<PAGE>
As filed with the Securities and Exchange Commission on April 2, 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. 83 [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.
------------------
Title of Securities Being Registered: Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
<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>
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
...............................................................................
THE SENTINEL FUNDS
LOGO National Life Drive Prospectus
Montpelier, Vermont 05604 Dated April 20, 1998
800-282-3863
...............................................................................
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Expenses..................
Annual Fund Operating Expenses.
Financial Highlights...........
Purchase Options...............
The Funds......................
Investment Objectives and Poli-
cies..........................
Further Information Relative to
the Investment Practices of
the Funds.....................
Management of the Funds........
Custodian......................
The Distributor................
</TABLE>
<TABLE>
<S> <C>
Distribution Plans.............
How to Purchase Shares.........
How To Redeem Shares...........
Tax Deferred Retirement Plans..
Determination of Net Asset Val-
ue............................
Dividends and Capital Gains
Distributions.................
Taxes..........................
Shareholder Services...........
Performance Data...............
Organization of the Funds......
Appendix A--Description of Bond
Ratings.......................
Applications
</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 de-
fined herein) that a prospective investor should know before investing. This
Prospectus should be read carefully and retained for future reference. Addi-
tional information about the Funds is contained in the Statement of Additional
Information, dated April 20, 1998 (the "Statement of Additional Information"),
which has been filed with the Securities and Exchange Commission. The State-
ment 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 ADE-
QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
1
<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 "Advisor") 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.
2
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
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 FINANCIAL ADVISOR 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)
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
HIGH GOVERNMENT SHORT MATURITY
YIELD BOND SECURITIES GOVERNMENT
FUND FUND FUND FUND
----- ---- ---------- --------------
<S> <C> <C> <C> <C>
Management Fees................... 0.75% .24 % .42% .12%
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 .04
Other........................... 0.27(c) .22(c) .22(c) .26(c)
Total Other Expenses.............. 0.31(c) .26(c) .26(c) .30(c)
---- ---- --- ---
Total Fund Operating Expenses
Before Expense Offset............ 1.26%(c) .70%(b) .88%(b) .77%(b)(c)
==== ==== === ===
</TABLE>
<TABLE>
<CAPTION>
MONEY TAX FREE
MARKET INCOME NEW YORK PENNSYLVANIA
FUND FUND FUND FUND
------ -------- -------- ------------
<S> <C> <C> <C> <C>
Management Fees.............. .40% .34% .00% .00%
Rule 12b-1 Fees (includes
service fee and distribution
fee)(a)..................... None .20 .00 .20
Other Expenses:
Accounting and
Administrative
Costs...................... .04 .04 .00 .00
Other...................... .33(c) .18(c) .06(c) .54(c)
Total Other Expenses......... .37(c) .22(c) .06(c) .54(c)
---- --- --- ---
Total Fund Operating Expenses
Before Expense Offset....... .77% .76%(b)(c) .06%(b)(c) .74%(b)(c)
==== === === ===
</TABLE>
4
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<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% .24% .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) 1.61%(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) 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 FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 5
Prospectus
<PAGE>
...............................................................................
(b) Effective March 30, 1998, the Advisor has voluntarily agreed for a period
until at least November 30, 1998 to reimburse the following Funds for
advisory fees or other expenses necessary to limit these Funds' overall
expense ratios, after expense offset, to the amounts shown below:
<TABLE>
<S> <C>
Bond Fund Class A shares............................................... 0.68%
Government Securities Fund Class A shares.............................. 0.87%
Short Maturity Government Fund Class A shares.......................... 0.75%
Tax-Free Income Fund Class A shares.................................... 0.72%
Pennsylvania Fund Class A shares....................................... 0.70%
New York Fund Class A shares........................................... 0.00%
</TABLE>
In the case of the Bond Fund, the reimbursement of advisory fees will also
benefit the Class B shares of the Bond Fund, which will experience the same
reduced effective advisory fee rate as the Class A shares of the Bond Fund.
The Advisor currently intends to reset the above expense caps annually to
amounts approximately equal to 90% of the average expense ratios of the Class
A shares of such Funds' peer groups (except that in the case of the Short Ma-
turity Government Fund, the expense cap is expected to be increased by approx-
imately 0.15% to take that Fund's higher Rule 12b-1 fee into account). Howev-
er, these arrangements may be changed or terminated at any time after November
30, 1998. No reimbursement arrangements were in effect during fiscal 1997 for
the Bond, Government Securities and Tax-Free Income Funds. In the absence of
any reimbursement arrangements, these Funds' Management Fees, Rule 12b-1 Fees,
Accounting and Administrative Costs, Other Expenses, Total Other Expenses and
Total Fund Operating Expenses were, or would have been, as follows:
<TABLE>
<CAPTION>
TOTAL
RULE ACCOUNTING TOTAL FUND
MANAGEMENT 12B-1 AND ADMINISTRATIVE OTHER OTHER OPERATING
FEES FEES COSTS EXPENSES EXPENSES EXPENSES
---------- ----- ------------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bond Fund Class A
shares................. .53 .20 .04 .22 .26 .99
Bond Fund Class B
shares................, .53 1.00 .04 .33 .37 1.90
Government Securities
Fund Class A shares.... .53 .20 .04 .22 .26 .99
Short Maturity Govern-
ment Fund Class A
shares................. .53 .35 .04 .26 .30 1.18
Tax-Free Income Fund
Class A shares......... .53 .20 .04 .18 .22 .95
Pennsylvania Fund Class
A shares............... .55 .20 .24 .35 .59 1.34
New York Fund Class A
shares................. .53 .20 .04 .32 .36 1.09
</TABLE>
After expense offset, the Other Expenses, Total Other Expenses and Total Fund
Operating Expenses were, or would have been, as follows:
<TABLE>
<CAPTION>
TOTAL
TOTAL FUND
OTHER OTHER OPERATING
EXPENSES EXPENSES EXPENSES
-------- -------- ---------
<S> <C> <C> <C>
Bond Fund Class A shares............................ .20 .24 .97
Bond Fund Class B shares............................ .30 .34 1.87
Government Securities Fund Class A shares........... .21 .25 .98
Short Maturity Government Fund Class A shares....... .24 .28 1.16
Tax-Free Income Fund Class A shares................. .14 .18 .91
Pennsylvania Fund Class A shares.................... .31 .55 1.30
New York Fund Class A shares........................ .26 .30 1.03
</TABLE>
For the Short Maturity Government Fund Class A shares, which were reimbursed
by Sentinel Administrative Service Company ("Sentinel Service") down to an ex-
pense ratio after expense offset of 1.00% in fiscal 1997, a reimbursement of
$68,091 was paid in fiscal 1997. For the Pennsylvania Fund Class A shares,
which were reimbursed by Sentinel Service down to an expense ratio after ex-
pense 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. For the New York Fund, the policy of reimbursing all expenses,
after expense offset, was initiated by Sentinel Service on March 31, 1997, and
a reimbursement of $47,242 was paid in fiscal 1997.
6
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
(c) Expense ratios after expense offset are as follows:
<TABLE>
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
CLASS A: ----- ----------- ------------------
<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 .68
Government Securities Fund.............. .21 .25 .87
Short Maturity Gov't Fund............... .24 .28 .75
Money Market Fund....................... .32 .36 .76
Tax-Free Income Fund.................... .14 .18 .72
New York Fund........................... .00 .00 .00
Pennsylvania Fund....................... .50 .50 .70
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
CLASS B: ----- ----------- ------------------
<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 1.58
Money Market Fund....................... .29 .33 .73
</TABLE>
<TABLE>
<CAPTION>
TOTAL OTHER TOTAL FUND
OTHER EXPENSES OPERATING EXPENSES
CLASS C: ----- ----------- ------------------
<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>
Class C shareholders who hold their shares for an extended period of time
may pay more in Rule 12b-1 distribution fees than the economic equivalent of
the maximum front-end sales charges permitted under the Conduct Rules of the
National Association of Securities Dealers, Inc.
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A: ------ ------- ------- --------
<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
Bond Fund.................................... 47 61 76 121
Government Securities Fund................... 49 67 86 143
Short Maturity Government Fund............... 18 34 51 102
Money Market Fund............................ 8 24 42 94
Tax-Free Income Fund......................... 47 62 78 126
New York Fund................................ 40 40 40 40
Pennsylvania Fund............................ 47 61 77 124
</TABLE>
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 7
Prospectus
<PAGE>
...............................................................................
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<TABLE>
<CAPTION>
CLASS B (assuming redemption at the end of
the 1 YEAR 3 YEARS 5 YEARS 10 YEARS
period): ------ ------- ------- --------
<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
Bond Fund................................. 56 80 106 141
Money Market Fund......................... 47 53 61 92
</TABLE>
<TABLE>
<CAPTION>
CLASS B (assuming no redemption at the end
of the 1 YEAR 3 YEARS 5 YEARS 10 YEARS
period): ------ ------- ------- --------
<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
Bond Fund................................. 16 50 86 141
Money Market Fund......................... 7 23 41 92
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS C:. ------ ------- ------- --------
<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
<CAPTION>
CLASS C (assuming no redemption at end of 1 YEAR 3 YEARS 5 YEARS 10 YEARS
period):. ------ ------- ------- --------
<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
</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 understand-
ing 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 Bond Fund Class
A shares, Bond Fund Class B shares, Government Securities Fund Class A
shares, Short Maturity Government Fund Class A shares, Tax-Free Income Fund
Class A shares and the Pennsylvania Fund Class A shares, which take into ac-
count a reimbursement policy adopted March 30, 1998, the New York Fund Class
A shares, which take into account changes in reimbursement policy effective
March 31, 1997, and the High Yield Fund, for which the 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 April 20, 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.
8
<PAGE>
................................................................................
[THIS PAGE INTENTIONALLY LEFT BLANK]
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR 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>
- ----------------------- -------------------------------------------- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
- ----------------------- -------------------------------------------- --------------------------------------
NET REALIZED
AND DISTRIBUTIONS
FISCAL NET ASSET NET UNREALIZED DIVIDENDS FROM
YEAR VALUE AT INVESTMENT GAIN TOTAL 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
<CAPTION>
- ----------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 0.80 1.39 0.58 0.36 0.94
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
<CAPTION>
- ----------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
<CAPTION>
- ----------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
<CAPTION>
- ----------------------- -------------------------------------------- --------------------------------------
</TABLE>
10
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------ -----------------------------------------------------------------------------
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>
- ------------------ -----------------------------------------------------------------------------
</TABLE>
(footnotes on following pages)
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 11
Prospectus
<PAGE>
................................................................................
<TABLE>
<CAPTION>
- ---------------------------- -------------------------------------------- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
- ---------------------------- -------------------------------------------- --------------------------------------
NET REALIZED
AND DISTRIBUTIONS
NET ASSET NET UNREALIZED DIVIDENDS FROM
FISCAL YEAR VALUE AT INVESTMENT GAIN TOTAL 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>
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
<CAPTION>
- ---------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield 5 Mo. to
Fund -- A 11/30/97(E) $10.00 $0.32 $ 0.41 $ 0.73 $0.32 $ -- $0.32
<CAPTION>
- ---------------------------- -------------------------------------------- --------------------------------------
<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>
- ---------------------------- -------------------------------------------- --------------------------------------
</TABLE>
12 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
<TABLE>
<CAPTION>
- ------------------ ------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------ ------------------------------------------------------------------------------
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>
$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>
- ------------------ ------------------------------------------------------------------------------
<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>
- ------------------ ------------------------------------------------------------------------------
</TABLE>
(footnotes on following pages)
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 13
Prospectus
<PAGE>
...............................................................................
<TABLE>
<CAPTION>
- ------------------------ -------------------------------------------- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
- ------------------------ -------------------------------------------- --------------------------------------
NET REALIZED
NET AND DISTRIBUTIONS
FISCAL ASSET NET UNREALIZED TOTAL DIVIDENDS FROM
YEAR VALUE AT INVESTMENT GAIN FROM FROM NET REALIZED
(PERIOD BEGINNING INCOME (LOSS) ON INVESTMENT INVESTMENT GAINS ON TOTAL
FUND ENDED) OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME INVESTMENTS DISTRIBUTIONS
- ------------------------ -------------------------------------------- --------------------------------------
<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>
- ------------------------ -------------------------------------------- --------------------------------------
<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.
14 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
...............................................................................
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------ -----------------------------------------------------------------------------
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>
$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>
$ 2.07 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>
- ------------------ -----------------------------------------------------------------------------
<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>
(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.
(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.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR 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 contin-
gent 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 FEECONVERSION FEATURE
----- --------------- ------------------ --------------------- ------------------
<C> <C> <C> <C> <S>
A Maximum 5.00% Maximum of Maximum of No
initial sales 0.20%(3) 0.30%(4)
charge (4.00%
for High Yield
Fund)(2)
- ------------------------------------------------------------------------------------
B CDSC of up to 0.25% 1.00% Class B Shares
4.00% for a convert to
maximum of 6 Class A Shares
years(5) automatically
after the
applicable
CDSC
period(5)(6)
- ------------------------------------------------------------------------------------
C CDSC of 1.00% 0.25% 1.00% No
for 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".
16 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<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 sub-
ject to a CDSC as described below.
<TABLE>
<CAPTION>
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEECONVERSION FEATURE
----- --------------- ------------------ --------------------- ------------------
<C> <C> <C> <C> <S>
A Maximum 5.00% Maximum of Maximum of No
initial sales 0.20%(3) 0.30%(4)
charge (4.00%
for Bond
Fund)(2)
- ------------------------------------------------------------------------------------
B CDSC of up to 0.25% 1.00% Class B Shares
4.00% for a convert to
maximum of 6 Class A Shares
years(5) automatically
after the
applicable
CDSC
period(5)(6)
</TABLE>
- ---------
(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.
<TABLE>
<CAPTION>
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEECONVERSION FEATURE
----- --------------- ------------------ --------------------- ------------------
<C> <C> <C> <C> <S>
A Maximum 4.00% Maximum of 0.10% Maximum of 0.20% None
initial sales
charge(2)
</TABLE>
- ---------
(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 de-
scribed below.
<TABLE>
<CAPTION>
TOTAL 12B-1 FEE,
CLASS SALES CHARGE(1) SERVICE FEE INCLUDING SERVICE FEECONVERSION FEATURE
----- --------------- ------------------ --------------------- ------------------
<C> <C> <C> <C> <S>
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 FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 17
Prospectus
<PAGE>
...............................................................................
The Money Market Fund offers Class A and Class B Shares. Ini-
tial 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 pur-
chased directly (except in connection with the plans de-
scribed 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 peri-
ods 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".
..............................................................
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 in-
vestors. All of the Funds in Sentinel Group Funds, Inc., ex-
cept 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 invest-
ment company.
Sentinel Advisors Company (the "Advisor") serves as the in-
vestment advisor to all of the Funds and Sentinel Financial
Services Company (the "Distributor") serves as the distribu-
tor 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 pol-
icies. Investment objectives are fundamental policies of each
Fund that may only be changed by a majority vote of the out-
standing 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 FUND .THE BALANCED FUND seeks a conservative combination of sta-
INVESTS FOR bility, income and long-term growth of capital by investing
STABILITY, in a diversified portfolio of stocks and bonds. The percent-
INCOME AND age invested in each type of security will depend on whether
GROWTH the Advisor believes stocks or bonds offer a better value at
the time of allocation. A greater proportion invested 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 secu-
rities. When determining this percentage, convertible bonds
and/or preferred stocks will be considered common stocks, un-
less 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 rat-
ing of Aa2; the average effective portfolio maturity for the
bond portion of the Fund was 9.1 years.
THE FUND .THE GROWTH FUND seeks to achieve long-term growth of capital
INVESTS IN by investing primarily in common stocks of companies which
STOCKS OF the Advisor believes have more growth potential than the U.S.
GROWING economy as a whole. The Growth Fund will focus on securities
COMPANIES, of well-established companies. Such companies will have, in
WITH A FOCUS the Advisor's judgment, favorable growth potential and expe-
ON WELL- rienced managements. Normally, the Fund will be fully in-
ESTABLISHED vested in common stocks and other securities convertible into
COMPANIES common stocks; however, the Fund may temporarily retain cash
or invest in fixed-income securities, if deemed appropriate
by the Advisor. Income is not a factor in selecting invest-
ments.
18 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
The Growth Fund emphasizes securities believed to have supe-
rior potential for growth rather than wide diversification.
Up to 25% of the value of the Growth Fund's assets may be in-
vested in securities of companies within a single industry.
.THE SMALL COMPANY FUND seeks long-term capital appreciation
by investing primarily in a diversified portfolio of common THE FUND
stocks, or securities convertible into common stock, issued INVESTS IN
by small and medium-sized companies. The Fund may also invest STOCKS OF
in larger, more established companies. Companies selected for GROWING
the Fund are believed to have superior growth potential and COMPANIES,
are judged to represent attractive relative values. Income is WITH A FOCUS
not a factor in selecting investments. ON SMALL AND
MID-SIZED
COMPANIES
The median market capitalization of the Fund's portfolio com-
panies generally will not exceed $1 billion and at least 65%
of the Fund's assets will be invested in companies with mar-
ket capitalizations not exceeding $2 billion. Up to 25% of
the Fund's assets may be invested in securities within a sin-
gle industry. The Fund may temporarily retain cash or invest
in fixed-income securities, if deemed appropriate by the Ad-
visor.
The Fund's policy is to avoid short-term trading. However,
the Advisor may sell a security without regard to holding pe-
riod if the Advisor believes it is in the Fund's best inter-
est to do so.
The Fund's turnover rate is not expected to exceed 100% annu-
ally. The Fund is intended for long-term investors willing to
accept a higher-than-average level of volatility in order to
seek above-average gains.
.THE WORLD FUND seeks long-term growth of capital by invest- THE FUND
ing primarily in a diversified portfolio of marketable equity INVESTS
securities of established non-U.S. companies. Normally, at PRIMARILY IN
least 75% of the Fund's total assets will be invested in se- STOCKS OF NON-
curities of non-U.S. issuers selected by INVESCO Capital Man- U.S. COMPANIES
agement, Inc. (the "World Fund Sub-advisor") primarily for
long-term capital growth. The remaining 25% may be invested
in companies organized in the United States that have their
principal activities and interests (i.e., 50% of assets
and/or 50% of revenues) outside 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 ("Stan-
dard & Poor's").
The Fund generally will not invest more than 25% of its total
assets in any one country; however, the Fund may invest up to
40% of its assets in any one country if in the judgment of
the World Fund Sub-advisor, economic and business conditions
make it appropriate to do so.
It is anticipated that the majority of the Fund's portfolio
transactions will be executed on established stock exchanges
or in the over-the-counter markets in the countries in which
portfolio investments are being made. The Fund also expects
to purchase American Depositary Receipts ("ADRs"), and Euro-
pean Depositary Receipts in bearer form, which are designed
for use in European securities markets. ADRs represent for-
eign securities traded on U.S. exchanges or in the over-the-
counter markets. To expedite settlement of portfolio transac-
tions and minimize currency value fluctuations, the Fund may
purchase foreign currencies and/or engage in forward foreign
currency transactions. You can obtain more information about
these strategies by reading the section entitled, "Investment
Objectives and Policies -- Considerations Applicable to the
World Fund -- Foreign Currency Transactions" in the Statement
of Additional Information. Normally, however, the Fund does
not hedge its foreign currency exposure.
Under abnormal economic or market conditions abroad, the Fund
may assume a temporary defensive posture by investing all, or
a major portion, of its assets in U.S. government obligations
or investment-grade fixed income securities of companies or-
ganized 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, includ-
ing, but not necessarily limited to, those described on page
below.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 19
Prospectus
<PAGE>
...............................................................................
THE FUND SEEKS .THE HIGH YIELD FUND seeks high current income and total re-
HIGH CURRENT turn by investing primarily in lower rated corporate debt se-
INCOME AND curities. The High Yield Fund will normally invest at least
TOTAL RETURN 80% of its total assets in lower rated debt securities. These
BY INVESTING are debt securities which, because of the greater possibility
PRIMARILY IN that the issuers will default, are not investment grade
LOWER RATED (i.e., are rated below BBB by Standard & Poor's or below Baa
CORPORATE DEBT by Moody's, or are unrated but considered by the High Yield
SECURITIES. Fund Sub-advisor to be of comparable credit quality). The
High Yield Fund may invest in debt securities of any maturi-
ty. No more than 25% of the High Yield Fund's assets 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 investing 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 -- Descrip-
tion of Bond Ratings" to this Prospectus.
The High Yield Fund may also invest up to 20% of total assets
in common stocks, usually as a result of warrants associated
with debt instruments purchased by the High Yield Fund, but
also, under certain circumstances, to seek capital apprecia-
tion. The Fund may also invest in debt securities convertible
into common stock. If this percentage restriction is met at
the time of investment, a later increase or decrease in per-
centage resulting from a change in values of portfolio secu-
rities or total amount of assets is not considered a viola-
tion of the above 20% restriction. If the Fund receives a
common stock in respect of its debt securities in a corporate
reorganization, the Fund will treat such common stock as a
new investment as of the time of its receipt for purposes of
this test, and if such investment would not be permitted un-
der this restriction, then common stock in an amount at least
equal to the amount of such new investment that would not be
permitted under this restriction will be promptly sold.
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 issu-
er.
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 nova-
tions of corporate loans. Certain corporate loans may not be
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 secu-
rities.
The corporate loans in which the High Yield Fund may invest
typically are originated, negotiated and structured by a syn-
dicate of co-lenders, one or more of whom administers the
loan on behalf of the syndicate. The value of a corporate
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; however,
the High Yield Fund Sub-advisor has no set minimum credit
rating criteria regarding the borrowers with respect to in-
vestments 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 mar-
ketable and include some 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 se-
curities may be sold without registration, such resale may be
permissible only in limited quantities. In either event, the
inability to sell securities at the most opportune 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 securi-
ties are denominated in U.S. dollars and are purchased and
held by the High Yield Fund in the United States. Investors
should note that investing in foreign securities involves
certain special risk considerations which normally are not
associated with investing in U.S. securities, including, but
not necessarily limited to, those described on page below.
Temporarily available cash may be invested in short term se-
curities 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 temporarily invested in such investments, or in longer
term more highly rated debt securities during periods of unu-
sual market conditions.
20 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
The High Yield Fund does not expect to invest in futures and
options, or other derivatives contracts during the coming
year. However, if and when derivative securities are devel-
oped which permit effective hedging of a lower quality bond
portfolio, the High Yield Fund may, for hedging purposes on-
ly, buy or sell derivative securities contracts which in the
opinion of the High Yield Fund Sub-advisor will hedge speci-
fied 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 assets.
.THE BOND FUND seeks as high a level of continuing income as
is consistent with capital preservation. The Fund will invest THE FUND
its assets exclusively in fixed-income securities. At least INVESTS FOR
80% of the Fund's assets, exclusive of cash items such as CONTINUING
commercial paper, certificates of deposit and banker's ac- INCOME
ceptances, will be invested in one or more of the following CONSISTENT
types of securities: WITH CAPITAL
PRESERVATION
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. govern-
ment, its agencies or instrumentalities ("U.S. Govern-
ment Securities");
3. Debt securities (payable in U.S. dollars) issued or
guaranteed by the government of Canada or of a province
of Canada, or any instrumentality or subdivision there-
of; and
4. Debt obligations of, or guaranteed by, domestic banks or
bank holding companies, even though not rated by Moody's
or Standard & Poor's, if the Advisor believes they have
investment qualities comparable to securities which may
be purchased under (1) above.
The remainder of the Fund's assets may be invested in other
fixed-income investments not described above, such as
straight or convertible debt securities and straight or con-
vertible preferred stocks.
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 Ratings"
in this Prospectus for more information concerning ratings of
debt securities. See the description of these lower rated se-
curities and discussion of the risks inherent in such securi-
ties 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 effec-
tive 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 ap-
plying this limitation, utility companies will be divided ac-
cording to their services, and financial services companies
will be classified according to the end users of their serv-
ices. For example, gas, gas transmission, electric, electric
and gas, and telephone will each be considered a separate in-
dustry, as will auto finance, bank finance, and diversified
finance.
.THE GOVERNMENT SECURITIES FUND seeks as high a level of cur- THE FUND
rent income as is consistent with safety of principal by in- INVESTS
vesting primarily in U.S. Government Securities. To a limited PRIMARILY IN
extent, the Fund may also invest in repurchase agreements U.S.
with respect to these securities. In addition, the Fund may GOVERNMENT
invest up to 20% of its net assets in high quality money mar- SECURITIES
ket instruments which are not issued or guaranteed by the
U.S. government or its agencies or instrumentalities. These
include bank money market instruments, commercial paper or
other short-term corporate obligations listed in the highest
rating categories by nationally recognized statistical rating
organizations. Money market instruments may be used as a
means of making short-term investments.
The Fund may also use repurchase agreements as a means of
making short-term investments, and will invest only in repur-
chase agreements with durations of seven days or less, only
where the collateral securities are U.S. Government Securi-
ties, and in aggregate amounts of not more than 25% of the
Fund's net assets. Further information concerning repurchase
agreements is set forth on page below.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
21
<PAGE>
...............................................................................
U.S. Government Securities include the following:
U. S. 1. U.S. TREASURY BILLS, NOTES AND BONDS. These are obliga-
GOVERNMENT tions issued directly by the U.S. Treasury and have ma-
SECURITIES turities of less than one year for Bills, one to ten
INCLUDE A WIDE years for Notes, and ten to thirty years for Bonds.
ARRAY OF
INVESTMENTS
2. OBLIGATIONS GUARANTEED BY THE U. S. GOVERNMENT. These
include securities issued or guaranteed by certain agen-
cies and instrumentalities of the U.S. government as to
which the U.S. government guarantees repayment of prin-
cipal and payment of interest. These securities include
fully modified pass-through mortgage-backed certificates
whose principal and interest are guaranteed by the Gov-
ernment National Mortgage Association ("GNMA Certifi-
cates").
3. OBLIGATIONS OF U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. These include obligations issued or
guaranteed by U.S. government agencies and
instrumentalities, 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
instrumentality; 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 Certificates
INVEST and other mortgaged-backed U.S. Government Securities ("Mort-
SUBSTANTIALLY gage-Backed Securities"). Each GNMA Certificate is backed by
IN MORTGAGE- a pool of mortgage loans insured by the Federal Housing Ad-
BACKED ministration and/or the Veterans Administration. GNMA Certif-
SECURITIES icates provide for the payment of fixed monthly installments
of principal and interest to the registered holder of the se-
curity. 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 securities represent-
ing an interest in a pool of FHLMC participation certifi-
cates. 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 typi-
cally 30 years, its average life varies with the maturities
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 Security,
due to prepayments, refinancing or foreclosure of these mort-
gage loans. Prepayments are passed through to the registered
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. Prepay-
ment possibilities reduce the potential of Mortgage-Backed
Securities to appreciate in market value during periods of
falling interest rates, while the risk of decline in market
value during periods of rising interest rates may be compara-
ble 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 repurchase
agreements. With respect to
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
22
<PAGE>
...............................................................................
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 of
current income as is consistent with safety of principal by THE FUND
investing primarily in U.S. Government Securities. This Fund INVESTS
will invest at least 65% of its assets in U.S. Government Se- PRIMARILY IN
curities with average maturities of from 2 to 5 years. The U.S.
remainder of the Fund's assets may be invested in U.S. Gov- GOVERNMENT
ernment Securities with other maturities, and the Fund may SECURITIES
also invest to a limited extent in repurchase agreements with WITH LIMITED
respect to these securities. In addition, like the Government MATURITIES
Securities Fund, the Short Maturity Government Fund may in-
vest up to 20% of its net assets in high quality money market
instruments which are not issued or guaranteed by the U.S.
government or its agencies or instrumentalities. The Fund may
also use repurchase agreements as a means of making short-
term investments, in the same way as described for the Gov-
ernment 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
rates and the economy. At times, the Fund may make invest-
ments in Mortgage-Backed Securities, as described above under
"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 repurchase
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 securi-
ties.
The Fund is not guaranteed or insured by the U.S. Government,
and the value of the Fund's shares will fluctuate.
.THE MONEY MARKET FUND seeks as high a level of current in- THE FUND
come as is consistent with safety of principal and the main- INVESTS SOLELY
tenance of liquidity by investing solely in short-term obli- IN SHORT-TERM
gations of the U.S. Treasury. Such obligations include U. S. U.S. TREASURY
Treasury Bills, U. S. Treasury Notes and U. S. Treasury Bonds SECURITIES
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 liquid-
ity, greater market risk and greater market value fluctua-
tions.
The Fund will seek to maintain a net asset value of $1.00 per
share, by using the amortized cost method of valuing its se-
curities. In accordance with rules adopted by the Commission,
the Fund is required to maintain a dollar-weighted average
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 State-
ment of Additional Information.
In many states, the Fund's income dividends may be exempt INCOME MAY BE
from state and local income taxes, but subject to federal in- EXEMPT FROM
come taxes. For more information on state and local tax ex- STATE AND
emption, see "Taxes" herein. LOCAL TAXES
.THE TAX-FREE INCOME FUND seeks as high a level of current THE FUND
income, exempt from federal income taxes, as is consistent INVESTS FOR
with capital preservation, by investing primarily in a diver- CURRENT INCOME
sified portfolio of municipal bonds. These investments may EXEMPT FROM
include obligations of states, territories and possessions of FEDERAL INCOME
the United States and their political subdivisions, agencies, TAXES
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 obligations 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 Fund is in-
vested in defensive investments, as described below. See
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
23
<PAGE>
...............................................................................
"Appendix A -- Description of Bond Ratings" in this Prospec-
tus for more information regarding ratings of debt securi-
ties.
The Fund also may invest in unrated municipal bonds if the
Advisor believes the credit characteristics are at least
equivalent to those of municipal bonds ranked in the fourth
highest rating category of either Moody's or Standard &
Poor's. Although this is not a fundamental policy, no more
than 5% of the Fund's total assets may be invested in securi-
ties rated below investment-grade or unrated securities that
the Advisor believes are not equivalent in credit quality to
municipal bonds in the fourth highest rating category. As of
November 30, 1997, the portfolio securities of the Tax-Free
Income Fund had an average rating of A1; the average effec-
tive portfolio maturity of the Fund was 10.9 years.
THE FUND SEEKS .THE NEW YORK FUND seeks as high a level of current interest
HIGH CURRENT income exempt from federal income taxes and New York State
INCOME EXEMPT and New York City personal income taxes as is consistent with
FROM FEDERAL liquidity and capital preservation, by investing substan-
AND NEW YORK tially all of its assets in obligations issued by or on be-
STATE AND CITY half of the State of New York and its political subdivisions,
INCOME TAXES agencies, authorities, and instrumentalities ("New York Obli-
gations"), the interest on which, in the opinion of the is-
suer'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 obligations 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 Ratings" in this Prospec-
tus for more information regarding ratings of debt securi-
ties. 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 securi-
ties that the Advisor believes are not equivalent in credit
quality to municipal bonds in the fourth highest rating cate-
gory. As of November 30, 1997, the portfolio securities 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 Obligations, the Fund
is more susceptible to factors adversely affecting issuers of
New York Obligations than a municipal bond fund which is di-
versified 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 exam-
ple, the economic condition of a significant industry within
New York may have a corresponding effect on specific issuers
within New York or on anticipated 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 informa-
tion pertinent to investment in New York Obligations, see
"Appendix A -- Economic Conditions in New York" to the State-
ment of Additional Information.
THE FUND SEEKS .THE PENNSYLVANIA FUND seeks as high a level of current in-
HIGH CURRENT terest income exempt from federal income taxes and Pennsylva-
INCOME EXEMPT nia personal income taxes as is consistent with liquidity and
FROM FEDERAL capital preservation, by investing substantially all of its
AND assets in obligations issued by or on behalf of the Common-
PENNSYLVANIA wealth of Pennsylvania (the "Commonwealth" or "Pennsylvania")
INCOME TAXES and its political subdivisions, agencies, authorities and in-
strumentalities ("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 maturities
of more than one year. The Fund may, however, invest up to
20% of its net assets in short-term Pennsylvania Obligations.
All of the Pennsylvania Obligations in which the Pennsylvania
Fund invests will be rated in the top four rating categories
by Moody's or Standard & Poor's or, if unrated, possess
equivalent investment characteristics, as determined by the
Advisor. See "Appendix A -- Descrip-
24 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
tion of Bond Ratings" in this Prospectus for more information
regarding ratings of debt securities. As of November 30,
1997, the portfolio securities of the Pennsylvania Fund had
an average rating of Aa1; the average effective portfolio ma-
turity 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 possess
investment characteristics equivalent to these securities, in
the opinion of the Advisor.
Due to the Pennsylvania Fund's concentration in Pennsylvania
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 policies
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 conditions
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 B -- Economic Con-
ditions in Pennsylvania" to the Statement of Additional In-
formation.
..............................................................
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 of PERIODICALLY
attractive securities and upon its judgment with respect to THE FUNDS MAY
market conditions, a Fund may be less than fully invested. BE LESS THAN
FULLY INVESTED
There can be no assurance that a Fund's objective will be at-
tained.
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 in-
vest in repurchase agreements, provided the counterparty
maintains the value of the underlying securities at a value
not less than the repurchase price stated in the agreement.
Under a repurchase agreement, a Fund purchases fixed-income
securities and simultaneously agrees to resell these holdings
to the counterparty at a prearranged time and specific price.
If the counterparty defaults on its repurchase obligation,
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 Information.
INVESTING IN FOREIGN SECURITIES
The Common Stock, Balanced, Growth, Small Company, High Yield
and Bond Funds may invest in securities of foreign issuers,
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 securities traded
in foreign markets and denominated in foreign currencies.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 25
Prospectus
<PAGE>
...............................................................................
Investing in foreign securities involves certain special risk
considerations which normally are not associated with invest-
ing in U.S. securities, including, but not necessarily lim-
ited to, those listed below. The Funds may be affected favor-
ably or unfavorably by changes in currency rates or exchange
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 se-
curities to meet unanticipated cash requirements. Fixed com-
missions 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 financial information than
comparable U.S. companies. Furthermore, foreign companies
generally are not subject to uniform accounting, auditing and
financial reporting requirements. When investing in foreign
countries, there is the possibility of expropriation of as-
sets, confiscatory taxation, difficulty with the execution of
judgments against foreign issuers, imposition of the with-
holding of taxes prior to payment of dividends or other dis-
tributions, political 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 eq-
uity securities of larger companies, because they generally
have limited financial resources and narrower product lines
and may have less seasoned managers. In addition, their secu-
rities may trade less frequently and in lower share volumes,
making them subject to wider price fluctuations.
INFORMATION RELEVANT TO THE FIXED-INCOME FUNDS
The market prices of debt securities, including those issued
by the U.S. government, are inversely affected by interest
rate changes. As a result, the net asset value of the shares
of Funds holding debt securities will fluctuate with condi-
tions in the debt securities market. Debt securities with
longer maturities and longer effective durations (a measure
of an instrument's sensitivity to changes in interest 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 down-
graded below investment-grade, the Advisor will determine
whether selling the security is in the shareholders' best in-
terest. To arrive at this decision, the Advisor will consider
several factors, including price, credit risk, market condi-
tions 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 securities
(commonly referred to as junk bonds). Because of the in-
creased 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 purchase
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 be-
lieves the quality of such securities is higher than indi-
cated by the rating.
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 inter-
est rate changes than fixed rate securities. However, reduc-
tions in interest rates also may translate into lower ordi-
nary income distributions paid by the Funds. The High Yield
and Bond Funds, and the bond portion of the Balanced Fund,
also may invest in debt securities (i) that do not pay inter-
est but, instead, are issued at a significant discount to
their maturity values (referred to as zero coupon securi-
ties), (ii) that pay interest, at the issuer's option, in ad-
ditional securities instead of cash (referred to as pay-in-
kind securities) or (iii) pay interest at predetermined 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
26 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
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 more RISK FACTORS
speculative and likely to default than higher quality bonds. RELATING TO
Relative to other debt securities, junk bond values tend to LOWER RATED
be more volatile because: (i) an economic downturn may affect FIXED-INCOME
the ability of issuers to pay interest and repay principal; SECURITIES
and (ii) the secondary market for such securities may at
times be less liquid or their prices may respond more ad-
versely to negative publicity or investor perceptions, making
it more difficult to value or dispose of the securities. If
the market for lower rated bonds becomes illiquid, the Fund
may experience problems in valuing these securities. The
likelihood that these securities will help the Funds achieve
their investment objectives is more dependent on the Advi-
sor's or the High Yield Fund Sub-advisor's own credit analy-
sis than on ratings. Lower rated bonds are also more sensi-
tive 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 securities be-
cause such securities may be unsecured and may be subordi-
nated to other creditors of the issuer. In the event of a de-
fault, the Funds may incur additional expenses to the extent
it is required to seek recovery or participate in the re-
structuring of the obligation. Junk bonds also may have call
or redemption features that permit the issuer to repurchase
the securities from the Funds. If a call is exercised by the
issuer during a period of declining interest rates, the af-
fected Fund would likely be required to replace such called
securities with lower yielding securities, thus decreasing
net investment income to the Fund.
The High Yield, Bond and bond portion of the Balanced Funds
may purchase certain restricted securities ("Rule 144A Secu-
rities") for which there is a secondary market of qualified
institutional buyers as defined by Rule 144A under the Secu-
rities 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 secu-
rities, or the prohibition on illiquid securities for the
Bond Fund and bond portion of the Balanced Fund. Such liquid
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 turn-
over 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 turnover re-
sults from portfolio turnover of 22% for the equity portion,
and 135% for the bond portion), and the Short Maturity Gov-
ernment Fund had portfolio turnover of 61%. These Funds are
actively managed, and their portfolios are constantly moni-
tored and adjusted in an attempt to increase income, protect
the income stream or improve the quality of the portfolios.
This investment policy results in portfolio turnover that is
considered high, but this need not adversely affect perfor-
mance, 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 in-
vestment objectives. High portfolio turnover (i.e., greater
than 100% per year) may result in earlier recognition of cap-
ital gains or capital losses for tax purposes than would oth-
erwise be the case.
The assets of the High Yield, Bond, New York, Pennsylvania,
Tax-Free Income, Government Securities and Short Maturity
Government Funds and the bond portion of the Balanced Fund
may include securities that have been purchased on a when-is-
sued or delayed-delivery basis. Delivery of and payment for
these securities could take place a month or more after the
date of the transaction. During this time, the value of the
purchase commitment will fluctuate with the market for compa-
rable securities. However, when the Fund makes a commitment
to purchase the securities, the payment and interest terms of
these issues are fixed. A Fund will make these commitments
only with the intention of acquiring the securities, but may
sell those holdings before settlement date if, in the Advi-
sor's opinion, such action would benefit shareholders. When a
Fund purchases securities on a when- issued or delayed-deliv-
ery basis, it will provide its
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 27
Prospectus
<PAGE>
...............................................................................
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
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 effect
of leveraging the portfolio.
The Bond, Government Securities, Short Maturity Government
and Balanced Funds may also enter into "dollar rolls". A dol-
lar roll occurs when a Fund sells mortgage-backed or U.S.
Treasury securities for delivery in the current month and si-
multaneously 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. Treasury
securities. A Fund is compensated by the difference between
the current sales price and the lower forward price for the
future purchase (often referred 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 in-
come without 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 April 20, 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 distri-
butions 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.
STRATEGIES TO Should the Advisor anticipate a rise in interest rates, and a
PROTECT corresponding decline in value of long-term municipal bonds,
SHAREHOLDER the Tax-Free Income, New York and Pennsylvania Funds may in-
CAPITAL IN vest temporarily in short-term debt obligations, including
TIMES OF taxable investments, to help protect shareholder capital.
MARKET Such investments may include notes issued by or on behalf of
WEAKNESS municipal issuers, U.S. Government Securities, instruments 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 obligations
to 20% of its assets. With respect to non-governmental is-
suers, the Pennsylvania Fund will limit these investments to
obligations of issuers whose quality rating at the time of
purchase is within the two highest categories of either Stan-
dard & Poor's or Moody's.
The interest on municipal obligations issued by states other
than New York or Pennsylvania, for the New York and Pennsyl-
vania Funds, respectively, is exempt only from federal income
tax. Interest on certain qualifying U.S. Government Securi-
ties, 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 taxes.
The New York and Pennsylvania Funds are subject to the risks
relating to concentration in New York Obligations or Pennsyl-
vania Obligations, as described on pages and above.
The New York, Pennsylvania and Tax-Free Income Funds may pur-
chase and sell certain exchange-traded financial futures con-
tracts and related options for the following reasons:
. to hedge against adverse changes in interest rates;
. to protect against depreciation of municipal bond
investments; or
28
<PAGE>
................................................................................
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
. 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; how-
ever, the Advisor believes that since the New York, Pennsyl-
vania and Tax-Free Income Funds will engage in these transac-
tions for hedging purposes only, these portfolio strategies
will not subject these Funds to the risks frequently associ-
ated with the speculative use of options and futures transac-
tions. However, there are certain risks related to futures
transactions used for hedging purposes that you should under-
stand. These include: (i) incorrect forecasts of interest
rates by the Advisor, which may result in the hedge being in-
effective; (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, Pennsylva-
nia or Tax-Free Income Fund may be adversely affected by its
inability to close out its futures position; and (iii) imper-
fect correlation between the change in the market value of a
Fund's municipal bonds and the prices paid for futures con-
tracts, which may result in the hedge being ineffective. From
their inceptions through April 20, 1998, none of the New
York, Pennsylvania or Tax-Free Income 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 Information.
..............................................................
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS -- BOARD OF TRUSTEES
The Board of Directors of the Company and the Board of Trust-
ees of the Pennsylvania Fund (together, the "Boards") consist
of thirteen individuals, three of whom are "interested per-
sons" of the Funds as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). The Boards are respon-
sible for the overall supervision of the operations of the
Funds and perform the various duties imposed on the directors
of investment companies by the 1940 Act.
INVESTMENT ADVISOR
The Advisor is a Vermont general partnership whose general THE ADVISOR'S
partners are affiliates of three of the nation's major insur- INDIRECT
ance companies, with aggregate assets of over $24 billion. OWNERS ARE
The partners are: MAJOR
INSURANCE
COMPANIES WITH
COMBINED
ASSETS OF OVER
$24 BILLION
. Sentinel Advisors, Inc., an indirect wholly-owned
subsidiary of National Life Insurance Company ("National
Life"),
. 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 invest-
ment decisions for the Funds and provides certain administra-
tive 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 following an-
nual 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;
29
<PAGE>
...............................................................................
0.60% per annum on the next $100 million of such
assets; and
0.55% per annum on such assets in excess of $400
million.
(2) With respect to the Common Stock Fund:
0.55% per annum on the average daily net assets of the
Fund.
(3) With respect to the Bond, New York, Tax-Free Income,
Government Securities and Short 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.
Effective March 30, 1998, the Advisor has voluntarily agreed
for at least until November 30, 1998 to reimburse the follow-
ing Funds for advisory fees or other expenses necessary to
limit these Funds' overall expense ratios, after expense off-
set, to the amounts shown below:
<TABLE>
<S> <C>
Bond Fund Class A shares...................................... 0.68%
Government Securities Fund Class A shares..................... 0.87%
Short Maturity Government Fund Class A shares................. 0.75%
Tax-Free Income Fund Class A shares........................... 0.72%
Pennsylvania Fund Class A shares.............................. 0.70%
New York Fund Class A shares.................................. 0.00%
</TABLE>
In the case of the Bond Fund, the reimbursement of advisory
fees will also benefit the Class B shares of the Bond Fund,
which will experience the same reduced effective advisory fee
rate as the Class A shares of the Bond Fund. The Advisor cur-
rently intends to reset the above expense caps annually to
amounts approximately equal to 90% of the average expense ra-
tios of the Class A shares of such Funds' peer groups (except
that in the case of the Short Maturity Government Fund, the
expense cap is expected to be increased by approximately
0.15% to take that Fund's higher Rule 12b-1 fee into ac-
count). However, these arrangements may be changed or termi-
nated at any time after November 30, 1998.
In addition to the above reimbursement program, the Advisor
has a policy of reimbursing advisory fees to the extent, if
any, necessary to maintain the aggregate expense ratios of
the Class A shares of all the Funds, except for the World
Fund, to 1.30%. In the event that a reimbursement were re-
quired under this policy, the aggregate expense ratios of the
Class B and Class C shares of the Funds, except for the World
Fund, would be reduced proportionately. Although the Advisor
has no present intention to do so, this arrangement may be
terminated at any time. The aggregate expense ratio of the
Class A shares of the Funds was less than 1.30% during fiscal
1997, and no reimbursement was required under this policy.
PORTFOLIO MANAGERS
The Advisor employs a team approach in managing the Funds.
The management teams are comprised of a lead portfolio manag-
er, other portfolio managers and research analysts. Each team
includes members
30 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
30
<PAGE>
................................................................................
with one or more areas of expertise and shares the responsi-
bility for providing ideas, information and knowledge in man-
aging the Funds. Rodney A. Buck, the Chief Executive Officer
of the Advisor, is also Chairman and Chief Executive Officer
of National Life Investment Management Company, Inc., and Se-
nior Vice President and Chief Investment Officer of National
Life. Mr. Buck has been employed by the Advisor or its affil-
iates since 1972. There are three investment management
teams: an Equity Value Team, headed by Richard A. Pender, Se-
nior Vice President of the Advisor; an Equity Growth Team,
headed by Robert L. Lee, Senior Vice President of the Advi-
sor; 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 Chartered
Financial Analyst. Mr. Pender has been associated with the
Advisor or its affiliates since 1986. Mr. Lee joined the Ad-
visor 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 Director 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 affiliates since
1969.
The portfolio managers for the Bond Fund are Mr. Temple and
William C. Kane, Vice President of the Advisor. Mr. Temple
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 Man-
hattan Bank.
The portfolio manager of the Government Securities and Short
Maturity Government Funds is Mr. Brownlee.
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 portfo-
lio managers of the Money Market Fund are Mr. Temple and
Darlene Coppola, Money Market Trader of the Advisor. Ms. Cop-
pola has been employed by the Advisor or its affiliates since
1974.
SUB-ADVISORS
With respect to the World Fund, the Advisor has entered into INVESCO
a sub-advisory agreement with the World Fund Sub-advisor, CAPITAL
INVESCO Capital Management, Inc. Pursuant to such agreement, MANAGEMENT,
the World Fund Sub-advisor provides the Advisor with a con- INC. SERVES AS
tinuous investment program consistent with the World Fund's SUB-ADVISOR TO
stated investment objectives and policies. The sub-advisory THE WORLD FUND
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 average daily net assets
of the Fund up to $500 million and 0.025% (0.30% per annum)
of such average net assets in excess of $500 million, or (b)
$20,000 per annum. INVESCO Capital 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.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 31
Prospectus
31
<PAGE>
...............................................................................
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 Finan-
cial Analyst. He was associated with Cashman Farrell and As-
sociates from June, 1994 to March 31, 1996, when he moved to
the World Fund Sub-advisor. Prior to June, 1994 he was an In-
ternational Portfolio Manager with Provident Capital Manage-
ment, Inc.
KEYSTONE With respect to the High Yield Fund, the Advisor has entered
INVESTMENT into a sub-advisory agreement with Keystone Investment Man-
MANAGEMENT agement Company, the High Yield Fund Sub-advisor. Pursuant to
COMPANY SERVES this agreement, the High Yield Fund Sub-advisor provides the
AS THE SUB- Advisor with a continuous investment program consistent with
ADVISOR TO THE the High Yield Fund's stated investment objective and poli-
HIGH YIELD cies. Under this arrangement, the High Yield Fund Sub-advisor
FUND works in cooperation with the Advisor's investment profes-
sionals but has full authority to manage the High Yield
Fund's portfolio on a day to day basis. 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 Advi-
sor, provided that the fee paid by the Advisor to the High
Yield Fund Sub-advisor will always be at least 0.35% per an-
num of the average daily net assets of the High Yield Fund.
This agreement became effective June 20, 1997.
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 Corporate
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 in-
vestment management subsidiary of the brokerage firm Advest
Co. Inc. He had joined Boston Security Counselors in November
of 1993 as Senior Vice President-Fixed Income, where he man-
aged among others the Advest Advantage 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 Manager. 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 accounting, fi-
nancial administration and shareholder relations services. To
perform the transfer agency function, Sentinel Service util-
izes 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 remote access
to the computer system of DST. Generally this is a fixed an-
nual charge per shareholder account, plus certain out-of-
pocket expenses, minus certain credits. The fees, as a per-
centage of net assets for transfer agency and shareholder
servicing are somewhat higher than industry norms. However,
the Boards believe that such fees are warranted in light of
the level of service provided.
Year 2000 Issues. Many computer systems were designed using
only two digits to designate years. These systems may not be
able to distinguish the year 2000 from the year 1900 (com-
monly known as the "Year 2000 Problem"). Like other invest-
ment companies and financial and business organizations, the
Funds could be adversely affected if the computer systems
used by the Advisor and Sentinel Service do not properly ad-
dress this problem prior to January 1, 2000. Sentinel Service
and its parent companies are currently analyzing these issues
and are in the process of implementing the systems modifica-
tions neces
32 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
sary to prepare for the year 2000. Currently neither Sentinel
Service nor the Advisor expects that the transition to the
21st century will have any material impact on its ability to
continue to service the Funds at current levels. In addition,
Sentinel Service and the Advisor have sought assurances from
the Funds' other service providers that they are taking all
necessary steps to ensure that their computer systems will
accurately reflect the year 2000, and Sentinel Service and
the Advisor will continue to monitor the situation. At this
time, however, no assurance can be given that the Funds'
other service providers have anticipated every step necessary
to avoid any adverse effect on the Funds attributable to the
Year 2000 problem.
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 Dis-
tributor has the exclusive right to distribute shares of the
Funds through broker-dealers with whom it has selling agree-
ments. The Distributor is a general partnership of which af-
filiates 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 supplemental
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. Effective April
1, 1996, the Small Company, World, Common Stock, Balanced and
Bond Funds adopted a Class B Distribution 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 April 17, 1998, the Common Stock,
Balanced, World and High Yield Funds adopted a Class C Dis-
tribution 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 participant 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 in-
curred in connection with the distribution of Money Market
Fund shares.
Under the Plans applicable to the Class A shares, each par-
ticipating Fund will pay to the Distributor a monthly fee at
the maximum annual rate of (a) .30% of average daily net as-
sets in the case of the Small Company, Growth, World, Common
Stock and Balanced Funds, (b) .20% of average daily net as-
sets in the case of the High Yield, Bond, New York, Pennsyl-
vania, 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 connection with dis-
tribution 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 incurred by the Distributor for the occu-
pancy of its office space in Montpelier, Vermont, expenses
incurred by the Distributor 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, expenses incurred for the preparation, printing and
distribution of the Prospectus and Statement of Additional
Information, and any sup-
33
<PAGE>
Prospectus
plement thereto used in connection with the offering of such
Fund's shares to the public, or any reports and other commu-
nications for distribution to existing shareholders, and
service fees paid to securities dealers who have executed a
selling agreement with the Distributor.
Under the Plan applicable to the Class B shares, the Class B
shares of each of the 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 remain-
ing 0.75% shall be for the recovery of the initial sales com-
missions paid by the Distributor at the time of sales of
Class B shares, together with the cost of financing such pay-
ments, 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 distribution 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 investment.
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 subsequent
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 component,
are subject to aggregate limits imposed by the National Asso-
ciation 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 Government Secu-
rities Funds, .10% per annum of the Funds' average 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 Inde-
pendence Capital Group of Funds assets by the Funds; and in
the case of the Short Maturity Government Fund, .25% per an-
num of the average net assets owned by clients 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 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 regis-
tered 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 ar-
rangement. In no case will the Class B shares of any Fund pay
service fees which total more than 0.25% per year. To the ex-
tent the above schedule requires a payment from the Distribu-
tor in an amount exceeding 0.25% of average daily assets of
the Class B shares of any Fund, then the Distributor will
make such payment and will not be entitled to recover the ex-
cess over 0.25% from the Funds under the Plans.
The Class B share service fee for the first year after a pur-
chase 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 ac-
counts in dealer street name.
...............................................................................
34 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
<PAGE>
................................................................................
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 pay-
ment is made in respect to a particular shareholder's shares.
The degree to which each Fund is affected will depend 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 securities OPENING AN
dealer who has a sales agreement with the Distributor. If you ACCOUNT IS
already have an account with Sentinel you can purchase shares EASY
by mailing your check directly to Sentinel Service.
ALTERNATIVE PURCHASE OPTIONS
The Common Stock, Balanced, World and High Yield Funds offer
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 different levels
of expenses. These alternative purchase arrangements are de-
signed to enable the investor to choose the method of pur-
chasing Fund shares that is most beneficial to the investor
based on all factors to be considered, which may include: the
amount and intended length of the investment, the type of
Fund, and whether the investor intends to utilize the ex-
change privilege. Generally, when making an investment deci-
sion, investors should at least consider the anticipated life
of an intended investment in the Funds, the accumulated dis-
tribution fees plus CDSCs on Class B and Class C shares, the
initial sales charge, if any, plus accumulated distribution
fees on Class A shares, the possibility that the anticipated
higher return on Class A shares due to the lower ongoing
charges will 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 investor.
In determining which class of shares to purchase, an investor
should always consider whether any waiver or reduction 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" below.
There is no size limit on purchases of Class A shares. The
maximum purchase of Class B shares or Class C shares accepted
is $1,000,000. The Funds may refuse any order to purchase
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 initial invest-
ment 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 exchange 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 of-
fering 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).
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 35
Prospectus
<PAGE>
...............................................................................
The sales charge ranges from 5.0% to 0.0% of the offering
price (5.3% to 0.0% of the net amount invested). The size of
your purchase will determine the amount of your sales charge.
CLASS A SHARES -- SALES CHARGES
The table below shows the schedule of sales charges for the
Common Stock, Balanced, Growth, 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 Secu-
rities, 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 reallowance
of 0.75%. For sales of $1,000,000 and over, there is no ini-
tial 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 entire
sales charge on their sales of Fund shares. As a result, they
may be considered underwriters of such shares. Because the
Funds calculate the offering price per share by rounding to
the nearest whole cent, the entire sales charge may be
slightly more or less than the sales charge percentages set
forth above.
CLASS B SHARES
For all purchases of Class B shares, you pay the current net
asset value. There is no initial sales charge. A CDSC will be
imposed on Class B shares (including Class B shares of the
Money Market Fund), if you redeem shares during the applica-
ble CDSC period, and no waiver of the CDSC applies. See "How
to Redeem Shares -- Class B Shares -- CDSC" and "How to Re-
deem Shares -- Class B Shares -- Waiver or Reduction of the
CDSC", below.
Class B shares are subject to higher distribution fees than
Class A shares for a fixed period after their purchase. See
"Distribution Plans" above. After such period, the Class B
shares automatically convert to Class A shares and are no
longer subject to such higher distribution fees. The holding
period for Class B shares after which they automatically con-
vert 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 au-
tomatic 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.
36 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
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 connec-
tion 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>
BROKER-DEALER
AMOUNT OF 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 avail-
able through exchange from the Class B shares of another 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 associated 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 before Class B shares
are automatically converted to Class A shares of the same
Fund, or toward the time that results in a declining CDSC.
See "How to Redeem Shares -- Class B Shares -- CDSC", 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 Re-
deem Shares -- Waiver or Reduction of the CDSC", below.
Similar to the Class B shares, Class C shares are subject to
higher distribution fees than Class A shares. See "Distribu-
tion Plans" above. However, since Class C shares never con-
vert to Class A shares, investments in Class C shares remain
subject to these higher distribution fees for the entire
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 in-
vestment, as well as whether the advantage, as compared with
Class A shares, of not being subject to an initial sales
charge outweighs the higher distribution fees.
Investors who purchase Class C shares have the ability to ex-
change at net asset value only for the Class C shares of
other Funds which offer Class C shares, except that investors
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 invest- YOU CAN
ments in Class A shares in excess of $100,000. This applies RECEIVE A
to purchases of Class A shares of one or more of the Funds at REDUCED SALES
one time, or to purchases of either Class A shares, Class B CHARGE FOR A
shares or Class C shares combined over time by you, your NUMBER OF
spouse and children under the applicable age of majority, a REASONS
trustee or other fiduciary account for these same persons.
Additionally, accounts for charitable, religious, educational
and similar corporations, associations, or foundations exempt
under Section 501(c)(3) or (13) of the Code, retirement plans
set up
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 37
Prospectus
<PAGE>
...............................................................................
under the Self-Employed Individuals Tax Retirement Act of
1962, and Individual Retirement Accounts ("IRAs") may be
linked to an individually owned account for this privilege.
However, individually registered accounts may not be linked
with a participant account 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 ac-
count number(s).
LETTER OF INTENT. The LOI lowers your costs on Class A share
investments of more than $100,000 or Class B share invest-
ments 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 purchase, or by the
Fund to sell additional shares. All purchases 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 completed.
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 Sen-
tinel 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 necessary to pay such
amount due. Upon payment of the balance due any remaining es-
crow shares will be released and free from further sales
charges. The sale of shares for this purpose will be a tax-
able 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 ex-
penses, 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 SIMPLE
IRA plans under the Small Business Protection Act of 1996 or
Section 403(b) plans for which American Guaranty & Trust Com-
pany ("AG&T") is the custodian may group participating em-
ployee accounts together in such a way as to result in re-
duced 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 Accumula-
tion", may be grouped with the employee's SIMPLE IRA or Sec-
tion 403(b) accounts for quantity purchases under both the
ROA and LOI.
NET ASSET VALUE PURCHASES. Certain investors, subject to lim-
itations, may purchase Class A shares of the Funds at net as-
set value. Such investors include current and former Direc-
tors of the Funds and predecessors to the Funds; certain
current and retired directors, officers, employees and retir-
ees of the general partners of the Advisor and their affili-
ates; directors, officers, employees and clients of the Sub-
advisors; members of the immediate families of, or survivors
of, all of the above-referenced individuals; registered rep-
resentatives of securities dealers that have entered into a
sales agreement with the Distributor, and who notify the Dis-
tributor of such status at the time of the purchase, and mem-
bers 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 broker-dealers who place
trades for their own accounts or the accounts of their cli-
ents (such clients may include, without limitation, retire-
ment 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 (the
"Code") and "rabbi trusts"), and who charge a management,
38 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
consulting or other fee for their services; clients of such
investment advisors, financial planners, bank trust depart-
ments or broker dealers who place trades for their own ac-
counts, 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; purchasers
who are investing section 403(b) loan principal repayments;
purchasers who notify the Distributor that the funds being
used for such purchase consist of 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 individually managed trust
accounts at AG&T. AG&T may also invest short-term balances of
trust accounts in the Short Maturity Government Fund at net
asset value. If there is more than one person on an account
registration, all persons named in the account registration
must qualify. You must notify 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 pen-
sion, profit-sharing or other employee benefit plans created
pursuant to a plan qualified under Section 401 of the Code or
plans under Section 457of the Code, or employee benefit plans
created pursuant to Section 403(b) of the Code and sponsored
by nonprofit organizations defined under Section 501(c)(3) of
the Code. Such plans will qualify for purchases 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-spon-
sored plan with at least 100 eligible employees, and all of
the plan's transactions are executed through a single finan-
cial institution or service organization 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 appropriate investments for
such plans. The Distributor may pay dealers for share pur-
chases 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 pur-
chases, 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 em-
ployee 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 spe-
cifically promote the Funds, for costs incurred by such bro-
ker-dealers in the course of such activities. Dealer conces-
sions on automated periodic investment programs may be
advanced to dealers who have entered into an agreement with
the Distributor with respect to such advances. 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, sub-
ject 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.
The Distributor is sponsoring a sales contest during the pe-
riod January 1, 1998 to December 31, 1998, in which regis-
tered representatives of all broker-dealers who 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 ac-
counts managed by American Guaranty & Trust Company, the Dis-
tributor's trust company affiliate, aggregating at least
$1,200,000, and may bring a guest at the Distributor's ex-
pense 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 con-
test.
Accounts may be opened with only $50 using the Automatic In- OPEN AN
vestment Plan. Otherwise, the minimum initial investment in ACCOUNT WITH
any Fund is $1,000, except as otherwise provided in the AS LITTLE AS
Statement of Additional Information and except for certain $50
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.
39
<PAGE>
...............................................................................
PURCHASING SHARES BY CHECK
Make your checks payable to "Sentinel Administrative Service
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 redemp-
tion 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 federal
funds are made available to a Fund, usually within one busi-
ness day after Sentinel Service receives the check. Federal
funds are monies held by a commercial bank on deposit in one
of the U.S. Federal Reserve branch banks (the "Federal Re-
serve Banks").
PURCHASING SHARES BY WIRE
ANOTHER EASY You may purchase shares by wiring federal funds directly to
WAY TO BUY Sentinel Service when the New York Stock Exchange ("NYSE")
SHARES 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 application
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 business day
are available to the Fund on the next business day.
DEALER WIRE PURCHASE ORDERS
As a convenience to shareholders, the Distributor will, act-
ing for the Funds without charge, ordinarily accept orders
from dealers who have sales agreements with the Funds for the
purchase of shares at the applicable offering price.
AUTOMATIC INVESTMENT PLAN
This feature affords you the opportunity to dollar-cost aver-
age 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 phon-
ing 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 pay-
ments from the Federal government automatically deposited
into your account. You may deposit as much of such payments
as you elect. To enroll in Government Direct Deposit, you
must complete and file with Sentinel Service a completed Di-
rect Deposit Sign-Up Form for each type of payment that you
desire to include in this Privilege. The Direct Deposit 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 participation in this
Privilege. You may elect to terminate your participation in
this privilege by providing written notification to the ap-
propriate 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 pro-
gram, you may have part or all of your paycheck transferred
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 au-
thorization form, available from Sentinel Service, with your
employer's payroll department. Changes may be made through
written notification to your employer.
40 FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
HOW TO REDEEM SHARES
If your shares are held by Sentinel Service, you can redeem FOLLOW THESE
your shares by providing Sentinel Service with the appropri- EASY STEPS TO
ate instructions by mail or otherwise. REDEEM SHARES
If you are the shareholder of record and have a certificate
representing ownership in a Fund, you can redeem your shares
by either:
. Surrendering the certificate in person, to Sentinel Service
(National Life Drive, Montpelier, Vermont),
or
. Mailing the certificate to
Sentinel Administrative Service Company, P. O. Box 1499, Montpelier, VT 05601-
1499
WE SUGGEST SENDING CERTIFICATES BY CERTIFIED MAIL.
Sentinel Service is required to redeem your shares at net asset
value, less any applicable CDSC, as of the close of business on
the day such surrender or appropriate instructions are received,
in "good order", prior to 4:00 p.m. on a day that the NYSE is
open for business.
"Good order" means that the instructions must be signed by IMPORTANT
the registered owner(s) exactly as the shares are registered INFORMATION
and the signature(s) must be guaranteed by an eligible guar- FOR REDEEMING
antor institution which meets Sentinel Service's require- SHARES
ments, unless an exception listed below applies. The seal or
stamp of a notary public is not acceptable. You are not re-
quired to provide a signature guarantee when:
. the proceeds of the redemption do not exceed $50,000 in any
one day and the proceeds check is made payable to the reg-
istered 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 redemptions will be deducted from the redemption
proceeds. Purchases 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 FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 41
Prospectus
<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 re-
demption 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 applicable CDSC
percentage multiplied by the lower of the purchase price or
the net asset value of the shares being redeemed. Any CDSC
imposed on a redemption of Class B shares is paid to the Dis-
tributor.
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 toward
the time that must elapse before Class B shares are automati-
cally 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 ultimately re-
deemed, 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 applicable.
WAIVER OR REDUCTION OF THE CDSC
You are subject to a reduced CDSC on Class B shares for quan-
tity purchases, as indicated above, or when you buy shares in
connection with the ROA or a LOI. The ROA will apply to pur-
chases 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 information on the
ROA and the LOI.
Any applicable CDSC may be waived in the following situations
when the Funds have been notified at the time of redemption:
1. Redemptions of shares acquired from the reinvestment of
income distributions and/or capital gains distributions;
2. Redemptions from the account of a shareholder (including
one who owns the shares as joint tenant with his or her
spouse) following his or her death 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.
42
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
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 Dis-
tributor 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 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.
If an investor exchanges Class C shares for Class A shares of
the Money Market Fund during the first year after the pur-
chase of the Class C shares, any redemption of the Money Mar-
ket Fund shares will be subject to a CDSC of 1.00%, regard-
less 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 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 af-
ter 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 in-
creased 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, com-
pany retirement plan, agent or fiduciary, or if a shareholder
is deceased. The Funds reserve the right to withhold the pro-
ceeds 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 with-
hold 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, Pennsylva-
nia, Tax-Free Income, Short Maturity Government or Money Mar-
ket Funds, Sentinel Service normally will not honor the re-
demption check if those shares have been purchased less than
15 calendar days prior to the date the redemption request is
presented to Sentinel Service.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 43
Prospectus
<PAGE>
...............................................................................
Distributions from retirement plans may be subject to with-
holding 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 par-
ticipants will be assessed an annual service fee for each
participant account. The fee will be deducted automatically
from each participant account in June of each year unless
prepaid.
The fee assessed will vary based upon the average account
value of all participant accounts within the plan, and will
be as set forth below:
<TABLE>
<CAPTION>
FEE PER PARTICIPATING
AVERAGE 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, acting
for the Funds without charge, ordinarily accepts orders from
dealers who have sales agreements with the Funds for the re-
purchase of shares based on net asset value, less any appli-
cable 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 orders 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 Request
with a proper signature guarantee and supporting documents
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 ad-
dress 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 telephone,
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, provided
that, in the case of the Funds, the Funds have followed pro-
cedures reasonably designed to prevent such losses taking
into account the cost of such procedures and the potential
risk of loss. In processing telephone exchange or redemption
requests, the Funds will determine that reasonable procedures
are employed to confirm that such telephone instructions are
genuine, and if such procedures are not employed, the Funds
may be liable for any resulting losses. Such procedures in-
clude receiving all calls for telephone redemptions and ex-
changes on a recorded telephone line, and screening callers
through a series of questions regarding specific account in-
formation.
NO FEES FOR No fees are charged for telephone redemptions; however, serv-
TELEPHONE ice fees described above may apply, and the CDSC described
REDEMPTIONS above under "How to Redeem Shares" may apply.
44
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
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
all types of tax-deferred retirement plans, including Keogh MANY TYPES OF
Plans, IRAs, Roth IRA's, Education IRAs, SIMPLE IRAs, Simpli- PLANS
fied Employee Pension Plans, Section 403(b) Plans, Section
457 Plans, and other corporate pension and profit-sharing
plans.
American Guaranty & Trust Company, a Delaware trust company
and an affiliate of the Advisor, will act as a custodian for
IRAs, SIMPLE IRAs, and 403(b) plans, if desired, and will
charge an annual fee of $15 per individual (individuals with
more than one account will be charged only one fee). This fee
will be deducted automatically from the account in November
of each year unless prepaid (in the case of more than one ac-
count 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; however, a fee of $25 per transac-
tion is assessed for transferring 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 parties
who will provide administrative services to section 403(b)
plans, which are qualified retirement savings plans for em-
ployees 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 obtain admin-
istrative 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 busi- HOW THE VALUE
ness day at 4:00 p.m., Eastern Time, and becomes effective OF FUND SHARES
immediately upon its determination. The net asset value per IS DETERMINED
share is computed by dividing the total value of the assets
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 estab-
lished each day by the board of trade or exchange on which
they are traded.
. Exchange-traded options are valued at the last sale price
unless there is no timely sale price, in which event cur-
rent prices provided by market makers are used.
The Money Market Fund's assets are valued on the basis of am-
ortized cost, which involves valuing a portfolio instrument
at its cost initially and thereafter assuming a constant am-
ortization to maturity of any discount or premium regardless
of the impact of fluctuating interest rates on the market
value of the instrument.
The per share net asset value of Class A shares generally
will be higher than the per share net asset value of Class B
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, howev-
er, that the per share net asset value of the classes will
tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions which will
differ by approximately the amount of the expense accrual
differentials between the classes.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 45
Prospectus
<PAGE>
...............................................................................
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
WHEN THE FUNDS Each Fund pays dividends substantially equivalent to its net
PAY DIVIDENDS 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 busi-
ness the preceding business day. Dividends are declared 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 securi-
ties in the portfolio or expenses exceed the Fund's income.
Distributions of any net realized gains for a fiscal year are
paid in December, following the November 30th fiscal year-
end. Income dividends and capital gains distributions will be
reinvested automatically in Fund shares at net asset value at
the close of business on the designated record date, unless
you elect otherwise (see "Shareholder Services -- Distribu-
tion Options" below). You may also elect to have dividends
sent directly to your bank account through electronic funds
transfer. Any dividend or distribution of less than $10.00
must be reinvested.
If you elect to receive dividends and/or capital gain distri-
butions in cash and the postal or other delivery service is
unable to deliver checks to your address of record, your dis-
tribution option will automatically be converted to having
all dividend and other distributions reinvested in additional
shares. No interest will accrue on amounts represented 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, ex-
cept for class specific expenses, shall be made (i) to each
share without regard to class, provided that the Fund has re-
ceived 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 classes of the Funds maintain the same net
asset value per share, or (ii) on the basis of relative net
asset value.
..............................................................
TAXES
HOW INCOME AND GENERAL. Each Fund intends to continue to qualify, and the
GAINS ARE High Yield Fund intends to elect and to qualify, for the spe-
TAXED cial tax treatment afforded regulated investment companies
under the Code. Qualifying Funds (but not their shareholders)
are free from federal income tax on net ordinary income and
net realized capital gains distributed to shareholders. The
Funds intend to distribute substantially all of this income
and gain.
46
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
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 ordinary
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 dividends").
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 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 share-
holders with a written notice designating the amounts of any
exempt-interest dividends, if applicable, ordinary 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 constitute 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 divi-
dends).
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 extent of
any capital gain dividends received with respect to such
shares. For the New York, Pennsylvania and Tax-Free Income
Funds, such loss will be disallowed to the extent of any "ex-
empt-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 hold-
ing period of the acquired Class A shares will include the
holding period for the converted Class B shares. Shareholders
should consult their tax advisors regarding the state and lo-
cal 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 purposes
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 au-
tomatic 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 eligi-
ble for the dividends received deduction allowed to corpora-
tions 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 shareholders
on December 31st of the year in which the dividend was de-
clared.
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 pay-
ments ("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,
. Those who have furnished Sentinel Service with an incorrect certified
taxpayer identification number, and
. Those identified by the IRS.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 47
Prospectus
<PAGE>
...............................................................................
When establishing an account, you must certify, under penalty
of perjury, that your taxpayer identification number is cor-
rect and that you are not otherwise subject to back-up with-
holding.
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. Treasury
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 securi-
ties. Therefore, many shareholders can expect to receive
Money Market Fund dividends and a significant portion of Gov-
ernment Securities Fund and Short Maturity Government Fund
dividends free of state and local taxes. If you live in a
state that imposes income taxes, consult with your tax advi-
sor to determine whether all or part of the dividends from
the Money Market Fund, the Government Securities Fund or the
Short Maturity Government Fund are exempt from state and lo-
cal 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 taxes.
Dividends and/or interest received by the World Fund and to a
lesser extent, the Bond Fund and to a much smaller degree,
the Balanced Fund and the Common Stock Fund 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. For example, certain re-
tirement accounts cannot claim foreign tax credits on invest-
ments in foreign securities held in the World Fund. In addi-
tion, 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. 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 for-
eign 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 in-
clude their proportionate shares as taxes paid by them, and
deduct such proportionate shares in computing their federal
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 share-
holder and the RIC. 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 de-
ductions 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 for-
eign corporation may be subject to United States withholding
tax on the income resulting from the World Fund's election
described in this paragraph but may not be able to claim a
credit or deduction against such United States tax for the
foreign taxes treated as having been paid by such sharehold-
er. The World Fund will report annually to its shareholders
the amount per share of such withholding taxes and other in-
formation needed to claim the foreign tax credit.
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 div-
idend 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 sharehold-
er'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
48
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
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in a capital gain for any shareholder who received a distri-
bution 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 tax-
es. You should consult with your tax advisor as to the avail-
ability 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 mu-
nicipal bonds and notes to qualify to pay "exempt-interest
dividends" to shareholders. Such dividends are excludable
from gross income for federal income tax purposes. Exempt-in-
terest dividends are included, however, in determining the
portion, 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 purposes
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 exempt-
interest dividends will not be deductible by the shareholder
for federal income tax purposes to the extent attributable to
exempt-interest dividends.
The Code subjects interest received on certain otherwise tax-
exempt securities to an AMT. The AMT applies to interest re-
ceived 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 enti-
ties (e.g. bonds used for commercial or housing purposes).
Income received on such bonds is classified as an item of
"tax preference" which would subject investors in such bonds,
including shareholders of the New York, Pennsylvania and Tax-
Free Income Funds, to an AMT. Each of the New York, Pennsyl-
vania 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 pur-
poses. The Code further provides that corporations are sub-
ject 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. Because an exempt-
interest dividend paid by the New York, Pennsylvania or Tax-
Free Income Fund will be included in adjusted current earn-
ings, a corporate shareholder may be required to pay AMT on
exempt-interest dividends paid by any such Fund. Persons who
may be substantial users (or "related persons" of substantial
users) of facilities financed by industrial development bonds
or private activity bonds held by the New York, Pennsylvania
or Tax-Free Income Fund should consult their tax advisors 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 Ob-
ligations. Distributions from the New York Fund which are at-
tributable to interest income received from such obligations
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. Distribu-
tions from the Pennsylvania Fund which are attributable to
interest income received from such obligations also will be
exempt from Pennsylvania personal income tax. Distributions
from the New York and Pennsylvania Funds which are attribut-
able to interest received from qualifying obligations of the
U.S. government, its agencies and instrumentalities similarly
will be exempt from New York State and New York City or from
Pennsylvania personal income tax, respectively. 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 corpora-
tion 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 taxable income for
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 49
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<PAGE>
...............................................................................
federal corporate income tax purposes (determined 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 Pennsyl-
vania Fund by a corporate shareholder will qualify as an ex-
empt asset for purposes of apportionment of the Pennsylvania
capital stock/foreign franchise tax.
Distributions from the Pennsylvania Fund will be exempt from
the Philadelphia School District investment income tax for
individual residents of the City of Philadelphia to the ex-
tent that such distributions are attributable to interest re-
ceived from Pennsylvania Obligations or from qualifying obli-
gations of the U.S. 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 Penn-
sylvania Fund assets are comprised of Pennsylvania Obliga-
tions and qualifying obligations of the U.S. government, its
agencies and instrumentalities on the annual assessment date.
If the New York and Pennsylvania Funds invest in obligations
and allowable investments other than New York Obligations and
Pennsylvania Obligations, respectively, a portion of the in-
come 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 taxa-
tion by states other than New York or Pennsylvania will real-
ize a lower after-tax return than New York or Pennsylvania
shareholders, respectively, since the dividends distributed
by the New York and Pennsylvania Funds generally will not be
exempt, to any significant degree, from income taxation by
such other states. The New York and Pennsylvania Funds will
inform shareholders annually as to the 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 invest-
ADVISOR ABOUT ors should consider applicable foreign taxes in their evalua-
TAX tion of an investment in the Funds.
IMPLICATIONS
OF CERTAIN The foregoing is a general and abbreviated summary of the ap-
DISTRIBUTIONS plicable provisions of the Code and U.S. Treasury regula-
tions, and relevant state and local tax laws presently in ef-
fect. 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 retroactively.
..............................................................
SHAREHOLDER SERVICES
MANY When you establish a new account, all dividends and any capi-
CONVENIENT tal gains distributions are reinvested at net asset value and
SHAREHOLDER without charge to purchase additional shares, unless you
SERVICES ARE elect another option. Many other features are available to
AVAILABLE you, as described below. Minimum account values apply for
some.
DISTRIBUTION OPTIONS: Several options for receiving dividends
and capital gains distributions are available, including 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 Sentinel Service or by pro-
viding appropriate instructions in writing to Sentinel Serv-
ice. Because Class B shares in the Tax-Free Income, New York,
Pennsylvania, Government Securities and Short Maturity Gov-
ernment 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 Compa-
ny, Bond, Tax-Free Income, New York, Pennsylvania, Government
Securities and Short Maturity Government Funds are not cur-
rently offered, holders of Class C shares of the other
50
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
................................................................................
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, however, shares purchased (other
than by exchange from another Fund other than the Money Mar-
ket Fund) must remain in the account for 90 days before they
are eligible for the exchange 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 initial purchase of the shares into which Money
Market Fund shares are being exchanged. In determining the
holding period for Class B or Class C shares, the holding pe-
riod for shares which have been exchanged into the then cur-
rently 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 applica-
ble 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 auto-
matically 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 telephone
instructions. Although the Funds and Sentinel Service will
attempt in good faith to provide adequate telephone exchange
service at all times, telephone exchanges may be difficult to
implement in times of drastic economic change. In the event
you cannot contact Sentinel Service by telephone, you may ef-
fect an exchange by sending a written request to Sentinel Ad-
ministrative Service Company, P. O. Box 1499, Montpelier, VT
05601-1499. Please be certain to specify which account op-
tions 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 accordance with the rules of
the Commission (the current rules of the Commission require
60 days advance notice to shareholders prior to the modifica-
tion or termination of the exchange privilege).
SYSTEMATIC EXCHANGE: This feature enables you to sell a spec-
ified 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.
TRANFERS: When you need to change ownership of or the name on
an account, a Sentinel Service representative will provide
you with the necessary assistance.
SYSTEMATIC WITHDRAWAL PLAN: If you want to have regular with-
drawals 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 div-
idends 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 Shareholder
Services Guide and/or the Statement of Additional Informa-
tion.
..............................................................
PERFORMANCE DATA
Periodically, the Funds include average annual total return
in advertisements or in information distributed to existing
and prospective shareholders.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 51
Prospectus
<PAGE>
...............................................................................
HOW THE FUNDS Average annual total return quotations are calculated by de-
COMPUTE TOTAL termining 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 dividends
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 In-
COMPUTE YIELD come, 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 av-
erage daily number of shares outstanding during that period
and the maximum offering price per share on the last day of
the period. The result is then annualized. (The amount of in-
come generated during the 30-day period is assumed to be
earned, reinvested at a constant rate at the end of such pe-
riod and compounded semi-annually.)
The Funds listed above may also show comparable yields to
those shareholders already invested in the Funds by using the
net asset value per share instead of maximum offering price
in the above calculations. This has the effect of raising the
quoted yields.
The 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" (Eu-
rope, Australia, Far East) Index.
The High Yield Fund may compare its performance to the Chase
Manhattan Bank Index.
The Bond, New York, Pennsylvania, Tax-Free Income, Government
Securities, Short Maturity Government, and Money Market Funds
may compare their performance to the following indices:
. Lehman Aggregate Bond Index
. Municipal Bond Index
. Government Bond Index
. Donoghue's Money Fund Report
In addition, the New York, Pennsylvania and Tax-Free Income
Funds may quote tax-equivalent yields in advertisements.
HOW THE FUNDS To determine the tax-equivalent yield of the Tax-Free Income
COMPUTE TAX- Fund, divide the tax-exempt part of the Fund's yield by an
EQUIVALENT amount which is one minus a stated tax rate, and add the re-
YIELD sult to that part, if any, of the Fund's yield that is tax-
able.
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, Pennsylva-
nia 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 Information.)
The Funds may also refer to rankings and ratings published by
independent tracking services and publications of general in-
terest including, but not limited to: Lipper Analytical Serv-
ices, Inc.,
52
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
...............................................................................
CDA/Wiesenberger, Morningstar, Donoghue's; magazines such as
Money, Forbes, Kiplinger's Personal Finance Magazine, Finan-
cial World, Consumer Reports, Business Week, Time, Newsweek,
U.S. News and World Report; and other publications such as
the Wall Street Journal, Barron's, Investor's Daily, and
Standard & Poor's Outlook. These ranking services and publi-
cations may rank the performance of the Funds against all
other mutual funds or against funds in specified categories.
The rankings may or may not include the effects of sales or
other charges.
..............................................................
ORGANIZATION OF THE FUNDS
HISTORICAL All of the Funds except the Pennsylvania Fund are series of
INFORMATION the Company. The Company was originally incorporated in Dela-
ABOUT THE ware as Group Securities, Inc. in 1933. The Company sold its
FUNDS 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. Previous-
ly, it was known as Sentinel Short-Intermediate Government
Fund. Effective March 31, 1997, the Sentinel Small Company
Fund began doing business under its present name. Previously,
it was known as Sentinel Emerging Growth Fund.
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 Compa-
ny, shareholders are entitled to receive (ratably per share)
the net assets of each Fund in which they are invested, 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 Penn-
sylvania law in 1986. Its shares of beneficial interest are
fully paid and non-assessable. Each share of beneficial in-
terest 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. Pre-
viously, the Fund was known as "ProvidentMutual Pennsylvania
Tax-Free Trust".
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 53
Prospectus
<PAGE>
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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.
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 sys-
tem. 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 rat-
ing category. Note: Those bonds in the Aa, A, Baa, Ba and B categories which
Moody's believes possess the strongest credit attributes within those catego-
ries 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 credit-
worthiness 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. Stan-
dard & 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.
54
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
<PAGE>
...............................................................................
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.
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.
Indicates that continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing documen-
tation confirming investments and cash flows.
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 55
Prospectus
<PAGE>
...............................................................................
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 ac-
count 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 catego-
ries ("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, in-
surance companies and fiduciaries generally.
56
FOR INFORMATION AND ASSISTANCE CALL YOUR FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863)
Prospectus
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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 ADMINISTRATOR
Sentinel Administrative Service Company
*National Life Drive
Montpelier, VT 05604
800-282-FUND (3863)
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* 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 FINANCIAL ADVISOR OR INVESTOR
SERVICES AT 1-800-282-FUND (3863) 57
Prospectus
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 20, 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 April 20, 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.
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TABLE OF CONTENTS
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Page
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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 - Economic Conditions in New York...............................
Appendix B - Economic Conditions in Pennsylvania...........................
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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.
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General Considerations
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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" in the Prospectus 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
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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").
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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
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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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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 the Prospectus.
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
10
<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.
11
<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 A - "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 B - "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
13
<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
35,872,227.154 shares amounting to 17% of the outstanding shares of the Company
(11% of the voting power) which included 3,207,776.170 shares of the Common
Stock Fund amounting to 8% of such Fund, 2,082,059.33 shares of the Balanced
Fund amounting to 12% of such Fund, 1,239,232.861 shares of the Growth Fund
amounting to 19% of such Fund, 1,232,485.549 shares of the Small Company Fund
amounting to 6% of such Fund, 1,674,467.185 shares of the World Fund amounting
to 27% of such Fund, 2,437,305.500 shares of the High Yield Fund amounting to
47% of such Fund, 3,876,952.797 shares of the Bond Fund amounting to 25% of such
Fund, 772,560.707 shares of the Government Securities Fund amounting to 11% of
such Fund, 272,206.454 shares of Short Maturity Fund amounting to 5% of such
Fund, 18,530,242.980 shares of the Treasury Fund amounting to 22% of such Fund,
542,908,748 shares of the Tax-Free Income Fund amounting to 8% of such Fund, and
4,029.170 shares of the New York Fund amounting to 1.0% of such Fund. National
Life and
16
<PAGE>
its affiliates also owned 58,950.089 shares of the Pennsylvania Fund amounting
to 2% 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 (Insurance) - 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, P.O. Box 404
Randolph, VT 05060
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
1117 Hamilton Ave.
Palo Alto, CA 94301
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, 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 April 17, 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 April 17, 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. Portfolio turnover for its first
fiscal year is not annualized.
(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 109,301
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 - 142,283.776 shares amounting to 20% of the class; Ms. Arlene
Federico, 39 Fruitledge Road, Brookville, New York 11545-3315 - 66,715.451
shares amounting to 8% of the class; and for the following shareholder of the
Short Maturity Fund: Vermont Community Foundation, P.O. Box 30, Middlebury,
Vermont 05753-0030 - 303,951.368 shares amounting to 6% 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 4,587,888 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 1,755,409 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
ECONOMIC CONDITIONS IN NEW YORK
-------------------------------
The information set forth below is derived from the official statements
prepared in connection with the issuance of New York 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
47
<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>
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.
48
<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>
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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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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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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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
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standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
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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 B
ECONOMIC 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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<PAGE>
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
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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
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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.
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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 February 28, 1998
-------------- ------------------------
<S> <C>
Sentinel Small Company Fund 12,011
Sentinel Growth Fund 7,045
Sentinel World Fund 6,340
Sentinel Common Stock Fund 51,048
Sentinel Balanced Fund 14,175
Sentinel Bond Fund 3,804
Sentinel New York Tax-Free Income Fund 136
Sentinel Tax-Free Income Fund 2,375
Sentinel Government Securities Fund 3,225
Sentinel Short Maturity Government Fund 1,702
Sentinel U.S. Treasury Money Market Fund 4,775
Sentinel High Yield Bond Fund 1,146
</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 26th day of March, 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 March 26, 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 March 26, 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 March 26, 1998
- ---------------------------------- and Principal
John M. Grab, Jr. Financial and
Accounting Officer
*By /s/ Joseph M. Rob March 26, 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. 83 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
March 30, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> SENT SMALL CO-A
<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
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,427,712
<PAYABLE-FOR-SECURITIES> 0
<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> 18,330,365
<SHARES-COMMON-PRIOR> 19,207,900
<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> 115,531,634
<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
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<PER-SHARE-NII> (0.02)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> SENT WORLD-A
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<TABLE> <S> <C>
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<ARTICLE> 6
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<NAME> SENT COMMON STK-A
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
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<NAME> SENT BALANCED-A
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</TABLE>
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<NAME> SENT BOND-A
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<NAME> SENT TAX-FREE-A
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<NAME> SENT NY TAX-FREE-A
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<NAME> SENT GOV SEC-A
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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
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 44,387,974
<INVESTMENTS-AT-VALUE> 44,878,814
<RECEIVABLES> 753,497
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<TOTAL-ASSETS> 46,245,168
<PAYABLE-FOR-SECURITIES> 999,078
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 201,832
<TOTAL-LIABILITIES> 1,200,910
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45,886,114
<SHARES-COMMON-STOCK> 4,587,888
<SHARES-COMMON-PRIOR> 3,718,756
<ACCUMULATED-NII-CURRENT> 7,429
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,340,125)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 490,840
<NET-ASSETS> 45,044,258
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,037,163
<OTHER-INCOME> 0
<EXPENSES-NET> 415,909
<NET-INVESTMENT-INCOME> 2,621,254
<REALIZED-GAINS-CURRENT> (370,535)
<APPREC-INCREASE-CURRENT> 211,738
<NET-CHANGE-FROM-OPS> 2,462,457
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,412,181
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,520,498
<NUMBER-OF-SHARES-REDEEMED> 2,855,286
<SHARES-REINVESTED> 203,920
<NET-CHANGE-IN-ASSETS> 8,570,564
<ACCUMULATED-NII-PRIOR> 1,384
<ACCUMULATED-GAINS-PRIOR> (1,173,287)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 221,104
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 492,376
<AVERAGE-NET-ASSETS> 41,610,614
<PER-SHARE-NAV-BEGIN> 9.81
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> 0.56
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.82
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SENT US TREAS MM-A
<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
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,292,401
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,947,299
<TOTAL-LIABILITIES> 11,947,299
<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
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<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
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,906,356
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,725,989
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 198,798,449
<NUMBER-OF-SHARES-REDEEMED> 197,029,796
<SHARES-REINVESTED> 3,338,706
<NET-CHANGE-IN-ASSETS> 5,380,625
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 350,009
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 669,199
<AVERAGE-NET-ASSETS> 83,446,483
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.04
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</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
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 44,007,585
<INVESTMENTS-AT-VALUE> 44,634,159
<RECEIVABLES> 1,002,048
<ASSETS-OTHER> 1,235,768
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 46,871,975
<PAYABLE-FOR-SECURITIES> 1,913,938
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 66,151
<TOTAL-LIABILITIES> 1,980,089
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,862,883
<SHARES-COMMON-STOCK> 1,064,882
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,779
<OVERDISTRIBUTION-NII> 0
<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
<EQUALIZATION> 0
<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
<ACCUMULATED-GAINS-PRIOR> 0
<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
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,427,712
<PAYABLE-FOR-SECURITIES> 0
<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
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<DISTRIBUTIONS-OF-INCOME> 9,446
<DISTRIBUTIONS-OF-GAINS> 52,020
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<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
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<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
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<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>
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<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
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<TOTAL-ASSETS> 1,590,357,400
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<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
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<ACCUMULATED-NET-GAINS> 169,009,191
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<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
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<OVERDISTRIB-NII-PRIOR> 0
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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
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> SENT BALANCED-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> 260,506,212
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<TOTAL-ASSETS> 358,870,163
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<OTHER-ITEMS-LIABILITIES> 579,849
<TOTAL-LIABILITIES> 17,329,682
<SENIOR-EQUITY> 0
<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
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<ACCUM-APPREC-OR-DEPREC> 95,058,692
<NET-ASSETS> 26,592,650
<DIVIDEND-INCOME> 4,346,925
<INTEREST-INCOME> 8,818,913
<OTHER-INCOME> 0
<EXPENSES-NET> 3,865,424
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<APPREC-INCREASE-CURRENT> 17,871,222
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 386,621
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<NUMBER-OF-SHARES-SOLD> 754,261
<NUMBER-OF-SHARES-REDEEMED> 68,172
<SHARES-REINVESTED> 33,293
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<ACCUMULATED-NII-PRIOR> 1,259,431
<ACCUMULATED-GAINS-PRIOR> 7,404,421
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,020,909
<INTEREST-EXPENSE> 0
<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>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 99,875,883
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<TOTAL-ASSETS> 104,151,992
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<OTHER-ITEMS-LIABILITIES> 175,202
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<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)
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<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
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<APPREC-INCREASE-CURRENT> 2,486
<NET-CHANGE-FROM-OPS> 6,239,092
<EQUALIZATION> 0
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<NUMBER-OF-SHARES-SOLD> 640,073
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<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
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<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
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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
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,292,401
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<OTHER-ITEMS-LIABILITIES> 11,947,299
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<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
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<ACCUM-APPREC-OR-DEPREC> 0
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<TABLE> <S> <C>
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<NAME> SENT HIGH YIELD BOND-B
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