02 0.36 0.34 -- 0.34
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury--B 8 Mo. to
11/30/96(D) $ 1.00 $ 0.03 $0.00 $0.03 $0.03 $-- $0.03
11/30/97 1.00 0.05 -- 0.05 0.05 -- 0.05
<CAPTION>
- --------------------- -------------------------------------------- --------------------------------------
</TABLE>
(A) Commenced operations March 1, 1993.
(B) Commenced operations March 27, 1995.
(C) Commenced operations October 1, 1990.
(D) Commenced operations April 1, 1996.
(E) Commenced operations June 23, 1997.
+ Annualized.
# Not 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 return.
** Expense reductions are comprised of (i) voluntary expense reimbursements,
in the cases of the World Fund and the Money Market Fund in fiscal 1993,
the Short Maturity Government Fund in all fiscal years shown, the Tax-Free
Income Fund in fiscal years 1990 to 1995, the Pennsylania Fund in the
periods ended December 31, 1986, 1987 and 1988, and November 30, 1995, 1996
and 1997, and the New York Fund for fiscal 1997, (ii) for all Funds in
operation during fiscal 1995, 1996 and 1997 only, credits received from the
custodian and dividend paying agent on cash balances.
(1) Ratio of net investment income to average net assets would have been .29%
in fiscal 1993, in the absence of a voluntary expense reimbursement.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
14
Prospectus
<PAGE>
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
RATIO OF
EXPENSES TO RATIO OF NET
NET ASSET RATIO OF AVERAGE NET INVESTMENT PORTFOLIO AVERAGE NET ASSETS
VALUE AT TOTAL NET EXPENSES ASSETS BEFORE INCOME TO TURNOVER COMMISSION AT END
END OF RETURN* TO AVERAGE EXPENSE AVG. NET RATE RATE PAID OF PERIOD
PERIOD (%) NET ASSETS (%) REDUCTION**(%) ASSETS (%) (%) PER SHARE (000 OMITTED)
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$40.57 14.9# 1.91+ 1.92+ 0.80+ 22 $.0600 $27,257
44.03 19.9 1.79 1.80 0.66 24 .0600 77,299
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$18.58 9.6# 2.12+ 2.13+ 2.21+ 83 $.0600 $10,948
20.32 14.6 1.88 1.89 2.21 63 .0600 26.593
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 5.12 6.2# 2.62+ 2.64+ (0.91)+ 60 $.0600 $ 1,943
6.18 21.6 2.35 2.36 (0.62) 45 .0600 7,656
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.58 7.5# 2.56+ 2.59+ (0.19)+ 14 $.0455 $ 3,188
17.05 11.5 2.16 2.18 0.23 21 .0411 10,121
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10.40 7.2# 1.30+ 1.34+ 7.70+ 133 N/A 33,808
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.36 4.5# 2.16+ 2.18+ 5.28+ 176 N/A $ 4,714
6.38 5.9 1.87 1.90 5.46 130 N/A 8,115
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 3.0# 0.76+ 0.77+ 4.40+ -- N/A $ 3,160
1.00 4.7 0.73 0.73 4.50 -- N/A 3,434
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
</TABLE>
(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, PMMC waived advisory fees of $97,538, and PMFS waived
distribution fees of $72,170. Had such fees not been waived, the ratio of
expenses to average net assets for the fiscal year ended December 31, 1988
would have been 1.44%.
(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 4.41%
fiscal 1997, 4.48% in fiscal 1996, 4.78% in fiscal 1995, 6.35% in 1988 and
6.14% in 1987, 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 6.14%
fiscal 1997, 5.93% in fiscal 1996 and 5.76% in fiscal 1995, in the absence
of a voluntary expense reimbursement.
(7) Ratio of net investment income to average net assets would have been 2.18%
in fiscal 1993, in the absence of a voluntary expense reimbursement.
(8) Ratio of net investment income to average net assets would have been 4.57%
in 1997, in the absence of a voluntary expense reimbursement.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
15
Prospectus
<PAGE>
PURCHASE OPTIONS
The Common Stock, Balanced, World and High Yield Funds currently offer three
classes of shares. Investors in these Funds may choose Class A shares, which
generally are sold subject to an initial sales charge and a distribution fee
of up to 0.30% per year, Class B shares, which are sold subject to a
contingent deferred sales charge ("CDSC") and a distribution fee of 1.00% per
year, or Class C shares, which are sold subject to a 1.00% CDSC in the first
year after purchase only, and a distribution fee of 1.00% per year. Class C
shares in general have operating expense ratios similar to those of the Class
B shares, but do not convert to Class A shares. The table below outlines the
differences between the three classes of shares.
<TABLE>
<CAPTION>
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
----- --------------- ----------- --------------------- ------------------
<C> <C> <C> <C> <S>
A Maximum 5.00% Maximum of 0.20%(3) Maximum of 0.30%(4) No
initial sales charge
(4.00% for High Yield
Fund)(2)
- ------------------------------------------------------------------------------------------
B CDSC of up to 4.00% 0.25% 1.00% Class B Shares
for a maximum of convert to Class A
6 years(5) Shares
automatically
after the
applicable CDSC
period(5)(6)
- ------------------------------------------------------------------------------------------
C CDSC of 1.00% for 0.25% 1.00% No
the first year
only (7)
</TABLE>
- --------
(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", "How to Redeem Shares--Class B Shares--CDSC", and "How to Redeem
Shares--Class C Shares--CDSC".
(2) Reduced for purchases of more than $100,000 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 High Yield Fund is
0.10%.
(4) The maximum distribution fee for Class A shares of the High Yield Fund is
0.20%.
(5) The applicable CDSC period is reduced to 5 years for aggregate purchases
from $250,001 to $500,000 and to 4 years for aggregate purchases of
$500,001 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.
(7) The CDSC may be waived in certain circumstances. See "How to Redeem
Shares--Waiver or Reduction of the CDSC".
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 16
<PAGE>
The Growth, Small Company and, Bond 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 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
Fund)(2)
- -----------------------------------------------------------------------------------------------
B CDSC of up to 4.00% 0.25% 1.00% Class B Shares convert
for a maximum of to Class A Shares
6 years(5) automatically after the
applicable CDSC
period(5)(6)
- --------
(1) See footnote (1) to the preceding chart.
(2) See footnote (2) to the preceding chart.
(3) The maximum service fee for Class A shares of the Bond Fund is 0.10%.
(4) The maximum distribution fee for Class A shares of the Bond Fund is 0.20%.
(5) See footnote (5) to the preceding chart.
(6) See footnote (6) to the preceding chart.
The Government Securities, Tax-Free Income, 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% None
initial sales
charge(2)
- --------
(1) See footnote (1) to the first chart in this section.
(2) See footnote (2) to the first chart in this section.
The Short Maturity Government Fund currently only offers 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 1.00% Maximum of 0.25% Maximum of 0.35% None
initial sales
charge(2)
</TABLE>
- --------
(1) See footnote (1) to first chart in this section.
(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 of $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".
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
17 Prospectus
<PAGE>
The Money Market Fund offers Class A and Class B Shares. Initial purchases
of Class A Shares of the Money Market Fund are not subject to any initial
sales charge, CDSC or Rule 12b-1 fees. Class B Shares of the Money Market Fund
may not be purchased directly (except in connection with the plans described
on page ) or acquired in exchange for shares of the Growth, Government
Securities, Short Maturity Government, New York and Pennsylvania Funds. Except
as provided on page , they 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 Money Market 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".
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 18
<PAGE>
THE FUNDS
Sentinel Group Funds, Inc. (the "Company") is a managed,
open-end investment company that consists of twelve 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".
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 a 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.
. The Common Stock Fund seeks a combination of long-term THE FUND
growth of capital and income, current return and relatively INVESTS FOR
low risk by investing in the common stocks of a diversified GROWTH OF
group of well-established companies. The Advisor will select CAPITAL AND
securities based on the issuing companies' quality and its INCOME WITH
appraisal of a stock's price in relation to its value. When RELATIVELY LOW
appropriate, the Fund may also invest in preferred stocks or RISK
debentures convertible into common stocks.
. The Balanced Fund seeks a conservative combination of THE FUND
stability, income and long-term growth of capital by invest- INVESTS FOR
ing in a diversified portfolio of stocks and bonds. The per- STABILITY,
centage invested in each type of security will depend on INCOME AND
whether the Advisor believes stocks or bonds offer a better GROWTH
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, 1997,
the portfolio securities in the bond portion of the Balanced
Fund had an average rating of Aa2; the average effective
portfolio maturity for the bond portion of the Fund was 9.1
years.
. The Growth Fund seeks to achieve long-term growth of THE FUND
capital by investing primarily in common stocks of companies INVESTS IN
which the Advisor believes have more growth potential than STOCKS OF
the U.S. economy as a whole. The Growth Fund will focus on GROWING
securities of well-established companies. Such companies COMPANIES, WITH
will have, in the Advisor's judgment, favorable growth po- A FOCUS ON
tential and experienced managements. Normally, the Fund will WELL-
be fully invested in common stocks and other securities con- ESTABLISHED
COMPANIES
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
19 Prospectus
<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 FUND . The Small Company Fund seeks long-term capital apprecia-
INVESTS IN tion by investing primarily in a diversified portfolio of
STOCKS OF common stocks, or securities convertible into common stock,
GROWING issued by small and medium-sized companies. The Fund may
COMPANIES, WITH also invest in larger, more established companies. Companies
A FOCUS ON selected for the Fund are believed to have superior growth
SMALL AND MID- potential and are judged to represent attractive relative
SIZED COMPANIES values. Income is not a factor in selecting investments.
The median market capitalization of the Fund's portfolio
companies generally will not exceed $1 billion and at least
65% of the Fund's assets will be invested in companies with
market capitalizations not exceeding $2 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 FUND . The World Fund seeks long-term growth of capital by in-
INVESTS vesting primarily in a diversified portfolio of marketable
PRIMARILY IN equity securities of established non-U.S. companies. Normal-
STOCKS OF NON- ly, at least 75% of the Fund's total assets will be invested
U.S. COMPANIES in securities of non-U.S. issuers selected by INVESCO Capi-
tal Management, Inc. (the "World Fund Sub-advisor") primar-
ily 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 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
Services ("Standard & 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 World Fund Sub-advisor, economic and busi-
ness conditions 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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
20
Prospectus
<PAGE>
purchase American Depositary Receipts ("ADRs"), and European
Depositary Receipts in bearer form, which are designed for
use in European securities markets. ADRs represent foreign
securities traded on U.S. exchanges or in the over-the-
counter markets. To expedite settlement of portfolio trans-
actions and minimize currency value fluctuations, the Fund
may purchase foreign currencies and/or engage in forward
foreign currency transactions. You can obtain more informa-
tion about these strategies by reading the section entitled,
"Investment Objectives and Policies--Considerations Applica-
ble 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, in-
cluding, but not necessarily limited to, those described on
page below.
THE FUND SEEKS
. The High Yield Fund seeks high current income and total HIGH CURRENT
return by investing primarily in lower rated corporate debt INCOME AND
securities. The High Yield Fund will normally invest at TOTAL RETURN BY
least 80% of its total assets in lower rated debt securi- INVESTING
ties. These are debt securities which, because of the PRIMARILY IN
greater possibility that the issuers will default, are not LOWER RATED
investment grade (i.e., are rated below BBB by Standard & CORPORATE DEBT
Poor's or below Baa by Moody's, or are unrated but consid- SECURITIES.
ered by the High Yield Fund Sub-advisor to be of comparable
credit quality). However, when unusual economic conditions
cause a temporary narrowing of yield spread between these
securities and higher rated securities, the High Yield Fund
may invest up to 100% of its assets in higher rated securi-
ties. The High Yield Fund may invest in debt securities of
any maturity. No more than 25% of the High Yield Fund's as-
sets will be invested in a single industry and no more than
5% of assets in a single issuer. Lower rated debt securities
are described in more detail, and the risks inherent in in-
vesting in such securities are discussed, under "Information
Relevant to the Fixed-Income Funds" on pages below. For
more information about ratings of debt securities, see
"Appendix A--Description of Bond Ratings" in the Statement
of Additional Information.
The High Yield Fund may also invest up to 20% of total as-
sets in common stocks, usually as a result of warrants asso-
ciated with debt instruments purchased by the High Yield
Fund, but also, under certain circumstances, to seek capital
appreciation. The Fund may also invest in debt securities
convertible into common stock.
The High Yield Fund, when aggregated with the holdings of
other mutual funds advised by Keystone Investment Management
Company ("the High Yield Fund Sub-advisor"), will not own
more than 20% of the outstanding debt securities of any is-
suer.
The High Yield Fund may invest in corporate loans made by
banks or other financial institutions either at origination
or by acquiring participations in, or assignments of or no-
vations of corporate loans. Certain corporate loans may not
be
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
21 Prospectus
<PAGE>
readily marketable and may be subject to restrictions on re-
sale; to the extent corporate loans are not readily market-
able or subject to such restrictions, those loans would be
subject to the High Yield Fund's limitation on illiquid se-
curities.
The corporate loans in which the High Yield Fund may in-
vest typically are originated, negotiated and structured by
a syndicate of co-lenders, one or more of whom administers
the loan on behalf of the syndicate. The value of a corpo-
rate loan will depend primarily on the creditworthiness of
the borrower. The High Yield Fund will invest in a corporate
loan only if, in the High Yield Fund Sub-advisor's judgment,
the borrower can meet the debt service on such a loan; how-
ever, the High Yield Fund Sub-advisor has no set minimum
credit rating criteria regarding the borrowers with respect
to investments in corporate loans by the High Yield Fund.
Although the High Yield Fund Sub-advisor will continue to
monitor the creditworthiness of the borrowers of corporate
loans in which the High Yield Fund invests, there can be no
assurance that such analysis will disclose factors that will
impair the value of a corporate loan.
The High Yield Fund may invest up to 15% of its net assets
in illiquid securities. Illiquid securities are not readily
marketable and include securities that are restricted as to
disposition under the federal securities laws or otherwise.
If registration of such securities under the Securities Act
of 1933, as amended (the "Securities Act"), is required,
such registration may not be readily accomplished, and if
such securities may be sold without registration, such re-
sale may be permissible only in limited quantities. In ei-
ther event, the inability to sell securities at the most op-
portune time may negatively affect the net asset value of
the High Yield Fund.
The High Yield Fund may invest up to 25% of net assets in
the securities of foreign issuers, provided that all such
securities are denominated in U.S. dollars and are purchased
and held by the High Yield Fund in the United States. In-
vestors should note that investing in foreign securities in-
volves certain special risk considerations which normally
are not associated with investing in U.S. securities, in-
cluding, but not necessarily limited to, those described on
page below.
Temporarily available cash may be invested in short term
securities such as certificates of deposit, bankers' accept-
ances, commercial paper, Treasury bills, repurchase agree-
ments and U.S. Government Securities, as defined on page
below. Some or all of the High Yield Fund's assets also may
be invested in such investments during periods of unusual
market conditions.
The High Yield Fund does not expect to invest in futures
and options, or other derivatives contracts during the com-
ing year. However, if and when derivative securities are de-
veloped which permit effective hedging of a lower quality
bond portfolio, the High Yield Fund may, for hedging pur-
poses only, buy or sell derivative securities contracts
which in the opinion of the High Yield Fund Sub-advisor will
hedge specified risks relating to the High Yield Fund's
portfolio of lower quality bonds. The total market value of
such contracts at the time of the transaction initiating the
position will not exceed 5% of the High Yield Fund's net as-
sets.
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 securities. At
INCOME least 80% of the Fund's assets, exclusive of cash items such
CONSISTENT WITH as commercial paper, certificates of deposit and banker's
CAPITAL acceptances, will be invested in one or more of the follow-
PRESERVATION ing types of securities:
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 22
<PAGE>
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. gov-
ernment, 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 prov-
ince 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 securi-
ties 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.
The Fund will invest no more than 20% 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 Advisor's opinion, is below the
credit quality of securities rated BBB by Standard & Poor's
or Baa by Moody's. See "Appendix A--Description of Bond Rat-
ings" in the Statement of Additional Information for more
information concerning ratings of debt securities. See the
description of these lower rated securities and discussion
of the risks inherent in such securities under "Information
Relevant to the Fixed-Income Funds" on page below.
As of November 30, 1997, the portfolio securities in the
Bond Fund had an average credit quality of AA3; the average
effective portfolio maturity for the Fund was 9.8 years. The
Bond Fund may not invest more than 25% of its total assets
in any one industry, except for U.S. Government Securities.
In applying this limitation, utility companies will be di-
vided according to their services, and financial services
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.
. The Government Securities Fund seeks as high a level of THE FUND
current income as is consistent with safety of principal 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
23 Prospectus
<PAGE>
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 below.
U.S. Government Securities include the following:
U.S. 1. U.S. Treasury Bills, Notes and Bonds. These are obli-
GOVERNMENT gations issued directly by the U.S. Treasury and have
SECURITIES maturities of less than one year for Bills, one to
INCLUDE A WIDE ten years for Notes, and ten to thirty years for
ARRAY OF Bonds.
INVESTMENTS
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, 1997, the Fund's average effective portfolio maturity
was 9.8 years.
THE FUND MAY At times, the Fund may make investments in GNMA Certifi-
INVEST cates and other mortgaged-backed U.S. Government Securities
SUBSTANTIALLY ("Mortgage-Backed Securities"). Each GNMA Certificate is
IN MORTGAGE- backed by a pool of mortgage loans insured by the Federal
BACKED Housing Administration and/or the Veterans Administration.
SECURITIES GNMA Certificates provide for the payment of fixed monthly
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.
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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 24
<PAGE>
securities representing an interest in a pool of FHLMC par-
ticipation certificates. 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 Short Maturity Government Fund seeks as high a level THE FUND
of current income as is consistent with safety of principal INVESTS
by investing primarily in U.S. Government Securities. This PRIMARILY IN
Fund will invest at least 65% of its assets in U.S. Govern- U.S. GOVERNMENT
ment Securities with average maturities of from 2 to 5 SECURITIES WITH
years. The remainder of the Fund's assets may be invested in LIMITED
U.S. Government Securities with other maturities, and the MATURITIES
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 Maturity Gov-
ernment 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 instru-
mentalities. 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.
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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
25 Prospectus
<PAGE>
rates and the economy. At times, the Fund may make invest-
ments in Mortgage-Backed Securities, as described above un-
der "The Government Securities Fund". As of November 30,
1997, the Fund's average effective portfolio maturity was
2.9 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 FUND . The Money Market Fund seeks as high a level of current
INVESTS SOLELY income as is consistent with safety of principal and the
IN SHORT-TERM maintenance of liquidity by investing solely in short-term
U.S. TREASURY obligations of the U.S. Treasury. Such obligations include
SECURITIES U. S. Treasury Bills, U. S. Treasury Notes and U. S. Trea-
sury Bonds with remaining maturities of 397 days or less.
Securities 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.
INCOME MAY BE In many states, the Fund's income dividends may be exempt
EXEMPT FROM from state and local income taxes, but subject to federal
STATE AND LOCAL income taxes. For more information on state and local tax
TAXES exemption, see "Taxes" herein.
THE FUND . The Tax-Free Income Fund seeks as high a level of cur-
INVESTS FOR rent income, exempt from federal income taxes, as is consis-
CURRENT INCOME tent with capital preservation, by investing primarily in a
EXEMPT FROM diversified portfolio of municipal bonds. These investments
FEDERAL INCOME may include obligations of states, territories and posses-
TAXES sions of the United States and their political subdivisions,
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
Fund will, at all times, be invested in municipal bonds
rated within the four highest rating categories, or obliga-
tions of issuers having an issue of outstanding municipal
bonds rated within the four highest rating categories of ei-
ther Moody's or Standard & Poor's, except to the extent the
Fund is invested in defensive investments, as described be-
low. See "Appendix A--Description of Bond Ratings" in the
Statement of Additional Information for more information re-
garding 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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 26
<PAGE>
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 Fund's total assets may be in-
vested in securities rated below investment-grade or unrated
securities that the Advisor believes are not equivalent in
credit quality to municipal bonds in the fourth highest rat-
ing category. As of November 30, 1997, the portfolio securi-
ties of the Tax-Free Income Fund had an average rating of
A1; the average effective portfolio maturity of the Fund was
10.9 years.
. The New York Fund seeks as high a level of current in- THE FUND SEEKS
terest income exempt from federal income taxes and New York HIGH CURRENT
State and New York City personal income taxes as is consis- INCOME EXEMPT
tent with liquidity and capital preservation, by investing FROM FEDERAL
substantially all of its assets in obligations issued by or AND NEW YORK
on behalf of the State of New York and its political subdi- STATE AND CITY
visions, agencies, authorities, and instrumentalities ("New INCOME TAXES
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. At least 80% of the total assets of the New
York Fund will, at all times, be invested in municipal bonds
rated within the four highest rating categories, or obliga-
tions of issuers having an issue of outstanding municipal
bonds rated within the four highest rating categories, of
either Moody's 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 Rat-
ings" to the Statement of Additional Information for more
information regarding 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 policy, no more
than 5% of the New York Fund's total assets may be invested
in securities rated below investment-grade or unrated secu-
rities that the Advisor believes are not equivalent in
credit quality to municipal bonds in the fourth highest rat-
ing category. As of November 30, 1997, the portfolio securi-
ties of the New York Fund had an average rating of A2; the
average effective maturity of the Fund was 10.6 years. Due
to the New York Fund's concentration in New York Obliga-
tions, the Fund is more susceptible to factors adversely af-
fecting 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. New York City's financial health
is particularly related to the financial services sector.
Other factors that may negatively affect economic conditions
in New York include adverse changes in employment rates,
federal revenue sharing or laws with respect to tax-exempt
financing. For additional information pertinent to invest-
ment in New York Obligations, see "Appendix B--Economic Con-
ditions in New York" to the Statement of Additional Informa-
tion.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
27 Prospectus
<PAGE>
THE FUND SEEKS . The Pennsylvania Fund seeks as high a level of current
HIGH CURRENT interest income exempt from federal income taxes and Penn-
INCOME EXEMPT sylvania personal income taxes as is consistent with liquid-
FROM FEDERAL ity and capital preservation, by investing substantially all
AND of its assets in obligations issued by or on behalf of the
PENNSYLVANIA Commonwealth of Pennsylvania (the "Commonwealth" or "Penn-
INCOME TAXES sylvania") and its political subdivisions, agencies, author-
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.
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, 1997, the portfolio securities of the Pennsyl-
vania Fund had an average rating of Aa1; the average effec-
tive portfolio maturity for the Fund was 10.8 years.
At least 75% of the Pennsylvania Fund's assets will be in-
vested in (a) municipal obligations rated "A" or higher by
Moody's or by Standard & Poor's or, if not rated, that, in
the opinion of the Advisor, possess equivalent investment
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 Pennsylvania.
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.
* * * * * * * * * * * * * * * * * * * * * * * * * *
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 28
<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, except the High Yield Fund as described
above, may invest in illiquid securities, and none of the
Funds may engage in short sales of securities.
All of the Funds, except the Money Market Fund, may also
invest 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.
Investing in Foreign Securities
The Common Stock, Balanced, Growth, Small Company, High
Yield and Bond Funds may invest in securities of foreign is-
suers, although only where such securities are trading in
the United States (or in the case of the High Yield and Bond
Funds, on the Eurodollar market), and only where trading is
denominated in U.S. dollars. The World Fund invests in secu-
rities traded in foreign markets and denominated in foreign
currencies.
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 listed below. The Funds may be affected
favorably or unfavorably by changes in currency rates or ex-
change control regulations. Markets in securities of foreign
issuers may be less liquid and more volatile than those in
the United States, for example because of substantially
lower trading volume. Such lower volume could result in the
Funds obtaining lower sales prices in the event of forced
liquidation of securities to meet unanticipated cash re-
quirements. 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 exchanges. Foreign companies generally release less fi-
nancial information than comparable U.S. companies. Further-
more, foreign companies generally are not subject to uniform
accounting, auditing and financial reporting requirements.
When investing in foreign countries, there is the possibil-
ity of expropriation of assets, confiscatory taxation, dif-
ficulty with the execution of judgments against
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
29 Prospectus
<PAGE>
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.
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. In addition,
their securities may trade less frequently and in lower
share volumes, making them subject to wider price fluctua-
tions.
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.
The High Yield Fund may invest without limitation, and the
Bond Fund and the bond portion of the Balanced Fund may in-
vest up to 20% of total assets in lower rated debt securi-
ties (commonly referred to as junk bonds). Because of the
increased risk of default, these securities generally have
higher nominal or effective interest rates than higher qual-
ity securities. The Funds may purchase bonds in the lowest
rating categories (D for S&P and C for Moody's) and compara-
ble unrated securities. However, the Funds will only pur-
chase securities rated lower than B- by S&P or B3 or lower
by Moody's if the Advisor or the High Yield Fund Sub-advisor
believes the quality of such securities is higher than indi-
cated by the rating.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 30
<PAGE>
These lower rated debt securities may pay interest at
fixed, floating or adjustable rates. To the extent the Funds
invest in adjustable or floating rate securities, the value
of such securities is less likely to be adversely affected
by interest rate changes than fixed rate securities. Howev-
er, reductions in interest rates also may translate into
lower ordinary income distributions paid by the Funds. The
High Yield and Bond Funds, and the bond portion of the Bal-
anced Fund, also may invest in debt securities (i) that do
not pay interest but, instead, are issued at a significant
discount to their maturity values (referred to as zero cou-
pon securities), (ii) that pay interest, at the issuer's op-
tion, in additional securities instead of cash (referred to
as pay-in-kind securities) or (iii) pay interest at prede-
termined rates that increase over time (referred to as step
coupon bonds). Although zero coupon securities, pay-in-kind
securities and step coupon bonds may not pay interest, the
High Yield, Bond and Balanced Funds nevertheless must under
existing tax law accrue and distribute the income deemed to
be earned on a current basis, and therefore may have to sell
other investments to raise the cash needed to make income
distributions.
Lower rated bonds are generally considered significantly RISK FACTORS
more speculative and likely to default than higher quality RELATING TO
bonds. Relative to other debt securities, junk bond values LOWER RATED
tend to be more volatile because: (i) an economic downturn FIXED-INCOME
may affect the ability of issuers to pay interest and repay SECURITIES
principal; and (ii) the secondary market for such securities
may at times be less liquid or their prices may respond more
adversely to negative publicity or investor perceptions,
making it more difficult to value or dispose of the securi-
ties. If the market for lower rated bonds becomes illiquid,
the Fund may experience problems in valuing these securi-
ties. The likelihood that these securities will help the
Funds achieve their investment objectives is more dependent
on the Advisor's or the High Yield Fund Sub-advisor's own
credit analysis than on ratings. Lower rated bonds are also
more sensitive than other debt securities to adverse issuer-
specific developments. The risk of loss due to default by
the issuer of a junk bond is significantly greater for the
holders of junk bonds than for holders of higher rated secu-
rities because such securities may be unsecured and may be
subordinated to other creditors of the issuer. In the event
of a default, the Funds may incur additional expenses to the
extent it is required to seek recovery or participate in the
restructuring of the obligation. Junk bonds also may have
call or redemption features that permit the issuer to repur-
chase the securities from the Funds. If a call is exercised
by the issuer during a period of declining interest rates,
the affected Fund would likely be required to replace such
called securities with lower yielding securities, thus de-
creasing net investment income to the Fund.
The High Yield, Bond and bond portion of the Balanced
Funds may purchase certain restricted securities ("Rule 144A
Securities") for which there is a secondary market of quali-
fied institutional buyers as defined by Rule 144A under the
Securities Act. Rule 144A Securities that are determined to
be liquid securities, either by the Advisor or the High
Yield Fund Sub-advisor pursuant to guidelines approved by
the Company's Board of Directors or by the Board, will not
be subject to the High Yield Fund's limitation on illiquid
securities, or the prohibition on illiquid securities for
the Bond Fund and bond portion of the Balanced Fund. Such
liquid
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
31 Prospectus
<PAGE>
Rule 144A Securities may become illiquid if qualified insti-
tutional buyers are unavailable. See "Investment Objectives
and Policies--Considerations Applicable to the Fixed Income
Funds" in the Statement of Additional Information for addi-
tional information regarding liquidity determinations with
respect to Rule 144A Securities and corporate loans.
In the fiscal year ended November 30, 1997, the Government
Fund had portfolio turnover of 249%, the High Yield Fund had
portfolio turnover of 133%, the Bond Fund had portfolio
turnover of 130%, the Tax-Free Income Fund had portfolio
turnover of 47%, the Balanced Fund had portfolio turnover of
63% (in the case of the Balanced Fund, this portfolio turn-
over results from portfolio turnover of 22% for the equity
portion, and 135% for the bond portion), and the Short Matu-
rity Government Fund had portfolio turnover of 61%. These
Funds are actively managed, and their portfolios are con-
stantly monitored and adjusted in an attempt to increase in-
come, 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 ad-
versely affect performance, because the Funds generally 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 Advisor or
High Yield Fund Sub-advisor believes it will help the Funds
to achieve their investment objectives. High portfolio turn-
over (i.e., greater than 100% per year) may result in ear-
lier recognition of capital gains or capital losses for tax
purposes than would otherwise be the case.
The assets of the High Yield, Bond, New York, Pennsylva-
nia, Tax-Free Income, Government Securities and Short Matu-
rity Government Funds and the bond portion of the Balanced
Fund may include securities that have been purchased on a
when-issued or delayed-delivery basis. Delivery of and pay-
ment for these securities could take place a month or more
after the date of the transaction. During this time, the
value of the purchase commitment will fluctuate with the
market for comparable 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 settle-
ment date if, in the Advisor's opinion, such action would
benefit shareholders. When a Fund purchases securities on a
when- issued or delayed-delivery basis, it will provide its
custodian with enough assets to pay the purchase price of
these securities upon delivery. Payment would be in the form
of cash, cash equivalents, or short-term, high grade, fixed-
income securities. This policy ensures that the use of when-
issued or delayed-delivery purchases does not have the ef-
fect of leveraging the portfolio.
The Bond, Government Securities, Short Maturity Government
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 current month and
simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified
future date. During the roll period, a Fund foregoes princi-
pal and interest paid on the mortgage-backed or U.S. Trea-
sury securities. A Fund is compensated by the difference be-
tween the current sales price and
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
32
Prospectus
<PAGE>
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.
The use of dollar rolls tends to increase the portfolio
turnover of the Funds, and increases portfolio income with-
out increasing the risk levels of the Funds.
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 March 30, 1998, 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.
In general, any gain or loss from the sale of a tax-exempt
security will be treated for federal income tax purposes 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 taxable. Recent legislation creates
new categories of capital gains taxable at different rates
which a Fund may pass through to shareholders. See "Taxes"
below.
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.
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 and
above.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
33 Prospectus
<PAGE>
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 These Options And Futures
Transactions.
Options and futures transactions involve certain risks;
however, the Advisor believes that since the New York, Penn-
sylvania and Tax-Free Income Funds will engage in these
transactions for hedging purposes only, these portfolio
strategies will not subject these Funds to the risks fre-
quently associated with the speculative use of options and
futures transactions. However, there are certain risks re-
lated to futures transactions used for hedging purposes that
you should understand. These include: (i) incorrect fore-
casts of interest rates by the Advisor, which may result in
the hedge being ineffective; (ii) possible lack of a liquid
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 March
30, 1998, 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 thirteen individuals, three of whom are "inter-
ested persons" of the Funds as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The Boards
are responsible for the overall supervision of the opera-
tions of the Funds and perform the various duties imposed on
the directors 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 $ bil-
INSURANCE lion. The partners are:
COMPANIES WITH
COMBINED ASSETS . Sentinel Advisors, Inc., an indirect wholly-owned
OF OVER $ subsidiary of National Life Insurance Company
BILLION ("National Life"),
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 34
<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 Small Company, 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 In-
come, Government Securities and Short Maturity
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 High Yield Fund:
0.75% per annum on the first $100 million of
average daily net assets of the Fund:
0.70% per annum on the next $100 million of such
assets;
0.65% per annum on the next $100 million of such
assets; and
0.60% per annum on such assets in excess of $300
million.
(5) 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.
(6) With respect to the Money Market 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
35 Prospectus
<PAGE>
Portfolio Managers
The Advisor employs a team approach in managing the Funds.
The management teams are comprised of a lead portfolio man-
ager, other portfolio managers and research analysts. Each
team includes members with one or more areas of expertise
and shares the responsibility for providing ideas, informa-
tion and knowledge in managing the Funds. Rodney A. Buck,
the Chief Executive Officer of the Advisor, is also Chairman
and Chief Executive Officer of National Life Investment Man-
agement Company, Inc., and Senior Vice President and Chief
Investment Officer of National Life. Mr. Buck has been em-
ployed by the Advisor or its affiliates since 1972. There
are three investment management teams: an Equity Value Team,
headed by Richard A. Pender, Senior Vice President of the
Advisor; an Equity Growth Team, headed by Robert L. Lee, Se-
nior Vice President of the Advisor; and a Fixed Income Team,
headed by David M. Brownlee, Senior Vice President of the
Advisor.
Each of Messrs. Buck, Pender, Lee and Brownlee is a Chart-
ered Financial Analyst. Mr. Pender has been associated with
the Advisor or its affiliates since 1986. Mr. Lee joined the
Advisor in 1993. Prior to that time he was a Vice President
at Shawmut National Corporation. Mr. Brownlee also joined
the Advisor in 1993; prior to that he was a Managing Direc-
tor at Aetna Life and Casualty.
The Common Stock Fund is managed by Mr. Pender and Daniel
J. Manion, Vice President of the Advisor. Mr. Pender and Mr.
Manion have been members of the Common Stock Fund management
team since 1994. Mr. Manion, a Chartered Financial Analyst,
has been associated with the Advisor since 1993; prior to
that he was associated with Wright Investors' Service.
Mr. Lee has been the portfolio manager for the Growth Fund
since November, 1993.
The Small Company Fund is managed by Scott T. Brayman,
Vice President of the Advisor, and Mr. Lee. Mr. Brayman is a
Chartered Financial Analyst, and has been with the Advisor
since 1995. He has been involved with the Small Company Fund
since he joined the Advisor. Prior to joining the Advisor,
he was associated with Argyle Capital Management, Inc.
The Balanced Fund is managed by a team consisting of Mr.
Buck, Mr. Pender and Richard D. Temple, Vice President of
the Advisor. Mr. Buck has been the Fund's lead portfolio
manager since 1982. Mr. Temple is a fixed-income portfolio
manager who has been employed by the Advisor or its affili-
ates since 1969.
The portfolio managers for the Bond Fund are Mr. Temple
and William C. Kane, Vice President of the Advisor. Mr. Tem-
ple has been the lead portfolio manager for the Bond Fund
since 1985. Mr. Kane is a Chartered Financial Analyst, and
has been employed by the Advisor or its affiliates since
1992. Prior to joining the Advisor, Mr. Kane was employed by
Chase Manhattan Bank.
The portfolio manager of the Government Securities and
Short Maturity Government Funds is Mr. Brownlee.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 36
<PAGE>
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. The port-
folio managers of the Money Market Fund are Mr. Temple and
Darlene Coppola, Money Market Trader of the Advisor. Ms.
Coppola has been employed by the Advisor or its affiliates
since 1974.
Sub-Advisors
With respect to the World Fund, the Advisor has entered INVESCO CAPITAL
into a sub-advisory agreement with the World Fund Sub-advi- MANAGEMENT,
sor, INVESCO Capital Management, Inc. Pursuant to such INC. SERVES AS
agreement, the World Fund Sub-advisor provides the Advisor SUB-ADVISOR TO
with a continuous investment program consistent with the THE WORLD FUND
World Fund's stated investment objectives and policies. The
sub-advisory agreement provides for a fee from the Advisor
to the World Fund Sub-advisor of the greater of (a) a
monthly fee equal to 0.03125% (0.375% per annum) of the av-
erage daily net assets of the Fund up to $500 million and
0.025% (0.30% per annum) of such average net assets in ex-
cess of $500 million, or (b) $20,000 per annum. INVESCO Cap-
ital Management, Inc. became the World Fund Sub-advisor on
April 1, 1996, and the present sub-advisory agreement was
approved by the shareholders of the World Fund at a meeting
held on February 28, 1997. The effective fee rate paid by
the Advisor to the World Fund Sub-advisor for the fiscal
year ended November 30, 1997 was 0.375% per annum.
The World Fund Sub-advisor is located at 1315 Peachtree
Street, Atlanta, Georgia 30309.
The World Fund's portfolio manager since June 1994 has
been Erik B. Granade, International Equity Portfolio Manager
of the World Fund Sub-advisor. Mr. Granade is a Chartered
Financial Analyst. He was associated with Cashman Farrell
and Associates from June, 1994 to March 31, 1996, when he
moved to the World Fund Sub-advisor. Prior to June, 1994 he
was an International Portfolio Manager with Provident Capi-
tal Management, Inc.
With respect to the High Yield Fund, the Advisor has en- KEYSTONE
tered into a sub-advisory agreement with Keystone Investment INVESTMENT
Management Company, the High Yield Fund Sub-advisor. Pursu- MANAGEMENT
ant to this agreement, the High Yield Fund Sub-advisor pro- COMPANY SERVES
vides the Advisor with a continuous investment program con- AS THE SUB-
sistent with the High Yield Fund's stated investment ADVISOR TO THE
objective and policies. Under this arrangement, the High HIGH YIELD FUND
Yield Fund Sub-advisor works in cooperation with the Advi-
sor's investment professionals but has full authority to
manage the High Yield Fund's portfolio on a day to day ba-
sis. The sub-advisory agreement relating to the High Yield
Fund provides for a fee from the Advisor to the High Yield
Fund Sub-advisor equal to one half of the fee paid by the
High Yield Fund to the Advisor, provided that the fee paid
by the Advisor to the High Yield Fund Sub-advisor will al-
ways be at least 0.35% per annum of the average daily net
assets of the High Yield Fund. This agreement became effec-
tive June 20, 1997.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
37 Prospectus
<PAGE>
The High Yield Fund Sub-advisor is located at 200 Berkeley
Street, Boston, Massachusetts 02116 and is an indirect sub-
sidiary of First Union Corporation. First Union is headquar-
tered in Charlotte, North Carolina. First Union and its sub-
sidiaries provide a broad range of financial services to
individuals and businesses throughout the United States.
The portfolio manager for the High Yield Fund is Prescott
B. Crocker, Senior Vice President and Group Head of Corpo-
rate Fixed Income at the High Yield Fund Sub-advisor. Mr.
Crocker is a Chartered Financial Analyst, and has been the
High Yield Fund's portfolio manager since its inception on
June 20, 1997. Mr. Crocker joined Keystone in February,
1997. Prior to that he was President of Boston Security
Counselors, the investment management subsidiary of the bro-
kerage firm Advest Co. Inc. He had joined Boston Security
Counselors in November of 1993 as Senior Vice President-
Fixed Income, where he managed among others the Advest Ad-
vantage series High Yield Trust. Upon the sale of the Advest
Advantage funds to Northstar Investment Management Co. in
July of 1995, Mr. Crocker joined that company as Fund Manag-
er. He returned to Boston Security Counselors in August of
1996 as President.
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 provide 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. Sentinel Service has
voluntarily agreed to reimburse the Class A shares of the
Tax-Free Income Fund, the Pennsylvania Fund, the Short Matu-
rity Government Fund, and the New York Fund for expenses
necessary to limit such Funds' individual expense ratios to
0.75%, 0.90%, 1.00% and zero, respectively, in each case af-
ter expense offset. Although Sentinel Service has no present
intention to do so, these arrangements may be terminated at
any time.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 38
<PAGE>
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 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 Money
Market, Short Maturity 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 Maturity Government Fund adopted a supple-
mental distribution plan pursuant to Rule 12b-1 under the
1940 Act, applicable only to it, and both the Short Maturity
Government Fund and the New York Fund became subject to the
existing distribution plan for all of the other Funds. Ef-
fective April 1, 1996, the Small Company, World, Common
Stock, Balanced and Bond Funds adopted a Class B Distribu-
tion Plan applicable only to the Class B shares of these
Funds. The High Yield Fund became subject to the Class A and
Class B distribution plans on June 20, 1997. The Growth Fund
commenced offering Class B shares pursuant to the Class B
Distribution Plan on January 12, 1998. Effective March 27,
1998, the Common Stock, Balanced, World and High Yield Funds
adopted a Class C Distribution Plan, which applies only to
the Class C 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 Money Market Fund is a partic-
ipant in the Plans and none of the fees paid by the other
Funds pursuant to the Plans will be used to reimburse the
Distributor for expenses incurred in connection with the
distribution of Money Market 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 Small Company, Growth, World, Com-
mon Stock and Balanced Funds, (b) .20% of average daily net
assets in the case of the High Yield, Bond, New York, Penn-
sylvania, Tax-Free Income and Government Securities Funds,
or (c) .35% of average daily net assets in the case of the
Short Maturity Government Fund. Such fees will be used to
reimburse the Distributor for expenses incurred in connec-
tion with distribution and promotion of the shares of each
participating Fund, including salaries and expenses of the
Distributor's wholesale sales force, home office management
and marketing personnel, expenses
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
39 Prospectus
<PAGE>
incurred by the Distributor for the occupancy of its office
space in Montpelier, Vermont, expenses incurred by the Dis-
tributor with respect to equipment and supplies, expenses
incurred for the preparation, printing and distribution of
sales literature used in connection with the offering of
such shares to the public, expenses incurred in advertising,
promoting and selling shares of such Fund to the public, ex-
penses incurred for the preparation, printing and distribu-
tion of the Prospectus and Statement of Additional Informa-
tion, and any supplement thereto used in connection with the
offering of such Fund's shares to the public, or any reports
and other communications for distribution to existing share-
holders, 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 Common Stock, Balanced, Growth,
Small Company, World, High Yield and Bond 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.
The High Yield Fund Class B shares are not assessed a dis-
tribution fee in respect of the seed money shares owned by
National Life, which will result in an overall Rule 12b-1
fee to the Class B shares of the High Yield Fund of less
than 1.00% for so long as National Life maintains its in-
vestment.
Under the Plan applicable to the Class C shares, the Class
C shares of each of the Common Stock, Balanced, World and
High Yield 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. In the first year after the purchase this fee
will be applied to recover the initial sales commission of
1.00% paid by the Distributor to the selling dealer. In sub-
sequent years, the entire 1.00% will be paid to the selling
dealer as additional commission and/or service fees.
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.
To dealers, the Distributor pays, in the case of the Class
A shares of the Small Company, 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 Maturity 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
Common Stock, Balanced, Growth, Small Company, World, High
Yield and Bond Funds, the Distributor pays to dealers a
service
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 40
<PAGE>
fee which varies based on the total assets in Class B shares
of such Funds for which each registered representative of
such dealer is the registered representative of record at
the time commissions are paid, as follows:
<TABLE>
<CAPTION>
ASSETS IN CLASS B SHARES OF THE FUNDS ANNUAL
FOR WHICH A PARTICULAR INDIVIDUAL IS THE 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 0.25% 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. No service fee is paid on
Class B shares in house accounts, accounts in nominee name,
or accounts in dealer street name.
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 expenses from any other Fund or class
of shares of a Fund, or in any future year for reimbursable
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 Common Stock, Balanced, World and High Yield Funds of-
fer prospective investors a choice of three classes of
shares, Class A, Class B and Class C, which incur sales
charges in different forms and amounts and which bear dif-
ferent levels of expenses. These alternative purchase ar-
rangements are designed to enable the investor to choose the
method of purchasing Fund shares that is most beneficial to
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
41 Prospectus
<PAGE>
the investor based on all factors to be considered, which
may include: the amount and intended length of the invest-
ment, the type of Fund, and whether the investor intends to
utilize the exchange privilege. Generally, when making an
investment decision, investors should at least consider the
anticipated life of an intended investment in the Funds, the
accumulated distribution fees plus CDSCs on Class B and
Class C shares, the initial sales charge, if any, plus accu-
mulated distribution fees on Class A shares, the possibility
that the anticipated higher return on Class A shares due to
the lower ongoing charges will offset the initial sales
charge paid on such shares, and the automatic conversion of
Class B shares to Class A shares at certain specified times.
The Growth, Small Company and Bond Funds offer prospective
investors a choice of Class A shares or Class B shares. The
same factors as those listed in the preceding paragraph
should be considered in determining which method of purchas-
ing shares of these Funds is most beneficial to the invest-
or.
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 or Class C shares ac-
cepted is $1,000,000. The Funds may refuse any order to pur-
chase shares.
The Government Securities, Short Maturity Government, Tax-
Free Income, New York and Pennsylvania Funds offer only
Class A shares. Class B shares of the Money Market Fund are
offered only for exchanges from the Class B shares of other
Funds, and are not offered for initial purchase, except
where the investment is to be exchanged into Class B shares
of other Funds within 90 days, or in dollar-cost averaging
programs into Class B shares of other Funds where the ini-
tial investment is a minimum of $10,000, each dollar-cost
averaging transaction at least $1,000, and the program is
completed within 24 months. A CDSC will apply to Class B
shares in the Money Market Fund, and to Class A shares of
the Money Market Fund if such shares were acquired in ex-
change for Class C shares acquired within one year of the
date of such exchange. See "Shareholder Services--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 Money Market 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 42
<PAGE>
Class A Shares--Sales Charges
The table below shows the schedule of sales charges for
the Common Stock, Balanced, Growth, Small Company 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>
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 $249,999.................... 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 Maturity Government Fund, the sales charge
for sales of up to $999,999 is 1.00%, with a dealer reallow-
ance 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 Money Market 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., 1717 Capital Management 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 en-
tire sales charge on their sales of Fund shares. As a re-
sult, 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 percent-
ages 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 Money Market Fund), if you redeem shares during the
applicable CDSC period, and no waiver of the CDSC applies.
See "How to Redeem Shares--Class B Shares--CDSC" and "How to
Redeem Shares--Class B Shares--Waiver or Reduction of the
CDSC", below.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
43 Prospectus
<PAGE>
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
$250,000, the automatic conversion occurs at the end of the
sixth year; for purchase payments from $250,001 to $500,000,
the automatic conversion occurs at the end of the fifth
year; and for purchase payments from $500,001 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 over
$250,000, it may be advantageous for a shareholder to use a
Right of Accumulation ("ROA") or a Letter of Intent ("LOI")
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 aggregate purchase amount (including in-
vestments in Class A shares and Class C shares under the ROA
and/or LOI):
<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 Money Market Fund are only
available through exchange from the Class B shares of an-
other Fund or in connection with the program described on
page . The Class B shares of the Money Market Fund do not
bear the higher ongoing distribution expenses normally asso-
ciated with the Class B shares. However, time during which
assets are in the Class B shares of the Money Market Fund
will not count either toward the time that must elapse be-
fore 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", below.
Class C Shares
For all purchases of Class C shares, you pay the current
net asset value. There is no initial sales charge. A CDSC in
the amount of 1.00% of the purchase price will be imposed on
Class C shares (including Class A shares of the Money Market
Fund received in exchange for Class C shares, as described
below), if you redeem shares during the first year after
their purchase, and no waiver of the CDSC applies. See "How
to Redeem Shares--Class C Shares--CDSC" and "How to Redeem
Shares--Waiver or Reduction of the CDSC", below.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 44
<PAGE>
Similar to the Class B shares, Class C shares are subject
to higher distribution fees than Class A shares. See "Dis-
tribution Plans" above. However, since Class C shares never
convert to Class A shares, investments in Class C shares re-
main subject to these higher distribution fees for the en-
tire holding period of the investment. An investor should
consider whether the advantage, as compared with Class B
shares, of the investment not being subject to a CDSC after
the first year, and the significantly lower CDSC in the
first year, outweighs the disadvantage of remaining subject
to higher distribution fees for the entire holding period of
the investment, as well as whether the advantage, as com-
pared with Class A shares, of not being subject to an ini-
tial sales charge outweighs the higher distribution fees.
Investors who purchase Class C shares have the ability to
exchange at net asset value only for the Class C shares of
other Funds which offer Class C shares, except that invest-
ors in Class C shares may also exchange into Class A shares
of the Money Market Fund. However, if an investor exchanges
Class C shares into Money Market Fund Class A shares within
one year of the purchase of the Class C shares, a CDSC may
apply to a subsequent redemption of the Money Market Fund
shares. See "Class C Shares--CDSC" on page below. An in-
vestor who has exchanged Class C shares into Money Market
Fund Class A shares may exchange back into Class C shares of
any Fund which offers Class C shares at any time, but may
not exchange at net asset value into Class A shares or Class
B shares of any Fund.
Class A Shares--Reduced Sales Charges
Right of Accumulation. Quantity discounts begin with in- YOU CAN RECEIVE
vestments in Class A shares in excess of $100,000. This ap- A REDUCED SALES
plies to purchases of Class A shares of one or more of the CHARGE FOR A
Funds at one time, or to purchases of either Class A shares, NUMBER OF
Class B shares or Class C shares combined over time by you, REASONS
your spouse and children under the applicable age of majori-
ty, a trustee or other fiduciary account for these same per-
sons. Additionally, accounts for charitable, religious, edu-
cational and similar corporations, associations, or
foundations exempt under Section 501(c)(3) or (13) of the
Code, retirement plans set up under the Self-Employed Indi-
viduals Tax Retirement Act of 1962, and Individual Retire-
ment Accounts ("IRAs") may be linked to an individually
owned account for this privilege. However, individually reg-
istered accounts may not be linked with a participant ac-
count in any plan which has multiple linked accounts except
as noted below in the AG&T Advantage Program. Please note
that, in order to take advantage of this privilege, you must
advise your representative at the time of purchase that you
are eligible for this privilege and must provide the fund
name(s), registration of account(s), and account number(s).
Letter of Intent. The LOI lowers your costs on Class A
share investments of more than $100,000 or Class B share in-
vestments of more than $250,000 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 by the Fund to sell additional shares. All pur-
chases made for your account within 13 months from the date
of the LOI, or when applicable 30 months will be made at the
reduced sales charge for the investment amount checked on
the account application. Any dividends and distributions
will be reinvested without a sales charge and will not be
considered in determining whether the LOI has been complet-
ed.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
45 Prospectus
<PAGE>
Any purchases of the Sentinel Family of Funds (except the
Money Market Fund) made by you within the 90 days preceding
the date of your LOI may be included under it but do not
qualify for the discount. You may also combine the value, at
the current offering price, of any shares you own of other
Sentinel Funds in order to determine the quantity discount
which would apply under the LOI. Two percent (2%) of the
shares purchased under the LOI will be held in escrow by
Sentinel Service and released at the end of the 13- or 30-
month period or upon completion of the LOI.
Upon expiration of the 13- or 30- month period a sales
charge may be due if total purchases are less than the LOI
amount indicated on the application. Sales charges are due
within 20 days after notification to the account holder and
may be paid either by check payable to Sentinel Service or
by redemption of shares held in escrow to the extent neces-
sary to pay such amount due. Upon payment of the balance due
any remaining escrow shares will be released and free from
further sales charges. The sale of shares for this purpose
will be a taxable event.
Group Investments. 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
expenses, will be entitled to be treated as if it were a
single entity for purposes of the reduced sales charges for
quantity purchases, the ROA and the LOI.
AG&T Advantage Program. Employers establishing either SIM-
PLE IRA plans under the Small Business Protection Act of
1996 or Section 403(b) plans for which American Guaranty &
Trust Company ("AG&T") is the custodian may group partici-
pating employee accounts together in such a way as to result
in reduced sales charges for quantity purchases under both
the ROA and the LOI. Quantity discounts under this program
are based upon amounts previously invested in the Funds. In
addition, personal accounts for the employee and members of
his or her immediate family, as defined above under "Right
of Accumulation", may be grouped with the employee's SIMPLE
IRA or Section 403(b) accounts for quantity purchases under
both the ROA and LOI.
Net Asset Value Purchases. Certain investors, subject to
limitations, may purchase Class A shares of the Funds at net
asset value. Such investors include current and former Di-
rectors of the Funds and predecessors to the Funds; certain
current and retired directors, officers, employees and re-
tirees of the general partners of the Advisor and their af-
filiates; directors, officers, employees and clients of the
Sub-advisors; members of the immediate families of, or sur-
vivors of, all of the above-referenced individuals; regis-
tered representatives of securities dealers that have en-
tered 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 or their
survivors; non-profit organizations with which any of the
above-referenced persons are actively involved; investment
advisors, financial planners, bank trust departments or bro-
ker-dealers who place trades for their own accounts or the
accounts of their clients (such clients may include, without
limitation, retirement and deferred compensation plans and
trusts used to fund those plans including those defined in
section 401(a), 403(b) or 457 of the Internal Revenue Code
of 1986, as amended
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 46
<PAGE>
(the "Code") and "rabbi trusts"), and who charge a manage-
ment, consulting or other fee for their services; clients of
such investment advisors, financial planners, bank trust de-
partments or broker dealers who place trades for their own
accounts, if such accounts are linked to the master account
of such investment advisor, financial planner or broker-
dealer on the books and records of the broker or agent; pur-
chasers who are investing section 403(b) loan principal re-
payments; purchasers who notify the Distributor that the
funds being used for such purchase consist of redemption
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 in-
dividually managed trust accounts at AG&T. If there is more
than one person on an account registration, all persons
named in the account registration must qualify. You must no-
tify the Distributor at the time of purchase if you qualify
for a front-end sales charge waiver. Please also note that
investors may be charged a transaction fee by a broker or
agent if they effect transactions in Fund shares through a
broker or agent.
In addition, Class A shares of any Fund may be purchased
at net asset value, without payment of a sales charge, by
pension, profit-sharing or other employee benefit plans cre-
ated pursuant to a plan qualified under Section 401 of the
Code or plans under Section 457of the Code, or employee ben-
efit plans created pursuant to Section 403(b) of the Code
and sponsored by nonprofit organizations defined under Sec-
tion 501(c)(3) of the Code. Such plans will qualify for pur-
chases at net asset value provided that (1) the total amount
invested in the plan is at least $1,000,000, (2) the sponsor
signs a $1,000,000 LOI, or (3) such shares are purchased by
an employer-sponsored plan with at least 100 eligible em-
ployees, and all of the plan's transactions are executed
through a single financial institution or service organiza-
tion who has entered into an agreement with the Distributor
with respect to their use of the Funds in connection with
such accounts. Please note that tax-exempt funds are not ap-
propriate investments for such plans. The Distributor may
pay dealers for share purchases of the Funds (other than the
Money Market Fund) sold at net asset value to an employee
benefit plan in accordance with this paragraph as follows:
1% of the first $2 million of such purchases, plus 0.80% of
the next $1 million of such purchases, plus 0.50% of the
next $17 million of such purchases, plus 0.25% of amounts in
excess of $20 million of such purchases and up to 0.10% of
the net asset value of any Money Market Fund shares sold at
net asset value to an employee benefit plan in accordance
with this paragraph.
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.
The Distributor is sponsoring a sales contest during the
period January 1, 1998 to December 31, 1998, in which regis-
tered representatives of all broker-dealers who
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
47 Prospectus
<PAGE>
have elected to participate in the contest can qualify for a
trip to a destination to be announced by achieving sales of
shares of the Funds (other than the Money Market Fund) and
sales of accounts managed by American Guaranty & Trust Com-
pany, the Distributor's trust company affiliate, aggregating
at least $1,200,000, and may bring a guest at the Distribu-
tor's expense by achieving such sales of at least
$1,700,000. In the event that a change in law prohibits such
a sales contest, however, the Distributor will be forced to
cancel the contest.
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 and except for certain
retirement plan accounts. 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 or electronic payment
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").
Purchasing Shares by Wire
ANOTHER EASY You may purchase shares by wiring federal funds directly
WAY TO BUY to Sentinel Service when the New York Stock Exchange
SHARES ("NYSE") and Federal Reserve Banks are open for business.
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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 48
<PAGE>
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 elec-
tronic funds transfers from your bank account simply by
phoning Sentinel Service.
Government Direct Deposit Privilege
Government Direct Deposit enables you to purchase Fund
shares (minimum of $50.00 per transaction) by having Federal
salary, Social Security, or certain veterans', military or
other payments from the Federal government automatically de-
posited into your account. You may deposit as much of such
payments as you elect. To enroll in Government Direct Depos-
it, you must complete and file with Sentinel Service a com-
pleted Direct Deposit Sign-Up Form for each type of payment
that you desire to include in this Privilege. The Direct De-
posit Sign-Up Form may be obtained by contacting Sentinel
Service or the appropriate Federal Agency for your type of
payment. Death or legal incapacity will terminate your par-
ticipation in this Privilege. You may elect to terminate
your participation in this privilege by providing written
notification to the appropriate Federal agency.
Payroll Savings Plan
Payroll Savings Plan permits you to purchase Fund shares
(minimum of $50.00 per transaction) automatically on a regu-
lar basis. Depending upon your employer's direct deposit
program, you may have part or all of your paycheck trans-
ferred to your existing Sentinel account electronically
through the Automated Clearing House system each pay period.
To establish a Sentinel Payroll Savings Plan account, you
must file an authorization form, available from Sentinel
Service, with your employer's payroll department. Changes
may be made through written notification to your employer.
HOW TO REDEEM SHARES
If your shares are held by Sentinel Service, you can re-
deem your shares by providing Sentinel Service with the ap-
propriate instructions by mail or otherwise.
If you are the shareholder of record and have a certifi- FOLLOW THESE
cate representing ownership in a Fund, you can redeem your EASY STEPS TO
shares by either: REDEEM SHARES
. Surrendering the certificate in person, to Sentinel
Service(National Life Drive, Montpelier, Vermont),
or
. Mailing the certificate toSentinel Administrative
Service Company,P. O. Box 1499, Montpelier, VT 05601-
1499
We suggest sending certificates by certified mail.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
49 Prospectus
<PAGE>
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.
IMPORTANT "Good order" means that the instructions must be signed by
INFORMATION FOR the registered owner(s) exactly as the shares are registered
REDEEMING and the signature(s) must be guaranteed by an eligible guar-
SHARES antor institution which meets Sentinel Service's require-
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
. the proceeds of the redemption are payable to one of
the Advisor's parent corporations or an affiliate.
No interest will accrue on amounts represented by uncashed
redemption checks.
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%
For purchase amounts from $250,000 to $499,999:
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
------------------- ---------------
<S> <C>
First.................................... 3.5%
Second................................... 3%
Third.................................... 2%
Fourth................................... 1%
Fifth.................................... 1%
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 50
<PAGE>
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.
If you exchange Class B shares into Class B shares of the
Money Market Fund, or purchase Class B shares of the Money
Market Fund in connection with the program described on page
, the time during which these assets are held in the Class
B shares of the Money Market Fund will not count either to-
ward the time that must elapse before Class B shares are au-
tomatically 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 Money Market Fund are ulti-
mately 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 Money Market Fund, regardless
of how long the Class B shares of the Money Market Fund were
held. Also, if the Class B shares of the Money Market 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 Money Market
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 Money Market Fund
have been held for the six, five or four year period, as ap-
plicable.
Waiver or Reduction of the CDSC
You are subject to a reduced CDSC on Class B shares for
quantity purchases, as indicated above, or when you buy
shares in connection with the ROA or a LOI. The ROA will ap-
ply to purchases of Class B shares when you and members of
your family own Class A, Class B or Class C shares in the
aggregate of more than $250,000. See "How to Purchase
Shares--Class A Shares--Reduced Sales Charges" for more in-
formation on the ROA and the LOI.
Any applicable CDSC may be waived in the following situa-
tions when the Funds have been notified at the time of re-
demption:
1. Redemptions of shares acquired from the reinvestment
of income distributions and/or capital gains
distributions;
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
51 Prospectus
<PAGE>
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 or
from the account of a trust whose primary income
beneficiary has died, provided the redemption is
requested within one year of the shareholder's or
beneficiary's death;
3. Redemptions from qualified retirement accounts taken
in equal or substantially equal periodic payments not
to exceed life, or joint life expectency and not
otherwise subject to the 10% penalty tax for early
withdrawal of Code section 72(t);
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.
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. The above CDSC waiver provisions will not apply to
Class B shares initially invested in the Money Market Fund
as part of the program described on page .
In addition, no CDSC will apply to Class B or Class C
share accounts owned by affiliates of the Advisor, where the
Distributor has not paid an initial commission to a selling
dealer.
Class C Shares--CDSC
Class C shares are subject to a CDSC if they are redeemed
in the first year after purchase, in the amount of 1.00% of
the lower of the purchase price or the net asset value of
the shares redeemed. Partial redemption requests will be in-
creased by the amount of CDSC due. CDSC balances due for
full redemptions will be deducted from the redemption pro-
ceeds. The Distributor receives the entire amount of any
CDSC paid. The CDSC is currently waived as specified under
"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.
If an investor exchanges Class C shares for Class A shares
of the Money Market Fund during the first year after the
purchase of the Class C shares, any redemption of the Money
Market Fund shares will be subject to a CDSC of 1.00%, re-
gardless of how long the Money Market Fund shares are held.
If the Money Market Fund shares are exchanged back into the
Class C shares of any Fund, the holding period of the Class
C shares will be aggregated with any holding periods of the
Class C shares prior to the exchange, and when such holding
periods in Class C shares aggregates more than one year, the
investment will no longer be subject to the 1.00% CDSC.
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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 52
<PAGE>
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 imposed. 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
redemption proceeds. The Distributor receives the entire
amount of any CDSC paid. The CDSC is currently waived as
specified under "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
High Yield, Government Securities, Bond, New York, Pennsyl-
vania, Tax-Free Income, Short Maturity Government or Money
Market Funds, Sentinel Service normally will not honor the
redemption check if those shares have been purchased less
than 15 calendar days prior to the date the redemption re-
quest is presented to Sentinel Service.
Distributions from retirement plans may be subject to
withholding by the Internal Revenue Service ("IRS") under
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 service fee for
each participant account. The fee will be deducted automati-
cally from each participant account in June of each year un-
less prepaid.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
53 Prospectus
<PAGE>
The fee assessed will vary based upon the average account
value of all participant accounts within the plan, and will
be as set forth below:
<TABLE>
<CAPTION>
FEE PER
AVERAGE PARTICIPATING
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
YOU CAN REDEEM Unless otherwise specified when opening your account or by
BY TELEPHONE subsequently submitting a Telephone Authorization and Re-
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 have not provided 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 SERVICES AT 1-800-282-FUND (3863)
Prospectus 54
<PAGE>
No fees are charged for telephone redemptions; however, NO FEES FOR
service fees described above may apply, and the CDSC de- TELEPHONE
scribed above under "How to Redeem Shares" may apply. REDEMPTIONS
TAX-DEFERRED RETIREMENT PLANS
The federal tax laws provide for a variety of retirement THE FUNDS CAN
plans offering tax benefits. Fund shares may be purchased by BE USED IN MANY
all types of tax-deferred retirement plans, including Keogh TYPES OF PLANS
Plans, IRAs, Roth IRA's, Education IRAs, SIMPLE IRAs, Sim-
plified Employee Pension Plans, Section 403(b) Plans, Sec-
tion 457 Plans, and other corporate pension and profit-shar-
ing plans.
American Guaranty & Trust Company, a Delaware trust com-
pany and an affiliate of the Advisor, will act as a custo-
dian for IRAs, SIMPLE IRAs, and 403(b) plans, if desired,
and will charge an annual fee of $15 per individual (indi-
viduals with more than one account will be charged only one
fee). This fee will be deducted automatically from the ac-
count 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 $15 is charged for each account when closing; howev-
er, a fee of $25 per transaction is assessed for transfer-
ring assets. Consult your tax advisor for details regarding
deductibility of contributions to IRAs other than Roth
IRA's.
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
Net asset value for each Fund is calculated once each HOW THE VALUE
business day at 4:00 p.m., Eastern Time, and becomes effec- OF FUND SHARES
tive immediately upon its determination. The net asset value IS DETERMINED
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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
55 Prospectus
<PAGE>
. 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.
The Money Market Fund's assets are valued on the basis of
amortized cost, which involves valuing a portfolio instru-
ment at its cost initially and thereafter assuming a con-
stant amortization 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
and Class C shares, reflecting the daily expense accruals of
the account maintenance and distribution fees applicable
with respect to Class B and Class C 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 Each Fund pays dividends substantially equivalent to its
PAY DIVIDENDS net investment income in accordance with the following
schedule:
<TABLE>
<CAPTION>
FUND DIVIDENDS PAID
---- --------------
<S> <C>
Growth Fund............................... Annually
Small Company Fund........................ Annually
World Fund................................ Annually
Common Stock Fund......................... Quarterly
Balanced Fund............................. Quarterly
High Yield Fund........................... Monthly
Bond Fund................................. Monthly
Government Securities Fund................ Monthly
Short Maturity Government Fund............ Monthly
Tax-Free Income Fund...................... Monthly
New York Fund............................. Monthly
Pennsylvania Fund......................... Monthly
</TABLE>
The Money Market 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
dividends will not be paid on days when net realized losses
on securities 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). You may also elect to have
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 56
<PAGE>
dividends sent directly to your bank account through elec-
tronic funds transfer. Any dividend or distribution of less
than $10.00 must be reinvested.
If you elect to receive dividends and/or capital gain dis-
tributions in cash and the postal or other delivery service
is unable to deliver checks to your address of record, your
distribution option will automatically be converted to hav-
ing all dividend and other distributions reinvested in addi-
tional shares. No interest will accrue on amounts repre-
sented by uncashed dividend or other distribution checks.
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 of shares of such Fund.
Allocation of expenses not allocated to a specific class
of shares of a Fund (except for the Money Market Fund) shall
be allocated according to the net assets or number of share-
holder accounts, each on a pro rata basis, of each class of
shares. Allocations in the case of the Money Market 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 pro-
vider of services to the Fund, agreeing to waive or reim-
burse the Fund for payments to such service provider by one
or more classes, as allocated as described above, to the ex-
tent necessary to assure that all classes of the Funds main-
tain the same net asset value per share, or (ii) on the ba-
sis of relative net asset value.
TAXES
General. Each Fund intends to continue to qualify, and the HOW INCOME AND
High Yield Fund intends to elect and 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. Recent legis-
lation creates additional categories of capital gains tax-
able at different rates. Generally not later than 60 days
after the close of its taxable year, each Fund will provide
its shareholders with a written notice designating the
amounts of any exempt-interest dividends, if applicable, or-
dinary income dividends or capital gain dividends, as well
as the amount of capital gain dividends in the different
categories of capital gain referred to above. 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 consti-
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
57 Prospectus
<PAGE>
tute capital gains to such holder for federal income tax
purposes (assuming the shares are held as a capital asset).
Dividends generally are taxable to shareholders even though
they are reinvested in additional shares (unless they are
designated as exempt-interest dividends).
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. For the New York, Pennsylvania and Tax-Free In-
come 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, with any additional loss not disal-
lowed under this rule treated as long-term capital loss to
the extent of capital gain dividends received.
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. Share-
holders should consult their tax advisors regarding the
state and local tax consequences of exchanging or converting
classes of 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.
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.
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 federal income tax purposes
as if it were paid by the Fund and received by its share-
holders on December 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 most ordinary in-
come dividends and on capital gain dividends and redemption
payments ("backup withholding"). Generally, shareholders
subject to backup withholding include the following:
. Those for whom no certified taxpayer identification
number is on file with Sentinel Service,
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 58
<PAGE>
. 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 back-up
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 Money Market Fund dividends and a significant por-
tion of Government Securities Fund and Short Maturity Gov-
ernment Fund dividends free of state and local taxes. If you
live in a state that imposes income taxes, consult with your
tax advisor to determine whether all or part of the divi-
dends from the Money Market Fund, the Government Securities
Fund or the Short Maturity 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. In addition, recent legislation permits a
foreign tax credit to be claimed with respect to withholding
tax on a dividend only if the shareholder meets certain
holding period requirements. If more than 50% in value of
the World 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 such fund will be required to include their proportionate
shares as taxes paid by them, and deduct such proportionate
shares in computing their federal taxable incomes or, alter-
natively, use them as foreign tax credits against their
United States income taxes. In the case of foreign taxes
passed through by a RIC, the holding period requirements re-
ferred to above must be met by both the shareholder and the
RIC. 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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
59 Prospectus
<PAGE>
foreign corporation may be subject to United States with-
holding 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
and other information needed to claim the foreign tax cred-
it.
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.
New York, Pennsylvania and Tax-Free Income Funds. Each of
the New York, Pennsylvania and Tax-Free Income Funds intends
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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 60
<PAGE>
housing purposes). Income received on such bonds is classi-
fied as an item of "tax preference" which would subject in-
vestors in such bonds, including shareholders of the New
York, Pennsylvania 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 its 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 ad-
justed for other tax preferences and the corporation's ad-
justed current earnings. Because an exempt-interest 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. Persons who may be substan-
tial users (or "related persons" of substantial users) of
facilities financed by industrial development bonds or pri-
vate activity bonds held by the New York, Pennsylvania or
Tax-Free Income Fund should consult their tax advisors be-
fore purchasing Fund shares.
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.
The New York Fund intends to invest primarily in New York
Obligations. Distributions from the New York Fund which are
attributable to interest income received from such obliga-
tions also will be exempt from New York State and New York
City personal income tax. The Pennsylvania Fund, likewise,
intends to invest primarily in Pennsylvania Obligations.
Distributions from the Pennsylvania Fund which are attribut-
able to interest income received from such obligations also
will be exempt from Pennsylvania personal income tax. Dis-
tributions from the New York and Pennsylvania Funds which
are attributable to interest received from qualifying obli-
gations of the U.S. government, its agencies and instrumen-
talities 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
shareholder of the Pennsylvania Fund are excluded from tax-
able income for federal corporate income tax purposes (de-
termined before net operating loss carryovers and special
deductions), they will not be subject to the Pennsylvania
corporate net income tax. However, it is unclear whether an
investment in the Pennsylvania Fund by a corporate share-
holder will qualify as an exempt asset for purposes of ap-
portionment of the Pennsylvania capital stock/foreign fran-
chise 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
61 Prospectus
<PAGE>
Government, its agencies and instrumentalities, or to the
extent such distributions are designated as capital gain
dividends for federal income tax purposes. Shares of the
Pennsylvania Fund will be exempt from Pennsylvania county
personal property tax to the extent Pennsylvania Fund assets
are comprised of Pennsylvania Obligations and qualifying ob-
ligations of the U.S. government, its agencies and instru-
mentalities 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
state and local taxes, and possibly federal income tax.
Shareholders of the New York and Pennsylvania Funds who are
subject to taxation by states other than New York or Penn-
sylvania will realize a lower after-tax return than New York
or Pennsylvania shareholders, respectively, since the divi-
dends 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 portion of such Fund's distributions which constitutes
exempt-interest dividends and the portion which is exempt
from New York or Pennsylvania personal income taxes.
CONSULT WITH Consult with your tax advisor regarding specific questions
YOUR TAX about federal, foreign, state or local taxes. Foreign in-
ADVISOR ABOUT vestors should consider applicable foreign taxes in their
TAX evaluation of an investment in the Funds.
IMPLICATIONS OF
CERTAIN
DISTRIBUTIONS
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and U.S. Treasury regula-
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
MANY CONVENIENT When you establish a new account, all dividends and any
SHAREHOLDER capital gains distributions are reinvested at net asset
SERVICES ARE value and without charge to purchase additional shares, un-
AVAILABLE less you elect another option. Many other features are
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.
Check Writing Privileges: Check writing is offered without
charge to holders of Class A shares of the High Yield, Bond,
New York, Pennsylvania, Tax-Free Income, Government Securi-
ties, Short Maturity Government and Money Market 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
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 62
<PAGE>
Sentinel Service or by providing appropriate instructions in
writing to Sentinel Service. Because Class B shares in the
Tax-Free Income, New York, Pennsylvania, Government Securi-
ties and Short Maturity Government Funds are not currently
offered, holders of Class B shares in the other Funds may
not exchange into these Funds. Similarly, because Class C
shares of the Growth, Small Company, Bond, Tax-Free Income,
New York, Pennsylvania, Government Securities and Short Ma-
turity Government Funds are not currently offered, holders
of Class C shares of the other Funds may not exchange into
these Funds. Class C shares may be exchanged for Class A
shares of the Money Market Fund. If the Class C shares which
were exchanged were held for less than one year in the Class
C Fund, a 1.00% CDSC will normally apply if the Money Market
Fund shares are redeemed. Such Money Market Fund shares may
be exchanged back into Class C shares at any time. 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 Maturity Government Fund, how-
ever, shares purchased (other than by exchange from another
Fund other than the Money Market Fund) must remain in the
account for 90 days before they are eligible for the ex-
change privilege. Also, where Class A shares in the Money
Market Fund, which were not acquired in exchange for Class A
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 ini-
tial purchase of the shares into which Money Market Fund
shares are being exchanged. In determining the holding pe-
riod for Class B or Class C 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 Money Market Fund will not count toward
the time necessary to reduce or eliminate any applicable
CDSC, or to be converted into Class A shares. The normal
minimum account sizes apply to new accounts opened by ex-
change.
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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
63 Prospectus
<PAGE>
Tranfers: When you need to change ownership of or the name
on an account, a Sentinel Service representative will pro-
vide 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. You
must reinvest dividends and capital gains distributions to
use a systematic withdrawal plan. No interest will accrue on
amounts represented by uncashed checks sent pursuant to a
systematic withdrawal plan.
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
Periodically, the Funds include average annual total re-
turn in advertisements or in information distributed to ex-
isting and prospective shareholders.
HOW THE FUNDS Average annual total return quotations are calculated by
COMPUTE TOTAL determining the average annual compounded rates of return
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.
HOW THE FUNDS Periodically, the Bond, New York, Pennsylvania, Tax-Free
COMPUTE YIELD Income, Government Securities, Short Maturity Government and
Money Market 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
Prospectus 64
<PAGE>
The Small Company, Growth, Common Stock and Balanced Funds
may compare their performance to the following indices:
. 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 High Yield Fund may compare its performance to the
Chase Manahattan Bank Index.
The Bond, New York, Pennsylvania, Tax-Free Income, Govern-
ment Securities, Short Maturity Government, and Money Market
Funds may compare their performance to the following indi-
ces:
. Lehman Aggregate Bond Index
. Municipal Bond Index
. Government Bond Index
. 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.
To determine the tax-equivalent yield of the Tax-Free In- HOW THE FUNDS
come Fund, divide the tax-exempt part of the Fund's yield by COMPUTE
an amount which is one minus a stated tax rate, and add the TAX-EQUIVALENT
result to that part, if any, of the Fund's yield that is YIELD
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
All of the Funds except the Pennsylvania Fund are series HISTORICAL
of the Company. The Company was originally incorporated in INFORMATION
Delaware as Group Securities, Inc. in 1933. The Company sold ABOUT THE FUNDS
its first shares to the public in January 1934, and became a
Maryland corporation in 1973. Effective February 3, 1997,
the name of the Sentinel Short-Intermediate Government Fund
was changed to Sentinel Short Maturity Government Fund. Pre-
viously, it was known as Sentinel Short-Intermediate Govern-
ment Fund. Effective March 31, 1997, the Sentinel Small Com-
pany Fund began doing business under its present name.
Previously, it was known as Sentinel Emerging Growth Fund.
FOR INFORMATION AND ASSISTANCE CALL YOUR REGISTERED REPRESENTATIVE OR
INVESTOR SERVICES AT 1-800-282-FUND (3863)
65
Prospectus
<PAGE>
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 SERVICES AT 1-800-282-FUND (3863)
Prospectus 66
<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 LLP
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 SERVICES AT 1-800-282-FUND (3863)
67 Prospectus
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
March 30, 1998
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 Small Company Fund (the "Small Company Fund")
Sentinel World Fund (the "World Fund")
Sentinel High Yield Bond Fund (the "High Yield Fund")
Sentinel Bond Fund (the "Bond Fund")
Sentinel Government Securities Fund (the "Government Securities Fund")
Sentinel Short Maturity Government Fund (the "Short Maturity 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 twelve separate and distinct funds, eleven of
which are diversified (the New York Fund being non-diversified), and the
Pennsylvania Fund is a separate, non-diversified fund. The twelve 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 March 30, 1998 (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.
1
<PAGE>
TABLE OF CONTENTS
Page
----
The Funds..................................................................
Investment Objectives and Policies.........................................
Investment Restrictions....................................................
Management of the Funds....................................................
The Investment Advisory Contracts..........................................
The Distribution Contracts.................................................
The Distribution Plans.....................................................
The Fund Services Agreements...............................................
Portfolio Transactions and Brokerage Commissions...........................
Portfolio Turnover.........................................................
Capitalization.............................................................
How To Purchase Shares and Reduce Sales Charges............................
Issuance of Shares at Net Asset Value......................................
How to Redeem Shares.......................................................
Determination of Net Asset Value...........................................
Computation of Maximum Offering and Redemption Prices......................
Dividends and Capital Gains Distributions..................................
Taxes......................................................................
Shareholder Services.......................................................
Total Return, Yield and Tax-Equivalent Yield Information...................
General Information........................................................
Financial Statements.......................................................
Appendix A - Description of Bond Ratings...................................
Appendix B - Economic Conditions in New York...............................
Appendix C - Economic Conditions in Pennsylvania...........................
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 Small Company, 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 Maturity
Government Funds.
On March 14, 1997, the Board of Directors of the Company authorized the
creation of the High Yield Fund as a new series of the Company.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and certain fundamental policies of each of the
Funds are set forth in the Prospectus.
3
<PAGE>
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 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 and the fixed income portion of the Balanced Fund may
invest up to 20% of its total assets, and each of the New York Fund and the Tax-
Free Income 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 Services ("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. The risks of below-investment grade securities are
described further in the Prospectus under "High Yield Fund - Risk Factors" on
page .
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
4
<PAGE>
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.
As stated in the Prospectus, the High Yield Fund may invest in Rule 144A
Securities and corporate loans; however, the High Yield Fund's investment in
illiquid securities is limited to 15% of its net assets. The Bond Fund may not
invest in illiquid securities, but may invest Rule 144A Securities to the extent
deemed to be liquid under the policies and procedures discussed below. In
promulgating Rule 144A under the Securities Act, the Securities and Exchange
Commission ("SEC") stated that although the ultimate responsibility for
liquidity determinations rests with a fund's board of directors, the board may
delegate the day-to-day function of determining liquidity to the investment
advisor provided the board retains sufficient oversight. The Board of Directors
of the Company will consider the adoption of policies and procedures for the
Bond Fund and the High Yield Fund for the purpose of determining whether Rule
144A Securities and, in the case of the High Yield Fund only, corporate loans,
in which such Fund proposes to invest are liquid or illiquid and will consider
guidelines under these policies and procedures pursuant to which the Advisor
will make these determinations on an ongoing basis. In making these
determinations, consideration will be given to, among other things, the
frequency of trades and quotes for the investment, the number of dealers willing
to sell the investment and the number of potential purchasers, dealer
undertakings to make a market in the investment, the nature of the investment
and the time needed to dispose of the investment. The Board of Directors will
review periodically purchases and sales of Rule 144A Securities by the Bond Fund
and the High Yield Fund and corporate loans by the High Yield Fund.
The extent that liquid Rule 144A Securities or corporate loans in which the
Bond Fund or the High Yield Fund invest become illiquid, due to the lack of
sufficient qualified institutional buyers or market or other conditions, the
Advisor, under the supervision of the Board of Directors, will consider
appropriate measures to enable the Bond Fund and the High Yield Fund to maintain
sufficient liquidity for operating purposes and to meet redemption requests.
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 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").
5
<PAGE>
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.
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
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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.
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.
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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 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
8
<PAGE>
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 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 could subject holders of 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,
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 and not more than 10% of the issuer's outstanding voting
securities. 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.
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.
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
12
<PAGE>
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 involves an
obligation by the 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 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 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 World Fund 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, the Fund 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 Fund will not enter into
such forward contracts or maintain a net exposure to such contracts when the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the 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 Fund. The Fund's custodian bank segregates
cash or equity or debt securities in an amount not less than the value of the
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 Fund's commitments with
respect to such contracts. Under normal circumstances, the Fund expects that
any appreciation (depreciation) on such
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<PAGE>
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 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 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, 1997, the Common Stock Fund had 3.8%, the Balanced
Fund had 6.7%, the Bond Fund had 17.4%, and the High Yield Fund had 9.3% of its
net assets invested in foreign securities; the Small Company, Growth, Tax-Free
Income, Pennsylvania, New York, Treasury, Government Securities and Short
Maturity 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
14
<PAGE>
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 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.
15
<PAGE>
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.
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 thirteen
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 World Fund 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, 1998, 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
shares amounting to % of the outstanding shares of the Company ( % of the
voting power) which included shares of the Common Stock Fund
amounting to % of such class, shares of the Balanced
Fund amounting to % of such class, shares of the Growth
Fund amounting to % of such class, shares of the Small
Company Fund amounting to % of such class, shares of the
World Fund amounting to % of such class, shares of the High
Yield Fund amounting to % of such class,
shares of the Bond Fund amounting to % of such class,
shares of the Government Securities Fund amounting to % of such class,
shares of Short Maturity Fund amounting to % of such class,
shares of the Treasury Fund amounting to % of such class,
shares of the Tax-Free Income Fund amounting to % of such class, and
shares of the New York Fund amounting to % of such class. National Life and
16
<PAGE>
its affiliates also owned shares of the Pennsylvania Fund
amounting to % of the outstanding shares on such date.
PATRICK E. WELCH * - CHAIRMAN AND DIRECTOR/TRUSTEE
National Life Drive
Montpelier, VT 05604
Age 51
National Life - Chairman and Chief Executive Officer, 1997 to present; GNA
Corporation - Chairman of the Board, Chief Executive Officer and President of
GNA Corporation - 1992 to 1996; LSW National Holdings, Inc. - Chairman and
Director; National Financial Services, Inc. - President and Director;
Administrative Services - Director - 1997 to present, National Life Investment
Management Company, Inc., - Director - 1997 to present; Equity Services, Inc. -
Director - 1997 to present; Sentinel Administrative Service Corporation -
Director - 1997 to present; and Sentinel Advisors Co. - Board of Directors-
Director - 1997 to present.
JOSEPH M. ROB - PRESIDENT AND DIRECTOR/TRUSTEE
National Life Drive
Montpelier, Vermont 05604
Age 55
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 -
Director, 1997 to present; LSW National Holdings, Inc. - Director, 1996 to
present; Life Insurance Company of the Southwest - Director, 1996 to present.
17
<PAGE>
RICHARD J. BORDA - DIRECTOR/TRUSTEE
P. O. Box 6091
Carmel, California 93923
Age 66
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 67
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 62
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.
JOHN D. FEERICK - DIRECTOR/TRUSTEE
140 West 62nd Street
New York, New York 10023
Age 61
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 63
Retired; Former Vice President and Manager - Bond Market Research Department,
Salomon Brothers Inc.
18
<PAGE>
ROBERT B. MATHIAS - DIRECTOR/TRUSTEE
7469 East Pine Avenue
Fresno, California 93727
Age 67
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.
KENISTON P. MERRILL~* - DIRECTOR/TRUSTEE
Brainstorm Farm
East Braintree, Vermont 05
Age 61
Chairman of the Board of the Company, 1990 to 1997; Chairman of the Board of
the Pennsylvania Fund, 1993 to 1997; Sentinel Advisors Company - Chairman and
Chief Executive Officer, 1993 to 1997, Sentinel Advisors, Inc. - Chairman and
Chief Executive Officer, 1986 to 1993, President and Chief Operating Officer,
1982 to 1986, Director, 1982 to 1997; National Life - Executive Vice President
and Chief Investment Officer, 1994 to 1995, Senior Vice President and Chief
Investment Officer, 1989 to 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
1997.
DEBORAH G. MILLER - DIRECTOR/TRUSTEE
3 Bates Street
Cambridge, Massachusetts 02140
Age 48
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.
JOHN RAISIAN, Ph.D. - DIRECTOR/TRUSTEE
Hoover Institution, Stanford University
Serra and Galvey Streets
Stanford, California 94305-6010
Age 48
Director and Senior Fellow - Hoover Institution, 1991 to present; Director,
Stanford Faculty Club, 1994 to present; Member of the Editorial Board, Journal
of Labor Research, 1983 to present; Member, American Economic Association, World
Affairs Council, Council of Foreign Relations, National Association of Scholars.
19
<PAGE>
SUSAN M. STERNE - DIRECTOR/TRUSTEE
5 Glen Court
Greenwich, Connecticut 06830-4505
Age 52
Economic Analysis Associates, Inc. - President and Chief Economist, 1979 to
present; Sentinel Cash Management Fund, Inc. - Director, 1990 to 1993.
ANGELA E. VALLOT - DIRECTOR/TRUSTEE
Director of Stakeholder Relations
Texaco, Inc.
200 Westchester Avenue
White Plains, New York 10650
Age 41
Texaco, Inc. - Director of Stakeholder Relations, 1997 to present; Arent Fox
Kintner Plotkin & Kahn - Lawyer, 1990 to 1997; Trustee, District of Columbia
Retirement Board; Acting Director of the Office of White House Liaison-Clinton-
Gore Transition Team, 1993; Member of the Steering Committee of the NAACP Legal
Defense Fund.
JOHN M. GRAB, JR., C.P.A.~ - VICE PRESIDENT
National Life Drive
Montpelier, Vermont 05604
Age 51
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.
THOMAS P. MALONE ~ - VICE PRESIDENT & TREASURER
National Life Drive
Montpelier, Vermont 05604
Age 42
Sentinel Administrative Service Company - Vice President, 1997 to present;
Assistant Vice President, 1990 to 1997; Sentinel Group Funds, Inc. - Vice
President & Treasurer, 1997 to present; Assistant Vice President, 1990 to 1997
20
<PAGE>
D. RUSSELL MORGAN~ - SECRETARY
National Life Drive
Montpelier, Vermont 05604
Age 42
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, 1998, National Life, with which Mr. Welch and Mr. Rob are
affiliated, together with National Life's affiliates, owned of record and
beneficially the number of shares of the Funds described on pages 15-16 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, 1997 to the officers and directors/trustees of the Funds
as a group was $ 304,051.
The following table sets forth for the fiscal year ended November 30, 1997
compensation paid by the Company and by the Pennsylvania Fund to the
Directors/Trustees who are not affiliated with the Advisor:
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Compensation
Compensation Benefits from Fund
Name of Aggregate From Accrued as and Sentinel
Director/ Compensation Pennsylvania Part of Fund Pennsylvania
Trustee from Company Tax-Free Trust Expense Tax-Free Trust
- ------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C>
Richard J. Borda $23,500 $3,500 None $27,000
Kalman J. Cohen $23,500 $3,500 None $27,000
Richard D. Farman $17,500 $2,700 None $20,200
John D. Feerick $22,000 $3,300 None $25,300
Richard I. Johannesen $23,500 $3,500 None $27,000
Robert B. Mathias $22,000 $3,300 None $25,300
Deborah G. Miller $22,000 $3,300 None $25,300
John Raisian $20,667 $3,092 None $23,759
Susan M. Sterne $23,500 $3,500 None $27,000
Angela E. Vallot $22,000 $3,300 None $25,300
</TABLE>
Code of Ethics
- --------------
21
<PAGE>
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 applicable to all Funds other
than the High Yield Fund, the Company will pay to the Advisor a monthly fee
determined as follows: (1) With respect to the Small Company, 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 Maturity 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 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, 1997, such fees aggregated
$13,907,812, for the fiscal year ended November 30, 1996, such fees aggregated
$11,732,548, and for the fiscal year ended November 30, 1995, such fees
aggregated $10,156,497.
Under a separate advisory agreement with the High Yield Fund, the Advisor
receives from the High Yield Fund a fee based on the average daily value of the
net assets of the High Yield Fund in accordance with the following schedule:
0.75% per annum on the first $100 million of average daily net assets of the
High Yield Fund; 0.70% per annum on the next $100 million of such assets; 0.65%
per annum on the next $100 million of such assets; and 0.60% per annum on such
assets in excess of $300 million.
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 years ended November 30, 1997,
November 30, 1996, and November 30, 1995, the Pennsylvania Fund paid advisory
fees of $188,819, $189,231, and $182,103, respectively.
22
<PAGE>
Under the Company's advisory agreement applicable to all Funds other than
the High Yield Fund, fees are allocated to the various Funds of the Company
which share common fee schedules in proportion to such Fund's net assets.
The Company's advisory agreement applicable to all Funds other than the High
Yield Fund, which was approved by the Company's shareholders on November 30,
1992, and the advisory agreement applicable to the High Yield Fund, which was
approved by the Company's Board of Directors on March 14, 1997 and the High
Yield Fund's shareholders on June 20, 1997, must each 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 applicable to all Funds other than the High Yield Fund, 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.
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 World Fund Sub-
advisor dated March 1, 1997. In accordance with this sub-advisory agreement, the
World Fund Sub-advisor provides the World Fund with a continuous investment
program consistent with its stated investment objectives and policies. The
Advisor pays to the World Fund 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 World Fund Sub-
23
<PAGE>
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. For the period April 1,
1996 to February 28, 1997, the World Fund Sub-advisor provided the same services
under an identical sub-advisory agreement dated April 1, 1996, and prior to
that, Cashman Farrell & Associates was the Sub-advisor under a similar sub-
advisory agreement. The fees paid to the World Fund and High Yield Sub-advisors
for the fiscal year ended November 30, 1997 were $329,200 and $52,589,
respectively; the fees paid to the World Fund Sub-advisor and Cashman Farrell by
the Advisor were $166,806 to INVESCO for the period April 1, 1996 to November
30, 1996, and $66,645 to Cashman Farrell for the period December 1, 1995 to
March 31, 1996, for a total of $233,451 for the fiscal year ended November 30,
1996; and $165,408 to Cashman Farrell for the fiscal year ended November 30,
1995.
Also as described in the Prospectus (as supplemented), the Advisor has
entered into a sub-advisory agreement with the High Yield Fund's sub-advisor,
Keystone Investment Management Company (the "High Yield Fund Sub-Advisor").
Pursuant to this agreement, the High Yield Fund Sub-Advisor provides the Advisor
with a continuous investment program consistent with the High Yield Fund's
stated investment objectives and policies. Under this agreement, the Advisor
pays a fee to the High Yield Fund Sub-Advisor equal to one half of the fee paid
by the High Yield Fund to the Advisor, provided that the fee paid by the Advisor
to the High Yield Fund Sub-Advisor will always be at least 0.35% per annum of
the average daily net assets of the High Yield Fund. This agreement became
effective June 20, 1997. This sub-advisory agreement may also be terminated by
either of the Advisor or the High Yield Fund Sub-Advisor or by action of the
Board of Directors of the Company or the shareholders of the High Yield Fund on
60 days' written notice, without penalty, and terminates automatically in the
event of its assignment.
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 $148,883 , $181,026 and
$127,814 for the fiscal years ended November 30, 1997, November 30, 1996 and
1995, respectively. During such periods, ESI received reallowances of
$2,352,258, $2,788,185 and $2,332,813, respectively. 1717 Capital Management
Company received reallowances of $219,348, $521,911 and $799,854, respectively.
For the fiscal years ended November 30, 1997 and November 30, 1996, Janney
Montgomery Scott received reallowances of $240,026 and $442,399, respectively,
and Hornor Townsend & Kent received reallowances of $599,900 and $582,120,
respectively. During the period from March 27, 1995 to November 30, 1995 Janney
Montgomery Scott received reallowances of $148,021 and Hornor Townsend & Kent
received reallowances of $156,325.
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.
24
<PAGE>
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
Maturity Government Fund has a separate Supplemental Distribution Plan
applicable only to it. The Pennsylvania Fund has a Distribution Plan applicable
only to it. The Class B shares of the Small Company, World, Common Stock,
Balanced, and Bond Funds have adopted a Class B Distribution Plan, effective
April 1, 1996. The Plans were extended to include the High Yield Fund's Class A
and Class B shares on March 14, 1997, and the Class B Distribution Plan was
extended to include the Class B shares of the Growth Fund effective January 12,
1998. Finally, effective March 30, 1998, the Class C shares of the Common Stock,
Balanced, World and High Yield Funds have adopted a Class C Distribution Plan
(all of these plans are collectively hereinafter referred to as the "Plans").
See "Distribution Plans" in the Prospectus.
The Class A and Class B 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 (the Funds did not offer Class C shares of any of the Funds during the
periods indicated):
Fund Total 12b-1 Fees
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
November 30, 1997 November 30, 1996 November 30, 1995
----------------------- --------------------- -----------------
A Shares B Shares A Shares B Shares
<S> <C> <C> <C>
Common Stock $4,100,000 $500,000 $3,345,000 $85,382 $2,545,000
Balanced 913,800 187,785 835,591 31,780 741,076
Growth 234,750 -- 189,755 -- 145,000
Small Company 321,320 46,440 278,965 6,630 281,355
High Yield(1) 5,175 30,050
World 244,390 62,680 183,351 10,900 132,778
Bond 183,535 62,170 204,195 14,799 196,750
Government Securities 161,500 -- 199,480 -- 210,478
Short Maturity (2) 145,635 -- 123,929 -- 48,200
Tax-Free Income 183,560 8,685 207,052 2,765 211,125
New York (3) 12,965 -- 11,005 -- 6,666
Pennsylvania 68,655 -- 68,800 -- 66,219
</TABLE>
(1) Commenced operations on June 23, 1997
(2) Commenced operations on March 24, 1995
(3) Commenced operations on March 27, 1995
The Plan applicable to the Class B shares of the Small Company, World,
Common Stock, Balanced and Bond Funds became effective on April 1, 1996, and was
extended to cover the High Yield Fund Class B shares effective June 20, 1997,
and the Growth Fund B shares effective January 12, 1998. 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 (except that this
amount will be less for the High Yield Fund Class B shares for so long as
National Life maintains a significant investment in High Yield Fund Class B
shares). 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
25
<PAGE>
same types of other marketing expenses for which SFSC receives reimbursement
under the Plans applicable to the Class A shares.
The Plan applicable to the Class C shares of the Common Stock, Balanced,
World and High Yield Funds became effective on March 30, 1998. It is expected
that the amounts payable to SFSC under this Class C Plan will be equal to 1.00%
of the net assets of the Class C 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 C shares, and pay continuing commissions and service fees to
brokers with respect to the Class C 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 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 Board 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
26
<PAGE>
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, 1997, 1996 and 1995 were $3,526,500, $3,526,500
and $3,470,333, respectively.
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 approved 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.
27
<PAGE>
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, 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.
The Funds obtain Lipper Directors' Analytical Data from Lipper Analytical
Distributors, Inc., in exchange for Fund brokerage commissions, presently in the
amount of $26,875 per year. This service is available only for brokerage
commissions.
Except for implementing the policies 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, 1997, 1996 and 1995, the
Funds paid total brokerage commissions of $1,467,627, $1,156,527 and $1,102,148,
respectively. Brokerage commissions paid by each Fund were as follows:
<TABLE>
<CAPTION>
Year Ended
<S> <C> <C> <C>
Fund 11/30/97 11/30/96 11/30/95
- ---- -------- -------- --------
Common Stock $860,093 $656,739 $650,368
Balanced 119,380 91,540 109,898
Growth 222,905 135,426 108,107
Small Company 128,474 162,972 126,348
World 136,775 109,850 107,427
High Yield(1) --- ---
Bond --- --- ---
Government Securities --- --- ---
Short Maturity Gov't (2) --- --- ---
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Treasury --- --- ---
Tax-Free Income --- --- ---
New York (3) --- --- N/A
Pennsylvania --- --- ---
</TABLE>
(1) Commenced operations on June 23, 1997
(2) Commenced operations on March 24, 1995.
(3) Commenced operations on March 27, 1995.
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 1997, 1996 and 1995 to brokers or dealers whose furnishing
of research information was a factor in their selection.
PORTFOLIO TURNOVER
Purchases for the Small Company, 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, 1997, 1996 and
1995, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Fund 11/30/97 11/30/96 11/30/95
- ---- -------- -------- --------
<S> <C> <C> <C>
Common Stock 24 22% 22%
Balanced 63 83% 110%
Growth 161 98% 84%
Small Company 45 60% 79%
World 21 14% 32%
High Yield(1) 133 N/A N/A
Bond 130 176% 237%
Government Securities 249 614% 367%
Short Maturity Gov't(2) 61 120% 58%
Treasury N/A N/A N/A
Tax-Free Income 47 112% 112%
New York(3) 21 48% 32%
Pennsylvania 28 56% 80%
</TABLE>
(1) Commenced operations on June 23, 1997.
(2) Commenced operations on March 24, 1995.
(3) Commenced operations on March 27, 1995.
In pursuit of the investment objectives of the High Yield, Bond, Government
Securities, Short Maturity Government, Tax-Free Income and New York Funds, it
is expected that assets
29
<PAGE>
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.
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.
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 an "Amended Rule 18f-3 Plan" under
which the methods of allocating income and expenses among classes of shares of
each Fund which has multiple classes, 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 such Funds. 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, 1998, none of the approximately 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 pages 15-16 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 - ____________ shares amounting to ___% of the class; Ms. Arlene Federico,
39 Fruitledge Road, Brookville, New York 11545-3315 -________________ shares
amounting to ___% of the class; Ms. Donna Bernstein, 15 Parkway Drive, Roslyn
Heights, New York 11577-2705 - __________________ shares amounting to ___% of
the class, and Ms. Mary Vezza, 1 Hillandale Close, Scarsdale, NY 10583-7659 -
_____________ shares amounting to ___% of the class.
30
<PAGE>
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, Growth, Small Company, World, High
Yield and Bond Funds, is equal to the current net asset value per share. The
public offering price of Class C shares, which are offered by the Common Stock,
Balanced, World and High Yield Funds, is also equal to the current net asset
value per share. A contingent deferred sales charge ("CDSC") may apply to
redemptions of Class B shares, redemption of Class C shares in the first year
after purchase, 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.
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 - Class A 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 generally are repurchased at current net
asset value; a CDSC may be payable on redemptions of Class B or Class C shares,
or Class A shares of the Treasury Fund received in exchange for Class C shares
of another Fund, 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
31
<PAGE>
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 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 by a
reduction in the number of shares in the account. See "Taxes" below.
32
<PAGE>
COMPUTATION OF MAXIMUM OFFERING AND REDEMPTION PRICES
AT NOVEMBER 30, 1997
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 Small
Stock Balanced Growth Company World
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Net assets $1,509,999,349 $314,947,831 $88,184,483 $115,531,634 $89,740,090
Shares outstanding 34,246,432 15,519,009 4,707,977 18,330,365 5,202,345
Net asset value per
share (redemption
price) $ 44.09 $ 20.29 $ 18.73 $ 6.30 $ 17.25
Maximum offering
price per share* $ 46.41 $ 21.36 $ 19.72 $ 6.63 $ 18.16
- -------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Government Short Maturity
Bond Securities Gov't. Treasury
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
Net assets $88,755,649 $75,809,550 $45,044,258 $85,911,496
Shares outstanding 13,944,583 7,513,605 34,587,888 85,911,496
Net asset value per
share (redemption
price) $ 6.36 $ 10.09 $ 9.82 $ 1.00
Maximum offering
price per share* $ 6.63 $ 10.51 $ 9.92 $ 1.00
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Tax-Free
Income New York Pennsylvania High Yield
Fund Fund Fund Bond Fund
<S> <C> <C> <C> <C>
Net assets $87,935,465 $ 7,704,448 $34,843,650 $11,084,365
Shares outstanding 6,447,780 648,427 2,611,098 1,064,882
Net asset value per
share (redemption
price) $ 13.64 $ 11.88 $ 13.34 $ 10.41
Maximum offering
price per share* $ 14.21 $ 12.38 $ 13.90 $ 10.84
- ----------------------------------------------------------------------------------------
</TABLE>
Class B Shares:
- --------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Common Small
Stock Balanced Company World Bond
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Net assets $77,299,420 $26,592,650 $7,655,895 $10,121,004 $ 8,115,417
Shares outstanding 1,855,409 1,308,557 1,238,948 593,750 1,272,634
Net asset value per
share (redemption
price) $ 44.03 $ 20.32 $ 6.18 $ 17.05 $ 6.38
Maximum offering
price per share** $ 44.03 $ 20.32 $ 6.18 $ 17.05 $ 6.38
- ----------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Treasury High Yield
Fund Bond Fund
<S> <C> <C>
Net assets $3,433,606 $33,807,521
Shares outstanding 3,433,606 3,250,551
Net asset value per
share (redemption
price) $ 1.00 $ 10.40
Maximum offering
price per share** $ 1.00 $ 10.40
- -----------------------------------------------------------------------------
</TABLE>
*For the Common Stock Fund, Balanced Fund, Growth Fund, Small Company Fund and
World Fund, the maximum offering price is 1000/950 times the net asset value
per share. For the High Yield Bond Fund, Bond Fund, Government Securities
Fund, Tax-Free Income Fund, New York Tax-Free Income Fund and Pennsylvania Tax-
Free Trust, the maximum offering price is 1000/960 times the net asset value per
share. For the Short Maturity Government Fund, the maximum offering price is
1000/990 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.
**In the case of Class B shares, 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, Class B and Class C shares of the World Fund and the Class A and Class B
shares of the Small Company and Growth Funds, quarterly for the Class A, Class B
and Class C shares of the Balanced and Common Stock Funds, and monthly for the
Class A, Class B and Class C shares of the High Yield Fund, the Class A and
Class B shares of the Bond Fund, and the Class A shares of the Tax-Free Income,
Government Securities, Short Maturity 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.
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 or only capital gains.
Such election may be made by written notice to Sentinel Service or by phoning
Investor Services and will take effect for
35
<PAGE>
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, and the High Yield Fund intends to
elect and to qualify, for the special tax treatment afforded regulated
investment companies ("RICs") under the Code. As long as 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, Class
B and, if applicable, Class C shareholders. Each Fund intends to distribute
substantially all of such income.
As discussed in the Prospectus, the Company consists of twelve 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 an excess of net long-term
capital gains over net 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. Recent legislation creates additional
categories of capital gains taxable at different rates. Generally not later than
60 days after the close of its taxable year, each Fund will provide its
shareholders with a written notice designating the amounts of any
exempt-interest dividends, ordinary income dividends, capital gain dividends, as
well as the amount of capital gain dividends in the different categories of
capital gain referred to above, and the portion of any ordinaty income dividends
eligible for the dividends received deduction allowed to corporations under the
Code. Any loss upon the sale or exchange of Fund shares held for six months or
less will be disallowed for federal income tax purposes to the extent of any
capital gain dividends received by the shareholder. 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. Generally,
distributions by the Tax-Exempt Funds, the World Fund, the Bond Fund, the
Government Securities Fund, the High Yield Fund, the Short Maturity Government
Fund and the Treasury Fund will not be eligible for the dividends received
deduction allowed to corporations under the Code. The Funds will allocate any
dividends eligible for dividends received deduction among the Class A, Class B
and Class C shareholders according to a method (which they believe is consistent
with SEC Rule 18f-3 which authorizes the issuance and sale of multiple classes
of shares) that is based on the gross income allocable to the Class A, Class B
and Class C shares during the taxable year, or such other method as the Internal
Revenue Service
36
<PAGE>
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 federal
income 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 most 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. In
addition, recent legislation permits a foreign tax credit to be claimed with
respect to withholding tax on a dividend only if the shareholder meets certain
holding period requirements. If more than 50% in value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
such Fund will be eligible 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. In the case of foreign taxes passed through by a RIC, the holding
period requirements referred to above must be met by both the shareholder and
the RIC. 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 a 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 a Fund. The World Fund and
other Funds to the extent applicable will report annually to shareholders the
amount per share of such withholding taxes and other information needed to claim
the foreign tax credit, if applicable. For purposes of passing through the
foreign tax credit, the World Fund will allocate foreign taxes and foreign
source income among the Class A, Class B and Class C shares according to a
method similar to that described above for the allocation of dividends eligible
for the dividends received deduction.
37
<PAGE>
No gain or loss will be recognized for federal income tax purposes by Class
B shareholders 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
shareholder'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 as described below within
90 days of acquiring such shares, then the loss such shareholder can recognize
on the exchange for federal income tax purposes 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. Shareholders should consult
their tax advisers regarding the state and local tax consequences of exchanging
or converting classes of shares.
A loss realized on a sale or exchange of shares of a Fund will be disallowed
for federal income tax purposes 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. Since the required distributions are based only on taxable income,
the excise tax generally will not apply to the Tax-Exempt Funds, discussed
below.
At November 30, 1997, the Bond, Government Securities and Short Maturity
Government Funds had capital loss carryforwards for federal income tax purposes
of $4,358,193, $5,906,903 and $1,340,125, 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, each Tax-
Exempt Fund will allocate interest from tax-exempt obligations (as well as
ordinary income, capital gains and tax preference items discussed below) among
the Class A, Class B and Class C shareholders according to a method (which it
believes is consistent with SEC Rule 18f-3, which authorizes the issuance and
sale of multiple classes of shares) that is based on the gross income allocable
to the Class A, Class B and Class C 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
38
<PAGE>
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 "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.
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 for federal income tax purposes rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
shareholders of these Funds.
Any loss upon the sale or exchange of Tax-Exempt Fund shares held for six
months or less will be disallowed for federal income tax purposes to the extent
of any exempt-interest dividends received by the shareholder. In addition, any
such loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain 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 Tax-Exempt 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.
Tax Treatment of Options and Futures Transactions
- -------------------------------------------------
39
<PAGE>
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 Tax-Exempt Funds may alter the timing and character of distributions to
shareholders. The mark-to-market rules 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.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Tax-Exempt Funds' sales of securities and transactions in
financial futures contracts or options thereon and the World Fund's sales of
securities and transactions in forward foreign exchange contracts, discussed
below. Under Section 1092, the Tax-Exempt Funds may be required to postpone
recognition for tax purposes of losses incurred in certain sales of securities
and 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.
Foreign Currency Transactions
- -----------------------------
A forward foreign exchange contract held by the World Fund that is a Section
1256 contract will be marked to market, as described under "Tax Treatment of
Options and Futures Transactions". However, the character of gain or loss from
such a contract will generally be ordinary under Code Section 988. The 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.
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 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 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 Fund would not be
able to
40
<PAGE>
make any ordinary income dividend distributions, and all or a portion of
distributions 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 shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in 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, 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
41
<PAGE>
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.
Check Writing Service (Class A shares of the High Yield, Bond, Government
-------------------------------------------------------------------------
Securities, Short Maturity 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 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 is 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 Maturity 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 Maturity 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.
42
<PAGE>
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 redemption proceeds may be made any time within 60 days
from the date on which the investor received the distribution.
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, 1997
were:
Average Annual Total Return for the
-----------------------------------
<TABLE>
<CAPTION>
One Year Ended Five Years Ended Ten Years Ended
November 30, 1997 November 30, 1997 November 30, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Common Stock Fund-A 20.9% 16.9% 16.3%
Common Stock Fund-B 19.9%(6)
Balanced Fund-A 15.4% 12.1% 12.4%
Balanced Fund-B 14.6%(6)
Growth Fund-A 27.3% 12.8% 13.5%
Small Company Fund-A 23.0% 13.4%(2) N/A
Small Company Fund-B 21.6%(6)
World Fund-A 12.5% 14.7%(2) N/A
World Fund-B 11.5%(6)
High Yield Fund - A 7.3%(1) N/A N/A
High Yield fund - B 7.2%(1) N/A N/A
Bond Fund-A 6.7% 7.5% 9.1%
Bond Fund-B 5.9%(6)
Gov. Sec. Fund-A 7.2% 6.6% 8.4%
Short Maturity Fund-A 6.0% 6.7%(3) N/A
Tax-Free Income Fund-A 6.9% 6.6% 7.8%(4)
New York Fund-A 7.7% 7.7%(5) N/A
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
Pennsylvania Fund-A 6.1% 5.8% 7.7%
</TABLE>
(1) For the period June 23, 1997 (commencement of operations) through November
30, 1997.
(2) For the period from March 1, 1993 (commencement of operations) through
November 30, 1997.
(3) For the period from March 24, 1995 (commencement of operations) through
November 30, 1997.
(4) For the period from October 1, 1990, when Sentinel Tax-Free Income Fund
commenced operations, through November 30, 1997.
(5) For the period from March 27, 1995 (commencement of operations) through
November 30, 1997.
(6) For the period from April 1, 1996 (commencement of operations) through
November 30, 1997.
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 for the Class A shares of the Common Stock, Balanced, Growth,
Small Company and World Funds; $40 (4.0% of the public offering price for the
Class A shares of the Bond, Government Securities, Tax-Free Income, New York and
Pennsylvania Funds); and $10 (1% for the Class A shares of the Short Maturity
Government Fund) was deducted. 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 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). For the Class B shares, the maximum
offering price is equal to the net asset value.
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.
44
<PAGE>
The High Yield, Bond, Tax-Free Income, Pennsylvania, New York, Government
Securities and Short Maturity Government Funds' annualized yields for the 30-day
period ended November 30, 1997 were:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
--------------- ---------------
<S> <C> <C>
High Yield 7.54% 7.86%
Bond Fund 5.76% 5.19%
Tax-Free Income 3.92% N/A
Pennsylvania 3.73% N/A
New York 4.98% N/A
Gov.'t Securities 6.07% N/A
Short Maturity 5.83% N/A
</TABLE>
The average daily number of shares outstanding during the period that were
eligible to receive dividends were:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------- --------------
<S> <C> <C>
High Yield 1,015,545 3,164,588
Bond Fund 14,007,798 1,255,739
Tax-Free Income 6,466,826 N/A
Pennsylvania 2,601,951 N/A
New York 641,497 N/A
Gov.'t Securities 7,546,891 N/A
Short Maturity 4,443,086 N/A
</TABLE>
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 also may 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 Class A shares of the High
Yield, Bond, Tax-Free Income, Pennsylvania, New York, Government Securities and
Short Maturity Government Funds as of November 30, 1997 were 7.86%, 6.01%,
4.08%, 3.89%, 5.20%, 6.33% and 5.89%, 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, 1997, the tax-equivalent yield of the Tax-Free
Income Fund was 6.75%, the tax-equivalent yield of the Pennsylvania Fund was
6.64%, and the tax-equivalent yield of the New York Fund was 9.35%. For purposes
of the above tax-equivalent yield calculations the assumed federal tax rate is
39.6%.
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
45
<PAGE>
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 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 Amended and Restated Articles of Incorporation and the By-Laws
of the Company, the Amended and Restated 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 and are
also now available at the SEC's Internet Web site at http://www.sec.gov. 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, Vermont 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 LLP, 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' 1997 Annual Report to Shareholders.
46
<PAGE>
APPENDIX A
Description of Bond Ratings
---------------------------
Moody's Investors Service, Inc. ("Moody's") Municipal 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 are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered 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 in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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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. Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Standard & Poor's, a Division of the McGraw-Hill Companies, Inc. ("Standard &
Poor's") Municipal Debt Ratings
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers and other
forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or
hold a financial obligation, 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 obligors
or obtained by Standard & Poor's from other sources it 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 based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. - Likelihood of payment capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation.
II - Nature of and provisions of the obligation; and
III - Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
Standard & Poor's describes its ratings for corporate and municipal debt
as follows:
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its commitment on the obligation is
extremely strong.
AA - Debt rated AA has differs from the highest rated obligations only
in a small degree. The obligor's capacity to meet its commitment on the
obligation is very strong.
A - Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. The obligor's capacity to meet its commitment on the obligation is
still strong.
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BBB - Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment to the
obligation.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major 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.
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 for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating 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.
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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 may impose certain rating or other
--------------------- ---
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
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APPENDIX B
ECONOMIC CONDITIONS IN NEW YORK
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The information set forth below is derived from the official statements
prepared in connection with the issuance of New York Municipal Bonds 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.
The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York Municipal Bonds in which the 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. After noticeable
improvements in the City's economy during the calendar year 1994, economic
growth slowed in calendar year 1995. It improved thereafter commencing in
calendar year 1996, reflecting improved securities industry earnings and
employment in other sectors. The City's current four-year financial plan
assumes that moderate economic growth will exist through calendar year 2001 with
moderate job growth and wage increases.
For each of the 1981 through 1997 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City has been required to close substantial gaps
between forecast revenues and forecast expenditures in recent fiscal years in
order to maintain balanced operating results. There can be no assurance that
the City will continue to maintain balanced operating results as required by
State law without additional reductions in City services or entitlement programs
or tax or other revenue increases that 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 1998 through 2001 fiscal years (the "1998-2001 Financial Plan" or "City
Financial Plan"). The City's projections set forth in the City Financial Plan
are based on various assumptions and contingencies that are uncertain and 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 1998 through 2001 contemplates the
issuance of $4.0 billion of general obligation bonds and $7.3 billion of bonds
to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority") to finance City capital projects. In 1997,
the State enacted the New York City Transitional Finance Authority Act (the
"Finance Authority Act"), which created the Transitional Finance Authority, to
assist the City in keeping the City's indebtedness within the forecast level of
the constitutional restrictions on the amount of
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debt the City is authorized to incur. The Transitional Finance Authority is
authorized to issue up to $7.5 billion in long term debt. In a challenge to the
constitutionality of the Finance Authority Act, the State trial court, by
summary judgment on November 25, 1997, held the Finance Authority Act to be
constitutional. The decision has been appealed to the New York Court of Appeals.
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, New York City Municipal Water Finance Authority (the
"Water Authority") bonds and Transitional Finance Authority bonds 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 or the Water Authority or the Transitional Finance Authority
were unable to sell its bonds, the City would be prevented from meeting its
planned operating and capital expenditures.
1998-2001 Financial Plan. On November 25, 1997, the City submitted to the
New York State Financial Control Board (the "Control Board") the Financial Plan
for the 1998 through 2001 fiscal years, which relates to the City, the Board of
Education (the "BOE") and the City University of New York ("CUNY"). The
Financial Plan is a modification to the financial plan submitted to the Control
Board on June 10, 1997 (the "June Financial Plan").
The June Financial Plan identified actions to close a previously projected
budget gap for the 1998 fiscal year. The proposed actions in the June Financial
Plan for the 1998 fiscal year included (i) agency actions; (ii) the proposed
sale of various assets; and (iii) additional State aid, including a proposal
that the State accelerate a revenue sharing payment to the City from March 1999.
The June Financial Plan also included a proposed discretionary transfer in the
1998 fiscal year of debt service due in the 1999 fiscal year for budget
stabilization purposes.
The 1998-2001 Financial Plan published on November 25, 1997 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the June Financial Plan. The 1998-2001 Financial Plan projects revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.2 billion, $2.7 billion and $2.6 billion for the 1999, 2000
and 2001 fiscal year, respectively. The City has outlined a gap-closing program
for these years that assumes additional agency actions, savings from
restructuring City government and privatization initiatives, additional revenue
initiatives and asset sales, additional State aid, additional entitlement cost
containment initiatives and the availability of funds from the General
Reserve.
The June Financial Plan includes a proposed tax reduction program totaling
$272 million, $435 million, $465 million and $481 million in the 1998 through
2001 fiscal years, respectively. The June Financial Plan assumes that portions
of these reductions will be offset by State aid.
Changes since the June Financial Plan include (i) an increase in projected
tax revenues; (ii) an increase in sales tax revenues, resulting from the State
adopting a smaller sales tax reduction than previously assumed; (iii) a
reduction in assumed State aid reflecting the State adopted budget; (iv) a
reduction in projected debt service expenditures and reduced pension costs; (v)
an increase in expenditures of BOE in the 1998 fiscal year; and (vi) an increase
in expenditures in each of the 1998 through 2001 fiscal years, reflecting
additional agency spending and costs for the City's proposed drug initiative.
The 1998-2001 Financial Plan also includes a proposed discretionary transfer in
the 1998 fiscal year of additional debt service due in the 1999 fiscal year for
budget stabilization purposes. Subsequently, the City modified its expense
budget for the 1998 fiscal year to reflect the changes made in the 1998-2001
Financial Plan and spending not included in the 1998-2001 Financial Plan,
primarily for the City's proposed drug initiative. The increased spending was
offset by reducing the proposed discretionary transfer in the 1998 fiscal year
of debt service due in the 1999 fiscal year.
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The City's projections set forth in the City Financial Plan are based on
various assumptions and contingencies that are uncertain and may not
materialize. 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, the ability to implement proposed
reductions in City personnel and other cost reduction initiatives, collection of
projected rent payments for the City's airports, the ability of the City's
hospital entities to take actions to offset potential budget shortfalls, the
ability to complete revenue generating transactions, provision of State and
Federal aid and mandate relief, the impact on City revenues and expenditures of
Federal and State welfare reform and any future legislation affecting Medicare
or other entitlements and approval by the Governor and the State Legislature of
the extension of certain personal income tax surcharges, that are scheduled to
expire in 1998 and 1999.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions and to obtain the savings outlined in the
City Financial Plan. In addition, the City may incur expenditures that 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 balance budget in a particular fiscal year. Certain identified
savings are subject to negotiation with the City's municipal unions. Various
other actions proposed for the 1998 through 2001 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 spending increases beyond its projections during its 1997-
1998 fiscal year or subsequent fiscal years, such developments could result in
reductions in anticipated State aid to the City. The State did not adopt its
budget for the 1997-1998 fiscal year until August 4, 1997, more than four months
after April 1, 1997, the beginning of the fiscal year. 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.
The City's financial plans have been the subject of extensive public
comment and criticism. On September 18, 1997, the City Comptroller issued a
report commenting on developments with respect to the 1998 fiscal year. The
report noted that the City's adopted budget, which is reflected in the June
Financial Plan, had assumed additional State resources of $612 million in the
1998 fiscal year, and that the approved State budget provided resources of only
$216 million for gap-closing purposes. The report further noted that, while the
City will receive $322 million more in education aid in the 1998 fiscal year
than assumed in the City's adopted budget, it is unlikely that the funding will
be entirely available for gap-closing purposes. In addition, the report noted
that the City's financial statements currently contain approximately $643
million in uncollected State education aid receivables from prior years as a
result of the failure of the State to appropriate funds to pay these claims, and
that the staff of the Board of Education ("BOE") has indicated that an
additional $302 million in prior year claims is available for accrual. The
report stated that the City Comptroller maintains the position that no further
accrual of prior year aid will take place, including $75 million in aid assumed
in the City's adopted budget for the 1998 fiscal year, unless the State makes
significant progress to retire the outstanding prior year receivables.
On October 28, 1997, the City Comptroller issued a subsequent report
commenting on recent developments. With respect to the 1997 fiscal year, the
report noted that the City ended the 1997 fiscal year with an operating surplus
of $1.367 billion, before certain expenditures and discretionary transfers, of
which $1.362 billion was used for expenditures due in the 1998 fiscal year.
With respect to tax revenues for the
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1998 fiscal year, the report noted that total tax revenues in the first quarter
of the 1998 fiscal year were $244.3 million above projections in the June
Financial Plan, excluding audit collections which were $31.2 million less than
projected. The report stated that the increased tax revenues included $110.3
million of greater than projected general property tax receipts, which resulted,
in part, from a prepayment discount program, and increased revenues from the
personal income, banking corporation, general corporation and unincorporated
business taxes. The report noted that Wall Street profits exceeded expectations
in the first half of the 1977 calendar year. However, the report noted that the
stock market in the last two weeks of October declined as a result of currency
turmoil in Southeast Asia. The report noted that, while tax revenues in the 1998
fiscal year should not be significantly affected by the recent stock market
activity, since there is a lag between activity on Wall Street and City tax
revenues, if the stock market declines, tax revenue forecasts for subsequent
years will have to be revised downward.
On July 2, 1997, the staff of the Office of the State Deputy Comptroller of
New York (the "OSDC") issued a report on the June Financial Plan. For the 1998
fiscal year, the report projected a potential surplus of $190 million. The
report also identified risks of $518 million, $1.1 billion, $1.3 billion and
$1.4 billion for the 1998 through 2001 fiscal years, respectively. On July 15,
1997, the staff of the Control Board issued a report commenting on the June
Financial Plan. The report stated that, while the City should end the 1998
fiscal year with its budget in balance, the June Financial Plan still contains
large gaps beginning in the 1999 fiscal year, reflecting revenues which are not
projected to grow during the June Financial Plan period and expenditures which
are projected to grow at about the rate of inflation. The principal risks of
revenues and cost savings to the City which may not materialize, identified in
the report, included (i) potential tax revenue shortfalls based on historical
average trends; (ii) BOE's structural gap, uncertain State funding of BOE and
implementation by BOE of various unspecified actions; (iii) the proposed sale of
certain assets in the 1998 fiscal year which could be delayed; (iv) assumed
additional State actions; (v) revenues from the extension of the personal income
tax surcharge beyond December 31, 1998, which requires State legislation; and
(vi) the receipt of revenues from the Port Authority in the 1999 through 2001
fiscal years, respectively, which is the subject of arbitration. Taking into
account risks identified in the report and the gaps projected in the June
Financial Plan, the report projected a gap of $485 million for the 1998 fiscal
year, which could be offset by available reserves, and gaps of $2.7 billion,
$4.1 billion and $4.0 billion for the 1999 through 2001 fiscal years,
respectively. The report also noted that (i) if the securities industry or
economy slows down to a greater extent than projected, the City could face
sudden and unpredictable changes to its forecast; (ii) the City's entitlement
reduction assumptions require a decline of historic proportions in the number of
eligible welfare recipients; (iii) the City has not yet shown how the City's
projected debt service, which would consume 20% of tax revenues by the 1999
fiscal year, can be accommodated on a recurring basis; (iv) the City is
deferring recommended capital maintenance; and (v) continuing growth in
enrollment at BOE has helped create projected gaps of over $100 million annually
at BOE.
On October 31, 1996 the City's Independent Budget Office (the "IBO")
released a report assessing the costs that could be incurred by the City in
response to the Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (the "1996 Welfare Act"). The IBO report noted that if the requirement
that all recipients work after two years of receiving benefits is enforced,
these additional costs could be substantial starting in 1999, reflecting costs
for worker training and supervision of new workers and increased child care
costs. The report further notes that if economic performance weakened and
resulted in an increased number of public assistance cases, potential costs to
the City could substantially increase. The report noted that the new welfare
law's most significant fiscal impact is likely to occur in the years 2002 and
beyond, reflecting the full impact of the lifetime limit on welfare
participation, which only will begin to be felt in 2002. In addition, the
report noted that, given the State constitutional requirement to care for the
needy, the 1996 Welfare Act might well prompt a migration of benefit-seekers
into the City. The report concluded that the impact of the 1996 Welfare Act on
the City will ultimately depend on decisions of State and City officials,
including the allocation of block grant funds between the State and
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New York local governments and the divisions between the State and local
governments of welfare costs not funded by the Federal Government, the
performance of the local economy and the behavior of thousands of individuals in
response to the new system. On August 25, 1997, the IBO issued a report relating
to recent developments regarding welfare reform. The report noted that Federal
legislation adopted in August 1997 modified certain aspects of the 1996 Welfare
Act, by reducing SSI eligibility restrictions for certain legal aliens residing
in the country as of August 22, 1996, resulting in the continuation of Federal
benefits by providing funding to the states to move welfare recipients from
public assistance and into jobs and by providing continued Medicaid coverage for
those children who lose SSI due to stricter eligibility criteria. In addition,
the report noted that the State had enacted the Welfare Reform Act of 1997
which, among other things, requires the City to achieve work quotas and other
work requirements and requires all able-bodied recipients to work after
receiving assistance for two years. The report noted that this provision could
require the City to spend substantial funds over the next several years for
workfare and day care in addition to the funding reflected in the June Financial
Plan. The report also noted that the State Welfare Reform Act of 1997
established a Food Assistance Program designed to replace Federal food stamp
benefits for certain classes of legal aliens denied eligibility for such
benefits by the 1996 Welfare Act. The report noted that if the City elects to
participate in the Food Assistance Program, it will be responsible for 50% of
the costs for the elderly and disabled.
Ratings. As of December 11, 1997, Moody's Investors Service, Inc.
("Moody's") rated the City's outstanding general obligation bonds Baa1, Standard
& Poor's, a division of The McGraw-Hill Company, Inc. ("Standard & Poor's")
rated such bonds BBB+ and Fitch IBCA, Inc. ("Fitch") rated such Bonds A-. On
July 10, 1995, Standard & Poor's revised downwards its ratings on outstanding
general obligation bonds of the City from A- to BBB+. On July 17, 1997, Moody's
changed its outlook on City bonds to positive from stable. 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 September 30, 1997, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.2 and $3.7 billion of outstanding net long-term debt. As of
October 8, 1997, the New York City Municipal Water Finance Authority had
approximately $8.1 billion of aggregate principal amount of outstanding bonds,
inclusive of subordinate second resolution bonds, and $200 million aggregate
principal amount of outstanding commercial paper notes.
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 has taken the position that increased regulatory, enforcement and other
efforts to protect its water supply, will prevent the need for filtration. On
May 6, 1997, the U.S. Environmental Protection Agency granted the City a
filtration avoidance waiver through April 15, 2002 in response to the City's
adoption of certain watershed regulations, which became effective May 1, 1997.
The estimated incremental cost to the City of implementing this Watershed
Memorandum of Agreement, beyond investments in the watershed which are planned
independently, is approximately $400 million. The City has estimated that if
filtration of the upstate water supply system is ultimately required, the
construction expenditures required could be between $4 billion and $5 billion.
Such an expenditure could cause significant increases in City water and sewer
charges.
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,
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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, 1997, the City estimated
its potential future liability on account of all outstanding claims to be
approximately $3.5 billion.
New York State
Current Economic Outlook. The national economy has resumed a more robust
rate of growth after a "soft landing" in 1995, with approximately 14 million
jobs added since early 1992. Although the State has added approximately 300,000
jobs since late 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 forecast of the State's economy shows moderate expansion during the
first half of calendar 1997 with the trend continuing through the year. On an
average annual basis, employment growth in the State, although less than that
for the nation, is expected to be up substantially from the 1996 rate. Personal
income is expected to record moderate gains in 1997. The State's overall
employment growth is projected to be 1.4 percent in 1997 and 1.0 percent in 1998
while personal income growth is projected to be 6.1 percent in 1997 and 4.5
percent in 1998.
The 1997-1998 Financial Plan. The State's current fiscal year commenced on
April 1, 1997, and ends on March 31, 1998. The State's budget for the 1997-1998
fiscal year was adopted by the Legislature on August 4, 1997, more than four
months after the start of the fiscal year. Prior to adoption of the budget, the
Legislature enacted necessary appropriations for state-supported debt service.
The State Financial Plan for the 1997-1998 fiscal year was formulated on August
11, 1997, updated on October 30, 1997, and is based on the State's budget as
enacted by the Legislature, as well as actual results for the first half of the
current fiscal year.
The 1997-1998 Financial Plan projects General Fund receipts of $35.09
billion, an increase of approximately 6 percent from the previous fiscal year.
General Fund disbursements are projected at $34.60 billion, an increase of
approximately 5 percent from the previous fiscal year. Tax receipts are
projected to grow by approximately 5 percent in fiscal year 1997-1998. The
1997-1998 Financial Plan projects budget balance on a cash basis. The State
projects it has closed a budget gap of approximately $2.3 billion for the 1997-
1998 fiscal year. Gap-closing actions include cost containment in State
Medicaid, the use of the $1.4 billion 1996-1997 fiscal year budget surplus to
finance current year spending, control on State agency spending and other
actions. Total non-recurring resources included in the 1997-1998 Financial Plan
are projected to be 0.7 percent of total General Fund receipts. There can be no
assurance that the cost containment and spending reduction programs can be
implemented as proposed.
On September 11, 1997, the State Comptroller released a report entitled
"The 1997-98 Budget Fiscal Review and Analysis" in which he identified several
risks to the State Financial Plan and estimated that the State faces a potential
imbalance in receipts and disbursements of approximately $1.5 billion for the
States's 1998-1999 fiscal year and approximately $3.4 billion for the State's
1999-2000 fiscal year. In addition, the Comptroller identified risks in future
years from an economic slowdown and from spending and revenue actions enacted as
a part of the 1997-1998 budget that will add pressure to future budget balance.
The Governor is required to submit a balanced budget each year to the State
Legislature.
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General Fund payments for Medicaid are projected to be $5.42 billion,
virtually unchanged from the level of $5.38 billion in 1996-1997. This slow
growth is due primarily to continuation of cost containment measures enacted in
1995-1996 and 1996-1997, new reforms included in the 1997-1998 adopted budget
and forecasts for slower underlying growth. Other social service spending is
forecast to increase by only $115 million to $3.15 billion in 1997-1998. This
slow growth stems from continued State efforts to reduce welfare fraud,
declining caseloads and changes produced by federal welfare legislation enacted
in 1996.
The 1997-1998 adopted budget includes multi-year tax reductions, including
a State funded property and local income tax reduction program, estate tax
relief, utility gross receipts tax reductions, permanent reductions in the State
sales tax on clothing and elimination of assessments on medical providers. The
various elements of the State and local tax and assessment reductions have
little or no impact on the 1997-1998 Financial Plan, and do not begin to
materially affect the outyear projections until the State's 1999-2000 fiscal
year.
The 1997-1998 Financial Plan projects a budget imbalance of up to $1.68
billion for the 1998-1999 fiscal year. The expected gap is smaller than the
three previous budget gaps closed by the State. The Governor is required to
submit a balanced budget to the State Legislature and has indicated that he will
close any potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. 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.
Certain actions taken in the State's 1997-1998 fiscal year, such as
Medicaid and welfare reforms, are expected to provide recurring savings in
future fiscal years. Continued controls on State agency spending will also
provide recurring savings. The availability of $530 million in reserves created
as a part of the 1997-1998 adopted budget and included in the State Financial
Plan is expected to benefit the 1998-1999 fiscal year. Sustained growth in the
State's economy and continued declines in welfare caseload and health care costs
would also produce additional savings in the 1988-1999 Financial Plan. Finally,
various Federal actions, including the potential beneficial effect on State tax
receipts from changes to the Federal tax treatment of capital gains, could
potentially provide significant benefits to the State over the next several
years.
Certain actions taken in the 1997-1998 adopted budget add pressure to
future budget balance in New York State. For example, the fiscal effects of tax
reductions adopted in the 1997-1998 budget are projected to grow more
substantially beyond the 1998-1999 fiscal year with incremental costs averaging
in excess of $1.3 billion annually over the last three years of the tax
reduction program. These incremental costs reflect the phase-in of State-funded
school property tax and local income tax relief, the phase-out of the
assessments on medical providers and reductions in estate and gift levies,
utility gross receipts taxes and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when fully effective in State fiscal year 2001-2002. In addition,
the 1997-1998 budget included multi-year commitments for school aid and pre-
kindergarten early learning programs which could add as much as $1.4 billion in
costs when fully annualized in fiscal year 2001-2002. These spending
commitments are subject to annual appropriation.
On August 11, 1997, President Clinton exercised his line item veto powers
to cancel a provision in the Federal Budget Act of 1997 that would have deemed
New York State's health care provider taxes to be approved by the Federal
government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was
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sanctioned by Federal legislation in 1987 and 1991. However, the Federal Health
Care Financing Administration ("HCFA") regulations governing the use of provider
taxes require the State to seek waivers from HCFA that would grant explicit
approval of the provider taxing system now in place. The State filed the
majority of these waivers with HCFA in 1995 but has yet to receive final
approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A Federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-1998 Financial Plan does not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor has stated that this proposal
does not appear to address all of the State's concerns and negotiations are
ongoing between the State and HCFA. In addition, the City of New York and other
affected parties in the health care industry have filed a lawsuit challenging
the constitutionality of the President's line item veto.
The 1997-1998 Financial Plan is 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, any of 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 1997-1998 and subsequent 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 fact 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.
The 1996-1997 Fiscal Year. The State ended its 1996-1997 fiscal year on
March 31, 1997 in balance on a cash basis, with a 1996-1997 General Fund cash
surplus as reported by the State Division of the Budget of approximately $1.4
billion that has been used to finance the 1997-1998 Financial Plan. The surplus
results primarily from higher-than-expected revenues and lower-than-expected
spending for social service programs. The General Fund closing balance was $433
million. General Fund receipts and transfers from other funds for the 1996-1997
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the 1995-
1996 fiscal year (excluding deposits into the tax refund reserve account).
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-1997 fiscal year, an increase of 0.7 percent from the 1995-1996
fiscal year.
Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance,
with a reported 1995-1996 General Fund cash surplus of $445 million. General
Fund receipts and transfers from other funds totaled $32.81 billion, a decrease
of 1.1 percent from the 1994-1995 levels. General Fund disbursements and
transfers to other funds totaled $32.68 billion for the 1995-1996 fiscal year, a
decrease of 2.2 percent from the 1994-1995 levels. Prior to adoption of the
State's 1995-1996 fiscal year budget, the State had
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projected a potential budget gap of approximately $5 billion, which was closed
primarily through spending reductions, cost containment measures, State agency
actions and local assistance reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion, an
increase of 2.9 percent from the 1993-1994 levels. General Fund disbursements
and transfers to other funds totaled $33.40 billion, an increase of 4.7 percent
from the 1993-1994 levels.
Local Government Assistance Corporation. In 1990, as part of a State
fiscal reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "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 had 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, 1997, the total amount of outstanding general obligation
debt was approximately $5.028 billion, including $293.6 million in Bond
Anticipation Notes. The total amount of moral obligation debt was approximately
$4.069 billion, and $22.499 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 incurring 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,
1996, there were 17 public authorities that had outstanding debt of $100 million
or more, and the aggregate outstanding debt, including refunding bonds, of all
State public authorities was $75.4 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 the State's
outstanding general obligation bonds "A2," A and A+, respectively. Standard &
Poor's revised its ratings upward from A- to A on August 28, 1997. 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 may have an effect on the market price of the New York Municipal Bonds
in which the 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. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. There can be no assurance that an adverse decision in one or more
legal
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proceedings would not exceed the amount the State reserves for the payment of
judgments or materially impair the State's financial operations. In its audited
financial statements for the fiscal year ended March 31, 1997, the State
reported its estimated liability for awarded and anticipated unfavorable
judgments at $364 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1997-1998 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 1997-1998 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.
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APPENDIX C
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
The following information is a brief summary of factors affecting the
economy of the Commonwealth and does not purport to be a complete description of
such factors. Other factors will affect issuers. The summary is based
primarily upon one or more publicly available offering statements relating to
debt offerings of Commonwealth issuers; however, it has not been updated nor
will it be updated during the year. The Trust has not independently verified
the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to as 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.
For the five year period from fiscal 1992 through fiscal 1996, revenues and
other sources (determined on a "GAAP" basis) increased by an average annual rate
of 4.6%. Intergovernmental revenues increased by an average annual rate of
13.2% due, in part, to an accounting change. Tax revenues during this period
increased an average of 2.5% as modest economic growth, low inflation rates and
several tax rate reductions and other tax reduction measures constrained growth
of tax revenues. The tax reduction measure followed a $2.7 billion tax increase
adopted for the 1992 fiscal year.
Expenditures and other uses during the fiscal 1992 through fiscal 1996
period rose at an average annual rate of 6.0%, led by increases of 14.2% for
protection of persons and property. A prison expansion program and other
correctional program expenses are responsible for the large percentage increase
in this area. Efforts to control costs for various social welfare programs and
the presence of favorable economic conditions have led to a modest 5.6% increase
for public health and welfare costs for the five year period.
The fund balance at June 30, 1996 totaled $635.2 million, a $547.7 million
increase from the balance of $87.5 million at June 30, 1992.
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The fiscal 1996 unappropriated surplus (prior to transfer to the Tax
Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate.
Expenditures from revenues, including $113 million of supplemental
appropriations (but excluding pooled financing expenditures) totalled $16,074.7
million. Expenditures exceeded available revenues and lapses by $253.2 million.
The difference was funded from a planned partial drawdown of the $437 million
fiscal year adjusted beginning unappropriated surplus.
Commonwealth revenues (prior to tax refunds) for fiscal 1996 increased by
$113.9 million over the prior year to $16,338.5 million (representing a growth
rate of .7%). Tax rate reductions and other tax law changes substantially
reduced the amount and rate of revenue growth for the fiscal year. It is
estimated the tax changes enacted for the fiscal year reduced Commonwealth
revenues by $283.4 million.
For GAAP purposes, the fiscal 1996 fund balance was drawn down $53.1
million to $635.2 million. A planned drawdown of the budgetary unappropriated
surplus during the fiscal year contributed to expenditures and other uses
exceeding revenues and other sources by $28.0 million. As a result, the
unreserved fund balance declined by $61.1 million, reducing the balance to
$381.8 million at the end of fiscal 1996. Total revenues and other sources
increased by 8.7% for the fiscal year, led by a 24.2% increase in
intergovernmental revenues (due mainly to an accounting change). Expenditures
and other uses increased by 8.6% for fiscal 1996.
The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal year.
Higher than estimated revenues and slightly lower expenditures than budgeted
caused the increase. Transfers to the Tax Stabilization Reserve Fund for fiscal
1997 operations will be $88.7 million representing the normal fifteen percent of
the ending unappropriated balance, plus an additional $100 million authorized by
the General Assembly when it enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 million (3.4%) above the estimate made at the time
the budget was enacted. Revenue from taxes was the largest contributor to higher
than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax revenues
in fiscal 1996. This rate of increase was not adjusted for legislated tax
reductions that affected receipts during both of those fiscal years, and
therefor understates the actual underlying rate of growth of tax revenue during
fiscal 1997. Non-tax revenues were $19.8 million (5.8%) over estimate mostly due
to higher than anticipated interest earnings.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to the
estimate made in February 1997 with the presentation of the Governor's fiscal
1998 budget request. Total expenditures represent an increase over fiscal 1996
expenditures of 1.7%. Lapses of appropriation authority during the fiscal year
totaled $200.6 million compared to an estimate of $100 million. The higher
amount of appropriation lapses was used to support an additional $79.8 million
in fiscal 1997 supplemental appropriation lapses was used to support an
additional $79.8 million in fiscal 1997 supplemental appropriations over the
February 1997 estimate. Supplemental appropriations for fiscal 1997 totaled
$169.3 million.
The budget for fiscal 1998 was enacted in May 1997. Commonwealth revenues
for the fiscal year at that time were estimated to be $17,435.4 million before
reserves for tax refunds. That estimate represented an increase over estimated
fiscal 1997 Commonwealth revenues of 1.0%. Although fiscal 1997 revenues
exceeded the estimate, the adopted fiscal 1998 budget revenue estimate remains
unchanged and represents an 0.7% increase over actual fiscal 1997 revenues.
Fiscal 1998 estimates for Commonwealth revenues are based on an economic
forecast for national economic growth to slow through the remainder of calendar
year 1997. A growth rate of just above 1.0% is anticipated to be maintained for
the last two quarters of the fiscal year and result in a 1.2% growth rate in
real gross domestic product for the second calendar quarter of 1998 over the
second quarter of 1997. This anticipated rate of economic growth is a result of
anticipated slowing of gains in consumer spending, business investment and
residential housing. Inflation is projected to remain modest and the
unemployment rate is expected to reach 6.0% by the second calendar quarter of
1998.
The rate of anticipated growth of Commonwealth revenues is also affected by
the enactment of tax reductions and tax revenue dedications effective for the
1998 fiscal year. Excluding these newly enacted changes, revenues are projected
to increase by 2.4% during fiscal 1998. Tax reductions enacted for the 1998
fiscal year budget totaled an estimated $170.6 million, including $16.2 million
that is reflected in higher projected tax refunds. Major changes to taxes
enacted for fiscal 1998 include: (i) the repeal of the sales and use tax on
computer services ($79.1 million); (ii) an increase in the amount of income that
is exempt from the personal income tax for low-income families ($25.4 million);
(iii) enactment of a research and development tax credit program for business
($15.0 million); (iv) conforming state tax laws to federal laws for subchapter S
corporations and limited liability companies ($16.3 million); and various other
miscellaneous changes.
The reserve for tax refunds for fiscal 1998 has been increased by 21.3% to
$655.0 million. A portion of the additional reserves reflect tax refund
liabilities that are expected to result in cash payments in a subsequent fiscal
year.
Appropriations enacted for fiscal 1998 are 3.7% ($618 million ) above
appropriations enacted for fiscal 1997 (including supplemental appropriations).
Major funding increases provided by the fiscal 1998 budget include: (i) $166
million of appropriations for elementary and secondary education plus an
estimated $51 million in reduced employer retirement contributions payable by
local school districts due to a reduction in the contribution rate; (ii)
$42
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million for higher education institutions plus $16 million for student
scholarships; (iii) $70 million for higher caseload, utilization, and cost of
nursing home care; (iv) $60 million for economic development assistance through
programs providing incentive grants and loans; and (v) $38 million for
corrections including $17 million for operating costs for new and expanded
facilities. The balance of the increase is spread over many other departments
and program operations.
Based on current expectations and the adopted budget for fiscal 1998 and
excluding any estimate for appropriation lapses during the fiscal year, the
unappropriated surplus is projected to decline from $402.7 million at the
beginning of the fiscal year to $16.7 million at fiscal year-end (prior to
transfer to the Tax Stabilization Reserve Fund). Published reports indicate
that year-to-date collections are $123.9 million (1.6%) over official
estimates.
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Pennsylvania had historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
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 Pennsylvania over the ten year period that
ended in 1996 increased at an annual rate of 1.03%. This compares to a .41%
rate for the Middle Atlantic region and 1.8% rate for the United States as a
whole during the period 1986 through 1996. For the last three years, employment
in the Commonwealth has increased 3.6%, as compared to 3% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for September, 1997
stood at a seasonally adjusted rate of 5.3%.
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The seasonally adjusted national unemployment rate for September, 1997 was
4.9%.
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.
Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues that
are not specified by law to be deposited elsewhere. As of June 30, 1997, the
Commonwealth had $4,795.1 million of general obligation debt outstanding.
Other state-related obligations include "moral obligations". Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
(the "PHFA"), a state-created agency which provides financing for housing for
lower and moderate income families, and The Hospitals and Higher 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.
The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of those leases and their respective lease payments are, with
the Commonwealth's approval, pledged as security for debt obligations issued by
certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law
to appropriate or otherwise provide monies from which the lease payments are to
be made. The obligations to be paid from such lease payments are not bonded
debt of the Commonwealth.
Certain Commonwealth-created organizations have statutory authorization to
issue debt for which Commonwealth appropriations to pay debt service thereon are
not required. The debt of these organizations is funded by assets of, or
revenues derived from, the various projects financed and is not a statutory or
moral obligation of the Commonwealth. Some of these organizations, however, are
indirectly dependent on Commonwealth operating appropriations. In addition, the
Commonwealth maintains pension plans covering all state employees, public school
employees and employees of certain state-related organizations. For their
fiscal years ended in 1996, the State Employees' Retirement System had an
accrued unfunded surplus of $904 million and the Public School Employees'
Retirement System had a total unfunded actuarial accrued liability of $1,459
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
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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 May 20, 1997.
PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain city 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, 1996 shows a
surplus of approximately $118.5 million.
No further bonds are to be issued by PICA for the purposes of financing a
capital project or deficit as the authority for such bond sales expired December
31, 1994. PICA's authority to issue debt for the purpose of financing a cash
flow deficit expired on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,102.4 million in Special Revenue
Bonds outstanding as of June 30, 1997.
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.
The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that an
adverse decision may have a material effect on governmental operations of the
Commonwealth:
Baby Neal v. Commonwealth, et al.
In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth in federal court seeking an
order that would require the Commonwealth to provide additional funding for
child welfare services. No figures for the amount of funding sought are
available. A similar lawsuit filed in the Commonwealth Court of Pennsylvania
was resolved through a court approved settlement which provides, among other
things, for more Commonwealth funding for such services in fiscal year 1991 and
a commitment to pay Pennsylvania counties $30 million over five years. In
December 1994, the Third Circuit Court of Appeals reversed the District Court's
denial of the plaintiff's motion for class certification in the federal action
with respect to the interests of 16 minor plaintiffs. As a result, the District
Court has recently certified the class and the parties have resumed
discovery.
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. On December 7, 1992, the State Association of
County Commissioners filed a new action in mandamus seeking to compel the
Commonwealth to comply with the Supreme Court's decision in County of
Allegheny.
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The Court issued the writ on July 26, 1996, and appointed a special master to
devise and submit a plan for implementation. Following the issuance of the
writ, the President Pro Tempore of the Senate and the Speaker of the House filed
a petition seeking reconsideration from the Court. On January 28, 1997, the
Supreme Court granted an extension of time within which the special master must
file his report and announced the establishment of a committee comprised of
members of the Executive Department, the Legislative Department and the special
master, to develop an implementation plan. On January 26, 1997, the "Interim
Report of the Master" was filed setting forth a state funding proposal.
Objections to the report were due by September 1, 1997. The General Assembly has
yet to consider legislation implementing the Pennsylvania Supreme Court's
judgment.
Fidelity Bank v. Commonwealth of Pennsylvania
On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed an action in
challenging the constitutional validity of a 1989 amendment increasing the bank
shares tax and related legislation. The Commonwealth Court ruled in favor of
the Commonwealth finding no constitutional deficiencies in the tax increase, but
invalidating one element of the legislation which provided a credit to new banks
(the "new bank tax credit"). Fidelity, the Commonwealth and certain intervener
banks appealed to the Pennsylvania Supreme Court. However, pursuant to a
Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to
enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues. The credit represents
approximately 5% of the potential claim of Fidelity, had the constitutional
issues been resolved in its favor.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.
Notwithstanding the foregoing settlements, other banks have filed petitions
challenging the validity of the 1989 tax increase. One of these banks, Royal
Bank of Pennsylvania, filed a Stipulation of Facts and proceeded forward on
behalf of the other banks. The issue in these cases include those which were
adjudicated by Fidelity, although not brought to resolution by the Pennsylvania
Supreme Court. On January 8, 1998, the Commonwealth Court again ruled in favor
of the Commonwealth, upholding the validity of the tax increase. Royal Bank of
Pennsylvania has 30 days within which to file exceptions to the Commonwealth
Court decision.
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Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey
In January 1991, an association of rural and small schools and several
other parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. In the state case, trial and post-trial
briefings have been completed and oral argument was heard on September 8,
1997.
Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania on behalf of inmate populations in various Pennsylvania
correctional institutions, challenging the conditions of confinement and seeking
injunctive relief. On January 17, 1995, the Court approved a Settlement
Agreement between the parties, pursuant to which the Commonwealth paid $1.3
million in attorneys' fees to the plaintiffs' attorneys, with an additional
$100,000 paid in connection with the dismissal of a preliminary injunction
relating to certain health issues. The parties are presently complying with
monitoring provisions outlined in the Settlement Agreement. The monitoring
phase will expire on January 6, 1998. The attorneys' fees for the three-year
monitoring period will not exceed $60,000 in any one year.
Envirotest/Synterra Partners
On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
("Envirotest") and the Commonwealth of Pennsylvania entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have against the Commonwealth arising from the suspension of an emissions
testing program. Under the Settlement Agreement, Envirotest is to receive $145
million, with interest at 6% per annum, in payments of $25 million in 1995 and
$40 million each in 1996, 1997 and 1998. An additional $11 million may be
required to be paid in 1998 depending on the results of property liquidations by
Envirotest. Pursuant to a Consent to Assignment entered into in November, 1996,
Envirotest has assigned its right, title and interest in the base settlement.
Pennsylvania Human Relations Commission v. School District of Philadelphia, et
al. v. Commonwealth of Pennsylvania, et al.
On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia
were joined as additional respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission
against the School District of Philadelphia pursuant to the Pennsylvania Human
Relations Act. The enforcement action was pursued to remedy unintentional
conditions of segregation in the public schools of Philadelphia. The
Commonwealth and the City were joined in the "remedial phase" of the proceeding
"to determine their liability, if any, to pay additional costs necessary to
remedy the unlawful conditions found to exist in the Philadelphia public
schools."
On February 28, 1996, the School District of Philadelphia filed a third-
party complaint against the Commonwealth of Pennsylvania asking Commonwealth
Court to require the
68
<PAGE>
Commonwealth to "supply such funding as is necessary for full compliance with
the November 28, 1994 and other remedial orders of the Commonwealth Court." In
addition, a group of interveners on March 4, 1996 filed a third-party complaint
against the Commonwealth of Pennsylvania and the City of Philadelphia requesting
Commonwealth Court to declare that "it is the obligation of the Commonwealth and
the City to supply the additional funds identified as necessary for the District
to fully comply with the orders of the Commonwealth Court," and to require the
Commonwealth and the City to supply such additional funding as is necessary for
the District to comply with the orders.
On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the claims
against them. The Commonwealth and the City thereafter filed answers to the
complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City, in the alternative, the Commonwealth
argued that if it is held to be liable, it has a right of indemnity or of
contribution against the City.
Trial commenced on May 30, 1996. During the course of the trial, upon
motion of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996
assumed extraordinary plenary jurisdiction and directed Judge Smith to conclude
the proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.
On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor of
Pennsylvania. Judgment was also entered in favor of the City of Philadelphia
and the Mayor of Philadelphia with respect to the intervener's claim and on the
cross-claim filed by the Commonwealth and Governor. The Judge ordered the
Commonwealth and Governor to submit a plan to the Court within thirty days
detailing the means by which the Commonwealth will effectuate the transfer of
additional funds payable to the School District of Philadelphia to enable it to
comply with the remedial order during fiscal year 1996-1997 and any future years
during which the School District establishes its fiscal incapacity to fund the
remedial programs. Judge Smith specifically found that "because of the lack
of adequate funds to comply with the remedial order, the School District is
entitled to additional resources for 1996-1997 of $45.1 million."
On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.
On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter. On
January 28, 1997, the Supreme Court issued an Order directing the parties to
brief certain specific issues relative to the lower court proceedings.
Ridge v. State Employees' Retirement Board
On December 29, 1993, Joseph H. Ridge, a former judge of the Allegheny
Court of Common Pleas, filed in the Commonwealth Court a Petition for Review in
the Nature of Complaint in Mandamus and for a Declaratory Judgment against the
State Employees' Retirement Board alleging that the use of gender distinct
actuarial factors for benefits based
69
<PAGE>
upon his pre-August 1, 1983 service violates the equal protection and equal
rights clauses of the Pennsylvania Constitution. The lawsuit requests that the
petitioner's benefits be "topped up" to equal those that a similarly situated
female would be receiving. A decision adverse to the Retirement Board could be
applicable to other members of the State Employees' Retirement System and Public
School Employees Retirement System. The Commonwealth Court granted the
Retirement Board's preliminary objection to Judge Ridge's claims for punitive
damages, attorneys fees and compensatory damages (other than a recalculation of
his pension benefits should he prevail). On November 20, 1996, the Commonwealth
Court heard oral arguments en banc on Judge Ridge's motion for judgment of the
pleadings. A decision on that motion is pending. On February 13, 1997, the
Commonwealth Court denied Judge Ridge's motion for judgment on the pleadings.
Yesenia Marrerro, et al. v. Commonwealth, et al.
On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf, and on behalf of their school-aged children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, filed in the Commonwealth Court a civil action for declaratory
judgment against the Commonwealth of Pennsylvania, the General Assembly of
Pennsylvania, the presiding officers of the General Assembly, the Governor of
Pennsylvania, the State Board of Education, the Department of Education, and the
Secretary of Education, claiming that the statutory education financing system
is unconstitutional as applied to the School District of Philadelphia and that
the system of funding public education violates the constitutional mandate to
provide a thorough and efficient system of education in the City of
Philadelphia. The lawsuit also alleges that a scheme for financing public
education precludes the Commonwealth from providing the constitutionally
required "thorough and efficient system of public education" in the
circumstances faced by the School District of Philadelphia, and that the
defendants have failed to provide the School District of Philadelphia with
resources and other assistance necessary to provide all of its students with the
quality of education to which they are constitutionally entitled. Among other
things, the petitioners seek a declaration that the legislature must amend the
present or enact new education legislation so as to assure that education
funding for the School District of Philadelphia accounts and makes adequate
provision for the greater and special educational challenges and needs of
students in the School District in order to address their disadvantage.
* * *
Currently, Pennsylvania general obligation bonds are rated AA- by Standard
& Poor's, AA by Fitch, and AA3 by Moody's. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular bond issues will not be adversely affected by changes in economic or
political conditions.
70
<PAGE>
APPENDIX A
Description of Bond Ratings
---------------------------
Moody's Investors Service, Inc. ("Moody's") Municipal 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 are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered 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 in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
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. Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Standard & Poor's, a Division of the McGraw-Hill Companies, Inc. ("Standard &
Poor's") Municipal Debt Ratings
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers and other
forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or
hold a financial obligation, 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 obligors
or obtained by Standard & Poor's from other sources it 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 based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. - Likelihood of payment capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation.
II - Nature of and provisions of the obligation; and
III - Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
Standard & Poor's describes its ratings for corporate and municipal debt
as follows:
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its commitment on the obligation is
extremely strong.
AA - Debt rated AA has differs from the highest rated obligations only
in a small degree. The obligor's capacity to meet its commitment on the
obligation is very strong.
A - Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. The obligor's capacity to meet its commitment on the obligation is
still strong.
<PAGE>
BBB - Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment to the
obligation.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major 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.
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 for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating 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.
<PAGE>
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 may impose certain rating or other
--------------------- ---
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
<PAGE>
Part C
Other Information
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
--------------------
Included in Part A:
- Selected Per Share Data and Ratios for the ten years ended November
30, 1997
Incorporated by reference in Part B:
- Selected Per Share Data and Ratios for the five years ended November
30, 1997*
- Statement of Assets and Liabilities at November 30, 1997*
- Statement of Operations for the year ended November 30, 1997*
- Statement of Changes in Net Assets for the years ended November 30,
1997 and 1996*
- Notes to Financial Statements*
- Report of Independent Accountants*
- ---------------
* Incorporated by reference to the Registrant's 1997 Annual Report to
shareholders filed with the Securities and Exchange Commission for the year
ended November 30, 1997 pursuant to Rule 30b2-1 under the Investment
Company Act of 1940, as amended ("1940 Act").
(b) Exhibits:
--------
1. (a) Amended and Restated Articles of Incorporation of the
Registrant.(1)
1. (b) Articles of Amendment reclassifying capital stock as Class A
shares.(1)
1. (c) Articles Supplementary creating Class B shares of capital
stock.(1)
1. (d) Articles of Amendment relating to name change of Sentinel Short
Maturity Government Fund.(1)
1. (e) Articles of Amendment relating to name change of Sentinel Small
Company Fund.(1)
1. (f) Articles of Amendment relating to name change of Sentinel
Emerging Growth Fund.(1)
1. (g) Articles Supplementary creating Class C shares of capital
stock.(1)
2. By-Laws of the Registrant, as amended.
3. None.
4. (a) Portion of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of Class A shares of
each Fund as series of the Registrant.(2)
4. (b) Form of Class A Stock Certificates.(1)
5. Investment Advisory Agreement between the Registrant and
Sentinel Advisors Company (the "Advisor"), dated as of March 1,
1993.(3)
6. Distribution Agreement between the Registrant and Sentinel
Financial Services Company ("SFSC"), dated as of March 1,
1993.(3)
7. None.
<PAGE>
8. Custody Agreement between the Registrant and Investors
Fiduciary Trust Company ("IFTC"), dated December 1, 1989.(1)
9. (a) Dividend Paying Agent Agreement between the Registrant and
IFTC, dated December 1, 1989.(1)
9. (b) Service Agreement between Sentinel Administrative Service
Corporation and IFTC, dated December 1, 1989.(1)
9. (c) Administrative Services Agreement between Sentinel
Administrative Service Corporation and IFTC, dated December 1,
1989.(1)
9. (d) Fund Services Agreement between the Registrant and Sentinel
Administrative Services Company ("SASC"), dated as of March 1,
1993.(3)
9. (e) Form of Agreement and Plan of Reorganization between the
Registrant and The Independence Capital Group of Funds, Inc.(4)
10. None.
11. Consent of Price Waterhouse llp, independent accountants for
the Registrant.
12. None.
13. None.
14.(a) Master Form of Keogh Plan.(1)
14.(b) Master Form of IRA.(1)
14.(c) Master Form of Prototype Pension Plan.(1)
14.(d) Master Form of Prototype Profit Sharing Plan.(1)
14.(e) Master Form of 403(b) Plan.(1)
15.(a) Class A Distribution Plan pursuant to Rule 12b-1 under the
1940 Act.(1)
15.(b) Amended Class B Distribution Plan pursuant to Rule 12b-1 under
the 1940 Act.(1)
15.(c) Class C Distribution Plan pursuant to Rule 12b-1 under the
1940 Act.
16. Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22.(1)
17. Financial Data Schedules.
18. Amended Plan pursuant to Rule 18f-3 under the 1940 Act.
- ------------------------
(1) Previously filed as an Exhibit to Post-Effective Amendments No. 54, 55, 56,
57 and 58 of the Registrant on Form N-1 and Post-Effective Amendments No.
61, 62, 63, 64, 67, 68, 71, 72, 76, 77 and 80 of the Registrant on Form N-
1A.
(2) Reference is made to Articles Fifth, Sixth, Seventh and Eighth of the
Registrant's Articles of Incorporation, previously filed as Exhibit 1 to
the Registration Statement; and to Paragraphs 4 through 12, 35 through 39,
43 through 45, 50 and 52 through 54 of the Registrant's By-Laws, previously
filed as Exhibit 2 to the Registration Statement.
(3) Incorporated by reference to Exhibits 4, 6(b), 7(b), 13(b) and 13(g) to the
Registration Statement of the Registrant on Form N-14, File No. 33-55000.
(4) Incorporated by reference to Appendix I to the Prospectus contained in the
Registration Statement of the Registrant on Form N-14 filed with the
Commission on January 6, 1995, File No. 33-88326.
Item 25. Persons Controlled by or under Common Control
With The Registrant
---------------------------------------------
None.
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of December 31, 1997
-------------- ------------------------
<S> <C>
Sentinel Small Company Fund 11,885
Sentinel Growth Fund 6,777
Sentinel World Fund 6,149
Sentinel Common Stock Fund 50,308
Sentinel Balanced Fund 18,183
Sentinel Bond Fund 3,760
Sentinel New York Tax-Free Income Fund 129
Sentinel Tax-Free Income Fund 2,405
Sentinel Government Securities Fund 3,287
Sentinel Short Maturity Government Fund 1,650
Sentinel U.S. Treasury Money Market Fund 4,755
</TABLE>
Item 27. Indemnification
---------------
See paragraphs 3, 4, 5 and 6 of Article SEVENTH of the Amended and
Restated Articles of Amendment of the Registrant, incorporated by
reference to Exhibit 1(a) to this Registration Statement.
The existing Advisory Agreement (Exhibit 5 hereof) provides that in
the absence of willful malfeasance, bad faith, gross negligence or
reckless disregard of the obligations or duties thereunder on the part
of the Advisor, the Advisor shall not be liable to the Registrant or
to any shareholder of the Registrant for any act or omission in the
course of, or connected with rendering services thereunder or for any
losses that may be sustained in the purchase, holding or selling of
any security.
In addition, the Registrant maintains a directors and officers
liability insurance policy with maximum coverage of $15 million under
which the directors and officers of the Registrant are named insureds.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted
to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the 1933 Act and therefore is unenforceable. In the event that a
claim for indemnification against such liabilities (other than for
expenses paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant, unless the matter has been settled by controlling
precedent in the opinion of its counsel, will submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
<PAGE>
Item 28. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
Information on the Advisor is incorporated by reference to the
Prospectus included in this Registration Statement.
Partners of the Advisor
-----------------------
Sentinel Management Co. - Managing General Partner
Sentinel Advisors, Inc. - General Partner
Provident Mutual Management Co., Inc. - General Partner
HTK of Delaware, Inc. - General Partner
Officers of the Advisor
-----------------------
Rodney A. Buck, Chief Executive Officer
Richard D. Temple, Vice President
David M. Brownlee, Senior Vice President
Robert L. Lee, Senior Vice President
Kenneth J. Hart, Vice President
Richard A. Pender, Senior Vice President
Bruce R. Bottamini, Vice President
Thomas H. Brownell, Vice President
William C. Kane, Vice President
Kay L. Edson, Vice President
Henry J. Restaino, Vice President
Dean R. Howe, Vice President and Treasurer
Scott T. Brayman, Vice President
Daniel J. Manion, Vice President
Lisa M. Pettrey, Secretary
Each of the above officers is also an officer or employee of National
Life Insurance Company or its subsidiary, National Life Investment
Management Company, Inc. The principal business address of each such
company is National Life Drive, Montpelier, Vermont 05604.
<PAGE>
Item 29. Principal Underwriters
----------------------
(a) The Registrant's principal underwriter, SFSC, also serves as principal
underwriter for Sentinel Pennsylvania Tax-Free Trust.
(b) As to each officer of SFSC:
<TABLE>
<CAPTION>
Positions and
Name and Principal Positions and Offices Offices with
Business Address with SFSC the Registrant
- ------------------ --------------------- --------------
<S> <C> <C>
Joseph M. Rob Chief Executive Officer President
Julie B. Hendrickson President and Chief None
Operating Officer
John M. Grab, Jr. Senior Vice President, Vice President
Chief Financial Officer,
and Treasurer
</TABLE>
The principal business address of all such persons is National Life Drive,
Montpelier, Vermont 05604.
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
The following maintain physical possession of each account book or other
documents required by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder.
(a) Sentinel Administrative Service Company
National Life Drive
Montpelier, Vermont 05604
Rule 31a-1(a)
Rule 31a-1(b)(1)(2)(3)(4)(5)(6)(7)(8)
Rule 31a-2(a)(b)(c)(f)
<PAGE>
(b) Sentinel Advisors Company
National Life Drive
Montpelier, Vermont 05604
Rule 31a-1(a)(9)(10)(11)
Rule 31a-1(d)(f)
Rule 31a-2(a)(c)(f)
(c) Sentinel Financial Services Company
National Life Drive
Montpelier, Vermont 05604
Rule 31a-1(d)
Rule 31a-2(c)
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to its Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Montpelier and State
of Vermont, on the 3rd day of February, 1998.
SENTINEL GROUP FUNDS, INC.
(Registrant)
By: /s/ Patrick E. Welch
---------------------------------------
Patrick E. Welch
Chairman
As required by the Securities Act of 1933, this post-effective amendment to
the Registration Statement has been signed by the following persons in the
capacities on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Patrick E. Welch Chairman February 3, 1998
- ---------------------------------- (Chief Executive
Patrick E. Welch Officer)
/s/ Richard J. Borda* Director
- ----------------------------------
Richard J. Borda
/s/ Kalman J. Cohen* Director
- ----------------------------------
Kalman J. Cohen
/s/ Richard D. Farman* Director
- ----------------------------------
Richard D. Farman
/s/ John D. Feerick* Director
- ----------------------------------
John D. Feerick
/s/ Richard J. Johannesen, Jr.* Director
- ----------------------------------
Richard J. Johannesen, Jr.
/s/ Robert B. Mathias* Director
- ----------------------------------
Robert B. Mathias
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Director
- ----------------------------------
Keniston P. Merrill
/s/ Deborah G. Miller* Director
- ----------------------------------
Deborah G. Miller
/s/ John Raisian* Director
- ----------------------------------
John Raisian
/s/ Joseph M. Rob Director February 3, 1998
- ----------------------------------
Joseph M. Rob
/s/ Susan M. Sterne* Director
- ----------------------------------
Susan M. Sterne
/s/ Angela E. Vallot* Director
- ----------------------------------
Angela E. Vallot
/s/ John M. Grab, Jr. Vice President February 3, 1998
- ---------------------------------- and Principal
John M. Grab, Jr. Financial and
Accounting Officer
*By /s/ Joseph M. Rob February 3, 1998
------------------------------
Joseph M. Rob
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT 11
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 81 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated December 19, 1997, relating to the financial
statements and financial highlights appearing in the November 30, 1997 Annual
Report to Shareholders of Sentinel Group Funds, Inc. and Sentinel Pennsylvania
Tax-Free Trust, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in the Prospectus and under the heading "General Information" in the
Statement of Additional Information.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
February 3, 1998
<PAGE>
Exhibit 15(c)
CLASS C DISTRIBUTION PLAN
of
SENTINEL GROUP FUNDS, INC.
Pursuant to Rule 12b-1
Class C Distribution Plan (the "Plan") dated as of the 14th day of
December, 1997 of Sentinel Group Funds, Inc., a Maryland corporation (the
"Company") and Sentinel Financial Services Company (the "Distributor").
WITNESSETH:
WHEREAS, the Company is engaged in business as a series open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Distributor is a securities firm engaged in the business of
marketing shares of investment companies through other securities firms; and
WHEREAS, the Company has entered into a Distribution Agreement with the
Distributor, pursuant to which the Distributor acts as the primary distributor
of the Company's shares, and the sole distributor and representative of the
Company in the offer and sale through independent broker-dealers of the common
stock, par value $.01 per share, of each Fund of the Company, including in
particular the Class C shares of each of the following investment portfolios of
the Company:
Sentinel World Fund
Sentinel Common Stock Fund
Sentinel Balanced Fund
Sentinel High Yield Bond Fund
(such classes, together with all class C classes of Funds that may be authorized
for issuance and sale in the future by the Board of Directors of the Company,
being hereinafter referred to as the "Class C Classes"); and
WHEREAS, the Company desires to adopt the Plan pursuant to Rule 12b-1 under
the Investment Company Act, pursuant to which the Company will pay certain fees
to the Distributor with respect to the shares of the Company's Class C Classes;
and
WHEREAS, the Directors of the Company have determined that there is a
reasonable likelihood that adoption of the Plan will benefit each Class C Class
and its shareholders.
<PAGE>
NOW, THEREFORE, the Company hereby adopts, and the Distributor hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1 under the
Investment Company Act on the following terms and conditions:
1. The Company shall, for the purpose and on the further terms and
conditions set forth herein, pay to the Distributor an amount equal to the
aggregate of the distribution expenditures relating to the sale of the shares of
common stock of each Class C Class of the Company, up to a maximum of 1.00% per
annum of average daily net assets of each Class C Class. Of such amount, up to
0.25% shall be allocated to service fees to broker-dealers, and up to 0.75% may
be allocated to other expenses described below.
2. The Company shall reimburse the Distributor for expenses actually
incurred by the Distributor for: (a) service fees with respect to Class C
Classes paid to securities broker-dealers who have executed a Dealer Agreement
with the Distributor; (b) recovery of front-end sales commissions paid by the
Distributor to securities broker-dealers who have executed a Dealer Agreement
with the Distributor with respect to sales of shares of the Class C Classes,
together with the costs of financing such payments incurred by the Distributor,
except to the extent such costs are recovered through contingent deferred sales
charges collected by the Distributor; and (c) expenses incurred for state "blue
sky" registration fees for the first year of operations of a series of Class C
shares of a Fund of the Company. Reimbursements contemplated under clauses (b)
and (c), above, shall be paid monthly upon receipt by the Company of a written
expense report detailing the expenses qualifying for such reimbursement and
purposes thereof. In the event that for any Class C Class or Classes the
aggregate of these reimbursable expenses exceeds the maximums set forth in
paragraph 1 above, then the expenses described in clause (a) of this paragraph 2
shall have priority over those reimbursements to be made to the Distributor
under clauses (b) and (c) of this paragraph 2. In such event, the Distributor
will not be reimbursed for any unreimbursed eligible expenses from any other
Class C Class, or in any future year.
3. The Distributor shall prepare reports to the Board of Directors of the
Company on a quarterly basis summarizing all payments made by it pursuant to the
Plan and the Dealer Agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Directors or the
Directors who are not interested persons may reasonably request from time to
time.
4. The Plan shall become effective as to each Class C Class upon its
approval by (a) a majority of the outstanding voting securities (as such phrase
is defined in the Investment Company Act) of such Class, and (b) a majority of
the members of the Board of Directors of the Company, including a majority of
the members of the Board of Directors who are not interested persons of the
Class C Classes and have no direct or indirect financial interest in the
operation of the Plan, with votes cast in person at a meeting called for the
purpose of voting on the Plan, and (c) upon the effectiveness of a Post-
Effective Amendment to the Company's Registration Statement reflecting this
Plan, filed with the U.S. Securities and Exchange Commission under the
Securities Act of
<PAGE>
1933. The date on which the last of (a), (b) and (c) occurs with respect to a
Class C Class shall be the "Effective Date" with respect to such Class C Class.
5. Upon receipt of the approvals required by paragraph 4 above, the Plan
and the Dealer Agreements contemplated hereby shall continue in effect with
respect to any Class C Class beyond the first anniversary of its adoption by the
Board of Directors of the Company only so long as (a) its continuation is
approved at least annually in the manner set forth in either clause (a) or
clause (b) of paragraph 4 above and (b) the selection and nomination of those
Directors of the Company who are not interested persons of the Company are
committed to the discretion of such Directors.
6. The Plan or any agreement related to the Plan may be terminated without
penalty at any time by a majority of those Directors of the Company who are not
interested persons of the Company and have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the Plan,
or with respect to any Class C Class, by the holders of a majority of the
outstanding voting securities of such Class C Class.
7. This Plan may not be amended to increase the maximum amount permitted
to be expended hereunder except with the approval of the holders of a majority
of the outstanding voting securities of any affected Class C Class, and may not
be amended in any other material respect except with the approval of the
majority of the members of the Board of Directors of the Company who are not
interested persons of the Company and have no direct or indirect financial
interest in the operation of the Plan. Amendments required to conform to
changes in the Rule shall not be deemed to be material amendments. The Plan or
any agreement related to the Plan will terminate automatically in the event of
its assignment.
8. The Company shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 3 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or reports,
as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
SENTINEL GROUP FUNDS, INC.
by
--------------------------
Keniston P. Merrill
Chairman
<PAGE>
SENTINEL FINANCIAL SERVICES
COMPANY
by
-----------------------------
Joseph M. Rob
Chief Executive Officer
<PAGE>
EXHIBIT 18
SENTINEL GROUP FUNDS, INC.
AMENDED RULE 18f-3 PLAN
Rule 18f-3 under the Investment Company Act of 1940 (the "Investment
Company Act") permits mutual funds to issue multiple classes of shares. Under
Rule 18f-3(d), each mutual fund that seeks to rely upon Rule 18f-3 is required
to (i) create a plan (the "Plan") setting forth the differences among each class
of shares, (ii) receive the approval of a majority of the Board of Directors of
the fund (including a majority of the non-interested directors) that the Plan,
including the expense allocation between each class of shares, is in the best
interests of each class individually and the fund as a whole, and (iii) file a
copy of the Plan with the Securities and Exchange Commission (the "Commission")
as an exhibit to the fund's registration statement. The following Plan
describes the differences among the classes of shares for certain (each a
"Fund," and collectively, the "Funds") series of Sentinel Group Funds, Inc. (the
"Company") as set forth in Appendix A hereto.
Each Fund is advised by Sentinel Advisors Company (the "Advisor") and
offers Class A and Class B shares. Sentinel Balanced Fund, Sentinel Common
Stock Fund, Sentinel High Yield Bond Fund, and Sentinel World Fund also offer
Class C shares (the "Class C Funds"). The shares of each class may be purchased
at a price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below, except that Class B
shares of Sentinel U.S. Treasury Money Market Fund (the "Money Market Fund") may
be acquired only through exchanges and may not be purchased directly, as
described below. Class A shares are sold to investors choosing the initial
sales charge alternative, and Class B and Class C shares are sold to investors
choosing the deferred sales charge alternative. Initial sales charges,
contingent deferred sales charges ("CDSCs"), fees ("Rule 12b-1 fees") payable
under the Company's distribution plans pursuant to Rule 12b-1 under the
Investment Company Act (each a "Rule 12b-1 Plan"), conversion periods and rights
of accumulation for each of the Funds are as set forth in the current prospectus
and statement of additional information for the Company.
Each Class A, Class B and Class C share of a Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that Class B and Class C shares bear the expenses of higher ongoing Rule 12b-1
fees and the additional incremental transfer agency costs resulting from the
additional recordkeeping required by the deferred sales charge arrangement,
although Class C shares are subject to a shorter CDSC period at a lower rate and
they forgo the Class B conversion feature. Each class of shares has exclusive
voting rights with respect to the Rule 12b-1 Plan applicable to that class. The
Rule 12b-1 fees that are imposed on the Class A, Class B and Class C shares of a
<PAGE>
Fund and the deferred sales charges that are imposed on the Class B and Class C
shares of that Fund are imposed directly against that class and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by a Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that Rule 12b-1 fees and any incremental transfer agency costs relating
to a particular class are borne exclusively by that class.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear ongoing Rule 12b-1 fees. Class A shares will be issued upon
reinvestment of dividends of outstanding Class A shares. Investors
purchasing in the aggregate shares in the amount $1 million or more
will be offered Class A shares only.
Class A investors may qualify for reduced initial sales charges
through the purchase of certain minimum amounts of Class A shares of a
Fund, as described in the Appendix B hereto. In cases in which no
initial sales charge is imposed, a CDSC of up to 1% will be imposed on
redemptions of Class A shares within two years of purchase, as
described in the Appendix B hereto.
Class B: Class B shares are sold on a deferred sales charge basis. Class B
shares do not incur a sales charge when they are purchased, but they
are subject to ongoing Rule 12b-1 fees that are higher than the Rule
12b-1 fees imposed on Class A shares and a CDSC for periods of up to
six years as described in the Appendix B hereto. Once the CDSC period
has expired, Class B shares will convert automatically to Class A
shares at a specified time as described below. Class B shares are
available only to investors whose share holdings aggregate less than
$1 million.
Class C: Class C shares are sold on a deferred sales charge basis. Class C
shares do not incur a sales charge when they are purchased, but they
are subject to ongoing Rule 12b-1 fees imposed on Class A shares and a
CDSC for only one year. Class C shares have no conversion feature
[and, accordingly, Class C shares will be subject to Rule 12b-1 fees
for an indefinite period subject to annual approval by the Fund's
Board of Directors].
Exchange Privilege. Shareholders of each class of shares of a Fund have an
exchange privilege with the other Funds. There is currently no limitation on
the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be
2
<PAGE>
modified or terminated in accordance with the rules of the Commission.
Class A and Class B shares of each Fund are exchangeable with shares of the
same class of the other Funds. Class C shares of each Class C Fund are
exchangeable with Class C shares of the other Class C Funds. Class A shares are
also exchangeable for shares of Sentinel Government Securities Fund, Sentinel
Growth Fund, Sentinel New York Tax-Free Income Fund and Sentinel Short-
Intermediate Government Fund, each a series of the Company, and for shares of
Sentinel Pennsylvania Tax-Free Trust (the "Single Class Funds").
Shares of a Fund or a Single Class Fund are exchangeable on the basis of
relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of such fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of a Fund is
"tacked" to the holding period of the newly acquired shares of the second Fund.
Class A shares of the Money Market Fund may be acquired either through a
purchase or through an exchange of Class A shares of another Fund or Single
Class Fund, or Class C shares of a Class C Fund; Class B shares of the Money
Market Fund may not be purchased directly or acquired in exchange of shares of a
Single Class Fund and may be acquired only in exchange for Class B shares of
another Fund. The period of time that shares are held in Class A shares of the
Money Market Fund through the exchange of Class C shares of a Class C Fund or in
Class B shares of the Money Market Fund, however, will not count toward
satisfaction of the holding period requirement for reduction of any CDSC imposed
on such shares.
Right of Accumulation. The right of accumulation for each class of shares
for each of the Funds is as set forth in the current prospectus and statement of
additional information for the Company.
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 Money Market Fund shall be allocated according to
the net assets or number of shareholder accounts, each on a pro rata basis, of
each class. Allocations in the case of the Money Market Fund 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 services to the Fund,
agreeing to waive or reimburse the Fund for payments to such service provider by
one or more classes, as allocated as described above, to the extent necessary to
assure that all
3
<PAGE>
classes of the Funds maintain the same net asset value per share, or (ii) on the
basis of relative net asset value.
Amending Rule 12b-1 Plans. No Fund will implement any amendment to the
Company's Class A, Class B or Class C Rule 12b-1 Plan that would materially
increase the amount that may be borne by each class of shares unless the holders
of such class of shares, voting separately as a class, approve the proposal.
Conversion of Class B Shares to Class A Shares. After the applicable
CDSC period has expired, Class B shares and shares purchased through
reinvestment of dividends on those converting Class B shares of a Fund will
automatically convert into Class A shares of the same Fund on the basis of
relative net asset value per share of the two classes without the imposition of
any sales load, fee or other charge. For purposes of computing the period for
conversion of Class B shares to Class A shares, the holding period for the
previously owned shares of a Fund is "tacked" to the holding period of the newly
acquired shares of the second Fund. The period of time that shares are held in
the Money Market Fund, however, will not count toward satisfaction of the
holding period necessary to convert Class B shares to Class A shares. As a
condition precedent to implementing this Rule 18f-3 Plan, the Company will
obtain a ruling from the Internal Revenue Service that no gain or loss will be
recognized by Class B shareholders on the conversion of their Class B shares
into Class A shares. Shareholders holding Class B shares in certificate form
will not receive Class A share certificates until the shareholder tenders the
Class B share certificate(s) to the Fund's Transfer Agent. Until Class B share
certificates are exchanged for Class A share certificates, the Class B share
certificates will represent the shareholder's interest in the Class A shares
received upon conversion.
4
<PAGE>
Appendix A
Series participating in the Plan
of
Sentinel Group Funds, Inc.
---------------------------------
Sentinel Balanced Fund
Sentinel Bond Fund
Sentinel Common Stock Fund
Sentinel Growth Fund
Sentinel High Yield Bond Fund
Sentinel Small Company Fund
Sentinel Tax-Free Income Fund
Sentinel U.S. Treasury Money Market Fund
Sentinel World Fund
5
<PAGE>
Appendix B
Class A Shares
- --------------
================================================================================
Sentinel Balanced Fund, Sentinel Bond Fund, Sentinel Common Stock Fund,
Sentinel Growth Fund, Sentinel High Yield Bond Fund, Sentinel Small Company
Fund, Sentinel Tax-Free Income Fund and Sentinel World Fund
- --------------------------------------------------------------------------------
Sale Size Initial Sales Charge
- --------------------------------------------------------------------------------
$0 to $99,999 5.0%
- --------------------------------------------------------------------------------
$100,000 to $249,999 4.0%
- --------------------------------------------------------------------------------
$250,000 to $499,999 2.5%
- --------------------------------------------------------------------------------
$500,000 to $999,999 2.0%
- --------------------------------------------------------------------------------
$1,000,000 or more 0.0%
================================================================================
There is no initial sales charge for purchases of Class A shares of the
Money Market Fund. Initial sales charges for the Single Class Funds are as set
forth in the current prospectus and statement of additional information for the
Company.
In cases in which there is no sales charge because the sale is in an amount
of $1,000,000 or more, if the Class A shares purchased are redeemed within one
year of the purchase, a CDSC will be imposed in the amount of 1.0%. If the
Class A shares are redeemed during the second year after the purchase, a CDSC of
0.5% will be imposed. After the second year, no CDSC will apply. The CDSC is
imposed on the lower of the cost or the current net asset value of the shares
redeemed. In determining whether a CDSC is payable, a Fund will first redeem
shares not subject to any sales charge.
Class A shares otherwise subject to a CDSC and owned by certain tax-exempt
qualified retirement plans may be redeemed without charge to pay benefits. In
addition, any shares acquired by reinvestment of dividends will be redeemable
without a CDSC. In determining whether a CDSC is payable, the Funds and Single
Class Funds will first redeem shares not subject to any charge.
6
<PAGE>
Class B Shares
- --------------
=============================================================================
All Funds
- -----------------------------------------------------------------------------
Sale Size Year CDSC
=============================================================================
$0 to $249,999 1 4.0%
- -----------------------------------------------------------------------------
2 4.0%
- -----------------------------------------------------------------------------
3 3.0%
- -----------------------------------------------------------------------------
4 2.0%
- -----------------------------------------------------------------------------
5 2.0%
- -----------------------------------------------------------------------------
6 1.0%
=============================================================================
$250,000 to $499,999 1 3.5%
- -----------------------------------------------------------------------------
2 3.0%
- -----------------------------------------------------------------------------
3 2.0%
- -----------------------------------------------------------------------------
4 1.0%
- -----------------------------------------------------------------------------
5 1.0%
=============================================================================
$500,000 to $1,000,000 1 3.0%
- -----------------------------------------------------------------------------
2 2.0%
- -----------------------------------------------------------------------------
3 1.0%
- -----------------------------------------------------------------------------
4 1.0
=============================================================================
CDSCs payable on redemptions of Class B shares will be waived in the
following circumstances:
. Redemptions of shares issued as a result of reinvestment of dividends and
capital gains
. Redemptions upon the death of the shareholder
. Redemptions to effect distributions required by the Employee Retirement
Income Security Act of 1974, as amended, or regulations of the Internal
Revenue Service
. Redemptions to distribute proceeds of loans made to employees of not-for-
profit organizations ((S)501(c)(3) companies) against shares held in
retirement plan accounts ((S)403(b)(7) accounts)
. Redemptions made pursuant to a systematic withdrawal plan in amounts up to
10% of the account's then current value annually
7
<PAGE>
Class C Shares
- --------------
===============================================================================
Sentinel Balanced Fund, Sentinel Common Stock Fund, Sentinel High Yield Bond
Fund and Sentinel World Fund
- -------------------------------------------------------------------------------
Sale Size Year CDSC
===============================================================================
all 1 1.0%
===============================================================================
CDSCs payable on redemptions of Class C shares will be waived in the
following circumstances:
. Redemptions of shares issued as a result of reinvestment of dividends and
capital gains
. Redemptions upon the death of the shareholder
. Redemptions to effect distributions required by the Employee Retirement
Income Security Act of 1974, as amended, or regulations of the Internal
Revenue Service
. Redemptions to distribute proceeds of loans made to employees of not-for-
profit organizations ((S)501(c)(3) companies) against shares held in
retirement plan accounts ((S)403(b)(7) accounts)
. Redemptions made pursuant to a systematic withdrawal plan in amounts up to
10% of the account's then current value annually
8
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<PAGE>
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<NAME> SENT SMALL CO-A
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<PAGE>
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<NAME> SENT COMMON STK-A
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
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<NAME> SENT BALANCED-A
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<PERIOD-START> DEC-01-1996
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<PER-SHARE-NAV-BEGIN> 18.55
<PER-SHARE-NII> 0.56
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> SENT BOND-A
<S> <C>
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<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
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<OVERDISTRIBUTION-NII> (14,366)
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<ACCUM-APPREC-OR-DEPREC> 2,138,215
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> SENT TAX-FREE-A
<S> <C>
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<ACCUM-APPREC-OR-DEPREC> 6,271,246
<NET-ASSETS> 87,935,465
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<EXPENSES-NET> 853,320
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<NET-CHANGE-IN-ASSETS> (12,797,499)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> SENT NY TAX-FREE-A
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SENT GOV SEC-A
<S> <C>
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<PERIOD-START> DEC-01-1996
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<PER-SHARE-NAV-BEGIN> 10.00
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SENT SHORT MAT GOV-A
<S> <C>
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<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
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<SHARES-COMMON-STOCK> 4,587,888
<SHARES-COMMON-PRIOR> 3,718,756
<ACCUMULATED-NII-CURRENT> 7,429
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<NET-ASSETS> 45,044,258
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<INTEREST-INCOME> 3,037,163
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<EXPENSES-NET> 415,909
<NET-INVESTMENT-INCOME> 2,621,254
<REALIZED-GAINS-CURRENT> (370,535)
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<NUMBER-OF-SHARES-SOLD> 3,520,498
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<ACCUMULATED-GAINS-PRIOR> (1,173,287)
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<PER-SHARE-NAV-BEGIN> 9.81
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SENT US TREAS MM-A
<S> <C>
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<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 82,966,714
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<OTHER-ITEMS-LIABILITIES> 11,947,299
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 89,345,102
<SHARES-COMMON-STOCK> 85,911,496
<SHARES-COMMON-PRIOR> 80,804,137
<ACCUMULATED-NII-CURRENT> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 85,911,496
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,570,494
<OTHER-INCOME> 0
<EXPENSES-NET> 664,138
<NET-INVESTMENT-INCOME> 3,906,356
<REALIZED-GAINS-CURRENT> 0
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<NUMBER-OF-SHARES-SOLD> 198,798,449
<NUMBER-OF-SHARES-REDEEMED> 197,029,796
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<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 669,199
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<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.04
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<EXPENSE-RATIO> 0.76
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> SENT HIGH YIELD BOND-A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> JUN-23-1997
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<INVESTMENTS-AT-COST> 44,007,585
<INVESTMENTS-AT-VALUE> 44,634,159
<RECEIVABLES> 1,002,048
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<TOTAL-LIABILITIES> 1,980,089
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<PAID-IN-CAPITAL-COMMON> 43,862,883
<SHARES-COMMON-STOCK> 1,064,882
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,779
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<ACCUMULATED-NET-GAINS> 398,650
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 626,574
<NET-ASSETS> 11,084,365
<DIVIDEND-INCOME> 13,906
<INTEREST-INCOME> 1,247,975
<OTHER-INCOME> 0
<EXPENSES-NET> 178,171
<NET-INVESTMENT-INCOME> 1,083,710
<REALIZED-GAINS-CURRENT> 398,650
<APPREC-INCREASE-CURRENT> 626,574
<NET-CHANGE-FROM-OPS> 2,108,934
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<DISTRIBUTIONS-OF-INCOME> 211,310
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 1,074,262
<NUMBER-OF-SHARES-REDEEMED> 23,133
<SHARES-REINVESTED> 13,753
<NET-CHANGE-IN-ASSETS> 2,108,934
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 105,178
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 184,699
<AVERAGE-NET-ASSETS> 5,907,295
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 0.41
<PER-SHARE-DIVIDEND> 0.32
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.41
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> SENT SMALL CO-B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 95,058,959
<INVESTMENTS-AT-VALUE> 122,403,471
<RECEIVABLES> 391,938
<ASSETS-OTHER> 632,303
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<TOTAL-ASSETS> 123,427,712
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 240,183
<TOTAL-LIABILITIES> 240,183
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,926,299
<SHARES-COMMON-STOCK> 1,238,948
<SHARES-COMMON-PRIOR> 379,304
<ACCUMULATED-NII-CURRENT> 272,080
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,644,638
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,344,512
<NET-ASSETS> 7,655,895
<DIVIDEND-INCOME> 942,761
<INTEREST-INCOME> 978,876
<OTHER-INCOME> 0
<EXPENSES-NET> 1,541,969
<NET-INVESTMENT-INCOME> 379,668
<REALIZED-GAINS-CURRENT> 14,644,582
<APPREC-INCREASE-CURRENT> 7,565,634
<NET-CHANGE-FROM-OPS> 22,589,884
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 17,013
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 919,683
<NUMBER-OF-SHARES-REDEEMED> 63,324
<SHARES-REINVESTED> 3,285
<NET-CHANGE-IN-ASSETS> 21,851,794
<ACCUMULATED-NII-PRIOR> 26,447
<ACCUMULATED-GAINS-PRIOR> 772,451
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 698,939
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,563,732
<AVERAGE-NET-ASSETS> 4,641,198
<PER-SHARE-NAV-BEGIN> 5.12
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 1.13
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 6.18
<EXPENSE-RATIO> 2.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> SENT WORLD-B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 78,153,725
<INVESTMENTS-AT-VALUE> 94,735,663
<RECEIVABLES> 320,482
<ASSETS-OTHER> 5,079,317
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<TOTAL-ASSETS> 100,135,462
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 274,368
<TOTAL-LIABILITIES> 274,368
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,916,778
<SHARES-COMMON-STOCK> 593,750
<SHARES-COMMON-PRIOR> 204,653
<ACCUMULATED-NII-CURRENT> 595,020
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,742,566
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,606,730
<NET-ASSETS> 10,121,004
<DIVIDEND-INCOME> 2,011,512
<INTEREST-INCOME> 113,192
<OTHER-INCOME> 0
<EXPENSES-NET> 1,183,403
<NET-INVESTMENT-INCOME> 941,301
<REALIZED-GAINS-CURRENT> 3,434,462
<APPREC-INCREASE-CURRENT> 5,077,269
<NET-CHANGE-FROM-OPS> 9,453,032
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,446
<DISTRIBUTIONS-OF-GAINS> 52,020
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 409,903
<NUMBER-OF-SHARES-REDEEMED> 24,658
<SHARES-REINVESTED> 3,852
<NET-CHANGE-IN-ASSETS> 25,215,849
<ACCUMULATED-NII-PRIOR> 512,082
<ACCUMULATED-GAINS-PRIOR> 1,128,545
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 548,359
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,205,343
<AVERAGE-NET-ASSETS> 6,268,561
<PER-SHARE-NAV-BEGIN> 15.58
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 1.74
<PER-SHARE-DIVIDEND> 0.04
<PER-SHARE-DISTRIBUTIONS> 0.24
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.05
<EXPENSE-RATIO> 2.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> SENT COMMON STK-B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 866,741,014
<INVESTMENTS-AT-VALUE> 1,584,371,764
<RECEIVABLES> 5,152,397
<ASSETS-OTHER> 833,239
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,590,357,400
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,058,631
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 697,098,246
<SHARES-COMMON-STOCK> 1,755,409
<SHARES-COMMON-PRIOR> 671,906
<ACCUMULATED-NII-CURRENT> 3,560,582
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 169,009,191
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 717,630,750
<NET-ASSETS> 77,299,420
<DIVIDEND-INCOME> 30,455,034
<INTEREST-INCOME> 5,011,831
<OTHER-INCOME> 0
<EXPENSES-NET> 15,434,669
<NET-INVESTMENT-INCOME> 20,032,196
<REALIZED-GAINS-CURRENT> 169,148,488
<APPREC-INCREASE-CURRENT> 84,198,889
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 313,742
<DISTRIBUTIONS-OF-GAINS> 2,471,535
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<NUMBER-OF-SHARES-SOLD> 1,086,877
<NUMBER-OF-SHARES-REDEEMED> 77,413
<SHARES-REINVESTED> 74,040
<NET-CHANGE-IN-ASSETS> 253,449,251
<ACCUMULATED-NII-PRIOR> 3,097,452
<ACCUMULATED-GAINS-PRIOR> 116,269,451
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 7,992,617
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<GROSS-EXPENSE> 15,562,464
<AVERAGE-NET-ASSETS> 50,625,383
<PER-SHARE-NAV-BEGIN> 40.57
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 6.99
<PER-SHARE-DIVIDEND> 0.26
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<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 44.03
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> SENT BALANCED-B
<S> <C>
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<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 260,506,212
<INVESTMENTS-AT-VALUE> 355,564,904
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<TOTAL-ASSETS> 358,870,163
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<OTHER-ITEMS-LIABILITIES> 579,849
<TOTAL-LIABILITIES> 17,329,682
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<PAID-IN-CAPITAL-COMMON> 225,496,833
<SHARES-COMMON-STOCK> 1,308,557
<SHARES-COMMON-PRIOR> 589,175
<ACCUMULATED-NII-CURRENT> 1,371,840
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 19,613,116
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 95,058,692
<NET-ASSETS> 26,592,650
<DIVIDEND-INCOME> 4,346,925
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<OTHER-INCOME> 0
<EXPENSES-NET> 3,865,424
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<APPREC-INCREASE-CURRENT> 17,871,222
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<NUMBER-OF-SHARES-SOLD> 754,261
<NUMBER-OF-SHARES-REDEEMED> 68,172
<SHARES-REINVESTED> 33,293
<NET-CHANGE-IN-ASSETS> 33,304,669
<ACCUMULATED-NII-PRIOR> 1,259,431
<ACCUMULATED-GAINS-PRIOR> 7,404,421
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 2,020,909
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<GROSS-EXPENSE> 3,910,991
<AVERAGE-NET-ASSETS> 19,154,803
<PER-SHARE-NAV-BEGIN> 18.58
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 2.18
<PER-SHARE-DIVIDEND> 0.41
<PER-SHARE-DISTRIBUTIONS> 0.45
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.32
<EXPENSE-RATIO> 1.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 18
<NAME> SENT BOND-B
<S> <C>
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<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 99,875,883
<INVESTMENTS-AT-VALUE> 102,014,098
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<ASSETS-OTHER> 539,103
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<TOTAL-ASSETS> 104,151,992
<PAYABLE-FOR-SECURITIES> 7,105,724
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 175,202
<TOTAL-LIABILITIES> 7,280,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99,105,410
<SHARES-COMMON-STOCK> 1,272,634
<SHARES-COMMON-PRIOR> 741,210
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (14,366)
<ACCUMULATED-NET-GAINS> (4,358,193)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,138,215
<NET-ASSETS> 8,115,417
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,202,589
<OTHER-INCOME> 0
<EXPENSES-NET> 1,006,231
<NET-INVESTMENT-INCOME> 6,196,358
<REALIZED-GAINS-CURRENT> 40,248
<APPREC-INCREASE-CURRENT> 2,486
<NET-CHANGE-FROM-OPS> 6,239,092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 339,384
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 640,073
<NUMBER-OF-SHARES-REDEEMED> 145,602
<SHARES-REINVESTED> 36,953
<NET-CHANGE-IN-ASSETS> (7,251,572)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,488,182)
<OVERDISTRIB-NII-PRIOR> 17,259
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 520,556
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,028,864
<AVERAGE-NET-ASSETS> 6,217,273
<PER-SHARE-NAV-BEGIN> 6.36
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.02
<PER-SHARE-DIVIDEND> 0.34
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<PER-SHARE-NAV-END> 6.38
<EXPENSE-RATIO> 1.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 19
<NAME> SENT US TREAS MM-B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 82,966,714
<INVESTMENTS-AT-VALUE> 82,966,714
<RECEIVABLES> 18,325,687
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,292,401
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<OTHER-ITEMS-LIABILITIES> 11,947,299
<TOTAL-LIABILITIES> 11,947,299
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,449,026
<SHARES-COMMON-STOCK> 3,433,606
<SHARES-COMMON-PRIOR> 3,160,304
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 3,433,606
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,570,494
<OTHER-INCOME> 0
<EXPENSES-NET> 664,138
<NET-INVESTMENT-INCOME> 3,906,356
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<DISTRIBUTIONS-OF-INCOME> 180,367
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 7,962,012
<NUMBER-OF-SHARES-REDEEMED> 7,839,276
<SHARES-REINVESTED> 150,530
<NET-CHANGE-IN-ASSETS> 5,380,625
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 350,009
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 669,199
<AVERAGE-NET-ASSETS> 4,011,651
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
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<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.73
<AVG-DEBT-OUTSTANDING> 0
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 17
<NAME> SENT HIGH YIELD BOND-B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> JUN-23-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 44,007,585
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<RECEIVABLES> 1,002,048
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<TOTAL-ASSETS> 46,871,975
<PAYABLE-FOR-SECURITIES> 1,913,938
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<OTHER-ITEMS-LIABILITIES> 66,151
<TOTAL-LIABILITIES> 1,980,089
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,862,883
<SHARES-COMMON-STOCK> 3,250,551
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,779
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 398,650
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<ACCUM-APPREC-OR-DEPREC> 626,574
<NET-ASSETS> 33,807,521
<DIVIDEND-INCOME> 13,906
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<OTHER-INCOME> 0
<EXPENSES-NET> 178,171
<NET-INVESTMENT-INCOME> 1,083,710
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<APPREC-INCREASE-CURRENT> 626,574
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<DISTRIBUTIONS-OF-INCOME> 868,621
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<NUMBER-OF-SHARES-SOLD> 3,282,060
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<SHARES-REINVESTED> 12,285
<NET-CHANGE-IN-ASSETS> 2,108,934
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 105,178
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<AVERAGE-NET-ASSETS> 25,885,626
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.32
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<PER-SHARE-NAV-END> 10.40
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
