FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
Federated Investors
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(412) 288-1900
April 24, 1997
EDGAR Operations Branch
Securities and Exchange Commission
Division of Investment Management
450 Fifth Street, N.W.
Washington, DC 20549
RE: Federated Fund For U.S. Government Securities, Inc. (the ``Fund'')
1933 Act File No. 333-23805
1940 Act File No. 811-1890
Dear Sir or Madam:
Pursuant to Regulation 14a-6 of the Securities Exchange Act of 1934 (the
`1934 Act''), enclosed for filing electronically are additional proxy
solicitation materials for the above-referenced Fund.
The enclosed information is expected to be mailed to shareholders of U.S.
Government Securities Income Portfolio, a portfolio of William Penn Interest
Income Fund, on or about April 25, 1997 in connection with the Special Meeting
of Shareholders to be held on May 29, 1997. The material is intended to
supplement the definitive Prospectus/Proxy, Statement of Additional Information,
and form of proxy of the Fund filed with the Commission on March 24, 1997.
Any questions or comments with respect to this filing may be directed to
the undersigned at (412) 288-4827.
Very truly yours,
/s/ Jody L. Petras
Jody L. Petras
Senior Compliance Analyst
cc: Byron Bowman
Matthew Hardin
Enclosures
COVER
[Graphic]
sketch of William Penn with an eagle perched on his outstretched arm
PENN'S WORDS
Spring 1997
[Graphic - top left of page]
sketch of William Penn with an eagle perched on his outstretched arm
``THE EAGLE HAS LANDED''
During recent months, Friend William had his hand in the air, testing
weather conditions. One fine day, as he strolled the rolling hills and gentle
streams of Pennsylvania Dutch country, a westerly wind blew, bringing with it
Federated Investors' eagle who promptly perched on Friend William's outstretched
arm and remained there.
ON MARCH 25, 1997, AN AGREEMENT WAS REACHED BETWEEN THE WILLIAM PENN
COMPANY AND FEDERATED INVESTORS. PENDING SHAREHOLDER APPROVAL, EACH OF THE
WILLIAM PENN MUTUAL FUNDS WILL MERGE INTO A FEDERATED MUTUAL FUND OF
CORRESPONDING PORTFOLIO COMPOSITION AND INVESTMENT OBJECTIVE.
The Management and Board of Directors of the William Penn Funds sincerely
recommend these mergers since they offer our shareholders a more diversified
menu of investment opportunities, plus state-of-art account servicing which is a
necessity in today's competitive market.
This final issue of Penn's Words deals with the proposed merger; a tax-free
transfer of mutual fund asset.
Federated Investors, located in Pittsburgh, Pennsylvania, is an investment
management and financial services company with more than $110 billion in assets,
and a national reputation for solid investment results and service. Founded in
1955, it introduced the country's first institutional money market mutual fund
in 1974 and currently manages 34 retail mutual funds.
PROXY/PROSPECTUS STATEMENT
A Proxy/Prospectus statement has been mailed to each shareholder in the
entire William Penn family of funds. There is a separate Proxy/Prospectus for
each fund. These documents detail essential information about the proposed
merger and the Federated Fund into which your William Penn fund will transfer.
Please read them carefully. Shareholders receive a separate Proxy/Prospectus
statement for each fund in which they are invested and for each individual
account registration. The accompanying proxy card represents your proportional
vote, based upon share balance.
Important: please sign and date the attached proxy card, and return it promptly
using the postage-paid envelope that is attached to the proxy statement. We
thank all of our shareholders for their excellent record of responding to proxy
solicitations, past and present.
ANNUAL MEETING
The annual meeting will be held on Thursday, May 29, 1997 at the Sheraton
Berkshire Hotel at 9:00 a.m., located in Wyomissing, Pennsylvania - off the
Paper Mill Road exit of U.S. Route 422. Please notice the earlier than usual
beginning time of 9:00 a.m. The meeting will open with an address by James
Jordan, Chairman of the William Penn Company; followed by announcement of the
tally of votes (for, against, and abstaining) on the proxy proposals as they
pertain to each of the separate funds. After completion of business, Scott B.
Schermerhorn, Vice President and Portfolio Manager of Federated American Leaders
Fund, and J. Scott Albrecht, Vice President and Portfolio Manager of Federated
Pennsylvania Municipal Income fund, will speak. Karen L. Monito, Federated
Assistant Vice President and Director of Retail Sales, will also be present when
the floor is then opened for all questions.
PENNSYLVANIA DUTCH
[photo - top left- James E. Jordan, Chairman]
As a result of the proposed sale of The William Penn Company to Federated
Investors, Inc. of Pittsburgh, you will soon receive a proxy requesting your
vote in favor of merging your fund assets into a corresponding Federated fund.
This letter is meant to address several common questions we have received
concerning this transaction.
1. WHY THE SALE? As owner/managers of William Penn, we recognized the
importance to our shareholders and their financial intermediaries of a true
range of fund investment possibilities, and greater levels of support than we
were able to provide over time. Accordingly, we sought a substantial buyer who
could offer these features, but whose investment philosophy and results are
compatible with our own.
2. WHY FEDERATED? We worked for many months to find an appropriate buyer,
screening many interested parties to arrive at Federated. Federated,
headquartered in Pittsburgh, is an old, well respected name in the mutual fund
world. The company is privately owned, and still directed by its founding
family. Its basic investment philosophy is the same as ours: to act as
responsible stewards of investors' money through all kinds of markets.
3. WHAT IS THEIR INVESTMENT TRACK RECORD? Federated manages or administers
over $110 billion in net assets. Of their 34 fund products, over 90% currently
have three, four, or five star ratings from Morningstar.
4. WHAT ABOUT SHAREHOLDER SERVICES? For the last five years, Federated has won
recognition from DALBAR, a research and publishing firm, for shareholder and
broker/dealer services and satisfaction. Additionally, Federated will maintain
an office in Berks County to service shareholders and broker/dealers for a
period following the mergers.
5. WILL THE MERGERS COST SHAREHOLDERS ANYTHING? No. The mergers are in the
form of tax-free exchanges of shares, which means that William Penn shareholders
will receive the equivalent value of their fund investment in Federated fund
shares. The costs of the proxy and proxy solicitation are borne by Federated.
6. IF SHAREHOLDERS ARE `GRANDFATHERED'' IN THE WILLIAM PENN FUNDS, WILL THEY
PAY SALES CHARGES IN THE FEDERATED FUNDS? No. In fact, grandfathered
shareholders will not pay sales charges in any Federated fund.
7. WHAT WILL HAPPEN TO PENN SQUARE EMPLOYEES? We are providing employee
severance equal to either 100% or 75% of salary, based on term of employment, to
all our colleagues, and in addition are paying for a year of insurance benefits.
Federated is conducting interviews with those employees who have expressed an
interest in working with them for employment possibilities.
8. ARE YOU SADDENED BY THE PENDING SALE? In part, yes. No major change in
life is without its poignancy. But with Federated, we are assured that our
shareholders' best investment interest will be well served into the 21st
Century. And that is a nice feeling.
THE CONVERSION PLAN
The schedule below shows the specific Federated fund and class of shares
into which each of the William Penn Funds is expected to be merged:
Penn Square Mutual Fund Federated American Leaders A
Penn Square Mutual Fund C Federated American Leaders C
Scottish Widows Int'l. Fund Federated International Equity A
Scottish Widows Int'l. Fund C Federated International Equity C
Wm. Penn Quality Income Federated Bond Fund A
Wm. Penn Quality Income C Federated Bond Fund C
Wm. Penn U.S. Gov't. Securities Federated Fund for U.S. Gov't
Securities A
Wm. Penn U.S. Gov't. Securities C Federated Fund for U.S. Gov't
Securities C
Wm. Penn PA Tax-Free Income A & C Federated PA Muni Income Fund
A
Wm. Penn NY Tax-Free Income Federated NY Muni Income F
Wm. Penn Money Market Automated Cash Management Trust-
Cash II
Share class designations are important for identifying your particular
mutual fund holding. If the letter `C'' does not appear after the fund name on
your William Penn account, you own Class A shares which automatically will
convert to A Shares at Federated.
Two exceptions are: (1) William Penn PA Tax-Free Fund, both Classes A and
C will convert to A Shares; and (2) William Penn NY Tax-Free Class A converts
to Class F.
William Penn Fund shares will convert into shares of their designated
Federated fund, value for value, based upon the closing net asset values of both
funds at the close of business on the merger date: tentatively scheduled for May
30, 1997.
HYPOTHETICAL EXAMPLE OF A CONVERSION
Penn Square Federated American
converts to
Mutual Fund Leaders Fund A
Number of Shares 1,000 600
NAV (net asset value) $12.00 $20.00
Total Value $12,000 $12,000
Each fund will have its own conversion factor, based upon the relative NAVs
of the funds.
A SPECIAL DISTRIBUTION of any realized capital gains and accrued dividend
income in the Penn Square Mutual Fund and Scottish Widows International Fund
portfolios will be made to shareholders of record at closing.
COMPARATIVE FUND PERFORMANCE DATA
The Proxy/Prospectus, which was mailed on April 25, contains performance
figures for the Federated funds. These are average annual total returns for
one, three, five, ten years and since inception for the period ended March 31,
1997. The Quarterly Reports for your William Penn fund also contain fund
performance figures for the period ended March 31, 1997. These reports are
included in this mailing of Penn's Words along with your regular William Penn
account statement. Please remember, historical performance does not guarantee
future performance.
MAY STATEMENTS FROM WILLIAM PENN
Pending shareholder approval of the proposed mergers, you will receive your
final William Penn Statement for the month of May. The statement will show
dividend accrual for the month and expected capital gains distributions from the
Penn Square and Scottish Widows portfolios. This statement will be a complete
history of your account for 1997 prior to the conversion. A separate Form 1099-
DIV will be issued for this account next January. PLEASE SAVE THIS STATEMENT
FOR YOUR RECORDS.
WILLIAM PENN IRA ACCOUNT SHAREHOLDERS
IRS Form 5498 will be mailed in mid-May. The form reports the Fair Market
Value of your account as of December 31, 1996, plus regular IRA contributions
for 1996 and rollovers during 1996. PLEASE CHECK YOUR FORM IMMEDIATELY AND CALL
US IF YOU HAVE ANY QUESTIONS SO WE MAY RESPOND BEFORE OUR SCHEDULED CLOSING.
SHAREHOLDER SERVICE AT FEDERATED
YOUR BROKER OR FINANCIAL PLANNER will continue to provide professional
advice and customer service. As shareholders in the Federated Family of Funds
you will have access to a greater selection of investment options. Federated
will send regular consolidated account statements. If the need arises to speak
with a representative, the toll free customer service number for retail broker
accounts is (800) 245-5051.
SHAREHOLDERS, WHO PURCHASED DIRECTLY FROM THE WILLIAM PENN FUNDS, become
`Federated Life Members'' and continue into Federated's entire family of retail
funds. You will receive a list of those funds shortly after the merger.
GRANDFATHERED SHAREHOLDERS WILL CONTINUE NO-LOAD IN ALL OF THESE FUNDS. Client
Service Representatives at the Federated call center are familiar with the
William Penn Funds and with our style of shareholder services. The toll free
number is (800) 245-4770.
SHAREHOLDER OPTIONS AT FEDERATED
Shareholder options which you have chosen for your funds and accounts at
William Penn will automatically convert to your accounts and funds at Federated.
These include:
SYSTEMATIC PURCHASE PLAN (SPP), called SYSTEMATIC INVESTMENT PROGRAM (SIP) at
Federated, will continue on the 20th day of the month; but you may choose any
other day or frequency.
SYSTEMATIC WITHDRAWAL PLAN (SWP), will continue on the 10th day of the month,
but you may choose any other day or frequency. HOWEVER, SWPS FROM IRA ACCOUNTS
ARE DONE ONLY ON THE 24TH DAY OF THE MONTH A FEDERATED.
SYSTEMATIC EXCHANGE PLAN (SEP), between funds will continue; as will FLEXIVEST,
which is called DIVMOVE.
ALTERNATE PAYEES, including bank account and wiring instructions, will carry
over.
TELEPHONE AUTHORIZATION to exchange and redeem shares will transfer
automatically to all accounts EXCEPT IRAS AND KEOGHS.
CHECK WRITING. You cannot use your William Penn Money Market checks after the
merger. New checkbooks will be issued. Minimum check amount is $100 at
Federated.
PAYOUT SCHEDULES OF FEDERATED FUNDS
EQUITY FUNDS:
FEDERATED AMERICAN LEADERS is a growth & income fund. Dividends are paid four
times year: March, June, September, and December. Capital Gains, if any, are
paid annually.
FEDERATED INTERNATIONAL EQUITY is a total return fund. Capital Gains, if any,
are paid annually.
INCOME FUNDS: BONDS AND MONEY MARKET.
FEDERATED BOND FUND, FUND FOR US GOVERNMENT, PA MUNI INCOME FUND, NY MUNI INCOME
FUND, AND AUTOMATED CASH MANAGEMENT TRUST-CASH II: Dividends are paid monthly.
FEDERATED REPRESENTATIVES ANSWER QUESTIONS
On March 31 and April, Karen L. Monito, Assistant Vice President and
Director of Retail Sales, and Barbara J. Bogulski, Manager of Investors
Services, visited our offices and met with members of our staff.
WHAT ARE THE DIVIDEND AND CAPITAL GAIN SCHEDULES FOR PENN SQUARE MUTUAL FUND AND
FEDERATED AMERICAN LEADERS FUND?
Penn Square Mutual Fund expects to pay any accrued dividends and capital
gain at the end of May. Federated American Leaders Fund pays its dividend and
long term gain in June.
WHAT WILL HAPPEN TO SHARE CERTIFICATES ISSUED FOR THE WILLIAM PENN FUNDS?
Since the William Penn Funds are proposed to merge into Federated funds,
the William Penn certificates would no longer be valid. Shareholders may
request Federated fund certificates if they feel it is critical to hold their
shares in this manner.
HOW WILL YEAR-END INFORMATION BE HANDLED?
Shareholders will receive two Form 1099s at year-end. We will issue one
for the William Penn fund and one for the Federated fund into which the shares
were merged. These forms will be mailed separately.
WILL FEDERATED PROVIDE AVERAGE COST INFORMATION?
Yes, Federated funds provide average cost calculations annually.
CAN SHAREHOLDERS USING THE SHARE IDENTIFICATIONS METHOD OF CALCULATING GAINS
CONTINUE TO USE THIS METHOD AFTER THE MERGER?
The shareholders can continue to use the cost basis calculation of their
choice. The conversion ratio that shareholders may need will be made available
by calling Federated.
DOES FEDERATED HAVE MAINTENANCE FEES ON THEIR IRA ACCOUNTS?
No, Federated currently has no maintenance fees for IRA accounts.
WILL NEW CHECKBOOKS FOR THE MONEY MARKET BE ISSUED AUTOMATICALLY OR WILL
SHAREHOLDERS HAVE TO REQUEST THEM?
If you have checkwriting in the William Penn money market fund, Federated
will send you a checkwriting application for Federated's money market fund,
Automated Cash Management Trust. Once your signed application is received by
Federated, your new checkbook will be mailed to you. It is important that you
send back your application promptly.
Federated also offers a convenient VISA check card as an additional way for you
to access your money market account. A VISA application will also be sent to
you.
WILL FEDERATED BE PROVIDING NEWSLETTERS TO SHAREHOLDERS?
Yes, Federated will send a newsletter to the Life Members on a quarterly
basis. It will discuss current industry events, investment issues, and
questions from our shareholders on the funds.
In December, we publish a special bulletin that addresses all year-end tax
issues that our shareholders may need to file their tax returns.
[photo of four women - middle of page - 2 3/4''x 1 3/4'']
From the William Penn Funds: Lidia Zidik, Vice President for Broker Services,
and Elizabeth Keller, Director of Shareholder Services, join Barbara Bogulski
and Karen Monito in a team handshake.
THE MOST FREQUENTLY ASKED QUESTION FROM OUR SHAREHOLDERS AND FRIENDS IN THE
FINANCIAL COMMUNITY
WHAT WILL HAPPEN TO ALL OF YOU?
It has been fun working here, especially because of the special
relationship we have had with so many of you. The fact that this question is
asked so often tells us that the feeling is reciprocated. The William Penn
Company has been good to us and allowed us to enjoy our work, by extending
respect and trust.
PUBLISHED BY PENN SQUARE MANAGEMENT CORPORATION FOR SHAREHOLDERS OF THE WILLIAM
PENN FAMILY OF FUNDS; MUST BE PRECEDED BY PROSPECTUS.
(610) 670-1031 (800) 523-8440
P.O. BOX 1419 l READING, PA l 19603-1419
IMPORTANT NOTICE TO SHAREHOLDERS:
By now, you should have received a Proxy Statement for a Special Meeting of
Shareholders to vote on the proposed Reorganization with the Federated Funds.
The Board of Trustees of each of the William Penn Funds has unanimously approved
this transaction, and recommends that you also vote approve. Your vote, no
matter how many shares you own, is important. Please help us to avoid
additional mailings or telephone solicitations to obtain a quorum for the
meeting. If your shares are held by your broker or a bank, please contact your
account representative and instruct him or her to execute a proxy on your behalf
today.
This is an important vote for you and your fund. Make your vote count by
returning your proxy. You may also vote by telephone, by calling (800) 733-8481
ext.459.
PLEASE RETURN YOUR PROXY NOW. THANK YOU FOR YOUR VOTE.
{If you have not yet received your Proxy Statement or have any questions, please
call (800)-523-8440.}
SCOTTISH WIDOWS INTERNATIONAL FUND
FIRST QUARTER REPORT 1997
April 18,1997
Dear Shareholders:
International securities market have not had the same rise to new heights
followed by a correction as have domestic U.S. markets, but they have begun to
act in the 1st quarter of 1997 as our Scottish Widows managers predicted their
Annual Report. Edinburgh argues that a model economic growth pickup in Europe
and Japan, together with tightening in U.S. monetary policy, has caused
investors to fear that liquidity will not be as supportive a prop for markets
going forward, and that relatively expensive valuation levels will accentuate
the risk of a downward market correction. Such a correction has apparently
already occurred in the U.S.
Looking at our major areas of investment concentration, Scottish Widows
notes that Japanese exporters are enjoying boom like conditions due to the sharp
fall in the Japanese yen against other currencies, but that domestically, Japan
remains in a slump. Other Asian economies are still in slow growth phase,
although a recovery in the important electronics sector implies reasonable
prospects for the year ahead. In Europe, the movement toward a single currency
has bogged down, and most European countries face continuing high unemployment
and economic sluggishness: only the U.K. is enjoying real prosperity. Emerging
markets in Latin America and eastern Europe might provide attractive buying
opportunities longer term if economic fundamentals remain sound.
On a total rate of return basis, Scottish Widows International Fund enjoyed
a +1.48% gain in the 1st Quarter ended March 31, 1997, in marked contrast to its
MSCI-EAFE standard, which was off by -1.95%. For the 12 months and five years
ended March 31st. Scottish Widows gained +3.42% and +56.76% respectively, as
compared with -0.13% and +52.42% respectively for the MSCI-EAFE in those
periods.
In conclusion, we would like to comment briefly on the proposed sale of the
William Penn Company to Federated Investors of Pittsburgh. Upon shareholder
approval, all our funds will be merged into corresponding Federated funds in a
tax-free exchange of shares. Scottish Widows International Fund will be merged
into Federated's International Equity Fund, which like Scottish Widows is an
international fund investing primarily in major international corporations
around the globe. In proposing this merger to you, we hope you will agree that
Federated provides real opportunities for your investment future, and that you
will support our efforts to prepare for that future.
With best regards,
Sincerely,
/s/ James E. Jordan
James E. Jordan
Chairman
WILLIAM PENN INTEREST INCOME FUND
FIRST QUARTER REPORT 1997
April 18, 1997
Dear Shareholders:
Action by the Federal Reserve rattled credit markets in the 1st Quarter of
1997, but that action had been well advertised in advance and caused no major
upsets. Evidently concerned with tightening labor markets and strong retail
sales, the Federal Reserve moved to raise interest rates by nudging up the Fed
Funds rate by one-quarter percent on March 25th which caused long-term
Treasuries to move above 7.0%.
Interestingly, however, in Congressional testimony the following day Fed
Chairman Greenspan seemed to imply that one such move might suffice when he
said, `The real Federal Funds rate, judged by core inflation, is only slightly
below its early 1995 peak for this cycle and might be at a level that will
promote continued non-inflationary growth, especially considering the recent
rise in the foreign exchange value of the dollar.'' In short, if core inflation
continues to behave, then no further rate hikes need to be made.
For our part, we would not be surprised by another quarter-point increase
later on this year, but we doubt that it will come soon - and it may not come at
all if the economy begins to slow a bit. After all, growth rates remain
moderate as do major commodity prices, and while labor markets are firm,
`labor'' is nowadays much augmented by technology, so that labor market
tightness as a harbinger of inflation is not clear. Furthermore, the already
high value of the dollar relative to other currencies and its negative impact on
exports would seem to weigh against further interest rate increases. If
anything, we would expect interest rates to decline by year-end.
Performance information for the one and five years ended March 31, 1997, is
provided inside this Report, as always expressed as total rates of return.
Relative to our Lipper fund peers, returns are commendable.
In conclusion, we would like to comment briefly on the proposed sale of the
William Penn Company to Federated Investors of Pittsburgh. Upon shareholder
approval, all our funds will be merged into corresponding Federated funds in a
tax-free exchange of shares. Each of the William Penn Interest Income Funds
will be merged into Federated Funds with essentially the same investment
objectives as our funds, and with good historic investment returns. In
proposing this merger to you, we hope you will agree that Federated provides
real opportunities for your investment future, and that you will support our
efforts to prepare for that future.
With best regards,
Sincerely,
/s/ James E. Jordan
James E. Jordan
Chairman
PENN SQUARE MUTUAL FUND
FIRST QUARTER REPORT 1997
April 18, 1997
Dear Shareholders:
The first quarter just ended was a momentous one for investors in general,
and in a sense, for Penn Square investors in particular. To begin with, the
stock market, as measured by the Dow Jones Industrial Average, initially
continued its seemingly relentless climb, reaching a 12 month high on March 11th
at 7085.16. Around that time, Federal Reserve Chairman Alan Greenspan spoke of
`irrational exuberance'' in the market, in effect signaling a change in
interest rate policy, which duly came on March 25th with a one-quarter percent
nudge in the Fed Funds rate. By last Friday, April 4th, the DJIA had moved down
7.9% from its peak to close at 6526.07. Broader averages, such as the Nasdaq
Composite, declined substantially more. Is this routine `correction'' or is
there more to come?
We fall into the routine correction camp, because we do not believe that
interest rates are going to rise much more, if at all, in the foreseeable
future. Another quarter point increase in the Fed Funds rate might occur in
late May, but we think that would be the end, and in any event, the market has
more or less factored in such a possibility already. Having said, that,
however, we do not think that the market has fully factored in a more probable
scenario, which is that corporate profit margins have peaked for this cycle. If
this is true, earnings valuations are relatively full, though perhaps not
excessive, and future market returns will reflect steadier but more moderate
profit growth..
With the above as background, Penn Square Mutual Fund rose a modest +0.83%
on a total rate of return basis in the quarter ended March 31, 1997, as compared
to +1.13% for the Lipper Growth & Income Funds Average, +2.10% for the DJIA, and
+2.68% for the S&P 500. (We might note that the Lipper average for all equity
funds reported a negative -1.98% for the 1st Quarter.) Looking at performance
on a longer term basis, as one should, for the 12 months ended March 31st, Penn
Square rose by +14.06%, essentially in line with its Lipper peer funds at
+15.47%. With this Report is included your check or reinvestment statement for
five cents per class A share, representing the second dividend to date for 1997.
Looking ahead, we believe that total equity returns for 1997 will be both
positive and competitive with returns available from alternative investments.
In conclusion, we would like to comment briefly on the proposed sale of the
William Penn Company to Federated Investors of Pittsburgh. Upon shareholder
approval, all our funds will be merged into corresponding Federated Funds in a
tax-free exchange of shares. Penn Square Mutual Fund will be merged into
Federated's American Leaders Fund, which like Penn Square is a well-established
growth and income fund that invests primarily in big capitalization American
corporations. American Leaders' record of investment performance and dividend
payout equals or exceeds our own, while Federated's reputation for shareholder
service is excellent. In proposing this merger to you, we hope you will agree
that
Federated provides real opportunities for your investment future, and that you
will support to prepare for that future.
With best regards,
Sincerely,
/s/ James E. Jordan
James E. Jordan
Chairman
PORTFOLIO HIGHLIGHTS: March 31, 1997
TOTAL NET ASSETS $ 329,770,777
CLASS A:
Shares Outstanding 26,875,722
Net Asset Value Per Share $ 12.20
Offering Price Per Share $ 12.81
CLASS C:
Shares Outstanding 152,943
Net Asset Value Per Share $ 12.17
TEN LARGEST HOLDINGS:
General Electric Co. $ 8,932,500
Intel Corporation 8,347,500
Exxon Corp. 7,542,500
Fluor Corp. 6,825,000
Williams Companies, Inc. (The) 6,675,000
Texaco, Inc. 6,570,000
PepsiCo Inc. 6,525,000
United HealthCare Corporation 6,429,375
Aetna Incorporated 6,011,250
Bristol-Myers Squibb Company 5,900,000
One Five
Ten
Year Ended Years Ended Years
Ended
TOTAL RETURN (WITH DIVIDENDS REINVESTED): 3/31/97 3/31/97 3/31/97
Penn Square Mutual Fund, Class A 14.1% 89.1%
193.2%
Lipper Growth & Income Funds Average 15.8% 94.3%
199.3%
Standard & Poor's 500 Index 19.8% 113.9%
251.0%
(Source: Lipper Analytical Services, Inc.)
AVERAGE ANNUAL TOTAL RETURNS:
Penn Square without sales charge 14.1 % 13.6 %
11.4%
Penn Square with maximum sales charge 8.7 % 12.5 %
10.8 %
INCOME DIVIDENDS:
Payable Date
January 31, 1997 $ 0.05
April 25, 1997 0.05
Total 1997 Income Dividends to Date $ 0.10
=====
FUND INDUSTRY WEIGHTING CHANGES:
FOR POSITIONS HELD ON
3/31/97 12/31/96 CHANGE
Food and beverages 5.9 % 2.0 % 3.9 %
Telecommunications 5.2 % 3.3 % 1.9 %
Computers and office equipment 6.8 % 4.9 % 1.9%
Chemicals 2.6 % 1.1 % 1.5 %
Insurance 4.3 % 2.9 % 1.4 %
Building, construction & engineering 3.3 % 2.0 %
1.3 %
Capital goods 3.8 % 2.7 % 1.1 %
Metals 4.0 % 3.3 % 0.7 %
Utilities 4.9 % 4.7 % 0.2 %
Textiles 1.4 % 1.4 % 0.0 %
Retail 2.1 % 2.5 % -0.4 %
Environmental services 0.0 % 1.0 % -1.0 %
Entertainment 1.5 % 2.5 % -1.0 %
Automotive 2.8 % 3.9 % -1.1 %
Paper and forest products 1.3 % 2.4 % -1.1%
Other services 0.0 % 1.1 % -1.1 %
Diversified 0.0 % 1.2 % -1.2 %
Pharmaceuticals and health care 12.4 % 13.7 % -1.3%
Railroads 3.5 % 5.2 % -1.7 %
Energy 11.2 % 13.3 % -2.1 %
Consumer goods 4.9 % 7.4 % -2.5 %
Financial services 3.4 % 7.8 % -4.4 %
Total Stocks 85.3 % 90.3 % -5.0 %
Short-term investments 8.1 % 10.0 % -1.9 %
Other assets and liabilities 6.6 % -0.3 % 6.9%
Net assets 100.0 % 100.0 %
========= =======
PORTFOLIO HIGHLIGHTS: March 31, 1997
Total Net Assets $ 20,045,446
Class A:
Shares Outstanding 1,603,409
Net Asset Value Per Share $ 12.37
Offering Price Per Share $ 12.99
Class C:
Share Outstanding 17,439
Net Asset Value and Offering Price Per Share $ 12.25
GEOGRAPHICAL
Europe 44 %
Japan 25 %
Pacific Basin 13 %
United Kingdom 11 %
Cash 5 %
Latin America 2 %
100.0 %
======
CUMULATIVE TOTAL RETURNS
PERIODS ENDED MARCH 31, 1997 ONE YEAR FIVE YEARS INCEPTION
Class A - without sales 3.4 % 56.8 % 59.2 %
charge
Morgan Stanley EAFE Index -0.1 % 52.4 % N/A
Class C 2.3 % N/A 11.5 %
Class A - with 4.75% sales -1.5 % 49.3 % 51.6 %
charge
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED MARCH 31, 1997 ONE YEAR FIVE INCEPTION
YEARS
Class A - without sales 3.4 % 9.4 % 7.4 %
charge
Morgan Stanley EAFE Index -0.1 % 8.8 % N/A
Class C 2.3 % N/A 8.3 %
Class A - with 4.75 % sales -1.5 % 8.4 % 6.6 %
charge
TEN LARGEST EQUITY HOLDINGS
MARKET % OF NET
SECURITY NAME AND DESCRIPTION VALUE
ASSETS
PHILIPS ELECTRONICS N.V.: Dutch manufacturer
of lighting and consumer electronics $ 769,686 3.8%
NOVARTIS AG: International pharmaceutical and
chemical company 732,688 3.7 %
ROCHE HOLDINGS AG: Swiss pharmaceutical
company 673,813 3.4 %
ADECCO SA: French international
business contracting 638,678 3.2 %
SUMITIMO REALTY & DEVELOPMENT: Real estate
developer in Japan 631,608 3.2 %
KONECRANES INTERNATIONAL: Finnish global
lifting equipment manufacturer 590,572 2.9 %
TELEFONAKTIEBOLAGET LM ERICSON: Swedish
telecommunications company which
produces and installs cable
and network systems 587,526 2.9 %
TELEFONIA DE ESPANA: Spanish
telecommunications company 578,064 2.9 %
ROYAL DUTCH PETROLEUM: World's
largest publically-owned oil company 573,791 2.8 %
INTERNATIONAL NETHERLANDS GROUP:
International bank of financial 563,065 2.8 %
services group
$6,339,491 31.6 %
====================
Past performance is not predictive of future performance. Investments return
and principal value may fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. The Fund's portfolio may differ
significantly from the securities in the index. The index is unmanaged and
therefore does not reflect the cost of portfolio management or trading.
PORTFOLIO HIGHLIGHTS: MARCH 31, 1997
PORTFOLIO
U. S.
Government New York
Pennsylvania Money
Securities Quality Tax-Free
Tax-Free Market
Income Income Income
Income Income
Total Net Assets $35,826,968 $29,458,434 $288,401
$126,165,427 $22,408,854
Class A
Shares Outstanding 3,440,494 2,800,064
28,754 11,466,097 22,403,654
Net Asset Value
Per Share $10.33 $10.28
$10.03 $10.88 $1.00
Maximum Offering
Price Per Share $10.85 $10.79
$10.53 $11.40 $1.00
(Reduced for purchases of 950.00 or more)
Class C:
Shares Outstanding 27,829 65,328
N/A 150,500 N/A
Net Asset Value
& Offering
Price/Share $10.31 $10.26
N/A $10.85 N/A
Average Portfolio
Maturity 6.7 years 8.4 years
8.1 years 9.4 years 22 days
Average Portfolio
Duration 5.0 years 4.8 years
4.6 years 5.1 years 22 days
Class A:
Total Return:
One Year Ended 4.52 % 5.75 % 4.96
% 4.16 % 4.52 %
Lipper Comparative
averages 34.22 % 5.02 %
4.82 % 4.95 % 4.76 %
Average annual Total Return:
One Year Ended
3/31/97 -0.15 % 0.73 %
- -0.03 % -0.79 % 4.62 %
five Years Ended
3/31/97 6.51 % 7.19 %
N/A 5.46 % 3.94 %
Five Years Ended
3/31/97 7.55 % 8.24 %
N/A 6.49 % 3.94 %
Lipper Comparative
averages 6.04 % 6.23 %
N/A 6.65 % 4.01 %
Source of return information: Lipper Analytical Service
SUMMARY OF INVESTMENTS: March 31, 1997
AVERAGE
OF NET STANDARD &
POOR'S
CATEGORY ASSETS MARKET VALUE RATINGS
U.S. GOVERNMENT SECURITIES INCOME PORTFOLIO
United States Treasury Obligations 39.5 % $ 14,163,341
Treasury
Federal Home Loan Mortgage Corp. 23.1 % 8,272,813
Agency
Government National Mortgage Ass. 13.0 % 4,655,742
Agency
Resolution Trust Corporation 10.0 % 3,581,758
Agency
Asset-Backed Securities 8.0 % 2,843,003
AAA
Federal National Mortgage
Association 5.5 % 1,966,302
Agency
Small Business
Administration and CMO's 2.9 % 1,064,497
Agency
Total Investments 102.0 %
36,547,456
Short-term Investment 21.7 % 7,775,850
AAA
Other Assets less liabilities 23.7 % (8,496,338)
TOTAL NET ASSETS 100.0 % $ 35,826,966
======================================================
QUALITY INCOME PORTFOLIO
Mortgage-Backed Securities 49.9 % $ 14,712,757
Agency
United States Treasury Obligations 35.0 % 10,301,794
Treasury
Corporate Bonds 5.8 %
1,704,682 BBB
Foreign Bonds 3.0 %
872,805 BB
Asset-Backed Securities 2.4 %
701,283 AAA
Total Investments 96.1 %
28,293,321
Short-term Investments 23.3 %
6,878,128 AAA
Other assets less liabilities -19.4 %
(5,713,015)
TOTAL NET ASSETS 100.0 % $ 29,458,434
AAA
===============================================================
NEW YORK TAX-FREE INCOME PORTFOLIO
General Obligation Bonds 58.9 % $ 169,797
AA+
Revenue Bonds 36.8 %
106,197 AA-
Total Investments 95.7 %
275,994
Short-term Investment 2.4 %
7,006 AAA
Other assets less liabilities 1.9 %
5,401
TOTAL NET ASSETS 100.0 % $ 288,401
AA+
======================================================
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
Revenue Bonds 41.8 % $
52,766,687 AA+
General Obligation Bonds 38.8 %
48,982,511 AA+
Zero Coupon Debentures 19.6 %
24,724,439 AAA
Total Investments 100.2 %
126,473,637
Short-term Tax-Free Investment 0.7 %
824,541 AAA
Other assets less liabilities -0.9 %
(1,112,751) AAA
TOTAL NET ASSETS 100.0 % $126,165,427
AA+
====================================================
MONEY MARKET INCOME PORTFOLIO
Commercial Paper 85.9 % $
19,238,286 A-1
Short-term Investment 8.9 %
1,992,364 AAA
Total Investments 94.8 %
21,230,650
Other assets less liabilities 5.2 %
1,173,204
TOTAL NET ASSETS 100.0 % $ 22,403,854
AA+
