AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1999
Securities Act File No. 2-10685
Investment Company Act File No. 811-214
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 87 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
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>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 30, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL THE REGISTRATION
STATEMENT CONTAINING THIS PROSPECTUS, WHICH HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING, INCLUDING
INFORMATION ABOUT RISKS. PLEASE READ IT BEFORE YOU INVEST AND KEEP IT FOR FUTURE
REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SENTINEL FUNDS
SENTINEL GROWTH INDEX FUND
PROSPECTUS SUPPLEMENT DATED AUGUST , 1999 TO
PROSPECTUS DATED MARCH 31, 1999
On August , 1999, Sentinel Group Funds, Inc. (the "Company") began
offering shares of a new Fund named Sentinel Growth Index Fund (the "Growth
Index Fund"). This Supplement, which is to be used in conjunction with the
Prospectus for the Sentinel Funds dated March 31, 1999 (the "Prospectus"),
describes the investment objective and policies and other features of the Growth
Index Fund.
WHAT IS THE MAIN GOAL AND INVESTMENT STRATEGY OF THE GROWTH INDEX FUND?
The Growth Index Fund seeks to match, as closely as possible, before
expenses, the performance of the S&P 500/BARRA Growth Index, which includes
those stocks of the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index") with higher than average price to book value ratios. The Fund will
invest primarily in the common stocks of the companies that comprise the S&P
500/BARRA Growth Index, in approximately the same proportions as they are
represented in the S&P 500/BARRA Growth Index.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE GROWTH INDEX FUND?
The value of the Growth Index Fund, like all equity mutual funds, will
go up and down as the prices of the stocks held by the Fund go up and down.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. Stocks could decline generally or underperform other types of
investment assets. An investor in the Fund could lose money over short or even
long periods of time.
The Growth Index Fund is also subject to investment style risk, which
is the chance that returns from large capitalization growth stocks will trail
returns from other asset classes or the overall stock market. Growth stocks tend
to go through cycles of doing better, or worse, than the stock market in
general. These periods have, in the past, lasted for as long as several years.
There is also a risk that Growth Index Fund will not track closely the
performance of the S&P 500/BARRA Growth Index for a number of reasons, including
the Fund's costs of buying and selling securities and the flow of money into and
out of the Fund.
There can be no assurance that the Growth Index Fund will achieve its
objective.
FEES AND EXPENSES
SHAREHOLDER FEES (fees paid directly from your investment)
CLASS A SHARES:
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of the offering price).........................................2.50%1
Maximum Deferred Sales Charge (Load)........................................None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.................None
Redemption Fees .........................................................None1,2
Exchange Fees ..............................................................None
_______________
1 The sales charge is reduced to 2.0% for purchase amounts of $500,000 to
$999,999, and to zero for purchase amounts of $1,000,000 or more. If you do not
pay a sales charge because your purchase amount is $1,000,000 or more, then you
may pay a deferred sales charge of up to 1% if you redeem your shares within two
years of your purchase.
2 If you redeem by wire transfer, we assess a wire charge of $25.00.
CLASS B SHARES:
Maximum Sales Charge (Load) Imposed on Purchases............................None
Maximum Deferred Sales Charge (Load) (as a percentage of the lower of the
purchase price or the net asset value of the shares being redeemed).......2.50%3
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ................None
Exchange Fees ..............................................................None
_______________
3 The maximum deferred sales charge is imposed on shares redeemed in the first
two years after purchase. For shares held longer than two years, the deferred
sales charge declines.
ANNUAL FUND OPERATING EXPENSES
We estimate that the Growth Index Fund will incur the expenses shown
below in its first year of operations, expressed as a percentage of the Fund's
average net assets.
CLASS A SHARES CLASS B SHARES
Management Fees 0.30% 0.30%
Rule 12b-1 Fees (includes service fee
and distribution fee) 0.20% 0.75%
Other Expenses:
Accounting and Administrative Costs 0.03% 0.03%
Other 0.17% 0.17%
Total Other Expenses 0.20% 0.20%
-------- -----
Total Fund Operating Expenses 0.70%(a) 1.25%(a)
===== =====
_________________________
(a) The above expense ratios do not reflect waivers of fees by Sentinel Advisors
Company. Currently Sentinel Advisors voluntarily waives fees to the extent
necessary to cap the expense ratio of the Class A shares of the Growth Index
Fund at 0.65%. This fee waiver will also proportionately benefit the Class B
shares of the Growth Index Fund. Sentinel Advisors currently intends to continue
this fee waiver indefinitely; however, it may change or terminate the fee waiver
at any time after November 30, 2000.
EXAMPLES:
These examples are intended to help you compare the cost of investing
in the Growth Index Fund with the cost of investing in other mutual funds. They
assume that you invest $10,000 in the Growth Index Fund for the time periods
indicated, that you pay the initial sales charge in the case of the Class A
shares, that the Fund's operating expenses are as estimated above for the entire
period, and that your investment has a 5% return each year. This assumption is
not meant to indicate that you will receive a 5% annual rate of return. Your
annual return may be more or less than the 5% used in these examples. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be as shown below. NOTE THAT THE AMOUNTS SHOWN DO NOT REFLECT THE WAIVER
OF FEES THAT LIMITS EXPENSE RATIOS AS DISCUSSED IN FOOTNOTE (A) ABOVE.
1 YEAR 3 YEARS
------ -------
Class A shares $320 $468
Class B shares (assuming redemption
at the end of the period) $377 $597
Class B shares (assuming no redemption
at the end of the period) $127 $397
DETAILS ABOUT THE GROWTH INDEX FUND'S INVESTMENT OBJECTIVE, PRINCIPAL
INVESTMENT STRATEGIES, AND ASSOCIATED RISKS
The Growth Index Fund seeks to match, as closely as possible, before
expenses, the performance of the S&P 500/BARRA Growth Index. The S&P 500/BARRA
Growth Index includes those stocks of the S&P 500 Index with higher than average
price to book value ratios. The S&P 500 is an unmanaged index and typically
includes companies that are the largest and most dominant in their industries.
There can be no assurance that the Fund will achieve its objective.
The Fund will invest at all times at least 80% of its total assets in
the common stocks of the companies that comprise the S&P 500/BARRA Growth Index.
It intends normally to invest substantially all its total assets in these common
stocks, in approximately the same weightings as the S&P 500/BARRA Growth Index.
The Fund also may hold up to 20% of its assets in money market instruments and
stock index options and futures. Futures and options are considered
"derivatives" because they "derive" their value from a traditional security
(like a stock or bond) or index. The Fund intends to buy index options or
futures, if at all, only in anticipation of buying stocks.
The Growth Index Fund is not "actively managed", which would involve
the investment advisor buying and selling securities based on research and
analysis. Rather, the Growth Index Fund tries to match, as closely as possible,
before expenses, the performance of its target index, the S&P 500/BARRA Growth
Index. It does this by holding, under normal circumstances, all of the common
stocks included in the target index, in approximately the same weightings as in
the index.
The Growth Index Fund by itself is not a balanced investment program.
The Growth Index Fund will generally hold exclusively the stocks of companies
among the 500 largest U.S. publicly owned corporations. Of these stocks, the
stocks included in the S&P 500/BARRA Growth Index have been valued in the stock
market at levels which indicate that the market expects their issuers to have
better than average prospects for growth of revenue and earnings. These stocks
are sometimes referred to as "large capitalization growth stocks". The Growth
Index Fund will not invest in other types of stocks, including the stocks of
small companies, or so-called "value stocks", from which the market does not
expect as much growth in revenue and earnings, but which can be purchased at
lower valuations. Diversifying your investments beyond "large capitalization
growth stocks" may lower the volatility of your overall investment portfolio,
and could improve your long-run investment return.
It is anticipated that the Growth Index Fund will have relatively small
portfolio turnover. However, it may have to sell securities from time to time to
meet redemption requests, and adjustments will be made in the portfolio from
time to time because of changes in the composition of the S&P/BARRA Growth
Index.
RISK FACTORS
Stock Market Risk. The Growth Index Fund is subject to stock market
risk, which is the risk that the value of common stocks in general will decline.
Investment Style Risk. The S&P 500/BARRA Growth Index is comprised of
larger companies which in general are perceived by the stock market to have
higher growth potential. The Growth Index Fund thus focuses on so-called "large
capitalization growth stocks". Changes in investment style may cause these large
capitalization growth stocks to underperform the stock market in general, or
other asset classes.
Tracking Error Risk. There are several reasons why the Fund's
performance may not match the S&P 500/BARRA Growth Index. First, the Fund incurs
administrative expenses and transaction costs in trading stocks. Second, the
composition of the S&P 500/BARRA Growth Index and the stocks held in the Fund
may diverge, due to cash flows into or out of the Fund and changes in the
composition of the index. Third, the timing and magnitude of cash flows into and
out of the Fund may result in temporarily uninvested cash, or may lead to
weightings of stocks held by the Fund which are not precisely the same as in the
S&P 500/BARRA Growth Index.
Futures and Options. If the Fund invests in stock index futures or
options contracts, the Fund will be subject to the risks that:
- the future or option will not fully offset the underlying
positions,
- the Fund cannot sell the future or option because of an illiquid
secondary market, and
- the intended risk management purpose of the future or option may
not be achieved, and may produce losses or missed opportunities.
INFORMATION REGARDING THE INDEX
The Growth Index Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P
makes no representation or warranty, express or implied, to the owners of the
Growth Index Fund or any member of the public regarding the advisability of
investing in securities generally or in the Growth Index Fund particularly or
the ability of the S&P 500/BARRA Growth Index to track general stock market
performance. S&P's only relationship to the Sentinel Funds is the licensing of
certain trademarks and trade names of S&P and the S&P 500/BARRA Growth Index,
which is determined, composed, and calculated without regard to the Growth Index
Fund. S&P has no obligation to take the needs of the Sentinel Funds or the
owners of the Growth Index Fund into consideration in determining, composing or
calculating the S&P 500/BARRA Growth Index. S&P is not responsible for and has
not participated in the determination of the prices at which the Growth Index
Fund shares are sold, the timing of the offering of Growth Index Fund shares, or
the determination of the prices at which Growth Index Fund shares may be
redeemed. S&P has no obligation or liability in connection with the
administration or marketing of the Growth Index Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500/BARRA GROWTH INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE GROWTH
INDEX FUND, OWNERS OF THE GROWTH INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE S&P 500/BARRA GROWTH INDEX OR ANY DATA INCLUDED THEREIN. S&P
MAKES NO EXPRESS OR IMPLIED WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500/BARRA GROWTH INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
PURCHASE OPTIONS
The Growth Index Fund offers both Class A and Class B shares. You can
compare the differences among the Class A shares and the Class B shares using
the table below.
________________________________________________________________________________
TOTAL 12B-1 FEE,
CLASS SALES CHARGE SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
________________________________________________________________________________
A Maximum 2.50% Maximum of Maximum of 0.20% No
initial sales 0.20%
charge
________________________________________________________________________________
B CDSC of up to 0.25% 0.75% Class B Shares
2.50% for a convert to Class
maximum of A Shares
six years automatically
after the
applicable CDSC
period
________________________________________________________________________________
Please see page 27 of the Prospectus for a discussion of things to
think about when choosing which share class to buy.
CLASS A SHARES
For purchases of Class A shares of the Growth Index Fund, you pay the
public offering price, which includes the front-end sales charge, next computed
after we receive your order. The sales charge ranges from 2.50% of the offering
price (2.56% of the net amount invested) to zero, depending on the size of your
purchase, as shown below.
SALES CHARGE AS SALES CHARGE AS A
A PERCENTAGE OF PERCENTAGE OF NET DEALER
SALE SIZE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- ---- ---------------------------------- ----------------- -----------
$0 to $499,999 2.50% 2.56% 2.25%
$500,000 to $999,999 2.00% 2.04% 1.75%
$1,000,000 or more -0- -0- -0-
In cases in which there is no sales charge because your purchase was $1,000,000
or more, the Funds' distributor, Sentinel Financial Services Company, will pay
dealers compensation of 1.00% for sales of up to $4,999,999. In these cases, if
you redeem the shares in the first one year after the purchase, a 1.0% CDSC will
be imposed, and if you redeem in the second year, a 0.5% CDSC will be imposed.
For sales of $5,000,000 or more, Sentinel Financial will individually negotiate
dealer compensation and CDSCs. After the second year, there will be no CDSC. You
can find additional information on this CDSC on page 28 of the Prospectus.
You can receive a reduced sales charge for a number of reasons, as
discussed on pages 28-30 of the Prospectus.
The Class A shares of the Growth Index Fund participate in the
Company's Class A Distribution Plan. This Plan provides for a fee to the
Distributor of the Sentinel Funds at a maximum annual rate of 0.20% of average
daily net assets of the Class A shares of the Growth Index Fund. We will pay
trail commissions to dealers on Class A shares of the Growth Index Fund at an
annual rate of 0.20% of average daily net assets. Additional information on this
Distribution Plan is set forth on page 30 of the Prospectus.
CLASS B SHARES
For purchases of Class B shares of the Growth Index Fund, you pay the
current net asset value. There is no initial sales charge. A CDSC will be
imposed on Class B shares of the Growth Index Fund if you redeem shares during
the CDSC period, unless you can use one of the CDSC waivers listed on page 34 of
the Prospectus. Whether you pay a CDSC upon a redemption and how much it is
depends on the amount of your purchases and the number of years since you made
the purchase. The CDSC schedules for Class B shares of the Growth Index Fund are
shown below:
CDSC PERCENTAGE
---------------
Year Since Purchase Payment Was Made
------------------------------------
PURCHASE AMOUNT 1st 2nd 3rd 4th 5th 6th
- --------------- --- --- --- --- --- ---
Up to $500,000 2.50% 2.50% 2% 1.50% 1.25% 0.50%
$500,000 to $1,000,000 2% 2% 1% 1% - -
The maximum purchase amount for Class B shares is $1,000,000. For additional
information on CDSCs on Class B shares, see page 30 of the Prospectus.
The Class B shares of the Growth Index Fund participate in the
Company's Class B Distribution Plan. This Plan provides for a fee to Sentinel
Financial at a maximum annual rate of 0.75% of average daily net assets of the
Class B shares of the Growth Index Fund. We will pay trail commissions to
dealers on Class B shares at varying rates depending on the overall average
daily net assets in all Class B shares of the Sentinel Funds for which a
particular registered representative is the registered representative of record,
as described on page 31 of the Prospectus. Additional information on this
Distribution Plan is set forth on page 31 of the Prospectus.
Class B shares of the Growth Index Fund automatically convert to Class
A shares of the Growth Index Fund at the end of the applicable CDSC period, in
the same way as the Class B shares of the other Sentinel Funds which offer Class
B shares convert to Class A shares of the same Fund. See page 31 of the
Prospectus.
Sentinel Financial pays selling dealers, at the time you purchase Class
B shares of the Growth Index Fund, an amount equal to 2.50% of your purchase
payment (2.0% in the case of purchases between $500,000 and $1,000,000).
EXCHANGES
Shares of the Growth Index Fund may be exchanged into shares of the
same class of any other Fund, as described on pages 37-38 of the Prospectus, but
only after at least 90 days have elapsed from their purchase, in the case of
purchases initially made in the Growth Index Fund. Shares of other Sentinel
Funds may be exchanged into shares of the same class of the Growth Index Fund,
but not within the first 90 days after the initial purchase of such other
Sentinel Fund shares.
OTHER INFORMATION
For other information on how to buy, sell exchange or transfer shares
of the Sentinel Funds, please see "How to Buy, Sell, Exchange and Transfer
Shares", beginning on page 35 of the Prospectus.
INITIAL MARKETING INCENTIVE
Sentinel Financial will pay to dealers, in addition to the normal
dealer reallowance described above, an amount of 0.25% of investments during the
first 90 days of the Growth Index Fund's operation for which a single registered
representative is the registered representative of record, if the amount of such
investments during the first 90 days of the Growth Index Fund's operation for
which such registered representative is the registered representative of record
is $500,000 or more.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Growth Index Fund pays dividends substantially equivalent to its
net investment income, if any, once per year in December. Distributions of net
realized capital gains, if any, are paid annually in December. Unless you elect
otherwise, your dividends and capital gains distributions will be reinvested
automatically in shares of the same class of the Growth Index Fund.
See "Dividends, Capital Gains and Taxes" on page 40 of the Prospectus.
MANAGEMENT OF THE GROWTH INDEX FUND
The investment advisor to the Growth Index Fund is Sentinel Advisors
Company, which also is the investment advisor to the other Sentinel Funds.
Information on Sentinel Advisors can be found on page 42 of the Prospectus. For
its services as investment advisor, Sentinel Advisors receives from the Growth
Index Fund a fee equal to 0.30% per annum of the average daily value of the net
assets of the Growth Index Fund.
PORTFOLIO MANAGEMENT. Sentinel Advisors uses a team approach in
managing the Sentinel Funds. The Growth Index Fund is managed by Sentinel
Advisors' Equity Growth Team. Information on Sentinel Advisors' team approach to
portfolio management and on the Equity Growth Team can be found on pages 42 and
43 of the Prospectus.
MATTERS NOT RELATING SPECIFICALLY TO THE GROWTH INDEX FUND
World Fund SubAdvisor
Effective July 1, 1999, the sub-advisor to the World Fund changed
from INVESCO Capital Management, Inc. to INVESCO Global Asset Manaement
(N.A.), Inc. These entities are under common control. The terms of the
contract have not changed and the personnel serving the World Fund has not
changed.
EXAMPLES
The numbers below replace the corresponding numbers in the examples shown on
page 13 of the Prospectus.
<TABLE>
<CAPTION>
CLASS B (if you redeem at the end of the period): 1 year 3 years 5 years
<S> <C> <C> <C>
Common Stock $584 $ 869 $1180
Balanced 593 897 1226
Mid Cap Growth 632 1015 1425
Small Company 628 1003 1405
World 628 1003 1405
High Yield 555 780 1029
Bond 587 879 1195
Money Market 480 549 633
CLASS C (if you redeem at the end of the period): 1 year
Common Stock $295
Balanced 321
World 324
High Yield 309
CLASS D (if you redeem at the end of the period): 1 year 3 years 5 years
Balanced $769 $1023 $1302
</TABLE>
PERFORMANCE DATA
The Funds may from time to time include average annual total return
figures in advertisements or other material the Funds send to existing or
prospective shareholders. The Funds calculate these figures by determining the
average annual compounded rates of return that would produce the redeemable
value of the Fund being shown at the end of each period for a given initial
investment. All recurring and nonrecurring expenses are included in the
calculation. It is assumed that all dividends and distributions are reinvested.
In addition, to better illustrate the performance of money already invested in
the Funds, the Funds may also periodically advertise total return without
subtracting sales charges.
The fixed income Funds also may quote yields in advertisements. Yields
are computed by dividing net investment income for a recent 30-day (or one
month) period by the product of the average daily number of shares outstanding
during that period and the maximum offering price per share on the last day of
the period. The result is then annualized. These Funds 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 Tax-Free
Income, New York and Pennsylvania Funds may also include tax-equivalent yields
in advertisements. Tax-equivalent yields increase the yield as calculated above
to make it comparable on an after-tax basis to an investment which produces
taxable income.
The Funds also may compare their performance to relevant indices in
advertisements. The equity Funds may compare their performance to stock indices,
including the Dow Jones Industrial Average, the S&P 500 Index, the S&P 500/BARRA
Growth Index, and the Russell 2000 Index. The World Fund may compare its
performance to the "EAFE" (Europe, Australia, Far East) Index. The High Yield
Fund may compare its performance to the Chase Manhattan Bank Index. The fixed
income Funds may compare their performance to bond or money market indices,
including the Lehman Aggregate Bond Index, Municipal Bond Index, or Government
Bond Index, and Donoghue's Money Fund Report.
The Funds also may refer to rankings and ratings published by
independent tracking services and publications of general interest including
Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar, Donoghue's;
magazines such as Money, Forbes, Kiplinger's Personal Finance Magazine,
Financial World, Consumer Reports, Business Week, Time, Newsweek, U.S. News and
World Report; and other publications such as the Wall Steet Journal, Barron's,
Investor's Daily, and Standard & Poor's Outlook. These ranking services and
publications 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.
<PAGE>
THE SENTINEL FUNDS
Sentinel Common Stock Fund
Sentinel Balanced Fund
Sentinel Mid Cap Growth Fund
Sentinel Small Company Fund
Sentinel World Fund
Sentinel High Yield Bond Fund
Sentinel Bond Fund
Sentinel Government Securities Fund
Sentinel Short Maturity Government Fund
Sentinel U.S. Treasury Money Market Fund
Sentinel Tax-Free Income Fund
Sentinel New York Tax-Free Income Fund
Sentinel Pennsylvania Tax-Free Trust
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
The Securities and Exchange Commission has not approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Prospectus dated March 31, 1999
<PAGE>
Table of Contents
Key Facts About The Sentinel Funds
Details About the Funds' Investment Objectives, Principal Investment Strategies
and Related Risks
Purchase Options
How to Buy, Sell, Exchange and Transfer Shares
How the Funds are Priced
Dividends, Capital Gains and Taxes
Management of the Funds
Financial Highlights
<PAGE>
Key Facts About the Sentinel Funds
What are the main goals and investment strategies of each of the Sentinel
Funds?
This prospectus contains information about the thirteen mutual funds that
comprise the Sentinel Family of Funds. In this prospectus, each Sentinel Fund is
referred to individually as a "Fund". Sentinel Advisors Company is the
investment advisor for each Fund. We cannot guarantee that any Fund will achieve
its goals. A brief description of each Fund follows.
. SENTINEL COMMON STOCK FUND seeks a combination of growth of capital, current
income, growth of income and relatively low risk as compared with the stock
market as a whole, by investing in a diverse group of common stocks of well-
established companies. [PIE CHART APPEARS HERE]
. SENTINEL BALANCED FUND seeks a combination of growth of capital and current
income, with relatively low risk and relatively low fluctuations in value, by
investing in both common stocks and bonds.
. SENTINEL MID CAP GROWTH FUND seeks growth of capital, by focusing its
investments on common stocks of mid sized growing companies. Income is not a
factor in selecting stocks. [PIE CHART APPEARS HERE]
. SENTINEL SMALL COMPANY FUND seeks growth of capital, by investing mainly in
common stocks of small and medium-sized companies that Sentinel Advisors
believes have attractive growth potential and are attractively valued. Income
is not a factor in selecting stocks. [PIE CHART APPEARS HERE]
. SENTINEL WORLD FUND seeks growth of capital, by investing in common stocks of
established non-U.S. companies or in U.S. companies that conduct their business
mainly outside the United States. [PIE CHART APPEARS HERE]
. SENTINEL HIGH YIELD BOND FUND seeks high current income and total return by
investing mainly in lower rated corporate bonds, sometimes called "junk bonds",
that have higher effective interest rates than investment grade bonds. These
lower rated bonds are more speculative and more likely to default than
investment grade bonds. [PIE CHART APPEARS HERE]
. SENTINEL BOND FUND seeks high current income while seeking to control risk by
through investingments mainly in investment grade bonds.
[PIE CHART APPEARS HERE]
. SENTINEL GOVERNMENT SECURITIES FUND seeks high current income while seeking to
control risk by investing mainly in U.S. government bonds.
[PIE CHART APPEARS HERE]
. SENTINEL SHORT MATURITY GOVERNMENT FUND seeks high current income and limited
fluctuations in principal value by investing mainly in a portfolio of U.S.
government bonds with a weighted average maturity of three years or less.
[PIE CHART APPEARS HERE]
. SENTINEL U.S. TREASURY MONEY MARKET FUND seeks as high a level of current
income as is consistent with stable principal values, by investing solely in
short-term direct obligations of the U.S. Treasury. [PIE CHART APPEARS HERE]
. SENTINEL TAX-FREE INCOME FUND seeks high current income exempt from federal
income taxes while seeking to control risk by investing mainly in investment
grade municipal bonds. [PIE CHART APPEARS HERE]
<PAGE>
. SENTINEL NEW YORK TAX-FREE INCOME FUND seeks high current income exempt from
federal income tax and New York State and City personal income taxes, while
seeking to control risk, by investing in investment grade municipal bonds of New
York issuers. [PIE CHART APPEARS HERE]
. SENTINEL PENNSYLVANIA TAX-FREE TRUST seeks high current income exempt from
federal and Pennsylvania income taxes, while seeking to control risk, by
investing in investment grade municipal bonds of Pennsylvania issuers.
[PIE CHART APPEARS HERE]
What are the main risks of investing in the Funds?
Investment in each Fund is subject to certain risks. Some of the risk factors
described below affect more than one Fund; others are specific to certain Funds.
More information on each Fund's risk factors is described under "Details About
the Funds' Investment Objectives, Principal Investment Strategies, and Related
Risks".
EQUITY FUND RISKS
The value of all equity funds, including the Common Stock Fund, the Balanced
Fund, the Mid Cap Growth Fund, the Small Company Fund and the World Fund, may go
up or down as the prices of the stocks held by the Funds go up or down. Changes
in value may occur because the U.S. or other stock markets are rising or
falling, or due to business developments or other factors that affect the value
of particular companies. If the value of the stocks held in these Funds goes
down, you may lose money. The stocks of smaller companies may be subject to
greater changes in value than stocks of larger, more established companies,
because they generally have more limited financial resources, narrower product
lines, and may have less seasoned managers. In addition, small company stocks
may trade less frequently and in lower share volumes, which could contribute to
wider price fluctuations.
Because the World Fund invests mainly in foreign countries, it is subject to
additional risks. The World Fund's foreign stock investments may go up or down
in value depending on foreign stock markets which may be rising or falling,
fluctuations in foreign exchange rates, foreign political and economic
developments and U.S. and foreign laws relating to foreign investment. Non-U.S.
securities also may be less liquid, more volatile and harder to value than U.S.
securities. If the value of the stocks held by the World Fund go down, you may
lose money.
FIXED INCOME FUND RISKS
The High Yield, Bond, Government Securities, Short Maturity Government, Tax-Free
Income, New York and Pennsylvania Funds, and the bond portion of the Balanced
Fund, primarily in bonds. Bonds are subject to several types of risk. A
bond's issuer may default on payments of interest or repayments of principal.
The market also may judge that the odds that an issuer of bonds could
default in the future have increased. Interest rates available in the market may
increase, which would reduce the present value of the fixed payments to be
received from outstanding bonds. Any of these factors could cause the value of
bonds held by these Funds to fall. If the value of the portfolio investments
falls you could lose money.
<PAGE>
U.S. government bonds are very unlikely to default or to decline in credit
quality. However, the value of U.S. government bonds generally will rise if
interest rates fall, and fall if interest rates rise. The longer the remaining
term of a bond, the more its value will tend to fluctuate as interest rates
change. As a result, the Short Maturity Government Fund is subject to the least
risk of the fixed-income Funds, since it invests mainly in U.S. government
securities with relatively shorter maturities. However, the value of the shares
of the Short Maturity Government Fund will fluctuate, and you can lose money in
this Fund. The Government Securities Fund also faces very little credit quality
risk, but since it invests in longer term securities, it faces more interest
rate risk than the Short Maturity Government Fund. Both of these Funds, as well
as the Bond Fund and the bond portion of the Balanced Fund, also invest in
mortgage-backed securities, which have varying rates of principal repayments.
When interest rates fall, mortgage prepayments generally increase, which may
cause mortgage-backed securities to lose value. To the extent these Funds invest
in mortgage-backed securities, they also are subject to extension risk.
Extension risk is the possibility that when interest rates rise, prepayments
occur at a slower than expected rate. In that event, a security that was
considered short or intermediate-term at the time of purchase may effectively
become a long-term security. Long-term securities generally tend to fluctuate
more widely in response to changes in interest rates than shorter-term
securities.
Corporate and municipal bonds, in which the High Yield, Bond, Tax-Free Income,
New York and Pennsylvania Funds, and the bond portion of the Balanced Fund
invest, are subject to default risk, or credit quality risk, as well as interest
rate risk. Generally, the degree of default risk is reflected in the ratings of
the securities. Investment grade rated securities generally are less subject to
default risk than, for example, the lower rated securities in which the High
Yield Fund invests. While any corporate or municipal security is subject to the
risk of default, the lower the rating of a bond the more speculative it is and
the more likely it is that the issuer may default or the security may be
downgraded.
The High Yield Fund involves significantly more risk than the other fixed-income
Funds, since it primarily invests in lower rated bonds while the other Funds
primarily invest in higher quality bonds. In addition to greater default risk,
lower rated bond values experience greater fluctuations in value for several
other reasons. An economic downturn is more likely to affect the ability of
issuers who are less financially strong to make their bond payments. There may
be less active trading in lower rated bond issues, and lower rated bond prices
are more responsive to negative publicity or changes in investor perceptions.
The risk of loss if a lower rated bond defaults also may also be greater than
for investment grade bonds because lower rated bonds are more likely to be
unsecured and may be subordinated to other creditors.
Because the New York and Pennsylvania Funds invest only in bonds of issuers in a
single state, these Funds are more susceptible to the risk factors affecting
municipal issuers in those states than funds which are more diversified
geographically. These Funds are more sensitive to changes in the economic
condition and governmental policies of their single states. For example, the
economic condition of a single significant industry within one of these states
may impact municipal issuers in that state or that state's revenues.
MONEY MARKET FUND
The Money Market Fund invests only in short-term securities issued directly by
the U.S. Treasury. The Fund is designed to maintain a stable net asset value,
and declare daily dividends. An investment in the Money Market Fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Money Market Fund.
Risk/Return Bar Charts
The bar charts and tables shown below for each of the Funds provide indications
of the risks of investing in each Fund. The bar charts shows changes in each
Fund's performance for Class A shares for each calendar year over a ten year
period, or for a shorter period for those Funds that have been in existence for
less than ten years.
Sales charges are not reflected in the bar charts. If sales charges were
reflected, returns would be less than those shown. The tables on page __
compares the average annual total returns for each class of each Fund's shares
for one, five and ten years with those of an appropriate broad-based securities
market index. How each Fund performed in the past is not necessarily an
indication of how that Fund will perform in the future.
Sentinel Common Stock, Fund
<TABLE>
<CAPTION>
Sentinel Common Stock
- ---------------------
Inception: 1934
Total Return (%)
- ----------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
27.6 (2.7) 30.4 5.8 9.3 (1.2) 34.4 20.8 27.9 14.0
- ----------------------------------------------------------------------------------
</TABLE>
During the 10 year period shown in the above bar chart, the highest return for a
quarter for the Common Stock Fund was 16.5% (quarter ended December, 1998) and
the lowest return for a quarter was (11.7%) (quarter ended September,
1998).
<PAGE>
Sentinel Balanced Fund
[GRAPH APPEARS HERE]
Sentinel Balanced
- ----------------------
Inception: 1938
Total return (%)
- -------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------
19.4 1.9 23.3 6.2 9.6 (3.6) 25.2 12.1 20.6 11.9
- -------------------------------------------------------------------------
During the 10 year period shown in the above bar chart, the highest return for a
quarter for the Balanced Fund was 9.9% (quarter ended December, 1998) and the
lowest return for a quarter was (6.5)% (quarter ended September, 1990).
Sentinel Mid Cap Growth Fund
[GRAPH APPEARS HERE]
Sentinal Mid Cap Growth*
- -----------------------
Inception: 1969
Total return (%)
- ----------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------
26.9 0.51 26.2 6.0 3.3 (7.5) 26.0 18.2 32.1 15.7
- ----------------------------------------------------------------------------
During the 10 year period shown in the above bar chart, the highest return for a
quarter for the Growth Fund was 25.1% (quarter ended December, 1998) and the
lowest return for a quarter was (14.7)% (quarter ended September, 1990).
* Known as Sentinel Growth Fund prior to March 31, 1999.
Sentinel Small Company Fund
[GRAPH APPEARS HERE]
Sentinel Small Company
- ----------------------
Inception: 1993
Total return (%)
- ----------------------------------------------
1994 1995 1996 1997 1998
- ----------------------------------------------
0.1 12.5 21.3 21.2 7.2
- ----------------------------------------------
<PAGE>
During the 5 year period shown in the above bar chart, the highest return for a
quarter for the Small Company Fund was 18.3% (quarter ended December, 1998) and
the lowest return for a quarter was (15.3%) (quarter ended September, 1998).
Sentinel World Fund
[GRAPH APPEARS HERE]
Sentinel World
- ---------------
Inception: 1993
Total return (%)
- ------------------------------------
1994 1995 1996 1997 1998
- ------------------------------------
1.1 14.0 11.9 14.2 10.3
- ------------------------------------
During the 5 year period shown in the above bar chart, the highest return for a
quarter for the World Fund was 14.1% (quarter ended March, 1998) and the lowest
return for a quarter was (14.9)% (quarter ended September, 1998).
Sentinel High Yield Fund
[GRAPH APPEARS HERE]
Sentinel High Yield
- -------------------
Inception: 1997
Total Return (%)
- ----------------
1998
- -----
1.1
- -----
During the 1 year period shown in the above bar chart, the highest return for a
quarter for the High Yield Fund was 5.1% (quarter ended March, 1998) and the
lowest return for a quarter was (6.6)% (quarter ended September, 1998).
<PAGE>
Sentinel Bond Fund
[GRAPH APPEARS HERE]
Sentinel Bond
- ---------------
Inception: 1969
Total return (%)
- ----------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------
12.5 7.2 18.0 7.7 12.4 (4.9) 19.9 1.9 8.6 7.6
- ----------------------------------------------------------------------------
During the 10 year period shown in the above bar chart, the highest return for a
quarter for the Bond Fund was 7.3% (quarter ended June, 1989) and the lowest
return for a quarter was (3.8)% (quarter ended March, 1994).
Sentinel Government Securities Fund
[GRAPH APPEARS HERE]
Sentinel Gov. Sec.
- ------------------
Inception: 1986
Total return (%)
- ----------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------
12.6 9.2 15.2 7.4 9.3 (4.4) 19.0 0.08 9.3 9.1
- ----------------------------------------------------------------------------
During the 10 year period shown in the above bar chart, the highest return for a
quarter for the Government Securities Fund was 5.7% (quarter ended June, 1995)
and the lowest return for a quarter was (3.6)% (quarter ended March, 1994).
Sentinel Short Maturity Government Fund
[GRAPH APPEARS HERE]
Sentinel Short Maturity Gov.
- ----------------------------
Inception: 1986
Total return (%)
- -------------------------------------
1996 1997 1998
- -------------------------------------
4.6 6.8 6.3
- -------------------------------------
<PAGE>
During the 3 year period shown in the above bar chart, the highest return for a
quarter for the Short Maturity Government Fund was 2.5% (quarter ended June,
1997) and the lowest return for a quarter was (0.01)% (quarter ended March,
1996)
Sentinel US Treasury Money Market Fund
Sentinel US Treasury Money Market
- ---------------------------------
Inception: 1993
Total Return (%)
- --------------------------------------
1994 1995 1996 1997 1998
- --------------------------------------
3.3 5.0 4.5 4.6 4.5
- --------------------------------------
During the 5 year period shown in the above bar chart, the highest return for a
quarter for the U.S Treasury Money Market Fund was 1.3% (quarter ended December,
1995) and the lowest return for a quarter was 0.6% (quarter ended March, 1994).
Sentinel Tax-Free Income Fund
Sentinel Tax-Free Income
- ------------------------
Inception: 1990
Total Return (%)
- --------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------
12.1 9.0 12.7 (5.3) 15.3 2.6 9.3 5.8
- --------------------------------------------------------------------
[GRAPH APPEARS HERE]
During the 8 year period shown in the above bar chart, the highest return for a
quarter for the Tax-Free Income Fund was 6.2% (quarter ended September, 1995)
and the lowest return for a quarter was (4.9)% (quarter ended March, 1994).
<PAGE>
Sentinel NY Tax-Free Income Fund
Sentinel NY Tax-Free Income
- ---------------------------
Total return (%)
Inception: 1995
- -----------------------------------
1996 1997 1998
- -----------------------------------
3.0 10.4 6.8
- -----------------------------------
[GRAPH APPEAR HERE]
During the 3 year period shown in the above bar chart, the highest return for a
quarter for the New York Tax-Free Income Fund was 4.1% (quarter ended June,
1997) and the lowest return for a quarter was (2.2)% (quarter ended March,
1996).
Sentinel PA Tax-Free Trust
Sentinel PA Trust
- -----------------
Total return (%)
Inception:
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
8.5 5.9 10.3 9.4 9.7 (4.9) 14.2 3.4 8.6 5.0
- --------------------------------------------------------------------------------
[GRAPH APPEAR HERE]
During the 10 year period shown in the above bar chart, the highest return for a
quarter for the Pennsylvania Tax-Free Trust was 5.7% (quarter ended June, 1989)
and the lowest return for a quarter was (4.3)% (quarter ended March, 1994).
Average Annual Total Returns
The tables below show the average annual total returns that were achieved by
each class of shares of each Fund for the year ended December 31, 1998, the 5
years ended December 31, 1998, and the 10 years ended December 31, 1998, unless
the Fund or class of shares did not exist for a full time period (in that case,
average annual total returns since inception are shown). All returns include
the effect of the maximum sales charges, including any contingent deferred sales
charge that would apply to a redemption at the end of the period, in the case
of the Class B and Class C shares. An appropriate broad-based securities market
index is also included for each Fund.
<PAGE>
Past Past Past 10 Years/
One Year 5 Years Since Inception
--------- ------- ---------------
Common Stock Fund Class A 8.30 17.31 15.35
S&P 500 Index 28.72 24.09 19.22
Common Stock Fund Class B 9.11 17.82(1)
S&P 500 Index 28.72 28.72
Common Stock Fund Class C
Balanced Fund Class A 6.29 11.65 11.72
Lehman Aggregate Bond Index 8.69 7.27 9.27
S&P 500 Index 28.72 24.09 19.22
Balanced Fund Class B 7.04 12.60(1)
Lehman Aggregate Bond Index 8.69 8.69
S&P 500 Index 28.72 28.72
Balanced Fund Class C*
Balanced Fund Class D**
Mid Cap Growth Fund Class A 9.93 14.87 13.43
S&P 500 Index 28.72 24.09 19.22
Mid Cap Growth Fund Class B*
Small Company Fund Class A 1.81 11.00 11.45(2)
Russell 2000 Index (2.24) 11.90 13.24
Small Company Fund Class B 2.22 11.69(1)
Russell 2000 Index (2.24) 10.79
World Fund Class A 4.80 9.08 13.13(2)
Morgan Stanley 20.33 9.50 12.90
International "EAFE" (Europe,
Australia, Far East) Index
World Fund Class B 5.23 9.83(1)
Morgan Stanley 20.33 9.04
International "EAFE" (Europe,
Australia, Far East) Index
World Fund Class C*
High Yield Bond Fund Class A (2.99) 3.76(3)
Lehman High Yield Index 1.87 5.54
High Yield Bond Fund Class B (3.24) 2.11(3)
Lehman High Yield Index 1.87 5.54
*No information is provided for the Class C shares of the Common Stock,
Balanced, World and High Yield Funds and the Class B shares of the Mid Cap
Growth Fund because those classes began operations less than one year prior to
December 31, 1998.
**No information is provided for the Class D shares of the Balanced Fund because
that class began operations on January 4, 1999.
<PAGE>
Past Past Past 10 Years/
One Year 5 Years Since Inception
-------- ------- ---------------
Bond Fund Class A 3.30 5.41 8.41
Lehman Aggregate Bond Index 8.69 7.27 9.29
Bond Fund Class B 2.45 11.69(1)
Lehman Aggregate Bond Index 8.69 8.69
Government Securities Fund Class A 4.75 5.59 8.11
Lehman Government Bond Index 9.85 7.18 9.17
Short Maturity Government Fund Class A 5.20 6.34(4)
Lehman 1-3 Yr. Gov't Bond Index 6.96 6.91
U.S. Treasury Money Market Fund Class A 4.5 4.4 4.0 (2)
U.S. Treasury Money Market Fund Class B 4.6 (1)
Lipper US Treasury Money Market Funds 4.77 5.13 5.40
Tax-Free Income Fund Class A 1.60 4.46 7.18(5)
Lehman Municipal Bond Index 6.48 6.22 8.32
New York Fund Class A 2.52 6.57(6)
Lehman Municipal Bond Index 6.48 7.91
Pennsylvania Fund Class A 0.79 4.20 6.45
Lehman Municipal Bond Index 6.48 6.22 8.22
(1) From inception on April 1, 1996.
(2) From inception on March 1, 1993.
(3) From inception on June 23, 1997.
(4) From inception on March 24, 1995.
(5) From inception on October 1 1990.
(6) From inception on March 27, 1995.
<PAGE>
Fees and Expenses
These tables describe the fees and expenses that you pay if you buy and hold
shares of the Funds:
Shareholder Fees (fees paid directly from your investment):
Class A Shares (available for all Funds):
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price) --
Common Stock, Balanced, Mid Cap 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
Maximum Deferred Sales Charge (Load) None/1/
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......None
Redemption Fees...................................................None/1/
Exchange Fees.....................................................None/2/
- ------------
/1/If you redeem by wire transfer, we assess a wire charge of $25.00. In
addition, you pay a deferred sales charge of up to 1% on certain
redemptions of Class A shares made within two years of purchase if you
bought them without an initial sales charge as part of an investment of
$1,000,000 or more.
/2/If you exchange Class A shares of the Money Market Fund for Class A shares
of another Fund, and you did not acquire the Money Market Fund shares in an
exchange from another Fund's Class A shares, then you pay a sales charge
equal to the sales charge imposed on new purchases of the new Fund.
Class B Shares (available for the Common Stock, Balanced, Mid Cap Growth, Small
Company, World, High Yield, Bond and Money Market Funds)
Maximum Sales Charge (Load) Imposed on Purchases......................... None
Maximum Deferred Sales Charge (Load) (as a percentage of the lower
of the purchase price or net asset value of shares being redeemed) .. . 4.00%
maximum/3/
Maximum Sales Charge (Load) Imposed on Reinvested Dividends............. None
Exchange Fees........................................................... None
- ------------
/3/ The maximum deferred sales charge imposed on shares redeemed in the first
year after purchase. For shares held longer than one year, the deferred
sales charge declines.
Class C Shares (available for the Common Stock, Balanced, World and High Yield
Funds):
Maximum Sales Charge (Load) Imposed on Purchases......................... None
Maximum Deferred Sales Charge (Load) (as a percentage of the lower
of the purchase price or net asset value of shares being redeemed) .... 1.00%
for one year after purchase
Maximum Sales Charge (Load) Imposed on Reinvested Dividends..............None
Exchange Fees........................................................... None
Class D Shares (available for the Balanced Fund only)
Maximum Sales Charge (Load) Imposed on
Purchases......................................................... ..... None
Maximum Deferred Sales Charge (Load) (as a percentage of the lower of the
purchase price or net asset value of shares being redeemed) .....6.00% maximum
/4/
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.... None
Exchange Fees.................................................. None
- ------------
/4/The maximum deferred sales charge is imposed on shares redeemed in the first
two years after purchase. For shares held longer than two years, the deferred
sales charge declines.
<PAGE>
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A:
COMMON MID CAP SMALL
STOCK BALANCED GROWTH COMPANY WORLD
------- ------------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Management Fees........................ 0.55% 0.61% 0.61% 0.61% 0.61%
Rule 12b-1 Fees (includes service fee
and distribution fee)................. 0.30 0.30 0.30 0.30 0.30
Other Expenses:
Accounting and Administrative
Costs............................... 0.03 0.03 0.03 0.03 0.03
Other................................ 0.14 0.19 0.35 0.39 0.32
Total Other Expenses................... 0.17 0.22 0.38 0.42 0.35
------ ------ ------- ------- -------
Total Fund Operating Expenses.......... 1.02% 1.13% 1.29% 1.33% 1.26%
====== ====== ======= ======= =======
<CAPTION>
HIGH GOVERNMENT SHORT MATURITY
YIELD BOND SECURITIES GOVERNMENT
------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Management Fees........................ 0.75% 0.53% 0.53% 0.53%
Rule 12b-1 Fees (includes service fee
and distribution fee)................. 0.20 0.20 0.20 0.35
Other Expenses:
Accounting and Administrative
Costs............................... 0.03 0.03 0.03 0.03
Other................................ 0.30 0.19 0.23 0.21
Total Other Expenses................... 0.33 0.22 0.26 0.24
------ ----------- ---------- ------------
Total Fund Operating Expenses.......... 1.28% 0.95%(a) 0.99%(a) 1.12%(a)
====== =========== ========== ============
<CAPTION>
MONEY TAX FREE NEW YORK PENNSYLVANIA
MARKET INCOME TAX FREE TAX FREE
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Management Fees........................ 0.40% 0.53% 0.53% 0.55%
Rule 12b-1 Fees (includes service fee
and distribution fee)................. None 0.20 0.20 0.20
Other Expenses:
Accounting and Administrative
Costs............................... 0.03 0.03 0.03 0.24
Other................................ 0.30 0.16 0.25 0.32
Total Other Expenses................... 0.33 0.19 0.28 0.56
--------
Total Fund Operating Expenses.......... 0.73% 0.92%(a) 1.01%(a) 1.31%(a)
======== ========== =============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS B: COMMON SMALL MID CAP
STOCK BALANCED COMPANY GROWTH
<S> <C> <C> <C> <C>
Management Fees........................ 0.55% 0.61% 0.61% 0.61%
Rule 12b-1 Fees (includes service fee
and distribution fee)................. 1.00 1.00 1.00 1.00
Other Expenses:
Accounting and Administrative
Costs............................... 0.03 0.03 0.03 0.03
Other................................ 0.23 0.26 .61 0.65
Total Other Expenses................... 0.26 0.29 .64 0.68
------ ------- ------- -------
Total Fund Operating Expenses.......... 1.81% 1.90% 2.25% 2.29%
====== ======= ======= =======
<CAPTION>
HIGH
WORLD YIELD BOND BOND MONEY MARKET
------ --------- --------- ------------
<S> <C> <C> <C> <C>
Management Fees........................ 0.61% 0.75% 0.53% 0.40%
Rule 12b-1 Fees (includes service fee
and distribution fee)................. 1.00 0.56 1.00 None
Other Expenses:
Accounting and Administrative
Costs............................... 0.03 0.03 0.03 0.03
Other................................ 0.61 0.18 0.28 0.35
Total Other Expenses................... 0.64 0.21 0.31 0.38
------ --------- ------- -------
Total Fund Operating Expenses.......... 2.25% 1.52% 1.84(a) 0.78%
====== ========= ========= =======
CLASS C:
<CAPTION>
COMMON HIGH
STOCK BALANCED WORLD YIELD BOND
--------- -------- ------ ------
<S> <C> <C> <C> <C>
Management Fees........................ 0.55% .61% 0.61% 0.75%
Rule 12b-1 Fees (includes service fee
and distribution fee)................. 1.00 1.00 1.00 1.00
Other Expenses:
Accounting and Administrative
Costs............................... 0.03 0.03 0.03 0.03
Other................................ 0.34 0.54 0.57 0.28
Total Other Expenses................... 0.37 0.57 0.60 0.31
------ -------- ------ ------
Total Fund Operating Expenses.......... 1.92% 2.18% 2.21% 2.06%
====== ======== ====== ======
</TABLE>
<PAGE>
CLASS D:
BALANCED
--------
Management Fees 0.61 %
Rule 12b-1 Fees (includes service fee & distribution fee) 0.75 %
Other Expenses:
Accounting and Administrative Costs 0.03 %
Other 0.27 %
Total Other Expenses 0.30 %
-------
Total Fund Operating Expenses 1.66 %
=======
_____________________________
(a) Current Expense Ratios
The above expense ratios do not reflect waivers or reimbursements of expenses by
Sentinel Advisors.
Currently Sentinel Advisors voluntarily waives or reimburses the expenses of the
Funds shown below to the extent necessary to cap expense ratios at the amounts
shown. These waivers or reimbursements will continue at least until November 30,
1999.
Bond Fund Class A shares......................................... 0.76%
Government Securities Fund Class A shares........................ 0.83%
Short Maturity Government Fund Class A shares.................... 0.77%
Tax-Free Income Fund Class A shares.............................. 0.73%
Pennsylvania Fund Class A shares................................. 0.69%
New York Fund Class A shares..................................... 0.00%
Because the Bond Fund also has Class B shares, the waiver of advisory fees of
the Bond Fund also benefits the Class B shares of the Bond Fund. The Class B
shares of the Bond Fund will experience the same reduced effective advisory
fee rate as the Class A shares of the Bond Fund. Sentinel Advisors intends to
reset these expense caps annually to amounts approximately equal to 90% of the
average expense ratios of the Class A shares of the Funds' peer groups (except
that in the case of the Short Maturity Government Fund, the expense cap is to be
increased by approximately 0.15% to take that Fund's higher Rule 12b-1 fee into
account). However, these arrangements may be changed or terminated at any time
after November 30, 1999.
<PAGE>
Examples:
These examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in each Fund for the time periods
indicated, that you pay the maximum sales charge that applies to a particular
class, that the Fund's operating expenses remain the same, and that your
investment has a 5% return each year. This assumption is not meant to indicate
that you will receive a 5% annual rate of return. Your annual return may be more
or less than the 5% used in these examples. Although your actual costs may be
higher or lower, based on these assumptions your costs would be as shown below.
NOTE THAT THE AMOUNTS SHOWN DO NOT REFLECT ANY OF THE WAIVERS OR REIMBURSEMENTS
THAT LIMIT EXPENSE RATIOS TO THE LEVELS SHOWN IN FOOTNOTE (A) ON PAGE 12.
<TABLE>
<CAPTION>
Class A: 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock .................................. $ 599 $ 808 $ 1035 $ 1685
Balanced ...................................... 609 841 1091 1806
Growth ........................................ 625 889 1172 1979
Small Company ................................. 629 900 1192 2021
World ......................................... 622 880 1157 1946
High Yield .................................... 525 790 1074 1883
Bond .......................................... 493 691 904 1520
Government Securities ......................... 497 703 925 1564
Short Maturity Government ..................... 213 452 711 1450
Money Market .................................. 75 233 406 906
Tax-Free Income ............................... 490 682 889 1486
New York ...................................... 499 709 936 1587
Pennsylvania .................................. 528 799 1089 1916
<CAPTION>
Class B (if you redeem at the end of the period):
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock .................................. $ 224 $ 599 $ 1000 $ 1728
Balanced ...................................... 233 627 1046 1838
Growth ........................................ 272 745 1245 2143
Small Company ................................. 268 733 1225 2140
World ......................................... 268 733 1225 2105
High Yield .................................... 195 510 849 1689
Bond .......................................... 227 609 1015 1710
Money Market .................................. 120 279 453 939
<CAPTION>
Class B (if you do not redeem):
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock .................................. $ 184 $ 569 $ 980 $ 1728
Balanced ...................................... 193 597 1026 1838
Growth ........................................ 232 715 1225 2143
Small Company ................................. 228 703 1205 2140
World ......................................... 228 703 1205 2105
High Yield .................................... 155 480 829 1689
Bond .......................................... 187 579 995 1710
Money Market .................................. 80 249 433 939
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class C: (if you redeem at the end of the period)
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock .................................... $ 205 $ 603 $ 1037 $ 2243
Balanced ........................................ 231 682 1169 2513
World ........................................... 234 691 1185 2544
High Yield ...................................... 219 646 1108 2390
<CAPTION>
Class C (if you do not redeem):
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Common Stock .................................... $ 195 $ 603 $ 1037 $ 2243
Balanced ........................................ 221 682 1169 2513
World ........................................... 224 691 1185 2544
High Yield ...................................... 209 646 1108 2390
<CAPTION>
Class D: (if you redeem at the end of the period)
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced $ 229 $ 573 $ 942 $ 1696
<CAPTION>
Class D: (if you do not redeem) 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced $ 169 $ 523 $ 902 $ 1696
</TABLE>
<PAGE>
Details About the Funds' Investment Objectives, Principal Investment Strategies,
and Related Risks
Each Fund has distinct investment objectives and policies. Investment objectives
are fundamental policies of each Fund that may only be changed by a majority
vote of the outstanding shares of that Fund. We cannot guarantee that these
objectives will be achieved.
Each Fund's investment objectives and policies are described in this section. A
general discussion of the Funds' investment policies and associated risks
follows.
THE COMMON STOCK FUND INVESTS IN COMMON STOCKS OF WELL-ESTABLISHED COMPANIES
. THE COMMON STOCK FUND seeks a combination of growth of capital, current
income, growth of income, and relatively low risk as compared with the stock
market as a whole. It seeks this goal by investing mainly in a diverse group of
common stocks of well-established companies, most of which pay regular
dividends. Sentinel Advisors tries to select stocks of leading companies that
are financially strong and are selling at attractive prices in relation to their
values. When appropriate, the Fund also may invest in preferred stocks or
debentures convertible into common stocks.
THE BALANCED FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS
. THE BALANCED FUND seeks a combination of growth of capital and current income,
with relatively low risk and relatively low fluctuations in value. It seeks this
goal by investing in common stocks similar to those in the Common Stock Fund and
in investment grade bonds similar to those in the Bond Fund, with at least 25%
of its assets in bonds. When determining this percentage, convertible bonds
and/or preferred stocks are considered common stocks, unless these securities
are held primarily for income. Sentinel Advisors will divide the Fund's assets
among stocks and bonds based on whether it believes stocks or bonds offer a
better value at the time. More bonds normally enhance price stability, and more
stocks usually enhance growth potential.
THE MID CAP GROWTH FUND INVESTS IN STOCKS OF MID-SIZED GROWING COMPANIES
. THE MID CAP GROWTH FUND seeks growth of capital by focusing its investments on
common stocks of mid-sized growing companies. Sentinel Advisors tries to invest
in companies with favorable growth potential with attractive pricing in relation
to this growth potential, and experienced and capable managements. The Fund will
invest at least 65% of its assets in stocks whose market capitalizations are
within the range of the stocks comprising the Standard & Poors 400 Midcap Index.
Income is not a factor in selecting investments.
Sentinel Advisors emphasizes stocks it believes to have superior potential for
growth, rather than wide diversification. The Fund may invest up to 25% of its
assets in stocks of companies within a single industry. The Fund is actively
managed. It is possible that the Fund's turnover rate may exceed 100% annually.
High turnover would cause the Fund to incur higher trading costs, including more
brokerage commissions. It may also cause the Fund to recognize capital gains and
capital losses for tax purposes earlier than it would if its turnover rate was
lower.
<PAGE>
THE SMALL COMPANY FUND INVESTS IN STOCKS OF SMALL AND MEDIUM-SIZED COMPANIES.
. THE SMALL COMPANY FUND seeks growth of capital, by investing mainly in common
stocks of small and medium-sized companies that Sentinel Advisors believes have
attractive growth potential and are attractively valued. Income is not a factor
in selecting stocks. The Fund invests at least 65% of its assets in stocks of
companies with market capitalizations of less than $2 billion, and the median
market capitalization of the Fund's holdings is less than $1 billion. Market
capitalization is the total value of all the outstanding shares of common stock
of a company. Up to 25% of the Fund's assets may be invested in securities
within a single industry.
The Small Company Fund's policy is to avoid short-term trading. However, the
Fund may sell a security without regard to its holding period if Sentinel
Advisors believes it is in the Fund's best interest to do so. The Fund's
turnover rate is not expected to exceed 100% annually. The Fund is intended for
long-term investors willing to accept more risk in order to seek above-average
gains.
THE WORLD FUND INVESTS IN STOCKS OF NON-U. S. COMPANIES.
. THE WORLD FUND seeks growth of capital, by investing mainly in common stocks
of established non-U.S. companies, or in U.S. companies that conduct their
business mainly outside the United States. INVESCO Capital Management, Inc.
manages the World Fund under a sub-advisory arrangement. The World Fund will
normally spread its assets over many different countries, and will normally not
concentrate its investments in any one country. The Fund generally will not
invest more than 25% of its assets in any one country, but the Fund may invest
up to 40% of its assets in any one country if INVESCO feels that economic and
business conditions make it appropriate to do so.
The Fund focuses its investments on developed foreign countries, but may invest
up to 5% of its assets in emerging markets. It normally will have substantial
investments in European countries. See page ___ for a discussion of the
European Economic and Monetary Union.
Normally, at least 75% of the Fund's total assets are invested in securities of
non-U.S. issuers selected by INVESCO mainly for their long-term capital growth
prospects. The remaining 25% may be invested in companies organized in the
United States that have at least 50% of their assets and/or revenues outside the
United States. The Fund also may also invest in convertible or debt securities
rated Baa or higher by Moody's Investors Service, Inc. or BBB or higher by
Standard & Poor's.
The majority of the Fund's trading of stocks will occur on established stock
exchanges or in the over-the-counter markets in the countries in which
investments are being made. The Fund also expects to purchase American
Depositary Receipts, and European Depositary Receipts in bearer form, which are
designed for use in European securities markets. ADRs are traded on U.S.
exchanges or in the U.S. over-the-counter markets, and represent foreign stocks.
To expedite settlement of portfolio transactions and minimize currency value
fluctuations, the Fund may purchase foreign currencies and/or engage in forward
foreign currency transactions. Normally, however, the Fund does not hedge its
foreign currency exposure.
You should note that investing in foreign stocks involves some risks which
normally are not associated with investing in U.S. securities, including those
described on page below.
THE HIGH YIELD BOND FUND INVESTS IN LOWER RATED CORPORATE BONDS
. THE HIGH YIELD BOND FUND seeks high current income and total return by
investing mainly in lower rated corporate bonds, sometimes called "junk bonds".
The High Yield Fund is managed by a sub-advisor, Evergreen Investment Management
Company. The High Yield Fund will normally invests at least 80% of its total
assets in lower rated bonds. These bonds, because of the greater possibility
that the issuers will default, are not investment grade - that is, they are
rated below BBB by Standard & Poor's or below Baa by Moody's, or are unrated but
considered by Evergreen to be of comparable credit quality). The High Yield Fund
may invest in debt securities of any maturity. No more than 25% of the High
Yield Fund's assets are will be invested in a single industry and no more than
5% of its assets in a single issuer. Lower rated debt securities and their
associated risks are described in more detail and the risks inherent in
investing in them are discussed on page .
The High Yield Fund also may also invest up to 20% of its total assets in common
stocks, usually as a result of warrants associated with its bond holdings, but
also, under certain circumstances, to seek capital appreciation. The Fund also
may also invest in bonds convertible into common stock. If the Fund receives
common stock in exchange for defaulted bonds in a corporate reorganization, the
Fund will treat this common stock as a new investment. If this new investment
would not be permitted under this restriction, then common stock in an amount at
least equal to the amount of the new investment will be promptly sold.
The High Yield Fund, when aggregated with the holdings of other mutual funds
advised by Evergreen, will not own more than 20% of the outstanding debt
securities of any issuer.
The High Yield Fund may invest up to 15% of its net assets in illiquid
securities. The Fund will not be able to readily resell illiquid securities and
resale of some of these securities may be restricted by law or contractual
provisions. The inability to sell these securities at the most opportune time
may cause the net asset value of the Fund to go down.
The High Yield Fund may invest in corporate loans made by banks or other
financial institutions. The Fund may not be readily able to resell some of
these corporate loans and they may be subject to restrictions on resale. If so,
they would be subject to the Fund's limitation on illiquid securities. The
value of a corporate loan will depend mainly on the borrower's ability to repay
its debts. The High Yield Fund will invest in a corporate loan only if, in
Evergreen's judgment, the borrower is capable of repaying the loan. However,
Evergreen does not have any set minimum credit rating criteria regarding these
borrowers. Evergreen will monitor the creditworthiness of the borrowers of
corporate loans in which the High Yield Fund invests, but there can be no
assurance that Evergreen will recognize factors that might ultimately impair the
value of a corporate loan in time to protect the High Yield Fund from loss.
The High Yield Fund may invest up to 25% of net assets in the securities of
foreign issuers, if they are denominated in U.S. dollars and are purchased and
held by the High Yield Fund in the United States. You should note that investing
in foreign securities involves certain special risk considerations which
normally are not associated with investing in U.S. securities, including those
described on page .
<PAGE>
The High Yield Fund does not expect to invest in futures and options, or other
derivatives contracts during the coming year. However, if derivative securities
are developed which permit effective hedging of a lower quality bond portfolio,
the High Yield Fund may, for hedging purposes only, buy or sell derivative
securities contracts. The total market value of any of these derivatives
contracts at the time a position is taken will not exceed 5% of the High Yield
Fund's net assets.
THE BOND FUND INVESTS IN INVESTMENT GRADE BONDS
. THE BOND FUND seeks high current income while seeking to control risk by
investing mainly in investment grade bonds. The Fund will invest exclusively in
fixed-income securities. At least 80% of the Fund's assets, will normally be
invested in the following types of bonds:
1. Corporate bonds which at the time of purchase are rated within the four
highest rating categories of Moody's, Standard & Poor's or any other
nationally recognized statistical rating organization;
2. Debt securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities, including the mortgage-backed securities described in
the section on the Government Securities Fund on page ;
3. Debt securities (payable in U.S. dollars) issued or guaranteed by Canadian
governmental entities; and
4. Debt obligations of domestic banks or bank holding companies, even though
not rated by Moody's or Standard & Poor's, that Sentinel Advisors
believes have investment qualities comparable to investment grade
corporate securities.
The remainder of the Fund's assets may be invested in other fixed income
securities, such as straight or convertible debt securities and straight or
convertible preferred stocks.
The Fund will invest no more than 20% of its total assets in lower quality
bonds. These bonds are described in more detail in the discussion of the High
Yield Fund. The risks inherent in these lower rated bonds are discussed on
pages .
The Bond Fund may not invest more than 25% of its total assets in any one
industry, except for U.S. Government Securities. In applying this limitation,
Sentinel Advisors classifies utility companies according to their services, and
financial services companies according to the end users of their services. For
example, natural gas, electric, and telephone will each be considered a separate
industry, as will auto finance, bank finance, and diversified finance.
<PAGE>
THE GOVERNMENT SECURITIES FUND INVESTS IN U.S. GOVERNMENT BONDS
. THE GOVERNMENT SECURITIES FUND seeks high current income while seeking to
control risk by investing mainly in U.S. government bonds. These bonds include
direct obligations of the U.S. Treasury, obligations guaranteed by the U.S.
government, and obligations of U.S. government agencies and instrumentalities.
The Fund is not required to invest set amounts in any of the various types of
U.S. government securities. Sentinel Advisors will choose the types of U.S.
government securities that it believes will provide the best return with the
least risk in light of its analysis of current market conditions and its outlook
for interest rates and the economy.
The Fund may make unlimited investments in mortgaged-backed U.S. government
securities, including pass-through certificates guaranteed by the Government
National Mortgage Association. Each GNMA certificate is backed by a pool of
mortgage loans insured by the Federal Housing Administration and/or the Veterans
Administration, and provides for the payment of fixed monthly installments of
principal and interest. Timely repayment of principal and payment of interest
is guaranteed by the full faith and credit of the U.S. government. The Fund may
invest in mortgage-backed securities guaranteed by the Federal National Mortgage
Association and by the Federal Home Loan Mortgage Corporation. In all of these
mortgage-backed securities, the actual maturity of and realized yield will vary
based on the prepayment experience of the underlying pool of mortgages.
Securities guaranteed by FNMA and FHLMC are not backed by the full faith and
credit of the United States.
While the maximum life of a mortgage-backed security is typically 30 years, its
average life is likely to be substantially less than the original maturity of
the underlying mortgages, because the mortgages in these pools may be prepaid,
refinanced, or foreclosed. Prepayments are passed through to the mortgage-
backed securityholder along with regularly scheduled repayments of principal
and payments of interest.
If prevailing interest rates are below the rates on the mortgages, the mortgage
borrowers are more likely to refinance their mortgages than if interest rates
are at or above the interest rates on the mortgages. Faster prepayments will
reduce the potential of the mortgage-backed securities to rise in value during
periods of falling interest rates, while the risk of falling value during
periods of rising interest rates may be comparable to other bonds of similar
maturities.
The Fund may engage in the "dollar roll" transactions described on page .
The Fund also may use repurchase agreements as a means of making short-term
investments. It will invest only in repurchase agreements with durations of
seven days or less, only where the collateral securities are U.S. government
securities, and only in aggregate amounts of not more than 25% of the Fund's net
assets. The Fund might incur time delays or losses if the other party to the
agreement defaults on the repurchase of the securities.
In addition, the Fund may invest up to 20% of its net assets in high quality
money market instruments which are not issued or guaranteed by the U.S.
government or its agencies or instrumentalities. These include bank money market
instruments, commercial paper or other short-term corporate obligations listed
in the highest rating categories by nationally recognized statistical rating
organizations. These money market instruments may be used as a means of making
short-term investments.
THE SHORT MATURITY GOVERNMENT FUND INVESTS IN U. S. GOVERNMENT BONDS WITH
LIMITED MATURITIES
. THE SHORT MATURITY GOVERNMENT FUND seeks high current income and limited
fluctuations in principal value by investing mainly in U.S. government bonds
that have average maturities from two to five years. Under normal circumstances,
the dollar weighted average maturity of the portfolio will be three years or
less. This Fund invests at least 65% of its assets in U.S. Government Securities
with average maturities of from two to five years. The remainder of the Fund's
assets may be invested in U.S. government securities with other maturities. The
U.S. government securities in which the Fund will invests include the same types
of securities in which the Government Securities Fund will invest.
The Fund is not required to invest set amounts in any types of U.S. government
securities. Sentinel Advisors chooses the types of U.S. government securities
that it believes will provide the best return with the least risk in light of
its analysis of current conditions and its outlook for interest rates and the
economy. Like the Government Securities Fund, the Short maturity Government Fund
may make unlimited investments in mortgage-backed U.S. government securities.
The Fund may engage in the "dollar roll" transactions described on page .
In addition, like the Government Securities Fund, the Short Maturity Government
Fund may invest up to 20% of its net assets in high quality money market
instruments which are not issued or guaranteed by the U.S. government or its
agencies or instrumentalities. The Fund may also use repurchase agreements as a
means of making short-term investments, in the same way as described for the
Government Securities Fund above.
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 INVESTS SOLELY IN SHORT-TERM U. S. TREASURY SECURITIES
. THE U.S. TREASURY MONEY MARKET FUND seeks as high a level of current income as
is consistent with stable principal values, by investing solely in short-term
direct obligations of the U.S. Treasury. These obligations include U. S.
Treasury bills, notes and bonds with remaining maturities of 397 days or less.
The Fund may earn less income than funds owning longer term securities or lower
quality securities that have less liquidity, greater market risk and greater
market value fluctuations.
<PAGE>
The Fund seeks to maintain a net asset value of $1.00 per share, by using the
amortized cost method of valuing its securities. The Fund is required to
maintain a dollar-weighted average portfolio maturity of 90 days or less.
In many states, the Fund's income dividends may be exempt from state and local
income taxes, but subject to federal income taxes. For more information on state
and local tax exemption, see "Taxes" herein.
THE TAX-FREE INCOME FUND INVESTS IN INVESTMENT GRADE MUNICIPAL BONDS
. THE TAX-FREE INCOME FUND seeks high current income exempt from federal income
taxes while seeking to control risk, by investing mainly in investment grade
municipal bonds. The interest earned from these municipal bonds, in the opinion
of the issuer's bond counsel, are exempt from federal income tax. These
investments may include municipal bonds issued by states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities. The Fund seeks to spread its holdings out
broadly among municipal bonds of different states and regions, and among
different types of issuing authorities.
Normally at least 80% of the total assets of the Tax-Free Income Fund will be
invested in municipal bonds rated within the four highest rating categories of
either Moody's or Standard & Poor's. The Fund also may invest in unrated
municipal bonds if Sentinel Advisors 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 lower rated municipal bonds.
THE NEW YORK FUND INVESTS IN INVESTMENT GRADE MUNICIPAL BONDS OF NEW YORK
ISSUERS
. THE NEW YORK TAX-FREE FUND seeks high current interest income exempt from
federal and New York State and City personal income taxes, while seeking to
control risk, by investing in investment grade municipal bonds of New York
issuers. The interest on these municipal bonds will be, in the opinion of the
issuer's bond counsel, exempt from federal income tax and New York State and
City personal income tax. Normally these bonds will have remaining 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
municipal bonds. Normally, at least 80% of the total assets of the New York
Fund will be invested in municipal bonds rated within the four highest rating
categories of either Moody's or Standard & Poor's. The New York Fund also may
invest in unrated municipal bonds if Sentinel Advisors 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 lower rated New York municipal bonds.
<PAGE>
THE PENNSYLVANIA FUND INVESTS IN INVESTMENT GRADE MUNICIPAL BONDS OF
PENNSYLVANIA ISSUERS
. THE PENNSYLVANIA FUND seeks high current interest income exempt from federal
and Pennsylvania personal income taxes, while seeking to control risk, by
investing in investment grade municipal bonds of Pennsylvania issuers. The
interest on these municipal bonds is, in the opinion of the issuer's bond
counsel, exempt from federal income tax and Pennsylvania personal income tax.
The Pennsylvania Fund normally will invest substantially all of its net assets
in Pennsylvania municipal bonds with maturities of more than one year. The Fund
may, however, invest up to 20% of its net assets in short-term Pennsylvania
municipal bonds. All of the Pennsylvania municipal bonds 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, will have equivalent investment
characteristics, as determined by Sentinel Advisors.
At least 75% of the Pennsylvania Fund's assets will always be invested in
municipal obligations rated "A" or higher by Moody's or by Standard & Poor's or
if not rated, bonds that, in the opinion of Sentinel Advisors, have equivalent
investment characteristics, or highly rated municipal notes or tax-exempt
commercial paper. The Pennsylvania Fund cannot invest in "junk" municipal
obligations.
GENERAL INFORMATION RELEVANT TO THE INVESTMENT PRACTICES OF THE FUNDS, AND
ASSOCIATED RISKS
We cannot guarantee that any Fund's investment objective will be achieved.
Information Relevant to the Equity Funds
RISKS YOU FACE BY INVESTING IN THE EQUITY FUNDS
Stock Market and Selection Risk. The Common Stock, Balanced, Mid Cap Growth,
Small Company and World Funds are subject to stock market and selection risk.
Stock market risk is the risk that the stock market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Sentinel
Advisors or INVESCO select will under perform that stock market or other funds
with similar investment objectives and investment strategies.
Risks of Stocks of Smaller Companies. The stocks of small and medium-sized
companies typically involve more risk than the stocks of larger companies.
These smaller companies may have more limited financial resources, narrower
product lines, and may have less seasoned managers. In addition, these stocks
may trade less frequently and in lower share volumes, making them subject to
wider price fluctuations.
<PAGE>
Risks of Investing in Foreign Securities.
The Common Stock, Balanced, Mid Cap Growth, Small Company, High Yield and Bond
Funds may invest in securities of foreign issuers, although only where they 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.
RISKS APPLICABLE MOST DIRECTLY TO THE WORLD FUND
Investing in foreign securities involves certain special risks in addition to
those associated with U.S. securities. For example, the Funds may be affected
favorably or unfavorably by changes in currency rates or exchange control
regulations. Foreign markets may have less active trading volume than those in
the United States, and values may fluctuate more as a result. If the Funds,
most particularly the World Fund, had to sell securities to meet unanticipated
cash requirements, it may be forced to accept lower prices. There may be less
supervision and regulation of foreign 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. Other possible risks include seizing of
assets by foreign governments, high and changing taxes, difficulty enforcing
judgments against foreign issuers, withholding taxes imposed by foreign
governments on dividend or interest payments, political or social instability,
or diplomatic developments that could affect U.S. investments in those
countries.
European Economic and Monetary Union ("EMU"). Certain European countries have
agreed to enter the EMU in an effort to, among other things, reduce barriers
between countries, increase competition among companies, reduce government
subsidies in certain industries, and reduce or eliminate currency fluctuations
among these countries. Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all EMU participants by
July 1, 2002. Upon introduction of the euro, certain securities (beginning with
government and corporate bonds) will be redenominated in the euro and,
thereafter, will be listed, trade, and make dividend and other payments only in
euros. Although EMU is generally expected to have a beneficial effect, it could
negatively affect the World Fund in a number of situations, including as
follows:
. If the euro, or EMU as a whole, does not take effect as planned, the World
Fund's investments could be adversely affected. For example, sharp
currency fluctuations, exchange rate volatility and other disruptions of
the markets could occur.
. Withdrawal from EMU by a participating country could also have a negative
effect on the World Fund's investments, for example, if securities
redenominated in euros are transferred back into that country's national
currency.
<PAGE>
. Computer, accounting and trading systems must be capable of recognizing the
euro as a distinct currency. Like other investment companies and business
organizations, the World Fund could be adversely affected if the systems
used by Sentinel Advisors, INVESCO, the Fund's other service providers, or
entities with which the Fund or its service providers do business have not
properly addressed this issue. These issues may negatively affect the
operations of the companies the Funds invest in as well.
Risks of Holding Fund Assets Outside the United States. The World Fund
generally holds its foreign securities outside the United States in foreign
banks and securities depositories. Some foreign banks and securities
depositories may be recently organized or new to the foreign custody business.
In addition, there may be limited or no regulatory oversight over their
operations. Also, the laws of certain countries may put limits on the World
Fund's ability to recover its assets if a foreign bank, depository or issuer of
a security, or any of their agents, goes bankrupt. Also, brokerage commissions,
and other costs of buying, selling or holding securities in foreign markets are
often higher than in the United States. This can reduce amounts the World Fund
can earn on its investments. Foreign settlement and clearance procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically involved with the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions. These
problems may make it difficult for the World Fund to carry out transactions.
Emerging Markets Risk. The World Fund may invest up to 5% of its assets in
emerging markets. The risks of foreign investments are usually much greater for
emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, investments in them may be more likely to suffer sharp and
frequent price changes or long term price depression because of adverse
publicity, investor perceptions or the actions of a few large investors. In
addition, traditional measures of investment values used in the United States,
such as price to earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Information Relevant to the Fixed-Income Funds
The market prices of bonds, including those issued by the U.S. government, go up
as interest rates fall, and go down as interest rates rise. As a result, the net
asset value of the shares of Funds holding bonds will fluctuate with conditions
in the bond markets. Bonds with longer maturities and longer durations (a
measure of a bond's sensitivity to changes in interest rates) generally have
higher yields and are subject to greater price fluctuation due to interest rate
changes than bonds 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 bonds in the fourth highest
rating category of Moody's and Standard & Poor's. The Pennsylvania Fund may
invest up to 25% of its assets in these bonds. While considered "investment-
grade", these bonds may have more speculative characteristics and may be more
likely to be downgraded than bonds rated in the three highest rating categories.
If a bond is downgraded below investment-grade, Sentinel Advisors will determine
whether selling it is in the shareholders' best interest. To arrive at this
decision, Sentinel Advisors will consider, among other things, the market price,
credit risk, and general market conditions.
LOWER QUALITY BONDS ARE MORE RISKY THAN HIGHLY RATED BONDS
Risks of Lower Quality Bonds. The High Yield Fund may invest without limitation,
and the Bond Fund and the bond portion of the Balanced Fund may invest up to 20%
of total assets in lower rated bonds. The Tax-Free Income and New York Funds
may invest up to 5% of total assets in lower quality bonds. Because of the
increased risk of default, these bonds generally have higher nominal or
effective interest rates than higher quality bonds. The Funds may purchase bonds
in the lowest rating categories (D for S&P and C for Moody's) and comparable
unrated securities. However, the Funds will only purchase securities rated lower
than B- by S&P or B3 or lower by Moody's if Sentinel Advisors or Evergreen
believes the quality of the bonds is higher than indicated by the rating.
Lower quality bonds may pay interest at fixed, floating or adjustable rates. The
value of floating or adjustable rate bonds is less likely to be adversely
affected by interest rate changes than fixed rate bonds. However, if interest
rates fall, the Funds may earn less income if they hold floating or adjustable
rate bonds.
<PAGE>
Lower rated bonds are more speculative and likely to default than higher quality
bonds. Lower rated bond values also tend to fluctuate more widely in value for
several reasons. An economic downturn may have a greater impact on the ability
of issuers with less financial strength to make their bond payments. These bonds
may not be traded as actively. Their prices may respond more adversely to
negative publicity and investor perceptions. If trading in lower rated bonds
becomes less active, the Funds may have more difficulty in valuing these bonds.
Success in investing in junk bonds depends heavily on Sentinel Advisors' or
Evergreen's credit analysis. Lower rated bonds are also more sensitive than
other debt securities to adverse business developments affecting specific
issuers. The risk of loss due to default by the issuer of a lower quality bond
may be significantly greater than the risk for higher rated bonds because lower
quality bonds are more likely to be unsecured and may be subordinated to other
creditors. If a bond defaults, the Funds may incur additional expenses in
seeking a recovery or participating in a restructuring. Lower quality bonds also
may have call features that permit the issuer to repurchase the securities from
the Funds before their maturity. If a call is exercised during a period of
declining interest rates, the affected Fund would probably have to replace the
called bonds with lower yielding bonds, and the Fund's investment income would
go down.
Zero Coupon and Similar Bonds. The High Yield and Bond Funds, and the bond
portion of the Balanced Fund, also may invest in bonds that do not pay interest,
but instead are issued at a significant discount to their maturity values
(referred to as zero coupon securities), that pay interest in additional
securities instead of cash (referred to as pay-in-kind securities) or that pay
interest at predetermined rates that increase over time (referred to as step
coupon bonds). Even though the Funds may not get cash interest payments on these
bonds, under existing tax law the Funds nevertheless must accrue and distribute
the income deemed to be earned on a current basis. This may cause a Fund to have
to sell other investments to raise the cash needed to make income distributions.
Restricted Bonds. The High Yield and Bond Funds and the bond portion of the
Balanced Fund may purchase certain restricted bonds, often called Rule 144A
bonds, for which trading is limited to qualified institutional buyers. Sentinel
Advisors or Evergreen may determine that Rule 144A bonds are liquid securities
under guidelines approved by the Funds' Board of Directors, and these Rule 144A
bonds will not be subject to the High Yield Fund's limitation on illiquid
securities, or the prohibition on illiquid securities for the Bond Fund and bond
portion of the Balanced Fund. These liquid Rule 144A Securities may become
illiquid if qualified institutional buyers are unavailable.
Portfolio Turnover. In the fiscal year ended November 30, 1998, the fixed
income Funds shown below had the following rates of portfolio turnover:
Government Securities Fund ......................... 355%
Bond Fund ........................................... 147%
High Yield Fund...................................... 139%
Short Maturity Government Fund ...................... 229%
In addition, the Balanced Fund had portfolio turnover of 31% for the equity
portion, and 153% for the bond portion.
<PAGE>
Funds are actively managed, and their portfolios are constantly monitored and
adjusted to try to increase income, protect the income stream or improve the
quality of the holdings. This investment policy results in higher portfolio
turnover, but this need not adversely affect performance, because these Funds
generally do not pay commissions. They deal directly with dealers acting as
principals when buying or selling. The trading price may include a profit to the
dealer, but the Funds will only make these trades when Sentinel Advisors or
Evergreen believes it will help the Funds to achieve their investment
objectives. This higher portfolio turnover may cause the Funds to recognize
capital gains or capital losses for tax purposes earlier than they otherwise
would.
Dollar Rolls. The Bond, Government Securities, Short Maturity Government and
Balanced Funds may also enter into "dollar rolls". In a dollar roll, a Fund
sells mortgage-backed or U.S. Treasury securities for delivery in the current
month, and simultaneously contracts to buy back securities of the same type,
coupon and maturity on a predetermined future date. During the roll period, a
Fund foregoes principal and interest paid on the mortgage-backed or U.S.
Treasury securities. In return, a Fund receives the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop"), and 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 separate account and invested only in
high grade money market instruments. The Funds may only invest in covered rolls.
The use of dollar rolls tends to increase the portfolio turnover of the Funds,
and increases portfolio income without increasing the risk levels of the Funds.
Information Relevant to the Tax-Exempt Funds
Alternative Minimum Tax. Interest income on certain "private activity" bonds is
a preference item for shareholders subject to the alternative minimum tax.
Municipal bonds whose interest is a preference item for alternative minimum tax
purposes will comprise less than 20% of each of the Tax-Free Income and New York
Funds' total assets.
Possible Taxability of Temporary Defensive Investments. If Sentinel Advisors
anticipates a rise in interest rates, the Tax-Free Income, New York and
Pennsylvania Funds may invest temporarily in short-term debt obligations,
including taxable investments, to help protect shareholder capital. These
investments may include notes of municipal issuers, U.S. government securities,
and money market instruments. Under these conditions, the Pennsylvania Fund
will limit its investments in securities other than Pennsylvania municipal bonds
to 20% of its assets, and will invest in non-governmental issuers only where the
bonds are rated in one of the two highest categories of either Standard & Poor's
or Moody's.
The interest on municipal bonds issued by states other than your state of
residence is exempt only from federal income tax. Interest on certain types of
U.S. government securities is exempt only from state personal income tax.
Interest on money market instruments is generally fully subject to both federal
and any applicable state income taxes.
Use of Financial Futures Contracts and Related Options. The New York,
Pennsylvania and Tax-Free Income Funds may purchase and sell certain exchange-
traded financial futures contracts and related options, only to hedge against
adverse changes in interest rates, to protect against declines in the value of
municipal bonds held by the Funds, or to hedge against increases in the cost of
municipal bonds to be purchased for the Funds in the future.
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 initial margin on existing futures positions plus the
premiums paid for outstanding options exceeds 5% of the Fund's total assets.
Risks Associated with Options and Futures Transactions. Options and futures
transactions involve certain risks. However, Sentinel Advisors believes that
since the New York, Pennsylvania and Tax-Free Income Funds would use these
investments for hedging purposes only, their use would not subject these Funds
to the risks frequently associated with the speculative use of options and
futures. However, there are certain risks related to futures transactions used
for hedging purposes that you should understand. One is that the hedge would be
ineffective if Sentinel Advisors' forecasts of interest rates prove to be
incorrect. Another is that the secondary market for a financial futures contract
may become illiquid. This may happen, for example, if the particular market
exceeds its daily price fluctuation limit. If this happens, the Funds may not be
able to close out futures positions. The change in the market value of a Fund's
municipal bonds also may not be perfectly correlated with the prices paid for
futures contracts, which may cause the hedge to be ineffective. From their
inceptions through March 31, 1999, none of the New York, Pennsylvania or Tax-
Free Income Funds engaged in any hedging transactions involving financial
futures and related options.
Information Relevant to the New York and Pennsylvania Funds
Since each of the New York and Pennsylvania Funds concentrates in state
municipal bonds, these Funds are more susceptible to factors adversely affecting
New York or Pennsylvania governmental entities than a municipal bond fund that
is diversified nationally. Each of these Funds' net asset value is particularly
sensitive to changes in the economic condition and governmental policies of the
state in which it invests. For example, if the economic condition of a single
significant industry within New York or Pennsylvania deteriorates, specific
governmental issuers within the state or the anticipated revenues to the state
may be weakened, and the net asset value of the Fund's shares may fall as a
result. Adverse changes in employment rates, federal revenue sharing or laws on
tax-exempt financing may also cause the value of the Funds' shares to fall.
<PAGE>
Sentinel Advisors does not believe that the current economic conditions in New
York State, New York City or Pennsylvania will have a significant adverse effect
on the Funds' ability to invest in high quality New York or Pennsylvania
municipal bonds. Since these Funds focus on investment grade bonds, the Funds
expect to be less subject to market and credit risks than a fund that invests
mainly in lower quality New York or Pennsylvania municipal bonds.
Information Relevant to All Funds
PERIODICALLY THE FUNDS MAY BE LESS THAN FULLY INVESTED
Temporary Defensive Positions. Each of the Funds, other than the U.S. Treasury
Money Market Fund, the Government Securities Fund and the Short Maturity
Government Fund, may be less than fully invested in securities called for by
its principal investment strategies at any time. If the investment advisor feels
that it is necessary under adverse market conditions to take a temporary
defensive position, these funds may depart significantly or completely from
their principal investment strategies. If the investment advisor's judgment in
taking a temporary defensive position proves to be incorrect, the Funds may not
achieve their investment objective.
Repurchase Agreements. All of the Funds, except the Money Market Fund, may
invest in repurchase agreements, provided the counterparty maintains the value
of the underlying securities at a value not less than the repurchase price
stated in the agreement. Under a repurchase agreement, a Fund purchases bonds
and simultaneously agrees to resell these bonds to a counterparty at a
prearranged time and specific price. If the counterparty defaults on its
repurchase obligation, the Fund would have the bonds and be able to sell them to
another party, but it could suffer a loss if the proceeds from a sale of the
bonds turns out to be less than the repurchase price stated in the agreement.
If the counterparty becomes insolvent or goes bankrupt, a Fund may be delayed in
being able to sell bonds that were subject to the repurchase agreement. For more
information about repurchase agreements, please refer to the Statement of
Additional Information.
<PAGE>
Purchase Options
The Balanced Fund offers Class A, Class B, Class C and Class D shares.
The Common Stock, World and High Yield Funds offer Class A, Class B and Class C
shares.
The Mid Cap Growth, Small Company and Bond Funds offer Class A shares
and Class B shares.
The Government Securities, Short Maturity, Tax-Free Income, New York and
Pennsylvania Funds offer only Class A shares.
This prospectus frequently uses the term CDSC, which stands for Contingent
Deferred Sales Charge. This type of charge is assessed when you redeem shares
subject to a CDSC, if none of the waivers listed on page apply. If you do
not redeem shares during the time periods in which an investment is subject to a
CDSC, you will not pay this charge.
You can compare the differences among the four classes of shares using the table
below.
- --------------------------------------------------------------------------------
TOTAL 12B-1 FEE,
CLASS SALES CHARGE SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
- ----- ------------ ----------- --------------------- ------------------
- --------------------------------------------------------------------------------
A Maximum 5.00% Maximum of Maximum of 0.30% No
initial sales 0.20% (Maxi- (Maximum of 0.20%
charge (Maxi- mum of 0.10% for fixed income
mum 4% for for fixed funds)
fixed income income funds)
funds)
- --------------------------------------------------------------------------------
B CDSC of up to 0.25% 1.00% Class B Shares
4.00% for a convert to Class
maximum of A Shares
six years automatically
after the
applicable CDSC
period
- --------------------------------------------------------------------------------
C CDSC of 1.00% 0.25% 1.00% No
for the first
year only
- --------------------------------------------------------------------------------
D CDSC of up to None 0.75% Class D Shares
6% for seven convert to
years Class A Shares
automatically
at the end of the
tenth year
- --------------------------------------------------------------------------------
The Short Maturity Government Fund currently only offers Class A Shares as
described below.
<PAGE>
- --------------------------------------------------------------------------------
TOTAL 12B-1 FEE,
CLASS SALES CHARGE SERVICE FEE INCLUDING SERVICE FEE CONVERSION FEATURE
- ----- ------------ ----------- --------------------- ------------------
A Maximum 1.00% Maximum of Maximum of 0.35% None
initial sales 0.25%
charge
- --------------------------------------------------------------------------------
The U.S. Treasury Money Market Fund offers Class A and Class B Shares. Initial
purchases of Class A Shares of the Money Market Fund are not subject to any
initial sales charge, CDSC or Rule 12b-1 fees. Class B shares of the Money
Market Fund are not offered for direct 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 you invest a
minimum of $10,000, each dollar-cost averaging transaction is at least $1,000,
and the program is completed within 24 months. They may also be acquired in
exchange for the Class B shares of another Fund.
More detailed information about each class of shares is included in the
descriptions of each class below.
If you who hold your shares for an extended period of time, you 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.
THINGS TO THINK ABOUT WHEN CHOOSING WHICH SHARE CLASS TO BUY
The Funds' purchase options are designed to enable you to choose the method of
purchasing Fund shares that is most beneficial to you. Factors you should
consider include:
- - the amount of the investment,
- - the intended length of the investment,
- - the type of Fund you want,
- - whether you are eligible for a waiver or reduction of an initial sales
charge or CDSC, and
- - whether you intend to utilize the exchange privilege.
Class A shares have the advantage of lower ongoing distribution expenses. The
disadvantage of the Class A shares is that you pay an initial sales charge. If
in your circumstances the lower ongoing expenses outweigh the impact of the
initial sales charge, Class A shares may be appropriate for you.
Class B shares have the advantage that you pay no initial sales charge. The
disadvantages are that you pay higher ongoing distribution fees for a fixed
period of time, and during this time you may pay a CDSC if you redeem. Class B
shares ultimately convert to Class A shares, so long term investors eventually
also obtain the benefit of the Class A shares' lower ongoing expenses. Class B
shares are appropriate for those for whom the benefit of avoiding an initial
sales charge outweighs the higher ongoing expenses and possible CDSCs incurred
prior to the conversion to Class A shares.
Class C shares have the advantages of no initial sales charge and a relatively
small CDSC that applies only in the first year. You pay higher ongoing
distribution fees for the entire period of your investment, however. This class
may be appropriate for you if the benefits of avoiding both an initial sales
charge and a significant CSDC outweigh the continuing higher distribution fees.
Over long periods, however, the other share classes may outperform Class C
shares.
The Class D shares, available for the Balanced Fund only, are similar to the
Class B shares, except that you are subject to a higher CDSC, that applies for
seven years instead of six, and conversion to Class A shares does not occur
until the tenth year. The benefit to you is that the ongoing distribution fees
are lower than for Class B shares. Class D shares may appeal to Balanced Fund
investors who want to avoid paying an initial sales charge, are willing to pay
ongoing distribution fees higher than those on Class A shares until they
convert, but want to benefit from lower ongoing distribution fees than those on
Class B or C shares.
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 maximum purchase
of Class D shares of the Balanced Fund is $250,000.
You should also consider that exchange privileges into other Funds are more
limited for classes other than Class A shares. Class B shares may only be
exchanged among the other funds offering Class B shares - the Common Stock,
Balanced, Mid Cap Growth, Small Company, World, Bond, High Yield and Money
Market Funds. For Class C shareholders, only the Class C shares of the Common
Stock, Balanced, World and High Yield Funds, and the Class A shares of the Money
Market Fund, are available for exchanges. In the case of the Class D shares of
the Balanced Fund, the only possible exchange is into the Class A shares of the
Money Market Fund, and back into the Class D shares of the Balanced Fund.
CLASS A SHARES
Sales Charges
CLASS A SHARES ARE GENERALLY SUBJECT TO A FRONT-END SALES CHARGE
For all purchases of Class A shares, you pay the public offering price, which
includes the front-end sales charge, next computed after we receive your order.
The sales charge ranges from 5.0% of the offering price (5.3% of the net amount
invested) to zero. Your sales charge will depend on the size of your purchase.
Sales charges for the Common Stock, Balanced, Mid Cap Growth, Small Company
and World Funds:
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
NET A PERCENTAGE OF PERCENTAGE OF DEALER
- --- ------------ -- ---------- -- ------
SALE SIZE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- ---- ---- -------- ----- ------ -------- -----------
<S> <C> <C> <C>
$0 to $99,999 5.00% 5.26% 4.50%
$100,000 to $249,999 4.00% 4.17% 3.75%
$250,000 to $499,999 2.50% 2.56% 2.25%
$500,000 to $999,999 2.00% 2.04% 1.75%
$1,000,000 or more -0- -0- -0-
</TABLE>
Sales charges for the High Yield, Bond, Government Securities, Tax-Free Income,
New York and Pennsylvania Funds:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS A
----- ------ -- ----- ------ -- -
NET A PERCENTAGE OF PERCENTAGE OF DEALER
- --- - ---------- -- ---------- -- ------
SALE SIZE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- ---- ---- -------- ----- ------ -------- -----------
<S> <C> <C> <C>
$0 to $99,999 4.00% 4.17% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.25%
$250,000 to $499,999 2.50% 2.56% 2.25%
$500,000 to $999,999 2.00% 2.04% 1.75%
$1,000,000 or more -0- -0- -0-
</TABLE>
For the Short Maturity Government Fund, the sales charge for sales of up to
$999,999 is 1.00% of the offering price (1.01% of the net amount invested), with
a dealer reallowance of 0.75% of the offering price. For sales of $1,000,000 and
over, there is no initial sales charge. There is no sales charge on purchases of
shares of the Money Market Fund.
In cases in which there is no sales charge because your purchase was $1,000,000
or more, the Funds' distributor, Sentinel Financial Services Company, will pay
dealers compensation of 1.00% for sales of up to $14,999,999 (for the Common
Stock, Balanced, Mid Cap Growth and Small Company Funds) and for sales of up to
$4,999,999 for sales of the other Funds. In these cases, if you redeem the
shares in the first one year after the purchase, a 1.0% CDSC will be imposed,
and if you redeem in the second year, a 0.5% CDSC will be imposed. For sales in
excess of these amounts, Sentinel Financial will individually negotiate dealer
compensation and CDSCs. After the second year, there will be no CDSC. Any CDSC
is imposed on the lower of the cost or the current net asset value of the shares
redeemed. If you redeem part of your shares, your redemption request will be
increased by the amount of any CDSC due. If you redeem your entire account, we
will deduct any CDSC due from the redemption proceeds. Sentinel Financial
receives the entire amount of any CDSC paid. The CDSC is waived in the
circumstances described on page . In determining whether a CDSC is
payable, we will first redeem shares not subject to any charge.
Reduced Sales Charges
YOU CAN RECEIVE A REDUCED SALES CHARGE FOR A NUMBER OF REASONS
Sales charges on Class A shares may be reduced or eliminated in certain
situations. Please note that, to take advantage of any reduced or eliminated
sales charge, you must advise Sentinel Financial or your representative of your
eligibility at the time of purchase, and provide any necessary information about
the accounts involved.
Right of Accumulation. Quantity discounts begin with investments in Class A
shares of $100,000. You may qualify for quantity discounts based on the total of
all classes of shares purchased, on purchases made at different times, and on
purchases made by you, your spouse and minor children, or a fiduciary for these
persons. Contact Sentinel Service for help in combining accounts for purposes of
obtaining quantity discounts by combining accounts or purchases.
Letter of Intent. You may use a letter of intent to obtain a reduced sales
charge, if you plan to make investments of $100,000 or more in Class A shares
or of $250,000 or more in Class B shares over a 13 month period (30 months in
the case of corporate qualified plans). The letter of intent is not a binding
commitment by you to complete the intended purchases. All your purchases made
under the letter of intent during the period covered will be made at the reduced
sales charge for your intended total purchase. Dividends and distributions will
be reinvested without a sales charge and will not count as purchases under the
letter of intent. We will hold in escrow 2% of the shares you purchase under the
letter of intent, and release these shares when you have completed the intended
purchases. If by the end of the period covered by the letter of intent you have
not made the intended purchases, an additional sales charge may be due. The
additional amount will be equal to what the initial sales charge would have been
on the amount actually invested, minus the sales charges already paid. We will
notify you if an additional sales charges is due. You may pay this additional
sales charge within 20 days after our notification is sent, or we may redeem
shares held in escrow to the extent necessary to pay this charge. Then we will
release any remaining escrow shares. The redemption of shares for this purpose
will be a taxable event to you.
Group Investments. Any group of investors which notifies Sentinel Financial that
it will act as a group in purchasing Fund shares, in order to reduce selling
expenses, will be treated as a single entity for purposes of the reduced sales
charges for quantity purchases, including the right of accumulation and letter
of intent.
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 Company is the custodian, may group participating
employee accounts together in such a way as to result in reduced sales charges
for quantity purchases. Quantity discounts under this program are based upon
amounts previously invested in the Funds.
Net Asset Value Purchases. You may purchase Class A shares of the Funds at net
asset value if you are included in the following list.
- current and former Directors of the Funds and predecessors to the Funds;
- current and retired employees of the general partners of Sentinel
Advisors and their affiliates;
- directors, employees and clients of the Funds' sub-advisors;
- directors and employees of Beneficial Life Insurance Company, and other
strategic partners of Sentinel Advisors and/or Sentinel Financial;
- registered representatives of securities dealers that have entered into
a sales agreement with Sentinel Financial;
- members of the immediate families of, or survivors of, all of these
individuals;
- non-profit organizations with which any of these 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 clients, and who charge a management, consulting or other fee
for their services, and clients of these investment advisors, financial
planners, bank trust departments or broker dealers who place trades for
their own accounts, if the accounts are linked to the master account of
the investment advisor, financial planner or broker-dealer;
- purchasers who are investing section 403(b) loan principal repayments;
- purchasers who are buying with the redemption proceeds from other mutual
fund shares for which a sales charge or CDSC has been paid;
- investments being transferred from individually managed trust accounts
at American Guaranty & Trust Company; and
- qualified pension, profit-sharing or other employee benefit plans, if
the total amount invested in the plan is at least $1,000,000, the
sponsor signs a $1,000,000 letter of intent, or the shares are purchased
by an employer-sponsored plan with at least 100 eligible employees, and
all of the plan's transactions are executed through a single financial
institution or service organization who has entered into an agreement
with Sentinel Financial to use the Funds in connection with the
accounts.
Sentinel Financial may pay dealers for share purchases of the Funds (other than
the Money Market Fund) sold at net asset value to an employee benefit plan in
accordance with the last item on the list above, as follows: 1% of the first $2
million of these purchases, plus 0.80% of the next $1 million of these
purchases, plus 0.50% of the next $17 million of these purchases, plus 0.25% of
amounts in excess of $20 million of these purchases.
American Guaranty and Trust Company may also invest short-term balances of trust
accounts in the Short Maturity Government Fund at net asset value. If more than
one person owns an account, all owners must qualify for the lower sales charge.
Please also note you may be charged a transaction fee by a broker or agent if
you effect transactions in Fund shares through a broker or agent.
Reinstatement. If you sell shares or receive dividends or capital gains
distributions in cash and subsequently want to reinvest your proceeds, you may
do so within 365 days at net asset value, without paying any additional sales
charge.
Distribution Plans
The Class A shares of each Fund, other than the Money Market Fund, have adopted
plans under Rule 12b-1 that allows the Funds to pay distribution fees for the
sale and distribution of their shares, and for services provided to
shareholders. The Class A shares of the Funds will pay to Sentinel Financial a
monthly fee at the maximum annual rate of (a) .30% of average daily net assets
in the case of the Small Company, Mid Cap Growth, World, Common Stock and
Balanced Funds, (b) .20% of average daily net assets in the case of the High
Yield, Bond, New York, Pennsylvania, Tax-Free Income and Government Securities
Funds, or (c) .35% of average daily net assets in the case of the Short Maturity
Government Fund.
Sentinel Financial uses a portion of these fees to pay service fees to dealers.
For the Class A shares of the Small Company, Mid Cap Growth, World, Common Stock
and Balanced Funds, annual service fees are 0.20% of the average net assets
owned by the dealer's clients. For the Class A shares of the Bond, New York,
Pennsylvania, Tax-Free Income and Government Securities Funds, annual service
fees are 0.10% per annum of the average net assets owned by the dealer's
clients. For the Short Maturity Government Fund, annual service fees are 0.25%
of the average net assets owned by the dealer's clients. No service fee is paid
with respect to Fund accounts opened prior to March 1, 1993.
CLASS B SHARES
THERE IS NO INITIAL SALES CHARGE ON CLASS B SHARES, BUT THEY ARE SUBJECT TO A
CDSC
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 CDSC
period, unless you can use one of the CDSC waivers listed on page .
CDSC. Whether you pay a CDSC upon a redemption of Class B shares and how much
it is depends on the amount of your purchases, and the number of years since you
made the purchase. The CDSC schedules for Class B shares are shown below:
FOR PURCHASE AMOUNTS OF UP TO $249,999:
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
- ------- --- ---- ---- ----------
First....................................... 4%
Second...................................... 4%
Third....................................... 3%
Fourth....................................... 2%
Fifth........................................ 2%
Sixth........................................ 1%
FOR PURCHASE AMOUNTS FROM $250,000 TO $499,999:
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
- ------- --- ---- ---- ----------
First....................................... 3.5%
Second...................................... 3%
Third....................................... 2%
Fourth...................................... 1%
Fifth....................................... 1%
FOR PURCHASE AMOUNTS FROM $500,000 TO $999,999:
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
- ------- --- ---- ---- ----------
First....................................... 3%
Second...................................... 2%
Third....................................... 1%
Fourth...................................... 1%
In determining whether a CDSC is payable, we will take redemptions first from
shares acquired through reinvestment of distributions, or any other shares as to
which a CDSC is waived. We will next take redemptions from the earliest purchase
payment from which a redemption or exchange has not already been taken. The
amount of the CDSC will be equal to the CDSC percentage from the schedules
above, multiplied by the lower of the purchase price or the net asset value of
the shares being redeemed. If you redeem part of your shares, you may choose
whether any CDSC due is deducted from the redemption proceeds of your redemption
request is increased by the amount of any CDSC due. Sentinel Financial receives
any CDSC imposed on a redemption of Class B shares.
Because the CDSC may be lower and the conversion to Class A shares may be
faster, for purchases of over $250,000, you should consider whether you would
benefit from the right of accumulation or a letter of intent in connection with
the purchase of Class B shares. These privileges operate in the same way as the
similar privileges which permit reduced sales charges on Class A shares.
Distribution Plan. The Class B shares of the Common Stock, Balanced, Mid Cap
Growth, Small Company, World, High Yield and Bond Funds, have adopted a plan
under Rule 12b-1 that allows these Funds to pay distribution fees for the sale
and distribution of their shares, and services provided to shareholders. The
Class B shares of each Fund will pay to Sentinel Financial a fee of up to a
total of 1.00% annually of average daily net assets, of which up to 0.25% shall
be for service fees to broker-dealers. The High Yield Fund Class B shares are
not assessed a distribution fee on the seed money shares owned by National Life
Insurance Company, which will result in an overall distribution 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.
<PAGE>
Sentinel Financial pays to dealers a service fee which varies based on the
average daily assets in Class B shares of the Funds (other than the Money Market
Fund) for which each registered representative of the dealer is the registered
representative of record at the time service fees are paid, as follows:
Average Daily Assets in Class B Shares of the Annual
Funds for which a Particular Individual is the Broker-Dealer
Registered Representative of Record Service Fee
- ----------------------------------- -----------
$0 - $99,999.................................................. -0-
$100,000 - $199,999........................................... 0.10%
$200,000 - $999,999........................................... 0.25%
$1,000,000 and over........................................... 0.50%
A selling dealer may elect a service fee of 0.25% per annum, instead of the
above arrangement. Class B shares will not pay service fees which total more
than 0.25% per year. If the above schedule requires a payment from Sentinel
Financial which exceeds 0.25% of average daily assets of the Class B shares of
any Fund, then Sentinel Financial will not be able to recover the excess from
the Funds. Sentinel Financial may change the amounts of assets needed to
qualify for the 0.10%, 0.25% and 0.50% service fee rates from time to time.
Sentinel Financial intends to manage these asset levels with the goal of
producing an average service fee on Class B shares of 0.25%. The Class B share
service fee for the first year after a purchase will be used to recover a
portion of the cost of the dealer concession paid by SFSC to the selling dealer,
which portion of the dealer concession is considered the service fee for the
first year. No service fee is paid on Class B shares in house accounts, accounts
in nominee name, or accounts in dealer street name.
Conversion to Class A Shares. The Class B shares automatically convert to Class
A shares after a fixed period of time, which depends upon the size of your
purchase. For purchases up to $250,000, the automatic conversion occurs at the
end of the sixth year; for purchases from $250,001 to $500,000, the automatic
conversion occurs at the end of the fifth year; and for purchases from $500,001
to $999,999, the automatic conversion occurs at the end of the fourth year. The
holding period for Class B shares will include the holding period of Class B
shares of another Fund from which they were exchanged.
Payments to Dealers. Sentinel Financial pays selling broker-dealers, at the
time you purchase Class B shares, the percentages of the aggregate purchase
amount shown below (including purchases of Class A, Class C and Class D shares
under a right of accumulation or letter of intent):
BROKER-
DEALER
AMOUNT OF PURCHASE PAYMENT PAYMENT
- ------ -- -------- ------- -------
Up to $249,999 4.0%
$250,000 to $499,999 2.5%
$500,000 to $999,999 2.0%
Class B Shares of the Money Market Fund. 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. Therefore,
if the Class B shares of the Money Market Fund are ultimately redeemed, you will
pay a CDSC in the same amount as would have been due on the date the assets were
exchanged into the Class B shares of the Money Market Fund, regardless of how
long you hold the Class B shares of the Money Market Fund. Also, if you
exchange the Money Market Fund Class B shares back into Class B shares of
another Fund, and then later redeem those shares, your CDSC, if any, will not
reflect the time you held the Money Market Fund Class B shares. The automatic
conversion into Class A shares will occur only after you hold Class B shares of
Funds other than the Money Market Fund for the six, five or four year period.
CLASS C SHARES
THERE IS NO INITIAL SALES CHARGE ON CLASS C SHARES, BUT THEY REMAIN SUBJECT TO
HIGHER ONGOING FEES FOR THE ENTIRE INVESTMENT PERIOD
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 if you redeem shares during the first year
after their purchase, unless you can use one of the CDSC waivers listed on page
.
Similar to the Class B shares, Class C shares are subject to higher distribution
fees than Class A shares. However, since Class C shares never convert to Class
A shares, investments in Class C shares remain subject to these higher
distribution fees for the entire holding period of the investment.
CDSC. you will pay a CDSC if you redeem Class C shares 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 unless a waiver applies. We apply the same
rules in determining a CDSC as we do for Class B shares. Sentinel Financial
receives the entire amount of any CDSC paid.
Distribution Plan. The Class C shares of the Common Stock, Balanced, World, and
High Yield Funds have adopted a plan under Rule 12b-1 that allows these Funds to
pay distribution fees for the sale and distribution of their shares, and
services provided to shareholders. These Funds pay to Sentinel Financial 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 Sentinel Financial keeps this fee
to recover the initial sales commission of 1.00% that it pays to the selling
dealer. In subsequent years, the entire 1.00% will be paid to the selling
dealer.
<PAGE>
Exchanges. If you purchase Class C shares, you will have the ability to
exchange at net asset value only for the Class C shares of other Funds, except
that you may also exchange into Class A shares of the Money Market Fund.
However, if you exchange Class C shares into Money Market Fund Class A shares
within one year of your purchase of the Class C shares, and then subsequently
redeem the Money Market Fund shares, you may pay a CDSC. If you exchange Class
C shares into Money Market Fund Class A shares, you may exchange back into 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.
Payments to Dealers. For all sales of Class C shares, Sentinel Financial
intends to make payments to selling broker-dealers, at the time you purchase
Class C shares, of amounts equal to 1% of the aggregate purchase amount.
CLASS D SHARES (BALANCED FUND ONLY)
THERE IS NO INITIAL SALES CHARGE ON CLASS D SHARES, BUT THEY ARE SUBJECT TO A
CDSC
For all purchases of Class D shares of the Balanced Fund, you pay the current
net asset value. There is no initial sales charge. A CDSC will be imposed on
Class D shares (including Class A shares of the Money Market Fund, if you
exchange Class D shares into the Money Market Fund), if you redeem shares during
the seven years after their purchase, unless you can use one of the CDSC waivers
listed on page .
CDSC. Whether you pay a CDSC upon a redemption of Class D shares and how much it
is depends on the number of years since you made the purchase. The CDSC schedule
for Class D shares is shown below:
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC PERCENTAGE
- ------- --- ---- ---- ----------
First....................................... 6%
Second...................................... 6%
Third....................................... 5%
Fourth...................................... 4%
Fifth....................................... 4%
Sixth....................................... 3%
Seventh..................................... 2%
The above schedule is higher than the schedules of CDSCs for Class B shares,
which start at maximums of 4% and extend for a maximum of six years. The CDSC
waivers, which are listed on page , are the same as those available for
Class B shares, except that the annual CDSC-free percentage redemption amount is
8% instead of 10%. We apply the same rules in determining a CDSC as we do for
Class B shares. Sentinel Financial receives the entire amount of any CDSC paid.
Distribution Plan. The Class D shares of the Balanced Fund have adopted a plan
under Rule 12b-1 that allows it to pay distribution fees for the sale and
distribution of their shares. The Fund pays a fee to Sentinel Financial at a
maximum annual rate of 0.75% of average daily net assets of the Class D shares
of the Balanced Fund. The Class D Distribution Plan is similar in its operation
to the Class B Distribution Plan, except that there is no service fee of up to
0.25%, and no asset-based service fee payable to dealers. These distribution
fees are lower than those that apply to Class B shares, but they are higher than
those that apply to Class A shares.
Conversion to Class A Shares. The Class D shares automatically convert to Class
A shares after 10 years.
Exchanges into Class A Shares of the Money Market Fund. You may exchange Class
D shares of the Balanced Fund into Class A shares of the Money Market Fund.
However, if you do so within seven years of the purchase of the Class D shares,
and subsequently redeem the Money Market Fund shares, you may pay a CDSC. You
may exchange back into Class D shares of the Balanced Fund at any time, but in
this case the time your investment was in the Money Market Fund will not count
toward the time for conversion to Class A shares of the Balanced Fund, or for
reduction or elimination of the CDSC.
Payments to Dealers. For sales of Class D shares of the Balanced Fund, Sentinel
Financial intends to make payments to selling broker-dealers, at the time you
purchase Class D shares, of amounts equal to 6% of the aggregate purchase
amount. If a selling broker-dealer has entered into agreements required by
Sentinel Financial, Sentinel Financial may pay annualized commissions in advance
with respect to Class D accounts which are set up to make, and are expected to
make monthly automated additional purchases.
WAIVER OR REDUCTION OF A CDSC
A CDSC will be waived in the following situations if you notify us at the time
of redemption that a waiver applies:
1. Redemptions of shares you acquire from the reinvestment of income
distributions and/or capital gains distributions;
2. Redemptions from your account (including when you own the shares as
joint tenant with your spouse) following your death, or from the
account of a trust whose primary income beneficiary has died, if the
redemption occurs within one year of your death or the 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);
<PAGE>
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;
5. Redemptions in amounts up to 10% annually of the account's then
current net asset value. Note that in the case of Class D
shares, this amount is up to 8% annually instead of up to 10%
annually). Note also that to establish a Systematic Withdrawal Plan
during the period a CDSC will apply, Plan redemptions must be
calculated based upon a percentage of the account's net asset value,
rather than a fixed dollar amount; and
6. For Class B share 401(k) plans administered by BYSIS, redemptions
resulting from the termination of a participant's participation in the
plan.
Sentinel Financial may require documentation to show a waiver applies, such as
certifications by plan administrators, applicable tax forms, or death
certificates. The waiver provisions will not apply to Class B shares initially
invested in the Money Market Fund as part of the program described on page __.
No CDSC will apply to Class B, Class C or Class D share accounts owned by
affiliates of Sentinel Advisors, if Sentinel Financial has not paid an initial
commission to a selling dealer.
OTHER MATTERS RELATING TO DISTRIBUTION OF FUND SHARES
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 Sentinel Advisors, 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 the Funds' shares.
Sentinel Financial will reimburse all broker-dealers who agree with Sentinel
Financial to undertake activities designed to specifically promote the Funds,
for costs incurred by these broker-dealers in the course of these activities.
Sentinel Advisors may consider sales of shares of the Funds in the selection of
broker-dealers to execute portfolio transactions for the Funds, as long as
commissions paid are no higher than would otherwise be paid and the prices are,
in Sentinel Advisors' judgment, the best then available.
<PAGE>
How to Buy, Sell, Exchange and Transfer Shares
BUYING SHARES
THERE ARE SEVERAL CONVENIENT WAYS TO BUY SHARES
You may invest in the Funds with only $50 using the Automatic Investment Plan.
Otherwise, the minimum initial investment in any Fund is $1,000, except for
certain retirement plan accounts. The minimum subsequent investment is $50. We
reserve the right to reject any order.
Purchasing Shares by Check
To purchase shares by check, make your check payable to "Sentinel Administrative
Service Company" and mail it to Sentinel Administrative Service Company, P. O.
Box 1499, Montpelier, VT 05601-1499. To make your initial purchase by check,
please also fill out an application (one is attached to this prospectus) and
return the application with your check. all checks must be drawn in U.S.
dollars on a U.S. bank. The funds reserve the right to withhold the proceeds of
a redemption of shares purchased by check until the check has cleared, which may
take up to 15 days after the purchase date.
Your purchase will be effected on the day when federal funds are made available
to a Fund, usually within one business day after Sentinel Service receives the
check. We may charge a fee of $25 for each check returned unpaid due to
insufficient funds.
Purchasing Shares by Wire
You may purchase shares by wiring federal funds directly to Sentinel Service
when the New York Stock Exchange 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. 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, Sentinel Financial will, acting 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.
<PAGE>
Purchasing Shares Online
If you already have an account you may purchase shares of the Funds over the
Internet by accessing the Funds' website at www.sentinelfunds.com.
Automatic Investment Plan
This feature affords you the opportunity to dollar-cost average using periodic
electronic funds transfer from your bank account to the Fund(s) of your choice.
Telephone Investment Service
This feature enables you to purchase Fund shares via electronic funds transfers
from your bank account simply by phoning Sentinel Service.
Government Direct Deposit Privilege
You may purchase Fund shares (minimum of $50.00 per transaction) by having
local, state or Federal salary, Social Security, or certain veterans', military
or other payments from the Federal government automatically deposited into your
account. You may deposit as much of the payments as you elect. To enroll in
Government Direct Deposit, please contact Sentinel Service.
Payroll Savings Plan
You may purchase Fund shares (minimum of $50.00 per transaction) automatically
on a regular basis by having money withheld from your paycheck, if your employer
permits this. You may have part or all of your paycheck transferred to your
existing Sentinel account electronically each pay period. To establish a
Sentinel Payroll Savings Plan account, please contact Sentinel Service.
SELLING SHARES
You may sell your shares back to the Funds at net asset value, less any
applicable CDSC, as of the close of business on the day your instructions are
received, in good order, prior to 4:00 p.m. on a day that the NYSE is open for
business.
YOU MAY SELL YOUR SHARES IN A NUMBER OF CONVENIENT WAYS
If your shares are held by Sentinel Service, you can sell your shares in the
following ways.
By Mail
<PAGE>
You may sell your shares by providing Sentinel Service with the appropriate
instructions by mail. Your instructions must be signed by the registered
owner(s) exactly as the shares are registered. If the proceeds of the
redemption exceed $50,000, if the check is not made payable to the registered
owner(s) and mailed to the record address, or if the record address has been
changed within the past 30 days, the signatures of the registered owner(s) must
be guaranteed by an eligible financial institution that meets Sentinel Service's
requirements.
Dealer Wire Redemption Orders
For the convenience of shareholders, Sentinel Financial, acting for the Funds
without charge, ordinarily accepts orders from dealers who have sales agreements
with the Funds for the repurchase of shares based on net asset value, less any
applicable CDSC. Brokers are not prohibited from charging for their service
onfor these redemptions.
Telephone Redemption
You may redeem up to $1,000,000 from your account each business day by providing
instructions to do so over the telephone, by calling Sentinel Service at 1-800-
282-FUND(3863). You may request that a check made payable to the registered
owners be sent their address of record, or you may request that the proceeds be
sent directly to a predesignated commercial bank account. If proceeds are wired
to your bank, we will deduct a fee of $25 from the proceeds. In addition, it is
possible that your bank may charge a fee for receiving wire transfers. You may
request a redemption on the Funds' automated voice response system.
Neither the Funds, Sentinel Advisors 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
procedures reasonably designed to prevent losses that take into account the cost
of these procedures and the potential risk of loss. In processing telephone
exchange or redemption requests, the Funds will use reasonable procedures to
confirm that telephone instructions are genuine, and if these procedures are not
employed, the Funds may be liable for any resulting losses. These procedures
include receiving all calls for telephone redemptions and exchanges on a
recorded telephone line, and screening callers through a series of questions
regarding specific account information.
You may indicate on your purchase application that you do not wish to have
telephone transaction privileges.
Online Redemption
<PAGE>
You may also request a redemption over the Internet by accessing the Funds'
website at www.sentinelfunds.com.
---------------------
By Checkwriting
If you own Class A shares of the High Yield, Bond, New York, Pennsylvania, Tax-
Free Income, Government Securities, Short Maturity Government and Money Market
Funds, you may sell shares by writing a check against your account. This check
writing privilege is free. If you write a check to redeem shares, we normally
will not honor the redemption check if those shares have been purchased less
than 15 days prior to the date the check is presented to Sentinel Service.
Redemptions by checkwriting are taxable transactions.
By Systematic Withdrawals
You may arrange to receive automatic regular withdrawals from your account. Each
withdrawal will be a taxable event. You must reinvest dividends and capital
gains distributions to use systematic withdrawals. No interest will accrue on
amounts represented by uncashed checks sent under a systematic withdrawal plan.
If You Hold Share Certificates
If you are the shareholder of record and have a certificate representing
ownership in a Fund, you can redeem your shares by mailing the certificate to
Sentinel Administrative Service Company, P. O. Box 1499, Montpelier, VT 05601-
1499, with appropriate instructions to redeem. Your instructions should be
signed by the registered owner(s) exactly as the shares are registered. The
signatures of the registered owner(s) must be guaranteed by an eligible
financial institution which meets Sentinel Service's requirements if the
proceeds of the redemption exceed $50,000, if the check is not made payable to
the registered owner(s) and mailed to the record address, or if the record
address has been changed within the past 30 days. We suggest sending
certificates by certified mail. You may also redeem share certificates by
presenting them in person to Sentinel Service at its office at National Life
Drive, Montpelier, Vermont.
Other Information on Redeeming Shares
Normally, Sentinel Service will mail you a check in payment for your shares
within seven days after it receives all documents required to process the
redemption. We may delay payment during any period in which the right of
redemption is suspended or date of payment is postponed because the NYSE is
closed, trading on the NYSE is restricted, or the Securities and Exchange
Commission deems an emergency to exist. No interest will accrue on amounts
represented by uncashed redemption checks.
<PAGE>
We may require additional documentation to redeem shares that are registered in
the name of a corporation, trust, company retirement plan, agent or fiduciary,
or if a shareholder is deceased. We will not honor redemption requests if you
have bought the shares by check within 15 days of the redemption request, unless
we have confirmed that your check has been cleared for payment.
Distributions from retirement plans may be subject to withholding by the
Internal Revenue Service under the Code.
Certain Account Fees
Due to the expense of maintaining accounts with small balances, we reserve the
right to liquidate, and/or 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.
Pension, 401(k) and profit-sharing plans which elect to have individually
registered accounts for the benefit of plan participants will be assessed an
annual service fee for each participant account, in the amounts shown below.
FEE PER
AVERAGE ACCOUNT VALUE PARTICIPATING ACCOUNT
- --------------------- ---------------------
$0 - $1000.................................. $20.00
$1000 - $2999............................... $10.00
$3000 and over.............................. No fee
This fee will be deducted automatically from each participant account in June of
each year unless it is prepaid.
EXCHANGES FROM ONE FUND TO ANOTHER
You may exchange shares of one Fund for shares of the same class of another
Fund, without charge, by phoning Sentinel Service or by providing appropriate
instructions in writing to Sentinel Service. Initial purchases of less than $1
million of the Short Maturity Government Fund must remain in the account for 90
days before they are eligible for an exchange.
Because Class B shares in the Tax-Free Income, New York, Pennsylvania,
Government Securities and Short Maturity Government Funds are not currently
offered, holders of Class B shares may not exchange into these Funds. Similarly,
because Class C shares of the Mid Cap Growth, Small Company, Bond, Tax-Free
Income, New York, Pennsylvania, Government Securities and Short Maturity
Government Funds are not currently offered, holders of Class C shares may not
exchange into these Funds. Class C shares may be exchanged for Class A shares of
the Money Market Fund (but if the Class C shares had not been held for a year
before the exchange into the Money Market Fund, a 1.00% CDSC may apply if the
Money
<PAGE>
Market Fund shares are then redeemed). The Money Market Fund shares may be
exchanged back into Class C shares at any time.
Holders of Class D shares of the Balanced Fund may not make exchanges into other
Funds, except that Class D shares may be exchanged for Class A shares of the
Money Market Fund. The Money Market Fund shares may be exchanged back into
Class D shares of the Balanced Fund at any time. If these Money Market Fund
shares are subsequently redeemed, however, we will assess a CDSC in the amount
which would have applied to the Class D shares of the Balanced Fund on the date
of the exchange into the Money Market Fund.
Funds are only available for exchange for residents of states in which these
Funds are registered. If you initially buy Class A shares in the Money Market
Fund, you may not exchange into other Funds without being treated as an initial
purchaser of the other Fund's shares. Holding periods for shares which have been
exchanged for the currently held shares will be included in the holding period
of the current shares, except that time in the Money Market Fund will not count
toward the holding period necessary to reduce or eliminate any applicable CDSC,
or to be converted into Class A shares. The normal minimum account sizes apply
to new accounts opened by exchange.
New purchases must remain in an account for 15 days before they can be exchanged
to another Fund. The Funds disclaim liability for unauthorized telephone
instructions under the same policy that applies to telephone redemption
instructions, discussed on page . We currently do not limit the number of
times you may exercise the exchange privilege. We may modify or terminate the
exchange privilege in accordance with the rules of the Securities and Exchange
Commission (the current rules require 60 days advance notice to shareholders
prior to the modification or termination of the exchange privilege).
You may also set up your account to exchange automatically a specified number or
dollar-value of shares in one of the Funds into shares of the same class in
another Fund at regular intervals.
TRANSFERS OF OWNERSHIP OF SHARES
When you need to change ownership of your shares or change the name on an
account, a Sentinel Service representative will assist you.
<PAGE>
How the Funds Are Priced
HOW THE VALUE OF FUND SHARES IS DETERMINED
Net asset value for each Fund is calculated once each business day at 4:00 p.m.,
Eastern Time, and becomes effective immediately upon its determination. The net
asset value per 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. The Funds' investments are valued as shown below:
. Equity securities are valued at the latest transaction prices on the
principal stock exchanges on which they are traded.
. Unlisted and listed securities for which there were no sales during the
day are valued at the mean between the latest available bid and asked
prices.
. Fixed-income securities are valued daily on the basis of valuations
furnished by an independent pricing service.
. Financial futures are valued at the settlement price established each day
by the board of trade or exchange on which they are traded.
. Exchange-traded options are valued at the last sale price unless there is
no timely sale price, in which event current prices provided by market
makers are used.
The Money Market Fund's assets are valued on the basis of amortized cost, which
involves valuing a portfolio instrument at its cost initially and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of Class B, Class C or Class D shares, reflecting
the higher daily expense accruals of Class B, Class C and Class D shares. It is
expected, however, 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. Dividends and distributions will differ by the
appropriate amount of the expense accrual differences between the classes.
<PAGE>
Dividends, Capital Gains and Taxes
The Funds distribute their net investment income as follows:
WHEN THE FUNDS PAY DIVIDENDS
FUND DIVIDENDS PAID
- ---- --------------
Mid Cap 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 Tax-Free Income Fund............... Monthly
Pennsylvania Tax-Free Trust................. Monthly
The Money Market Fund's net income is determined as of the close of business,
4:00 p.m. Eastern Time, on each day the NYSE is open. The Fund declares
dividends of all of its daily net income to shareholders of record as of the
close of business the preceding business day. Dividends are 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 securities in the portfolio or expenses exceed the Fund's income.
Distributions of any net realized capital gains for a fiscal year are paid in
December, following the November 30th fiscal year-end.
You may elect to receive all or any part of your dividends and/or capital gains
distributions in cash, shares of your Fund, or shares of another Fund of the
same class. Unless you elect otherwise, your dividends will be reinvested in
shares of the same Fund. Any dividend or distribution of less than $10.00 must
be reinvested. If you elect to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed dividend or other distribution checks.
You will pay tax on dividends and capital gains distributions from the Funds
whether you receive them in cash or additional shares. If you redeem Fund
shares or exchange them for shares of another Fund, any gain or the transaction
may be subject to tax. Except for the Tax-Free Income, New York and
Pennsylvania Funds, the Funds intend to make distributions that will be taxed
either as ordinary income or capital gains.
<PAGE>
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Funds' ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the World 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 these taxes. You may be
able to claim a credit or deduction with respect to such taxes if certain
requirements are met.
By law, the Funds must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
New York, Pennsylvania and Tax-Free Income Funds
Each of the New York, Pennsylvania and Tax-Free Income Funds intends to invest a
sufficient portion of its assets in municipal bonds and notes to qualify to pay
"exempt-interest dividends" to shareholders. These exempt-interest dividends are
generally not subject to federal income tax. However, these Funds may invest
portions of their assets in investments which generate income that is not exempt
for federal income tax. Most of the income from the Tax-Free Income Fund will
be subject to any state income tax to which you are subject. Any capital gains
distributed by the these Funds will normally be taxable as capital gains. In
addition, gain from the sale of municipal bonds 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 you
receive.
Distributions from the New York Fund which are attributable to interest income
received from New York municipal bonds also will be exempt from New York State
and New York City personal income tax. Distributions from the Pennsylvania Fund
which are attributable to interest income received from Pennsylvania municipal
bonds also will be exempt from Pennsylvania personal income 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 if they are attributable to interest received from Pennsylvania
municipal bonds or from qualifying U.S. government obligations, or if they are
capital gain dividends for federal income tax purposes. Shares of the
Pennsylvania Fund will be exempt from Pennsylvania county personal property tax
to the extent Pennsylvania Fund holds Pennsylvania municipal bonds and
qualifying U.S. government obligations on the annual assessment date.
If the New York and Pennsylvania Funds invest in investments other than New York
municipal bonds and Pennsylvania municipal bonds, respectively, a portion of
their income distributions may be subject to state and local taxes, and possibly
federal income tax. The Funds will inform shareholders annually as to the
portions of their distributions which are exempt-interest dividends and which
are exempt from state and local income taxes.
This section summarizes some of the consequences under current federal tax law
and relevant state and local tax laws of investments in the Funds. It is not a
substitute for personal tax advice. Consult your personal tax advisor about the
potential tax consequences of investments in the Funds under all applicable tax
laws.
<PAGE>
Management of the Funds
INVESCO ACTS AS SUBADVISOR TO THE WORLD FUND
EVERGREEN ACTS AS SUBADVISOR TO THE HIGH YIELD FUND
Sentinel Advisors Company manages the Funds' investments and their business
operations under the overall supervision of the Board of Directors of Sentinel
Group Funds, Inc. (for all Funds except the Pennsylvania Fund) and the Board of
Trustees of Sentinel Pennsylvania Tax-Free Trust. Sentinel Advisors has the
responsibility for making all investment decisions for the Funds, except where
it has retained a subadvisor to make the investment decisions for a Fund.
Sentinel Advisors has retained INVESCO Capital Management, Inc. as the
subadvisor to manage the investments of the World Fund, and Evergreen Investment
Management Company as the subadvisor to manage the investments of the High Yield
Fund. Sentinel Advisors is a partnership of affiliates of three major insurance
companies, National Life Insurance Company, Provident Life Insurance Company,
and Penn Mutual Life Insurance Company. Its principal business address is
National Life Drive, Montpelier, Vermont 05604. INVESCO is located at 1315
Peachtree Street, Atlanta, Georgia 30309. Evergreen is located at 200 Berkeley
Street, Boston, Massachusetts 02116.
The Funds' investment advisory contracts call for the Funds to pay Sentinel
Advisors fees, which were, for the fiscal year ended November 30, 1998, equal to
the following percentages of the Funds' average daily net assets:
Common Stock Fund ..................................... 0.55%
Balanced Fund.......................................... 0.61%
Growth Fund............................................ 0.61%
Small Company Fund..................................... 0.61%
World Fund............................................. 0.61%
High Yield Bond Fund .................................. 0.75%
Bond Fund.............................................. 0.53%
Government Securities Fund............................. 0.53%
Short Maturity Government Fund......................... 0.53%
U.S. Treasury Money Market Fund ....................... 0.40%
Tax-Free Income Fund................................... 0.53%
New York Tax-Free Income Fund.......................... 0.53%
Pennsylvania Tax-Free Trust ........................... 0.55%
Sentinel Advisors currently waives all or a portion of its advisory fees for
some of the Funds. The effective advisory fee rates (as a percentage of each
Fund's average daily net assets) that these Funds paid in the fiscal year ended
November 30, 1998, after taking these waivers into account, were as follows:
Bond Fund ............................................. 0.35%
Government Securities Fund ............................ 0.45%
Short Maturity Government Fund ........................ 0.23%
Tax-Free Income Fund .................................. 0.35%
<PAGE>
New York Tax-Free Income Fund ...................... 0%
Pennsylvania Tax-Free Trust ........................ 0.01%
Portfolio Managers
Sentinel Advisors employs a team approach in managing the Funds. The management
teams are comprised of a lead portfolio manager, other portfolio managers and
research analysts. Each team includes members with one or more areas of
expertise and shares the responsibility for providing ideas, information and
knowledge in managing the Funds. Rodney A. Buck, the Chief Executive Officer of
Sentinel Advisors, is also Chairman and Chief Executive Officer of National Life
Investment Management Company, Inc., and Senior Vice President and Chief
Investment Officer of National Life. Mr. Buck has been employed by Sentinel
Advisors or its affiliates since 1972. There are three investment management
teams: an Equity Value Team, headed by Daniel J. Manion, Vice President of
Sentinel Advisors; an Equity Growth Team, headed by Robert L. Lee, Senior Vice
President of Sentinel Advisors; and a Fixed Income Team, headed by David M.
Brownlee, Senior Vice President of Sentinel Advisors.
Each of Messrs. Buck, Lee, Brownlee and Manion is a Chartered Financial Analyst.
Mr. Lee, Mr. Brownlee and Mr. Manion have each been associated with Sentinel
Advisors since 1993.
The Common Stock Fund is managed by Mr. Manion. Mr. Manion has been a member of
the Common Stock Fund management team since 1994. 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 Sentinel Advisors, and Mr. Lee.
Mr. Brayman is a Chartered Financial Analyst, and has been with Sentinel
Advisors since 1995. He has been involved with the Small Company Fund since he
joined Sentinel Advisors. Prior to joining Sentinel Advisors, he was associated
with Argyle Capital Management, Inc.
The Balanced Fund is managed by a team consisting of Mr. Buck, Mr. Manion and
Richard D. Temple, Vice President of Sentinel Advisors. 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 Sentinel Advisors or its affiliates since 1969.
The portfolio managers for the Bond Fund are Mr. Temple and William C. Kane,
Vice President of Sentinel Advisors. 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 Sentinel Advisors or its affiliates since 1992. 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 Sentinel Advisors.
Mr. Hart has been with Sentinel Advisors or its affiliates since 1990. The
portfolio managers of the Money Market Fund are Mr. Temple and Darlene Coppola,
Money Market Trader of Sentinel Advisors. Ms. Coppola has been employed by
Sentinel Advisors or its affiliates since 1974.
Erik B. Granade, International Equity Portfolio Manager of INVESCO, has been the
lead manager of the World Fund since June 1994. Michele T. Garren has been the
Fund's co-manager since September, 1997. Mr. Granade is a Chartered Financial
Analyst. He was associated with Cashman Farrell and Associates from June, 1994
to March 31, 1996, when he moved to INVESCO. Prior to June, 1994 he was an
International Portfolio Manager with Provident Capital Management, Inc. Ms.
Garren is a Chartered Financial Analyst. She was associated with AIG Global
Investment Corp from August, 1993 to July, 1996.
The portfolio manager for the High Yield Fund is Prescott B. Crocker, Senior
Vice President and Group Head of Corporate Fixed Income at Evergreen. 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
Evergreen in February, 1997. Prior to that he was President of Boston Security
Counselors, the investment 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 managed 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.
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 (commonly known as the "Year 2000 Problem"). Like other
investment companies and financial and business organizations, the Funds could
be adversely affected if the computer systems used by Sentinel Advisors and
Sentinel Service do not properly address 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 modifications necessary to
prepare for the year 2000. Currently neither Sentinel Service nor Sentinel
Advisors expects that the transition to the 21/st/ century will have any
material impact on its ability to continue to service the Funds at current
levels. In addition, Sentinel Service and Sentinel Advisors 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 Sentinel Advisors 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.
The Year 2000 Problem could also have a negative impact on the companies in
which the Funds invest, and this could hurt the Funds' investment returns.
<PAGE>
Financial Highlights
- --------------------
The financial highlights table is intended to help you understand each Fund's
financial performance for the past five years, or for the period of the Fund's
operations, in the case of the High Yield, Short Maturity Government, and New
York Funds. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would
have earned on an investment in each Fund, assuming reinvestment of all
dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements of
the Funds, are included in the Funds' Annual Report to Shareholders, which is
available upon request.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations Less Distributions
- ----------------------------------------------------------------------------------------------------------------------------------
NET GAINS OR
LOSSES ON
FISCAL NET ASSET NET SECURITIES (BOTH DIVIDENDS
YEAR VALUE, INVESTMENT REALIZED TOTAL FROM (FROM NET DISTRIBUTIONS TOTAL
(PERIOD BEGINNING INCOME AND INVESTMENT INVESTMENT (FROM CAPITAL DISTRI-
FUND ENDED) OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) BUTIONS
- ------------------ ----------- --------- ----------- ----------------- ----------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 11/30/94 $29.63 $ 0.83 $(1.35) $(0.52) $0.80 $0.06 $0.86
Stock - A 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
11/30/98 44.09 0.42 5.19 5.61 0.45 4.69 5.14
Balanced - 11/30/94 $15.27 $ 0.58 $(1.12) $(0.54) $0.56 $0.09 $0.65
A 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
11/30/98 20.29 0.54 1.76 2.30 0.55 1.16 1.71
Mid Cap 11/30/94 $17.51 $ 0.05 $(0.92) $(0.87) $0.03 $0.46 $0.49
Growth A 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
11/30/98 18.73 (0.03) 1.08 1.05 --- 5.13 5.13
Small 11/30/94 $ 6.87 $(0.04) $ 0.18 $ 0.14 $ --- $1.48 $1.48
Company- A 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
11/30/98 6.30 --- 0.14 0.14 0.02 0.75 0.77
World - A 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
11/30/98 17.25 0.18 1.52 1.70 0.12 0.64 0.76
High Yield 5 Mo. To
- - A 11/30/97(C) $10.00 $ 0.32 $ 0.41 $ 0.73 $0.32 $ --- $0.32
11/30/98 10.41 0.87 (0.58) 0.29 0.86 0.09 0.95
Bond - A 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
11/30/98 6.36 0.40 0.09 0.49 0.40 --- 0.40
Government 11/30/94 $10.45 $0.59 $(1.04) $(0.45) $0.58 $0.11 $0.69
Securities 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
11/30/98 10.09 0.61 0.37 0.98 0.61 --- 0.61
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
RATIO OF NET
INVESTMENT
RATIO OF INCOME TO
EXPENSES TO RATIO AVG. NET
NET ASSET NET ASSETS AT RATIO OF AVERAGE NET OF NET ASSETS BEFORE
VALUE, TOTAL END OF EXPENSES TO ASSETS BEFORE INCOME TO VOLUNTARY EX- PORTFOLIO
END OF RETURN* PERIOD (000 AVERAGE NET EXPENSE AVG. NET PENSE REIM-- TURNOVER
FUND PERIOD (%) OMITTED) ASSETS (%) REDUCTION**(%) ASSETS (%) BURSEMENTS RATE (%)
- -------------------- --------- --------- -------------- ------------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common $28.25 (1.8) $ 839,335 1.02 1.02 2.82 ---- 15
Stock - A 35.21 32.8 1,057,944 1.09 1.10 2.29 ---- 22
40.60 27.2 1,306,592 1.06 1.07 1.64 ---- 22
44.09 20.9 1,509,999 1.04 1.05 1.41 ---- 24
44.56 14.3 1,610,630 1.01 1.02 0.98 ---- 28
Balanced - $14.08 (3.6) $ 226,328 1.21 1.21 3.97 ---- 66
A 16.84 24.4 267,103 1.27 1.29 3.77 ---- 110
18.55 16.6 297,288 1.20 1.22 3.13 ---- 83
20.29 15.4 314,948 1.16 1.17 2.93 ---- 63
20.88 12.2 330,067 1.12 1.13 2.69 ---- 81
Mid Cap $16.15 (5.1) $ 50,447 1.43 1.43 0.30 ---- 58
Growth A 16.93 24.9 60,446 1.50 1.54 0.42 ---- 84
17.57 22.6 69,816 1.40 1.43 0.16 ---- 98
18.73 27.3 88,184 1.29 1.32 (0.15) ---- 161
14.65 8.3 97,895 1.26 1.29 (0.23) ---- 97
Small $ 5.53 2.0 $ 88,420 1.58 1.58 (0.74) ---- 46
Company- A 5.20 12.2 89,321 1.56 1.60 0.26 ---- 79
5.17 22.0 99,393 1.47 1.51 0.23 ---- 60
6.30 23.0 115,532 1.34 1.36 0.38 ---- 45
5.67 2.7 109,598 1.31 1.33 (0.07) ---- 45
World - A 12.74 8.2 $ 41,970 1.58 1.58 0.62 ---- 30
13.78 10.2 47,702 1.56 1.63 0.79 ---- 32
15.69 15.5 71,458 1.43 1.48 0.94 ---- 14
17.25 12.5 89,740 1.29 1.32 1.14 ---- 21
18.19 10.3 100,790 1.24 1.26 1.18 ---- 12
High Yield- A $10.41 7.3# $ 11,084 1.20+ 1.26+ 7.80+ ---- 133
9.75 2.7 31,120 1.26 1.28 8.42 ---- 139
Bond - A 5.85 (4.9) $ 80,487 0.98 0.98 6.34 6.34 133
6.49 18.8 108,755 0.99 1.03 6.81 6.81 237
6.35 4.5 99,408 0.98 1.00 6.46 6.46 176
6.36 6.7 88,756 0.97 0.99 6.37 6.37 130
6.45 8.0 91,297 0.77 0.95 6.26 6.11 147
Government $ 9.31 (4.5) $ 104,457 1.00 1.00 5.95 5.95 149
Securities - A 10.30 17.9 108,100 1.03 1.04 6.50 6.50 367
10.00 3.2 92,299 1.00 1.01 6.18 6.18 614
10.09 7.2 75,810 0.98 0.99 6.15 6.15 249
10.46 10.0 76,498 0.91 0.99 6.02 5.94 355
</TABLE>
<PAGE>
Less Distributions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET GAINS OR
LOSSES ON
FISCAL NET ASSET NET SECURITIES (BOTH DIVIDENDS
YEAR VALUE, INVESTMENT REALIZED TOTAL FROM (FROM NET DISTRIBUTIONS TOTAL
(PERIOD BEGINNING INCOME AND INVESTMENT INVESTMENT (FROM CAPITAL DISTRI-
FUND ENDED) of PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) BUTIONS
- ---- ------ --------- ------ ----------- ---------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short 8 Mo. to
Maturity 11/30/95 (A) $ 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
11/30/98 9.82 0.57 0.06 0.63 0.57 --- 0.57
Money 11/30/94 $ 1.00 $ 0.03 $ --- $ 0.03 $ 0.03 $ --- $ 0.03
Market - A 11/30/95 1.00 0.05 --- 0.05 0.05 --- 0.05
11/30/96 1.00 0.04 --- 0.04 0.04 --- 0.04
11/30/97 1.00 0.04 --- 0.04 0.04 --- 0.04
11/30/98 1.00 0.04 --- 0.04 0.04 --- 0.04
Tax-Free - A 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
11/30/98 13.64 0.65 0.33 0.98 0.65 0.19 0.84
New York - A 8 Mo. to
11/30/95(A) $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
11/30/98 11.88 0.62 0.34 0.96 0.62 0.03 0.65
Pennsyl- 11/30/94 $13.57 $ 0.64 $(1.28) $(0.64) $ 0.64 $ --- $ 0.64
vania 11/30/95 12.29 0.66 1.11 1.77 0.66 --- 0.66
- - A 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
11/30/98 13.34 0.63 0.26 0.89 0.63 0.12 0.75
Common 8 Mo. To
Stock - B 11/30/96(B) $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
11/30/98 44.03 0.07 5.19 5.26 0.13 4.69 4.82
Balanced - B 8 Mo. To
11/30/96(B) $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
11/30/98 20.32 0.38 1.77 2.15 0.40 1.16 1.56
Mid Cap 11 Mo. to
Growth - B 11/30/98(E) $13.08 $(0.17) $ 1.61 $ 1.44 $ --- $ --- $ ---
Small 8 Mo. To
Company - B 11/30/96(B) $ 4.82 $(0.03) $ 0.33 $ 0.30 $ --- $ --- $ ---
11/30/97 5.12 (0.03) 1.13 1.10 --- 0.04 0.04
11/30/98 6.18 (0.03) 0.11 0.08 --- 0.75 0.75
World - B 8 Mo. to
11/30/96(B) $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
11/30/98 17.05 0.04 1.47 1.51 --- 0.64 0.64
</TABLE>
<TABLE>
<CAPTION>
RATIO OF NET
INVESTMENT
RATIO OF INCOME TO
EXPENSES TO RATIO AVG. NET
NET ASSET NET ASSETS AT RATIO OF AVERAGE NET OF NET ASSETS BEFORE
VALUE, TOTAL END OF EXPENSES TO ASSETS BEFORE INCOME TO VOLUNTARY EX- PORTFOLIO
END OF RETURN* PERIOD (000 AVERAGE NET EXPENSE AVG. NET PENSE REIM- TURNOVER
FUND PERIOD (%) OMITTED) ASSETS (%) REDUCTION**(%) ASSETS (%) BURSEMENTS RATE (%)
- ---- ------ --- -------- ---------- -------------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Maturity $ 9.84 6.3# $ 28,417 1.00+ 1.38+ 6.07+ 5.76 58
Gov't. - A 9.81 5.6 36,474 1.00 1.20 6.09 5.93 120
9.82 6.0 45,044 1.00 1.18 6.20 6.14 61
9.88 6.6 68,346 0.82 1.12 6.04 5.76 229
Money $ 1.00 3.1 $ 75,301 0.81 0.81 3.01 ---- ----
Market - A 1.00 5.0 80,664 0.81 0.82 4.83 ---- ----
1.00 4.6 80,804 0.78 0.78 4.38 ---- ----
1.00 4.6 85,911 0.76 0.77 4.46 ---- ----
1.00 4.6 98,115 0.72 0.73 4.47 ---- ----
Tax-Free - A $12.35 (5.1) $ 99,935 0.75 0.94 5.11 4.92 92
13.62 16.0 110,506 0.90 0.99 5.06 5.00 112
13.53 4.3 99,967 0.94 0.97 4.86 4.86 112
13.64 6.9 87,935 0.91 0.95 4.84 4.84 47
13.78 7.4 88,683 0.74 0.92 4.77 4.59 37
New York - A $11.72 8.1# $ 5,332 1.22+ 1.29+ 4.60+ 4.60+ 32
11.72 4.8 5,749 1.04 1.10 4.65 4.65 48
11.88 7.7 7,704 0.30 1.09 5.31 4.57 21
12.19 8.3 11,978 ---- 1.01 5.17 4.19 6
Pennsyl- $12.29 (4.9) $ 31,172 1.30 1.30 4.84 4.84 56
vania - A 13.40 14.8 34,975 0.97 1.36 5.14 4.78 80
13.29 5.0 35,545 0.75 1.37 5.07 4.48 56
13.34 6.1 34,844 0.85 1.34 4.86 4.41 28
13.48 6.9 34,720 0.77 1.31 4.65 4.14 50
Common $40.57 14.9# $ 27,257 1.91+ 1.92+ 0.80+ ---- 22
Stock - B 44.03 19.9 77,299 1.79 1.80 0.66 ---- 24
44.47 13.4 129,966 1.81 1.81 0.19 ---- 28
Balanced - B $18.58 9.6# $ 10,948 2.12+ 2.13+ 2.21+ ---- 83
20.32 14.6 26,593 1.88 1.89 2.21 ---- 63
20.91 11.3 46,946 1.89 1.90 1.91 ---- 81
Mid Cap Growth - B $14.52 11.0# 3,841 2.27+ 2.29+ (1.24)+ ---- 97
Small $ 5.12 6.2# $ 1,943 2.62+ 2.64+ (0.91)+ ---- 60
Company - B 6.18 21.6 7,656 2.35 2.36 (0.62) ---- 45
5.51 1.7 12,103 2.24 2.25 (1.00) ---- 45
World - B $15.58 7.5# $ 3,188 2.56+ 2.59+ (0.19)+ ---- 14
17.05 11.5 10,121 2.16 2.18 0.23 ---- 21
17.92 9.2 18,163 2.23 2.25 0.19 ---- 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations Less Distributions
====================================================================================================================================
NET GAINS OR
LOSSES ON
FISCAL NET ASSET NET SECURITIES (BOTH DIVIDENDS
YEAR VALUE, INVESTMENT REALIZED TOTAL FROM (FROM NET DISTRIBUTIONS TOTAL
(PERIOD BEGINNING INCOME AND INVESTMENT INVESTMENT (FROM CAPITAL DISTRI-
FUND ENDED) OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) BUTIONS
- ----- ---------- --------- ---------- ----------------- ---------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield 5 Mo. To
- - B 11/30/97(C) $10.00 $ 0.32 $ 0.39 $ 0.71 $0.31 $ --- $0.31
11/30/98 10.40 0.84 (0.57) 0.27 0.84 0.09 0.93
Bond - B 8 Mo. To
11/30/96(B) $ 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
11/30/98 6.38 0.34 0.08 0.42 0.34 --- 0.34
Money 8 Mo. To
Market - B 11/30/96(B) $ 1.00 $ 0.03 $ --- $ 0.03 $0.03 $ --- $0.03
11/30/97 1.00 0.05 --- 0.05 0.05 --- 0.05
11/30/98 1.00 0.04 --- 0.04 0.04 --- 0.04
Common Stock - C 7 mo. to
11/30/98(D) $45.23 $ 0.06 $ (0.71) $(0.65) $0.03 $ --- $0.03
Balanced - C 7 mo. to
11/30/98(D) $20.87 $ 0.20 $ (0.01) $ 0.19 $0.16 $ --- $0.16
World - C 7 mo. to
11/30/98(D) $19.57 $(0.02) $ (1.50) $(1.52) $ --- $ --- $ ---
High Yield - C 7 mo. to
11/30/98(D) $10.70 $ 0.41 $ (0.91) $(0.50) $0.45 $ --- $0.45
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
====================================================================================================================================
INVESTMENT
RATIO OF INCOME TO
EXPENSES TO RATIO AVG. NET
NET ASSET NET ASSETS AT RATIO OF AVERAGE NET OF NET ASSETS BEFORE
VALUE, TOTAL END OF EXPENSES TO ASSETS BEFORE INCOME TO VOLUNTARY EX- PORTFOLIO
END OF RETURN* PERIOD (000 AVERAGE NET EXPENSE AVG. NET PENSE REIM-- TURNOVER
FUND PERIOD (%) OMITTED) ASSETS (%) REDUCTION**(%) ASSETS (%) BURSEMENTS RATE (%)
- ---- --------- ------- ------------- ----------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield -B $10.40 7.2# $ 33,808 1.30+ 1.34+ 7.70+ ---- 133
9.74 2.4 55,911 1.49 1.52 8.19 ---- 139
Bond - B $ 6.36 4.5# $ 4,714 2.16+ 2.18+ 5.28+ 5.28+ 176
6.38 5.9 8,115 1.87 1.90 5.46 5.46 130
6.46 6.8 16,601 1.64 1.84 5.40 5.22 147
Money $ 1.00 3.0# $ 3,160 0.76+ 0.77+ 4.40+ ---- ---
Market - B 1.00 4.7 3,434 0.73 0.73 4.50 ---- ---
1.00 4.5 4,422 0.77 0.78 4.42 ---- ---
Common Stock - C $44.55 (1.4)# $ 5,358 1.92+ 1.92+ 0.08+ ---- 28
Balanced - C $20.90 0.9# $ 1,523 2.17+ 2.18+ 1.63+ ---- 81
World - C
$18.05 (7.8)# $ 1,013 2.20+ 2.21+ 0.23+ ---- 12
High Yield -
Yield - C $ 9.75 (4.7)# $ 1,956 2.05+ 2.06+ 7.63+ ---- 139
</TABLE>
_____________________________________________________________
(A) Commenced operations March 27, 1995.
(B) Commenced operations April 1, 1996.
(C) Commenced operations June 23, 1997.
(D) Commenced operations May 4, 1998.
(E) Commenced operations January 12, 1998.
+ 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 the voluntary expense reimbursements
and include, effective 1995, the earnings credits that are received from
the custodian and dividend paying agent on cash balances.
<PAGE>
THE SENTINEL FUNDS
Shareholder Reports
Additional information about the Funds' investments is available in the Funds'
annual and semi-annual reports to shareholders. In the Funds' annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected investment performance of each of the Funds during
its last fiscal year. You may obtain copies of these reports at no cost by
calling 1-800-282-FUND (3863).
The Funds will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account at no cost, call Sentinel Service
at 1-800-282-FUND (3863).
Statement of Additional Information
The Funds' Statement of Additional Information contains further information
about the Funds and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing the Funds at the
address shown below or by calling 1-800-282-FUND (3863). Please contact your
registered representative or the Funds if you have any questions.
The Funds' Statement of Additional Information is also available at the Funds'
website at www.sentinelfunds.com. Information about the Funds (including the
Statement of Additional Information) can also be reviewed and copied at the
SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the public reference room. This information is
also available on the SEC's Internet site at http://www.sec.gov and copies may
------------------
be obtained upon payment of a duplicating fee by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE SENTINEL FUNDS
National Life Drive
Montpelier, VT 05604
INVESTMENT ADVISOR COUNSEL
Sentinel Advisors Company Brown & Wood LLP
National Life Drive One World Trade Center
Montpelier, VT 05604 New York, NY 10048
PRINCIPAL UNDERWRITER INDEPENDENT ACCOUNTANTS
Sentinel Financial Services Company PricewaterhouseCoopers LLP
National Life Drive 1177 Avenue of the Americas
Montpelier, VT 05604 New York, NY 10036
TRANSFER AGENT, SHAREHOLDER SERVICING CUSTODIAN AND DIVIDEND PAYING AGENT
AGENT AND ADMINISTRATOR *Investors Fiduciary Trust Company
Sentinel Administrative Service Company 801 Pennsylvania Avenue
*National Life Drive Kansas City, MO 64105
Montpelier, VT 05604
800-282-FUND (3863)
<PAGE>
- ------------
* All mail and correspondence should be sent to Sentinel Administrative
Service Company, P. O. Box 1499, Montpelier, VT 05601-1499
Investment Company Act files #811- 214, and #811- 4781.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 1999
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 Mid Cap 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 "Money Market Fund")
Sentinel Tax-Free Income Fund (the "Tax-Free Income Fund")
Sentinel New York Tax-Free Income Fund (the "New York Fund")
Sentinel Pennsylvania Tax-Free Trust (the "Pennsylvania Fund")
Each of SENTINEL GROUP FUNDS, INC. (the "Company") and the Pennsylvania Fund is
a managed, open-end investment company, which continuously offers its shares to
investors. The Company consists of twelve separate and distinct funds, eleven of
which are diversified (the New York Fund being non-diversified), and the
Pennsylvania Fund is a separate, non-diversified fund. The twelve funds of the
Company and the Pennsylvania Fund are referred to hereinafter collectively as
the "Funds", and individually as a "Fund". The Funds are described in a
Prospectus of the Funds dated March 31, 1999 (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 Life
Insurance Company ("Provident") 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, or by calling
1-800-282-FUND(3863). The Financial Statements of the Funds that are included
in the Annual Report of the Funds dated November 30, 1998 have been incorporated
by reference into this Statement of Additional Information. This Annual Report
can be obtained in the same way as the Prospectus of the Funds. This Statement
of Additional Information has been incorporated by reference into the
Prospectus.
<PAGE>
TABLE OF CONTENTS
PAGE
----
The Funds .............................................
Investment Objectives and Policies ....................
Investment Restrictions ...............................
Management of the Funds ...............................
Principal Shareholders ................................
The Investment Advisor ................................
Principal Underwriter .................................
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 .................
Determination of Net Asset Value ......................
Computation of Maximum Offering and Redemption Prices .
Taxes..................................................
Shareholder Services ..................................
Total Return, Yield and Tax-Equivalent Yield
Information ...........................................
General Information ...................................
Financial Statements ..................................
Appendix A - Ratings of Municipal Bonds
Appendix B - Economic and Other Conditions in
New York
Appendix C - Economic and Financial Conditions in
Pennsylvania
<PAGE>
THE FUNDS
Originally incorporated in the State of Delaware on December 5, 1933 as
Group Securities, Inc., the Company became a Maryland corporation on February
28, 1973. On November 30, 1973, the Company's name was changed to USLIFE Funds,
Inc. On September 30, 1976, the Company's name was changed to Sentinel Group
Funds, Inc.
On March 31, 1978, Sentinel Bond Fund, Inc. (formerly Sentinel Income Fund,
Inc.) and Sentinel Mid Cap 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.
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 Money
Market Funds. From March 1, 1993 to March 29, 1994, the Small Company Fund's
name was Sentinel Aggressive Growth Fund, and from March 29, 1994 to March 31,
1997, the Small Company Fund's name was Sentinel Emerging Growth Fund. Also on
March 1, 1993, 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 "Purchase Options".
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. From March 27, 1995 to February 3, 1997, the Short Maturity
Government Fund's name was Sentinel Short-Intermediate Government Fund.
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.
<PAGE>
General Considerations
- ----------------------
Each Fund is an open-end, management investment company. All Funds are
diversified investment companies except the New York and Pennsylvania Funds,
which are non-diversified investment companies.
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.
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 at an agreed upon price. The difference between the amount a Fund
pays for securities and the amount it receives upon resale is interest income to
a Fund. Failure of the seller to repurchase the securities as agreed may result
in a loss to a Fund if the market value of the securities has fallen to less
than the repurchase price. In the event of such a default, a Fund may also
experience certain costs and be delayed or prevented from recovering or
liquidating the collateral securities, which could result in further loss to a
Fund. The Funds will use repurchase agreements as a means of making short-term
investments of seven days or less and in aggregate amounts of not more than 25%
of the net assets of the Fund. All repurchase agreements used by the Funds will
provide that the value of the collateral underlying the repurchase agreement
always will be at least equal to 102% of the repurchase price. The Advisor will
monitor on a continuing basis the creditworthiness of all parties with which it
might enter into repurchase agreements and will enter into repurchase agreements
only if it determines that the credit risk of such a transaction is minimal.
Considerations Applicable to the Fixed-Income Funds
- ---------------------------------------------------
Each of the Bond Fund and the fixed income portion of the Balanced Fund may
invest up to 20% of its total assets, and each of the New York Fund and the Tax-
Free Income Fund may invest up to 5% of its total assets, in debt securities
which are rated below "investment grade", i.e., lower than "Baa" by Moody's
Investors Service, Inc. ("Moody's") or lower than "BBB" by Standard & Poor's
Ratings Services ("Standard & Poor's") or which, in the Advisor's judgment,
possess similar credit characteristics. See Appendix A - "Description of Bond
Ratings" for additional information regarding ratings of debt securities. The
Advisor considers the ratings assigned by Standard & Poor's or Moody's as one of
several factors in its independent credit analysis of issuers. Such securities
are considered by Standard & Poor's and Moody's to have varying degrees of
speculative characteristics. Consequently, although securities rated below
investment grade can be expected to provide higher yields, such securities may
be subject to greater market price fluctuations and risk of loss of principal
than lower yielding, higher rated debt securities. Investments in such
securities will be made only when in the judgment of the Advisor, such
securities provide attractive total return potential relative to the risk of
such securities, as compared to higher quality debt securities. The Funds do not
intend to purchase debt securities that are in default or which the Advisor
believes will be in default. The risks of below-investment grade securities are
described further in the Prospectus under "Details About the Funds' Investment
Objectives, Principal Investment Strategies and Related Risks - General
Information Relevant to the Investment Practices of the Funds, and Associated
Risks - Information Relevant to the Fixed Income Funds - Risks of Lower Quality
Bonds" on pages.
When Issued Purchases. 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 purchase bonds on a when issued or
delayed-delivery basis. Delivery of and payment for these bonds 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 these bonds.
However, when the Fund makes a commitment to purchase the bonds, the payment and
interest terms of these issues are fixed. A Fund will make these commitments
only with the intention of acquiring the bonds, but may sell those bonds before
settlement date if Sentinel Advisors or Evergreen believes that would benefit
shareholders. When a Fund purchases bonds on a when issued or delayed-delivery
basis, it will provide its custodian with enough cash or short-term investments
to pay the purchase price of these bonds upon delivery. This policy ensures that
when issued or delayed-delivery purchases will not be used as a form of
borrowing to make investments.
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.
To the extent that liquid Rule 144A Securities or corporate loans in which
the Bond Fund or the High Yield Fund invests 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
- -------------------------------------------------
<PAGE>
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").
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 generates 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 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. 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 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 may subject certain investors to an
alternative minimum tax ("AMT"). The provisions of the Code relating to private
activity bonds generally apply to bonds issued after August 15, 1986, with
certain transitional rule exemptions. Private activity bonds are eligible for
purchase by the Tax-Exempt Funds provided that the interest paid thereon
qualifies as exempt from federal income taxes (and in the case of the New York
and Pennsylvania Funds, New York State and City, and Pennsylvania, personal
income taxes, respectively). It is the position of the SEC and the Funds that
municipal obligations that generate income subject to the AMT should not be
counted as tax-exempt for the purpose of determining whether 80% of a Fund's net
assets are invested in tax-exempt obligations.
Tax-exempt obligations held by the Tax-Exempt Funds generally will consist
of investment grade municipal obligations with maturities of longer than one
year. Long-term obligations normally are subject to greater market fluctuations
as a result of changes in interest rates and market conditions than are short-
term obligations. The two principal classifications of municipal obligations
which may be held by the Tax-Exempt Funds are "general obligation" bonds and
"revenue" bonds. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power in support of the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Tax-exempt private activity bonds (including industrial
development bonds) are in most cases revenue bonds and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds usually is related directly to the credit standing of the
corporate user of the facility involved. In addition, the Tax-Exempt Funds may
invest in short-term municipal obligations (commonly referred to as municipal
notes). Municipal notes often are used to provide for short-term capital needs
and generally have maturities of one year or less. Municipal notes include
variable and floating rate demand obligations, tax anticipation notes, revenue
anticipation notes, construction loan notes and bond anticipation notes.
The Pennsylvania Fund will attempt to invest 100% of its assets in
Pennsylvania obligations, and the New York Fund will attempt to invest 100% of
its assets in New York obligations. 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.
<PAGE>
During temporary defensive periods when, in the Advisor's opinion, suitable
Pennsylvania or New York obligations are unavailable, or the Advisor anticipates
an increase in interest rates, the Pennsylvania and New York Funds may invest
not more than 20% of their assets in obligations, the interest on which is
exempt only from federal income taxes (such as obligations issued by states
other than Pennsylvania or New York, respectively) or is exempt only from
Pennsylvania or New York personal income taxes, respectively (such as
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities). Moreover, under such conditions, all three Tax-Exempt Funds
may make temporary investments in high-quality obligations, the interest on
which is not exempt from either federal or any state personal income taxes.
Such investments will consist of debt securities (including commercial paper) of
issuers having, at the time of purchase, a quality rating within the two highest
categories of either Standard & Poor's or Moody's, certificates of deposit,
banker's acceptances, or repurchase agreements.
Variable or Floating Rate Notes. The Tax-Exempt Funds may invest in
-------------------------------
variable or floating rate demand obligations, which are securities that provide
for adjustment in their interest rates at intervals ranging from daily to up to
one year based upon prevailing market rates for similar investments and an
adjustment formula that is intended to maintain the market value of the security
at par. These obligations normally have a stated maturity in excess of one year
but permit the holder to demand repayment of principal plus payment of accrued
interest at any time upon a specified number of days' notice. The Tax-Exempt
Funds will have the right to receive repayment of principal and payment of
accrued interest within seven days. Some notes may be rated by credit rating
agencies but unrated notes purchased by the Funds, in the Advisor's opinion,
will be of comparable quality at the time of purchase to instruments that are
rated as high quality. Where necessary to ensure that an unrated note is of
high quality, the Funds will require that the issuer's obligation to pay the
principal of the note be backed by an unconditional domestic or foreign bank
letter or line of credit, guarantee or commitment to lend. In such a case, the
quality of the bank will be looked to for purposes of satisfying the Funds'
quality standards. In addition, the Advisor will consider that foreign banks
are not subject to the same regulations as are domestic banks and may be
involved in different business activities and have different risks. Although
there may be no active secondary market for a particular instrument, the Funds
may, upon notice, exercise a note's demand feature or resell the note at any
time to a third party. If a significant portion of a Fund's assets were
invested in notes of a single issuer, however, the issuer's ability to meet the
demand feature could affect that Fund's liquidity. Included in the variable and
floating rate demand instruments that the Tax-Exempt Funds may purchase are
participations in municipal obligations purchased from and owned by financial
institutions, primarily banks, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income taxes and in the case of the New
York and Pennsylvania Funds, New York State and City, and Pennsylvania, personal
income taxes, respectively. In determining average weighted portfolio maturity,
an instrument will be deemed to have a maturity equal to the longer of the
period remaining to the next interest rate adjustment or the demand notice
period.
Municipal Bond Insurance. Certain of the municipal obligations held in the
-------------------------
portfolios of the Tax-Exempt Funds may be insured. Different types of such
insurance include a "New Issue Insurance Policy", a "Mutual Fund Insurance
Policy" or a "Secondary Market Insurance Policy".
A New Issue Insurance Policy is obtained by the issuer of the securities,
and all premiums for such a policy are paid in advance by the issuer. Such
policies are generally used by an issuer to increase the credit rating of a
lower-rated security, and therefore may increase both the purchase price and the
subsequent resale value of a security for a Fund's portfolio. They are non-
cancellable and continue in force as long as the securities are outstanding and
the respective insurers remain in business. Premiums for issuer insurance are
paid in advance by the issuer and are reflected in a somewhat higher purchase
price paid by the Tax-Exempt
<PAGE>
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.
Other Matters Specific to the New York Fund. The New York Fund is a non-
-------------------------------------------
diversified series of the Company under the Investment Company Act of 1940, as
amended (the "1940 Act"). Therefore, the New York Fund could invest all of its
assets in securities of a single issuer. However, as the Fund intends to comply
with Subchapter M of the Code, at least 50% of its total assets must be
comprised of individual issues, each of which represents no more than 5% of such
Fund's total assets and not more than 10% of the issuer's outstanding voting
securities. Those issues which represent more than 5% of the New York Fund's
total assets must be limited in the aggregate to 50% of such Fund's total
assets, provided, however, that no more than 25% of the Fund's total assets may
be invested in any one issuer. For these purposes, a security is considered to
be issued by the governmental entity (or entities) whose assets or revenues back
the security, or with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, a security is considered to
be issued by such non-governmental user. In accordance with SEC regulations,
the guarantor of a guaranteed security may be considered to be an issuer in
connection with such guarantee. Since investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio, the New York
Fund is more susceptible to economic, political and regulatory developments and
the change in value of any one security will affect the overall value of a non-
diversified portfolio and thereby subject its net asset value per share to
greater fluctuations.
Because the New York Fund invests at least 80% of its assets in New York
obligations, its net asset value is particularly sensitive to changes in the
economic conditions and governmental policies of the State of New York. See
Appendix B - "Economic Conditions in New York" for additional information
regarding these factors.
Other Matters Specific to the Pennsylvania Fund. The Pennsylvania Fund is
-----------------------------------------------
registered as a non-diversified, open-end investment company under the 1940 Act.
Therefore, the Pennsylvania Fund could invest all of its assets in securities of
a single issuer. However, as the Pennsylvania Fund also intends to comply with
Subchapter M of the Code, it must observe the same diversification restrictions
set forth in the preceding section for the New York Fund. Since investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio, the Pennsylvania Fund is also more susceptible to
economic, political and regulatory developments, and the change in value of any
one security will affect the overall value of a non-diversified portfolio and
thereby subject the Pennsylvania Fund's net asset value per share to greater
fluctuations.
<PAGE>
Because the Pennsylvania Fund invests at least 80% of its assets in
Pennsylvania obligations, its net asset value is particularly sensitive to
changes in the economic conditions and governmental policies of the Commonwealth
of Pennsylvania. See Appendix C - "Economic Conditions in Pennsylvania" for
additional information regarding these factors.
The Pennsylvania Fund's portfolio turnover rate generally will not exceed
100%. A portfolio turnover rate of 100% or higher will result in higher
transaction costs, which must be borne directly by the Pennsylvania Fund and
ultimately by its shareholders. High portfolio turnover may result in the
realization of substantial net capital gains, and possibly interest income,
representing accrued market discount. To the extent net short-term capital
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
In addition, the Pennsylvania Fund does not intend to (i) invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein, or (ii)
invest in securities issued by companies which, together with any predecessor,
have been in continuous operation for fewer than three years. The Pennsylvania
Fund would seek to notify shareholders before changing any of these policies.
Considerations Applicable to the World Fund
- -------------------------------------------
Foreign Currency Transactions. The value of the assets of the World Fund
-----------------------------
as measured in U.S. dollars may be affected favorably or unfavorably by changes
in foreign currency exchange rates and exchange control regulations, and the
Fund may incur costs in connection with conversions between various currencies.
The Fund will conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through the use of forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract 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 INVESCO Capital Management, Inc., the World
Fund's sub-advisor ("INVESCO") 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
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.
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 or the High Yield Fund may enter into
futures transactions and related options for hedging purposes as described
above. None of the Funds may invest in oil, gas or other mineral exploration or
development programs or leases. None of the Funds will invest more than 5% of
its net assets in warrants valued at the lower of cost or market, or more than
2% of its net assets in warrants which are not listed on either the New York
Stock Exchange or the American Stock Exchange.
The Company's By-Laws also prohibit the purchase or retention of the
securities of any one issuer if officers and directors of the Company, its
Advisor or underwriter owning individually more than .5% of the securities of
such issuer together own more than 5% of the securities of such issuer.
The Company may not purchase more than 10% of the voting securities of any
issuer. The Company may not invest in companies for purposes of exercising
control or management and may not invest in any securities of any issuer which
the Company is restricted from selling to the public without registration under
the Securities Act of 1933. It also may not purchase for any Fund securities of
any issuer beyond a market value of 5% of such Fund's net assets, and may not
invest in securities which are not readily marketable. The Company may not make
short sales of securities.
Although not a fundamental policy, so long as the Common Stock Fund is used
as the underlying investment vehicle for a National Life separate account, it is
the view of management that its investment policies will be affected by
insurance laws of certain states, principally New York, which, among other
things, may limit most of the Common Stock Fund's investment in common stocks to
the common stocks of listed companies meeting certain earnings tests. These
essentially are qualitative limitations imposed upon the investments of life
insurance companies in order to reduce the risk of loss.
Restrictions and policies established by resolution of the directors may be
changed by the Board, with any material changes to be reported to shareholders.
Those presently in effect provide that under circumstances that the directors
with the advice of independent investment counsel determine to be extraordinary,
assets of all Funds may be invested entirely or in part in U.S. Government
Securities or an agency thereof, or held as cash deposits in a bank or trust
company having resources of not less than $2,000,000. The securities of foreign
companies or governments may be selected as being suitable for one or more of
the Funds.
The Pennsylvania Fund. The following investment limitations are applicable
---------------------
to the Pennsylvania Fund, and may not be changed without a vote of the
Pennsylvania Fund's shareholders.
The Pennsylvania Fund may not:
1. Purchase or sell real estate, except that the Fund may invest in
municipal obligations which are secured by real estate or interests therein.
2. Make loans, except that the Fund may purchase or hold debt instruments
and enter into repurchase agreements pursuant to its investment objective and
policies.
3. Underwrite the securities of other issuers, except to the extent that
the acquisition or disposition of municipal obligations or other securities
directly from the issuer thereof in accordance with the Fund's investment
objective and policies might be deemed to be an underwriting.
4. Purchase securities of companies for the purpose of exercising control.
5. Acquire any other investment company or investment company security,
except in connection with a merger, consolidation, reorganization or acquisition
of assets.
6. Purchase securities on margin, make short sales of securities or
maintain a short position, provided that the Fund may enter into futures
contracts.
7. Issue senior securities except insofar as borrowing in accordance with
the Fund's investment objective and policies might be considered to result in
the issuance of a senior security; provided that the Fund may enter into futures
contracts.
8. Invest in or sell interests in oil, gas or other mineral exploration
development programs.
9. Invest in private activity bonds where the payment of principal and
interest are the responsibility of a company (including its predecessors) with
less than three years of continuous operations.
The above investment limitations are considered at the time that portfolio
securities are purchased.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in asset value
will not constitute a violation of the restriction.
In order to permit the sale of Pennsylvania Fund shares in certain states,
the Pennsylvania Fund may make commitments more restrictive than the investment
policies and limitations described above. Should the Pennsylvania Fund
determine that any such commitment is no longer in the best interests of the
Fund, it will revoke the commitment by terminating sales of its shares in the
state involved.
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 twelve
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 INVESCO with respect to the World Fund, and Evergreen Investment
Management Company ("Evergreen") with respect to the High Yield Fund. See the
"The Investment Advisor", 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. In the case of
those persons who also hold positions with affiliated persons of the Funds, such
positions are also indicated.
<PAGE>
PATRICK E. WELCH * - CHAIRMAN AND DIRECTOR/TRUSTEE
National Life Drive
Montpelier, VT 05604
Age 52
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 National Retirement Plan Advisors,
Inc.- Director - 1997 to present.
JOSEPH M. ROB* - PRESIDENT AND DIRECTOR/TRUSTEE
National Life Drive
Montpelier, Vermont 05604
Age 56
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,
1997 to present; American Guaranty & Trust Company - Director, 1993 to present;
LSW National Holdings, Inc. - Director, 1996 to present; Life Insurance Company
of the Southwest - Director, 1996 to present.
RICHARD J. BORDA - DIRECTOR/TRUSTEE
P. O. Box 6091
Carmel, California 93923
Age 67
National Life - Former Vice Chairman of the Board, 1985 to 1990, Director, 1975
to 1991;; 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 68
Distinguished Bank Research Professor Emeritus, The Fuqua School of Business,
Duke University, 1993 to present; USLIFE Income Fund, Inc. - Director, 1973 to
present; Sentinel Cash Management Fund, Inc. - Director, 1981 to 1993.
<PAGE>
JOHN D. FEERICK - DIRECTOR/TRUSTEE
140 West 62nd Street
New York, New York 10023
Age 62
Fordham University School of Law - Dean, 1982 to present; American Home Products
Corporation - Director, 1987 to present; The Association of the Bar of the City
of New York - President, 1992 to 1994;
RICHARD I. JOHANNESEN, JR. - DIRECTOR/TRUSTEE
87 Whitney Lane
Stowe, Vermont 05672
Age 64
Retired; Former Vice President and Manager - Bond Market Research Department,
Salomon Brothers Inc.
ROBERT B. MATHIAS - DIRECTOR/TRUSTEE
7469 East Pine Avenue
Fresno, California 93727
Age 68
Sports Consultant; formerly Executive Director- National Fitness Foundation;
former U.S. Congressman;
KENISTON P. MERRILL* - DIRECTOR/TRUSTEE
Brainstorm Farm, P. O. Box 404
Randolph, Vermont 05060
Age 62
Chairman of the Board of the Company, 1990 to 1997; Chairman of the Board of the
Pennsylvania Fund, 1990 to 1997; Sentinel Advisors Company - Chairman and Chief
Executive Officer, 1993 to 1997National Life - Executive Vice President and
Chief Investment Officer, 1994 to 1995, Senior Vice President and Chief
Investment Officer, 1989 to 1994; National Life Investment Management Company,
Inc. - Chairman and Chief Executive Officer, 1990 to 1995; American Guaranty &
Trust Company - Director, 1993 to 1997.
DEBORAH G. MILLER - DIRECTOR/TRUSTEE
1117 Hamilton Avenue
Palo Alto, CA 94301
Age 49
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
JOHN RAISIAN, Ph.D. - DIRECTOR/TRUSTEE
Hoover Institution, Stanford University
Serra and Galvey Streets
Stanford, California 94305-6010
Age 49
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.
<PAGE>
SUSAN M. STERNE - DIRECTOR/TRUSTEE
5 Glen Court
Greenwich, Connecticut 06830-4505
Age 53
Economic Analysis Associates, Inc. - President and Chief Economist, 1979 to
present.
ANGELA E. VALLOT - DIRECTOR/TRUSTEE
Director of Stakeholder Relations
Texaco, Inc.
200 Westchester Avenue
White Plains, New York 10650
Age 42
Texaco, Inc. - Director of Stakeholder Relations, 1997 to present; Arent Fox
Kintner Plotkin & Kahn - Lawyer, 1990 to 1997; Trustee, District of Columbia
Retirement Board; 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 52
Sentinel Management Company - Senior Vice President, 1993 to present; Sentinel
Administrative Service Company - Senior Vice President, 1993 to present; 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 43
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
D. RUSSELL MORGAN* - SECRETARY
National Life Drive
Montpelier, Vermont 05604
Age 43
National Life - Counsel, 1994 to present; Associate Counsel, 1990 to 1994; ESI -
Counsel, 1986 to present; 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.
*"Interested Persons" (as defined in the 1940 Act).
The officers and directors/trustees of the Funds who are employees of
National Life, Provident, 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
<PAGE>
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, 1998 to the officers and directors/trustees of the Funds as a group
was $341,348 .
The following table sets forth for the fiscal year ended November 30, 1998
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 $20,500 $3,100 None $23,600
John D. Feerick $20,500 $3,100 None $23,600
Richard I. Johannesen $23,500 $3,500 None $27,000
Robert B. Mathias $23,500 $3,500 None $27,000
Deborah G. Miller $23,500 $3,500 None $27,000
John Raisian $23,500 $3,500 None $27,000
Susan M. Sterne $23,500 $3,500 None $27,000
Angela E. Vallot $23,500 $3,500 None $27,000
</TABLE>
Code of Ethics
- --------------
The Boards of the Funds have adopted a Code of Ethics pursuant to Rule 17j-
1 under the 1940 Act, and the Advisor has adopted a similar Code of Ethics
(together, the "Codes of Ethics"). The Codes of Ethics significantly restrict
the personal investing activities of all employees of the Advisor.
The Codes of Ethics require that all employees preclear any personal
securities transaction (with limited exceptions, such as mutual funds and
government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable to
the proposed transaction. The substantive restrictions include a ban on
acquiring any securities in an initial public offering, and a prohibition on
profiting from short-term trading in securities. In addition, no employee may
purchase or sell any security which at the time is being purchased or sold by
any mutual fund advised by the Advisor. Furthermore, the Codes of Ethics
provide for seven day trading "blackout periods" which prohibit trading by
employees of the Advisor in proximity to periods of trading by mutual funds
managed by the Advisor in the same (or equivalent) security.
PRINCIPAL SHAREHOLDERS
As of December 31, 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
<PAGE>
23,142,070.792 shares amounting to 9.2% of the outstanding shares of the Company
(8.8% of the voting power) which included 3,520,339.863 shares of the Common
Stock Fund amounting to 8.3% of such Fund, 2,273,210.668 shares of the Balanced
Fund amounting to 11.5% of such Fund, 1,473,441.28 shares of the Growth Fund
amounting to 19.4% of such Fund, 1.302,097.866 shares of the Small Company Fund
amounting to 5.5% of such Fund, 1,836,406.151 shares of the World Fund
amounting to 27.3% of such Fund, 2,795,891.681 shares of the High Yield Fund
amounting to 30.1% of such Fund, 4,072,021.466 shares of the Bond Fund amounting
to 24.2% of such Fund, 755,422.62 shares of the Government Securities Fund
amounting to 10.3% of such Fund, 311,211.575 shares of Short Maturity Fund
amounting to 4.3% of such Fund, 4,278,649.16 shares of the Money Market Fund
amounting to 4.3% of such Fund, 468,674.781 shares of the Tax-Free Income Fund
amounting to 7.2% of such Fund, and 2,194.839 shares of the New York Fund
amounting to 0.2% of such Fund. National Life and its affiliates also owned
52,508.842 shares of the Pennsylvania Fund amounting to 2.0% of the outstanding
shares on such date.
As of December 31, 1998, none of the approximately 116,205 shareholders owns
as much as 5% of the voting stock of any Fund except National Life and its
affiliates, and except for the following shareholders of the New York Fund: Mr.
Louis P. Dicerbo, 261 Madison Avenue, New York, New York 10016-2303 -
148,410.254 shares amounting to 12.9% of the class; Donaldson, Lufkin & Jenrette
Securities Corporation Inc., P.O. Box 2052, Jersey City, New Jersey 07303-2052,
122,448.98 shares amounting to 10.7% of the class; Mr. John Kenny Carlin and
Mary Anne Carlin, 6110 South County Line Road, Burr Ridge, Illinois 60521-5220,
84,411.691 shares amounting to 7.3% of the class; Ms. Arlene Federico, 39
Fruitledge Road, Brookville, New York 11545-3315 - 69,588.094 shares amounting
to 6% of the class; and the following shareholder of the Short Maturity Fund:
PaineWebber for the Benefit of Catherine V. Robinson, 1970 Pompano Drive, Garden
City, South Carolina 29576-5534 - 366,195.376 shares amounting to 5.1% of the
class.
In the case of the High Yield Fund and the World Fund, the ownership by
National Life and its affiliates may be deemed to be a controlling interest in
the Fund. As a result, on matters in which these Funds vote separately as a
class, it may be difficult for the other shareholders to adopt resolutions
opposed by National Life, or to defeat proposed resolutions supported by
National Life. National Life is organized under the laws of the State of
Vermont.
THE INVESTMENT ADVISOR
The Advisor provides general supervision of the Funds' investments as well
as certain administrative and related services. The Advisor is a Vermont
general partnership, the general partners of which are affiliates of National
Life, Provident, and Penn Mutual. National Life's affiliate is the majority
partner of the Advisor. Patrick E. Welch, the Chairman and Chief Executive
Officer of the Funds, is also Chairman and Chief Executive Officer of National
Life. As such, he may be deemed to control the Advisor. Joseph M. Rob, the
President of the Funds, is also Chief Executive Officer of SFSC, the Funds'
distributor, Sentinel Administrative Service Company, the Funds' transfer agent
and fund accounting service provider, and Sentinel Management Company, an
umbrella partnership which coordinates the activities of the other partnerships.
SFSC, Sentinel Administrative Service Company and Sentinel Management Company
are all also Vermont general partnerships of which the general partners are
affiliates of National Life, Provident and Penn Mutual, with National Life being
the majority partner in each case. Mr. Rob is also Chairman, Chief Executive
Officer and President of Equity Services, Inc., a broker-dealer which is wholly
owned by National Life. John M. Grab, Jr., Thomas P. Malone, and D. Russell
Morgan, the Vice President, Vice President and Treasurer, and Secretary of the
Funds, respectively, also hold the positions with the affiliates of the Advisor
shown on pages.
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 Money Market 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. 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.
Before waivers of advisory fees, for the fiscal year ended November 30, 1998,
such fees aggregated $16,207,972, for the fiscal year ended November 30, 1997,
such fees aggregated $13,907,812, and for the fiscal year ended November 30,
1996, such fees aggregated $11,732,548.. Of the above advisory fees, $519,063
were waived in the fiscal year ended November 30, 1998.
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, 1998,
November 30, 1997 and November 30, 1996, the Pennsylvania Fund paid advisory
fees of $190,754, $188,819, and $189,231, respectively. Of these advisory
fees, $135,034 were waived in the fiscal year ended November 30, 1998.
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 Funds' net assets.
Effective March 31, 1999, the Advisor has voluntarily agreed for a period
at least until November 30, 1999, to waive the following Funds' advisory fees or
other expenses necessary to limit these Funds' overall expense ratios to the
amounts shown below:
Bond Fund Class A shares......................................... 0.76%
Government Securities Fund Class A shares........................ 0.83%
Short Maturity Government Fund Class A shares.................... 0.77%
Tax-Free Income Fund Class A shares.............................. 0.73%
Pennsylvania Fund Class A shares................................. 0.69%
New York Fund Class A shares..................................... 0.00%
In the case of the Bond Fund, the waiver of advisory fees also benefits 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 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 account). However, these
arrangements may be changed or terminated at any time after November 30, 1999.
In addition to the above waiver program, the Advisor has a policy of
waiving advisory fees to the extent, if any, necessary to maintain the aggregate
expense ratios of the Class A shares of all of the Funds, except for the World
Fund, to 1.30%. In the event that a waiver were required under this policy, the
waiver would apply to the same extent across all classes of shares of these
Funds, and the aggregate expense ratios of the Class B and Class C shares of
these Funds, and the Class D shares of the Balanced 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 1998, and no
reimbursement was required under this policy.
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 INVESCO dated March 1,
1997. In accordance with this sub-advisory agreement, INVESCO provides the
World Fund with a continuous investment program consistent with its stated
investment objectives and policies. The Advisor pays to INVESCO 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 INVESCO 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,
<PAGE>
INVESCO 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. Also as described in the
Prospectus, the Advisor has entered into a sub-advisory agreement with Evergreen
with respect to the High Yield Fund. Pursuant to this agreement, Evergreen
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 Evergreen 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 Evergreen 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
Evergreen 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 fees paid to INVESCO and Evergreen by the Advisor for the fiscal year
ended November 30, 1998 were $430,058 and $253,092, respectively. The fees paid
to INVESCO and Evergreen by the Advisor for the fiscal year ended November 30,
1997 were $329,200 and $52,589, respectively; the fees paid by the Advisor to
INVESCO were $166,806 for the period April 1, 1996 to November 30, 1996, and the
Advisor paid $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.
PRINCIPAL UNDERWRITER
SFSC acts as the principal underwriter of shares of the Funds. Its
principal business address is National Life Drive, Montpelier, Vermont 05604.
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 the total amount of underwriting commissions paid to it
in the fiscal years ended November 30, 1998, 1997 and 1996 were $4,834,945,
$4,790,051, and $5,908,736, respectively. Of this amount, SFSC retained, in the
fiscal years ended November 30, 1998, 1997 and 1996, $153,177, $148,883 and
$181,026.
During the fiscal year ended November 30, 1998, SFSC also received $360,069
in contingent deferred sales loads. It did not receive any brokerage
commissions or other compensation from the Funds. The distribution contracts of
the Company and the Pennsylvania Fund provide that SFSC use its best efforts to
continuously offer the Funds' shares. These contracts may be terminated by
either party thereto on 60 days' written notice, without penalty, and they
terminate automatically in the event of their assignment. The distribution
contracts must be approved annually in one of the same ways as described above
for the advisory agreements.
THE DISTRIBUTION PLANS
The Company and the Pennsylvania Fund have adopted several plans pursuant
to Rule 12b-1 under the 1940 Act. One such plan applies to the Class A shares of
the Company's Funds (other than the Money Market 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 May 4, 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"). In
all cases, the Plans reimburse SFSC for expenses actually incurred.
The Class A, Class B and Class C shares of each Fund (except for the Money
Market Fund) paid fees for the various activities shown below under the Plans in
the amounts set forth below for the fiscal year ended November 30, 1998:
<TABLE>
<CAPTION>
RECOVERY OF SALARY RENT
SERVICE FEES PREPAID SALES AND & OTHER
FUND PAID TO DEALERS COMMISSION BENEFITS MISC. EXPENSES
<S> <C> <C> <C> <C>
COMMON $2,200,360 $ 774,994 $1,436,259 $166,100
BALANCED 572,883 252,349 225,985 35,521
GROWTH 143,487 15,432 61,228 9,508
SMALL COMPANY 218,637 72,161 44,797 12,350
WORLD 216,941 108,476 33,592 11,464
HIGH YIELD 28,342 200,327 14,366 4,923
BOND 92,335 75,365 43,939 9,860
GOVERNMENT 60,084 - 29,158 7,295
SHORT MATURITY 136,951 - 18,914 5,594
TAX-FREE 69,781 - 38,826 8,735
N.Y. TAX-FREE 9,171 - 2,237 895
PA TAX-FREE 25,865 - 16,223 3,402
TOTAL $3,774,837 $1,499,104 $1,965,524 $275,647
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS
PRINTING & TOTAL
SALES TRAVEL & 12B-1
FUND PROMOTION ENTERTAINMENT ACCRUAL
<S> <C> <C> <C>
COMMON $ 904,192 $ 250,571 $5,732,476
BALANCED 198,650 53,784 1,339,172
GROWTH 58,328 14,285 302,268
SMALL COMPANY 78,852 18,523 445,320
WORLD 67,119 17,228 454,820
HIGH YIELD 57,915 7,465 313,338
BOND 55,211 15,040 291,750
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
GOVERNMENT 41,373 11,160 149,070
SHORT MATURITY 30,758 8,513 200,730
TAX-FREE 47,352 13,306 178,000
N.Y. TAX-FREE 4,753 1,374 18,430
PA TAX-FREE 18,691 5,189 69,370
-
-
TOTAL $1,563,194 $ 416,438 $9,494,744
</TABLE>
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 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 May 4, 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 Plan applicable to the Class D shares of the Balanced Fund became
effective on January 4, 1999. It is expected that the amounts payable to SFSC
under this Class D Plan will be equal to 0.75% of the net assets of the Class D
shares of the Balanced Fund. SFSC will use such payments to recoup the cost of
commissions paid to brokers at the time of sale of the Class D 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 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, 1998, 1997, and 1996 were $3,596,581,
$3,526,500, and $3,526,500, respectively.
Sentinel Service is a Vermont general partnership of which affiliates of
National Life, Provident 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.
<PAGE>
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 fixed income Funds where trading may be
an important factor. Subject to the direction and control of the Boards and in
accordance with its advisory agreements, the Advisor supervises the investments
of the Funds and, as an essential feature thereof, places orders for the
purchase and sale of portfolio securities and supervises their execution,
including negotiating the amount of the commission rate paid, in each case at
prices it believes to be the best then available, taking into consideration such
factors as price, commission, size of order, difficulty of execution and skill
required of the executing broker-dealer as well as the extent to which a broker
capable of satisfactory execution may provide research information and
statistical and other services to the Advisor. Sales of shares of the Funds may
also be considered as a factor in the selection of broker-dealers to execute
portfolio transactions for the Funds, subject to the conditions that commissions
paid to such broker-dealers be no higher than would otherwise be paid, and that
the prices be, in the judgment of the Advisor, the best then available.
In making such purchases and sales, the brokerage commissions are paid by
the Funds. The Funds may also buy or sell securities from, or to, dealers
acting as principals.
Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), which was enacted by Congress in connection with the elimination of fixed
commission rates on May 1, 1975, provides that, except as agreements such as
investment advisory contracts otherwise provide, money managers such as the
Advisor will not be deemed to have acted unlawfully or to have breached a
fiduciary duty if, subject to certain conditions, a broker-dealer is paid in
return for brokerage and research services an amount of commission for effecting
transactions for accounts, such as the Funds, in excess of the amount of
commission another broker-dealer would charge for effecting the transaction. In
order to cause the Funds to pay such greater commissions, 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 Advisor obtains several research services specifically in exchange for
commissions paid by the Funds and its other clients. These services primarily
consist of electronic research services from Bloomberg, ILX, Factset, and First
Call. The Funds also obtain Lipper Directors' Analytical Data from Lipper
Analytical Distributors, Inc., in exchange for Fund brokerage commissions. This
service is available only for brokerage commissions.
The research services provided by brokers through which the Funds effect
securities transactions may be used by the Advisor in managing its other client
accounts, as well as the Funds. However, the Advisor uses the commissions paid
by most of its other client accounts to obtain research services as well, and
this research is also useful in managing the Funds' accounts, as well those of
its other clients.
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, 1998, 1997, and 1996 , the
Funds paid total brokerage commissions of $1,804,189, $1,467,627, and
$1,156,527, respectively. Brokerage commissions paid by each Fund were as
follows:
YEAR ENDED
Fund 11/30/98 11/30/97 11/30/96
- ---- -------- -------- --------
Common Stock $1,152,082 $ 860,093 $ 656,739
Balanced 194,922 119,380 91,540
Growth 255,666 222,905 135,426
Small Company 201,520 128,474 162,972
World 90,926 136,775 109,850
High Yield(1) --- --- ---
Bond --- --- ---
Government Securities --- --- ---
Short Maturity Gov't (2) --- --- ---
Money Market --- --- ---
Tax-Free Income --- --- ---
New York (3) --- ---
Pennsylvania --- --- ---
(1) Commenced operations on June 23, 1997
(2) Commenced operations on March 24, 1995.
(3) Commenced operations on March 27, 1995.
The Funds paid brokerage commissions of $28,702, $24,384 and $30,367
to Janney Montgomery Scott Inc. for the fiscal years ended November 30, 1998,
1997 and 1996, respectively. Janney Montgomery Scott, Inc. is wholly owned by
Penn Mutual, an affiliate of a general partner of the Advisor. These
commissions were 1.6% of the Funds' aggregate brokerage commissions paid in the
fiscal year ended November 30, 1998. The commission rate applicable to all such
transactions was $.06 per share, the same commission rate paid by the Funds in
all its transactions. The Funds believes that the aggregate dollar amount of
transactions involving the payment of commissions to Janney Montgomery Scott,
Inc. was not materially different than the 1.6% of total commissions that were
paid to Janney Montgomery Scott, Inc.
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, 100% was
allocated in 1998, 1997, and 1996 to brokers or dealers whose furnishing of
research information was a factor in their selection.
<PAGE>
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.
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 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.
There were no significant variations in the Funds' portfolio turnover rates
over the two most recently completed fiscal years, or any anticipated variations
in these portfolio turnover rates from those in the fiscal year ended November
30, 1998, except for the Short Maturity Government Fund, for which portfolio
turnover increased from 61% to 229%, due to increased dollar roll activity and
more active trading in response to more volatile spreads in mortgage-backed
securities. The Government Securities Fund's portfolio turnover rate also
increased from 249% in fiscal 1997 to 355% in fiscal 1998, due to increased
dollar roll activity, but 1998's portfolio turnover rate was not significantly
greater than other recent years for this Fund.
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.
<PAGE>
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.
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, and the Class D shares offered by the
Balanced Fund, is also equal to the current net asset value per share. A
contingent deferred sales charge ("CDSC") may apply to redemptions of Class B
and Class D 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 "Purchase Options" 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. Such investors include officers, directors and
employees of the Funds, the Advisor, and the Advisors' affiliates. See
"Purchase Options - Class A Shares - Reduced Sales Charges" in the Prospectus.
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, Class C or Class D
shares, or Class A shares of the Money Market Fund received in exchange for
Class C shares of another Fund or Class D shares of the Balanced 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 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 Money Market 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
Money Market 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 Money Market
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 Money Market 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 Money Market 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 Money Market 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 Money
Market 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 Money Market Fund by having each shareholder proportionately contribute
shares to the Money Market 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 Money Market 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 Money Market Fund.
Since the net income of the Money Market Fund is determined and declared as
a dividend immediately prior to each time the asset value of the Money Market
Fund is determined, the net asset value per share of the Money Market 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
Money Market Fund, representing the reinvestment of dividend income, is
reflected by an increase in the number of shares of the Money Market 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.
COMPUTATION OF MAXIMUM OFFERING PRICES
AT NOVEMBER 30, 1998
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 $1,610,630,312 $330,066,783 $97,894,832 $109,597,879 $100,789,778
Shares outstanding 36,146,489 15,808,573 6,683,438 19,316,736 5,540,261
Net asset value per
share (redemption
price) $ 44.56 $ 20.88 $ 14.65 $ 5.67 $ 18.19
Maximum offering
price per share* $ 46.91 $ 21.98 $ 15.42 $ 5.97 $ 19.15
============================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=============================================================================
Government Short Maturity
Bond Securities Gov't. Money Market
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
Net assets $91,296,600 $76,498,486 $68,345,937 $98,115,042
Shares outstanding 14,157,366 7,313,259 6,917,259 98,115,042
Net asset value per
share (redemption
price) $ 6.45 $ 10.46 $ 9.88 $ 1.00
Maximum offering
price per share* $ 6.72 $ 10.90 $ 9.98 $ 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 $88,683,426 $11,977,632 $34,720,112 $31,119,632
Shares outstanding 6,437,752 982,448 2,576,514 3,190,634
Net asset value per
share (redemption
price) $ 13.78 $ 12.19 $ 13.48 $ 9.75
Maximum offering
price per share* $ 14.35 $ 12.70 $ 14.04 $ 10.16
============================================================================
</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 Money Market Fund, the
maximum offering price per share is equal to the net asset value per share.
In the case of Class B, Class C shares and Class D shares, the maximum offering
price is equal to the net asset value per share.
<PAGE>
TAXES
General
- -------
Each Fund intends to continue 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 Class C and Class D shareholders, if applicable. 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 and 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. However, "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 any amount of capital gain dividends in the different categories of
capital gain referred to above, and the portion of any ordinary 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 Money Market 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,
Class C and Class D shares, (in the case of the Balanced Fund) 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, Class C and Class D
shares, if applicable during the taxable year, or such other method as the
Internal Revenue Service may prescribe. If a Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for 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 Money Market 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. A Fund also must meet these holding period
requirements, and if a Fund fails to do so, it will not be able to "pass
through" to shareholders the ability to claim a credit or a deduction for the
related foreign taxes paid by such Fund. If a Fund satisfies the holding period
requirements and 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. 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. 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.
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, 1998, the Bond, Government Securities, Short Maturity
Government, High Yield and World Funds had capital loss carryforwards for
federal income tax purposes of $3,731,389, $2,952,502, $1,289,609, $1,490,419
and $1,283,934, 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. Exempt-interest dividends
may be treated by shareholders for all purposes as items of interest excludable
from their federal gross income under Code Section 103(a). Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security benefits and railroad retirement benefits subject to
federal income taxes. Interest on indebtedness incurred or continued to purchase
or carry shares of a RIC paying exempt-interest dividends will not be deductible
by the shareholder for federal income tax purposes to the extent attributable to
exempt-interest dividends. Each shareholder is advised to consult a tax advisor
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if such shareholder were to be treated as a "substantial
user" or "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 before February 1 of each year the portion of such Fund's dividends
declared during the preceding calendar 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
- -------------------------------------------------
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 Tax- Exempt Funds solely to reduce
the risk of changes in price or interest rates with respect to their
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 World
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
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
diversification requirements applicable to RICs.
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 a 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, a Fund would not be
able to 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 World Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's basis in World Fund shares (assuming the shares were held as a
capital asset). These rules, however, will not apply to certain transactions
entered into by the World Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, 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.
<PAGE>
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 or Penn Mutual who invest policy
dividends may open an account in any of the Funds with a minimum initial
purchase of $50 or more of policy dividends and subsequent assignment of
dividends to the Funds.
Stock certificates will be issued upon written request and without charge.
Except for confirmation of purchases made under the Open Account, the cost
of these shareholder services are borne by the Funds.
Automated Clearing House ("ACH") The ACH Network expedites the transfer of
--------------------------------
monies by electronically transmitting funds between member financial
institutions. To take advantage of this convenient fund transfer method, you
must provide Sentinel Service with a pre-designated destination. There is no
charge for this service.
Distribution Options Shareholders of the Funds may elect to reinvest
--------------------
automatically their income dividends and any capital gains distributions in
additional full and fractional shares of any one of the other Funds at the net
asset value of the selected Fund at the close of business on the valuation date
for the dividend, without the payment of any charge. Before exercising this
option, shareholders should read the portions of the Prospectus relating to the
selected Fund's objectives and policies. The target and original accounts for
dividends must be in different Funds.
Automatic Investment Plan See the Prospectus for information and an
-------------------------
application. The minimum initial investment and subsequent investment is $50.
Telephone Investment Service See the Prospectus for information and an
----------------------------
application.
Check Writing Service (Class A shares of the High Yield, Bond, Government
-------------------------------------------------------------------------
Securities, Short Maturity Government, Money Market, 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 Money Market 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.
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 Money Market 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, 1998 were:
<PAGE>
AVERAGE ANNUAL TOTAL RETURN FOR THE
-----------------------------------
<TABLE>
<CAPTION>
One Year Ended Five Years Ended Ten Years Ended
November 30, 1998 November 30, 1998 November 30, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Common Stock Fund-A 8.6% 16.8% 15.2%
Common Stock Fund-B 9.5% 17.4%(6)
Balanced Fund-A 6.6% 11.5% 11.6%
Balanced Fund-B 7.5% 12.5%(6)
Growth Fund-A 2.9% 13.7% 12.6%
Small Company Fund-A -2.5% 10.9% 10.5%(2)
Small Company Fund-B -1.8% 9.9%(6)
World Fund-A 4.8% 10.2% 13.0%(2)
World Fund-B 5.4% 9.7%(6)
High Yield Fund - A -1.4% 4.0%(1) N/A
High Yield Fund - B -1.1% 4.2%(1) N/A
Bond Fund-A 3.6% 5.5% 8.4%
Bond Fund-B 3.8% 5.8%(6)
Gov. Sec. Fund-A 5.6% 5.6% 8.1%
Short Maturity Fund-A 5.6% 6.4%(3) N/A
Tax-Free Income Fund-A 3.2% 4.8% 7.3%(4)
New York Fund-A 4.0% 6.6%(5) N/A
Pennsylvania Fund-A 2.6% 4.5% 6.6%
</TABLE>
(1) For the period June 23, 1997 (commencement of operations) through November
30, 1998.
(2) For the period from March 1, 1993 (commencement of operations) through
November 30, 1998.
(3) For the period from March 24, 1995 (commencement of operations) through
November 30, 1998.
(4) For the period from October 1, 1990, when Sentinel Tax-Free Income Fund
commenced operations, through November 30, 1998.
(5) For the period from March 27, 1995 (commencement of operations) through
November 30, 1998.
(6) For the period from April 1, 1996 (commencement of operations) through
November 30, 1998.
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, and it is assumed that the
investment is redeemed at the end of the period. No information is shown for the
Class B shares of the Growth Fund and the Class C shares of the Common Stock,
Balanced, World and High Yield Funds, since they had less than one year of
results as of November 30, 1998, or for the Class D shares of the Balanced Fund,
which had not begun operations as of November 30, 1998.
Each Fund's average annual total return and current yield will vary
depending upon market conditions, the securities comprising such Fund's
portfolio, such Fund's operating expenses and the amount of net capital gains or
losses realized by such Fund during the period. An investment in any of the
Funds will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
Each of the Funds also from time to time may advertise its total return for
specified periods without subtracting the sales load, to illustrate better the
performance of money already invested in the Fund during those periods.
On occasion, the Funds may compare their average annual total return figures
to mutual fund averages such as those compiled by Lipper Analytical Services,
Inc., and to market indices such as the Dow Jones Industrial Average, the
Standard & Poor's 500 and the Shearson Lehman Aggregate Bond Index.
The 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, 1998 were:
Class A Shares Class B Shares Class C shares
--------------- --------------- ---------------
High Yield 9.55% 9.43% 8.47%
Bond Fund 6.09% 5.44%
Tax-Free Income 3.91% N/A
Pennsylvania 3.99% N/A
New York 4.33% N/A
Gov.'t Securities 5.59% N/A
Short Maturity 6.05% N/A
The average daily number of shares outstanding during the period that were
eligible to receive dividends were:
Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
High Yield 3,155,048 5,683,846 190,006
Bond Fund 14,174,880 2,475,185
Tax-Free Income 6,428,407 N/A
Pennsylvania 2,580,551 N/A
New York 969,691 N/A
Gov.'t Securities 7,339,878 N/A
Short Maturity 6,,941,348 N/A
<PAGE>
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, 1998 were 9.95%, 6.34%,
4.08%, 4.16%, 4.51%, 5.83% and 6.11%, 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
done by multiplying the tax-exempt part of the Fund's yield by an amount which
is one minus a stated tax rate, and adding the result to that part, if any, of
the Fund's yield that is taxable. As of November 30, 1998, the tax-equivalent
yield of the Tax-Free Income Fund was 6.75 %, the tax-equivalent yield of the
Pennsylvania Fund was 7.08%, and the tax-equivalent yield of the New York Fund
was 8.02%. For purposes of the above tax-equivalent yield calculations the
assumed federal tax rate is 39.6%. In the case of the New York and Pennsylvania
Funds, the assumed combined federal and state tax rates are 43.75% and 41.27%,
respectively.
The Money Market 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 Money Market Fund is required to disclose its annualized yield for
certain seven-day base periods in a standardized manner which does not take into
consideration any realized or unrealized gains or losses on portfolio
securities. The SEC also permits the calculation of a standardized effective or
compounded yield. This is computed by compounding the unannualized base period
return which is done by adding one to the base period return, raising the sum to
a power equal to 365 divided by seven and subtracting one from the result.
The yield quoted should not be considered a representation of the yield of
the Money Market 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 Money Market Fund and changes in interest rates on such investments, but
also on changes in the Money Market Fund's expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Fund and for providing a basis for comparison with other investment
alternatives. However, the Money Market 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 PricewaterhouseCoopers 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' 1998 Annual Report to Shareholders.
<PAGE>
APPENDIX A
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are 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.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
Al, Baal, Bal and B1.
Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments
are of "favorable quality . . . but . . . lacking the undeniable strength of
the preceding grades."
<PAGE>
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-l repayment capacity
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and with established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt 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 issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor to meet its financial commitment on
the obligation is extremely strong.
AA Debt rated "AA" differs from the highest-rated issues only in small
degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
<PAGE>
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. However, the obligor's capacity to meet
its financial 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 on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having B
significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of
speculation. While CC such debt will likely have some quality and
protective characteristics, C these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
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 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.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-l"
for the highest quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments 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.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
<PAGE>
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
<PAGE>
APPENDIX B
ECONOMIC AND OTHER CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York"). Other factors will affect issuers. The summary is based primarily upon
one or more of the most recent publicly available offering statements relating
to debt offerings of State issuers, however, it has not been updated. The 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. The City's current
financial plan assumes that after noticeable improvements in the City's economy
during calendar years 1997 and 1998, economic growth will slow, with local
employment increasing modestly through fiscal year 2002.
For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating results
as reported in accordance with generally accepted accounting principles
("GAAP"), after discretionary transfers. The City has been required to close
substantial gaps between forecast revenues and forecast expenditures 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 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 financial plan, including the City's current financial plan for the
1999 through 2002 fiscal years (the "1999-2002 Financial Plan", "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.
City's Financing Program. 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 1999
through 2002 contemplates the issuance of $5.2 billion of general obligation
bonds and $5.4 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 debt the
City is authorized to incur. 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. On July 30,
1998, the State Appellate Division affirmed the trial court's decision.
Plaintiffs filed a notice of appeal with the State's Court of Appeals for an
appeal as of right of the Appellate Division order. The appeal as of right was
dismissed on September 22, 1998. Plaintiffs subsequently filed a motion for
leave to appeal with the Court of Appeals, which motion was denied on December
22, 1998. Even with the capacity of the Transitional Finance Authority, the
City may be required temporarily to delay entering into new contractual
commitments at the end of fiscal year 1999 and, without additional legally
authorized borrowing capacity, under projections (current as of December 18,
1998), would reach the limit of its capacity to enter into new contractual
commitments in fiscal year 2000. In addition, the City issues revenue notes and
tax anticipation notes to finance its seasonal working capital requirements (See
"Seasonal Financing Requirements" within). 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. The City's planned capital and
operating expenditures are dependent upon the sale of its general obligation
bonds and notes, and the Water Authority and Transitional Finance Authority
bonds.
1998 Fiscal Year. For the 1998 fiscal year, (July 1, 1997-June 30, 1998)
the City had an operating surplus, before discretionary and other transfers, and
achieved balanced operating results, after discretionary and other transfers, in
accordance with GAAP. The 1998 fiscal year is the eighteenth year that the City
has achieved an operating surplus, before discretionary and other transfers, and
balanced operating results, after discretionary and other transfers.
1999-2002 Financial Plan. On November 18, 1998, the City released the
Financial Plan for the 1999 through 2002 fiscal years, which relates to the City
and certain entities which receive funds from the City. The City Financial Plan
is a modification to the financial plan submitted to the New York State
Financial Control Board (the "Control Board") on June 26, 1998 (the "June
Financial Plan"). The City Financial Plan projects revenues and expenditures
for the 1999 fiscal year balanced in accordance with GAAP, and project gaps of
$2.2 billion, $2.9 billion and $2.4 billion for the 2000 through 2002 fiscal
years, respectively, after implementation of a gap closing program to reduce
agency expenditures by $200 million in the 1999 fiscal year and approximately
$80 million in each of fiscal years 2000 through 2002.
The City's projected budget gaps for the 2001 and 2002 fiscal years do not
reflect the savings expected to result from the prior years' programs to close
the gaps set forth in the City Financial Plan. Thus, for example, recurring
savings anticipated from the actions which the City proposes to take to balance
the fiscal year 2000 budget are not taken into account in projecting the budget
gaps for the 2001 and 2002 fiscal years.
<PAGE>
The 1999-2002 Financial Plan includes a proposed discretionary transfer in
the 1999 fiscal year of $465 million to pay debt service due in the fiscal year
2000. In addition, the Financial Plan reflects enacted and proposed tax
reduction programs totaling $429 million, $604 million and $606 million in
fiscal years 2000 through 2002, respectively, including the elimination of the
City sales tax on all clothing as of December 1, 1999, the extension of current
tax reductions for owners of cooperative and condominium apartments starting in
fiscal year 2000 and a personal income tax credit for child care and for
resident holders of Subchapter S corporations starting in fiscal year 2000,
which are subject to State legislative approval, and reduction of the commercial
rent tax commencing in fiscal year 2000.
Assumptions. The 1999-2002 Financial Plan is based on numerous
assumptions, including the condition of the City's and the region's economy and
a modest employment recovery and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The 1999-2002 Financial Plan
is subject to various other uncertainties and contingencies relating to, among
other factors, the extent, if any, to which wage increases for City employees
exceed the annual wage costs assumed for the 1999 through 2002 fiscal years;
continuation of projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability of the
State to provide the aid contemplated by the Financial Plan and to take various
other actions to assist the City; the ability of Health and Hospitals
Corporation (the "HHC"), the Board of Education (the "BOE") and other such
agencies to maintain balanced budgets; the willingness of the Federal government
to provide the amount of Federal aid contemplated in the Financial Plan; the
impact on City revenues and expenditures of Federal and State welfare reform and
any future legislation affecting Medicare or other entitlement programs; the
ability of the City to implement cost reduction initiatives; the success with
which the City controls expenditures; the impact of conditions in the real
estate market on real estate tax revenues and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999 and which is projected to provide
revenue of $183 million, $524 million, and $544 million in the 2000, 2001 and
2002 fiscal years, respectively; and (ii) collection of the projected rent
payments for the City's airports, totaling $6 million, $365 million, $155
million and $185 million in the 1999 through 2002 fiscal years, respectively, a
substantial portion of which may depend on the successful completion of
negotiations with The Port Authority of New York and New Jersey (the "Port
Authority") or the enforcement of the City's rights under the existing leases
through pending legal actions. In addition, the economic and financial
condition of the City may be affected by various financial, social, economic and
political factors which could have a material effect on the City.
Municipal Unions. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining units,
which together represent approximately 98% of the City's workforce, and assumes
that the City will reach agreement with its remaining municipal unions under
terms which are generally consistent with such settlements and arbitration
awards. These contracts are approximately five years in length and have a total
cumulative net increase of 13%. Assuming the City reaches similar settlements
with its remaining municipal unions, the cost of all settlements for all City-
funded employees, as reflected in the Financial Plan, would total $1.2 billion
in the 1999 fiscal year and exceed $2 billion thereafter. The Financial Plan
provides no additional wage increases for City employees after their contracts
expire in fiscal years 2000 and 2001.
Intergovernmental Aid. The City depends on the State for aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected; that State budgets will be adopted by the
April 1 statutory deadline, or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in reductions or delays in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
Year 2000 Computer Matters. The year 2000 presents potential operational
problems for computerized data files and computer programs which may recognize
the year 2000 as the year 1900, resulting in possible system failures or
miscalculations. In November 1996, the City's Year 2000 Project Office was
established to develop a project methodology, coordinate the efforts of City
agencies, review plans and oversee implementation of year 2000 projects. At
that time, the City also evaluated the capabilities of the City's Integrated
Financial Management System and Capital Projects Information System, which are
the City's central accounting, budgeting and payroll systems, identified the
potential impact of the year 2000 on these systems, and developed a plan to
replace these systems with a new system which is expected to be year 2000
compliant prior to December 31, 1999. The City has also performed an assessment
of its other mission-critical and high priority computer systems in connection
with making them year 2000 compliant, and the City's agencies have developed and
begun to implement both strategic and operational plans for non-compliant
application systems. In addition, the City Comptroller is conducting audits of
the progress of City agencies in achieving year 2000 compliance. While these
efforts may involve additional costs beyond those assumed in the Financial Plan,
the City believes, based on currently available information, that such
additional costs will not be material.
The Mayor's Office of Operations has stated that work has been completed,
and all or part of the necessary testing has been performed, on approximately
49% (current as of December 18, 1998) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is in the process of developing
contingency plans for all mission-critical and high priority systems, if such
systems are not year 2000 compliant by pre-determined dates. The City is also in
the process of contacting its significant third party vendors regarding the
status of their compliance. Such compliance is not within the City's control,
and therefore the City cannot assure that there will not be any adverse effects
on the City resulting from any failure of these third parties.
Certain Reports. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the Control Board
staff, the Office of the State Deputy Comptroller (the "OSDC"), the City
Comptroller, the City's Independent Budget Office (the "IBO") and others issue
reports and make public statements regarding the City's financial condition,
commenting on, among other matters, the City's financial plans, projected
revenues and expenditures and actions by the City to eliminate projected
operating deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately provided for
future contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services.
On December 30, 1998, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1999 fiscal year, the report identified a
possible surplus of between $593 million and $897 million, including $465
million in the budget stabilization account. Potential risks identified in the
report for the 1999 fiscal year include $135 million of greater overtime
spending and a write-down of outstanding education aid receivables that are ten
years past due, which are estimated to be approximately $39 million in the 1999
fiscal year. With respect to fiscal years 2000 through 2002, the report
identified baseline risks of between $454 million and $636 million, $223 million
and $1.2 billion, and $399 million and $1.9 billion, respectively, depending
upon whether the State approves the extension of the 14% personal income tax
surcharge and whether the City incurs additional labor costs as a result of the
expiration of labor contracts starting in fiscal year 2001 which, if settled at
the current forecast level of inflation, would result in additional costs
totaling $487 million in fiscal year 2001 and $987 million in fiscal year 2002.
Additional risks identified in the report for fiscal years 2000 through 2002
include assumed payments from the Port Authority relating to the City's claim
for back rentals, which are the subject of arbitration, possible increased
overtime expenditures and the write-down of outstanding education aid
receivables increasing to $109 million in fiscal year 2002. The report noted
that these risks may be partially offset in each of fiscal years 2000 through
2002 by additional resources of between approximately $500 million and $700
million to $950 million, depending on the level of assumed tax revenues, which
would result in projected budget gaps, including the gaps projected in the
Financial Plan, of between $1.9 billion and $2.3 billion, $2.3 billion and $3.7
billion, and $1.9 billion and $3.8 billion in fiscal years 2000 through 2002,
respectively. The report noted that, in the past, the City has relied on
initiatives such as agency expenditure reductions, asset sales and increased
State and Federal aid to close projected budget gaps. The report further noted
that an area of concern is the projected 8.4% growth in the 1999 fiscal year of
operating expenditures (which exclude State and Federal categorical aid and debt
service).
<PAGE>
On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report's
findings relate only to current infrastructure and do not address future
capacity or technology needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next decade to bring the
City's infrastructure to a systematic state of good repair and address new
capital needs already identified. The report stated that the City's current
Ten-Year Capital Strategy, together with funding received from other sources, is
projected to provide approximately $52.08 billion. The report noted that the
City's ability to meet all capital obligations is limited by law, as well as
funding capacity, and that the issue for the City is how best to set priorities
and manage limited resources.
On December 16, 1998, the staff of the OSDC issued a report on the City
Financial Plan. The report concluded that the City is likely to end fiscal year
1999 with a $1 billion surplus. With respect to fiscal years 2000 through 2002,
the report concluded that the budget gaps for such years could be larger than
those projected by the City, totaling $3.1 billion, $3.6 billion and $3.2
billion in fiscal years 2000 through 2002, respectively. The risks identified
in the report include (i) assumed payments from the Port Authority relating to
the City's claim for back rentals, which are the subject of arbitration, (ii)
greater than expected increases in health insurance costs and (iii) the
potential need for the City to provide funding to HHC for wage increases and to
BOE for Project Read and teachers' supplemental salaries which were previously
funded by the State. The report also noted that potential future liabilities
could result from possible changes in the investment earnings assumption or
other assumptions affecting pension costs. In addition, the report noted that
the City is vulnerable to an economic downturn, which could reduce revenues and
increase City pension contributions and public assistance caseloads and that the
City Financial Plan does not make any provision for (i) wage increases after the
expiration of current contracts which, at projected local inflation rates, would
increase the gaps by $430 million and $940 million in fiscal years 2001 and
2002, respectively, or (ii) the possibility that the 14% personal income tax
surcharge will not be extended.
In the report the OSDC identified several other concerns. With respect to
property taxes, the report noted that the City is supporting legislation that
would prevent certain property owners from using actual sales of real property
as evidence of whether an assessment is unequal, and that, if such legislation
is not enacted, City officials feel that the City's liability in tax certiorari
cases could increase substantially over current estimates. With respect to
welfare reform, the report expressed concern that the City Financial Plan does
not reflect the full impact of implementing Federal welfare reform and other
changes in State public assistance programs, including compliance with the
Federal work requirements.
The report also expressed concern about the City's growing debt burden,
which will reach 19% of tax revenues by fiscal year 2002, and noted that HHC is
facing significant budget gaps starting in fiscal year 2000 and will face
increasing competitive pressures in the near future when the State begins
requiring most Medicaid recipients to enroll in managed care plans. With respect
to the City's program to repair or replace computer systems to solve the Year
2000 problem, the report noted that an additional $100 million may be required
from the operating budget for consulting contracts.
On December 21, 1998, the staff of the Control Board issued a report
reviewing the City Financial Plan. The report noted that the City is likely to
end the 1999 fiscal year in balance. However, the report identified risks of
$504 million, $284 million and $619 million for fiscal years 2000 through 2002,
respectively, which when combined with the City's projected gaps, results in
estimated gaps of $2.7 billion, $3.2 billion and $3.0 billion for fiscal years
2000 through 2002, respectively, before making provision for any increased labor
costs which may occur when the current contracts with City employees expire in
calendar year 2000. With respect to subsequent fiscal years, the principal
risks identified in the report include (i) the possibility that the City may
decide to fund the $63 million annual cost of teachers' salary supplementation
for fiscal years 2000 through 2002, which the State failed to fund in the 1999
fiscal year, and an additional risk of $109 million in fiscal year 2002 for BOE
resulting from the write-down of funds owed to BOE by the State which have been
outstanding for ten years or more; (ii) the receipt of assumed rental payments
from the Port Authority relating to the City's claim for back rents, which are
the subject of arbitration; and (iii) overtime and health insurance expenditures
which could be greater than assumed in the City Financial Plan. With respect to
fiscal year 2000, the report noted that it is unlikely, given the economic
outlook, that the City will approach the $2.1 billion surplus rolled from fiscal
year 1998 into fiscal year 1999. The report further noted that the gaps facing
the City are being caused by slowly growing revenues, reflecting the City's tax
reduction programs, as well as expenditure growth from increased salaries and
wages in the City's current collective bargaining agreements, increased health
insurance costs and an expanding debt service burden.
Seasonal Financing Requirements. The City since 1981 has fully satisfied
its seasonal financing needs in the public credit markets, repaying all short-
term obligations within their fiscal year of issuance. The City has issued $500
million of short-term obligations in the 1999 fiscal year to finance the City's
projected cash flow needs for the 1999 fiscal year. The City issued $1.075
billion in short-term obligations in fiscal year 1998 to finance the City's
projected cash flow needs for the 1998 fiscal year. The City issued $2.4
billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Ratings. As of January 15, 1999, Moody's Investors Service, Inc.
("Moody's") rated the City's outstanding general obligation bonds A3, Standard &
Poor's ("Standard & Poor's") rated such bonds A- and Fitch IBCA, Inc. ("Fitch")
rated such bonds A-. In July 1995, Standard & Poor's revised downwards its
ratings on outstanding general obligation bonds of the City from A- to BBB+. In
July 1998, Standard & Poor's revised its rating of City bonds upward to A-.
Moody's rating of City bonds was revised in February 1998 to A3 from Baa1. 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, 1998, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.4 and $3.1 billion of outstanding net long-term debt. As of
October 22, 1998, the Water Authority had approximately $8.4 billion aggregate
principal amount of outstanding bonds, inclusive of subordinate second
resolution bonds, and $600 million aggregate principal amount of outstanding
commercial paper notes.
Water, Sewer and Waste. 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.
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.
Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001.
The Financial Plan includes the estimated costs of phasing out the use of
landfills located within the City. A suit has been commenced against the City
by private individuals under the Resource Conservation and Recovery Act seeking
to compel the City to take certain measures or, alternatively, to close the
Fresh Kills landfill. If as a result of such litigation, the City is required
to close the landfill earlier than required by State legislation, the City could
incur additional costs during the Financial Plan period. Pursuant to court
order, the City is currently required to recycle 2,100 tons per day of solid
waste and is required to recycle 3,400 tons per day by July 1999 and 4,250 tons
per day by July 2001. The City is currently recycling slightly over 2,100 tons
per day of solid waste. The City may seek to obtain amendments to Local Law No.
19 to modify this requirement. If the City is unable to obtain such amendments
and is required to fully implement Local Law No. 19, the City may incur
substantial costs.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
<PAGE>
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, 1998, the City estimated its
potential future liability on account of outstanding claims amounted to
approximately $3.5 billion.
<PAGE>
New York State
Current Economic Outlook. The national economy strengthened during 1997
and accelerated its rate of expansion as 1998 began. National economic growth
in both 1998 and 1999 is expected to be slower than it was during 1997. The
State Division of the Budget projects real GDP growth of 3.4 percent in 1998,
below the 1997 growth rate of 3.9 percent. In 1999, real GDP growth is expected
to fall further, to 1.6 percent. The State economy has also continued to
expand, but growth remains somewhat slower than in the nation. The State's
forecast of the State's economy projects continued growth in 1998 and 1999 for
employment, wages, and personal income, although for 1999, a significant
slowdown in the growth rates of personal income and wages are expected.
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. Government downsizing has also moderated job
gains. With the exception of government and manufacturing, every sector
recorded employment gains for the first six months of 1998, with the service and
trade sectors accounting for most of the increase. Much of the service sector
increase occurred in business services. According to data through June 1998,
since December 1994, total employment has risen 286,000, with private employment
up by 330,000 and government employment down by 44,000.
Overall, employment growth is expected to be 2.0 percent in 1998, the
strongest in a decade, but is expected to drop to 1.0 percent in 1999,
reflecting the slowing growth in the national economy, continued spending
restraint in government, less robust profitability in the financial sector and
continued restructuring in the manufacturing, health care and banking sectors.
Employment growth in the State was 1.5 percent for 1997. On the national level,
employment growth was 2.6 percent for 1997 and is projected to be 2.5 percent
and 1.9 percent for 1998 and 1999, respectively.
On an average annual basis, the State unemployment rate is projected to
drop through 1998 and 1999 reaching 5.3 percent for 1999 as compared to the 6.4
percent level of 1997. The State unemployment rate for 1998 is projected to be
5.6 percent. For the nation as a whole, the unemployment rate was 5.0 percent
for 1997, is projected to be 4.5 percent in 1998 and 4.6 percent in 1999.
Personal income growth in both the State and nation is projected to be 5.0
percent for 1998. Personal income growth in 1997 was 4.7 percent and 5.6
percent respectively for the State and nation. Personal income growth in the
State is projected to decline to 3.4 percent for 1999, below the 4.2 percent
level as projected for the nation. Growth in bonus payments is expected to
moderate significantly, a distinct shift from the unusually high increases of
the last few years.
The 1998-1999 Fiscal Year. The State's current fiscal year commenced on
April 1, 1998 and ends on March 31, 1999. On January 20, 1998 the Governor
presented his 1998-1999 Executive Budget (the "Executive Budget") to the
Legislature. The State's budget for the 1998-1999 fiscal year was not adopted by
the April 1 statutory deadline. Prior to adoption of the budget, the Legislature
enacted necessary appropriations for state-supported debt service. On April 18,
1998, the State Legislature passed a State budget for the State's 1998-1999
fiscal year, and on April 25, 1998 the Governor vetoed certain of the increased
spending initiatives in the budget passed by the State Legislature.
The State's financial plan for the 1998-1999 fiscal year (the "1998-1999
Financial Plan") is projected to be balanced on a cash basis in the General
Fund. (The General Fund is the principal operating fund of the State. It is
the State's largest fund and receives almost all State taxes. In the State's
1998-1999 fiscal year, the General Fund is expected to account for approximately
70.1 percent of total State Funds disbursements). Previously, the State had
projected a potential budget imbalance of up to $1.68 billion for the 1998-1999
fiscal year. Total General Fund receipts, including transfers from other funds,
are projected to be $37.84 billion, an increase of over $3 billion from the
$34.55 billion recorded in the 1997-1998 fiscal year. Total General Fund
disbursements, including transfers to support capital projects, debt service and
other funds, are estimated at $36.78 billion. This represents an increase of
$2.43 billion or 7.1 percent from 1997-1998, or an average annual increase of
only 2.3 percent since 1994-1995.
The State Division of the Budget estimates that the 1998-1999 Financial
Plan includes approximately $64 million in non-recurring resources or savings.
In terms of receipts, the transfer of a portion of the budget surplus
recorded in 1997-1998 to 1998-1999 exaggerates the "real" growth in State
receipts from year to year by depressing reported 1997-1998 figures and
inflating 1998-1999 projections. Conversely, the incremental cost of tax
reductions newly effective in 1998-1999 and the impact of statutes earmarking
certain tax receipts to other funds work to depress apparent growth below the
underlying growth in receipts attributable to expansion of the State economy.
Net personal income tax collections are projected to reach $21.44 billion,
nearly $3.70 billion above the reported 1997-1998 collection total with $2.4
billion of the increase reflecting the net impact of the transfer of the surplus
from State fiscal year 1997-1998 to the 1998-1999 fiscal year. This tax
continues to account for over half of the State's General Fund receipts base.
User tax collections are projected to reach $7.21 billion in fiscal year 1998-
1999, an increase of $170 million over the 1997-1998 fiscal year.
Business tax receipts are projected to be $4.79 billion for State fiscal
year 1998-1999. This represents an approximate 2.0 percent decline from the
1997-1998 results. The year-over-year decline in projected receipts in this
category is largely due to statutory changes resulting in diversion of General
Fund petroleum business and utility tax receipts. Additionally, the State's
economic forecast has profit growth slowing significantly in 1998.
The 1998-1999 Financial Plan, as of June 1998, projected General Fund
receipts to be received from the following sources in the approximate following
proportions: i) personal income tax: 56.6 percent, ii) user taxes and fees: 19.0
percent, iii) business taxes 13.2 percent, iv) other taxes: 2.7 percent
(includes estate and gift taxes), and v) miscellaneous receipts: 8.5 percent
(includes investment income, medical provider assessments and minor federal
grants).
In terms of disbursements, the 1998-1999 Financial Plan, as of June 1998,
projected General Fund disbursements to be allocated to the following categories
in the approximate following proportions: i) grants to local government: 68.4
percent, ii) state operations: 18.2 percent, iii) debt service: 6.0 percent, iv)
general State charges: 6.0 percent (includes contributions to pension systems
and health insurance for State employees) and v) capital/other: 1.4 percent.
The 1998-1999 Financial Plan projects spending of $25.14 billion for grants
to local government, an increase of $1.88 billion or 8.1 percent over the prior
year. The largest annual increases are for educational programs, Medicaid,
other health and social welfare program, and community project grants. State
operations spending, which accounts for the costs of running State agencies, is
projected at $6.70 billion, an increase of $511 million or 8.3 percent from the
prior year. General State Charges, which accounts primarily for fringe benefits
for State employees, is projected to total $2.22 billion in 1998-1999, a modest
decrease from the 1997-1998 fiscal year.
Future Fiscal Years. The Executive Budget projected budget gaps of
approximately $1.75 billion in 1999-2000 growing to approximately $3.75 billion
in the 2000-2001 fiscal year. These gaps were projected after assuming
unspecified savings actions totaling $600 million in 1999-2000 and $800 million
in 2000-2001. Moreover, the State's projections for 1999-2000 also assume $250
million in additional receipts from the settlement of State claims against the
tobacco industry. As a result of the budget passed by the State Legislature and
the vetoes of the Governor of certain increased spending in the State budget
passed by the Legislature, the potential imbalance in the 1999-2000 fiscal year
is expected to be roughly $1.3 billion, or about $400 million less than
previously projected. Consistent with past practice, the projections do not
include any costs associated with new collective bargaining agreements after the
expiration of the current round of contracts at the end of the 1998-1999 fiscal
year.
The STAR program, which dedicates a portion of personal income tax receipts
to fund school tax reductions, has a significant impact on General Fund
receipts. STAR is projected to reduce personal income tax revenues available to
the General Fund by an estimated $1.3 billion in the 2000-2001 fiscal year.
Measured from the 1998-1999 base, scheduled reductions to estate and gift, sales
and other taxes, reflecting tax cuts enacted in the 1997-1998 and 1998-1999
fiscal years, will lower General Fund taxes and fees by an estimated $1.8
billion in the 2000-2001 fiscal year. The fiscal effects of tax reductions
adopted in the last several fiscal years (including 1998-1999) are projected to
grow more substantially beyond the 1998-1999 fiscal year, with the incremental
annual cost of all currently enacted tax reductions estimated at over $4 billion
by the time they are fully effective in State fiscal year 2002-2003.
Disbursement projections for the out years currently assume additional outlays
for i) school aid, ii) Medicaid, iii) welfare reform, iv) mental health
community reinvestment, and v) other multi-year spending commitments in law.
<PAGE>
GAAP-Basis Results. On March 31, 1998, the State recorded on a GAAP-basis,
its first-ever accumulated positive balance in its General Fund. This
accumulated surplus was $567 million. This compares to accumulated deficits of
$995 million and $2.928 billion for the fiscal years ended March 31, 1997 and
March 31, 1996, respectively. The improvement in the State's GAAP position, is
attributable, in part, to the cash surplus recorded at the end of the State's
1997-1998 fiscal year. Much of that surplus is reserved for future
requirements, but a portion is being used to meet spending needs in 1998-1999.
Thus, the State expects some deterioration in its GAAP position, but expects to
maintain a positive GAAP balance through the end of the 1998-1999 fiscal year.
The General Fund accumulated surplus is projected to be $27 million at the end
of the 1998-1999 fiscal year.
The State reported a General Fund operating surplus of $1.56 billion for
the 1997-1998 fiscal year, as compared to an operating surplus of $1.93 billion
for the 1996-1997 fiscal year. Revenues increased 1.8 percent, and expenditures
increased 0.4 percent from the 1996-1997 fiscal year.
Special Considerations. On July 23, 1998, the New York State Comptroller
issued a report which noted that a significant cause for concern is the budget
gaps in the 1999-2000 and 2000-2001 fiscal years, which the State Comptroller
projected at $1.8 billion and $5.5 billion, respectively, after excluding the
uncertain receipt of $250 million of funds from the tobacco settlement assumed
for each of such fiscal years, as well as the unspecified actions assumed in the
State's projections. The State Comptroller also stated that if the securities
industry or economy slows, the size of the gaps would increase.
According to the State Division of the Budget, uncertainties with regard to
the economy present the largest potential risk to budget balance in New York
State. The Executive Budget identified various risks, including either a
financial market or broader economic correction during the State's financial
plan period, which risks are heightened by the relatively lengthy expansion
currently underway, and the financial turmoil in Asia. In addition, the
Executive Budget noted that a normal forecast error of one percentage point in
the expected growth rate could raise or lower receipts by over $1 billion by the
last year of the projection period, and that funding is not included for any
costs associated with new collective bargaining agreements after the expiration
of the current contracts at the end of the 1998-1999 fiscal year. Furthermore,
the securities industry is more important to the New York economy than the
national economy, and a significant deterioration in stock market performance
could ultimately produce adverse changes in wage and employment levels.
The State's financial plans and executive budgets are based upon forecasts
of national and State economic activity. Economic forecasts have frequently
failed to predict accurately the timing and magnitude of changes in the national
and State economies. Many uncertainties exist in forecasts of both the national
and State economies, particularly in light of the recent volatility in the
international economy and the domestic financial markets, 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 remainder
of the 1998-1999 fiscal year and subsequent fiscal years, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the Federal government have helped to create
projected structural budget gaps for the State. To address a potential
imbalance in a given fiscal year, the State would be required to take actions to
increase receipts and/or reduce disbursements as it enacts the budget for that
year, and, under the State Constitution, the Governor is required to propose a
balanced budget each year.
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.
Year 2000 Computer Matters. New York State is currently addressing "Year
2000" data processing compliance issues. In 1996, the State created the Office
of Technology (the "OFT") to help address statewide technology issues, including
the Year 2000 issue. OFT has estimated that investments of at least $140
million will be required to bring approximately 350 State mission-critical and
high-priority computer systems not otherwise scheduled for replacement into Year
2000 compliance, and the State is planning to spend $100 million in the 1998-
1999 fiscal year for this purpose. As of June 26, 1998, work had been completed
on roughly 20 percent of these mission-critical and high-priority systems. All
remaining unfinished mission-critical and high-priority systems had at least 40
percent or more of the work completed. Contingency planning is underway for
those systems which may be non-compliant prior to failure dates.
Prior Fiscal Years (Cash Basis). The State ended its 1997-1998 fiscal
year balanced on a cash basis, with a reported General Fund cash surplus of
$2.04 billion resulting from revenue growth and lower spending on welfare,
Medicaid, and other entitlement programs. General Fund receipts and transfers
from other funds for the 1997-1998 fiscal year (including net tax refund reserve
account activity) totaled $34.55 billion, an annual increase of $1.51 billion,
or 4.57 percent over the 1996-1997 fiscal year. General Fund disbursements and
transfers to other funds were $34.35 billion, an annual increase of $1.45
billion or 4.41 percent. The State closed a budget gap of approximately $2.3
billion for the 1997-1998 fiscal year. Gap-closing actions included cost
containment in State Medicaid, the use of the $1.4 billion 1996-1997 fiscal year
budget surplus to finance 1997-1998 fiscal year spending, control on State
agency spending and other actions.
The State ended its 1996-1997 fiscal year balanced 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 was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. 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.
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 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.
Provisions prohibiting the State from returning to a reliance upon cash flow
manipulation to balance its budget will remain in bond covenants until the LGAC
bonds are retired.
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, 1998, the total amount of outstanding general obligation
debt was approximately $5.033 billion, including $293.6 million in bond
anticipation notes. The total amount of moral obligation debt was approximately
$1.390 billion (down from $3.272 billion as of March 31, 1997), and $24.015
billion of bonds issued primarily in connection with lease-purchase and
contractual-obligation financing of State capital programs were outstanding.
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease purchase and
contractual obligations of public authorities (and municipalities) where debt
service is paid from State appropriations (including dedicated tax sources, and
other revenues such as patient charges and dormitory facilities rentals). In
addition, a broader classification, referred to as State-related debt, includes
State-supported debt, as well as certain types of contingent obligations,
including moral obligation financing, certain contingent contractual-obligation
financing arrangements, and State-guaranteed debt, where debt service is
expected to be paid form other sources and State appropriations are contingent
in that they may be made and used only under certain circumstances.
The total amount of State-supported debt outstanding grew from 3.4 percent
of personal income in the State in the 1988-1989 fiscal year to 6.1 percent for
the 1997-1998 fiscal year while State-related debt outstanding declined from 6.8
percent to 6.6 percent of personal income for the same period. Thus, State-
supported debt grew at a faster rate than personal income while State-related
obligations grew at a slower rate. At the end of the 1997-1998 fiscal year,
there was $37 billion of outstanding State-related debt and $34.25 billion of
outstanding State-supported debt.
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 December 31,
1997, 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 $84 billion, up from $75.4 billion as of September
30, 1996. 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. As of July 10, 1998, Moody's and Standard & Poor's rated the
State's outstanding general obligation bonds A2 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.
<PAGE>
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 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 1998-1999 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 1998-1999 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.
<PAGE>
APPENDIX C
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
The following information is a brief summary of factors affecting the
economy of the Commonwealth of Pennsylvania and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based upon one or more of the most recent publicly available
offering statements relating to debt offerings of Pennsylvania issuers. The
Fund has not independently verified the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to herein 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, sometimes referred to herein as the "City") 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.
The period from fiscal year 1993 through fiscal 1997 was a time of steady,
modest economic growth and low rates of inflation. These economic conditions,
together with tax reductions in the several years following the tax rate
increases and tax base expansions enacted in fiscal 1991 for the General Fund,
produced tax revenue gains averaging 4.1% per year during the period. Total
revenues during the same period increased at a 4.7% average rate.
Intergovernmental revenue recorded the largest percentage gain during this
period, averaging 8.1% (due, in part, to an accounting change). Expenditures
and other uses during the fiscal 1993 through fiscal 1997 period rose at a
3.8% rate, led by and average 13.8% annual increase for protection of persons
and property program costs. This high rate of increase reflects the costs to
acquire, staff and operate expanded prison facilities to house a larger prison
population. Public health and welfare program costs expanded an average 5.4%
annually during this period, the second largest rate of increase for program
categories.
The fund balance at June 30, 1997 (determined on a "Generally Accepted
Accounting Principles" basis) totaled $1,364.9 million, a $729.7 million
increase over the $635.2 million balance at June 30, 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 were $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
therefore 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 $79.8 million in fiscal 1997
supplemental appropriations over the February 1997 estimate. Supplemental
appropriations for fiscal 1997 totaled $169.3 million.
For GAAP purposes, assets increased $563.4 million and liabilities declined
$166.3 million to produce a $729.7 million increase in the fund balance at
June 30, 1997. Total revenues and other sources rose 3.5% for fiscal 1997. An
increase of 5.5% in tax revenue aided by an improving state economy was
partially offset by a $175.2 million decline in intergovernmental revenues.
Expenditures and other uses increased by 1% for this fiscal year.
Operations during the 1998 fiscal year increased the unappropriated balance
of Commonwealth revenues during that period by $86.4 million to $488.7 million
at June 30, 1998 (prior to reserves for transfer to the Tax Stabilization
Reserve Fund). Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than budgeted were
responsible for the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1998 operations will total $223.3 million consisting of $73.3
million representing the required transfer of fifteen percent of the ending
unappropriated surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget. With these
transfers, the balance in the Tax Stabilization Reserve Fund will exceed $664
million and represent 3.7% of fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$18,123.2 million, $676.1 million (3.9%) above the estimate made at the time
the budget was enacted. Tax revenue received in fiscal 1998 grew 4.8% over tax
revenues received during fiscal 1997. This rate of increase includes the
effect of legislated tax reductions that affected receipts during both fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1998. Receipts from the personal income tax produced the
largest single component of higher revenues during fiscal 1998.
Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net of
current year lapses). This amount represents an increase of 4.5% over fiscal
1997 appropriation expenditures. Lapses of appropriation authority during the
fiscal year totaled $161.8 million including $58.8 million from fiscal 1998
appropriations. These appropriation lapses were used to fund $120.5 million of
supplemental fiscal 1998 appropriations.
Reserves established during fiscal 1998 for tax refunds totaled $910
million. This amount is a $370 million increase over tax refund reserves for
fiscal 1997 representing an increase of 68.5%. The fiscal 1998 amount includes
a one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. In prior fiscal years,
tax refunds generally were budgeted for the year in which the disbursement was
anticipated to occur. This change in the recognition of tax refund liabilities
on a budgetary basis is expected to reduce the difference between the
budgetary basis unappropriated balance and the GAAP basis unreserved and
undesignated balance (when computed) for the 1998 fiscal year.
The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at
$18,456.6 million. The estimate was reduced by 1.1 million in November 1998
due to passage of tax legislation. Only Commonwealth funds are included in the
official revenue estimate. The official revenue estimate is based on an
economic forecast for national gross domestic product, on a year-over-year
basis, to slow from an estimated annualized 3.9% rate in the fourth quarter of
1997 to a projected 1.8% annualized growth rate by the second quarter of 1999.
The forecast of slowing economic activity is based on the expectation that
consumers will reduce their pace of spending, particularly on motor vehicles,
housing and other durable goods. Business is also expected to trim its
spending on fixed investments. Foreign demand for domestic goods is expected
to decline in reaction to economic difficulties in Asia and Latin America,
while an economic recovery in Europe is expected to proceed slowly. The
underlying growth rate, excluding any effect of scheduled or proposed tax
changes, for the General Fund fiscal 1999 official revenue estimate is 3.0%
over actual fiscal 1998 revenues. When adjusted to include the estimated effect
of enacted tax changes, fiscal 1999 Commonwealth revenues are projected to
increase by 1.66% over actual Commonwealth revenues for fiscal 1998.
Tax reductions included in the enacted 1999 fiscal year budget totaled an
estimated $241.0 million for fiscal 1999. The major tax changes were enacted
with January 1, 1998 effective dates. Consequently, the first year's cost of
these changes may be above the expected annualized cost.
Reserves for tax refunds for fiscal 1999 total $603.9 million. This amount
includes $33.1 million of tax refunds anticipated to be due to the enacted
fiscal 1999 tax changes and included in the estimated cost of those changes.
Reserves for tax refunds for fiscal 1999 are $306.1 million below the reserve
established for fiscal 1998. The fiscal 1998 amount (described above) includes
a one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. Without the necessity to
pay fiscal 1998 tax refund liabilities from fiscal 1999 reserves, the fiscal
1999 reserve need only be in an amount equal to the estimated fiscal 1999
estimate for tax refund liabilities.
Appropriations enacted for fiscal 1999 are 4.1% ($705.1 million) above the
appropriations enacted for fiscal 1998 (including supplemental
appropriations).
The enacted fiscal 1999 budget assumes the drawn down of the $265.4 million
beginning budgetary balance by $141.1 million to an estimated closing balance,
prior to transfer of the required portion to the Tax Stabilization Reserve
Fund, of $124.3 million. The amount of the anticipated drawn down does not
consider the availability of appropriation lapses normally occurring during a
fiscal year that are used to fund supplemental appropriations or increase
unappropriated surplus.
Pennsylvania has 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 1997 increased at an annual rate of 0.76%. This compares to a 0.17%
rate for the Middle Atlantic region and a 1.69% rate for the United States as
a whole during the period 1988 through 1997. For the five years ended with
1997, employment in the Commonwealth has increased 5.4%. The growth in
employment during this period is higher than the 4.8% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for October 1998 stood
at a seasonably adjusted rate of 4.7%. The seasonably adjusted national
unemployment rate for October 1998 was 4.6%.
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, 1998,
the Commonwealth had $4,724.5 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
<PAGE>
for housing for lower and moderate income families, and The Hospitals and
Higher Education Facilities Authority of Philadelphia, a municipal authority
organized by the City of Philadelphia to, among other things, acquire and
prepare various sites for use as intermediate care facilities for the mentally
retarded. PHFA's bonds, but not its notes, are partially secured by a capital
reserve fund required to be maintained by PHFA in an amount equal to the
maximum annual debt service on its outstanding bonds in any succeeding
calendar year. PHFA is not permitted to borrow additional funds as long as any
deficiency exists in the capital reserve fund.
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 agencies 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 agencies, however, are
indirectly dependent on Commonwealth operating appropriations. In addition,
the Commonwealth may choose to take action to financially assist these
organizations. The Commonwealth also maintains pension plans covering all
state employees, public school employees and employees of certain state-
related organizations.
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 (the "PICA") to assist Philadelphia in remedying fiscal emergencies
was enacted by the Pennsylvania General Assembly and approved by the Governor
in June 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on June 9, 1998.
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, 1997 shows a
surplus of approximately $128.8 million.
No further bonds are to be issued by PICA for the purpose 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 $1,055 million in Special
Revenue bonds outstanding as of June 30, 1998.
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 government 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, the City of Philadelphia
and others in federal court seeking an order that, among other things,
<PAGE>
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. The Commonwealth sought
dismissal of the federal action based, among other things, on the settlement
of the Commonwealth Court case. In December 1994, the Third Circuit Court of
Appeals reversed the District Court's denial of the plaintiff's motion for
class certification. As a result, the District Court has recently certified
the class and the parties have resumed discovery. In July 1998, the plaintiffs
entered into a settlement agreement with the City of Philadelphia and related
parties and submitted the agreement to the district court for approval. The
district court has preliminarily approved the settlement. Recently, the
remaining parties, including the Commonwealth, have agreed to settle the
claims made against them. The Commonwealth has agreed to pay $100,000 to
settle plaintiff's $1.4 million claim for attorney's fees and to take other
actions in exchange for a full and final release and dismissal of the case
against the Commonwealth parties. The settlement has been presented to the
Court for approval, and the Court has scheduled a hearing for February 1999.
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. The Court in Pennsylvania State Association of County Commissioners
v. Commonwealth of Pennsylvania 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. The Court has not acted on the petition. 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 July 26, 1997, the
"Interim Report of the Master" was filed setting forth a state funding
proposal. Numerous objections to the report were filed, but the Court has
taken no action on them.
On April 22, 1998, the Pennsylvania General Assembly enacted legislation
appropriating approximately $12 million to the Supreme Court for the purpose
of funding county court administrators. The appropriation was designed to
enable the Commonwealth to implement Phase I of the special master's plan.
However, the legislation also provides that no funds from the appropriation
may be expended until legislation has been approved by the General Assembly
providing for the payment of Commonwealth compensation of county court
administrators. Because no such legislation has yet been enacted, the $12
million appropriated to the Judicial Department cannot be used.
On May 11, 1998, the Administrative Governing Board of the First Judicial
District (comprising the Court of Common Pleas of Philadelphia, the
Philadelphia Municipal Court, and the Traffic Court of Philadelphia) filed an
action in mandamus in the Commonwealth Court of Pennsylvania against the City
of Philadelphia and several City officials, claiming that the City government
had failed to provide adequate funds for the operation of the courts of the
First Judicial District. The petitioners have demanded that the court order
the City of Philadelphia to disburse all funds reasonably necessary for the
continued operation of the courts during fiscal year 1998-99 in an amount
totaling at least $110 million. The case is captioned Alex Bonavitacola, et
al. v. Edward G. Rendell, et al.
Also on May 11, 1998, the City of Philadelphia and related respondents in
Bonavitacola filed a complaint joining the Commonwealth of Pennsylvania, the
General Assembly and its elected leadership as additional respondents. In their
complaint, the City respondents assert that under the Supreme Court's order
issued July 26, 1996 in Pa. State Ass'n of County Commissioners v. Commonwealth
of Pennsylvania, the General Assembly was obligated to enact a funding scheme
for a unified court system no later than January 1, 1998. Because the General
Assembly has not done so, the City respondents allege, the Commonwealth has
failed to comply with the Supreme Court's order. Thus, the City respondents have
requested Commonwealth Court to require the General Assembly to comply with the
Supreme Court's mandamus order and to order the Commonwealth to pay whatever
sums are necessary to fund the cost of operating the courts in fiscal 1998-99.
The First Judicial District Governing Board joined in the City respondents'
request as an alternative to its demanded relief against the City defendants.
On July 15, 1998, the Supreme Court of Pennsylvania assumed extraordinary
jurisdiction over the case and directed Commonwealth Court, on an expedited
basis, to prepare proposed findings of fact and conclusions of law. Acting
pursuant to the Supreme Court's June 15, 1998 order, President Judge James
Gardner Colins of Commonwealth Court on June 17, 1998 issued findings of fact,
conclusions of law and a proposed order. In his proposed order, President
Judge Colins recommended that the Supreme Court order the President of the
Philadelphia Council immediately to introduce legislation to fund the courts
of the First Judicial District for fiscal year 1998-99 and to take all
necessary steps to ensure its passage. President Judge Colins also recommended
that the Supreme Court order the General Assembly to pass legislation, prior
to June 30, 1999, to fund the entire state judicial system. By order entered
June 23, 1998, Commonwealth Court forwarded its findings of fact and
conclusions of law and proposed order to the Supreme Court for final
disposition. The Commonwealth and the General Assembly have objected to
President Judge Colins' proposed order.
Subsequent to Commonwealth Court's issuance of its findings of fact,
conclusions of law and proposed order, the City Council and Mayor of
Philadelphia acceded (at least temporarily) to President Judge Colins'
proposed mandate that the City fund the First Judicial District's courts for
fiscal year 1998-99, thus obviating the First Judicial District's request for
emergency relief. However, the First Judicial District petitioners and the
City of Philadelphia respondents continue to press their demands that the
General Assembly be required to enact legislation providing for state funding
of the courts. In addition, the County of Allegheny has petitioned the Supreme
Court for leave to intervene in the Bonavitacola case to secure the same
relief against the Commonwealth -- an order requiring Commonwealth to fund its
courts. The Bonavitacola case remains pending before the Supreme Court for
disposition.
On November 25, 1998, the First District Governing Board filed with the
Supreme Court a renewed motion for entry of an order providing emergency
relief. In their renewed motion, the Bonavitacola plaintiffs asked the court
to order the City of Philadelphia to provide funds to the First Judicial
District's courts sufficient to maintain necessary judicial operations through
the end of the fiscal year.
Bank Shares Tax Litigation
On November 30, 1989, the 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 investment 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, has filed a Stipulation of Facts and is in effect
proceeding forward on behalf of the other banks. Their appeals raise the issues
that were advanced by Fidelity, although not brought to resolution by the
Pennsylvania Supreme Court. By decision dated January 8, 1998, a panel of the
Commonwealth Court ruled in favor of the Commonwealth, finding no constitutional
violation. Royal Bank filed exceptions which were denied by the Commonwealth
Court on July 30, 1998. Royal Bank has appealed to filed a notice of appeal with
the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey
In January 1991, an association of rural and small schools and several
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. On July 9, 1998, Commonwealth Court Judge
Dan Pellegrini issued an opinion and decree nisi dismissing the petitioners'
claims in its entirety, holding that Pennsylvania's system for funding public
schools is constitutional under both the education clause and the equal
protection clause of the Pennsylvania Constitution.
On July 20, 1998, the petitioners filed a motion for post-trial relief,
taking exception to many of Judge Pellegrini's findings of fact and
conclusions of law, and again asking the Commonwealth Court to declare
Pennsylvania's public school funding system to be unconstitutional. Also, the
petitioners on July 21, 1998 filed an application asking the Supreme Court of
Pennsylvania to assume extraordinary, plenary jurisdiction over the case to
decide one legal issue -- whether the petitioners' constitutional claims are
justiciable in the courts of the Commonwealth. The petitioners have asked the
court to consider the issue in conjunction with a separate appeal pending in
another case, Marrerro v. Commonwealth of Pennsylvania, involving the same
provisions of the Constitution and a similar issue of justiciability. On
September 2, 1998, the Supreme Court granted petitioners' application and
directed the filing of briefs. Recently, the respondents asked the Supreme
Court to clarify its assumption of jurisdiction. Specifically, the respondents
have asked the Court to state the petitioners' application and not other
issues presented in petitioners' motion for post-trial relief pending in the
Commonwealth Court.
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 addition 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 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 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 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 concluded 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
"[b]ecause 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. The
Supreme Court heard oral argument on February 3, 1998 and took the matter
under advisement.
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 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, attorney's
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 on the
pleadings. On February 13, 1997, the Commonwealth Court denied Judge Ridge's
motion for judgment on the pleadings. The case is currently in discovery.
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-age 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 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 the 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. The
respondents filed preliminary objections seeking dismissal of the action. On
March 2, 1998, Commonwealth Court sustained the respondents' preliminary
objections and dismissed the case on the grounds that the issues presented are
not justiciable. An appeal to the Supreme Court of Pennsylvania is pending and
briefing is complete, but the Court has not scheduled oral argument.
Powell v. Ridge
On March 9, 1998, several residents of the City of Philadelphia on behalf of
themselves and their school-aged children, along with the School District of
Philadelphia, the Philadelphia Superintendent of Schools, the chairman of the
Philadelphia Board of Education, the City of Philadelphia, the Mayor of
Philadelphia, and several membership organizations interested in the
Philadelphia public schools, brought suit in the United States District Court
for the Eastern District of Pennsylvania against the Governor, the Secretary
of Education, the chairman of the State Board of Education, and the State
Treasurer. The plaintiffs claimed that the defendants are violating a
regulation of the U.S. Department of Education promulgated under Title VI of
the Civil Rights Act of 1964 in that the Commonwealth's system for funding
public schools has the effect of discriminating on the basis of race. The
plaintiffs asked the court to declare the funding system to be illegal, to
enjoin the defendants from violating the regulation in the future, to award
counsel fees and costs, and to grant such other relief as the court might find
just and proper.
The Philadelphia Federation of Teachers intervened on the side of the
plaintiffs, while several leaders of the Pennsylvania General Assembly
intervened on the side of the defendants. In addition, the U.S. Department of
Justice intervened to defend against a claim made by the legislator
intervenors that a statute waiving states' immunity under the Eleventh
Amendment to the U.S. Constitution for Title VI claims is unconstitutional.
The defendants filed a motion to dismiss the complaint, arguing that the
plaintiffs sued the wrong parties, that some of the plaintiffs lack standing
or the capacity to sue the Commonwealth officials, that the plaintiffs' claims
are barred by the doctrines of claim preclusion and issue preclusion, and that
Congress has not authorized private parties to bring actions in court to
enforce the regulations of federal administrative agencies issued under
section 602 of the Civil Rights Act of 1964.
The legislator intervenors filed a motion to dismiss or, in the alternative,
a motion for judgment on the pleadings. The legislator intervenors claimed
that the defendants are immune from suit under the Eleventh Amendment, that
the statute purporting to waive Eleventh Amendment immunity for Title VI
claims is not applicable or, in the alternative, is unconstitutional, and that
the plaintiffs have otherwise failed to state a claim.
On November 18, 1998, the district court granted in part and denied in part
the various motions by the parties. However, because the court found
ultimately that the plaintiffs had failed to state a claim under the Title VI
regulation at issue or under 42 U.S.C. (S)1983, the court dismissed the action
in its entirety with prejudice. An appeal is expected.
<PAGE>
Rite Aid of Pennsylvania, Inc. v. Houston
On March 24, 1997, Rite Aid of Pennsylvania, Inc. (Rite Aid) filed in the
U.S. District Court for the Eastern District of Pennsylvania a civil action
against the Secretary of Public Welfare (Secretary). In its complaint, Rite
Aid alleged that in promulgating regulations on October 1, 1995 governing
payment rates for prescription drugs and related services provided to
recipients of benefits under the Pennsylvania Medical Assistance Program
(Medicaid), the Secretary violated various provisions of Title XIX of the
Social Security Act (commonly known as the Medicaid Act) and regulations of
the U.S. Department of Health and Human Services, as well as provisions of
state law and federal constitutional due process.
On November 3, 1997, the district court granted in part and denied in part
the parties' cross-motions for judgment on the pleadings. The court granted
judgment in favor of the Secretary on Rite Aid's federal due process claim and
Rite Aid's claim that the Secretary had violated a federal regulation (42 CFR
(S)447.205) requiring public notice 60 days prior to revising the
reimbursement rates. However, the court denied the Secretary's motion for
judgment on the pleadings regarding Rite Aid's procedural claim under 42
U.S.C. (S)1396(a)(30)(A). The court also granted judgment on the pleadings in
favor of Rite Aid on its claim that the Secretary violated a federal
regulation (42 CFR (S)447.205(c)(4)) requiring the Secretary to identify a
local agency where the proposed reimbursement changes were available for
public view.
After allowing the Pennsylvania Pharmacists Association (PPA) to intervene
as a plaintiff, the district court on May 8, 1998 granted a motion filed by
Rite Aid and PPA to limit its review of the Secretary's compliance with 42
U.S.C. (S)1396(a)(30)(A) "to the information before [the Secretary] at the
time [she] made [her] decision to lower" the reimbursement rates.
On August 31, 1998, the district court granted the motions of Rite Aid and
PPA for summary judgment and denied the cross-motion of the Secretary. The
court declared that the pharmacy reimbursement rates made effective after
October 1, 1995, were adopted by the Secretary in violation of section
1396(a)(30)(A) of the Medicaid Act and enjoined the Secretary from using those
rates to reimburse for any prescription drugs and related services provided to
Medicaid recipients on and after October 1, 1998. The court held that the
Secretary acted arbitrarily and capriciously by failing to consider whether
the revised rates were consistent with the statutory standards of efficiency,
economy, and quality of care.
The Secretary timely appealed the district court's orders, and Rite Aid and
PPA filed cross-appeals. The Secretary filed motions to stay the district
court's injunction order pending appeal. However, the district court denied
the motion on September 18, 1998, and the court of appeals denied the
application for stay on October 26, 1998. However, the court of appeals did
grant the Secretary's motion for expedited appeal, and briefing should be
concluded in early January. The court has not scheduled oral argument. In the
meantime, the Department of Public Welfare has altered its reimbursement rates
consistent with the district court's ruling. The estimated annualized cost of
paying the higher reimbursement rates is $106 million.
As of December 1, 1998, Pennsylvania general obligation bonds were rate 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.
<PAGE>
PART C
OTHER INFORMATION
-----------------
ITEM 23. 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)
1.(h) Articles Supplementary creating Class D shares of Sentinel
Balanced Fund.(1)
1.(i) Articles of Amendment relating to name change of Sentinel
Mid Cap Growth.(5)
1.(j) Form of Articles Supplementary creating Class A shares and
Class B shares of Sentinel Growth Index Fund.
2. By-Laws of the Registrant, as amended.(1)
3. 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.(a) Investment Advisory Agreement between the Registrant and
Sentinel Advisors Company (the "Advisor"), dated as of March
1, 1993.(3)
4.(b) Investment Subadvisory Agreement between the Advisor and
INVESCO Capital Management, Inc.(5)
4.(c) Investment Subadvisory Agreement between the Advisor and
Evergreen Investment Management Company.(5)
4.(d) Form of Investment Advisory Agreement between the Registrant
and the Advisor, dated as of , 1999.
4.(e) Sub-Investment Advisory Agreement between the Advisor and
INVESCO Global Asset Management (N.A.), Inc.
5. Distribution Agreement between the Registrant and Sentinel
Financial Services Company ("SFSC"), dated as of March 1,
1993.(3)
6. None.
7. Custody Agreement between the Registrant and Investors
Fiduciary Trust Company ("IFTC"), dated December 1, 1989.(1)
8.(a) Dividend Paying Agent Agreement between the Registrant and
IFTC, dated December 1, 1989.(1)
8.(b) Service Agreement between Sentinel Administrative Service
Corporation and IFTC, dated December 1, 1989.(1)
8.(c) Administrative Services Agreement between Sentinel
Administrative Service Corporation and IFTC, dated December
1, 1989.(1)
8.(d) Fund Services Agreement between the Registrant and Sentinel
Administrative Services Company ("SASC"), dated as of March
1, 1993.(3)
9.(a) Opinion of Brown & Wood LLP, counsel to the Registrant.(6)
9.(b) Consent of Brown & Wood LLP, counsel to the Registrant.
10. Consent of PricewaterhouseCoopers LLP, independent
accountants for the Registrant.
11.(a) Financial Statements included in Part A:
- Selected Per Share Data and Ratios for the five
years ended November 30, 1998*
11.(b) Financial Statements incorporated by reference in Part B:
- Selected Per Share Data and Ratios for the five years
ended November 30, 1998
- Statement of Assets and Liabilities at November 30, 1998*
- Statement of Operations for the year ended November 30,
1998*
- Statement of Changes in Net Assets for the years ended
November 30, 1998 and 1997*
- Notes to Financial Statements*
- Report of Independent Accountants*
12.(a) None.
13.(a) Form of Amended Class A Distribution Plan pursuant to
Rule 12b-1 under the 1940 Act.
13.(b) Form of Amended Class B Distribution Plan pursuant to
Rule 12b-1 under the 1940 Act.
13.(c) Class C Distribution Plan pursuant to Rule 12b-1 under
the 1940 Act.(1)
13.(d) Class D Distribution Plan pursuant to Rule 12b-1 under the
1940 Act.(1)
14. Financial Data Schedules for Class A, B, C, D.(5)
15. Form of 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, 80, 83, 84 and
85 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) Previously filed as an Exhibit to Post-Effective Amendment 85 of the
Registrant on Form N-1.
(5) Previously filed as an Exhibit to Post-Effective Amendment 86 of the
Registrant on Form N-1.
(6) Filed on March 28, 1997 as an Exhibit to Post-Effective Amendment No.
77 to the Registration Statement.
* Incorporated by reference to the Registrant's 1998 Annual Report to
shareholders filed with the Securities and Exchange Commission for the
year ended November 30, 1998 pursuant to Rule 30b2-1 under the
Investment Company Act of 1940, as amended ("1940 Act").
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE REGISTRANT
---------------------------------------------
None.
ITEM 25. 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.
ITEM 26. 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
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.
ITEM 27. 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:
Positions and
Name and Principal Positions and Offices Offices with
Business Address with SFSC the Registrant
- ------------------ --------------------- --------------
Joseph M. Rob Chief Executive Officer President
Julie A. Hendrickson President and Chief None
Operating Officer
John M. Grab, Jr. Senior Vice President, Vice President
Chief Financial Officer,
and Treasurer
The principal business address of all such persons is National Life
Drive, Montpelier, Vermont 05604.
(c) Not applicable.
ITEM 28. 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)
(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 30. 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 30th day of June, 1999.
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.
Signature Title Date
- --------- ----- ----
/s/ Patrick E. Welch Chairman June 30, 1999
- --------------------------------- (Chief Executive
Patrick E. Welch Officer
/s/ Richard J. Borda* Director
- ---------------------------------
Richard J. Borda
/s/ Kalman J. Cohen* Director
- ---------------------------------
Kalman J. Cohen
/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
- ---------------------------------
Keniston P. Merrill Director
/s/ Deborah G. Miller* Director
- ---------------------------------
Deborah G. Miller
/s/ John Raisian* Director
- ---------------------------------
John Raisian
/s/ Joseph M. Rob Director June 30, 1999
- ---------------------------------
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 June 30, 1999
- --------------------------------- and Principal Financial and
John M. Grab, Jr. Accounting Officer
*By /s/ Joseph M. Rob June 30, 1999
-----------------------------
Joseph M. Rob
Attorney-in-Fact
<PAGE>
Exhibit Index
-------------
Exhibit Number
--------------
1.(j) Form of Articles Supplementary creating Class A and
Class B shares of Sentinel Growth Index Fund.
4.(d) Form of Investment Advisory Agreement.
4.(e) Sub-Investment Advisory Agreement between the Advisor
and INVESCO Global Asset Management (N.A.), Inc.
9.(b) Consent of Brown & Wood LLP, counsel to the Registrant.
10. Consent of Independent Accountants
13.(a) Form of Amended Class A Distribution Plan.
13.(b) Form of Amended Class B Distribution Plan.
15. Form of Amended Plan pursuant to Rule 18f-3.
Exhibit 1(j)
SENTINEL GROUP FUNDS, INC.
ARTICLES SUPPLEMENTARY
CREATING ADDITIONAL SERIES OF COMMON STOCK
SENTINEL GROUP FUNDS, INC., a Maryland corporation having its principal
Maryland office c/o The Corporation Trust Incorporated, 300 East Lombard Street,
Baltimore, Maryland 21202 (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors
of the Corporation (the "Board of Directors") by its Amended and Restated
Articles of Incorporation, as amended (the "Charter"), the Board of Directors,
at a meeting duly convened and held on June 10, 1999, adopted resolutions
reclassifying and designating twenty million (20,000,000) of the authorized but
unissued shares of common stock as Class A shares of Sentinel Growth Index Fund,
par value $0.01 per share (the "Class A Shares") with the preferences,
designations, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
as follows, which upon any restatement of the Charter shall be made part of
Article SIXTH, with any necessary or appropriate changes to the enumeration or
lettering of sections or subsections hereof:
The Class A Shares shall represent the same interest in the
Corporation and have identical preferences, designations, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the shares of
common stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Charter and further except that:
(i) Expenses related to the distribution of the Class A Shares
shall be borne solely by such class and such class shall have exclusive
voting rights with respect to matters relating to the expenses being
borne solely by such class; and
(ii) Such distribution expenses borne solely by Class A Shares
shall be appropriately reflected (in the manner determined by the Board
of Directors) in the net asset value, dividends, distribution and
liquidation rights of the shares of such class.
SECOND: Pursuant to authority expressly vested in the Board of
Directors by the Charter, the Board of Directors, at a meeting duly convened and
held on June 10, 1999, adopted resolutions reclassifying and designating twenty
million (20,000,000) authorized but unissued shares of common stock as Class B
shares of Sentinel Growth Index Fund, par value $0.01 per share (the "Class B
Shares") with the preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption as follows, which upon any restatement of the Charter
shall be made part of Article SIXTH, with any necessary or appropriate changes
to the enumeration or lettering of sections or subsections hereof:
The Class B Shares shall represent the same interest in the
Corporation and have identical preferences, designations, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the shares of
common stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Charter and further except that:
(i) Expenses related to the distribution of the Class B Shares
shall be borne solely by such class and such class shall have exclusive
voting rights with respect to matters relating to the expenses being
borne solely by such class; and
(ii) Such distribution expenses borne solely by Class B Shares
shall be appropriately reflected (in the manner determined by the Board
of Directors) in the net asset value, dividends, distribution and
liquidation rights of the shares of such class.
THIRD: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
<PAGE>
IN WITNESS WHEREOF, SENTINEL GROUP FUNDS, INC. has caused these
Articles Supplementary to be signed in its name and on its behalf by its
President and attested by its Secretary on the day of , 1999.
SENTINEL GROUP FUNDS, INC.
By__________________________________
Joseph M. Rob
President
Attest:
______________________________
D. Russell Morgan
Secretary
THE UNDERSIGNED, President of SENTINEL GROUP FUNDS, INC. (the
"Corporation"), who executed on behalf of the Corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of the Corporation, the foregoing Articles Supplementary
to be the corporate act of the Corporation and, as to all matters or facts
required to be verified under oath, further certifies that, to the best of his
knowledge, information and belief, these matters and facts contained are true in
all material respects and that this statement is made under the penalties for
perjury.
__________________________________
Joseph M. Rob
President
Exhibit 4(d)
INVESTMENT ADVISORY AGREEMENT
Agreement made as of this day of June, 1999, by and between Sentinel
Group Funds, Inc., a Maryland corporation and a registered series investment
company under the Investment Company Act of 1940, one series of which is the
Sentinel Growth Index Fund (hereinafter called the "Fund"), and Sentinel
Advisors Company, a Vermont general partnership, and a registered investment
adviser under the Investment Advisers Act of 1940 (hereinafter called
"Advisor").
WITNESSETH:
In consideration of the mutual promises and agreements herein contained and
other good and valuable considerations, the receipt of which is hereby
acknowledged, it is hereby agreed by and between the parties hereto as follows:
1. Management of Growth Index Fund Portfolio
-----------------------------------------
Advisor agrees to act as investment adviser to the Fund with respect to
the investment of its assets and in general to supervise the investments of the
portfolio of the Fund, subject at all times to the direction and control of the
Board of Directors of Sentinel Group Funds, Inc. all as more fully set forth
herein. In connection therewith, Advisor shall regularly provide investment
advice to the Fund, and shall, subject to the succeeding provisions of this
section, continuously supervise the investment and reinvestment of cash,
securities or other property comprising the assets of the investment portfolio
of the Fund, and Advisor shall accordingly:
(a) provide continuously an investment program for the Fund
consistent, in its opinion, with its investment policy and objectives; and
(b) determine what securities shall be purchased or sold by the Fund,
and regularly report thereon to the Board of Directors of Sentinel Group Funds,
Inc.; and
(c) take, on behalf of the Fund, all actions which appear to Advisor
necessary to carry into effect such investment programs and supervisory
functions as aforesaid including the placing of purchase and sale orders.
The investment program provided by Advisor under this section, or any
supervisory functions taken hereunder by it shall at all times conform to, and
be in accordance with, any requirements imposed by: the provisions of the
Investment Company Act of 1940 (the "1940 Act"), and any rules or regulations in
force thereunder, any other applicable provision of law, the provisions of the
Articles of Incorporation of Sentinel Group Funds, Inc. as amended from time to
time, the provisions of the By-Laws of Sentinel Group Funds, Inc. as amended
from time to time, resolutions as adopted and/or amended from time to time by
the Board of Directors of Sentinel Group Funds, Inc., and the terms of the
registration statements of Sentinel Group Funds, Inc., as amended from time to
time, under the Securities Act of 1933 and the 1940 Act.
2. The Fund to Bear Other Expenses
-------------------------------
It is understood and agreed that the Fund, in addition to the advisory
fee paid to Advisor set forth in Article 3 below, will bear and pay for its
expenses of operation including its (i) rent and office equipment, if any; (ii)
salaries and employee benefits including applicable employment and payroll taxes
of its own administrative and executive personnel who are not affiliated with
Advisor, if any; (iii) brokerage commissions and other costs in connection with
the purchase or sale of securities; (iv) all taxes and corporate fees payable by
the Fund to federal, state or other governmental agencies; (v) fees and costs of
its transfer agent, fund accounting and financial administration service
provider, custodian, registrar, independent legal counsel and auditors; (vi)
expenses of printing and mailing stock certificates, dividends, reports, notices
and proxy materials to its shareholders; (vii) fees and expenses incident to the
registration and maintenance of registration under the Securities Act of 1933 of
shares of the Fund for public sale (other than costs of printing prospectuses
for prospective new shareholders) and the qualification of its shares for
offering and sale under state or other securities laws; (viii) fees and expenses
imposed on the Fund under the 1940 Act; (ix) insurance premiums for fidelity
bonds and other coverage to its operations; (x) all expenses incident to holding
of meetings of its shareholders; (xi) fees and expenses of directors who are not
affiliated with Advisor; (xii) its pro rata share of fees and dues of the
Investment Company Institute; and (xiii) such non-recurring expenses as may
arise, including actions, suits or proceedings, affecting the Fund and the legal
obligation which the Fund may have to indemnify its officers and directors with
respect thereto.
3. Compensation of Advisors
------------------------
As compensation in full for services rendered under this Agreement, the
Fund will pay to Advisor a monthly fee equal to 0.30% per annum of the aggregate
daily average net assets of the Fund.
4. Guarantee of Expense Limitation
-------------------------------
If, for any fiscal year of the Fund, expenses (including management fee
and costs incident to its regular and executive personnel, but excluding
interest, taxes, brokerage fees and, where permitted, extraordinary expense)
borne by the Fund exceed expense limitations applicable to each class of shares
of the Fund which are imposed by state securities regulators as such limitations
may be lowered or raised from time to time, Advisor guarantees that it will
reimburse the Fund for any excess. The portion of any such reduction to be borne
by Advisor shall be deducted from the monthly investment advisory fee otherwise
payable to Advisor and, if such amount should exceed such monthly investment
advisory fees, Advisor agrees to repay to the Fund annually before publication
of Sentinel Group Funds, Inc.'s annual report to shareholders such sum as may be
required to make up the deficiency. For the purpose of this article, the term
"fiscal year" shall include the portion of the then current fiscal year which
shall have elapsed at the date of termination of this Investment Advisory
Agreement.
5. Placing of Purchase and Sale Orders
-----------------------------------
Advisor shall not deal as principal with the Fund in the purchase and
sale of portfolio securities nor shall it receive any commissions or other
remuneration on the purchase or sale of portfolio securities by the Fund.
Advisor is authorized and directed to place the orders for the purchase
and sale of portfolio securities by the Fund and to supervise the executions
thereof. With respect to such transactions, whether through a broker as agent or
with a dealer as principal, Advisor's primary objective is to both obtain the
best price and execution of each transaction. Such orders may be placed with
qualified brokers and/or dealers who also provide investment information or
other services to the Fund. Management shall report to the Directors of Sentinel
Group Funds, Inc. at least quarterly on said allocations of order and on the
brokerage commissions and/or dealer concessions involved, indicating to whom
such allocations are made and the basis thereof.
6. Nonexclusivity
-----------------
Advisor's services to the Fund hereunder are not to be deemed
exclusive and Advisor shall be free to render similar services to others, so
long as its services hereunder are not impaired thereby.
7. National Life Services
----------------------
National Life Insurance Company and its subsidiaries may furnish to
Advisor, in order to better enable it to fulfill its obligations hereunder,
office space, personnel and other services as are requested by Advisor, in all
cases for a reasonable charge. Advisor will present the details of any such
arrangements to the Board of Directors of Sentinel Group Funds, Inc.
8. Affiliations of Advisor
-----------------------
It is understood that the directors and officers of Sentinel Group
Funds, Inc. may be directors or officers of Advisor or an entity under common
control, including National Life Insurance Company, Provident Mutual Life
Insurance Company, or Penn Mutual Life Insurance Company, or any affiliate of
any of them, or otherwise be interested in Advisor, and that the existence of
such dual interest shall not affect the validity of this Agreement or any
transactions hereunder.
9. Liability of Advisor
--------------------
In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of Advisor, it
shall not be subject to liability to the Fund or Sentinel Group Funds, Inc., or
to any stockholder of the Fund or Sentinel Group Funds, Inc. for any act or
omission in the course of, or in connection with, rendering services hereunder
or for any losses that may be sustained in the purchase, holding or sale of any
security.
10. Duration of this Agreement
--------------------------
This Agreement shall become effective upon the date set forth above and
shall continue in force and effect, unless terminated as hereinafter provided,
until November 30, 2000, and from year to year thereafter, provided such
continuance is specifically approved at least annually by the Board of Directors
of Sentinel Group Funds, Inc., including specific approval (i) by a majority of
the Directors who are not interested persons of a party to this Agreement (other
than as Directors of Sentinel Group Funds, Inc.) by votes cast in person at a
meeting specifically called for such purpose (Director vote) or (ii) as to the
Fund by a vote of a majority of each class of shares of the Fund and a Director
vote.
11. Termination
-----------
This Agreement may be terminated by Advisor at any time without penalty
upon giving Sentinel Group Funds, Inc. sixty (60) days' written notice (which
notice may be waived by Sentinel Group Funds, Inc.) and may be terminated by
Sentinel Group Funds, Inc. at any time without penalty upon giving Advisors
sixty (60) days' written notice (which notice may be waived by Advisor),
provided that such termination by Sentinel Group Funds, Inc. shall be approved
by the vote of a majority of the Board of Directors of Sentinel Group Funds,
Inc. in office at the time or by the vote of a majority of the outstanding
voting securities of the Fund. This Agreement shall automatically terminate in
the event of its assignment, the term "assignment" for this purpose having the
meaning defined in Section 2(a)(4) of the 1940 Act.
12. Notification of Changes in Advisor
----------------------------------
Advisor will notify Sentinel Group Funds, Inc. of any change in the
identities of the partners of Advisor within a reasonable time after such
change.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their corporate
seals to be hereunder affixed, all as of the day and year first above written.
Attest: SENTINEL GROUP FUNDS, INC.
_______________________________ BY:_____________________________________
D. Russell Morgan Patrick E. Welch
Secretary Chairman and Chief Executive Officer
Attest: SENTINEL ADVISORS COMPANY
_______________________________ By:_____________________________________
Lisa A. Petty Rodney A. Buck,
Secretary Chief Executive Officer
Exhibit 4.(e)
Sub-Investment Advisory Agreement
AGREEMENT made as of this 1st day of July, 1999 by and between Sentinel
Advisors Company (herein called "SAC"), a Vermont general partnership, having
its principal office at National Life Drive, Montpelier, Vermont 05604, and
INVESCO Global Asset Management (N.A.), Inc. (herein called "INVESCO"), a
Delaware corporation, having its principal office at 1360 Peachtree Street,
N.E., Atlanta, Georgia 30309.
Witnesseth:
WHEREAS, SAC is a party to an Investment Advisory Agreement dated as
of March 1, 1993, a copy of which is attached hereto as Exhibit "A" between it
and Sentinel Group Funds, Inc., a corporation organized under the laws of the
State of Maryland, a series of which is Sentinel World Fund (herein called the
"Fund"), pursuant to which SAC provides, inter alia, investment research and
advice to the Fund; and
WHEREAS, SAC wishes to employ INVESCO as a sub-investment adviser to
provide SAC with investment research and other investment services; and
WHEREAS, INVESCO is prepared to provide such services on the terms
and conditions hereinafter contained;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, SAC and INVESCO agree as follows:
1. INVESCO, employing its best efforts and complete facilities, shall
act as sub-investment adviser to the Fund. As such, it shall, subject to SAC's
supervision, provide a program for the investment and reinvestment of the
cash, securities, and other properties comprising the investment portfolio of
the Fund in accordance with the investment policies and objectives of the Fund
as reflected in the current Prospectus and Statement of Additional Information
of the Sentinel Funds and as may be adopted from time to time by the Board of
Directors of the Fund. INVESCO shall also give SAC a continuing review of
economic conditions and security markets with the help of statistical and
financial data.
2. INVESCO shall select industries and companies to be represented in
the investment portfolio of the Fund and shall carry out programs for the
purchase and sale of the securities included or to be included in the
investment portfolio. All activities will be regularly reported to SAC.
3. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of INVESCO to engage in any other business or
to render services of any kind to any other corporation, firm, individual, or
association.
4. SAC, for its part, shall at all times keep INVESCO fully informed
with regard to the funds available or to become available for investment, and,
in general, the condition of the Fund's affairs. SAC shall furnish INVESCO
with a certified copy of all financial statements and a signed copy of each
report prepared by independent public accountants and with such other
information with regard to the Fund's affairs as INVESCO may from time to time
reasonably request.
5. For the services to be rendered by INVESCO hereunder, SAC shall
pay to INVESCO the greater of a monthly fee equal to 0.03125% (0.375% per
annum) of the average daily net asset value of the Fund up to $500,000,000 and
0.025% (0.30% per annum) of such average net assets in excess of $500,000,000,
as determined in accordance with the provisions of the Prospectus then
constituting part of the Registration Statement then in effect under the
Securities Act of 1933, at the end of each month of the Fund's fiscal year in
arrears, or $20,000 per annum, also in twelve equal monthly installments in
arrears.
6. This Agreement shall become effective upon approval by a vote of a
majority of the outstanding voting securities, as such term is defined in the
Investment Company Act of 1940, as amended (the "Act"), of the Fund, and shall
remain in full force and effect until November 30, 1997, and shall continue
thereafter only so long as its continuance is specifically approved at least
annually by (1) the Board of Directors of the Fund, or by vote of a majority
of the outstanding voting securities, as such term is defined in the Act, of
the Fund, and (2) a majority of the Directors of the Fund who are not
interested persons, as such term is defined in the Act, of any party to this
Agreement, at a meeting called for the purpose of voting on such approval;
provided, however, that (1) this Agreement may at any time be terminated
without the payment of any penalty, either by vote of the Board of Directors
of the Fund or by vote of a majority of the outstanding voting securities of
the Fund, on 60 days' written notice to INVESCO, (2) this Agreement shall
immediately terminate in the event of its assignment (within the meaning of
the Act), and (3) this Agreement may at any time be terminated by INVESCO or
SAC on 60 days' written notice to the other party to this Agreement. Any
notice under this Agreement shall be given in writing, addressed and delivered
or mailed postpaid, to the other party at any office of such party.
7. INVESCO agrees to reimburse the Fund for all expenses it
reasonably incurs in preparing and filing proxy materials, soliciting and
tabulating proxies, and holding a meeting of shareholders of the Fund for the
purpose of obtaining the approval of a majority of the outstanding shares of
the Fund for this Agreement.
8. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of its obligations hereunder, INVESCO shall
not be subject to liability for any act or omission in the course or in
connection with the rendition of services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on the day and year first above written.
Sentinel Advisors Company
By:
David M. Brownlee
Senior Vice President
INVESCO Global Asset Management (N.A.), Inc.
By:
Name:
Title:
Exhibit 9. (b)
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
Telephone (212) 839-5300
Facsimile (212) 839-5599
June 30, 1999
Sentinel Group Funds, Inc.
National Life Drive
Montpelier, Vermont 08536
Ladies and Gentlemen:
We consent to the incorporation by reference in Post-Effective Amendment No. 87
to the Registration Statement on Form N-1A (File Nos. 2-10685 and 811-214) of
our opinion dated March 27, 1997 filed on March 28, 1997 as an Exhibit to
Post-Effective Amendment No. 77 to such Registration Statement and to the use of
our name in the prospectus and statement of additional information constituting
parts thereof.
Very truly yours,
/s/ BROWN &WOOD LLP
Exhibit 10
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Telephone (212) 596-8000
Facsimile (212) 596-8910
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. 87 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated December 18, 1998, relating to the financial
statements and financial highlights appearing in the November 30, 1998 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.
PricewaterhouseCoopers LLP
June 29, 1999
Exhibit 13(a)
DISTRIBUTION PLAN
of
SENTINEL GROUP FUNDS, INC.
Pursuant to Rule 12b-1
Distribution Plan dated as of the first day of March, 1993, as amended
as of June 10, 1999, of Sentinel Group Funds, Inc., a Maryland corporation (the
"Company").
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, Sentinel Financial Services, Inc. (the "Distributor") is a
securities firm engaged in the business of marketing shares of investment
companies through other securities firms; and
WHEREAS, the Company proposes to enter into a Distribution Agreement
with the Distributor, pursuant to which the Distributor will act 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; and
WHEREAS, the Company desires to adopt this Distribution 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 Company's shares;
and
WHEREAS, the Directors of the Company have determined that there is a
reasonable likelihood that adoption of this Distribution Plan will benefit each
Fund and its shareholders.
NOW, THEREFORE, the Company hereby adopts, and the Distributor hereby
agrees to the terms of, this Distribution Plan (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 Fund of the Company, up to a maximum of 0.30% per annum of
average daily net assets in the case of each of the Aggressive Growth, Growth,
Common Stock, Balanced, and World Funds, and any future new Funds which are
classified by the Board of Directors of the Fund as "equity funds" (the "Equity
Funds"), except that the maximum in the case of the Sentinel Growth Index Fund
shall be 0.20% per annum of average daily net assets, and 0.20% per annum of
average daily net assets in the case of each of the Bond, Tax-Free Income,
Pennsylvania Tax-Free Income, and Government Securities Fund, and any future new
funds which are classified by the Board of Directors as "fixed income funds"
(the "Fixed Income Funds"). The U.S. Treasury Money Market Fund shall not be a
participant in the Plan.
2. The Company shall reimburse the Distributor for expenses actually
incurred by the Distributor for: (a) distribution fees paid to securities
broker-dealers who have executed a Dealer Agreement with the Distributor, as
provided in paragraph 3 below; (b) salaries and expenses of the Distributor's
wholesale sales force, and the Distributor's home office management and
marketing personnel; (c) expenses incurred by the Distributor for the occupancy
of its office space in Montpelier, Vermont; (d) expenses incurred by the
Distributor with respect to equipment and supplies; (e) expenses incurred for
the preparation, printing and distribution of sales literature used in
connection with the offering of the Company's shares to the public; (f) expenses
incurred in advertising, promoting and selling shares of the Company to the
public; (g) expenses incurred for the preparation, printing and distribution of
the prospectus and statement of additional information of the Company, and any
supplement thereto used in connection with the offering of the Company's shares
to the public; and (h) expenses incurred for the printing of additional copies
for use by the Distributor as sales literature of reports and other
communications which were prepared by the Company for distribution to existing
shareholders. Reimbursements contemplated under clauses (b) through (h), 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 Fund or Funds 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) through (h) of
this paragraph 2. In such event, the Distributor will not be reimbursed for any
unreimbursed eligible expenses from any other Fund, or in any future year.
3. The Dealer Agreements contemplated by paragraph 2(a) above shall
permit payments to securities dealers by the Distributor only in accordance with
the provisions of this paragraph. The Distributor may pay to the other party of
any Dealer Agreement a quarterly fee for distribution and marketing services
provided by such other party. Such quarterly fee shall be payable in arrears in
an amount equal to, in the case of the Equity Funds, up to 0.05% of the average
daily net asset value of the Qualifying Shares of each such Fund held by such
other party's clients for the period as determined by the Distributor, and, in
the case of the Fixed Income Funds, up to 0.025% of the average daily net asset
value of the Qualifying Shares of each such Fund held by such other party's
clients for the period as determined by the Distributor. "Qualifying Shares"
shall mean those shares sold by such other parties after the Effective Date of
this Plan, shares of predecessor funds of the Company as to which such
distribution fees were earned under the distribution plan under Rule 12b-1 of
such predecessor funds, and shares resulting from the reinvestment of dividends
and distributions on such shares.
4. 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
this 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.
5. This Plan shall become effective as to each Fund upon its approval
by (a) a majority of the outstanding voting securities (as such phrase is
defined in the Investment Company Act) of such Fund, 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 Fund 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 an Amendment to the Company's Registration
Statement reflecting this Plan, filed with the U.S. Securities and Exchange
Commission under the Securities Act of 1933. The date on which the last of (a),
(b) and (c) occurs with respect to a Fund shall be the "Effective Date" with
respect to such Fund.
6. Upon receipt of the approvals required by paragraph 5 above, this
Plan and the Dealer Agreements contemplated hereby shall continue in effect with
respect to any Fund 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 5 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.
7. This 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, or, with respect to any Fund, by the holders of a majority of the
outstanding voting securities of such Fund.
8. 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 Fund, 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.
9. The Company shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 4 hereof, for a period of
not less than six years from the date of this 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_________________________________
Patrick E. Welch
Chairman
SENTINEL FINANCIAL SERVICES COMPANY
by_________________________________
Exhibit 13(b)
CLASS B DISTRIBUTION PLAN
OF
SENTINEL GROUP FUNDS, INC.
PURSUANT TO RULE 12B-1
Class B Distribution Plan (the "Plan") dated as of the 25th day of
March, 1996, as amended on March 14, 1997, and November 6, 1997, and as further
amended on June 10, 1999, 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 B shares of each of the following investment portfolios of
the Company:
Sentinel Small Company Fund
Sentinel World Fund
Sentinel Common Stock Fund
Sentinel Balanced Fund
Sentinel Bond Fund
Sentinel High Yield Bond Fund
Sentinel Tax-Free Income Fund (through October 31, 1997 only)
Sentinel Mid Cap Growth Fund
Sentinel Growth Index Fund
(such classes, together with all class B 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 B 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 B
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 B Class
and its shareholders.
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 B Class of the Company, up to a maximum of 1.00%
(0.75% in the case of the Sentinel Growth Index Fund) per annum of average daily
net assets of each Class B Class. Of such amount, up to 0.25% shall be allocated
to service fees to broker-dealers, and up to 0.75% (0.50% in the case of the
Sentinel Growth Index Fund) may be allocated to other expenses described below.
The U.S. Treasury Money Market Fund, Class B is not a "Class B Class" as such
term is used herein, and will not be a participant in the Plan.
2. The Company shall reimburse the Distributor for expenses actually
incurred by the Distributor for: (a) service fees with respect to Class B
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 B 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; (c) salaries and expenses of the
Distributor's wholesale sales force, and the Distributor's home office
management and marketing personnel; (d) expenses incurred by the Distributor for
the occupancy of its office space in Montpelier, Vermont; (e) expenses incurred
by the Distributor with respect to equipment and supplies; (f) expenses incurred
for the preparation, printing and distribution of sales literature used in
connection with the offering of the Company's Class B Classes to the public; (g)
expenses incurred in advertising, promoting and selling shares of the Company's
Class B Classes to the public; (h) expenses incurred for the preparation,
printing and distribution of the prospectus and statement of additional
information of the Company, and any supplement thereto used in connection with
the offering of the Company's Class B shares to the public; (i) expenses
incurred for the printing of additional copies for use by the Distributor as
sales literature of reports and other communications which were prepared by the
Company for distribution to existing shareholders, and (j) expenses incurred for
state "blue sky" registration fees for the first year of operations of a new
Fund of the Company. Reimbursements contemplated under clauses (b) through (j),
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 B 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) through (j) of this paragraph 2. In such event, the Distributor will not be
reimbursed for any unreimbursed eligible expenses from any other Class B 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 B 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 B 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 1933. The date on which the last of (a), (b) and (c) occurs
with respect to a Class B Class shall be the "Effective Date" with respect to
such Class B 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 B 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 B Class, by the holders of a majority of
the outstanding voting securities of such Class B 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 B 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______________________________________
Patrick E. Welch
Chairman
SENTINEL FINANCIAL SERVICES COMPANY
by______________________________________
Joseph M. Rob
Chief Executive Officer
Exhibit 15
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 shares as follows:
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________________________
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
_______________________________________________________________________________________________________________________
<S> <C> <C> <C>
Balanced Fund Balanced Fund Balanced Fund Balanced Fund
Bond Fund Bond Fund Common Stock Fund
Common Stock Fund Common Stock Fund High Yield Bond Fund
Government Securities Fund Growth Fund World Fund
Growth Fund Growth Index Fund
Growth Index Fund High Yield Bond Fund
High Yield Bond Fund Small Company Fund
Short Maturity Government Fund U.S. Treasury Money Market
Small Company Fund Fund
Tax-Free Income Fund World Fund
U.S. Treasury Money Market
Fund
World Fund
_______________________________________________________________________________________________________________________
</TABLE>
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, Class C and Class D 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, Class C and Class D share of a Fund represents
an identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D 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 and Class D 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, Class C and Class D shares of a Fund and the deferred sales charges
that are imposed on the Class B, Class C and Class D 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 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 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 Appendix B hereto. Once the applicable Class
B 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 that are higher than the Rule
12b-1 fees imposed on Class A shares and a CDSC for only one year.
Class C shares have no conversion feature.
Class D: Class D shares are sold on a deferred sales charge basis. Class D
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 but lower than the Rule 12b-1
fees imposed on Class B and Class C shares and a CDSC for seven years
as described in Appendix C hereto. Once the Class D conversion period
has expired, Class D shares will convert automatically to Class A
shares at a specified time as described below. Class D shares may only
be purchased in increments of $249,999 or less.
Exchange Privilege. Holders of Class A, Class B and Class C 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 modified or terminated in accordance
with the rules of the Commission. Holders of Class D shares have an exchange
privilege with Class A shares of the Money Market Fund only.
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 Balanced Fund, Common Stock
Fund, High Yield Bond Fund and World Fund (each a "Class C Fund") are
exchangeable with Class C shares of the other Class C Funds. Class A shares are
also exchangeable for shares of Government Securities Fund, Growth Fund, New
York Tax-Free Income Fund and 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 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. Except with respect to exchanges into the
Money Market 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, Class C or Class D shares of
another Fund; Class B shares of the Money Market Fund may not be purchased and
may be acquired only in exchange for Class B shares of another Fund. The holding
period for shares of the Money Market Fund acquired through an exchange of Class
B, Class C or Class D shares, however, will not count toward satisfaction of the
holding period requirement for the previously owned Class B, Class C or Class D
shares 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 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, Class C or Class D 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.
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.
Conversion of Class D Shares to Class A Shares. Approximately ten years
from the date of purchase, Class D shares and shares purchased through
reinvestment of dividends on those converting Class D 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. 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 D shares to Class A shares.
Shareholders holding Class D shares in certificate form will not receive Class A
share certificates until the shareholder tenders the Class D share
certificate(s) to the Fund's Transfer Agent. Until Class D share certificates
are exchanged for Class A share certificates, the Class D share certificates
will represent the shareholder's interest in the Class A shares received upon
conversion.
<PAGE>
APPENDIX A
Series participating in the Rule 18f-3 Plan
of
Sentinel Group Funds, Inc.
Sentinel Balanced Fund
Sentinel Bond Fund
Sentinel Common Stock Fund
Sentinel Growth Fund
Sentinel Growth Index 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
<PAGE>
APPENDIX B
================================================================================
CLASS A SHARES (EXCEPT MONEY MARKET FUND, SHORT MATURITY GOVERNMENT FUND
AND GROWTH INDEX 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%
================================================================================
================================================================================
CLASS A SHARES OF SHORT MATURITY GOVERNMENT FUND
================================================================================
SALE SIZE INITIAL SALES CHARGE
================================================================================
$0 to $999,999 1.0%
- --------------------------------------------------------------------------------
$1,000,000 or more 0.0%
================================================================================
================================================================================
CLASS A SHARES OF GROWTH INDEX FUND
================================================================================
SALE SIZE INITIAL SALES CHARGE
================================================================================
$0 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.
<PAGE>
================================================================================
CLASS B SHARES (EXCEPT MONEY MARKET FUND AND GROWTH INDEX FUND)
================================================================================
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%
================================================================================
================================================================================
CLASS B SHARES OF GROWTH INDEX FUND
================================================================================
SALE SIZE YEAR CDSC
- --------------------------------------------------------------------------------
$0 to $500,000 1 2.50%
- --------------------------------------------------------------------------------
2 2.50%
- --------------------------------------------------------------------------------
3 2.00%
- --------------------------------------------------------------------------------
4 1.50%
- --------------------------------------------------------------------------------
5 1.25%
- --------------------------------------------------------------------------------
6 0.50%
- --------------------------------------------------------------------------------
$500,000 to $1,000,000 1 2.0%
- --------------------------------------------------------------------------------
2 2.0%
- --------------------------------------------------------------------------------
3 1.0%
- --------------------------------------------------------------------------------
4 1.0%
================================================================================
<PAGE>
================================================================================
CLASS C SHARES (all funds)
================================================================================
SALE SIZE YEAR CDSC
================================================================================
all 1 1.0%
================================================================================
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CLASS D SHARES (all funds)
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SALE SIZE YEAR CDSC
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$0 to $249,999 1 6.0%
- --------------------------------------------------------------------------------
2 6.0%
- --------------------------------------------------------------------------------
3 5.0%
- --------------------------------------------------------------------------------
4 4.0%
- --------------------------------------------------------------------------------
5 4.0%
- --------------------------------------------------------------------------------
6 3.0%
- --------------------------------------------------------------------------------
7 2.0%
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WAIVERS OF CLASS A, CLASS B, CLASS C AND CLASS D CDSCS
- ------------------------------------------------------
CDSCs payable on redemptions of Class A, Class B, Class C and Class D
shares will be waived in the following circumstances:
o Redemptions of shares issued as a result of reinvestment of dividends
and capital gains
o Redemptions upon the death of the shareholder
o Redemptions to effect distributions required by the Employee Retirement
Income Security Act of 1974, as amended, or regulations of the Internal
Revenue Service
o Redemptions to distribute proceeds of loans made to employees of
not-for-profit organizations (ss.501(c)(3) companies) against shares
held in retirement plan accounts (ss.403(b)(7) accounts)
o Redemptions made pursuant to a systematic withdrawal plan in amounts up
to 10% of the account's then current value annually for Class B and
Class C Shares and in amounts up to 8% of the account's then current
value annually for Class D Shares
