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ARMADA FUNDS
PROSPECTUS
September 9, 1996
Intermediate Government Fund
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ARMADA FUNDS
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City Investments
Corporation, please call your
Investment Consultant for
information.
For current performance, fund
information, and to purchase shares,
please call 1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
This Prospectus describes shares in the following investment fund (the
"Fund") of Armada Funds (the "Trust") and its investment objective and policies:
INTERMEDIATE GOVERNMENT FUND'S investment objective is to seek
preservation of capital and a high degree of liquidity while providing current
income. The Fund invests primarily in obligations issued or guaranteed as to
principal and interest by the U.S. Government and its agencies and
instrumentalities.
The net asset value per share of the Fund will fluctuate as the value
of its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to
the Fund (the "adviser").
1
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440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp., (the "Distributor") serves as the Trust's sponsor and distributor.
The Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS PARENT
COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL
AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 9, 1996
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The classes which represent interests in the Fund are described in this
Prospectus. Class R shares constitute the Institutional class of shares (herein
referred to as the "Institutional shares") of the Fund. Class R - Special
Series 1 constitute the Retail class of shares (herein referred to as the
"Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and customers of
National Asset Management Corporation ("NAM") customers. Retail shares are sold
to the public primarily through financial institutions such as banks, brokers
and dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
GOVERNMENT GOVERNMENT
FUND FUND
RETAIL INSTITUTIONAL
SHARES(1) SHARES
------- ------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases.................. 3.75% None
Sales Charge Imposed
on Reinvested Dividends............... None None
Deferred Sales Charge................... None None
Redemption Fee.......................... None None
Exchange Fee............................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees......................... .55% .55%
12b-1 Fees (after fee waivers)(2)....... .05% .05%
Other Expenses.......................... .46% .21%
---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER FEE WAIVERS)(2)..... 1.06% .81%
===== ====
</TABLE>
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1 The Trust has implemented a Shareholder Services Plan (the "Services Plan")
with respect to Retail shares of the Fund. Pursuant to the Services Plan, the
Trust may enter into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own Retail shares in
consideration for the payment of up to .25% (on an annualized basis) of the
net asset value of Retail shares.
2 The Armada Intermediate Government Fund has in effect a 12b-1 Plan pursuant
to which the Fund may bear fees in an amount of up to .10% of average daily
net assets. As a result of the payment of sales charges and 12b-1 fees,
long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which generally
limit the aggregate sales charges and payments under the Trust's Service and
Distribution Plan ("Distribution Plan") and Services Plan to a certain
percentage of total new gross share sales, plus interest. The Trust would
stop accruing 12b-1 and related fees if, to the extent, and for as long as,
such limit would otherwise be exceeded. If the maximum distribution fees
permitted under the 12b-1 Plan were imposed, Total Fund Operating Expenses
would be 1.11% and .86% for the Retail and Institutional shares,
respectively.
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For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee); and (3) the
imposition of the maximum sales charge at the beginning of the period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Intermediate Government Fund
Retail Shares...................................... $48 $70 $94 $162
Intermediate Government Fund
Institutional Shares............................... $ 8 $26 $45 $100
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Fund. Any fees that are charged by affiliates of the adviser
or other institutions directly to their customer accounts for services related
to an investment in retail shares of the Fund are in addition to and not
reflected in the fees and expenses described above.
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FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR INTERMEDIATE GOVERNMENT FUND
The Fund commenced operations on August 10, 1994 as a separate
investment portfolio (the "Predecessor Intermediate Government Fund") of
Inventor Funds, Inc., which was organized as a Maryland corporation. On
September 9, 1996, the Fund was reorganized as a new portfolio of the
Trust. Prior to the reorganization, the Predecessor Fund offered and sold Retail
Shares that were similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain
information concerning the investment results of the Predecessor Fund's Retail
Shares (the series that is similar to the Retail Shares of the Intermediate
Government Fund) for the fiscal year ended April 30, 1996 and the fiscal period
ended April 30, 1995. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Fund, whose report thereon is contained in Inventor Funds' Annual Report to
Shareholders for the fiscal year ended April 30, 1996. Such financial highlights
should be read in conjunction with the financial statements and notes thereto
contained in Inventor Funds' Annual Report to Shareholders and incorporated by
reference into the Statement of Additional Information relating to the
Intermediate Government Fund.
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, April 30,
1996 1995(2)
---- ----
<S> <C> <C>
Net Asset Value, Beginning of Period ...... $ 10.02 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income ................... 0.64 0.44
Net Realized and Unrealized Gains on
Securities .............................. 0.07 0.02
---------- ----------
Total from Investment Operations 0.71 0.46
LESS DISTRIBUTIONS
Distributions from Net Investment Income (0.64) (0.44)
Distributions from Realized Capital Gains (0.05) --
---------- ----------
Total Distributions ................... (0.69) (0.44)
Net Asset Value End of Period ............. $ 10.04 $ 10.02
TOTAL RETURN(4) ........................... 7.09% 4.75%
RATIO/SUPPLEMENTAL DATA
Net Assets End of Period (000) ............ $ 89,901 $ 53,316
Ratio of Expenses to Average Net Assets ... 0.85%(1) 0.85%(1,3)
(after fee waivers) ......................
</TABLE>
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<TABLE>
<S> <C> <C>
Ratio of Net Investment Income to Average
Net Assets (after fee waivers) .......... 6.20%(1) 6.17%(1,3)
Portfolio Turnover Rate ................. 94% 172%
</TABLE>
1. The operating expense ratio and the net investment income ratio before
fee waivers by the investment adviser and custodian for the year ended
April 30, 1996 and for the period ended April 30, 1995 would have been
1.25% and 5.80% and 1.33% and 5.69%, respectively.
2. Commenced operations on August 10, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
3. Annualized.
4. Total Return does not reflect sales charge. Not annualized.
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INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund consists of a pool of assets with investment objectives and
policies as described below under "Risk Factors, Investment Objectives and
Policies." The Fund is classified as a diversified investment fund under the
1940 Act.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except that,
as described more fully below under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares of the Fund. Under
the Services Plan, only the beneficial owners of Retail shares bear the expenses
of shareholder administrative services which are provided by financial
institutions for their benefit (not to exceed .25% annually). See "Shareholder
Services Plan," "Dividends and Distributions" and "Description of the Trust and
Its Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. In addition, the Fund may sell portfolio securities
shortly after they are purchased, which may result in higher transaction costs
and taxable gains for the Fund. There can be no assurance that the Fund will
achieve its objective.
The investment objective of the Fund is to preserve capital
and maintain a high degree of liquidity while providing current income. The Fund
seeks to achieve this objective by investing primarily (at least 65% of the
Fund's total assets) in obligations issued or guaranteed as to principal and
interest by the U.S. Government and its agencies and instrumentalities ("U.S.
Governments"). The Fund also invests in U.S. Treasury obligations and futures on
U.S. Treasury obligations. The Fund's dollar-weighted average maturity
ordinarily will be approximately five years; however, the adviser may vary this
average maturity substantially in anticipation of a change in the interest rate
environment. Nevertheless, under normal circumstances, the Fund will maintain a
dollar-weighted average maturity of between three and ten years.
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In order to meet liquidity needs, the Fund may hold cash
reserves, and may, for temporary defensive purposes, invest up to 100% of its
assets in Short Term obligations (as described below).
The Fund may also purchase securities on a when-issued basis.
The Fund reserves the right to engage in securities lending,
although it does not presently have the intent of doing so. The Fund may also
borrow money in amounts up to 33-1/3% of its net assets.
OTHER INVESTMENT POLICIES
U.S. Treasury Obligations
The Fund may invest in U.S. Treasury obligations consisting of
bills, notes and bonds issued by the U.S. Treasury, and separately traded
interest and principal component parts of such obligations that are transferable
through the Federal book-entry system known as Separately Traded Registered
Interest and Principal Securities ("STRIPS").
Debt Securities
The Fund may invest in debt securities which may include
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Certain federal agencies such as the Government National
Mortgage Association ("GNMA") have been established as instrumentalities of the
United States Government to supervise and finance certain types of activities.
Issues of these agencies, while not direct obligations of the United States
Government, are either backed by the full faith and credit of the United States
(e.g. GNMA) or supported by the issuing agencies' right to borrow from the
Treasury. The issues of other agencies are supported by the credit of the
instrumentality (e.g., Federal National Mortgage Association). Fund appreciation
may result from an improvement in the credit standing of an issuer whose
securities are held or a general decline in the level of interest rates or a
combination of both. An increase in the level of interest rates generally
reduces the value of the fixed rate debt instruments held by the Fund;
conversely, a decline in the level of interest rates generally increases the
value of such investments. An increase in the level of interest rates may
temporarily reduce the value of the floating rate debt instruments held by the
Fund; conversely, a decline in the level of interest rates may temporarily
increase the value of those investments.
Futures Contracts
The Fund may purchase or sell futures contracts on U.S.
Treasury obligations in order to offset an expected decrease in the value of its
fund that might otherwise result from a market decline. The Fund may do so
either to hedge the value of its portfolio securities as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, the Fund may utilize futures contracts in
anticipation of changes in the composition of its holdings for hedging purposes
or to maintain liquidity.
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Futures contracts obligate a Fund, at maturity, to take or
make delivery of certain securities or the cash value of a contract or
securities index. When interest rates are rising, futures contracts can offset a
decline in value of the securities held by the Fund. When rates are falling,
these contracts can secure higher yields for securities the Fund intends to
purchase. In addition, the Fund may utilize futures contracts in anticipation of
changes in the composition of its fund holdings.
The Fund intends to comply with the regulations of the
Commodity Futures Trading Commission ("CFTC") exempting the Fund from
registration as a "commodity pool operator." The Fund's commodities transactions
must constitute bona fide hedging or other permissible transactions pursuant to
such regulations. In addition, the Fund may not engage in such transactions if
the sum of the amount of initial margin deposits, other than for bona fide
hedging transactions, would exceed 5% of the liquidation value of its assets,
after taking into account unrealized profits and unrealized losses on such
contracts it has entered into. In connection with the Fund's position in a
futures contract, the Fund will create a segregated account of liquid assets,
such as cash, U.S. Government securities or other liquid high grade debt
obligations, or will otherwise cover its position in accordance with applicable
requirements of the SEC.
Risk Factors Associated with Futures
To the extent the Fund is engaging in a futures transaction as
a hedging device, due to the risk of an imperfect correlation between securities
in its funds that are the subject of a hedging transaction and the futures
contract used as a hedging device, it is possible that the hedge will not be
fully effective in that, for example, losses on the portfolio securities may be
in excess of gains on the futures contract or losses on the futures contract may
be in excess of gains on the portfolio securities that were the subject of the
hedge. In futures contracts based on indices, the risk of imperfect correlation
increases as the composition of the Fund varies from the composition of the
index. In an effort to compensate for the imperfect correlation of movements in
the price of the securities being hedged and movements in the price of futures
contracts, the Fund may buy or sell futures contracts in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than that
of the securities. Such "over hedging" or "under hedging" may adversely affect
the Fund's net investment results if market movements are not as anticipated
when the hedge is established.
Successful use of futures by the Fund is also subject to the
adviser's ability to predict correctly movements in the direction of securities
prices, interest rates and other economic factors. For example, if the Fund has
hedged against the possibility of a decline in the market adversely affecting
the value of securities held in its funds and prices increase instead, the Fund
will lose part or all of the benefit of the increased value of securities which
it has hedged because they will have offsetting losses in their futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may,
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but will not necessarily, be at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Although the Fund intends to enter into futures contracts
transactions only if there is an active market for such contracts, no assurance
can be given that a liquid market will exist for any particular contract at any
particular time. See "Illiquid Securities" below. Many futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that limit
or trading may be suspended for specified periods during the trading day.
Futures contracts prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Fund to substantial losses. If it is
not possible, or the Fund determines not, to close a futures position in
anticipation of adverse price movements, it will be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the Fund being hedged, if any, may offset partially or completely
losses on the futures contract.
The primary risks associated with the use of futures contracts
are: (i) the imperfect correlation between the change in market value of the
securities held by the Fund and the price of the futures contract; (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures contract when desired; (iii) losses due to
unanticipated market movements which are potentially unlimited; and (iv) the
adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. For a further discussion see "Risk
Factors, Investment Objectives and Policies -- Futures Contracts and Options"
and Appendix B in the Statement of Additional Information.
Mortgage-Backed Securities
The Fund may purchase securities that are secured or backed by
mortgages and are issued by entities such as the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC").
The yield characteristics of mortgage-backed securities differ
from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying
assets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-backed security is purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate that
is slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if a mortgage-backed security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Fund, the maturity of mortgage-backed securities will
be based on estimates of average life.
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Prepayments on mortgage-backed securities generally increase
with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and social
factors. Like other fixed income securities, when interest rates rise, the value
of a mortgage-backed security generally will decline; however, when interest
rates decline, the value of a mortgage-backed security with prepayment features
may not increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard prepayments
and thus affect maturities. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
These characteristics may result in a higher level of price
volatility for these assets under certain market conditions. In addition, while
the trading market for short-term mortgages and Mortgage-Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Presently there are several types of mortgage-backed
securities that may be acquired by the Fund, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. These multiple class securities may be issued or
guaranteed by U.S. Government agencies or instrumentalities, including GNMA,
FNMA and FHLMC, or issued by trusts formed by private originators of, or
investors in, mortgage loans. Classes in CMOs which the Fund may hold are known
as "regular" interests. CMOs also issue "residual" interests, which are a form
of beneficial interest in a CMO that permit the purchaser to receive the net
cash flow remaining after payment of liabilities and expenses associated with
the collateral underlying the CMO. Residual interests generally are junior to
and more volatile than regular interests. The Fund will not purchase "residual"
CMO interests, which normally exhibit a high degree of price volatility. FHLMC
has in the past guaranteed only the ultimate collection of principal of the
underlying mortgage loan; however, FHLMC now issues mortgage-backed securities
(FHLMC Gold PCs) which also guarantee timely payment of monthly principal
reductions. Government and private guarantees do not extend to the securities'
value, which is likely to vary inversely with fluctuations in interest rates.
Mortgage pass-through certificates, which represent interests
in pools of mortgage loans, provide the holder with a pro rata interest in the
underlying mortgages. One type of such certificate in which the Fund may invest
is a GNMA Certificate which is backed as to the timely payment of principal and
interest by the full faith and credit of the U.S. Government. Another type is a
FNMA Certificate, the principal and interest of which are guaranteed only by
FNMA itself, not by the full faith and credit of the U.S.
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<PAGE> 13
Government. Another type is a FHLMC Participation Certificate which is
guaranteed by FHLMC as to timely payment of principal and interest. However,
like a FNMA security it is not guaranteed by the full faith and credit of the
U.S. Government.
Risk Factors Associated with Derivative Instruments
The Fund may purchase certain "derivative" instruments.
"Derivative" instruments are instruments that derive value from the performance
of different securities, interest or currency exchange rates, or indices. The
types of derivative instruments that the fund may purchase include futures
contracts and structured debt obligations (including collateralized mortgage
obligations, various floating rate instruments and other types of securities).
Like all investments, derivative instruments involve several
basic types of risks which must be managed in order to meet investment
objectives. The specific risks presented by derivatives include, to varying
degrees, market risk in the form of underperformance of the underlying
securities, exchange rates or indices; credit risk that the dealer or other
counterparty to the transaction will fail to pay its obligations; volatility and
leveraging risk that, if interest or exchange rates change adversely, the value
of the derivative instrument will decline more than the securities, rates or
indices on which it is based; liquidity risk that the Fund will be unable to
sell a derivative instrument when it wants because of lack of market depth or
market disruption; pricing risk that the value of a derivative instrument (such
as an option) will not correlate exactly to the value of the underlying
securities, rates or indices on which it is based; and operations risk that loss
will occur as a result of inadequate systems and controls, human error or
otherwise. Some derivative instruments are more complex than others, and for
those instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The adviser has determined that the risk features that most
distinguish derivatives from other investment instruments (and which heavily
influence the market, volatility and leveraging, liquidity, and pricing risks
referred to above) can be described generally as "structural risk." Structural
risk refers to the contractual features of an investment that can cause its
total return to vary with changes in interest rates or other variables.
Structural risk is not unique to derivatives, but because derivatives often are
created through the intricate division of the cash flows of the underlying
security, they can (but do not necessarily) present a high degree of structural
risk. Structural risk can arise from variations in coupon levels, principal,
and/or average life.
The adviser has adopted the following internal policies
concerning management of the structural risk inherent in derivative instruments
on behalf of the Fund:
The adviser does not presently intend to invest in the
following types of derivatives which are structured instruments, such as range
notes, dual index notes, leveraged or deleveraged bonds, inverse floaters, index
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<PAGE> 14
amortizing notes and other structured instruments having similar cash flow
characteristics.
Receipts
The Fund may invest in separately traded interest and
principal component parts of the U.S. Treasury obligations that are issued by
banks or brokerage firms and are created by depositing U.S. Treasury obligations
into a special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
of receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
"Liquid Yield Option Notes" ("LYON's"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). TIGR's, LYON's and CATS are interests in private
proprietary accounts while TR's are interests in accounts sponsored by the U.S.
Treasury.
Securities denominated as TR's, TIGR's, LYON's and CATS are
sold as zero coupon securities which means that they are sold at a substantial
discount and redeemed at face value at their maturity date without interim cash
payments of interest or principal. This discount is accreted over the life of
the security, and such accretion will constitute the income earned on the
security for both accounting and tax purposes. Because of these features, such
securities may be subject to greater interest rate volatility than interest
paying Permitted Investments.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to
the seller's agreement to repurchase them at a mutually agreed-upon date and
price ("repurchase agreements"). The Fund may enter into repurchase agreements
only with financial institutions such as banks and broker-dealers which are
deemed to be creditworthy by the adviser, pursuant to guidelines approved by the
Trust's Board of Trustees. The Fund is not permitted to enter into repurchase
agreements with the adviser, Distributor, or any of their affiliates. Although
the securities subject to repurchase agreements may bear maturities exceeding
397 days, the Fund presently intends to enter only into repurchase agreements
which terminate within seven days after notice by the Fund. If a Fund were to
enter into repurchase agreements which provide for a notice period greater than
seven days in the future, the Fund would do so only if such investment, together
with other illiquid securities, did not exceed 15% of the Fund's net assets.
The seller under a repurchase agreement will be required to
maintain the value of the securities which the Fund holds subject to the
agreement at not less than the repurchase price, marked to market daily, by
providing additional securities or other collateral to the Fund if necessary. If
the seller defaulted on its repurchase obligation, the Fund would suffer a loss
to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
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<PAGE> 15
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. Further, it is uncertain
whether the Trust would be entitled, as against a claim by such seller or its
receiver or trustee in bankruptcy, to retain the underlying securities.
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when delivery takes place. The Fund
does not intend to purchase when-issued securities for speculative purposes but
only for the purpose of acquiring portfolio securities. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be attractive. One form of when-issued or delayed delivery
security that the Fund may purchase is a "to be announced" ("TBA")
mortgage-backed security. A TBA transaction arises when a mortgage-backed
security, such as a GNMA pass-through security, is purchased or sold with the
specific pools that will constitute that GNMA pass-through security to be
announced on a future settlement date. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Variable and Floating Rate Obligations
The Fund may purchase rated and unrated variable and floating
rate instruments. These instruments may include adjustable rate mortgages
("ARMs') that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. The absence of an
active secondary market with respect to particular variable and floating rate
instruments could, however, make it difficult for the Fund to dispose of
instruments if the issuer defaulted on its payment obligation or during periods
that the Fund is not entitled to exercise its demand rights, and the Fund could,
for these or other reasons, suffer a loss with respect to such instruments. For
a further description, see "Risk Factors, Objectives and Policies" in the
Statement of Additional Information.
Lending Portfolio Securities
In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. The Fund must receive 100% collateral in the form of
cash or U.S. Government securities. This collateral must be valued daily by the
Fund's adviser, and the borrower will be required to provide additional
collateral should the market value of the loaned securities increase. During the
time portfolio securities are on loan, the borrower pays the Fund involved any
dividends or interest paid on such securities. Loans are subject to termination
by the Fund or the borrower at any time. While the Fund does not have the right
to vote securities on loan, it intends to terminate the loan
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<PAGE> 16
and regain the right to vote if this is considered important with respect to the
investment. The Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which its adviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Illiquid Securities
The Fund will not knowingly invest more than 15% of its net
assets in securities that are illiquid. Illiquid securities would generally
include repurchase agreements with notice/termination dates in excess of seven
days and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933, as amended (the "1933
Act").
The Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser, acting under guidelines approved and monitored by the Board,
that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board will carefully
monitor any investment by the Fund in these securities.
Portfolio Turnover
The Fund may engage in short term trading and may sell
securities which have been held for periods ranging from several months to less
than a day. The object of such short-term trading is to increase the potential
for capital appreciation and/or income by making fund changes in anticipation of
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<PAGE> 17
expected movements in interest rates or fixed income security prices or in order
to take advantage of what the Fund's adviser believes is a temporary disparity
in the normal yield relationship between two securities. Any such trading would
increase the Fund's turnover rate and its transaction costs. Higher portfolio
turnover may result in increased taxable gains to shareholders (see "Taxes"
below) and increased expenses paid by the Fund due to transaction costs.
The Fund's annual portfolio turnover is not expected to exceed
250% under normal market conditions. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed without the affirmative vote of the Fund's outstanding shares (as
defined under "Miscellaneous"). (Other investment limitations that also cannot
be changed without a vote of shareholders are contained in the Statement of
Additional Information under "Risk Factors, Investment Objectives and
Policies.")
The Fund may not:
I. Make loans, except that each Fund may purchase or hold debt instruments, lend
portfolio securities and enter into repurchase agreements in accordance with its
investment objective and policies.
1. Borrow money or issue senior securities, except that each
Fund may borrow from anyone for temporary purposes in amounts not in excess of
5% of the value of its total assets at the time of such borrowing; or the Fund
may borrow from a bank for non-temporary purposes, provided that the borrowing
does not exceed 33-1/3% of the Fund's net assets. To the extent a bank borrowing
exceeds 5% of the Fund's total assets, assets coverage of at least 300% is
required. The Fund will not purchase securities while outstanding borrowings
equal or exceed 5% of its total assets.
2. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured by such obligations, (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents, and (c) utilities will be classified according to
their services, for example, gas, gas transmission, electric and gas, electric,
and telephone will each be considered a separate industry.
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<PAGE> 18
3. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, except that
up to 25% of the value of the Fund's total assets may be invested without regard
to such limitations. This investment limitation No. 4 does not apply to
repurchase agreements involving securities issued by the U.S. Government or its
agencies or instrumentalities.
For purposes of investment limitations No. 3 and 4, a security
is considered to be issued by the government entity (or entities) whose assets
and revenues back the security.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of the Fund's securities will not constitute a violation of such
limitation. If the Fund exceeds the limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes that it is in the best interests of
the Fund to do so.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's yield and total return data for its
Institutional shares and Retail shares. The "yield" quoted in advertisements
refers to the income generated by an investment in a class of shares of the Fund
over a 30-day period identified in the advertisement. This income is then
"annualized." The amount of income so generated by the investment during the
30-day period is assumed to be earned and reinvested at a constant rate and
compounded semi-annually; the annualized income is then shown as a percentage of
the investment.
The Fund calculates its total return for each class of shares
on an "average annual total return" basis for various periods from the date of
commencement of investment operations and for other periods as permitted under
the rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
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<PAGE> 19
class. When considering average total return figures for periods longer than one
year, it is important to note that the annual total return of a class for any
one year in the period might have been greater or less than the average for the
entire period. The Fund may also advertise, from time to time, the total returns
of one or more classes of shares on a year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
Investors may compare the performance of each class of shares
of the Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the Lehman
Intermediate Government Index and to data or rankings prepared by independent
services such as Lipper Analytical Services, Inc. or other financial or industry
publications that monitor the performance of mutual funds. Comparisons may also
be made to indices or data published in Money Magazine, Forbes, Barron's, The
Wall Street Journal, The New York Times, Business Week, U.S.A. Today,
CDA/Weisenberger, The American Banker, Morningstar, Incorporated and other
publications of a local, regional or financial industry nature.
The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value of a class
should be considered in ascertaining the total return to shareholders for a
given period. Yield and total return data should also be considered in light of
the risks associated with the Fund's portfolio composition, quality, maturity,
operating expenses and market conditions. Any fees charged by financial
institutions (as described in "How to Purchase and Redeem Shares") are not
included in the computation of performance data but will reduce a shareholder's
net return on an investment in the Fund.
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling 1-800-622-
FUND(3863).
PRICING OF SHARES
For purposes of pricing purchases and redemption orders, the
net asset value per share of the Fund is calculated as of the close of trading
on the New York Stock Exchange (the "Exchange") (generally, 4:00 p.m. Eastern
Time). Net asset value per share is determined on each business day, except
those holidays which the Exchange, or banks and trust companies which are
affiliated with National City Corporation (the "Banks"), observe (currently New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day) ("Business
Day"). Net asset value per share of a particular class in the Fund is calculated
by dividing the value of all securities and other assets
-18-
<PAGE> 20
belonging to the Fund allocable to such class, less the liabilities charged to
that class, by the number of the outstanding shares of that class.
The Fund's investments in securities for which market
quotations are readily available are valued at their market values determined on
the basis of the mean between their current available bid and asked prices in
the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities and other
assets for which quotations are not readily available are valued at their fair
value under procedures approved by the Board of Trustees. Absent unusual
circumstances, short-term investments having maturities of 60 days or less are
valued on the basis of amortized cost unless the Trust's Board of Trustees
determines that this does not represent fair value. The net asset value per
share of each class of shares of the Fund will fluctuate as the value of its
investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards, to National City Investments Corporation.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. (For information on such fees, the Investor should review his
agreement with the institution or contact it directly.) In addition, certain
financial institutions may enter into shareholder servicing agreements with the
Trust whereby a financial institution would perform various administrative
support services for its customers who are the beneficial owners of Retail
shares and would receive fees from the Fund for such services of up to .25% (on
an annualized basis) of the average daily net asset value of such shares. See
"Shareholder Services Plan." To purchase shares, Investors should call
1-800-622-FUND(3863) or visit their local National City Investments Corporation
office: Cleveland (1-800-624-6450), Columbus (1-800-345-0278), Dayton
(1-800-755-8723), Akron (1-800-229-0295), Louisville (1-800-727-5656),
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<PAGE> 21
Indianapolis (1-800-826-2868), Toledo (1-800-331-8275) or Youngstown (1-800-
742-4098).
Shares may be purchased in conjunction with an individual
retirement account ("IRA") and rollover IRAs where a designated custodian acts
as custodian. Investors should contact National City Investments Corporation,
the Distributor or their financial institutions for information as to
applications and annual fees. Investors should also consult their tax advisers
to determine whether the benefits of an IRA are available or appropriate.
The minimum investment for the initial purchase of Retail
shares in each Fund is $2,500, except for purchases for an IRA or other
retirement plan in which event the minimum initial investment is $500. All
subsequent investments for Retail shares and IRAs are subject to a minimum
investment of $250. Investments made in Retail shares through a monthly savings
program described below are not subject to the minimum initial and subsequent
investment requirements or any minimum account balance requirements described in
"Other Redemption Information" below. Purchases for an IRA through the monthly
savings program will be considered as contributions for the year in which the
purchases are made.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of a Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional Retail shares at the
Public Offering Price next determined after an order is received by the Trust.
An Investor may apply for participation in a monthly program through a financial
institution, such as banks, brokers, or dealers selling Retail shares of the
Funds, by completing an application. The program may be modified or terminated
by an Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent, First
Data Investor Services Group, Inc. (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, which is assessed as follows:
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<PAGE> 22
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- ------ -- ----------- ----- --- ----- -------- -----
<S> <C> <C> <C>
Less than $100,000.................. 3.75 3.90 3.75
$100,000 but less
than $250,000..................... 2.75 2.83 2.75
$250,000 but less
than $500,000...................... 2.00 2.04 2.00
$500,000 but less
than $1,000,000................... 1.25 1.27 1.25
$1,000,000 or more.................. 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons
who offer or sell for an issuer in connection with the distribution of a
security or have a direct or indirect participation in such undertaking, but
excludes persons whose interest is limited to a commission from an underwriter
or dealer not in excess of the usual and customary distributors' or sellers'
commission. The Staff of the SEC has expressed the view that persons who receive
90% or more of a sales load may be deemed to be underwriters within the meaning
of this definition. The Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of Retail shares
made by: (a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b) above; (d)
qualified retirement plans purchasing shares through National City Investments
Corporation or NatCity Investments, Inc.; (e) individuals investing in the Fund
by way of a direct transfer or a rollover from a qualified plan distribution and
subsequent transactions into the same account where affiliates of National City
Corporation are serving as a trustee or agent; (f) Investors purchasing Fund
shares through a payroll deduction plan; and (g) individuals investing in the
Fund by way of an asset allocation program sponsored by financial institutions,
although certain account level fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of the Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions at the time of purchase. Reduced
sales charges may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings.
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<PAGE> 23
Right of Accumulation. Investors may use their aggregate investments in
Retail shares in determining the applicable sales charge. An Investor's
aggregate investment in Retail shares is the total value (based on the higher of
current net asset value or any Public Offering Price originally paid) of: (a)
current purchases; (b) Retail shares that are already beneficially owned by the
Investor for which a sales charge has been paid; (c) Retail shares that are
already beneficially owned by the Investor which were purchased prior to July
22, 1990; and (d) Retail shares purchased by dividends or capital gains that are
reinvested. If, for example, an Investor beneficially owns Retail shares of the
Fund with an aggregate current value of $90,000 and subsequently purchases
Retail shares of the Fund having a current value of $10,000, the sales charge
applicable to the subsequent purchase would be reduced to 2.75% of the Public
Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales charge
immediately upon signing a nonbinding Letter of Intent stating the Investor's
intention to invest during the next 13 months a specified amount which, if made
at one time, would qualify for a reduced sales charge. A Letter of Intent form
may be obtained from the Investor's financial institution. If an Investor so
elects, the 13-month period may begin up to 30 days prior to the Investor's
signing the Letter of Intent. The initial investment under the Letter of Intent
must be equal to at least 4.0% of the amount indicated in the Letter of Intent.
During the term of a Letter of Intent, the Transfer Agent will hold Retail
shares representing 4.0% of the amount indicated in the Letter of Intent in
escrow for payment of a higher sales charge if the entire amount is not
purchased. Upon completing the purchase of the entire amount indicated in the
Letter of Intent, the escrowed shares will be released. If the entire amount is
not purchased within the 13-month period, the Investor will be required to pay
an amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge the Investor would have had to pay on the
aggregate purchases if the total of such purchases had been made at a single
time.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM customers
("Customers"). Institutional shares are sold without a sales charge imposed by
the Trust or the Distributor. However, depending on the terms governing the
particular account, the Banks may impose account charges such as account
maintenance fees, compensating balance requirements or other charges based upon
account transactions, assets or income which will have the effect of reducing
the shareholder's net return on his investment in the Fund. There is no minimum
investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should obtain
information relating to the requirements of such accounts from their Banks.
-22-
<PAGE> 24
If participating in an Asset Diversification Account, Customers may
purchase Institutional shares under a monthly savings program. Customers may add
to their investment in the Institutional shares of a Fund, in a consistent
manner each month, with a minimum amount of $50. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through a
Customer's financial institution and invested in additional shares at the net
asset value per share next determined after an order is received by the Trust. A
Customer may apply for participation in a monthly program through the Customer's
Bank by completing an application. The program may be modified or terminated by
an Investor on 30 days written notice or by the Trust at any time.
It is the responsibility of the Banks to transmit their Customers'
purchase orders to the Transfer Agent and to deliver required funds on a timely
basis, in accordance with the procedures stated above. Institutional shares will
normally be held of record by the Banks. Confirmations of share purchases and
redemptions will be sent to the Banks. Beneficial ownership of Institutional
shares will be recorded by the Banks and reflected in the account statements
provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are priced
according to the net asset value per share determined on that day plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third Business Day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the same
financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds are
paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks. It is the responsibility of the Banks to transmit redemption orders to
the Transfer Agent and credit their Customers' accounts with the
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<PAGE> 25
redemption proceeds on a timely basis. Redemption orders are effected at the net
asset value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a minimum
balance in his account at the Bank and the balance in such account falls below
that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by sending a
written request to Armada Funds, P.O. Box 5109, Westborough, Massachusetts
01581-5109. Redemption requests must be signed by each shareholder, including
each joint owner on redemption requests for joint accounts, in the exact manner
as the Fund account is registered, and must state the number of shares or the
amount to be redeemed and identify the shareholder account number and tax
identification number. For a redemption amount of $5,000 or more, each signature
on the written request must be guaranteed by a commercial bank or trust company
which is a member of the Federal Reserve System or FDIC, a member firm of a
national securities exchange or a savings and loan association. A signature
guaranteed by a savings bank or notarized by a notary public is not acceptable.
For a redemption amount less than $5,000, no signature guarantee is needed. The
Trust may require additional supporting documents for redemptions made by
corporations, fiduciaries, executors, administrators, trustees, guardians and
institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record also may redeem shares in any amount by calling
1-800-628-0523 (provided he has made the appropriate election in his account
application).
During periods of unusual economic or market changes, telephone
redemptions may be difficult to implement. In such event, shareholders should
mail their redemption requests to their financial institutions or Armada Funds
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use
such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as the
name in which an account is registered, the account number and recent
transactions in the account). To the extent that the Trust and its Transfer
Agent fail to use reasonable procedures to verify the genuineness of telephone
instructions, they may be liable for such instructions that prove to be
-24-
<PAGE> 26
fraudulent and unauthorized. In all other cases, shareholders will bear the risk
of loss for fraudulent telephone transactions. The Trust reserves the right to
refuse a telephone redemption if it believes it is advisable to do so.
Procedures for redeeming Retail shares by telephone may be modified or
terminated at any time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any fund of the Trust held on the Transfer
Agent's system. The Plan allows the shareholder to have a fixed minimum sum of
$250 distributed at regular intervals. The shareholder's account must have a
minimum value of $5,000 to be eligible for the Plan. Additional information
regarding this service may be obtained from an Investor's financial institution
or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts, the
Trust reserves the right to redeem, at net asset value, any account maintained
by a shareholder that has a value of less than $1,000 due to redemptions where
the shareholder does not increase the amount in the account to at least $1,000
upon 60 days' notice.
If any portion of the shares to be redeemed represents an investment
made by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to 10 days from the date of
purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
federal funds.
Payment to shareholders for shares redeemed will be made within seven
days after receipt of the request for redemption or such shorter time period as
may be required by the Securities Exchange Act of 1934.
EXCHANGE PRIVILEGE APPLICABLE TO SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of the Fund or another investment
portfolio of the Trust (each a "load Fund") may exchange those Retail shares for
Retail shares of another load Fund offered by the Trust, or another investment
fund offered by the Trust without the imposition of a sales charge (each a "no
load Fund") at the net asset value per share on the date of exchange, provided
that such other Retail shares may be legally sold in the state of the
shareholder's residence. As a result, no additional sales charge will be
incurred with respect to such an exchange. Shareholders may also exchange Retail
shares of a no load Fund for Retail shares of another no load Fund at the net
asset value per share without payment of a sales charge. In
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<PAGE> 27
addition, shareholders of a no load Fund may exchange Retail shares for Retail
shares of a load Fund subject to payment of the applicable sales charge.
However, shareholders exchanging Retail shares of a no load Fund which were
received in a previous exchange transaction involving Retail shares of a load
Fund will not be required to pay an additional sales charge upon notification of
the reinvestment of the equivalent amount into the Retail shares of a load Fund.
Shareholders contemplating an exchange should carefully review the Prospectus of
the fund into which the exchange is being considered. An Armada Funds Prospectus
may be obtained from National City Investments Corporation or an Investor's
financial institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal to the
minimum initial investment required by the particular investment fund into which
the exchange is being made. Investors should make their exchange requests in
writing or by telephone to the financial institutions through which they
purchased their original Retail shares. It is the responsibility of financial
institutions to transmit exchange requests to the Transfer Agent. Investors who
purchased shares directly from the Trust should transmit exchange requests
directly to the Transfer Agent. Exchange requests received by the Transfer Agent
prior to 4:00 p.m. (Eastern Time) will be processed as of the close of business
on the day of receipt; requests received by the Transfer Agent after 4:00 p.m.
(Eastern Time) will be processed on the next Business Day. The Trust reserves
the right to reject any exchange request. During periods of unusual economic or
market changes, telephone exchanges may be difficult to implement. In such
event, an Investor should mail the exchange request to his financial
institution, and an Investor who directly purchased shares from the Trust should
mail the exchange request to the Transfer Agent. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to shareholders.
Shareholders who hold Institutional shares of the Fund may also
exchange their shares for Institutional shares of another Fund offered by the
Trust at the net asset value per share on the date of exchange, provided that
such other Institutional shares may be legally sold in the state of the
shareholder's residence.
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act, each investment fund of the
Trust reimburses the Distributor monthly for the direct and indirect expenses
incurred by the Distributor in providing such fund advertising, marketing,
prospectus printing and other distribution services up to a maximum of .10% per
annum of the average net assets of the fund, inclusive of an annual distribution
fee of $250,000 payable monthly and accrued daily among the investment funds
with respect to which the Distributor is distributing shares.
-26-
<PAGE> 28
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to Retail
shares of the Fund. Pursuant to the Services Plan, the Trust enters into
shareholder servicing agreements with certain financial institutions pursuant to
which the institutions render shareholder administrative services to their
customers who are the beneficial owners of Retail shares of the Fund in
consideration for the payment of up to .25% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation with
respect to those shares than with respect to Institutional shares in the same
Fund. Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Trust on
behalf of customers, providing information periodically to customers showing
their position in Retail shares, and providing sub-transfer agent services or
the information necessary for subaccounting, with respect to Retail shares
beneficially owned by customers. Since financial institutions may charge their
customers fees depending on the type of customer account the Investor has
established, beneficial owners of Retail shares should read this Prospectus in
light of the terms and fees governing their accounts with financial
institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared daily
and paid monthly. Any net realized capital gains will be distributed at least
annually. Dividends and distributions will reduce the Fund's net asset value per
share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class or series at the net asset
value of such shares on the payment date. Shareholders must make such election,
or any revocation thereof, in writing to his Bank or financial institution. The
election will become effective with respect to dividends and distributions paid
after its receipt.
Under the Services Plan, the amount of the Fund's net investment income
available for distribution to the holders of Retail shares is reduced by the
amount of shareholder servicing fees payable to financial institutions under the
Services Plan.
TAXES
The Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
generally relieves the Fund of liability for federal income taxes to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Fund distribute to its
-27-
<PAGE> 29
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income (if any) net of
certain deductions for such year. In general, the Fund's investment company
taxable income will be its taxable income (including interest and short-term
capital gains) subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The Fund intends to distribute substantially all of
its investment company taxable income and net tax-exempt income each taxable
year. Such distributions by the Fund will be taxable as ordinary income to its
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or to a qualified retirement plan are
deferred under the Code.) Because all of the Fund's net investment income is
expected to be derived from earned interest, it is anticipated that no part of
any distribution will be eligible for the dividends received deduction for
corporations.
Substantially all of the Fund's net realized long-term capital gains,
if any, will be distributed at least annually to Fund shareholders. The Fund
generally will have no tax liability with respect to such gains, and the
distributions will be taxable to Fund shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long the
shareholders have held Fund shares and whether such gains are received in cash
or reinvested in additional shares.
Dividends declared in December of any year payable to shareholders of
record on a specified date in such month will be deemed to have been received by
shareholders and paid by the Fund on December 31 of such year in the event such
dividends are actually paid during January of the following year.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution paid shortly
after a purchase of shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his tax basis for such shares for the purpose of determining gain
or loss on a redemption, transfer or exchange of such shares. However, if the
shareholder effects an exchange of such shares for shares of another Fund within
90 days of the purchase and is able to reduce the sales charges applicable to
the new shares (by virtue of the
-28-
<PAGE> 30
Trust's exchange privilege), the amount equal to such reduction may not be
included in the tax basis of the shareholder's exchanged shares, but may be
included (subject to this limitation) in the tax basis of the new shares.
Shareholders of the Fund will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which
were in effect as of the date of this Prospectus; such laws and regulations may
be changed by legislative or administrative actions. The foregoing summarizes
some of the important tax considerations generally affecting the Fund and its
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction
of the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
-29-
<PAGE> 31
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
Richard B. Tullis Chairman of the Board Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, OH 44124 communication and
Age 82 information processing
equipment), since October
1985; Director, NACCO
Materials Handling Group,
Inc. (manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex, Inc.
(manufacturer of
household appliances),
since 1990; Director,
Waste-Quip, Inc. (waste
handling equipment),
since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO
564 Hackberry Drive Manufacturing Company and
Westerville, OH 43081 subsidiaries
Age 51 (manufacture, sale and
financing of water coolers
and dehumidifiers), since
January 1996 and
President, January 1987 to
January 1996; Vice
President and Executive
Committee Member of Ebtech
Corp. (market and sell
bottled and point-of-use
water coolers), since
March 1991.
-30-
<PAGE> 32
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
Leigh Carter* Trustee, President Retired President and
13901 Shaker Blvd., #6B and Treasurer Chief Operating Officer,
Cleveland, OH 44120 BFGoodrich Company,
Age 70 August 1986 to September
1990; Director, Adams
Express Company
(closed-end investment
company), since April
1982; Director, Lamson &
Sessions Co. (producer of
electrical supplies for
construction, consumer
power and communications
industry), since April
1991; Director, Petroleum
& Resources Corp., since
April 1987; Director,
Morrison Products
(manufacturer of blower
fans and air moving
equipment), since April
1983.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 51 Center, Inc., since
January 1982; partner,
Kittles Bloomington
Property Company, since
January 1981; partner,
KK&D (Affiliated Real
Estate Companies of
Kittle's Home Furnishings
Center), since January
1989.
Richard W. Furst, Dean Trustee Professor of Finance and
Carol Martin Gatton Dean, Carol Martin Gatton,
College of Business and College of Business and
Economics Economics, University of
University of Kentucky Kentucky, since 1981;
Lexington, KY 40506-0034 Director, Studio Plus
Age 57 Hotels, Inc., since 1994.
-31-
<PAGE> 33
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
Robert D. Neary Trustee Retired Co-Chairman of
2000 National City Center Ernst & Young April 1984-
1900 E. 9th Street September 1993; Director,
Cleveland, OH 44114 Cold Metal Products,
Age 62 Inc., since March 1994;
Director, Zurn Industries,
Inc., (environmental
systems and engineering
and construction services)
since June 1995.
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since
Age 57 1986; President and Chief
Executive Officer,
American Contractors
Rentals & Sales (rental
subsidiary of Whayne
Supply Co.), since 1988.
- ------------------
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as the investment adviser to the Fund.
National City is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. National City is a member bank
of the Federal Reserve System and the Federal Deposit Insurance Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and had approximately $32
-32-
<PAGE> 34
billion in total assets. National City has its principal offices at 1900 East
Ninth Street, Cleveland, Ohio 44114.
Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the Fund's investment policies, National City has agreed to
manage the Fund, make decisions with respect to and place orders for all
purchases and sales of the Fund's securities, and maintain the Fund's records
relating to such purchases and sales. The Fixed Income Team of National City's
Asset Management Group assumed responsibility for the day-to-day management of
the Fund upon the commencement of operations of the Fund. Members of the team
make decisions for the Fund. No person is primarily responsible for making
recommendations. Members of the team are:
- Donald L. Ross, Director of the Fixed Income Team, has been
with National City since 1985. He specializes in the overall
duration and yield curve decisions.
- Michael E. Santelli, Vice President, joined National City in
1995. Previously, he was associated with Donaldson, Lufkin and
Jenrette's Mortgage research department since at least 1991.
He specializes in the mortgage and asset-backed markets.
- Alex L. Vallecillo, Assistant Vice President, joined National
City in 1996. He traded corporate structured securities for
Merrill Lynch in 1993, and was associated with EDS from
September 1990 through July 1992. He specializes in the
analysis of the corporate bond sector.
- Stephen P. Carpenter, Vice President, joined National City in
1988. He has more than 21 years of investment experience with
expertise in the area of municipal bonds -- taxable as well as
tax-free -- and money market instruments.
- Douglas J. Carey, Fixed Income Analyst, joined National City
in 1995. Prior to joining National City, Mr. Carey was a
graduate assistant for the Economic Department of Miami
University from August 1994 through July 1995. He is
responsible for the development of econometric models used in
economic and interest rate forecasting, as well as fixed
income sector relative valuation.
- Marilou C. Hitt, Assistant Vice President, has worked in
National City's Funds Management Trading Department since
1984. Her responsibilities include fixed income trading of
government and corporate securities as well as short-term
taxable and tax-free money market instruments.
-33-
<PAGE> 35
For the services provided and expenses assumed pursuant to the Advisory
Agreement, National City is entitled to receive an advisory fee, computed daily
and payable monthly, at the annual rate of .55% of the average net assets of the
Fund. The adviser may from time to time waive all or a portion of its advisory
fees to increase the net income of the Fund available for distribution as
dividends.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington,
Delaware 19809, serves as the administrator to the Fund. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the
Trust, PFPC has agreed to provide the following services with respect to the
Fund: statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
the Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Fund with respect to all aspects of its
administration and operation. PFPC is entitled to receive with respect to the
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, 0.75% of the next
$200,000,000 of its net assets, .05% of the next $200,000,000 of its net assets
and .03% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of the Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January
28, 1986. The Trust is a series fund authorized to issue 35 separate classes or
series of shares of beneficial interest ("shares"). Two of these classes or
series, which represent interests in the Fund (Class R and Class R - Special
Series 1) are described in this Prospectus. Class R shares constitute the
Institutional class or series of shares; and Class R - Special Series 1 shares
constitute the Retail class or series of shares. The other Funds of the Trust
are: Money Market Fund (Class A and Class A - Special Series 1), Government Fund
(Class B and Class B - Special Series 1), Treasury Fund (Class C and Class C -
Special Series 1), Tax Exempt Fund (Class D and Class D - Special Series 1),
Equity Fund (Class H and Class H - Special Series 1), Fixed Income Fund (Class I
and Class I - Special Series 1), Ohio Tax Exempt Fund (Class K and Class K -
Special Series 1), National Tax Exempt Fund (Class L and Class L - Special
Series 1), Equity Income Fund (Class M and Class M - Special Series 1), Mid Cap
Regional Fund (Class N and Class N Special Series 1), Enhanced Income Fund
(Class O and Class O - Special Series 1), Total Return Advantage Fund (Class P
and Class P - Special Series 1), Pennsylvania Tax-Exempt Fund (Class Q and Class
Q - Special Series 1), GNMA Fund (Class S and Class S - Special Series 1) and
the Pennsylvania Municipal Fund (Class T and Class T - Special Series 1). Each
share has no par value,
-34-
<PAGE> 36
represents an equal proportionate interest in the investment fund with other
shares of the same class or series outstanding, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such fund as are declared in the discretion of the Trust's Board of Trustees.
The Trust's Declaration of Trust authorizes the Board of Trustees to classify or
reclassify any unissued shares into any number of additional classes of shares
and to classify or reclassify any class of shares into one or more series of
shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Services Plan, only
the holders of Retail shares in an investment fund are, or would be entitled to
vote on matters submitted to a vote of shareholders (if any) concerning the
Services Plan. Voting rights are not cumulative, and accordingly, the holders of
more than 50% of the aggregate shares of the Trust may elect all of the trustees
irrespective of the vote of the other shareholders.
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
held personally liable (as if they were partners) for the obligations of the
Trust. The Declaration of Trust of the Trust provides for indemnification out of
the Trust property for any shareholder held personally liable solely by reason
of his being or having been a shareholder and not because of his acts or
omissions or some other reason.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders shall
be called at the written request of shareholders entitled to cast at least 10%
of the votes entitled to be cast at such meeting. Such meeting may be called by
shareholders to consider the removal of one or more trustees. Shareholders will
receive shareholder communication assistance with respect to such matter as
required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets. First Data
Investor Services Group, Inc., a wholly-owned subsidiary of First Data Corp.,
serves as the Trust's transfer and dividend disbursing agent. Communications to
the Transfer Agent should be directed to P. O. Box 5109,
-35-
<PAGE> 37
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses in
connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. The Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Fund also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or the Fund means, with respect to the approval
of an investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the affirmative vote of the lesser of (a) 50% or
more of the outstanding shares of the Trust or the fund or (b) 67% or more of
the shares of the Trust or the fund present at a meeting if more than 50% of the
outstanding shares of the Trust or the fund are represented at the meeting in
person or by proxy.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
-36-
<PAGE> 38
ARMADA FUNDS
INVESTMENT ADVISER
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
TABLE OF CONTENTS
PAGE
EXPENSE TABLE............................................................ 3
INTRODUCTION............................................................. 7
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES......................... 7
INVESTMENT LIMITATIONS................................................... 16
YIELD AND PERFORMANCE INFORMATION........................................ 17
PRICING OF SHARES........................................................ 18
HOW TO PURCHASE AND REDEEM SHARES........................................ 19
DISTRIBUTION AGREEMENT................................................... 26
SHAREHOLDER SERVICES PLAN................................................ 27
DIVIDENDS AND DISTRIBUTIONS.............................................. 27
TAXES ................................................................ 27
MANAGEMENT OF THE TRUST.................................................. 29
DESCRIPTION OF THE TRUST AND ITS SHARES.................................. 34
CUSTODIAN AND TRANSFER AGENT............................................. 35
EXPENSES ................................................................ 36
MISCELLANEOUS............................................................ 36
- --------------------------------------------------------
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHER-WISE SUPPORTED BY, NATIONAL CITY BANK, ITS
PARENT COMPANY OR ANY OF ITS AFFILIATES OR ANY BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and certain of its affiliates serve as investment advisers
to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment
return will fluctuate, so that you may have a gain or loss when you sell your
shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
-37-
<PAGE> 39
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of National City Corporation
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 40
ARMADA FUNDS
PROSPECTUS
September 9, 1996
Pennsylvania Municipal Fund
<PAGE> 41
ARMADA FUNDS
- -------------------------------------------------------------------------------
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City Investments
Corporation, please call your
Investment Consultant for
information.
For current performance, fund
information, and to purchase
shares, please call
1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
This Prospectus describes shares in the following investment fund (the
"Fund") of Armada Funds (the "Trust") and its investment objective and policies:
PENNSYLVANIA MUNICIPAL FUND'S investment objective is to provide
current income exempt from both regular federal income and Pennsylvania personal
income taxes while preserving capital. The Fund invests primarily in investment
grade debt obligations issued by or on behalf of the Commonwealth of
Pennsylvania.
The net asset value per share of the Fund will fluctuate as the value
of its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to
the Fund (the "adviser"). Weiss, Peck & Greer, L.L.C. ("WPG") serves as sub-
investment adviser to the Fund (the "sub-adviser").
-1-
<PAGE> 42
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp. (the "Distributor"), serves as the Trust's sponsor and distributor.
The Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS PARENT
COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL
AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 9, 1996
-2-
<PAGE> 43
The classes which represent interests in the Fund are described in this
Prospectus. Class T shares constitute the Institutional class of shares (herein
referred to as the "Institutional shares") of the Fund. Class T Special Series 1
shares constitute the Retail class of shares (herein referred to as the "Retail
shares") of the Fund.
Institutional shares are sold primarily to Banks and National Asset
Management Corporation ("NAM") customers. Retail shares are sold to the public
primarily through financial institutions such as banks, brokers and dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
PENNSYLVANIA PENNSYLVANIA
MUNICIPAL FUND MUNICIPAL FUND
RETAIL INSTITUTIONAL
SHARES(1) SHARES
--------- ------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases............... 3.00% None
Sales Charge Imposed
on Reinvested Dividends............ None None
Deferred Sales Charge................ None None
Redemption Fee....................... None None
Exchange Fee......................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (after fee
waivers)(2)........................ .54% .54%
12b-1 Fees (after fee
waivers)(3).......................... .01% .01%
Other Expenses....................... .39% .29%
--- ---
TOTAL FUND OPERATING
EXPENSES (AFTER FEE WAIVERS)(2).. .94% .84%
=== ===
</TABLE>
- ---------------------------
(1) The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Fund. Under the Services
Plan, the Trust may enter into shareholder servicing agreements with
certain financial institutions pursuant to which they would agree to
provide shareholder administrative services to their customers who
beneficially own Retail shares in consideration for the payment of up
to .10% (on an annualized basis) of the net asset value of such shares.
(2) The expense information in the table relating to the Fund has been
restated to reflect current fees. Management fees (before waivers)
would be .55%. Total Fund Operating Expenses (before waivers) would be
.95% for the Retail shares and .85% for the Institutional shares. The
fee waivers are expected to be in effect during the current fiscal
year. Similarly, absent such waiver, and if the maximum distribution
fees permitted under the 12b-1 Plan were imposed, Total Operating
Expenses would be 1.04% and .94% for the Retail and Institutional
shares, respectively.
(3) The Armada Pennsylvania Municipal Fund has in effect a 12b-1 Plan
pursuant to which the Fund may bear fees in an amount of up to .10% of
average daily net assets. As a result of the payment of sales charges
and 12b-1 and certain other related fees, long-term shareholders may
pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers,
Inc. ("NASD"). The NASD has adopted rules which generally limit the
aggregate sales charges and payments under the Trust's Service and
Distribution Plan ("Distribution Plan") and Services Plan to a certain
percentage of total new gross share sales, plus interest. The Trust
would stop accruing 12b-1 and related fees if, to the extent, and for
as long as, such limit would otherwise be exceeded.
- -----------------------
-3-
<PAGE> 44
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee); and (3) the
imposition of the maximum sales charge at the beginning of the period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Pennsylvania Municipal Fund
Retail Shares................................. $39 $59 $80 $142
Pennsylvania Municipal Fund
Institutional Shares.......................... $ 9 $27 $47 $104
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Fund. Any fees that are charged by affiliates of the adviser
or other institutions directly to their customer accounts for services related
to an investment in retail shares of the funds are in addition to and not
reflected in the fees and expenses described above.
-4-
<PAGE> 45
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PREDECESSOR PENNSYLVANIA MUNICIPAL FUND
The Fund commenced operations on August 10, 1994 as a separate
investment portfolio (the "Predecessor Pennsylvania Municipal Fund") of Inventor
Funds, Inc., which was organized as a Maryland corporation. On September 9,
1996, the Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold Retail Shares that
were similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain
information concerning the investment results of the Predecessor Fund's Retail
Shares (the series that is similar to the Retail Shares of the Pennsylvania
Municipal Fund) for the fiscal year ended April 30, 1996 and the fiscal period
ended April 30, 1995. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Fund, whose report thereon is contained in Inventor Funds' Annual Report to
Shareholders for the fiscal year ended April 30, 1996. Such financial highlights
should be read in conjunction with the financial statements and notes thereto
contained in Inventor Funds' Annual Report to Shareholders and incorporated by
reference into the Statement of Additional Information relating to the
Pennsylvania Municipal Fund. Additional information about the performance of the
Predecessor Fund is contained in Inventor Funds' Annual Report to Shareholders,
which may be obtained without charge by contacting the Trust at its telephone
numbers or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
1996 1995(2)
---- -------
<S> <C> <C>
Net Asset Value, Beginning of Period.......................... $10.04 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................................... 0.43 0.29
Net Realized and Unrealized
Gains on Securities....................................... 0.08 0.04
------ ------
Total from Investment Operations 0.51 0.33
LESS DISTRIBUTIONS
Dividends from Net Investment Income........................ (0.43) (0.29)
Distributions from Realized
Capital Gains............................................. -- --
------ ------
Total Distributions....................................... (0.43) (0.29)
Net Asset Value, End of Period................................ $10.12 $10.04
TOTAL RETURN(4)............................................... 5.06% 3.38%
</TABLE>
-5-
<PAGE> 46
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
1996 1995(2)
---- -------
<S> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000)............................. $38,809 $34,638
Ratio of Expenses to Average
Net Assets (after fee waivers)............................ 0.85%(1) 0.85%(1),(3)
Ratio of Net Investment Income
to Average Net Assets (after fee 4.16%(1) 4.05%(1),(3)
waivers)..................................................
Portfolio Turnover Rate..................................... 22% 4%
</TABLE>
(1.) The operating expense ratio and the net investment income ratio before
fee waivers by the investment adviser, administrator and custodian for
the year ended April 30, 1996 and for the period ended April 30, 1995
would have been 1.24% and 3.77% and 1.36% and 3.54%, respectively.
(2.) Commenced operations on August 10, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
(3.) Annualized.
(4.) Total return does not reflect the sales charge. Not annualized.
-6-
<PAGE> 47
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act").
The Fund consists of a pool of assets with investment objective and policies, as
described below under "Risk Factors, Investment Objective and Policies." Under
the 1940 Act, the Fund is classified as a non-diversified investment fund.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except that,
as described more fully below under "Shareholder Services Plan" (the "Services
Plan"), the Trust has implemented the Services Plan with respect to the Retail
shares of the Fund. Under the Services Plan, only the beneficial owners of
Retail shares would bear the expenses of shareholder administrative services
which are provided by financial institutions for their benefit (not to exceed
.10% annually). See "Shareholder Services Plan," "Dividends and Distributions"
and "Description of the Trust and Its Shares" for a description of the impact
that the Services Plan may have on holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVE AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. There can be no assurance that the Fund will achieve its
objective.
The investment objective of the Fund is to provide current
income exempt from both regular federal income and Pennsylvania personal income
tax while preserving capital. The Fund seeks to achieve its objective by
investing primarily in investment grade Pennsylvania Municipal Securities.
Pennsylvania Municipal Securities are debt obligations and municipal lease
obligations issued by or on behalf of the Commonwealth of Pennsylvania and its
political subdivisions and financing authorities, obligations of the United
States,
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<PAGE> 48
including territories and possessions of the United States, the income from
which is, in the opinion of qualified legal counsel, exempt from federal regular
income tax and Pennsylvania state income tax imposed upon non-corporate
taxpayers, and securities of money market investment companies that invest
primarily in debt obligations and municipal lease obligations issued by or on
behalf of the Commonwealth of Pennsylvania and its political subdivisions and
financing authorities, obligations of the United States, including territories
and possessions of the United States, the income from which is, in the opinion
of qualified legal counsel, exempt from federal regular income tax and
Pennsylvania state income tax imposed upon non-corporate taxpayers
("Pennsylvania Municipal Securities").
Under normal market conditions, the Fund will be fully
invested in Pennsylvania Municipal Securities. This policy is fundamental and
may not be changed without the affirmative vote of the holders of a majority of
the Fund's outstanding shares (as defined under "Miscellaneous"). The Fund may
invest up to 10% of its assets in Pennsylvania Municipal Securities the interest
on which is a preference item for purposes of the alternative minimum tax.
For temporary defensive purposes when, in the opinion of the
sub-adviser, Pennsylvania Municipal Securities of sufficient quality are not
readily available, the Fund may invest up to 100% of its assets in securities
which pay interest exempt only from federal income taxes and in taxable
securities. Dividends paid by the Fund which are derived from interest properly
attributable to Pennsylvania Municipal Securities will be exempt from regular
federal income tax and Pennsylvania personal income tax. Dividends derived from
interest on Municipal Securities of other governmental issuers will be exempt
from regular federal income tax but may be subject to Pennsylvania personal
income tax. See "Taxes."
The Fund may hold uninvested cash reserves, pending
investment, during temporary defensive periods. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods; however, uninvested cash reserves will not earn income. See
"Other Investment Policies of the Fund." The Fund may invest in variable and
floating rate obligations, may purchase zero coupon bonds and securities on a
"when-issued" basis, and reserves the right to engage in transactions involving
standby commitments and repurchase agreements.
Although the Fund's average weighted maturity will vary in
light of current market and economic conditions, the comparative yields on
instruments with different maturities, and other factors, the Fund anticipates
that it will maintain a dollar-weighted average portfolio maturity of seven
years or less. Each security purchased by the Fund will have a maximum maturity
of fifteen years.
Special Risk Considerations
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. Consequently, the change in value of any
one security may affect the overall value of a non-diversified portfolio more
than it would a diversified portfolio, and thereby subject the market-based net
asset value per share of the non-diversified portfolio to greater fluctuations.
In addition, a non-diversified portfolio may be more susceptible to economic,
political and regulatory developments than a diversified investment portfolio
with similar objectives may be.
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<PAGE> 49
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth of Pennsylvania or its municipalities, and could
adversely affect the market value of the Bonds in the Fund or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds. Rising unemployment, a relatively high proportion of persons 65 and older
in the Commonwealth of Pennsylvania and court ordered increases in healthcare
reimbursement rates place increased pressures on the tax resources of the
Commonwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains
moderate. The recession in the early 1990s affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January 1995,
but the Commonwealth has continued to show fiscal restraint.
OTHER INVESTMENT POLICIES
Types of Municipal Bonds
The two principal classifications of Municipal Bonds which may
be held by the Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue or "special obligation" securities are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a specific excise tax or other specific revenue
source such as the user of the facility being financed. "Private activity" bonds
are revenue securities normally issued by industrial development authorities to
finance privately-owned facilities and are backed by private entities. Any
private activity bonds (including industrial development bonds) held by the Fund
are not payable from revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of the
corporate or other user of the facility involved. Private activity bonds are
included in the term "Municipal Bonds" only if the interest paid thereon is
exempt from regular federal income tax and not treated as a specific tax
preference item under the federal alternative minimum tax. See "Taxes."
The Fund may also invest in "moral obligation" bonds, which
are ordinarily issued by special purpose public authorities in certain states.
If the issuer of moral obligation bonds is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
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<PAGE> 50
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
The Fund may also purchase municipal leases. Municipal leases
are obligations issued by state and local governments or authorities to finance
the acquisition of equipment and facilities and may be considered to be
illiquid. They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate in any of the above.
Municipal lease obligations typically are not backed by the
municipality's credit, and their interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease payments,
a lease may terminate, with a possibility of default on the lease obligation and
significant loss to the Fund. Under guidelines established by the Board of
Directors, the credit quality of municipal leases will be determined on an
ongoing basis, including an assessment of the likelihood that a lease will be
canceled.
The Fund may also invest in unsecured short-term promissory
notes issued by municipalities and other entities.
Ratings Criteria
The Fund invests in Municipal Bonds which at the time of
purchase are rated the following or higher: "BBB" by Standard and Poor's Ratings
Group ("S&P"), or Fitch Investors Service, Inc. ("Fitch"), "Baa" by Moody's
Investors Service, Inc. ("Moody's"), or "A" by Duff & Phelps Credit Rating Co.
("Duff") in the case of bonds; "SP-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff,
or "MIG-2" ("VMIG-2" for variable rate demand notes) by Moody's in the case of
notes; or "A-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, Baa or "Prime-2" by
Moody's in the case of tax-exempt commercial paper. Securities that are unrated
at the time of purchase will be determined to be of comparable quality by the
Fund's adviser pursuant to guidelines approved by the Trust's Board of Trustees.
If the rating of an obligation held by the Fund is reduced below the Fund's
rating requirements, the Fund will sell the obligation when the adviser believes
that it is in the best interests of the Fund to do so. The applicable ratings
are more fully described in the Appendix to the Statement of Additional
Information.
Stand-by Commitments
The Fund may acquire stand-by commitments with respect to
Municipal Securities held in its fund. Under a stand-by commitment, a dealer
agrees to purchase at the Fund's option specified Municipal Bonds at a specified
price. Stand-by commitments acquired by the Fund must be of high quality as
determined by any Rating Agency, or, if not rated, must be of comparable quality
as determined by the Fund's adviser. The Fund acquires stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.
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<PAGE> 51
Variable and Floating Rate Obligations
The Fund may purchase, in an amount of up to 5% of the Fund's
assets, variable and floating rate obligations (including variable amount master
demand notes) which are unsecured instruments that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate.
Because variable and floating rate obligations are direct lending arrangements
between the Fund and the issuer, they are not normally traded. Although there
may be no active secondary market in such instruments, the Fund may demand
payment of principal and accrued interest at a time specified in the instrument
or may resell them to a third party. Such obligations may be backed by bank
letters of credit or guarantees issued by banks, other financial institutions or
the U.S. Government, its agencies or instrumentalities. The quality of any
letter of credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the Fund's sub-adviser. In the event
an issuer of a variable or floating rate obligation defaulted on its payment
obligation, the Fund might be unable to dispose of the instrument because of the
absence of a secondary market and could, for this or other reasons, suffer a
loss to the extent of the default.
Certificates of Participation
The Fund may purchase Municipal Securities in the form of
"certificates of participation" which represent undivided proportional interests
in lease payments by a governmental or nonprofit entity. The municipal leases
underlying the certificates of participation in which the Fund invests will be
subject to the same quality rating standards applicable to Municipal Securities.
The lease payments and other rights under the lease provide for and secure the
payments on the certificates. Lease obligations may be limited by law, municipal
charter or the duration or nature of the appropriation for the lease and may be
subject to periodic appropriation. If the entity does not appropriate funds for
future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default; in such event, the trustee would only be able to
enforce lease payments as they became due. In the event of a default or failure
of appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In addition, certificates of
participation are less liquid than other bonds because there is a limited
secondary trading market for such obligations. To alleviate potential liquidity
problems with respect to these investments, the Fund may enter into remarketing
agreements which may provide that the seller or a third party will repurchase
the obligation within seven days after demand by the Fund and upon certain
conditions (such as the Fund's payment of a fee).
Zero Coupon Bonds
Zero coupon obligations are discount debt obligations that do
not make periodic interest payments although income is generally imputed to the
holder on a current basis. Such obligations may have higher price volatility
than those which require the payment of interest periodically. The adviser
-11-
<PAGE> 52
and sub-adviser will consider the liquidity needs of the Fund when any
investment in zero coupon obligations is made.
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when delivery takes place. The Fund
does not intend to purchase when-issued securities for speculative purposes but
only for the purpose of acquiring portfolio securities. In when- issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be attractive. For further information, see "Risk Factors,
Investment Objective, and Policies" in the Statement of Additional Information.
Illiquid Securities
The Fund will not knowingly invest more than 15% of the value
of its net assets in securities that are illiquid. Illiquid securities would
generally include repurchase agreements with notice/termination dates in excess
of seven days and certain securities which are subject to trading restrictions
because they are not registered under the Securities Act of 1933, as amended
(the "1933 Act").
The Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser, acting under guidelines approved and monitored by the Board,
that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board will carefully
monitor any investment by the Fund in these securities.
Taxable Money Market Instruments
The Fund may invest, from time to time, a portion of its
assets for temporary defensive or liquidity purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. Government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the highest rating categories of S&P, Fitch,
Duff or Moody's or unrated instruments of comparable quality; certificates of
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<PAGE> 53
deposit; bankers' acceptances; and repurchase agreements with respect to such
obligations.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the advisers) which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method, and
which meet the definition of Pennsylvania Municipal Securities. As a shareholder
of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to
the seller's agreement to repurchase them at a mutually agreed-upon date and
price ("repurchase agreements"). The Fund may enter into repurchase agreements
only with financial institutions such as banks and broker-dealers which are
deemed to be creditworthy by the sub-adviser, pursuant to guidelines approved by
the Trust's Board of Trustees. The Fund is not permitted to enter into
repurchase agreements with the adviser, sub-adviser, Distributor, or any of
their affiliates. Although the securities subject to repurchase agreements may
bear maturities exceeding 397 days, the Fund presently intends to enter only
into repurchase agreements which terminate within seven days after notice by the
Fund. If a Fund were to enter into repurchase agreements which provide for a
notice period greater than seven days in the future, the Fund would do so only
if such investment, together with other illiquid securities, did not exceed 15%
of the Fund's net assets.
The seller under a repurchase agreement will be required to
maintain the value of the securities which the Fund holds subject to the
agreement at not less than the repurchase price, marked to market daily, by
providing additional securities or other collateral to the Fund if necessary. If
the seller defaulted on its repurchase obligation, the Fund would suffer a loss
to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. Further, it is uncertain
whether the Trust would be entitled, as against a claim by such seller or its
receiver or trustee in bankruptcy, to retain the underlying securities.
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<PAGE> 54
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed without the affirmative vote of the Fund's outstanding shares (as
defined under "Miscellaneous"). (Other investment limitations that also cannot
be changed without a vote of shareholders are contained in the Statement of
Additional Information under "Risk Factors, Investment Objective and Policies.")
The Fund may not:
1. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies, and the
Fund may enter into repurchase agreements in accordance with its investment
objective and policies.
2. Borrow money or issue senior securities, except that the
Fund may borrow from anyone for temporary purposes in amounts not in excess of
5% of the value of its total assets at the time of such borrowing; or the Fund
may borrow from a bank for non-temporary purposes, provided that the borrowing
does not exceed 33 1/3% of the Fund's net assets. To the extent that a bank
borrowing exceeds 5% of the Fund's total assets, asset coverage of at least 300%
is required. The Fund will not purchase securities while outstanding borrowings
equal or exceed 5% of the Fund's total assets.
4. Purchase any securities (except securities issued or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions) which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same industry.
5. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of such purchase, (i)
more than 5% of the value of its total assets would be invested in such issuer,
or (ii) more than 10% of the outstanding voting securities of such issuer would
be held by the Fund, except that up to 50% of the value of its total assets may
be invested without regard to these 5% and 10% limitations, respectively,
provided that no more than 25% of the value of the Fund's total assets may be
invested in the securities of any one issuer.
For purposes of investment limitation No. 4, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to a private activity bond that
is backed only by the assets and revenues of a nongovernmental user, a security
is considered to be issued by such nongovernmental user.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in
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<PAGE> 55
value of the Fund's securities will not constitute a violation of such
limitation. If the Fund exceeds the limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes that it is in the best interests of
the Fund to do so.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
Opinions relating to the validity of Municipal Securities and
to the exemption of interest thereon from federal income tax (and, with respect
to Pennsylvania Municipal Securities, to the exemption of interest from
Pennsylvania income tax) are rendered by bond counsel to the respective issuers
at the time of issuance. Neither the Fund nor its advisers will review the
proceedings relating to the issuance of Municipal Bonds or the basis for such
opinions.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's yield, tax-equivalent yield and total return
data for its Institutional shares and Retail shares. The "yield" quoted in
advertisements refers to the income generated by an investment in a class of
shares over a 30-day period identified in the advertisement. This income is then
"annualized." The amount of income generated by an investment during a 30-day
period is assumed to be earned and reinvested at a constant rate and compounded
semi-annually; the annualized income is then shown as a percentage of the
investment. The Fund's "tax-equivalent" yield for a class of shares, which shows
the level of taxable yield necessary to produce an after-tax equivalent to the
Fund's tax-free yield for that class, may also be quoted from time to time. It
is calculated by increasing the yield (calculated as above) for a class of
shares by the amount necessary to reflect the payment of federal and
Pennsylvania income tax at stated tax rates. The Fund's tax-equivalent yield for
a class of shares will always be higher than its yield.
The Fund calculates its total returns for each class of shares
on an "average annual total return" basis for various periods from the date of
commencement of investment operations and for other periods as permitted under
the rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
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<PAGE> 56
class. When considering average total return figures for periods longer than one
year, it is important to note that the annual total return of a class for any
one year in the period might have been greater or less than the average for the
entire period. The Fund may also advertise, from time to time, the total returns
of one or more classes of shares on a year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
Shareholders should note that the yield and total return on
Retail shares will be reduced by the amount of shareholder servicing fees that
are payable under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares
of the Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the Lehman Five-
Year Index and to data or rankings prepared by independent services such as
Lipper Analytical Services, Inc. or other financial or industry publications
that monitor the performance of mutual funds. Comparisons may also be made to
indices or data published in Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, U.S.A. Today, CDA/Weisenberger, The
American Banker, Morningstar, Incorporated and other publications of a local,
regional or financial industry nature.
The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value of a class
should be considered in ascertaining the total return to shareholders for a
given period. Yield and total return data should also be considered in light of
the risks associated with the Fund's portfolio composition, quality, maturity,
operating expenses and market conditions. Any fees charged by financial
institutions (as described in "How to Purchase and Redeem Shares") are not
included in the computation of performance data but will reduce a shareholder's
net return on his investment in the Fund.
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling 1-800-622-
FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the
net asset value per share of the Fund is calculated as of the close of the New
York Stock Exchange (the "Exchange") (generally, 4:00 p.m., Eastern Time). Net
asset value per share is determined on each business day, except those holidays
which the Exchange, or banks and trust companies which are affiliated with
National City Corporation (the "Banks"), observe (currently New Year's
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Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day) ("Business
Day"). Net asset value per share of a particular class in the Fund is calculated
by dividing the value of all securities and other assets belonging to the Fund
allocable to such class, less the liabilities charged to that class, by the
number of the outstanding shares of that class.
The Fund's investments in securities for which market
quotations are readily available are valued at their market values determined on
the basis of the mean between their current available bid and asked prices in
the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities and other
assets for which quotations are not readily available are valued at their fair
value under procedures approved by the Board of Trustees. Absent unusual
circumstances, short-term investments having maturities of 60 days or less are
valued on the basis of amortized cost unless the Trust's Board of Trustees
determines that this does not represent fair value. The net asset value per
share of each class of shares of the Fund will fluctuate as the value of its
investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards to National City Investments Corporation.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. (For information on such fees, the Investor should review his
agreement with the institution or contact it directly.) In addition, certain
financial institutions may enter into shareholder servicing agreements with the
Trust whereby a financial institution would perform various administrative
support services for its customers who are the beneficial owners of Retail
shares and would receive fees from the Fund for such services of up to .10% (on
an annualized basis) of the average daily net asset value of such shares. See
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"Shareholder Services Plan." To purchase shares, Investors should call
1-800-622-FUND(3863) or visit their local National City Investments Corporation
office: Cleveland (1-800-624-6450), Columbus (1-800-345-0278), Dayton
(1-800-755-8723), Akron (1-800-229-0295), Louisville (1-800-727-5656),
Indianapolis (1-800-826-2868), Toledo (1-800-331-8275) or Youngstown (1-800-
742-4098).
The minimum investment is $2,500 for the initial purchase of
Retail shares in the Fund. All subsequent investments for Retail shares are
subject to a minimum investment of $250. Investments made in Retail shares of
the Fund through a monthly savings program described below are not subject to
the minimum initial and subsequent investment requirements or any minimum
account balance requirements described in "Other Redemption Information" below.
Under a monthly savings program, Investors may add to their
investment in Retail shares of the Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional Retail shares at the
Public Offering Price next determined after an order is received by the Trust.
An Investor may apply for participation in a monthly program through a financial
institution, such as banks, brokers, or dealers selling Retail shares of the
Fund, by completing an application. The program may be modified or terminated by
an Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent, First
Data Investor Services Group, Inc. (formerly The Shareholder Services Group,
Inc. d/b/a "440 Financial") (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, which is assessed as follows:
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<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----- --------- --------------
<S> <C> <C> <C>
Less than $100,000.................. 3.00 3.09 3.00
$100,000 but less
than $250,000..................... 2.00 2.04 2.00
$250,000 but less
than $500,000..................... 1.50 1.52 1.50
$500,000 but less
than $1,000,000................... 1.00 1.01 1.00
$1,000,000 or more.................. 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons
who offer or sell for an issuer in connection with the distribution of a
security or have a direct or indirect participation in such undertaking, but
excludes persons whose interest is limited to a commission from an underwriter
or dealer not in excess of the usual and customary distributors' or sellers'
commission. The Staff of the SEC has expressed the view that persons who receive
90% or more of a sales load may be deemed to be underwriters within the meaning
of this definition. The Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of Retail shares
made by: (a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b) above; (d)
qualified retirement plans purchasing shares through National City Investments
Corporation or NatCity Investments, Inc.; (e) individuals investing in the Fund
by way of a direct transfer or a rollover from a qualified plan distribution and
subsequent transactions into the same account where affiliates of National City
Corporation are serving as a trustee or agent; (f) investors purchasing Fund
shares through a payroll deduction plan; and (g) individuals investing in the
Fund by way of an asset allocation program sponsored by financial institutions,
although certain account level fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of the Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions at the time of purchase. Reduced
sales charges may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings.
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Right of Accumulation. Investors may use their aggregate
investments in Retail shares in determining the applicable sales charge. An
Investor's aggregate investment in Retail shares is the total value (based on
the higher of current net asset value or any Public Offering Price originally
paid) of: (a) current purchases; (b) Retail shares that are already beneficially
owned by the Investor for which a sales charge has been paid; (c) Retail shares
that are already beneficially owned by the Investor which were purchased prior
to July 22, 1990; and (d) Retail shares purchased by dividends or capital gains
that are reinvested. If, for example, an Investor beneficially owns Retail
shares of the Fund with an aggregate current value of $90,000 and subsequently
purchases Retail shares of the Fund having a current value of $10,000, the sales
charge applicable to the subsequent purchase would be reduced to 2.0% of the
Public Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales
charge immediately upon signing a nonbinding Letter of Intent stating the
Investor's intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge. A Letter
of Intent form may be obtained from the Investor's financial institution. If an
Investor so elects, the 13-month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the Letter
of Intent must be equal to at least 4.0% of the amount indicated in the Letter
of Intent. During the term of a Letter of Intent, the Transfer Agent will hold
Retail shares representing 4.0% of the amount indicated in the Letter of Intent
in escrow for payment of a higher sales charge if the entire amount is not
purchased. Upon completing the purchase of the entire amount indicated in the
Letter of Intent, the escrowed shares will be released. If the entire amount is
not purchased within the 13- month period, the Investor will be required to pay
an amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge the Investor would have had to pay on the
aggregate purchases if the total of such purchases had been made at a single
time.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM
customers ("Customers"). Institutional shares are sold without a sales charge
imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his investment in the Fund. There is no
minimum investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should obtain
information relating to the requirements of such accounts from their Banks.
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<PAGE> 61
If participating in an Asset Diversification Account,
Customers may purchase Institutional shares under a monthly savings program.
Customers may add to their investment in the Institutional shares of the Fund,
in a consistent manner each month, with a minimum amount of $50. Monies may be
automatically withdrawn from a shareholder's checking or savings account
available through a Customer's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. A Customer may apply for participation in a monthly
program through a financial institution, such as banks or brokers, by completing
an authorization form. The program may be modified or terminated by an Investor
on 30 days written notice or by the Trust at any time.
It is the responsibility of the Banks to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will normally be held of record by the Banks. Confirmations of share
purchases and redemptions will be sent to the Banks. Beneficial ownership of
Institutional shares will be recorded by the Banks and reflected in the account
statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by
the Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are
priced according to the net asset value per share determined on that day plus
any applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third Business Day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the
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redemption proceeds on a timely basis. Redemption orders are effected at the net
asset value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a
minimum balance in his account at the Bank and the balance in such account falls
below that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
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<PAGE> 63
WRITTEN REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
sending a written request to Armada Funds, P.O. Box 5109, Westborough,
Massachusetts 01581-5109. Redemption requests must be signed by each
shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $5,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $5,000, no signature
guarantee is needed. The Trust may require additional supporting documents for
redemptions made by corporations, fiduciaries, executors, administrators,
trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record also may redeem shares in any amount
by calling 1-800-628-0523 (provided he has made the appropriate election in his
account application).
During periods of unusual economic or market changes, telephone
redemptions may be difficult to implement. In such event, shareholders should
mail their redemption requests to their financial institutions or Armada Funds
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming Retail Shares by telephone may be modified or terminated at any time
by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of any Fund held on the Fund transfer
agent's system. The Plan allows the shareholder to have a fixed minimum sum of
$250 distributed at regular intervals. The shareholder's account must have a
minimum value of $5,000 to be eligible for the Plan. Additional information
regarding this service may be obtained from an investor's financial institution
or the Transfer Agent at 1-800-622-FUND(3863).
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<PAGE> 64
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts,
the Trust reserves the right to redeem, at net asset value, any account
maintained by a shareholder that has a value of less than $1,000 due to
redemptions where the shareholder does not increase the amount in the account to
at least $1,000 upon 60 days notice.
If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay payment
of the redemption proceeds until the Transfer Agent is reasonably satisfied that
the check has been collected, which could take up to 10 days from the date of
purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
federal funds.
Payment to Shareholders for shares redeemed will be made
within seven days after receipt of the request for redemption or such shorter
time period as may be required by the Securities Exchange Act of 1934.
EXCHANGE PRIVILEGE APPLICABLE TO SHARES
The Trust offers an exchange program whereby Investors who
have paid a sales charge to purchase Retail shares of the Fund or another
investment portfolio of the Trust (each a "load Fund") may exchange those Retail
shares for Retail shares of another load Fund offered by the Trust, or another
investment fund offered by the Trust without the imposition of a sales charge (a
"no load Fund") at the net asset value per share on the date of exchange,
provided that such other Retail shares may be legally sold in the state of the
shareholder's residence. As a result, no additional sales charge will be
incurred with respect to such an exchange. Shareholders may also exchange Retail
shares of a no load Fund for Retail shares of another no load Fund at the net
asset value per share without payment of a sales charge. In addition,
shareholders of a no load Fund may exchange Retail shares for Retail shares of
the Fund or another load Fund subject to payment of the applicable sales charge.
However, shareholders exchanging Retail shares of a no load Fund which were
received in a previous exchange transaction involving Retail shares of a load
Fund will not be required to pay an additional sales charge upon notification of
the reinvestment of the equivalent amount into the Retail shares of a load Fund.
Shareholders contemplating an exchange should carefully review the Prospectus of
the Trust into which the exchange is being considered. An Armada Funds
Prospectus may be obtained from National City Investments Corporation or an
Investor's financial institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal
to the minimum initial investment required by the particular investment fund
into which the exchange is being made. Investors should make their exchange
requests in writing or by telephone to the financial institutions through which
they purchased their original Retail shares. It is the responsibility
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of financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) will be processed as of the
close of business on the day of receipt; requests received by the Transfer Agent
after 4:00 p.m. (Eastern Time) will be processed on the next Business Day. The
Trust reserves the right to reject any exchange request. During periods of
unusual economic or market changes, telephone exchanges may be difficult to
implement. In such event, an Investor should mail the exchange request to his
financial institution, and an Investor who directly purchased shares from the
Trust should mail the exchange request to the Transfer Agent. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
Shareholders who hold Institutional shares of the Fund may
also exchange their shares for Institutional shares of another Fund offered by
the Trust at the net asset value per share on the date of exchange, provided
that such other Institutional shares may be legally sold in the state of the
shareholder's residence.
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act, each
investment fund of the Trust reimburses the Distributor monthly for the direct
and indirect expenses incurred by the Distributor in providing such fund
advertising, marketing, prospectus printing and other distribution services up
to a maximum of .10% per annum of the average net assets of the fund, inclusive
of an annual distribution fee of $250,000 payable monthly and accrued daily
among the investment funds with respect to which the Distributor is distributing
shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to
Retail shares. Pursuant to the Services Plan, the Trust may enter into
shareholder servicing agreements with certain financial institutions pursuant to
which the institutions render shareholder administrative services to their
customers who are the beneficial owners of Retail shares of the Fund in
consideration for the payment of up to .10% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation with
respect to those shares than with respect to Institutional shares in the Fund.
Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Trust on
behalf of customers, providing information periodically to customers showing
their position in Retail shares, and providing sub-transfer agent services or
the information necessary for sub-transfer agent services, with respect to
Retail shares beneficially owned by customers. Since financial institutions may
charge their customers fees depending on the type of customer account the
Investor has established, beneficial owners of Retail shares should read this
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Prospectus in light of the terms and fees governing their accounts with
financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are
declared daily and paid monthly. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce the
Fund's net asset value per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class or series at the
net asset value of such shares on the payment date. Shareholders must make such
election, or any revocation thereof, in writing to his Bank or financial
institution. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of the Fund's net
investment income available for distribution to the holders of Retail shares may
be reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally relieves the Fund of liability for federal income tax to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its tax-exempt
interest income net of certain deductions and 90% of its investment company
taxable income (if any) for such year. The Fund intends to distribute
substantially all of its net tax-exempt income (such distributions are known as
"exempt-interest dividends") and investment company taxable income (if any) each
taxable year. Exempt-interest dividends may be treated by shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code
unless under the circumstances applicable to the particular shareholder the
exclusion would be disallowed. See the Statement of Additional Information under
"Additional Information Concerning Taxes." To the extent, if any, dividends paid
to shareholders are derived from taxable income or from net long-term capital
gains, such dividends will not be exempt from federal income tax and may also be
subject to state and local taxes. The Fund does not intend to earn any
investment company taxable income or net long-term capital gains. Because all of
the Fund's net investment income is expected to be derived from earned interest,
it is anticipated that no part of
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<PAGE> 67
any distribution will be eligible for the dividends received deduction for
corporations.
Dividends declared in December of any year payable to
shareholders of record on a specified date in such month will be deemed to have
been received by shareholders and paid by the Fund on December 31 of such year
in the event such dividends are actually paid during January of the following
year.
If the Fund should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the alternative minimum tax applicable to
individuals and corporations and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. Shareholders receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of shares of the Fund depending upon the
tax basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include sales
charges incurred upon the purchase of Fund shares in his tax basis for such
shares for the purpose of determining gain or loss on a redemption, transfer or
exchange of such shares. However, if the shareholder effects an exchange of such
shares for shares of another Fund within 90 days of the purchase and is able to
reduce the sales charges applicable to the new shares (by virtue of the Trust's
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged shares, but may be included
(subject to this limitation) in the tax basis of the new shares.
PENNSYLVANIA TAXES
Under current Pennsylvania law, Shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Fund attributable to
interest income from obligations of the State of Pennsylvania or its political
subdivisions, the United States, its territories or certain of its agencies and
instrumentalities ("Exempt Securities"). However, Pennsylvania Personal Income
Tax will apply to distributions from the Fund attributable to gain realized on
the disposition of any investment, including Exempt Securities, or to interest
income from investments other than Exempt Securities. Shareholders also will be
subject to the Pennsylvania Personal Income tax on any gain they realize on the
disposition of Shares in the Fund.
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<PAGE> 68
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of Shares in the Fund
that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended to the extent that the Fund is comprised of Exempt Securities.
MISCELLANEOUS
Shareholders of the Fund will be advised at least annually as
to the federal income tax and Pennsylvania income tax consequences of
distributions made to them each year. Shareholders are advised to consult their
tax advisers concerning the application of state and local taxes, other than
Pennsylvania taxes, which may differ from tax consequences described above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors should consult their tax
advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the
direction of the Trust's Board of Trustees. The trustees of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
-28-
<PAGE> 69
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
Richard B. Tullis Trustee and Chairman Chairman Emeritus, Harris
5150 Three Village Drive of the Board Corporation (electronic
Lyndhurst, OH 44124 communication and
Age 82 information processing
equipment), since October
1985; Director, NACCO
Materials Handling Group,
Inc. (manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990;
Director, Waste-Quip, Inc.
(waste handling equipment),
since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO
564 Hackberry Drive Manufacturing Company and
Westerville, OH 43081 subsidiaries (manufacture,
Age 51 sale and financing of water
coolers and dehumidifiers),
since January 1996 and
President, January 1987 to
January 1996; Vice President
and Executive Committee Member
of Ebtech Corp. (market and
sell bottled and point-of-use
water coolers), since March
1991.
</TABLE>
-29-
<PAGE> 70
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
Leigh Carter* Trustee, President Retired President and Chief
18901 Shaker Blvd., #6B and Treasurer Operating Officer,
Cleveland, OH 44120 BFGoodrich Company, August
Age 70 1986 to September 1990;
Director, Adams Express
Company (closed-end investment
company), since April 1982;
Director, Lamson & Sessions
Co. (producer of electrical
supplies for construction,
consumer power and
communications industry),
since April 1991; Director,
Petroleum & Resources Corp.,
since April 1987; Director,
Morrison Products
(manufacturer of blower fans
and air moving equipment),
since April 1983.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer, Kittle's
Indianapolis, IN 46250 Home Furnishings Center,
Age 51 Inc., since January 1982;
partner, Kittle's Bloomington
Property Company, since
January 1981; partner, KK&D
(Affiliated Real Estate
Companies of Kittle's Home
Furnishings Center), since
January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and
Carol Martin Gatton Dean, Carol Martin Gatton,
College of Business and College of Business and
Economics Economics, University of
University of Kentucky Kentucky, since 1981;
Lexington, KY 40506-0034 Director, Studio Plus
Age 57 Hotels, Inc., since 1994.
</TABLE>
-30-
<PAGE> 71
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
Robert D. Neary Trustee Retired Co-Chairman of
2000 National City Center Ernst & Young, March 1984-
1900 E. 9th Street September 1993; Director,
Cleveland, OH 44114 Cold Metal Products, Inc.,
Age 62 since March 1994; Director,
Zurn Industries, Inc.
(environmental systems and
engineering and
construction services),
since June 1995.
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 57 President and Chief
Executive Officer, American
Contractors Rentals & Sales
(rental subsidiary of Whayne
Supply Co.), since 1988.
</TABLE>
- --------------------
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Fund. The
adviser is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. The adviser is a member bank of
the Federal Reserve System and the Federal Deposit Insurance Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and approximately $32
-31-
<PAGE> 72
billion in total assets. National City has its principal offices at 1900 East
Ninth Street, Cleveland, Ohio 44114
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, National City
has agreed to manage the Fund, make decisions with respect to and place orders
for all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales. The Fixed Income Team of National
City's Asset Management Group assumed responsibility for the day-to-day
management of the Fund upon commencement of operations of the Fund. Members of
the team make decisions for the Fund. No person is primarily responsible for
making recommendations. Members of the team are:
- Donald L. Ross, Director of the Fixed Income Team,
has been with National City since 1985. He
specializes in the overall duration and yield curve
decisions.
- Michael E. Santelli, Vice President, joined National
City in 1995. Previously, he was associated with
Donaldson, Lufkin and Jenrette's mortgage research
department since at least 1991. He specializes in the
mortgage and asset-backed markets.
- Alex L. Vallecillo, Assistant Vice President, joined
National City in 1996. He traded corporate structured
securities for Merrill Lynch in 1993, and was
associated with EDS from September 1990 through July
1992. He specializes in the analysis of the corporate
bond sector.
- Stephen P. Carpenter, Vice President, joined National
City in 1988. He has more than 21 years of investment
experience with expertise in the area of municipal
bonds -- taxable as well as tax-free -- and money
market instruments.
- Douglas J. Carey, Fixed Income Analyst, joined
National City in 1995. Prior to joining National
City, Mr. Carey was a graduate assistant for the
Economics Department of Miami University from August
1994 through July 1995. He is responsible for the
development of econometric models used in economic
and interest rate forecasting, as well as fixed
income sector relative valuation.
- Marilou C. Hitt, Assistant Vice President, has worked
in National City's Funds Management Trading
Department since 1984. Her responsibilities include
fixed income trading of government and corporate
securities as well as short-term taxable and tax-free
money market instruments.
-32-
<PAGE> 73
For the services provided and expenses assumed pursuant to the
Advisory Agreement, the adviser is entitled to receive an advisory fee, computed
daily and payable monthly, at the annual rate of .55% of the average net assets
of the Fund. The adviser may, from time to time, waive all or a portion of its
advisory fees to increase the net income of the Fund available for distribution
as dividends.
SUB-ADVISER
Weiss, Peck & Greer, L.L.C. serves as the investment
sub-adviser to the Fund under a sub-advisory agreement (the "Sub-Advisory
Agreement") with the adviser. WPG is a limited liability company founded in
1970. WPG engages in investment management, venture capital management and
management buyouts. WPG has been active since its founding in managing
portfolios of tax exempt securities. On March 31, 1996, total assets under
management were approximately $12.2 billion. The principal business address of
WPG is One New York Plaza, New York, New York 10004.
Pursuant to the Sub-Advisory Agreement and subject to the
supervision of the adviser and of the Trust's Board of Trustees and in
accordance with the Fund's investment policies, the sub-adviser has agreed to
assist the Adviser in providing a continuous investment program for the Fund and
in determining investments for the Fund. The sub-adviser will maintain the
Trust's records relating to purchases and sales effected by it. For the services
provided and expenses assumed pursuant to the Sub-Advisory Agreement, the
sub-adviser is entitled to an advisory fee, payable by the adviser, calculated
daily and payable monthly, at the annual rate of .18% of the average daily net
assets of the Fund. The sub-adviser may from time-to-time waive all or a portion
of its fee from the adviser.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Fund. PFPC is an
indirect, wholly owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation of
the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive an
administrative fee, computed daily and paid monthly, at the annual rate of .10%
of the first $200,000,000 of its net assets, .075% of the next $200,000,000 of
its net assets, .05% of the next $200,000,000 of its net assets and .03% of its
net assets over $600,000,000 and is entitled to be reimbursed for its
out-of-pocket expenses incurred on behalf of the Fund.
-33-
<PAGE> 74
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 36 separate
classes or series of shares of beneficial interest ("shares"). Two of these
classes or series, which represent interests in the Fund (Class T and Class T -
Special Series 1) are described in this Prospectus. Class T shares constitute
the Institutional class or series of shares; and Class T - Special Series 1
shares constitute the Retail class or series of shares. The other investment
funds of the Trust are: Money Market Fund (Class A and Class A- Special Series
1), Government Fund (Class B and Class B-Special Series 1), Treasury Fund (Class
C and Class C-Special Series 1), Tax Exempt Fund (Class D and Class D-Special
Series 1), Equity Fund (Class H and Class H-Special Series 1), Fixed Income Fund
(Class I and Class I-Special Series 1), Ohio Tax Exempt Fund (Class K and Class
K-Special Series 1), National Tax Exempt Fund (Class L and Class L-Special
Series 1), Equity Income Fund (Class M and Class M-Special Series 1), Mid Cap
Regional Fund (Class N and Class N-Special Series 1), Enhanced Income Fund
(Class O and Class O-Special Series 1), Total Return Advantage Fund (Class P and
Class P-Special Series 1), Pennsylvania Tax Exempt Fund (Class Q and Class
Q-Special Series 1), Intermediate Government Fund (Class R and Class R-Special
Series 1) and the GNMA Fund (Class S and Class S- Special Series 1). Each share
has no par value, represents an equal proportionate interest in the investment
fund with other shares of the same class or series outstanding, and is entitled
to such dividends and distributions out of the income earned on the assets
belonging to such fund as are declared in the discretion of the Trust's Board of
Trustees. The Trust's Declaration of Trust authorizes the Board of Trustees to
classify or reclassify any unissued shares into any number of additional classes
of shares and to classify or reclassify any class of shares into one or more
series of shares.
Shareholders are entitled to one vote for each full share
held, and a proportionate fractional vote for each fractional share held.
Shareholders will vote in the aggregate and not by investment fund, except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular investment fund. The Statement of Additional Information gives
examples of situations in which the law requires voting by investment fund. In
addition, shareholders of each of the investment funds will vote in the
aggregate and not by class or series, except as otherwise expressly required by
law or when the Board of Trustees determines the matter to be voted on affects
only the interests of the holders of a particular class or series of shares.
Under the Services Plan, only the holders of Retail shares in an investment fund
are, or would be entitled to vote on matters submitted to a vote of shareholders
(if any) concerning the Services Plan. Voting rights are not cumulative, and
accordingly, the holders of more than 50% of the aggregate shares of the Trust
may elect all of the trustees irrespective of the vote of the other
shareholders.
As stated above, the Trust is organized as a trust under the
laws of Massachusetts. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
-34-
<PAGE> 75
obligations of the trust. The Declaration of Trust of the Trust provides for
indemnification out of the Trust property for any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders shall
be called at the written request of shareholders entitled to cast at least 10%
of the votes entitled to be cast at such meeting. Such meeting may be called by
shareholders to consider the removal of one or more trustees. Shareholders will
receive shareholder communication assistance with respect to such matter as
required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc. serves as the Trust's transfer and
dividend disbursing agent. Communications to the Transfer Agent should be
directed to P.O. Box 5109, Westborough, Massachusetts 01581-5109. The fees
payable by the Trust for these services are described in the Statement of
Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses
in connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. The Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Fund also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as
both the custodian and an investment adviser, a procedure has been established
requiring three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
-35-
<PAGE> 76
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or a particular investment fund
means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
the Trust or such fund or (b) 67% or more of the shares of the Trust or such
fund present at a meeting if more than 50% of the outstanding shares of the
Trust or such fund are represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
-36-
<PAGE> 77
ARMADA FUNDS
INVESTMENT ADVISER
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
SUB-INVESTMENT ADVISER
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLE............................................................. 3
FINANCIAL HIGHLIGHTS...................................................... 5
INTRODUCTION.............................................................. 7
RISK FACTORS, INVESTMENT OBJECTIVE AND POLICIES........................... 7
INVESTMENT LIMITATIONS.................................................... 14
YIELD AND PERFORMANCE INFORMATION......................................... 15
PRICING OF SHARES......................................................... 16
HOW TO PURCHASE AND REDEEM SHARES......................................... 17
DISTRIBUTION AGREEMENT.................................................... 25
SHAREHOLDER SERVICES PLAN................................................. 25
DIVIDENDS AND DISTRIBUTIONS............................................... 26
TAXES ................................................................. 26
MANAGEMENT OF THE TRUST................................................... 28
DESCRIPTION OF THE TRUST AND ITS SHARES................................... 34
CUSTODIAN AND TRANSFER AGENT.............................................. 35
EXPENSES ................................................................. 35
MISCELLANEOUS............................................................. 35
</TABLE>
- - Shares of the Armada Funds are not Bank Deposits or Obligations of, or
guaranteed or endorsed or otherwise supported by, National City Bank; National
City Bank, Columbus; National City Bank, Kentucky; National Asset Management
Corporation, their parent company or any of their affiliates or any bank.
- - Shares of the Armada Funds are not insured or guaranteed by the U.S.
Government, FDIC, or any governmental agency or state.
- - An Investment in the Armada Funds involves investment risks, including the
possible loss of principal amount invested.
National City Bank and certain of its affiliates serves as investment advisers
to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
-37-
<PAGE> 78
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of
National City
Corporation
National City Bank
1900 East Ninth Street
Cleveland, OH 44114
Investment Sub-Adviser
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
<PAGE> 79
ARMADA FUNDS
PROSPECTUS
September 9, 1996
Pennsylvania Tax Exempt Fund
<PAGE> 80
ARMADA FUNDS
4400 Computer Drive
If you purchased your shares through
Westborough, Massachusetts 01581 National City Investments Corporation,
please call your Investment Consultant
for information.
For current performance,
fund information, and to
purchase shares, please call
1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
This Prospectus describes shares in the following investment
fund (the "Fund") of Armada Funds (the "Trust") and its investment objective and
policies:
PENNSYLVANIA TAX EXEMPT FUND'S objective is to provide current income
exempt from regular federal income and Pennsylvania personal income
taxes, consistent with stability of principal. The Fund invests
primarily in high quality debt obligations issued by or on behalf of
the Commonwealth of Pennsylvania and its political subdivisions and
financing authorities.
All securities or instruments in which the Fund invests have
remaining maturities of 397 calendar days or less, although variable and
1
<PAGE> 81
floating rate instruments and securities underlying certain repurchase
agreements may bear longer maturities.
National City Bank ("National City") serves as investment
adviser (the "adviser") to the Fund. Weiss, Peck & Greer, L.L.C. ("WPG") serves
as the sub-investment adviser to the Fund (the "sub-adviser").
440 Financial Distributors, Inc., a wholly-owned subsidiary of
First Data Corp. (the "Distributor"), serves as the Trust's sponsor and
distributor. The Fund pays a fee to the Distributor for distributing its shares.
See "Distribution Agreement."
This Prospectus sets forth concisely the information about the
Fund that a prospective investor should consider before investing. Investors
should carefully read this Prospectus and retain it for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information, has been filed with the Securities and Exchange Commission ("SEC")
and is available upon request without charge by contacting the Trust at its
telephone number or address shown above. The Statement of Additional Information
bears the same date as this Prospectus and is incorporated by reference in its
entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS
PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY
GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 9, 1996
-2-
<PAGE> 82
The classes which represent interests in the Fund are
described in this Prospectus. Class Q shares constitute the Institutional class
of shares (herein referred to as the "Institutional shares") of the Fund. Class
Q Special Series 1 shares constitute the Retail class of shares (herein referred
to as the "Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and National
Asset Management Corporation ("NAM") customers. Retail shares are sold to the
public primarily through financial institutions such as banks, brokers and
dealers.
<TABLE>
<CAPTION>
EXPENSE TABLE
Pennsylvania Pennsylvania
Tax Exempt Fund Tax Exempt Fund
Retail Institutional
Shares(1) Shares
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Sales Charge Imposed on Purchases .............. None None
Sales Charge Imposed on Reinvested
Dividends..................................... None None
Deferred Sales Charge........................... None None
Exchange Fee.................................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily
net assets)
Management Fees (after fee
waivers)(2)................................... .15% .15%
12b-1 Fees (after fee
waivers)(3)................................... .05% .05%
Other Expenses.................................. .24% .14%
---- ----
TOTAL FUND OPERATING EXPENSES
(AFTER FEE WAIVERS)(2)...................... .44% .34%
==== ====
</TABLE>
- ---------------------------
1 The Trust has implemented a Shareholder Services Plan (the "Services Plan")
with respect to Retail shares in the Fund. Pursuant to the Services Plan,
the Trust enters into shareholder servicing agreements with certain
financial institutions under which they agree to provide shareholder
administrative services to their customers who beneficially own Retail
shares in consideration for the payment of up to 10% (on an annualized
basis) of the net asset value of such shares.
-3-
<PAGE> 83
2 The expense information in the table relating to each Fund has been restated
to reflect current fees. Management fees (before waivers) would be .40%.
Total Fund Operating Expenses (before waivers) would be .69% for the Retail
shares and .59% for the Institutional shares. The fee waivers are expected
to be in effect during the Fund's current fiscal year. Similarly, absent
such waiver, and if the maximum distribution fees permitted under the 12b-1
Plan were imposed, Total Operating Expenses would be .74% and .64% for the
Retail and Institutional shares, respectively.
3 The Armada Pennsylvania Tax Exempt Fund has in effect a 12b-1 Plan pursuant
to which the Fund may bear fees in an amount of up to .10% of average daily
net assets. As a result of the payment of 12b-1 fees, long-term shareholders
may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
("NASD"). The NASD has adopted rules which generally limit the aggregate
payments under the Trust's Service and Distribution Plan ("Distribution
Plan") and Services Plan to a certain percentage of total new gross share
sales, plus interest. The Trust would stop accruing 12b-1 and related fees
if, to the extent, and for as long as, such limit would otherwise be
exceeded.
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- - ----- - ----- -- -----
<S> <C> <C> <C> <C>
Pennsylvania Tax Exempt Retail Shares.................................... $5 $14 $25 $55
Pennsylvania Tax Exempt Institutional Shares............................. $3 $11 $19 $43
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Fund. Any fees that are charged by affiliates of the adviser
or other institutions directly to their customer accounts for services related
to an investment in retail shares of the Fund are in addition to and not
reflected in the fees and expenses described above.
-4-
<PAGE> 84
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR PENNSYLVANIA TAX EXEMPT FUND
The Fund commenced operations on August 8, 1994 as a separate
investment portfolio (the "Predecessor Pennsylvania Tax Exempt Fund") of
Inventor Funds, Inc., which was organized as a Maryland corporation. On
September 9, 1996, the Fund was reorganized as a new portfolio of the
Trust. Prior to the reorganization, the Predecessor Fund offered and sold Retail
Shares that were similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain
information concerning the investment results of the Predecessor Fund's Retail
Shares (the series that is similar to the Retail Shares of the Pennsylvania Tax
Exempt Fund) for the fiscal year ended April 30, 1996 and the fiscal period
ended April 30, 1995. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Fund, whose report thereon is contained in Inventor Funds' Annual Report to
Shareholders for the fiscal year ended April 30, 1996. Such financial highlights
should be read in conjunction with the financial statements and notes thereto
contained in Inventor Funds' Annual Report to Shareholders and incorporated by
reference into the Statement of Additional Information relating to the
Pennsylvania Tax Exempt Fund.
<TABLE>
<CAPTION>
Year Ended Period ended
April 30, 1996 April 30, 1995(2)
-------------- -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............................. $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................................. 0.03 0.02
LESS DISTRIBUTIONS
Distributions from Net Investment Income.......................... (0.03) (0.02)
Net Asset Value, End of Period.................................... $1.00 $1.00
TOTAL RETURN(4)................................................... 3.36% 2.32%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000)................................... $70,422 $56,668
Ratio of Expenses to Average Net Assets 0.55%(1) 0.55%(1,3)
(after fee waivers)...............................................
Ratio of Net Investment Income to 3.29%(1) 3.21%(1,3)
Average Net Assets (after fee waivers)..........................
</TABLE>
-5-
<PAGE> 85
1. The operating expense ratio and the net investment income ratio before fee
waivers by the investment adviser for the year ended April 30, 1996 and for
the period ended April 30, 1995 would have been 0.96% and 2.88%, and 1.04%
and 2.72%, respectively.
2. Commenced operations on August 8, 1994. The Fund did not offer Institutional
shares during the period covered by the Financial Highlights.
3. Annualized.
4. Not annualized.
-6-
<PAGE> 86
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund consists of a pool of assets with separate investment objectives
and policies as described below under "Risk Factors, Investment Objectives and
Policies." The Fund is deemed to be a diversified investment fund under the 1940
Act, as it satisfies the diversification requirements applicable to funds that
hold themselves out as primarily distributing income that is exempt from income
taxes of a specific state.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except that,
as described more fully below under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares of the Fund. Under
the Services Plan, only the beneficial owners of Retail shares bear the expenses
of shareholder administrative services which are provided by financial
institutions for their benefit (not to exceed .10% annually). See "Shareholder
Services Plan," "Dividends and Distributions" and "Description of the Trust and
Its Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. There can be no assurance that the Fund will achieve its
objective.
The investment objective of the Fund is to provide current
income exempt from regular federal income tax and Pennsylvania personal income
taxes, consistent with stability of principal. It is a fundamental policy of the
Fund to use its best efforts to maintain a constant net asset value of $1.00 per
share. The Fund intends to comply with regulations of the Securities and
Exchange Commission ("SEC") applicable to money market funds. These regulations
impose certain quality, maturity and diversification restraints on investments
by the Fund.
The Fund invests primarily in debt obligations issued by or on
behalf of the Commonwealth of Pennsylvania and its political subdivisions and
financing authorities, and obligations of the United States, including
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territories and possessions of the United States, the income from which is, in
the opinion of qualified legal counsel, exempt from federal regular income tax
and Pennsylvania state income tax imposed upon non-corporate taxpayers
("Pennsylvania Municipal Securities"). As a matter of fundamental policy, the
Fund invests its assets so that at least 80% of its annual interest income is
not only exempt from regular federal income tax and Pennsylvania personal income
taxes, but is not considered a preference item for purposes of the alternative
minimum tax.
The Fund is concentrated on securities issued by the
Commonwealth of Pennsylvania or entities within the Commonwealth of
Pennsylvania, and therefore investment in the Fund may be riskier than an
investment in other types of money market funds.
The Fund will only purchase "eligible securities" that present
minimal credit risks as determined by the adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities generally
include (i) U.S. Government Obligations, (ii) securities that are rated (at the
time of purchase) by nationally recognized statistical rating organizations
("Rating Agencies") in the two highest rating categories for such securities,
and (iii) certain securities that are not so rated but are of comparable quality
to rated eligible securities as determined by the adviser. See "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information
for a more complete description of eligible securities. A description of ratings
is also contained in the Statement of Additional Information.
The Fund's assets have remaining maturities of 397 calendar
days or less (except for certain variable and floating rate instruments and
securities underlying certain repurchase agreements) as defined by the SEC and
the Fund's dollar-weighted average portfolio maturity may not exceed 90 days.
The Fund may invest in variable and floating rate obligations,
may purchase securities on a "when-issued" basis and reserves the right to
engage in transactions involving standby commitments and repurchase agreements.
The Fund may invest up to 100% of its assets in securities which pay interest
exempt only from federal taxes and in taxable securities during temporary
defensive periods when, in the opinion of the sub-adviser, Pennsylvania
Municipal Securities of sufficient quality are unavailable. There is no
percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods; however, uninvested cash reserves will not
earn income. See "Other Investment Policies."
Special Risk Considerations
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural
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workers, followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds. Rising unemployment, a relatively high proportion of persons 65 and older
in the Commonwealth of Pennsylvania and court ordered increases in healthcare
reimbursement rates place increased pressures on the tax resources of the
Commonwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains
moderate. The recession in the early 1990s affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January 1995,
but the Commonwealth has continued to show fiscal restraint.
OTHER INVESTMENT POLICIES
Types of Municipal Bonds
The two principal classifications of Pennsylvania Municipal
Securities which may be held by the Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue or "special obligation" securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a specific excise tax or other specific revenue
source such as the user of the facility being financed. "Private activity" bonds
are revenue securities normally issued by industrial development authorities to
finance privately-owned facilities and are backed by private entities. Any
private activity bonds (including industrial development bonds) held by the Fund
are not payable from revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of the
corporate or other user of the facility involved. Private activity bonds are
included in the term "Pennsylvania Municipal Securities" only if the interest
paid thereon is exempt from regular federal income tax and not treated as a
specific tax preference item under the federal alternative minimum tax. See
"Taxes."
Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), in addition to the issuer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
The Fund may also invest in "moral obligation" bonds, which
are ordinarily issued by special purpose public authorities in certain states.
If the issuer of moral obligation bonds is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
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restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid. They may take the form of a
lease, an installment purchase contract, a conditional sales contract, or a
participation certificate in any of the above. Municipal lease obligations
typically are not backed by the municipality's credit, and their interest may
become taxable if the lease is assigned. Under guidelines established by the
Board of Directors, the credit quality of municipal leases will be determined on
an ongoing basis, including an assessment of the likelihood that a lease will be
canceled.
Participation interests are interests in Municipal Securities
from financial institutions such as commercial and investment banks, savings and
loan associations and insurance companies. These interests may take the form of
participations, beneficial interests in a trust, partnership interests or any
other form of indirect ownership that allows the Fund to treat the income from
the investment as exempt from federal income tax. The Fund invests in these
participation interests in order to obtain credit enhancement or demand features
that would not be available through direct ownership of the underlying Municipal
Securities.
A participation interest may be in the form of a "certificates
of participation" which represents undivided proportional interests in lease
payments by a governmental or nonprofit entity. The municipal leases underlying
the certificates of participation in which the Fund invests will be subject to
the same quality rating standards applicable to Municipal Bonds. The lease
payments and other rights under the lease provide for and secure the payments on
the certificates. Lease obligations may be limited by law, municipal charter or
the duration or nature of the appropriation for the lease and may be subject to
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. Furthermore, a
lease may provide that the certificate trustee cannot accelerate lease
obligations upon default; in such event, the trustee would only be able to
enforce lease payments as they become due. In the event of a default or failure
of appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In addition, certificates of
participation are less liquid than other bonds because there is a limited
secondary trading market for such obligations. To alleviate potential liquidity
problems with respect to these investments, the Fund may enter into remarketing
agreements which may provide that the seller or a third party will repurchase
the obligation within seven days after demand by the Fund and upon certain
conditions (such as the Fund's payment of a fee). Investments in certificates of
participation will not exceed 5% of the Fund's net assets.
The Fund may also invest in unsecured short-term promissory
notes issued by municipalities and other entities.
Taxable Money Market Instruments
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The Fund may invest, from time to time, a portion of its
assets for temporary defensive or other purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. Government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the two highest rating categories of S&P,
Fitch, Duff or Moody's or unrated instruments of comparable quality;
certificates of deposit; bankers' acceptances; and repurchase agreements with
respect to such obligations.
Illiquid Securities
The Fund will not knowingly invest more than 10% of the value
of its net assets in securities that are illiquid. The Fund may purchase
securities which are not registered under the Securities Act of 1933, as amended
(the "1933 Act") but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
sub-adviser, acting under guidelines approved and monitored by the Board, that
an adequate trading market exists for that security. This investment practice
could have the effect of increasing the level of illiquidity in the Fund during
any period that qualified institutional buyers become uninterested in purchasing
these restricted securities. The ability to sell to qualified institutional
buyers under Rule 144A is a recent development, and it is not possible to
predict how this market will develop. The Board will carefully monitor any
investment by the Fund in these securities.
Variable and Floating Rate Obligations
The Fund may purchase variable and floating rate demand
obligations (including variable amount master demand notes) which are unsecured
instruments that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate. The Fund, however, may invest in such
obligations which have a stated maturity in excess of one year only if the Fund
may demand repayment of the principal at least once a year upon not more than
thirty days notice (unless the obligation is guaranteed by the U.S. Government
or any agency or instrumentality thereof). Because variable and floating rate
obligations are direct lending arrangements between the purchasing Fund and the
issuer, they are not normally traded. Although there may be no active secondary
market in such instruments, the Fund may demand payment of principal and accrued
interest at a time specified in the instrument or may resell them to a third
party. Such obligations may be backed by bank letters of credit or guarantees
issued by banks, other financial institutions or the U.S. Government, its
agencies or instrumentalities. The quality of any letter of credit or guarantee
will be rated high quality or, if unrated, will be determined to be of
comparable quality by the sub-adviser. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Fund might be
unable to dispose of the instrument because of the absence of a secondary market
and could, for this or other reasons, suffer a loss to the extent of the
default.
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Stand-by Commitments
The Fund may acquire stand-by commitments with respect to
Pennsylvania Municipal Securities or other securities held in its fund. Under a
stand-by commitment, a dealer agrees to purchase at the Fund's option specified
securities at a specified price. Stand-by commitments acquired by the Fund must
be of high quality as determined by any Rating Agency, or, if not rated, must be
of comparable quality as determined by the Fund's adviser. The Fund acquires
stand-by commitments solely to facilitate fund liquidity and does not intend to
exercise its rights thereunder for trading purposes.
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when delivery takes place. The Fund
does not intend to purchase when-issued securities for speculative purposes but
only for the purpose of acquiring portfolio securities. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be attractive. For further information, see "Risk Factors,
Investment Objectives, and Policies" in the Statement of Additional Information.
Derivatives and Other Municipal Bonds
The Fund may invest in TAX-EXEMPT DERIVATIVE SECURITIES relating to
Municipal Securities, including tender option bonds, participations, beneficial
interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the Fund
from tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Fund and its investment adviser and
sub-investment adviser will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Securities, the creation of any tax-exempt derivative securities, or the bases
for such opinions.
The adviser and sub-investment adviser will evaluate the risks
presented by the derivative instruments purchased by the Fund, and will
determine, in connection with their day-to-day management of the Fund, how they
will be used in furtherance of the Fund's investment objective.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
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companies (including other investment companies advised by the adviser) which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding shares (as defined under "Miscellaneous"). (Other investment
limitations that also cannot be changed without a vote of shareholders are
contained in the Statement of Additional Information under "Risk Factors,
Investment Objectives and Policies.")
The Fund may not:
1. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies, and the
Fund may enter into repurchase agreements in accordance with its investment
objective and policies.
2. Borrow money or issue senior securities, except that the
Fund may borrow from anyone for temporary purposes in amounts not in excess of
5% of the value of its total assets at the time of such borrowing; or the Fund
may borrow from a bank for non-temporary purposes, provided that the borrowing
does not exceed 33-1/3% of the Fund's net assets. To the extent that a bank
borrowing exceeds 5% of the Fund's total assets, asset coverage of at least 300%
is required. The Fund will not purchase securities while outstanding borrowings
equal or exceed 5% of the Fund's total assets.
3. Purchase securities of other investment companies except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
4. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided, that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities or by domestic branches of U.S. banks and repurchase
agreements secured by such obligations, (b) wholly owned finance
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companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be classified according to their services, for example, gas, gas
transmission, electric and gas, electric, and telephone each will be considered
a separate industry, and (d) there is no limitation with respect to securities
issued by state and local governments.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of the Fund's securities will not constitute a violation of such
limitation. If the Fund exceeds the limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes that it is in the best interests of
the Fund to do so.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's "yield," "effective yield" and "tax-
equivalent yield" for Institutional shares and Retail shares. The "yield" quoted
in advertisements refers to the income generated by an investment in a class of
shares of the Fund over a seven-day period identified in the advertisement. This
income is then "annualized." The amount of income so generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" for a class of
shares is calculated similarly but, when annualized, the income earned by an
investment in the class is assumed to be reinvested. An effective yield for a
class of shares will be slightly higher than its yield because of the
compounding effect of the assumed reinvestment. The "tax-equivalent yield" for a
class of shares, which shows the level of taxable yield necessary to produce an
after-tax equivalent to the Fund's tax-free yield for that class, may also be
quoted from time to time. It is calculated by increasing the yield (calculated
as above) for a class of shares by the amount necessary to reflect the payment
of federal income tax at stated tax rates. The Fund's tax-equivalent yield for a
class of shares will always be higher than its yield.
Investors may compare the performance of each class of shares
of a Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the IBC/Donoghue
Pennsylvania Tax Exempt Index, and to data or rankings prepared by independent
services such as Lipper Analytical Services, Inc. or other financial or industry
publications that monitor the performance of mutual funds.
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The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate future
performance. Performance data may not provide a basis for comparison with bank
deposits and other investments which provide a fixed yield for a stated period
of time. Yield will be affected by fund quality, composition, maturity, market
conditions and the level of operating expenses for the class of shares. From
time to time, the adviser and/or the sub-adviser may voluntarily waive their
investment advisory fees in order to reduce such operating expenses, which will
have the effect of enhancing the yield. Any fees charged by financial
institutions (as described in "How to Purchase and Redeem Shares") are not
included in the computation of performance data but will reduce a shareholder's
net return on an investment in a Fund.
Shareholders should note that the yield of the Retail shares
will be reduced by the amount of the shareholder servicing fees that are payable
under the Services Plan. See "Shareholder Services Plan."
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling 1-800-622-
FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the
net asset value per share of the Fund is calculated as of 2:00 p.m. and 4:00
p.m. (Eastern Time) on each business day as described below. Net asset value per
share is determined on each business day, except those holidays which the
Exchange, or banks and trust companies which are affiliated with National City
Corporation (the "Banks"), observe (currently New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans'
Day, Thanksgiving Day and Christmas Day) ("Business Day"). Net asset value per
share of a particular class in the Fund is calculated by dividing the value of
all securities and other assets belonging to the Fund allocable to such class,
less the liabilities charged to that class, by the number of the outstanding
shares of that class.
The assets in the Fund are valued based upon the amortized
cost method, which has been determined by the Trust's Board of Trustees to
represent the fair value of the Fund's investments. Amortized cost valuation
involves valuing an instrument at its cost initially and, thereafter, assuming a
constant amortization to maturity of any discount or premium. Although the Trust
seeks to maintain the net asset value per share of the Fund at $1.00, there can
be no assurance that the net asset value will not vary.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
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Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards to National City Investments Corporation and
NatCity Investments, Inc.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. Financial institutions may
charge certain account fees depending on the type of account the Investor has
established with the institution. (For information on such fees, the Investor
should review his agreement with the institution or contact it directly.) In
addition, certain financial institutions may enter into shareholder servicing
agreements with the Trust whereby a financial institution would perform various
administrative support services for its customers who are the beneficial owners
of Retail shares and would receive fees from the Fund for such services of up to
.10% (on an annualized basis) of the average daily net asset value of such
shares. See "Shareholder Services Plan." To purchase shares, Investors should
call 1-800-622-FUND(3863) or visit their local National City Investments
Corporation office: Cleveland (1- 800-624-6450), Columbus (1-800-345-0278),
Dayton (1-800-755-8723), Akron (1- 800-229-0295), Louisville (1-800-727-5656),
Indianapolis (1-800-826-2868), Toledo (1-800-331-8275), or Youngstown
(1-800-742-4098).
The minimum investment for the initial purchase of Retail
shares in a Fund is $2,500. All subsequent investments for Retail shares are
subject to a minimum investment of $250. Investments made in Retail shares by a
sweep program described below or through a monthly savings program described
below are not subject to the minimum initial and subsequent investment
requirements or any minimum account balance requirements described in "Other
Redemption Information" below.
Customers of Banks may purchase Retail shares through
procedures established by the Banks or their financial institutions in
connection with the requirements of their customer accounts. These procedures
may include instructions under which a Bank or financial institution may
automatically "sweep" a customer account and invest amounts agreed to by the
Bank or financial institution and the customer in additional Retail shares of
the Fund. Customers may obtain information relating to the requirements of such
accounts from their Banks or financial institutions.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of the Fund, in a consistent manner twice each
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month, with a minimum amount of $50 per month. Funds may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional shares at the net
asset value per share next determined after an order is received by the Trust.
An Investor may apply for participation in a monthly program through a financial
institution, such as banks, brokers or dealers selling Retail shares of the
Fund, by completing an application. The program may be modified or terminated by
an Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent, First
Data Investor Services Group, Inc. (formerly, The Shareholder Services Group,
Inc. d/b/a "440 Financial") (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM
customers ("Customers"). Depending on the terms governing the particular
account, the Banks may impose account charges such as account maintenance fees,
compensating balance requirements or other charges based upon account
transactions, assets or income which will have the effect of reducing the net
return on a shareholder's investment in the Fund. There is no minimum
investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should obtain
information relating to the requirements of such accounts from their Banks.
If participating in an Asset Diversification Account, under a
monthly savings program, Customers may add to their investment in the
Institutional shares of the Fund, in a consistent manner each month, with a
minimum amount of $50. Monies may be automatically withdrawn from a Customer's
checking or savings account available through a Customer's financial institution
and invested in additional shares at the net asset value per share next
determined after an order is received by the Trust. A Customer may apply for
participation in a monthly program through the Customer's Bank, by completing an
application. The program may be modified or terminated by the Customer on 30
days written notice or by the Trust at any time.
It is the responsibility of the Banks to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will be held of record by the Banks. Confirmations of share purchases
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and redemptions will be sent to the Banks. Beneficial ownership of Institutional
shares will be recorded by the Banks or the Transfer Agent and reflected in the
account statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by
the Transfer Agent on any Business Day prior to 2:00 p.m. (Eastern Time) are
priced at the net asset value per share next determined after receipt of the
order by the Transfer Agent. Purchase orders received between 2:00 p.m. and 4:00
p.m. (Eastern Time) are priced at the net asset value per share determined at
the close of trading on the New York Stock Exchange. Purchase orders received
before 2:00 p.m. (Eastern Time) are processed on the day of receipt. Purchase
orders received by the Transfer Agent after 2:00 p.m. and before 4:00 p.m.
(Eastern Time) will be executed on the following Business Day at the previous
day's net asset value per share.
Purchases will be effected only when Federal funds or other
funds are immediately available to the Trust's custodian to make the purchase on
the day the Transfer Agent receives the purchase order. Orders for which funds
have not been received by the Transfer Agent by the prescribed deadline on a
given day will not be accepted and notice thereof will be given promptly to the
Bank or financial institution. In accordance with this policy, purchase orders
which are accompanied by a check will be executed on the second Business Day
following receipt of the order at the previous day's net asset value per share.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
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If a Customer has agreed with a particular Bank to maintain a
minimum balance in his account at the Bank and the balance in such account falls
below that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
sending a written request to Armada Funds, P.O. Box 5109, Westborough,
Massachusetts 01581-5109. Redemption requests must be signed by each
shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $5,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $5,000, no signature
guarantee is needed. The Trust may require additional supporting documents for
redemptions made by corporations, fiduciaries, executors, administrators,
trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record also may redeem shares in any amount
by calling 1-800-628-0523 (provided he has made the appropriate election in his
account application).
During periods of unusual economic or market changes,
telephone redemptions may be difficult to implement. In such event, shareholders
should mail their redemption requests to their financial institutions or Armada
Funds at the address shown above. Neither the Trust nor its Transfer Agent will
be responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming Retail shares by telephone may be modified or terminated at any time
by the Trust or the Transfer Agent.
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<PAGE> 99
CHECKWRITING SERVICE
You may redeem Shares by writing checks on your Pennsylvania
Tax- Exempt Money Market Fund account for $250 or more per check. Once you have
signed and returned a signature card, you will receive a supply of checks. The
check may be made payable to any person, and your account will continue to earn
dividends until the check clears. Because of the difficulty of determining in
advance the exact value of a Fund account, you may not use a check to close your
account. These checks are free, but your account will be charged a fee of $10 on
stopping payment of a check upon your request or if the check cannot be honored
because of insufficient funds or other valid reasons.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of any fund of the Trust held on the
Transfer Agent's system. The Plan allows the shareholder to have a fixed minimum
sum of $250 distributed at regular intervals. The shareholder's account must
have a minimum value of $5,000 to be eligible for the Plan. Additional
information regarding this service may be obtained from an Investor's financial
institution or the Transfer Agent at 1-800-628- FUND(0523).
OTHER REDEMPTION INFORMATION
Redemption orders are effected at the net asset value per
share next determined after acceptance of the order by the Transfer Agent.
Payment for redemption orders received by the Transfer Agent on a Business Day
before 12:00 noon (Eastern Time) will be wired the same day to the Bank or
financial institution placing the order. Payment for redemption orders which are
received between 12:00 noon (Eastern Time) and the close of business or on a
non-Business Day will normally be wired to the Bank or financial institution on
the next Business Day, provided that the Trust reserves the right to wire
redemption proceeds within seven days after receiving the redemption orders if,
in the judgment of the sub-adviser, an earlier payment could adversely affect
the Trust.
Due to the relatively high cost of maintaining small accounts,
the Trust reserves the right to redeem, at net asset value, any account
maintained by a shareholder that has a value of less than $1,000 due to
redemptions where the shareholder does not increase the amount in the account to
at least $1,000 upon 60 days' notice.
If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay payment
of the redemption proceeds until the Transfer Agent is reasonably satisfied that
the check has been collected, which could take up to 10 days from the date of
purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by Federal funds, bank wire, or by
certified or cashier's check. Financial institutions
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<PAGE> 100
normally impose a charge in connection with the use of bank wires, as well as
certified checks, cashier's checks and Federal funds.
The Trust may also redeem shares involuntarily or make payment
for redemption in securities if it appears appropriate to do so in light of the
Trust's responsibilities under the 1940 Act. See "Net Asset Value" in the
Statement of Additional Information.
Payment to shareholders for shares redeemed will be made
within seven days after receipt of the request for redemption or such shorter
time period as may be required by the Securities Exchange Act of 1934.
EXCHANGE PRIVILEGE APPLICABLE TO SHARES
The Trust offers an exchange program whereby Investors who own
Retail shares of the Fund or another investment portfolio of the Trust which was
purchased without a sales charge (each a "no load Fund") may exchange those
Retail shares for Retail shares of an investment fund offered by the Trust which
is sold with a sales charge (each a "load Fund") subject to payment of the
applicable sales charge, provided that such other Retail shares may be legally
sold in the state of the shareholder's residence. (However, shareholders
exchanging Retail shares of a no load Fund which were received in a previous
exchange transaction involving Retail shares of a load Fund will not be required
to pay an additional sales charge upon the reinvestment of the equivalent amount
into the Retail shares of a load Fund.) Shareholders may also exchange Retail
shares of a no load Fund for Retail shares of another no load Fund at the net
asset value per share without payment of a sales charge. Shareholders
contemplating an exchange should carefully review the Prospectus of the Fund
into which the exchange is being considered. An Armada Funds Prospectus may be
obtained from National City Investments Corporation or an Investor's financial
institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal
to the minimum initial investment required by the particular investment fund
into which the exchange is being made. Investors should make their exchange
requests in writing or by telephone to the financial institutions through which
they purchased their original Retail shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests for the Fund received
by the Transfer Agent prior to 12:00 noon (Eastern Time) will be processed as of
the close of business on the day of receipt; such requests received by the
Transfer Agent after 12:00 noon (Eastern Time) will be processed on the next
Business Day. The Trust reserves the right to reject any exchange request.
During periods of unusual economic or market changes, telephone exchanges may be
difficult to implement. In such event, an Investor should mail the exchange
request to his financial institution, and an Investor who directly purchased
shares from the Trust should mail the exchange request to the Transfer Agent.
The exchange privilege may be modified or terminated at any time upon 60 days'
notice to shareholders.
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Shareholders who hold Institutional shares of the Fund may
also exchange their shares for Institutional shares of another Fund offered by
the Trust at the net asset value per share on the date of exchange, provided
that such other Institutional shares may be legally sold in the state of the
shareholder's residence.
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act, each
investment fund of the Trust reimburses the Distributor monthly for the direct
and indirect expenses incurred by the Distributor in providing such fund
advertising, marketing, prospectus printing and other distribution services up
to a maximum of .10% per annum of the average net assets of the fund, inclusive
of an annual distribution fee of $250,000 payable monthly and accrued daily
among the investment funds with respect to which the Distributor is distributing
shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to
Retail shares in the Fund. Pursuant to the Services Plan, the Trust enters into
shareholder servicing agreements with certain financial institutions pursuant to
which the institutions render shareholder administrative services to their
customers who are the beneficial owners of Retail shares in consideration for
the payment of up to .10% (on an annualized basis) of the average daily net
asset value of such shares. Persons entitled to receive compensation for
servicing Retail shares may receive different compensation with respect to those
shares than with respect to Institutional shares in the Fund. Shareholder
administrative services may include aggregating and processing purchase and
redemption orders, processing dividend payments from the Funds on behalf of
customers, providing information periodically to customers showing their
position in Retail shares, and providing sub-transfer agent services or the
information necessary for sub-transfer agent services with respect to Retail
shares beneficially owned by customers. Since financial institutions may charge
their customers fees depending on the type of customer account the Investor has
established, beneficial owners of Retail shares should read this Prospectus in
light of the terms and fees governing their accounts with financial
institutions.
DIVIDENDS AND DISTRIBUTIONS
On each day that the net asset values per share of the Fund
are determined, the Fund declares a dividend from net investment income as of
the close of business on the day of declaration. Net investment income for
dividend purposes consists of (i) interest accrued and discount earned
(including both original issue and market discount) on the Fund's assets, (ii)
less amortization of market premium on such assets, and the accrued expenses of
the Fund. Fund shares begin earning dividends on the day the purchase
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order is executed and continue earning dividends through and including the day
before the redemption order for the shares is executed.
Dividends are paid monthly by check, or by wire transfer if
requested in writing by the shareholder to his Bank or financial institution,
within five Business Days after the end of each calendar month or within five
Business Days after a shareholder's complete redemption of his shares in the
Fund.
Shareholders of the Fund may elect to have their dividends
reinvested in additional full and fractional Fund shares of the same class or
series at the net asset value of such shares on the payment date. Shareholders
must make such election, or any revocation thereof, in writing to his Bank or
financial institution. The election will become effective with respect to
dividends paid after its receipt.
Under the Services Plan, the amount of the Fund's net
investment income available for distribution to the holders of Retail shares is
reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally relieves each Fund of liability for federal income tax
to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distributes to
its shareholders an amount equal to at least the sum of 90% of its tax-exempt
interest income net of certain deductions and 90% of its investment company
taxable income (if any) for such year. The Fund intends to distribute
substantially all of its net tax-exempt income (such distributions are known as
"exempt-interest dividends") and investment company taxable income (if any) each
taxable year. Exempt-interest dividends may be treated by shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code
unless under the circumstances applicable to the particular shareholder the
exclusion would be disallowed. See the Statement of Additional Information under
"Additional Information Concerning Taxes." To the extent, if any, dividends paid
to shareholders of the Fund are derived from taxable income or from net
long-term capital gains, such dividends will not be exempt from federal income
tax and may also be subject to state and local taxes. The Fund does not intend
to earn any investment company taxable income or net long-term capital gains.
Because all of the Fund's net investment income is expected to be derived from
earned interest, it is anticipated that no part of any distribution will be
eligible for the dividends received deduction for corporations.
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Dividends declared in December of any year payable to
shareholders of record on a specified date in such month will be deemed to have
been received by shareholders and paid by a Fund on December 31 of such year in
the event such dividends are actually paid during January of the following year.
If the Fund should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the alternative minimum tax applicable to
individuals and corporations and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. Shareholders receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of shares of the Fund depending upon the
tax basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include sales
charges incurred upon the purchase of Fund shares in his tax basis for such
shares for the purpose of determining gain or loss on a redemption, transfer or
exchange of such shares. However, if the shareholder effects an exchange of such
shares for shares of another Fund within 90 days of the purchase and is able to
reduce the sales charges applicable to the new shares (by virtue of the Trust's
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged shares, but may be included
(subject to this limitation) in the tax basis of the new shares.
PENNSYLVANIA TAXES
Under current Pennsylvania law, Shareholders will not be
subject to Pennsylvania Personal Income Tax on distributions from the Fund
attributable to interest income from obligations of the State of Pennsylvania or
its political subdivisions, the United States, its territories or certain of its
agencies and instrumentalities ("Exempt Securities"). However, Pennsylvania
Personal Income Tax will apply to distributions from the Fund attributable to
gain realized on the disposition of any investment, including Exempt Securities,
or to interest income from investments other than Exempt Securities.
Shareholders also will be subject to the Pennsylvania Personal Income tax on any
gain they realize on the disposition of Shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
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months are exempt. A shareholder's gain on the disposition of Shares in the Fund
that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended to the extent that the Fund is comprised of Exempt Securities.
MISCELLANEOUS
Shareholders of the Fund will be advised at least annually as
to the federal income tax and Pennsylvania income tax consequences of
distributions made to them each year. Shareholders are advised to consult their
tax advisers concerning the application of state and local taxes, other than
Pennsylvania taxes, which may differ from the tax consequences described above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the
direction of the Trust's Board of Trustees. The trustees of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
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<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
<S> <C> <C>
Richard B. Tullis Chairman of the Board Chairman Emeritus, Harris Corporation
5150 Three Village Drive (electronic communication and
Lyndhurst, OH 44124 information processing equipment), since
Age 82 October 1985; Director, NACCO Materials
Handling Group, Inc. (manufacturer of
industrial fork lift trucks), since
1984; Director, Hamilton
Beach/Proctor-Silex, Inc. (manufacturer
of household appliances), since 1990;
Director, Waste-Quip, Inc. (waste
handling equipment), since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO Manufacturing Company and
564 Hackberry Drive subsidiaries (manufacture, sale and
Westerville, OH 43081 financing of water coolers and
Age 51 dehumidifiers), since January 1996 and
President, January 1987 to January 1996;
Vice President and Executive Committee
Member of Ebtech Corp. (market and sell
bottled and point- of-use water
coolers), since March 1991.
</TABLE>
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<PAGE> 106
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
<S> <C> <C>
Leigh Carter* Trustee, President and Retired President and 1990; Chief
13901 Shaker Blvd., #6B Treasurer Operating Officer, BFGoodrich Company,
Cleveland, OH 44120 August 1986 to September Director, Adams
Age 70 Express Company (closed-end investment
company), since April 1982; Director,
Lamson & Sessions Co. (producer
of electrical supplies to construction
consumer power and communications
industries), since April 1991;
Director, Petroleum & Resources
Corp., since April 1987; Director,
Morrison Products (manufacturer of
blower fans and air moving equipment),
since April 1983.
John F. Durkott Trustee President and Chief Operating Officer,
8600 Allisonville Road Kittle's Home Furnishings Center, Inc.,
Indianapolis, IN 46250 since January 1982; partner, Kittle's
Age 51 Bloomington Property Company, since
January 1981; partner, KK&D (Affiliated
Real Estate Companies of Kittle's Home
Furnishings Center), since January 1989
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol
Carol Martin Gatton Martin Gatton College of Business and
College of Business and Economics, University of Kentucky, since
Economics 1981; Director, Studio Plus Hotels,
University of Kentucky Inc., since 1994.
Lexington, KY 40506-0034
Age 57
</TABLE>
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<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
<S> <C> <C>
Robert D. Neary Trustee Retired Co-Chairman of Ernst & Young
2000 National City Center March 1984-September 1993; Director,
1900 E. 9th Street Cold Metal Products, Inc., since March
Cleveland, OH 44114 1994; Director, Zurn Industries, Inc.
Age 62 (environmental systems and engineering
and construction services), since June
1995.
J. William Pullen Trustee President and Chief Executive Officer,
Whayne Supply Company Whayne Supply Co. (engine and heavy
1400 Cecil Avenue equipment distribution), since 1986;
P.O. Box 35900 President and Chief Executive Officer,
Louisville, KY 40232-5900 American Contractors Rentals & Sales
Age 57 (rental subsidiary of Whayne Supply
Co.), since 1988.
</TABLE>
- --------------------
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Fund. The
adviser is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. The adviser is a member bank of
the Federal Reserve System and the Federal Deposit Insurance Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and approximately $32
billion in total assets. National City has its principal offices at 1900 East
Ninth Street, Cleveland, Ohio 44114.
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<PAGE> 108
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, the adviser has
agreed to manage the Fund, make decisions with respect to and place orders for
all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales. For the services provided and
expenses assumed pursuant to the Advisory Agreement, the adviser is entitled to
receive an advisory fee, computed daily and payable monthly, at the annual rate
of .40% of the average net assets of the Fund. The adviser may from time to time
waive all or a portion of the advisory fee payable by the Fund.
SUB-ADVISER
Weiss, Peck & Greer, L.L.C. serves as the investment
sub-adviser to the Fund under a sub-advisory agreement (the "Sub-Advisory
Agreement") with the adviser. WPG is a limited liability company founded in
1970. WPG engages in investment management, venture capital management and
management buyouts. WPG has been active since its founding in managing
portfolios of tax exempt securities. On March 31, 1996, total assets under
management were approximately $12.2 billion, over $3.9 billion of which were
tax-free money market instruments. The principal business address of WPG is One
New York Plaza, New York, New York 10004.
Pursuant to the Sub-Advisory Agreement and subject to the
supervision of the adviser and of the Trust's Board of Trustees and in
accordance with the Fund's investment policies, the sub-adviser has agreed to
assist the Adviser in providing a continuous investment program for the Fund and
in determining investments for the Fund, the sub-adviser will maintain the
Trust's records relating to purchases and sales effected by it. For the services
provided and expenses assumed pursuant to the Sub-Advisory Agreement, the
sub-adviser is entitled to an advisory fee, payable by the adviser, calculated
daily and payable monthly, at the annual rate of .05% of the average daily net
assets of the Fund. The sub-adviser may from time-to-time waive all or a portion
of its fee from the adviser.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Fund. PFPC is an
indirect, wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation of
the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset values per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive an
administration fee, accrued daily and paid monthly, computed separately for the
Fund at an annual rate of .10% of the first $200,000,000 of its net assets,
.075% of the next $200,000,000 of its net assets, .05% of the next
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<PAGE> 109
$200,000,000 of its net assets and .03% of its net assets over $600,000,000.
PFPC is also entitled to be reimbursed for its out-of-pocket expenses incurred
on behalf of the Trust.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 36 separate
classes or series of shares of beneficial interest ("shares"). Two of these
classes or series, which represent interests in the Fund (Class Q and Class Q-
Special Series 1) are described in this Prospectus. Class Q shares constitute
the Institutional class or series of shares; and Class Q-Special Series 1 shares
constitute the Retail class or series of shares. The other Funds of the Trust
are: Money Market Fund (Class A and Class A-Special Series 1), Government Fund
(Class B and Class B-Special Series 1), Treasury Fund (Class C and Class
C-Special Series 1), Tax Exempt Fund (Class D and Class D-Special Series 1),
Equity Fund (Class H and Class H-Special Series 1), Fixed Income Fund (Class I
and Class I-Special Series 1), Ohio Tax Exempt Fund (Class K and Class K-Special
Series 1), National Tax Exempt Fund (Class L and Class L- Special Series 1),
Equity Income Fund (Class M and Class M-Special Series 1), Mid Cap Regional
Equity Fund (Class N and Class N-Special Series 1), Enhanced Income Fund (Class
O and Class O-Special Series 1), Total Return Advantage Fund (Class P and Class
P-Special Series 1), Intermediate Government Fund (Class R and Class R-Special
Series 1), GNMA Fund (Class S and Class S-Special Series 1) and the Pennsylvania
Municipal Fund (Class T and Class T-Special Series 1). Each share has no par
value, represents an equal proportionate interest in the investment fund with
other shares of the same class or series outstanding, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such class or series as are declared in the discretion of the Trust's Board of
Trustees. The Trust's Declaration of Trust authorizes the Board of Trustees to
classify or reclassify any unissued shares into any number of additional classes
of shares and to classify or reclassify any class of shares into one or more
series of shares.
Shareholders are entitled to one vote for each full share
held, and a proportionate fractional vote for each fractional share held.
Shareholders will vote in the aggregate and not by investment fund, except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular investment fund. The Statement of Additional Information gives
examples of situations in which the law requires voting by investment fund. In
addition, shareholders of each of the investment funds will vote in the
aggregate and not by class or series, except as otherwise expressly required by
law or when the Board of Trustees determines that the matter to be voted on
affects only the interests of the holders of a particular class or series of
shares. Under the Services Plan, only the holders of Retail shares in an
investment fund are entitled to vote on matters submitted to a vote of
shareholders (if any) concerning the Services Plan. Voting rights are not
cumulative, and accordingly the holders of more than 50% of the aggregate shares
of the Trust may elect all of the trustees irrespective of the vote of the other
shareholders.
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<PAGE> 110
As stated above, the Trust is organized as a trust under the
laws of Massachusetts. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
obligations of the trust. The Declaration of Trust of the Trust provides for
indemnification out of the Trust property for any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders shall
be called at the written request of shareholders entitled to cast at least 10%
of the votes entitled to be cast at such meeting. Such meeting may be called by
shareholders to consider the removal of one or more trustees. Shareholders will
receive shareholder communication assistance with respect to such matter as
required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P.O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses
in connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses relating to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. The Fund also pays for brokerage fees and
commissions (if any) in connection with the purchase of its portfolio
securities. Under the Services Plan, the Retail shares in the Fund also bear the
expense of shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as
both the custodian and as investment adviser, a procedure has been established
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<PAGE> 111
requiring three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or a particular investment fund
means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
the Trust or such fund or (b) 67% or more of the shares of the Trust or such
fund present at a meeting if more than 50% of the outstanding shares of the
Trust or such fund are represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
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<PAGE> 112
ARMADA FUNDS
Investment Adviser
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
Sub-Investment Adviser
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
EXPENSE TABLE..................................................................... 3
INTRODUCTION...................................................................... 7
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES.................................. 7
INVESTMENT LIMITATIONS............................................................ 13
YIELD AND PERFORMANCE INFORMATION................................................. 14
PRICING OF SHARES................................................................. 15
HOW TO PURCHASE AND REDEEM SHARES................................................. 15
DISTRIBUTION AGREEMENT............................................................ 22
SHAREHOLDER SERVICES PLAN......................................................... 22
DIVIDENDS AND DISTRIBUTIONS....................................................... 22
TAXES ......................................................................... 23
MANAGEMENT OF THE TRUST........................................................... 25
DESCRIPTION OF THE TRUST AND ITS SHARES........................................... 30
CUSTODIAN AND TRANSFER AGENT...................................................... 31
EXPENSES ......................................................................... 31
MISCELLANEOUS..................................................................... 31
</TABLE>
- - Shares of the Armada Funds are not bank deposits or obligations of, or
guaranteed or endorsed or otherwise supported by, National City Bank, its
parent company or any of its affiliates or any bank.
- - Shares of the Armada Funds are not insured or guaranteed by the U.S.
Government, FDIC, or any governmental agency or state.
- - An investment in the Armada Funds involves investment risks, including the
possible loss of principal amount invested.
National City Bank and certain of its affiliates serve as investment advisers to
Armada Funds for which they receive an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
There can be no assurances the Armada Pennsylvania Tax Exempt Fund will be able
to maintain a stable net asset value of $1 per share. An investment in the Fund
is neither insured nor guaranteed by the U.S. Government.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
33
<PAGE> 113
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of
National City
Corporation
National City Bank
1900 East Ninth Street
Cleveland, OH 44114
Sub-Investment Adviser
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
<PAGE> 114
ARMADA FUNDS
PROSPECTUS
September 9, 1996
GNMA Fund
<PAGE> 115
ARMADA FUNDS
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City
Investments Corporation, please call your
Investment Consultant for information.
For current performance, fund information,
and to purchase shares, please call
1-800-622-FUND(3863).
For account redemption information, please
call 1-800-628-0523.
This Prospectus describes shares in the following investment fund (the
"Fund") of Armada Funds (the "Trust") and its own investment objective and
policies:
GNMA FUND'S investment objective is to seek the highest level of current
income consistent with preservation of capital and a high degree of liquidity.
The Fund invests primarily in mortgage pass-through securities guaranteed by the
Government National Mortgage Association.
The net asset value per share of the Fund will fluctuate as the value of
its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to the
Fund (the "adviser").
440 Financial Distributors, Inc., a wholly-owned subsidiary of First Data
Corp. (the "Distributor"), serves as the Trust's sponsor and distributor.
-1-
<PAGE> 116
The Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS PARENT COMPANY OR
ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR
STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 9, 1996
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<PAGE> 117
The classes which represent interests in the Funds are described in
this Prospectus. Class S shares constitute the Institutional class of shares
(herein referred to as the "Institutional shares") of the Fund. Class S -
Special Series 1 shares constitute the Retail class of shares (herein referred
to as the "Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and customers of
National Asset Management Corporation ("NAM"), a registered investment adviser.
Retail shares are sold to the public primarily through financial institutions
such as banks, brokers and dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
GNMA GNMA
FUND FUND
RETAIL INSTITUTIONAL
SHARES(1) SHARES
--------- ------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases.............. 3.75% None
Sales Charge Imposed
on Reinvested Dividends........... None None
Deferred Sales Charge............... None None
Redemption Fee...................... None None
Exchange Fee........................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees .................... .55% .55%
12b-1 Fees(after fee waivers)(2).... .05% .05%
Other Expenses...................... .49% .24%
--- ---
TOTAL FUND OPERATING
EXPENSES(AFTER FEE WAIVERS)(2).. 1.09% .84%
==== ===
</TABLE>
- ---------------------------
(1) The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Fund. Pursuant to the Services
Plan, the Trust may enter into shareholder servicing agreements with
certain financial institutions under which they agree to provide
shareholder administrative services to their customers who beneficially
own Retail shares in consideration for the payment of up to .25% (on an
annualized basis) of the net asset value of such shares.
(2) The Armada GNMA Fund has in effect a 12b-1 Plan pursuant to which the Fund
may bear fees in an amount of up to .10% of average daily net assets. As a
result of the payment of sales charges and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD"). The NASD has adopted rules which generally limit
the aggregate sales charges and payments under the Trust's Service and
Distribution Plan ("Distribution Plan") and Services Plan to a certain
percentage of total new gross share sales, plus interest. The Trust would
stop accruing 12b-1 and related fees if, to the extent, and for as long
as, such limit would otherwise be exceeded. If the maximum distribution
fees permitted under the 12b-1 Plan were imposed, Total Fund Operating
Expenses would be 1.14% and .89% for the Retail and Institutional
shares, respectively.
- ---------------------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee); and (3) the
imposition of the maximum sales charge at the beginning of the period:
-3-
<PAGE> 118
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GNMA Retail Shares.............. $48 $71 $95 $165
GNMA Institutional Shares....... $ 9 $27 $47 $104
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Fund. Any fees that are charged by affiliates of the adviser
or other institutions directly to their customer accounts for services related
to an investment in retail shares of the Fund are in addition to and not
reflected in the fees and expenses described above.
-4-
<PAGE> 119
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
GNMA FUND
The following table has been audited by the Fund's prior independent
accountants, whose report is incorporated by reference in the Statement of
Additional Information. It should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Statement of Additional Information.
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, April 30,
1996 1995(2)
---------- ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........ $10.16 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................... 0.66 0.48
Net Realized and Unrealized Gains on
Securities.............................. 0.14 0.16
------ ------
Total from Investment Operations............ 0.80 0.64
LESS DISTRIBUTIONS
Distributions from Net Investment Income.. (0.66) (0.48)
Distributions from Realized Capital Gains. (0.18) -
------ ------
Total Distributions..................... (0.84) (0.48)
Net Asset Value End of Period............... $10.12 $10.16
TOTAL RETURN(4)............................. 7.97% 6.61%
RATIO/SUPPLEMENTAL DATA
Net Assets End of Period (000)............ $62,161 $42,212
Ratio of Expenses to Average Net
Assets (after fee waivers).................. 0.85%(1) 0.85%(1,3)
Ratio of Net Investment Income to
Average Net Assets (after fee
waivers).................................... 6.30%(1) 6.68%(1,3)
Portfolio Turnover Rate................... 149% 226%
</TABLE>
1. The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and custodian for the year ended April
30, 1996 and for the period ended April 30, 1995 would have been 1.29% and
5.86% and 1.40% and 6.13%, respectively.
2. Commenced operations on August 10, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
-5-
<PAGE> 120
3. Annualized.
4. Total Return does not reflect the sales charge. Not annualized.
-6-
<PAGE> 121
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
consists of a pool of assets with investment objectives and policies as
described below under "Risk Factors, Investment Objectives and Policies." The
Fund is classified as a diversified investment fund under the 1940 Act.
Shares of the Fund have been classified into two separate classes --
Retail shares and Institutional shares. Retail shares and Institutional shares
represent equal pro rata interests in the Fund except that, as described more
fully below under "Shareholder Services Plan," (the "Services Plan") the Trust
has implemented the Services Plan with respect to Retail shares of the Fund.
Under the Services Plan, only the beneficial owners of Retail shares bear the
expenses of shareholder administrative services which are provided by financial
institutions for their benefit (not to exceed .25% annually). See "Shareholder
Services Plan," "Dividends and Distributions" and "Description of the Trust and
Its Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed without the
vote of the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Except as noted below under "Investment Limitations," the
Fund's investment policies, however, may be changed without a vote of
shareholders. In addition, the Fund may sell portfolio securities shortly after
they are purchased, which may result in higher transaction costs and taxable
gains for the Fund. There can be no assurance that the Fund will achieve its
objective.
The investment objective of the Fund is to provide the highest level
of current income consistent with preservation of capital and a high degree of
liquidity.
The Fund invests primarily (at least 65% of its total assets under
normal conditions) in mortgage pass-through securities guaranteed by the
Government National Mortgage Association ("GNMA"). Any remaining assets may
consist of: (i) obligations of the U.S. Treasury; (ii) obligations issued or
guaranteed as to principal and interest by agencies and instrumentalities of the
U.S. Government; (iii) mortgage-backed securities issued by other government
agencies and privately issued mortgage-backed securities rated at least A by a
Nationally Recognized Security Rating Organization ("NRSRO");
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<PAGE> 122
(iv) repurchase agreements involving any of such obligations; (v) shares of
money market investment companies investing exclusively in such obligations; and
(vi) futures on U.S. Treasury obligations. The Fund may also engage in dollar
rolls, short sales against the box and interest rate swaps.
Under normal market conditions, the estimated average life of the
Fund's holdings of mortgage pass-through and mortgage-backed securities will
range between 4 and 10 years.
In order to meet liquidity needs, the Fund may hold cash reserves,
and may, for temporary defensive purposes, invest up to 100% of its assets in
Money Market Instruments (as defined below).
The Fund may purchase securities on a when-issued basis.
The Fund reserves the right to engage in securities lending, although
the Fund does not have the present intent of doing so during the current fiscal
year. The Fund may also borrow money in amounts up to 33-1/3% of its net assets.
OTHER INVESTMENT POLICIES
Debt Securities
Fund appreciation may result from an improvement in the credit
standing of an issuer whose securities are held or a general decline in the
level of interest rates or a combination of both. An increase in the level of
interest rates generally reduces the value of the fixed rate debt instruments
held by the Fund; conversely, a decline in the level of interest rates generally
increases the value of such investments. An increase in the level of interest
rates may temporarily reduce the value of the floating rate debt instruments
held by the Fund; conversely, a decline in the level of interest rates may
temporarily increase the value of those investments.
Mortgage-Backed Securities
The Fund may purchase securities that are secured or backed by
mortgages and are issued by entities such as the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), commercial banks, savings and loan
associations, mortgage banks and investment banks.
The yield characteristics of mortgage-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if a mortgage-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if a mortgage-backed security is purchased at a discount, faster
than expected prepayments will increase, while slower than
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<PAGE> 123
expected prepayments will decrease, yield to maturity. In calculating the
average weighted maturity of the Fund, the maturity of mortgage-backed
securities will be based on estimates of average life.
Prepayments on mortgage-backed securities generally increase with
falling interest rates and decrease with rising interest rates; furthermore,
prepayment rates are influenced by a variety of economic and social factors.
Like other fixed income securities, when interest rates rise, the value of a
mortgage-backed security generally will decline; however, when interest rates
decline, the value of a mortgage-backed security with prepayment features may
not increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard prepayments
and thus affect maturities. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
These characteristics may result in a higher level of price
volatility for these assets under certain market conditions. In addition, while
the trading market for short-term mortgages and Mortgage-Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Presently there are several types of mortgage-backed securities that
may be acquired by the Fund, including guaranteed mortgage pass-through
certificates, which provide the holder with a pro rata interest in the
underlying mortgages, and collateralized mortgage obligations ("CMOs"), which
provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. These multiple class securities may be issued or
guaranteed by U.S. Government agencies or instrumentalities, including GNMA,
FNMA and FHLMC, or issued by trusts formed by private originators of, or
investors in, mortgage loans. Classes in CMOs which the Fund may hold are known
as "regular" interests. CMOs also issue "residual" interests, which are a form
of beneficial interest in a CMO that permit the purchaser to receive the net
cash flow remaining after payment of liabilities and expenses associated with
the collateral underlying the CMO. Residual interests generally are junior to
and more volatile than regular interests. The Fund will not purchase "residual"
CMO interests, which normally exhibit a high degree of price volatility. FHLMC
has in the past guaranteed only the ultimate collection of principal of the
underlying mortgage loan; however, FHLMC now issues mortgage-backed securities
(FHLMC Gold PCs) which also guarantee timely payment of monthly principal
reductions. Government and private guarantees do not extend to the securities'
value, which is likely to vary inversely with fluctuations in interest rates.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in
-9-
<PAGE> 124
which the Fund may invest is a GNMA Certificate which is backed as to the timely
payment of principal and interest by the full faith and credit of the U.S.
Government. Another type is a FNMA Certificate, the principal and interest of
which are guaranteed only by FNMA itself, not by the full faith and credit of
the U.S. Government. Another type is a FHLMC Participation Certificate which is
guaranteed by FHLMC as to timely payment of principal and interest. However,
like a FNMA security it is not guaranteed by the full faith and credit of the
U.S. Government.
Private Mortgage-Backed Securities: These are mortgage-backed
securities issued by a non-governmental entity, such as a trust. These
securities include CMOs and REMICs that are rated in one of the top three rating
categories, or if unrated, will be in the adviser's opinion equivalent in credit
quality to such rating. While they are generally structured with one or more
types of credit enhancement, private pass-through securities typically lack a
guarantee by an entity having the credit status of a governmental agency or
instrumentality. Mortgage-backed securities issued by private issuers, whether
or not such obligations are subject to guarantees by the private issuer, may
entail greater risk than obligations directly or indirectly guaranteed by the
U.S. Government.
Stripped Mortgage-Backed Securities ("SMBs"): SMBs are usually
structured with two classes that receive specified proportions of the monthly
interest and principal payments from a pool of mortgage securities. One class
may receive all of the interest payments and is thus termed an interest-only
class ("IO"), while the other class may receive all of the principal payments
and is thus termed the principal-only class ("PO"). The value of IOs tends to
increase as rates rise and decrease as rates fall; the opposite is true of POs.
SMBs are extremely sensitive to changes in interest rates because of the impact
thereon of prepayment of principal on the underlying mortgage securities. The
market for SMBs is not as fully developed as other markets; SMBs therefore may
be illiquid.
REITs
REITs are trusts that invest primarily in commercial real estate or real
estate-related loans. The value of interests in REITs may be affected by the
value of the property owned or the quality of the mortgages held by the trust.
Interest Rate Swaps
In order to protect its value from interest rate fluctuations, the
Fund may enter into interest rate swaps. The Fund expects to enter into these
hedging transactions primarily to preserve a return or spread of a particular
investment or portion of their holdings and to protect against an increase in
the price of securities the Fund anticipates purchasing at a later date.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (i.e., an exchange of floating
rate payments for fixed rate payments). The net amount of the
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<PAGE> 125
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an amount of liquid
assets, such as cash, U.S. Government securities or other liquid high grade debt
securities, having an aggregate net asset value at least equal to such accrued
excess will be maintained in a segregated account by the Fund's custodian. The
Fund will not enter into any interest rate swap unless the unsecured commercial
paper, senior debt, or claims paying ability of the other party is deemed to be
creditworthy and any such obligation the Fund may have under such an arrangement
will be covered by setting aside liquid high grade securities in a segregated
account. For further information, see "Risk Factors, Investment Objectives and
Policies" in the Statement of Additional Information.
Futures Contracts
The Fund may invest in futures contracts on U.S. Treasury Obligations
in order to offset an expected decrease in the value of its fund that might
otherwise result from a market decline. The Fund may do so either to hedge the
value of its portfolio securities as a whole, or to protect against declines
occurring prior to sales of securities in the value of the securities to be
sold. In addition, the Fund may utilize futures contracts in anticipation of
changes in the composition of its holdings for hedging purposes or to maintain
liquidity.
Futures contracts obligate the Fund, at maturity, to take or make
delivery of certain securities or the cash value of a contract or securities
index. When interest rates are rising, futures contracts can offset a decline in
value of the securities held by the Fund. When rates are falling or prices of
securities are rising, these contracts can secure higher yields or lower prices
for securities the Fund intends to purchase. In addition, the Fund may utilize
futures contracts in anticipation of changes in the composition of its fund
holdings.
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission ("CFTC") exempting the Fund from registration as a
"commodity pool operator." The Fund's commodities transactions must constitute
bona fide hedging or other permissible transactions pursuant to such
regulations. In addition, the Fund may not engage in such transactions if the
sum of the amount of initial margin deposits, other than for bona fide hedging
transactions, would exceed 5% of the liquidation value of its assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into. In connection with the Fund's position in a futures
contract, the Fund will create a segregated account of liquid assets, such as
cash, U.S. Government securities or other liquid high grade debt obligations, or
will otherwise cover its position in accordance with applicable requirements of
the SEC.
Risk Factors Associated with Futures
To the extent the Fund is engaging in a futures transaction as a
hedging device, due to the risk of an imperfect correlation between securities
-11-
<PAGE> 126
in its funds that are the subject of a hedging transaction and the futures
contract used as a hedging device, it is possible that the hedge will not be
fully effective in that, for example, losses on the portfolio securities may be
in excess of gains on the futures contract or losses on the futures contract may
be in excess of gains on the portfolio securities that were the subject of the
hedge. In futures contracts based on indices, the risk of imperfect correlation
increases as the composition of the Fund varies from the composition of the
index. In an effort to compensate for the imperfect correlation of movements in
the price of the securities being hedged and movements in the price of futures
contracts, the Fund may buy or sell futures contracts in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than that
of the securities. Such "over hedging" or "under hedging" may adversely affect
the Fund's net investment results if market movements are not as anticipated
when the hedge is established.
Successful use of futures by the Fund is also subject to the
adviser's ability to predict correctly movements in the direction of securities
prices, interest rates and other economic factors. For example, if the Fund has
hedged against the possibility of a decline in the market adversely affecting
the value of securities held in its funds and prices increase instead, the Fund
will lose part or all of the benefit of the increased value of securities which
it has hedged because they will have offsetting losses in their futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices which
reflect the rising market. The Fund may have to sell securities at a time when
it may be disadvantageous to do so.
Although the Fund intends to enter into futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time. See
"Illiquid Securities" below. Many futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular contract, no
trades may be made that day at a price beyond that limit or trading may be
suspended for specified periods during the trading day. Futures contracts prices
could move to the limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Fund to substantial losses. If it is not possible, or
the Fund determines not, to close a futures position in anticipation of adverse
price movements, it will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
Fund being hedged, if any, may offset partially or completely losses on the
futures contract.
The primary risks associated with the use of futures contracts are:
(i) the imperfect correlation between the change in market value of the
securities held by the Fund and the price of the futures contract; (ii) possible
lack of a liquid secondary market for a futures contract and the
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<PAGE> 127
resulting inability to close a futures contract when desired; (iii) losses due
to unanticipated market movements which are potentially unlimited; and (iv) the
adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. For a further discussion see "Risk
Factors, Investment Objectives and Policies -- Futures Contracts and Options"
and Appendix B in the Statement of Additional Information.
U.S. Treasury Obligations
The Fund may invest in U.S. Treasury obligations consisting of bills,
notes and bonds issued by the U.S. Treasury, and separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book-entry system known as Separately Traded Registered Interest and
Principal Securities ("STRIPS").
U.S. Government Obligations
The Fund may purchase obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some of these obligations are
supported by the full faith and credit of the U.S. Treasury, such as obligations
issued by the GNMA. Others, such as those of the Export-Import Bank of the
United States, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the FNMA, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Fund will invest in the obligations of such
agencies or instrumentalities only when the adviser believes that the credit
risk with respect thereto is minimal.
Short Sales
The Fund may engage in short sales of its securities. Selling
securities short involves selling securities the seller does not own (but has
borrowed) in anticipation of a decline in the market price of such securities.
To deliver the securities to the buyer, the seller must arrange through a broker
to borrow the securities and, in so doing, the seller becomes obligated to
replace the securities borrowed at their market price at the time of
replacement. In a short sale, the proceeds the seller receives from the sale are
retained by a broker until the seller replaces the borrowed securities. The
seller may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Fund may only sell securities short "against the box." A short sale is
"against the box" if, at all times during which the short position is open, the
Fund owns at least an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issuer as the securities that are sold short.
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When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when delivery takes place. The Fund
expects that commitments to purchase when-issued securities will not exceed 25%
of the value of its total assets under normal market conditions. The Fund does
not intend to purchase when-issued securities for speculative purposes but only
for the purpose of acquiring portfolio securities. In when-issued and delayed
delivery transactions, a Fund relies on the seller to complete the transaction;
its failure to do so may cause the Fund to miss a price or yield considered to
be attractive. One form of when-issued or delayed delivery security that the
Fund may purchase is a "to be announced" ("TBA") mortgage-backed security. A TBA
transaction arises when a mortgage-backed security, such as a GNMA pass-through
security, is purchased or sold with the specific pools that will constitute that
GNMA pass-through security to be announced on a future settlement date. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Variable and Floating Rate Obligations
The Fund may purchase rated and unrated variable and floating rate
instruments. These instruments may include adjustable rate mortgages that permit
the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market with
respect to particular variable and floating rate instruments could, however,
make it difficult for the Fund to dispose of instruments if the issuer defaulted
on its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss with respect to such instruments. For a further description, see
"Risk Factors, Objectives and Policies" in the Statement of Additional
Information.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). The Fund may enter into repurchase agreements only
with financial institutions such as banks and broker-dealers which are deemed to
be creditworthy by the sub-adviser, pursuant to guidelines approved by the
Trust's Board of Trustees. The Fund is not permitted to enter into repurchase
agreements with the adviser, sub-adviser, Distributor, or any of their
affiliates. Although the securities subject to repurchase agreements may bear
maturities exceeding 397 days, the Fund presently intends to enter only into
repurchase agreements which terminate within seven days after notice by the
Fund. If a Fund were to enter into repurchase agreements which provide for a
notice period greater than seven days in the future, the Fund would do so only
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if such investment, together with other illiquid securities, did not exceed 15%
of the Fund's net assets.
The seller under a repurchase agreement will be required to maintain
the value of the securities which the Fund holds subject to the agreement at not
less than the repurchase price, marked to market daily, by providing additional
securities or other collateral to the Fund if necessary. If the seller defaulted
on its repurchase obligation, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying securities (including accrued
interest) were less than the repurchase price (including accrued interest) under
the agreement. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Further, it is uncertain whether the Trust would be
entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities.
Dollar Rolls
The Fund may invest in Dollar Rolls. Dollar Rolls are transactions
in which securities are sold by the Fund for delivery in the current month and
the Fund simultaneously contracts to repurchase substantially similar securities
on a specified future date. Any difference between the sale price and the
purchase price is netted against the interest income foregone on the securities
sold to arrive at an implied borrowing rate. Alternatively, the sale and
purchase transactions can be executed at the same price, with the Fund being
paid a fee as consideration for entering into the commitment to purchase. Dollar
Rolls may be renewed prior to cash settlement and initially may involve only a
firm commitment by the Fund to buy a security. If the broker-dealer to whom the
Fund sells the security becomes insolvent, the Fund's right to repurchase the
security may be restricted. Other risks involved in entering into Dollar Rolls
include the risk that the value of the security may change adversely over the
term of the Dollar Roll and that the security the Fund is required to repurchase
may be worth less than the security that the Fund originally held.
To avoid any leveraging concerns, the Fund will place U.S. Government
or other liquid, high grade debt securities in a segregated account in an amount
sufficient to cover its repurchase obligation.
Lending Portfolio Securities
In order to generate additional income, the Fund may, from time to
time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. The Fund must receive 100% collateral in the form of
cash or U.S. Government securities. This collateral must be valued daily by the
Fund's adviser, and the borrower will be required to provide additional
collateral should the market value of the loaned securities increase. During the
time portfolio securities are on loan, the borrower pays the Fund involved any
dividends or interest paid on such securities. Loans are subject to termination
by the Fund or the borrower at any time. While the Fund does not
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have the right to vote securities on loan, it intends to terminate the loan and
regain the right to vote if this is considered important with respect to the
investment. The Fund will only enter into loan arrangements with broker-
dealers, banks or other institutions which its adviser has determined are
creditworthy under guidelines established by the Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Illiquid Securities
The Fund will not knowingly invest more than 15% of its net assets in
securities that are illiquid. Illiquid securities would generally include
repurchase agreements and interest rate swaps with notice/termination dates in
excess of seven days and certain securities which are subject to trading
restrictions because they are not registered under the Securities Act of 1933,
as amended (the "1933 Act").
The Fund may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the 1933 Act. Any such security will not be considered
illiquid so long as it is determined by the Board of Trustees or the Fund's
adviser, acting under guidelines approved and monitored by the Board, that an
adequate trading market exists for that security. This investment practice could
have the effect of increasing the level of illiquidity in the Fund during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities. The ability to sell to qualified institutional
buyers under Rule 144A is a recent development, and it is not possible to
predict how this market will develop. The Board will carefully monitor any
investment by the Fund in these securities.
Risk Factors Associated with Derivative Instruments
The Fund may purchase certain "derivative" instruments. "Derivative"
instruments are instruments that derive value from the
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performance of different securities, interest or currency exchange rates, or
indices. The types of derivative instruments that the Fund may purchase include
futures contracts and structured debt obligations (including collateralized
mortgage obligations, various floating rate instruments and other types of
securities).
Like all investments, derivative instruments involve several basic
types of risks which must be managed in order to meet investment objectives. The
specific risks presented by derivatives include, to varying degrees, market risk
in the form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
is based; liquidity risk that a Fund will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying securities, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The adviser has determined that the risk features that most
distinguish derivatives from other investment instruments (and which heavily
influence the market, volatility and leveraging, liquidity, and pricing risks
referred to above) can be described generally as"structural risk." Structural
risk refers to the contractual features of an investment that can cause its
total return to vary with changes in interest rates or other variables.
Structural risk is not unique to derivatives, but because derivatives often are
created through the intricate division of the cash flows of the underlying
security, they can (but do not necessarily) present a high degree of structural
risk. Structural risk can arise from variations in coupon levels, principal,
and/or average life.
The adviser has adopted the following internal policy concerning
management of the structural risk inherent in derivative instruments on behalf
of the Fund:
The adviser does not presently intend to invest in the following
types of derivatives on behalf of the Fund:
- exchange rate-related securities;
- forward currency exchange contracts; and
- structured instruments, such as range notes, dual index notes,
leveraged or deleveraged bonds, inverse floaters, index amortizing
notes and other structured instruments having similar cash flow
characteristics.
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Portfolio Turnover
The Fund may engage in short term trading and may sell securities
which have been held for periods ranging from several months to less than a day.
The object of such short-term trading is to increase the potential for capital
appreciation and/or income by making fund changes in anticipation of expected
movements in interest rates or fixed income security prices or in order to take
advantage of what the adviser believes is a temporary disparity in the normal
yield relationship between two securities. Any such trading would increase the
Fund's turnover rate and its transaction costs. Higher portfolio turnover may
result in increased taxable gains to shareholders (see "Taxes" below) and
increased expenses paid by the Fund due to transaction costs.
The Fund's annual portfolio turnover is not expected to exceed 250%
under normal market conditions. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Fund without the affirmative vote of the
Fund's outstanding shares (as defined under "Miscellaneous"). (Other investment
limitations that also cannot be changed without a vote of shareholders are
contained in the Statement of Additional Information under "Risk Factors,
Investment Objectives and Policies.")
The Fund may not:
1. Make loans, except that the Fund may purchase or hold debt
instruments, lend portfolio securities and enter into repurchase agreements in
accordance with its investment objective and policies.
2. Borrow money or issue senior securities, except that the Fund may
borrow from anyone for temporary purposes in amounts not in excess of 5% of the
value of its total assets at the time of such borrowing; or the Fund may borrow
from a bank for non-temporary purposes, provided that the borrowing does not
exceed 33-1/3% of the Fund's net assets. To the extent a bank borrowing exceeds
5% of the Fund's total assets, asset coverage of at least 300% is required. The
Fund will not purchase securities while outstanding borrowings equal or exceed
5% of its total assets.
3. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements secured by such
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<PAGE> 133
obligations, (b) wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of their parents, and (c) utilities will be classified
according to their services, for example, gas, gas transmission, electric and
gas, electric, and telephone will each be considered a separate industry, and
(d) there is no limit with respect to securities issued by state and local
governments.
4. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, except that
up to 25% of the value of the Fund's total assets may be invested without regard
to such limitations. This investment limitation No. 4 does not apply to
repurchase agreements involving securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities.
For purposes of investment limitation No. 2 above, "asset coverage"
means that the Fund would be required to set aside assets valued in an amount
that is at least 300% of the amount borrowed.
For purposes of investment limitation No. 4, a security is considered
to be issued by the government entity (or entities) whose assets and revenues
back the security.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of the Fund's securities will not constitute a violation of such limitation. If
the Fund exceeds the limitation on the holding of illiquid securities, it will
sell illiquid securities as necessary to maintain the required liquidity when
the adviser believes that it is in the best interests of the Fund to do so.
In order to permit the sale of the Fund's shares in certain states,
the Trust may make commitments more restrictive than the investment policies and
limitations described above. Should the Trust determine that any such commitment
is no longer in the Fund's best interests, it will revoke the commitment by
terminating sales of the Fund's shares to investors residing in the state
involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's yield and total return data for its
Institutional shares and Retail shares. The "yield" quoted in advertisements
refers to the income generated by an investment in a class of shares of the Fund
over a 30-day period identified in the advertisement. This income is then
"annualized." The amount of income so generated by the investment during the
30-day period is assumed to be earned and reinvested at a constant rate
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and compounded semi-annually; the annualized income is then shown as a
percentage of the investment.
The Fund calculates its total return for each class of shares on an
"average annual total return" basis for various periods from the date of
commencement of investment operations and for other periods as permitted under
the rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
class. When considering average total return figures for periods longer than one
year, it is important to note that the annual total return of a class for any
one year in the period might have been greater or less than the average for the
entire period. The Fund may also advertise, from time to time, the total returns
of one or more classes of shares on a year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
Shareholders should note that the yield and total return of Retail
shares will be reduced by the amount of shareholder servicing fees that are
payable under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares of the
Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the Lehman GNMA
Index, and to data or rankings prepared by independent services such as Lipper
Analytical Services, Inc. or other financial or industry publications that
monitor the performance of mutual funds. Comparisons may also be made to indices
or data published in Money Magazine, Forbes, Barron's, The Wall Street Journal,
The New York Times, Business Week, U.S.A. Today, CDA/Weisenberger, The American
Banker, Morningstar, Incorporated and other publications of a local, regional or
financial industry nature.
The performance of each class of shares of the Fund is based on
historical earnings and will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value of a class
should be considered in ascertaining the total return to shareholders for a
given period. Yield and total return data should also be considered in light of
the risks associated with the Fund's portfolio composition, quality, maturity,
operating expenses and market conditions. Any fees charged by financial
institutions (as described in "How to Purchase and Redeem Shares") are not
included in the computation of performance data but will reduce a shareholder's
net return on an investment in the Fund.
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<PAGE> 135
Further information about the performance of the Fund is available in
the annual and semi-annual reports to shareholders. Shareholders may obtain
these materials from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the net asset
value per share of the Fund is calculated as of the close of trading on the New
York Stock Exchange (the "Exchange") (generally, 4:00 p.m. Eastern Time). Net
asset value per share is determined on each business day, except those holidays
which the Exchange, or banks and trust companies which are affiliated with
National City Corporation (the "Banks"), observe (currently New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day) ("Business
Day"). Net asset value per share of a particular class in the Fund is calculated
by dividing the value of all securities and other assets belonging to the Fund
allocable to such class, less the liabilities charged to that class, by the
number of the outstanding shares of that class.
The Fund's investments in securities for which market quotations are
readily available are valued at their market values determined on the basis of
the mean between their current available bid and asked prices in the principal
market (closing sales prices if the principal market is an exchange) in which
such securities are normally traded. Securities and other assets for which
quotations are not readily available are valued at their fair value under
procedures approved by the Board of Trustees. Absent unusual circumstances,
short-term investments having maturities of 60 days or less are valued on the
basis of amortized cost unless the Trust's Board of Trustees determines that
this does not represent fair value. The net asset value per share of each class
of shares of the Fund will fluctuate as the value of its investment fund
changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Trust's
sponsor and distributor. The Distributor is a registered broker/dealer with
principal offices located at 4400 Computer Drive, Westborough, Massachusetts
01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards, to National City Investments Corporation.
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<PAGE> 136
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily through
financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees depending on
the type of account the Investor has established with the institution. (For
information on such fees, the Investor should review his agreement with the
institution or contact it directly.) In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby a
financial institution would perform various administrative support services for
its customers who are the beneficial owners of Retail shares and would receive
fees from the Fund for such services of up to .25% (on an annualized basis) of
the average daily net asset value of such shares. See "Shareholder Services
Plan." To purchase shares, Investors should call 1-800-622-FUND(3863) or visit
their local National City Investments Corporation office: Cleveland
(1-800-624-6450), Columbus (1-800-345-0278), Dayton (1-800-755-8723), Akron
(1-800-229-0295), Louisville (1-800-727-5656), Indianapolis (1-800-826-2868),
Toledo (1-800-331-8275) or Youngstown (1-800-742-4098).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact National City Investments Corporation, the
Distributor or their financial institutions for information as to applications
and annual fees. Investors should also consult their tax advisers to determine
whether the benefits of an IRA are available or appropriate.
The minimum investment for the initial purchase of Retail shares in
each Fund is $2,500, except for purchases for an IRA or other retirement plan in
which event the minimum initial investment is $500. All subsequent investments
for Retail shares and IRAs are subject to a minimum investment of $250.
Investments made in Retail shares through a monthly savings program described
below are not subject to the minimum initial and subsequent investment
requirements or any minimum account balance requirements described in "Other
Redemption Information" below. Purchases for an IRA through the monthly savings
program will be considered as contributions for the year in which the purchases
are made.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of a Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional Retail shares at the
Public Offering Price next determined after an order is received by the Trust.
An Investor may apply for participation in a monthly program through a financial
institution, such as banks, brokers, or dealers selling Retail
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shares of the Funds, by completing an application. The program may be modified
or terminated by an Investor on 30 days written notice or by the Trust at any
time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent, First
Data Investor Services Group, Inc. (formerly The Shareholder Services Group,
Inc., d/b/a "440 Financial") (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Fund is the sum of
the net asset value of the shares being purchased plus any applicable sales
charge per account which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000... 3.75 3.90 3.75
$100,000 but less
than $250,000...... 2.75 2.83 2.75
$250,000 but less
than $500,000....... 2.00 2.04 2.00
$500,000 but less
than $1,000,000.... 1.25 1.27 1.25
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons who offer or sell
for an issuer in connection with the distribution of a security or have a direct
or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of Retail shares made
by: (a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b)
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above; (d) qualified retirement plans purchasing shares through National City
Investments Corporation or NatCity Investments, Inc.; (e) individuals investing
in the Fund by way of a direct transfer or a rollover from a qualified plan
distribution and subsequent transactions into the same account where affiliates
of National City Corporation are serving as a trustee or agent; (f) Investors
purchasing Fund shares through a payroll deduction plan; and (g) individuals
investing in the Fund by way of an asset allocation program sponsored by
financial institutions, although certain account level fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail
shares of the Fund made under the Right of Accumulation or Letter of Intent, as
described below. To qualify for a reduced sales charge, Investors must so notify
their financial institutions at the time of purchase. Reduced sales charges may
be modified or terminated at any time and are subject to confirmation of an
Investor's holdings.
Right of Accumulation. Investors may use their aggregate investments
in Retail shares in determining the applicable sales charge. An Investor's
aggregate investment in Retail shares is the total value (based on the higher of
current net asset value or any Public Offering Price originally paid) of: (a)
current purchases; (b) Retail shares that are already beneficially owned by the
Investor for which a sales charge has been paid; (c) Retail shares that are
already beneficially owned by the Investor which were purchased prior to July
22, 1990; and (d) Retail shares purchased by dividends or capital gains that are
reinvested. If, for example, an Investor beneficially owns Retail shares of the
Fund with an aggregate current value of $90,000 and subsequently purchases
Retail shares of the Fund having a current value of $10,000, the sales charge
applicable to the subsequent purchase would be reduced to 2.75% of the Public
Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales charge
immediately upon signing a nonbinding Letter of Intent stating the Investor's
intention to invest during the next 13 months a specified amount which, if made
at one time, would qualify for a reduced sales charge. A Letter of Intent form
may be obtained from the Investor's financial institution. If an Investor so
elects, the 13-month period may begin up to 30 days prior to the Investor's
signing the Letter of Intent. The initial investment under the Letter of Intent
must be equal to at least 4.0% of the amount indicated in the Letter of Intent.
During the term of a Letter of Intent, the Transfer Agent will hold Retail
shares representing 4.0% of the amount indicated in the Letter of Intent in
escrow for payment of a higher sales charge if the entire amount is not
purchased. Upon completing the purchase of the entire amount indicated in the
Letter of Intent, the escrowed shares will be released. If the entire amount is
not purchased within the 13-month period, the Investor will be required to pay
an amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge the Investor would have had to pay on the
aggregate purchases if the total of such purchases had been made at a single
time.
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PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM customers
("Customers"). Institutional shares are sold without a sales charge imposed by
the Trust or the Distributor. However, depending on the terms governing the
particular account, the Banks may impose account charges such as account
maintenance fees, compensating balance requirements or other charges based upon
account transactions, assets or income which will have the effect of reducing
the shareholder's net return on his investment in the Fund. There is no minimum
investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should obtain
information relating to the requirements of such accounts from their Banks.
If participating in an Asset Diversification Account, Customers may
purchase Institutional shares under a monthly savings program. Customers may add
to their investment in the Institutional shares of a Fund, in a consistent
manner each month, with a minimum amount of $50. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through a
Customer's financial institution and invested in additional shares at the net
asset value per share next determined after an order is received by the Trust. A
Customer may apply for participation in a monthly program through the Customer's
Bank by completing an application. The program may be modified or terminated by
an Investor on 30 days written notice or by the Trust at any time.
It is the responsibility of the Banks to transmit their Customers'
purchase orders to the Transfer Agent and to deliver required funds on a timely
basis, in accordance with the procedures stated above. Institutional shares will
normally be held of record by the Banks. Confirmations of share purchases and
redemptions will be sent to the Banks. Beneficial ownership of Institutional
shares will be recorded by the Banks and reflected in the account statements
provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are priced
according to the net asset value per share determined on that day plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third Business Day following the receipt of such order, at which
time the order will be executed. If funds are not received by such
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date, the order will not be accepted and notice thereof will be given to the
Bank or financial institution placing the order. Purchase orders for which
payment has not been received or accepted will be returned after prompt inquiry
to the sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the
same financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds are
paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks. It is the responsibility of the Banks to transmit redemption orders to
the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a minimum
balance in his account at the Bank and the balance in such account falls below
that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by sending a
written request to Armada Funds, P.O. Box 5109, Westborough, Massachusetts
01581-5109. Redemption requests must be signed by each shareholder, including
each joint owner on redemption requests for joint accounts, in the exact manner
as the Fund account is registered, and must state the number of shares or the
amount to be redeemed and identify the shareholder account number and tax
identification number. For a redemption amount of $5,000 or more, each signature
on the written request must be guaranteed by a commercial bank or trust company
which is a member of the Federal Reserve System or FDIC, a member firm of a
national securities exchange or a savings and loan association. A signature
guaranteed by a savings bank or notarized by a notary public is not acceptable.
For a redemption amount less than $5,000, no
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signature guarantee is needed. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record also may redeem shares in any amount by
calling 1-800-628-0523 (provided he has made the appropriate election in his
account application).
During periods of unusual economic or market changes, telephone
redemptions may be difficult to implement. In such event, shareholders should
mail their redemption requests to their financial institutions or Armada Funds
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming Retail shares by telephone may be modified or terminated at any time
by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for
a shareholder who owns shares of any fund of the Trust held on the Transfer
Agent's system. The Plan allows the shareholder to have a fixed minimum sum of
$250 distributed at regular intervals. The shareholder's account must have a
minimum value of $5,000 to be eligible for the Plan. Additional information
regarding this service may be obtained from an Investor's financial institution
or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts, the
Trust reserves the right to redeem, at net asset value, any account maintained
by a shareholder that has a value of less than $1,000 due to redemptions where
the shareholder does not increase the amount in the account to at least $1,000
upon 60 days' notice.
If any portion of the shares to be redeemed represents an investment
made by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably
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satisfied that the check has been collected, which could take up to 10 days from
the date of purchase. A shareholder who anticipates the need for more immediate
access to his investment should purchase shares by federal funds, bank wire,
certified or cashier's check. Financial institutions normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and federal funds.
Payment to shareholders for shares redeemed will be made within seven
days after receipt of the request for redemption or such shorter time period as
may be required by the Securities Exchange Act of 1934.
EXCHANGE PRIVILEGE APPLICABLE TO SHARES
The Trust offers an exchange program whereby Investors who have paid
a sales charge to purchase Retail shares of the Fund or another investment
portfolio of the Trust (each a "load Fund") may exchange those Retail shares for
Retail shares of another load Fund offered by the Trust, or another investment
fund offered by the Trust without the imposition of a sales charge (each a "no
load Fund") at the net asset value per share on the date of exchange, provided
that such other Retail shares may be legally sold in the state of the
shareholder's residence. As a result, no additional sales charge will be
incurred with respect to such an exchange. Shareholders may also exchange Retail
shares of a no load Fund for Retail shares of another no load Fund at the net
asset value per share without payment of a sales charge. In addition,
shareholders of a no load Fund may exchange Retail shares for Retail shares of a
load Fund subject to payment of the applicable sales charge. However,
shareholders exchanging Retail shares of a no load Fund which were received in a
previous exchange transaction involving Retail shares of a load Fund will not be
required to pay an additional sales charge upon notification of the reinvestment
of the equivalent amount into the Retail shares of a load Fund. Shareholders
contemplating an exchange should carefully review the Prospectus of the fund
into which the exchange is being considered. An Armada Funds Prospectus may be
obtained from National City Investments Corporation or an Investor's financial
institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal to the
minimum initial investment required by the particular investment fund into which
the exchange is being made. Investors should make their exchange requests in
writing or by telephone to the financial institutions through which they
purchased their original Retail shares. It is the responsibility of financial
institutions to transmit exchange requests to the Transfer Agent. Investors who
purchased shares directly from the Trust should transmit exchange requests
directly to the Transfer Agent. Exchange requests received by the Transfer Agent
prior to 4:00 p.m. (Eastern Time) will be processed as of the close of business
on the day of receipt; requests received by the Transfer Agent after 4:00 p.m.
(Eastern Time) will be processed on the next Business Day. The Trust reserves
the right to reject any exchange request. During periods of unusual economic or
market changes, telephone exchanges may be difficult to implement. In such
event, an Investor should mail the exchange request to his financial
institution, and an Investor who directly purchased shares from the Trust should
mail the exchange request to the
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Transfer Agent. The exchange privilege may be modified or terminated at any time
upon 60 days' notice to shareholders.
Shareholders who hold Institutional shares of the Fund may also
exchange their shares for Institutional shares of another Fund offered by the
Trust at the net asset value per share on the date of exchange, provided that
such other Institutional shares may be legally sold in the state of the
shareholder's residence.
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act, each investment fund of
the Trust reimburses the Distributor monthly for the direct and indirect
expenses incurred by the Distributor in providing such fund advertising,
marketing, prospectus printing and other distribution services up to a maximum
of .10% per annum of the average net assets of the fund, inclusive of an annual
distribution fee of $250,000 payable monthly and accrued daily among the
investment funds with respect to which the Distributor is distributing shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to Retail
shares in the Fund. Pursuant to the Services Plan, the Trust enters into
shareholder servicing agreements with certain financial institutions pursuant to
which the institutions render shareholder administrative services to their
customers who are the beneficial owners of Retail shares of the Fund in
consideration for the payment of up to .25% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation with
respect to those shares than with respect to Institutional shares in the same
Fund. Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Trust on
behalf of customers, providing information periodically to customers showing
their position in Retail shares, and providing sub-transfer agent services or
the information necessary for subaccounting, with respect to Retail shares
beneficially owned by customers. Since financial institutions may charge their
customers fees depending on the type of customer account the Investor has
established, beneficial owners of Retail shares should read this Prospectus in
light of the terms and fees governing their accounts with financial
institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared
daily and paid monthly. Any net realized capital gains will be distributed at
least annually. Dividends and distributions will reduce the Fund's net asset
value per share by the per share amount thereof.
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Shareholders may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class or series at the
net asset value of such shares on the payment date. Shareholders must make such
election, or any revocation thereof, in writing to their Bank or financial
institution. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of each Fund's net investment
income available for distribution to the holders of Retail shares is reduced by
the amount of shareholder servicing fees payable to financial institutions under
the Services Plan.
TAXES
The Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
generally relieves the Fund of liability for federal income taxes to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income (if any) net of
certain deductions for such year. In general, the Fund's investment company
taxable income will be its taxable income (including interest and short-term
capital gains) subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The Fund intends to distribute substantially all of
its investment company taxable income and net tax-exempt income each taxable
year. Such distributions by the Fund will be taxable as ordinary income to its
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or to a qualified retirement plan are
deferred under the Code.) Because all of the Fund's net investment income is
expected to be derived from earned interest, it is anticipated that no part of
any distribution will be eligible for the dividends received deduction for
corporations.
Substantially all of the Fund's net realized long-term capital gains,
if any, will be distributed at least annually to Fund shareholders. The Fund
generally will have no tax liability with respect to such gains, and the
distributions will be taxable to Fund shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long the
shareholders have held Fund shares and whether such gains are received in cash
or reinvested in additional shares.
Dividends declared in December of any year payable to shareholders of
record on a specified date in such month will be deemed to have been received by
shareholders and paid by the Fund on December 31 of such year in
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the event such dividends are actually paid during January of the following year.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution paid shortly
after a purchase of shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his tax basis for such shares for the purpose of determining gain
or loss on a redemption, transfer or exchange of such shares. However, if the
shareholder effects an exchange of such shares for shares of another Fund within
90 days of the purchase and is able to reduce the sales charges applicable to
the new shares (by virtue of the Trust's exchange privilege), the amount equal
to such reduction may not be included in the tax basis of the shareholder's
exchanged shares, but may be included (subject to this limitation) in the tax
basis of the new shares.
Shareholders of the Fund will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which
were in effect as of the date of this Prospectus; such laws and regulations may
be changed by legislative or administrative actions. The foregoing summarizes
some of the important tax considerations generally affecting the Fund and its
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
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<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
- ----------------- --------------- ------------------
<S> <C> <C>
Richard B. Tullis Trustee and Chairman Emeritus,
5150 Three Village Drive Chairman of the Board Harris Corporation
Lyndhurst, OH 44124 (electronic
Age 82 communication and
information processing
equipment), since
October 1985; Director,
NACCO Materials
Handling Group, Inc.
(manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex,
Inc. (manufacturer of
household appliances),
since 1990; Director,
Waste-Quip, Inc. (waste
handling equipment),
since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO
564 Hackberry Drive Manufacturing Company
Westerville, OH 43081 and subsidiaries
Age 51 (manufacture, sale and
financing of water coolers
and dehumidifiers), since
January 1996 and President,
January 1987 to January
1996; Vice President and
Executive Committee Member
of Ebtech Corp. (market and
sell bottled and point-
of-use water coolers),
since March 1991.
</TABLE>
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<PAGE> 147
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
- ----------------- --------------- ------------------
<S> <C> <C>
Leigh Carter* Trustee, President Retired President and
13901 Shaker Blvd., #6B and Treasurer Chief Operating
Cleveland, OH 44120 Officer, BFGoodrich
Age 70 Company, August 1986 to
September 1990; Director,
Adams Express Company
(closed-end investment
company), since April 1982;
Director, Centerior Energy
Corp., since April 1986;
Director, Lamson & Sessions
Co. (producer of electrical
supplies for construction,
consumer power and
communications industry)
since April 1991; Director,
Petroleum & Resources
Corp., since April 1987;
Director, Morrison Products
(manufacturer of blower
fans and air moving
equipment), since April
1983.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home
Age 51 Furnishings Center,
Inc., since January 1982;
partner, Kittle's
Bloomington Property
Company, since January
1981; partner, KK&D
(Affiliated Real Estate
Companies of Kittle's Home
Furnishings Center), since
January 1989.
Richard W. Furst, Dean Trustee Professor of Finance
Carol Martin Gatton and Dean, Carol Martin
College of Business and Gatton, College of
Economics Business and Economics,
University of Kentucky University of Kentucky,
Lexington, KY 40506-0034 since 1981; Director,
Age 57 Studio Plus Hotels,
Inc., since 1994.
</TABLE>
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<PAGE> 148
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
- ----------------- --------------- ------------------
<S> <C> <C>
Robert D. Neary Trustee Retired Co-Chairman of
2000 National City Center Ernst & Young, April
1900 E. 9th Street 1984-September 1993;
Cleveland, OH 44114 Director, Cold Metal
Age 62 Products, Inc., since
March 1994; Director,
Zurn Industries, Inc.
(environmental systems
and engineering and
construction services),
since June 1995.
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer,
1400 Cecil Avenue Whayne Supply Co.
P.O. Box 35900 (engine and heavy
Louisville, KY 40232-5900 equipment
Age 57 distribution), since
1986; President and Chief
Executive Officer, American
Contractors Rentals & Sales
(rental subsidiary of
Whayne Supply Co.), since
1988.
</TABLE>
- --------------------
* Mr. Carter is considered by the Trust to be an "interested
person" of the Trust as defined in the 1940 Act.
The trustees of the Trust receive fees and are reimbursed for their
expenses in connection with each meeting of the Board of Trustees they attend.
Additional information on the compensation paid by the Trust to its trustees and
officers and their background is included in the Statement of Additional
Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Fund. National City
is a wholly owned subsidiary of National City Corporation, which provides trust
and banking services to individuals, corporations, and institutions, both
nationally and internationally, including investment management, estate and
trust administration, financial planning, corporate trust and agency, and
personal and corporate banking. National City is a member bank of the Federal
Reserve System and the Federal Deposit Insurance Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and approximately $32
billion in total assets. National City has its principal offices at 1900 Ninth
Street, Cleveland, Ohio 44114.
Subject to the general supervision of the Trust's Board of Trustees
and in accordance with the Fund's investment policies, National City has agreed
to manage the Fund, make decisions with respect to and place orders for all
purchases and sales of the Fund's securities, and maintain the Fund's records
relating to such purchases and sales. The Fixed Income Team of
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<PAGE> 149
National City's Asset Management Group assumed responsibility for the day-to-
day management of the Fund upon commencement of operations of the Fund. Members
of the team make decisions for the Fund. No person is primarily responsible for
making recommendations. Members of the team are:
- Donald L. Ross, Director of the Fixed Income Team, has been with
National City since 1985. He specializes in the overall duration
and yield curve decisions.
- Michael E. Santelli, Vice President, joined
National City in 1995. He specializes in the
mortgage and asset-backed markets.
- Alex L. Vallecillo, Assistant Vice President,
joined National City in 1996. He specializes in
the analysis of the corporate bond sector.
- Stephen P. Carpenter, Vice President, joined National City in
1988. He has more than 21 years of investment experience with
expertise in the area of municipal bonds -- taxable as well as
tax-free -- and money market instruments.
- Douglas J. Carey, Fixed Income Analyst, joined National City in
1995. He is responsible for the development of econometric
models used in economic and interest rate forecasting, as well
as fixed income sector relative valuation.
- Marilou C. Hitt, Assistant Vice President, has worked in
National City's Funds Management Trading Department since 1984.
Her responsibilities include fixed income trading of government
and corporate securities as well as short-term taxable and
tax-free money market instruments.
For the services provided and expenses assumed pursuant to the
Advisory Agreement relating to the Fund, National City is entitled to receive an
advisory fee, computed daily and payable monthly, at the annual rate of .55% of
the average net assets of the Fund. The adviser may from time to time waive all
or a portion of its advisory fees to increase the net income of the Fund
available for distribution as dividends.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington,
Delaware 19809, serves as the administrator to the Fund. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
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<PAGE> 150
Under its Administration and Accounting Services Agreement with the
Trust, PFPC has agreed to provide the following services with respect to the
Fund: statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
the Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Fund with respect to all aspects of its
administration and operation. PFPC is entitled to receive with respect to the
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .05% of the next $200,000,000 of its net assets
and .03% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of the Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January
28, 1986. The Trust is a series fund authorized to issue 36 separate classes or
series of shares of beneficial interest ("shares"). Two of these classes or
series, which represent interests in the Fund (Class S and Class S - Special
Series 1) are described in this Prospectus. Class S shares constitute the
Institutional class or series of shares; and Class S - Special Series 1 shares
constitute the Retail class or series of shares. The other Funds of the Trust
are: Money Market Fund (Class A and Class A-Special Series 1), Government Fund
(Class B and Class B-Special Series 1), Treasury Fund (Class C and Class
C-Special Series 1), Tax Exempt Fund (Class D and Class D-Special Series 1),
Equity Fund (Class H and Class H-Special Series 1), Fixed Income Fund (Class I
and Class I-Special Series 1), Ohio Tax Exempt Fund (Class K and Class K-Special
Series 1), National Tax Exempt Fund (Class L and Class L-Special Series 1),
Equity Income Fund (Class M and Class M-Special Series 1), Mid Cap Regional Fund
(Class N and Class N-Special Series 1), Enhanced Income Fund (Class O and Class
O-Special Series 1), Total Return Advantage Fund (Class P and Class P-Special
Series 1), Pennsylvania Tax Exempt Fund (Class Q and Class Q-Special Series 1),
Intermediate Government Fund (Class R and Class R-Special Series 1) and the
Pennsylvania Municipal Fund (Class T and Class T-Special Series 1). Each share
has no par value, represents an equal proportionate interest in the investment
fund with other shares of the same class or series outstanding, and is entitled
to such dividends and distributions out of the income earned on the assets
belonging to such fund as are declared in the discretion of the Trust's Board of
Trustees. The Trust's Declaration of Trust authorizes the Board of Trustees to
classify or reclassify any unissued shares into any number of additional classes
of shares and to classify or reclassify any class of shares into one or more
series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as
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otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular investment fund. The Statement of Additional Information gives
examples of situations in which the law requires voting by investment fund. In
addition, shareholders of each of the investment funds will vote in the
aggregate and not by class or series, except as otherwise expressly required by
law or when the Board of Trustees determines the matter to be voted on affects
only the interests of the holders of a particular class or series of shares.
Under the Services Plan, only the holders of Retail shares in an investment fund
are, or would be entitled to vote on matters submitted to a vote of shareholders
(if any) concerning the Services Plan. Voting rights are not cumulative, and
accordingly, the holders of more than 50% of the aggregate shares of the Trust
may elect all of the trustees irrespective of the vote of the other
shareholders.
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Trust provides for indemnification out of
the Trust property for any shareholder held personally liable solely by reason
of his being or having been a shareholder and not because of his acts or
omissions or some other reason.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders shall
be called at the written request of shareholders entitled to cast at least 10%
of the votes entitled to be cast at such meeting. Such meeting may be called by
shareholders to consider the removal of one or more trustees. Shareholders will
receive shareholder communication assistance with respect to such matter as
required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets. First
Data Investor Services Group, Inc., a wholly-owned subsidiary of First Data
Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P. O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses in
connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses
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<PAGE> 152
related to the Distribution Plan; advisory fees; administration fees and
expenses; charges of the custodian and Transfer Agent; certain insurance
premiums; outside auditing and legal expenses; costs of shareholders' reports
and shareholder meetings; and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions in connection with the purchase of its portfolio
securities. Under the Services Plan, the Retail shares in the Fund also bear the
expense of shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of
the outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
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ARMADA FUNDS
INVESTMENT ADVISER
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
EXPENSE TABLE.............................................................. 3
INTRODUCTION............................................................... 7
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES........................... 7
INVESTMENT LIMITATIONS..................................................... 18
YIELD AND PERFORMANCE INFORMATION.......................................... 19
PRICING OF SHARES.......................................................... 21
HOW TO PURCHASE AND REDEEM SHARES.......................................... 21
DISTRIBUTION AGREEMENT..................................................... 29
SHAREHOLDER SERVICES PLAN.................................................. 29
DIVIDENDS AND DISTRIBUTIONS................................................ 29
TAXES ..................................................................... 30
MANAGEMENT OF THE TRUST.................................................... 31
DESCRIPTION OF THE TRUST AND ITS SHARES.................................... 36
CUSTODIAN AND TRANSFER AGENT............................................... 37
EXPENSES................................................................... 37
MISCELLANEOUS.............................................................. 38
</TABLE>
- --------------------------------------------------------------------------------
- - Shares of the Armada Funds are not bank deposits or obligations of, or
guaranteed or endorsed or otherwise supported by, National City Bank its parent
any of its affiliates or any bank.
- - Shares of the Armada Funds are not insured or guaranteed by the U.S.
Government, FDIC, or any governmental agency or state.
- - An investment in the Armada Funds involves investment risks, including the
possible loss of principal amount invested.
National City Bank and certain of its affiliates serve
as investment advisers to Armada Funds for which they receive an investment
advisory fee. Past performance is not indicative of future performance, and
the investment return will fluctuate, so that you may have a gain or loss
when you sell your shares.
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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<PAGE> 154
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of
National City
Corporation
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 155
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 9, 1996
INTERMEDIATE GOVERNMENT FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated September 9, 1996 (the
"Prospectus"). A copy of the Prospectus may be obtained by calling or writing
the Trust at 1-800-622-FUND, 4400 Computer Drive, Westbourough, Massachusetts
01581.
<PAGE> 156
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION.......................... 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES............. 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............... 8
DESCRIPTION OF SHARES........................................ 10
ADDITIONAL INFORMATION CONCERNING TAXES...................... 11
TRUSTEES AND OFFICERS........................................ 13
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS................ 15
SHAREHOLDER SERVICES PLAN.................................... 19
PORTFOLIO TRANSACTIONS....................................... 19
AUDITORS..................................................... 21
COUNSEL...................................................... 21
YIELD AND PERFORMANCE INFORMATION............................ 21
MISCELLANEOUS................................................ 25
FINANCIAL STATEMENTS......................................... 26
APPENDIX A................................................... A-1
APPENDIX B................................................... B-1
</TABLE>
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<PAGE> 157
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Intermediate Government Fund (the "Fund"). The information contained in this
Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus.
The Intermediate Government Fund commenced operations on
August 10, 1994 as a separate investment portfolio (the "Predecessor Fund") of
Inventor Funds, Inc. which was organized as a Maryland corporation. On
September 9, 1996, the Predecessor Fund was reorganized as a new portfolio of
Armada. Prior to the reorganization, the Predecessor Fund offered and sold
shares of stock that were similar to Armada's Retail shares of beneficial
interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for securities which may be held by the Fund.
GNMA SECURITIES
The Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-owned U.S. Government corporation. The
market value and interest yield of these instruments can vary due to market
interest rate fluctuations and early prepayments of underlying mortgages. These
securities represent ownership in a pool of federally insured mortgage loans.
GNMA certificates consist of underlying mortgages with a maximum maturity of 30
years. However, due to scheduled and unscheduled principal payments, GNMA
certificates have a shorter average maturity and, therefore, less principal
volatility than a comparable 30-year bond. Since prepayment rates vary widely,
it is not possible to predict accurately the average maturity of a particular
GNMA pool. GNMA securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather than at
maturity. The scheduled
<PAGE> 158
monthly interest and principal payments relating to mortgages in the pool are
"passed through" to investors. In addition, there may be unscheduled principal
payments representing prepayments on the underlying mortgages. Although GNMA
certificates may offer yields higher than those available from other types of
U.S. Government securities, GNMA certificates may be less effective than other
types of securities as a means of "locking in" attractive long-term rates
because of the prepayment feature. For instance, when interest rates decline,
the value of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
MORTGAGE-BACKED SECURITIES
The Fund may purchase securities backed by mortgages.
Mortgage-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly, thus
in effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of mortgage-backed securities
varies with the maturities of the underlying instruments, and the average life
of a mortgage-backed instrument, in particular, is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, a
mortgage-backed security's stated maturity may be shortened, and the security's
total return may be difficult to predict precisely. Mortgage-backed securities
acquired by the Fund may include collateralized mortgage obligations ("CMOs")
issued by private companies.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related securities
guaranteed by the GNMA include GNMA Mortgage Pass-Through Certificates (also
known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by the FNMA include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest
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<PAGE> 159
by FNMA. Mortgage-related securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Bank and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
FUTURE CONTRACTS
The Fund may purchase and sell futures contracts on U.S.
Treasury obligations. For a detailed description of futures contracts, see
Appendix B to this Statement of Additional Information.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When the Fund agrees to purchase when-issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment, marked to market daily. It is likely that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because the Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its fund might be affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
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<PAGE> 160
VARIABLE AND FLOATING RATE OBLIGATIONS
The Fund may purchase variable and floating rate obligations
(including adjustable rate mortgages) which are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Because variable and floating rate obligations are direct
lending arrangements between a Fund and the issuer, they are not normally traded
although certain variable and floating rate obligations, such as Student Loan
Marketing Association variable rate obligations, may have a more active
secondary market because they are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. Even though there may be no active secondary
market in such instruments, the Fund may demand payment of principal and accrued
interest at a time specified in the instrument or may resell them to a third
party. Such obligations may be backed by bank letters of credit or guarantees
issued by banks, other financial institutions or the U.S. Government, its
agencies or instrumentalities. The quality of any letter of credit or guarantee
will be rated high quality or, if unrated, will be determined to be of
comparable quality by the advisers. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Fund might be
unable to dispose of the instrument because of the absence of a secondary market
and could, for this or other reasons, suffer a loss to the extent of the
default.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's advisers deem creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying fund
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
its repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying fund securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Although there is no controlling legal
precedent confirming that a Fund would be entitled, as against a claim by such
seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody
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<PAGE> 161
of a Trust's securities subject to repurchase agreements and under federal laws,
a court of competent jurisdiction would rule in favor of the Trust if presented
with the question. Securities subject to repurchase agreements will be held by
the Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS
The Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Fund will invest in the obligations of such
agencies or instrumentalities only when the adviser believes that the credit
risk with respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund currently intends to limit its investments in securities
issued by other investment companies so that, as determined immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend securities pursuant to agreements requiring
that the loans be continuously secured by cash, securities of the U.S.
government or its agencies, or any combination of cash and such securities, as
collateral equal to 100% of the market value at all times of the securities
lent. Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for the Fund exceed one-third of the value of its
total assets taken at fair market value. The Fund
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<PAGE> 162
will continue to receive interest on the securities lent while simultaneously
earning interest on the investment of the cash collateral in U.S. government
securities. However, the Fund will normally pay lending fees to such
broker-dealers and related expenses from the interest earned on invested
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the adviser to be of good standing
and when, in the judgment of the adviser, the consideration which can be earned
currently from such securities loans justifies the attendant risk. Any loan may
be terminated by either party upon reasonable notice to the other party.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making fund decisions.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed with respect to the Fund only by a vote of the holders of a
majority of the Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities on
margin, except that it may purchase and sell futures contracts in accordance
with its investment objective.
2. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities.
3. Purchase or sell real estate or real estate limited
partnership interests, except that the Fund may invest in securities or
interests of companies which invest in real estate.
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<PAGE> 163
4. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs and
oil, gas or mineral leases, except that the Fund may: (a) to the extent
appropriate to its investment objective, invest in securities issued by
companies which purchase or sell financial commodity contracts; and (b) purchase
and sell futures contracts in accordance with its investment objective.
5. Invest in any issuer for the purpose of exercising control.
6. Pledge, mortgage or hypothecate assets, except to secure
borrowings permitted by the Fund's investment limitations in aggregate amounts
not to exceed 33 1/3% of the Fund's total assets taken at current value at the
time of the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any one
issuer, provided that this limitation shall apply only as to 75% of the Fund's
net assets.
8. Purchase securities of other investment companies, except
as permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
9. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described above or as permitted by rule, regulation or order of the Securities
and Exchange Commission.
The following are considered non-fundamental investment
limitations and therefore may be changed without a shareholder vote.
The Fund may not write or purchase put options, call options,
straddles, spreads, or any combination thereof, except that the Fund may
purchase and sell futures contracts in accordance with its investment objective.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 15% of its net assets.
The Fund may not purchase securities of any company which has
(with predecessors) a record of less than three years continuing operations, if,
as a result, more than 5% of the total assets of the Fund (taken at current
value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase
of a security.
* * * * *
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<PAGE> 164
In addition, so long as the Fund is offering and selling its
shares in the State of Texas the Fund may not (i) invest more than 5.0% of its
net assets in warrants (including within that amount, but not to exceed 2.0%,
may be warrants that are not listed of the New York or American Stock Exchange;
(ii) invest in oil, gas, or other mineral leases; and (iii) invest in real
estate limited partnership interests.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Fund are sold on a continuous basis by 440
Financial Distributors, Inc. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must be
signed by each shareholder, with each signature guaranteed by a U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended April 30, 1996, sales loads paid by
shareholders of the Predecessor Fund totalled $1,391.24.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Fund permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis.
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<PAGE> 165
Investors should be aware, however, that dollar cost averaging results in
purchases of shares regardless of their price on the day of investment or market
trends and does not ensure a profit, protect against losses in a declining
market, or prevent a loss if an investor ultimately redeems his shares at a
price which is lower than their purchase price. An investor may want to consider
his financial ability to continue purchases through periods of low price levels.
From time to time, in advertisements, sales literature, communications to
shareholders and other materials ("Materials"), the Trust may illustrate the
effects of dollar cost averaging through use of or comparison to an index such
as the Lehman Intermediate Government Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUND
Illustrations of the computation of the offering price per
Retail share of the Fund, based on the value of the Predecessor Fund's net
assets and number of outstanding shares on April 30, 1996 are as follows:
INTERMEDIATE GOVERNMENT
FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares............................... $89,901,309
Outstanding Retail Shares................................. 8,952,005
Net Asset Value Per Share
($89,901,309 divided by 8,952,005)........................ $ 10.04
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share)................................ $ 0.42
Offering to Public........................................ $ 10.46
</TABLE>
EXCHANGE PRIVILEGE
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived) to
reduce the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes
the Trust's Transfer Agent or his financial institution to act on telephonic
or written instructions from any person representing himself or herself to be
the shareholder and believed by the Transfer Agent or the financial
institution to be genuine. The
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<PAGE> 166
Investor or his financial institution must notify the Transfer Agent of his
prior ownership of Retail shares and account number. The Transfer Agent's
records of such instructions are binding.
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 32 classes
or series of shares. Two of these classes or series, which represent interests
in the Intermediate Government Fund (Class R and Class R - Special Series 1) are
described in this Statement of Additional Information and the related
Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
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<PAGE> 167
class in a particular investment fund have equal voting rights except that only
Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
qualify for tax treatment as a regulated
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investment company under the Code, the Fund must satisfy, in addition to the
distribution requirement described in the Prospectus, certain requirements with
respect to the source of its income during a taxable year. At least 90% of the
gross income of the Fund must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stocks,
securities or foreign currencies, and other income (including, but not limited
to, gains from options, futures, or forward contracts) derived with respect to
the Fund's business of investing in such stock, securities or currencies. The
Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to a Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by the Fund from a partnership or trust is
treated for this purpose as derived from the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust. Some of
the investments that the Fund may make (such as equipment lease and trust
certificates) may not be securities or may not produce qualifying income.
Therefore, it may be necessary for the advisers to restrict the investments of
the Fund to ensure that nonqualifying income does not exceed 10% of its total
gross income for a taxable year.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Fund's principal business
of investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by the Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
The Trust will designate any distribution of long-term capital
gains of the Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of the Fund's shares,
if the shareholder has not held such shares for more than six months, any loss
on the sale or
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exchange of those shares will be treated as long-term capital loss to the extent
of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits and would be eligible for
the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so that they are not subject to backup withholding or
that they are "exempt recipients."
TRUSTEES AND OFFICERS
The Prospectus includes a description of the trustees and
certain executive officers of the Trust, their addresses, principal occupations
during the past five years, and other affiliations. Mr. W. Bruce McConnel, III,
Secretary of the Trust, is a partner of the law firm of Drinker Biddle & Reath,
which receives fees as counsel to the Trust. Mr. John J. Burke, Assistant
Treasurer of the Trust, is employed by First Data Investor Services Group, Inc.
(formerly the Shareholder Services Group, Inc., d/b/a 440 Financial) which
receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1996, the
Trust's trustees and officers as a group received aggregate fees of
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$69,875. The trustees and officers of the Trust own less than 1% of the shares
of the Trust.
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Approval Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., $11,375 $0 $0 $11,375
Trustee
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $ 0 $0 $0 $ 0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder and
not because of his acts or omissions or some other reason. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust,
and shall satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
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The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AGREEMENT
As described in the Prospectus, National City serves as
investment adviser to the Fund. The adviser is an affiliate of National City
Corporation, a bank holding company with $32 billion in assets, and headquarters
in Cleveland, Ohio and nearly 600 branch offices in three states. Through its
subsidiaries, National City Corporation has been managing investments for
individuals, pension and profit-sharing plans and other institutional investors
for over 75 years and currently manages over $30 billion in assets. From time to
time, the advisers may voluntarily waive fees or reimburse the Trust for
expenses.
For the fiscal years ended April 30, 1996 and 1995, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $602,602 and $178,282, respectively. Integra waived
advisory fees during the same period in the amounts of $130,371 and $76,919,
respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the advisers in the performance of
their duties or from reckless disregard by them of its duties and
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<PAGE> 172
obligations thereunder. In addition, the adviser has undertaken in its Advisory
Agreement to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
The Advisory Agreement was approved by its sole shareholder
prior to the Fund's commencement of investment operations. Unless sooner
terminated, the Advisory Agreement will continue in effect until September 30,
1997 and from year to year thereafter, subject to annual approval by the Trust's
Board of Trustees, or by a vote of a majority of the outstanding shares of the
Fund (as defined in the Fund's Prospectus) and a majority of the trustees who
are not parties to the Agreement or interested persons (as defined in the 1940
Act) of any party by votes cast in person at a meeting called for such purpose.
The Advisory Agreement may be terminated by the Trust or the adviser on 60 days
written notice, and will terminate immediately in the event of its assignment.
If expenses borne by the Fund in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Fund's adviser will reimburse the Trust for any such excess with respect to the
Fund to the extent described in any written undertaking provided by the advisers
to such state. To the Trust's knowledge, as of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Trust provides that annual expenses (as defined by statute) may not exceed
2.5% of the first $30 million, 2% of the next $70 million and 1.5% of the
remaining average net assets of the Fund. Such amount, if any, will be
estimated, reconciled and paid on a monthly basis. The fees banks may charge to
customers for services provided in connection with their investments in the
Trust are not covered by the state securities expense limitations described
above.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. For the fiscal years ended April 30, 1996
and 1995, SEI Financial Management Corporation, a wholly-owned subsidiary of SEI
Corporation, served as administrator to the Predecessor Fund and earned the
following fees: $154,955 and $65,623, respectively.
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DISTRIBUTION PLAN AND RELATED AGREEMENT
The Distributor acts as distributor of the Fund's shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by Rule
12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's Board
of Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement relating to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the Trust
and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial interest
in the Plan or related agreement. The Plan and related agreement may be
terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has been
committed to the discretion of such disinterested trustees as required by the
Rule.
The Trust's Plan provides that the fund will reimburse the
Distributor for distribution expenses in an amount not to exceed .10% of the
Fund's average net assets. Distribution expenses payable by the Distributor
pursuant to the Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a fund's shares, and direct and
indirect costs and expenses of preparing, printing and distributing its
prospectuses to other than current shareholders. In addition, the Plan provides
that the Trust will pay the Distributor an annual distribution fee of $250,000
payable monthly and accrued daily by
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all of the Trust's investment funds with respect to which the Distributor is
distributing shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares excluding the distributor's expenses for travel,
communication, compensation and benefits for sales personnel; and (4) any other
expenses reasonably incurred in connection with the distribution and marketing
of Class A shares subject to approval by a majority of disinterested directors
of Integra. For the fiscal years ended April 30, 1996 and 1995, the Predecessor
Fund paid $0 and $0, respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of the
Fund; (ii) hold and disburse fund securities on account of the Fund; (iii)
collect and make disbursements of money on behalf of the Fund; (iv) collect and
receive all income and other payments and distributions on account of the Fund's
fund securities; (v) respond to correspondence by security brokers and others
relating to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Fund's operations. National City Bank is authorized to select one
or more banks or trust companies to serve as sub-custodian on behalf of the
Fund, provided that it shall remain responsible for the performance of all of
its duties under the Custodian Services Agreement and shall hold the Fund
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian. The Fund reimburses National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by the Fund in any year may not exceed $.225
for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent")
serves as the Trust's transfer agent and dividend
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<PAGE> 175
disbursing agent with respect to the Fund. Under its Transfer Agency Agreement,
it has agreed to: (i) issue and redeem shares of the Fund; (ii) transmit all
communications by the Fund to its shareholders of record, including reports to
shareholders, dividend and distribution notices and proxy materials for meetings
of shareholders; (iii) respond to correspondence by security brokers and others
relating to its duties; (iv) maintain shareholder accounts; and (v) make
periodic reports to the Board of Trustees concerning the Fund's operations. The
Transfer Agent sends each shareholder of record a monthly statement showing the
total number of shares owned as of the last business day of the month (as well
as the dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan (the "Services Plan") with respect to Retail shares of
the Fund. Pursuant to the Services Plan, the Trust may enter into agreements
with financial institutions pertaining to the provision of administrative
services to their customers who are the beneficial owners of Retail shares in
consideration for the payment of up to .25% (on an annualized basis) in the case
of the Fund and of the net asset value of such shares. Such services may
include: (i) aggregating and processing purchase and redemption requests from
customers; (ii) providing customers with a service that invests the assets of
their accounts in Retail shares; (iii) processing dividend payments from the
Fund; (iv) providing information periodically to customers showing their
position in Retail shares; (v) arranging for bank wires; (vi) responding to
customer inquiries relating to the services performed with respect to Retail
shares beneficially owned by customers; (vii) forwarding shareholder
communications; and (viii) other similar services requested by the Trust.
Agreements between the Trust and financial institutions will be terminable at
any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
Pursuant to their Advisory Agreement with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of fund securities for the Fund. The adviser purchases
fund securities either directly from the issuer or from an underwriter or dealer
making a market in the securities involved. Purchases from an underwriter of
fund securities include a commission or concession paid by the issuer to the
underwriter and purchases from dealers serving as market makers may include the
spread between the bid and asked
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price. Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up.
For the fiscal year ended April 30, 1996, the Fund did not pay
any brokerage commissions.
While the adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to the
adviser may receive orders for transactions by the Fund. Information so received
is in addition to and not in lieu of services required to be performed by the
adviser and does not reduce the fees payable to it by the Fund. Such information
may be useful to the adviser in serving both the Trust and other clients, and,
similarly, supplemental information obtained by the placement of business of
other clients may be useful to the adviser in carrying out its obligations to
the Trust.
Fund securities will not be purchased from or sold to the
Fund's adviser, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its adviser's correspondents with respect to such transactions, securities,
savings deposits and repurchase agreements.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust department
independently of its Commercial Department. In making investment recommendations
for the Trust, personnel will not inquire or take into consideration whether the
issuer of securities proposed for purchase or sale for the Trust's account are
customers of the Commercial Department. In dealing with commercial customers,
the Commercial Department will not inquire or take into consideration whether
securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from
those for the other funds of the Trust and for other investment companies and
accounts advised or managed by the adviser. Such other funds, investment
companies and accounts may also invest in the same securities as the Fund. When
a purchase or sale of the same security is made at substantially the same time
on
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behalf of the Fund and another investment company or account, the transaction
will be averaged as to price, and available investments allocated as to amount,
in a manner which the advisers believe to be equitable to the Fund and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund. To the extent permitted by
law, the adviser may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
The Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b 6
Yield = 2 [(------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
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c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last
day of the period.
The Fund calculates interest earned on debt obligations held
in its fund by computing the yield to maturity of each obligation held by it
based on the market value of the obligation (including actual accrued interest)
at the close of business on the last business day of each 30-day period, or,
with respect to obligations purchased during the 30-day period, the purchase
price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30-day period that the obligation is in the Fund.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased by the Fund at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" in
the Prospectus.
For the 30-day period ended April 30, 1996, the yield of the
Predecessor Fund was 5.55%.
The Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
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ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total return for the Predecessor Fund's one
year period ending April 30, 1996 was 2.78% (after taking the sales load into
account) and 7.09% (without taking into account any sales load). The average
annual total return since the Predecessor Fund's commencement of operations
through April 30, 1996 was 4.38% (after taking into account the sales load) and
6.91% (without taking into account any sales load). The Fund commenced
operations on August 10, 1994.
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the
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formulas set forth above in order to compare more accurately a Fund's
performance with other measures of investment return. For example, in comparing
a Fund's total return with data published by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of an index, the Fund may calculate its aggregate total
return for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however, disclose
the maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sale charges would reduce the
performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on the Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as a
whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Fund), as well as the views of the adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in Materials
charts, graphs or drawings which compare the investment objective, return
potential, relative stability and/or growth possibilities of the Fund and/or
other mutual funds, or illustrate the potential risks and rewards of investment
in various investment vehicles, including but not limited to, stocks, bonds,
Treasury securities and shares of the Fund and/or other mutual funds. Materials
may include a discussion of certain attributes or benefits to be derived by an
investment in the Fund and/or other
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mutual funds (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organizational
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in the
Fund, together with all income, earnings, profits, and proceeds derived from the
investment thereof, including any proceeds from the sale of such investments,
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Trust not belonging to the Fund. In
determining the Fund's net asset value, assets belonging to the Fund are charged
with the liabilities in respect of the Fund.
The following shareholders owned beneficially or of record 5%
or more of the outstanding shares of the Predecessor Fund as of June 21, 1996:
<TABLE>
<CAPTION>
Number of Percentage
Outstanding of
Retail Retail
Predecessor Shares Shares
- ----------- ----------- ----------
Fund
----
<S> <C> <C>
Sheldon & Co (Integra-49) 8,732,394.498 97.66%
c/o National City
Attn: Trust Mutual Funds
P.O. Box 94777, Loc. 5312
Cleveland, OH 44101-4777
</TABLE>
No Institutional shares of the Predecessor Fund had been
issued as of June 21, 1996.
-25-
<PAGE> 182
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the
fiscal year ended April 30, 1996 and the periods prior thereto are contained in
the Predecessor Fund's Annual Report to Shareholders (the "Financial
Statements"), which has been filed with the Securities and Exchange Commission
and is incorporated into this Statement of Additional Information by reference.
The Financial Statements and the information included in the Financial
Highlights tables for the same periods which appear in the Fund's prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon appears in such Annual Reports. The
Financial Statements in such Annual Reports have been incorporated herein and in
the Fund's Prospectus, in reliance upon the report of said firm of independent
accountants given upon their authority as experts in accounting and auditing.
-26-
<PAGE> 183
APPENDIX A
DESCRIPTION OF RATINGS
Corporate Long-Term Debt Ratings
The following summarizes the rating categories used by
Standard & Poor's Ratings Group ("S&P") for corporate debt:
"AAA" - This designation represents the highest rating
assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues
only to a small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt that possesses one of
these ratings is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
"CI" - this rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in default, and payment of interest and/or
repayment of principal is in arrears.
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PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
The following summarizes the rating categories used by Moody's
Investors Service, Inc. ("Moody's") for corporate debt:
"Aaa" - Bonds 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 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 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 considered medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the
present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and
principal ("Ba" indicates some speculative elements; "B"
indicates a general lack of characteristics of desirable
investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and
"C" bonds may be in default.
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Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" through "B" in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the rating categories used by Duff &
Phelps Credit Rating Co. ("Duff & Phelps") for corporate debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for
prudent investment. Considerable variability in risk is
present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade.
Although below investment grade, debt rated "BB" is deemed
likely to meet obligations when due. Debt rated "B" possesses
the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or
preferred dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
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To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the rating categories used by
Fitch Investors Service, Inc. ("Fitch") for corporate bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent
Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted
bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation.
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To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA Inc. ("IBCA") assesses the investment quality of
unsecured debt with an original maturity of more than one year which is issued
by bank holding companies and their principal bank subsidiaries. The following
summarizes the rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to
increase investment risk significantly.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk
albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal
and interest is strong, although adverse changes in business,
economic or financial conditions may lead to increased
investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment
of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative
characteristics are present. "BB" represents the lowest degree
of speculation and indicates a possibility of investment risk
developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
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<PAGE> 188
Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by S&P for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment
is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects
of changes and circumstances than an obligation carrying a
higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
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 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of
short-term promissory obligations. Principal repayment
capacity will normally 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 well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity 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,
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while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity 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 in the level
of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate
liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors
are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
"Duff 4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure
against disruption in debt service. Operating factors
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and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal
and/or interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having
the strongest degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great
as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be
rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
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<PAGE> 191
"A1+" - Obligations are supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a good capacity for
timely repayment.
"A3" - Obligations are supported by a satisfactory
capacity for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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APPENDIX B
As stated in the Prospectus, the Fund may enter into certain futures
transactions for hedging purposes. Such transactions are described in this
Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by a Fund's entering
into a futures contract purchase for the same aggregate amount of the specific
type of financial instrument and the same delivery date. If the price of the
sale exceeds the price of the offsetting purchase, the Fund is immediately paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Fund entering into a futures contract sale. If the offsetting sale price exceeds
the purchase price, the Fund realizes a gain, and if the purchase price exceeds
the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Fund would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Fund may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
EXAMPLE OF FUTURES CONTRACT SALE. The Fund may engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by the Fund
tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The adviser wishes to fix the current
market value of this Fund security until some point in the future. Assume the
Fund security has a market value of 100, and the adviser believes that because
of an anticipated rise in interest rates, the value will decline to 95. The Fund
might enter into futures contract sales of Treasury bonds for a equivalent of
98. If the market value of the Fund security does indeed decline from 100 to 95,
the equivalent futures market price for the Treasury bonds might also decline
from 98 to 93.
In that case, the five point loss in the market value of the Fund
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures
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market price of Treasury bonds might well decline to more than 93 or to less
than 93 because of the imperfect correlation between cash and futures prices
mentioned below.
The adviser could be wrong in their forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the Fund securities, including the Fund security being protected, would
increase. The benefit of this increase would be reduced by the loss realized on
closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss (which might be reduced by a offsetting transaction prior to
the settlement date). In each transaction, transaction expenses would also be
incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Fund may engage in a interest
rate futures contract purchase when it is not fully invested in long-term bonds
but wishes to defer for a time the purchase of long-term bonds in light of the
availability of advantageous interim investments, e.g., shorter term securities
whose yields are greater than those available on long-term bonds. The Fund's
basic motivation would be to maintain for a time the income advantage from
investing in the short-term securities; the Fund would be endeavoring at the
same time to eliminate the effect of all or part of a expected increase in
market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the 5
point increase in the price that the Fund pays for the long-term bond would be
offset by the 5 point gain realized by closing out the futures contract
purchase.
The adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the
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equivalent futures market price could fall below 98. If short-term rates at the
same time fall to 10% or below, it is possible that the Fund would continue with
its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the fund, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued incremental
income will be reduced by the loss realized on closing out the futures contract
purchase. In each transaction, expenses would also be incurred.
II. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian or a subcustodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when the Fund has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the adviser may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination
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of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Fund as hedging devices. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may move
more than or less than the price of the instruments being hedged. If the price
of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the instruments being hedged has moved in a favorable direction, this advantage
will be partially offset by the loss on the futures. If the price of the futures
moves more than the price of the hedged instruments, the Fund will experience
either a loss or gain on the futures which will not be completely offset by
movements in the price of the instruments which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by the advisers. Conversely, the Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by the
adviser.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin
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deposit requirements, investors may close futures contracts through off-setting
transactions which could distort the normal relationship between the cash and
futures markets. Second, with respect to financial futures contracts, the
liquidity of the futures market depends on participants entering into
off-setting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced thus producing distortions. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the advisers may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge fund securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a 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 futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
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Successful use of futures by the Fund is also subject to the adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
IV. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 9, 1996
PENNSYLVANIA MUNICIPAL FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated September 9, 1996 (the
"Prospectus"). A copy of the Prospectus may be obtained by calling or writing
the Trust at 1-800-622-FUND, 4400 Computer Drive, Westborough, Massachusetts
01581.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
STATEMENT OF ADDITIONAL INFORMATION....................................... 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES.......................... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 12
DESCRIPTION OF SHARES..................................................... 13
ADDITIONAL INFORMATION CONCERNING TAXES................................... 15
TRUSTEES AND OFFICERS..................................................... 18
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS ............... 20
SHAREHOLDER SERVICES PLAN................................................. 24
PORTFOLIO TRANSACTIONS.................................................... 25
AUDITORS.................................................................. 26
COUNSEL................................................................... 26
YIELD AND PERFORMANCE INFORMATION......................................... 26
MISCELLANEOUS............................................................. 31
FINANCIAL STATEMENTS...................................................... 31
APPENDIX A................................................................ A-1
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction
with the Prospectus of Armada Funds (the "Trust") that describes the
Pennsylvania Municipal Fund (the "Fund"). The information contained in this
Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus.
The Pennsylvania Municipal Fund commenced operations on August 10, 1994
as a separate investment portfolio (the "Predecessor Fund") of Inventor Funds,
Inc., which was organized as a Maryland corporation. On September 9, 1996, the
Predecessor Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold shares of stock that were
similar to the Trust's Retail Shares of beneficial interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the adviser's investment management strategies,
techniques, policies and related matters may be included from time to time in
advertisements, sales literature, communications to shareholders and other
materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is Appendix A
which contains descriptions of the rating symbols used by S&P, Fitch, Duff, IBCA
and Moody's for Municipal Bonds and other securities which may be held by the
Fund.
MUNICIPAL BONDS
As described in the Prospectus, the two principal classifications of
Municipal Bonds consist of "general obligation" and "revenue" issues, and the
Fund may include "moral obligation" issues, which are normally issued by special
purpose authorities. Municipal Bonds include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities. Municipal Bonds in which the Fund
invests must be rated BBB or better by S&P or Fitch or Baa or better by Moody's,
or, if unrated must be deemed by the Sub-Adviser to have essentially the same
characteristics and quality as bonds having the above ratings. The Sub-Adviser
may purchase private activity bonds if the interest paid is excludable from
federal
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income tax. Private activity bonds are issued by or on behalf of states or
political subdivisions thereof to finance privately owned or operated facilities
for business and manufacturing, housing, sports, and pollution control and to
finance activities of and facilities for charitable institutions. Private
activity bonds are also used to finance public facilities such as airports, mass
transit systems, ports, parking and low income housing. The payment of the
principal and interest on private activity bonds is dependent solely on the
ability of the facility's user to meet its financial obligations and may be
secured by a pledge of real and personal property so financed.
Pennsylvania municipal securities that are payable only from the
revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest and principal,
including, among others, laws and regulations which limit the amount fees, rates
or other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. Pennsylvania municipal
securities, the payment of interest and principal on which is insured in whole
or in part by a Pennsylvania governmentally created fund, may be adversely
affected by Pennsylvania laws or regulations which restrict the aggregate
proceeds available for payment of principal and interest in the event of a
default on such municipal securities. Similarly, Pennsylvania municipal
securities, the payment of interest and principal on which is secured, in whole
or in part, by an interest in real property may be adversely affected by
Pennsylvania laws which limit the availability of remedies or the scope of
remedies available in the event of a default on such municipal securities.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific Pennsylvania municipal securities the
Fund will invest from time to time or predicting the nature or extent of future
changes in existing laws or regulations or the future enactment or adoption of
additional laws or regulations, it is not presently possible to determine the
impact of such laws and regulations on the securities in which the Fund may
invest and, therefore, on the shares of the Fund.
There are, of course, variations in the quality of Municipal Bonds both
within a particular classification and between classifications, and the yields
on Municipal Bonds depend upon a variety of factors, including the financial
condition of the issuer, the general conditions of the municipal bond market,
the size of a particular offering, the maturity of the obligation and the rating
of the issue. The ratings of Rating Agencies represent their opinions as to the
quality of Municipal Bonds. It should be emphasized, however, that ratings are
general and are not absolute
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standards of quality, and Municipal Bonds with the same maturity, interest rate
and rating may have different yields while Municipal Bonds of the same maturity
and interest rate with different ratings may have the same yield. Subsequent to
its purchase by the Fund, an issue of Municipal Bonds may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund. The Fund's Sub-Adviser will consider such an event in determining whether
the Fund should continue to hold the obligation.
The payment of principal and interest on most Municipal Bonds purchased
by the Fund will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its Municipal Bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on the principal of its Municipal Bonds may be materially adversely
affected by litigation or other conditions.
Certain Municipal Bonds held by the Fund may be insured at the time of
issuance as to the timely payment of principal and interest. The insurance
policies will usually be obtained by the issuer of the Municipal Bond at the
time of its original issuance. In the event that the issuer defaults on interest
or principal payments, the insurer of the bond is required to make payment to
the bondholders upon proper notification. There is, however, no guarantee that
the insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors. The Fund may, from time to time, invest more than 25% of its
assets in Municipal Bonds covered by insurance policies.
Municipal notes in which the Fund may invest include, but are not
limited to, general obligation notes, tax anticipation notes (notes sold to
finance working capital needs of the issuer in anticipation of receiving taxes
on a future date), revenue anticipation notes (notes sold to provide needed cash
prior to receipt of expected non-tax revenues from a specific source), bond
anticipation notes, certificates of indebtedness, demand notes and construction
loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 by S&P, F-2 by Fitch or Prime-2 by
Moody's at the time of investment or which are of equivalent quality as
determined by the Sub-Adviser. Other
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types of tax-exempt instruments which are permissible investments for the Fund
including floating rate notes. Investments in such floating rate instruments
will normally involve industrial development or revenue bonds which provide that
the rate of interest is set as a specific percentage of a designated base rate
(such as the prime rate) at a major commercial bank, and that the Fund can
demand payment of the obligation at all times or at stipulated dates on short
notice (not to exceed 30 days) at par plus accrued interest. The Fund must use
the shorter of the period required before the Fund is entitled to prepayment
under such obligations or the period remaining until the next interest rate
adjustment date for purposes of determining the maturity. Such obligations are
frequently secured by letters of credit or other credit support arrangements
provided by banks. The quality of the underlying credit or of the bank, as the
case may be, must, in the Sub-Adviser's opinion be equivalent to the long-term
bond or commercial paper ratings stated above. The Sub-Adviser will monitor the
earning power, cash flow and liquidity ratios of the issuers of such instruments
and the ability of an issuer of a demand instrument to pay principal and
interest on demand. The Sub-Adviser may purchase other types of tax-exempt
instruments as long as they are of a quality equivalent to the bond or
commercial paper ratings stated above.
STAND-BY COMMITMENTS
The Fund may acquire stand-by commitments (also known as put options)
with respect to Municipal Bonds held in its portfolio. It expects that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, the Fund may pay for
a stand-by commitment either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus reducing
the yield to maturity otherwise available for the same securities). The Fund
will not acquire a stand-by commitment unless immediately after the acquisition,
not more than 5% of its total assets will be invested in instruments subject to
a demand feature, or in stand-by commitments, with the same institution.
The Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will be transferable by the Fund only
with the underlying Municipal Bonds which may be sold to a third party at any
time. Until the Fund exercises its stand-by commitment, it owns the securities
in its portfolio which are subject to the commitment.
The amount payable to the Fund upon its exercise of a stand-by
commitment will normally be (i) the Fund's acquisition cost of the Municipal
Bonds (excluding any accrued interest which the Fund paid on its acquisition),
less any amortized market
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premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Under normal
market conditions, in determining net asset value, the Fund values the
underlying Municipal Bonds on an amortized cost basis. Accordingly, the amount
payable by a dealer upon exercise of a stand-by commitment will normally be
substantially the same as the portfolio value of the underlying Municipal Bonds.
The Fund intends to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Sub-adviser's opinion, present minimal
credit risks. The Fund's reliance upon the credit of these dealers, banks and
broker-dealers will be secured by the value of the underlying Municipal Bonds
that are subject to the commitment. Thus, the risk of loss to the Fund in
connection with a stand-by commitment will not be qualitatively different from
the risk of loss faced by a person that is holding securities pending settlement
after having agreed to sell the securities in the ordinary course of business.
WHEN-ISSUED SECURITIES
The Fund may purchase Municipal Bonds on a "when-issued" basis (i.e.,
for delivery beyond the normal settlement date at a stated price and yield).
When the Fund agrees to purchase when-issued securities, the custodian sets
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Fund may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitment, marked to market daily. It is likely that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because the Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When the Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in securities issued by other investment companies
(including other investment companies advised
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by the adviser and Sub-Adviser) which invest in high quality, short term debt
securities and which determine their net asset value per share based on the
amortized cost or penny-rounding method. The Fund currently intends to limit
such investments so that, as determined immediately after a securities purchase
is made: (a) not more than 5% of the value of its total assets will be invested
in the securities of any one investment company; (b) not more than 10% of the
value of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding voting
stock of any one investment company will be owned by the Fund; and (d) not more
than 10% of the outstanding voting stock of any one investment company will be
owned in the aggregate by the Fund and other investment companies advised by the
adviser.
TAXABLE MONEY MARKET INSTRUMENTS
The Fund may invest in various Taxable Money Market Instruments such as
bank obligations, commercial paper, repurchase agreements and U.S. Government
Obligations.
Bank obligations include bankers' acceptances generally having a
maturity of six months or less and negotiable certificates of deposit. Bank
obligations also include U.S. dollar denominated bankers' acceptances and
certificates of deposit. Investment in bank obligations is limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase.
Investments include commercial paper and other short term promissory
notes issued by corporations, municipalities and other entities (including
variable and floating rate instruments). The Fund may also acquire zero coupon
obligations, which have greater price volatility than coupon obligations and
which will not result in the payment of interest until maturity.
Securities held by the Fund may be subject to repurchase agreements.
Under the terms of a repurchase agreement, the Fund purchases securities from
financial institutions such as banks and broker-dealers which the Fund's
Sub-Adviser deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
its repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities
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were less than the repurchase price under the agreement, or to the extent that
the disposition of such securities by the Fund were delayed pending court
action. Although there is no controlling legal precedent confirming that a Fund
would be entitled, as against a claim by such seller or its receiver or trustee
in bankruptcy, to retain the underlying securities, the Board of Trustees of the
Trust believes that, under the regular procedures normally in effect for custody
of a Fund's securities subject to repurchase agreements and under federal laws,
a court of competent jurisdiction would rule in favor of the Trust if presented
with the question. Securities subject to repurchase agreements will be held by
the Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
The Fund may purchase obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some of these obligations are
supported by the full faith and credit of the U.S. Treasury, such as obligations
issued by the Government National Mortgage Association. Others, such as those of
the Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the agency or instrumentality issuing the obligation. No assurance can
be given that the U.S. Government would provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when the advisers believe that the credit risk with
respect thereto is minimal.
VARIABLE AND FLOATING RATE OBLIGATIONS
The Fund may purchase variable and floating rate obligations (including
variable amount master demand notes) which are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Because variable and floating rate obligations are direct lending
arrangements between the Fund and the issuer, they are not normally traded
although certain variable and floating rate obligations, such as Student Loan
Marketing Association variable rate obligations, may have a more active
secondary market because they are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. Even though there may be no active secondary
market in such instruments, the Fund may demand payment of principal and accrued
interest at a time specified in the instrument or may resell them to a third
party. Such obligations may be backed by bank letters of credit or guarantees
issued by banks, other financial institutions or the U.S. Government, its
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agencies or instrumentalities. The quality of any letter of credit or guarantee
will be rated high quality or, if unrated, will be determined to be of
comparable quality by the adviser. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Fund might be
unable to dispose of the instrument because of the absence of a secondary market
and could, for this or other reasons, suffer a loss to the extent of the
default.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the portfolio securities. The calculation excludes U.S.
Government securities and all securities whose maturities at the time of
acquisition were one year or less. Portfolio turnover may vary greatly from year
to year as well as within a particular year, and may also be affected by cash
requirements for redemptions of shares and by requirements which enable the
Trust to receive certain favorable tax treatment. Portfolio turnover will not be
a limiting factor in making decisions.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the Prospectus,
the Fund is subject to the following investment limitations which may be changed
only by a vote of the holders of a majority of the Fund's outstanding shares (as
defined under "Miscellaneous" in the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities on margin,
except to obtain short-term credits as necessary for the clearance of security
transactions in accordance with its investment objective.
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of certain portfolio securities acquired within the limitation
on purchases of restricted securities.
3. Purchase or sell real estate or real estate limited partnership
interests, except to invest in securities or interests of companies which invest
in real estate.
4. Purchase or sell commodities or commodity contracts or invest in
oil, gas, or other mineral exploration or development programs and oil, gas and
mineral leases, except to the extent appropriate to its investment objective,
invest in securities
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issued by companies which purchase or sell financial commodity contracts or
invest in real estate.
5. Invest in any issuer for the purpose of exercising control.
6. Pledge, mortgage or hypothecate assets, except to secure borrowings
permitted by the Fund's investment limitations in aggregate amounts not to
exceed 33-1/3% of the Fund's total assets taken at current value at the time of
the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any one issuer,
provided that this limitation shall apply only as to 75% of the Fund's net
assets.
8. Purchase securities of other investment companies, except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
9. Issue senior securities (as defined in the Investment Company Act of
1940), except in connection with permitted borrowings as described above or as
permitted by rule, regulation or order of the Securities and Exchange
Commission.
The following limitations are considered non-fundamental and therefore
may be changed without a shareholder vote.
The Fund may not purchase puts, calls, options or combinations thereof,
except that the Fund may purchase puts as described in its prospectus.
The Fund may not invest in illiquid securities in an amount exceeding,
in the aggregate, 15% of its net assets.
The Fund may not purchase securities of any company which has (with
predecessors) a record of less than three years continuing operations, if, as a
result, more than 5% of the total assets of the Fund (taken at current value)
would be invested in such securities.
The foregoing percentages will apply at the time of purchase of a
security. If the Fund exceeds the limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes that it is in the best interests of
the Fund to do so.
* * * * *
In addition, so long as the Fund is offering and selling its shares in
the State of Texas , it may not: (i) invest more than 5% of its net assets in
warrants (including within that amount but not to exceed 2%, warrants that are
not listed on the New York or
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American Stock Exchange), (ii) invest in oil, gas or other mineral leases, or
(iii) invest in real estate limited partnership interests.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
Potential shareholders should consider the fact that the Fund's
portfolio consists primarily of securities issued by the Commonwealth of
Pennsylvania (the "Commonwealth"), its municipalities and authorities and should
realize that the Fund's performance is closely tied to general economic
conditions within the Commonwealth as a whole and to economic conditions within
particular industries and geographic areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal operating
fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax
increases and spending deceases have resulted in surpluses the last four years;
as of June 30, 1994, the General Fund had a surplus of $892.9 million. The
deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly into
medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suit relating to the following matters: (i) the American
Civil Liberties Union ("ACLU") filed suit in federal court demanding additional
funding for child welfare services; the Commonwealth settled a similar suit in
the Commonwealth Court of Pennsylvania and is seeking the dismissal of the
federal suit, among other things, because of that settlement. After its earlier
denial of class certification was reversed by the Third Circuit Court of
Appeals, the district court granted class certification to the ACLU and the
parties are proceeding with discovery; (ii) in 1987, the Supreme Court of
Pennsylvania held the
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statutory scheme for county funding of the judicial system to be in conflict
with the constitution of the Commonwealth, but it stayed judgment pending
enactment by the legislature of funding consistent with the opinion, and the
legislature has yet to consider legislation implementing the judgment. In 1992,
a new action in mandamus was filed seeking to compel the Commonwealth to comply
with the original decision; (iii) litigation was filed in both state and federal
court by an association of rural and small schools and several individual school
districts and parents challenging the constitutionality of the Commonwealth's
system for funding local school districts -- the federal case has been stayed
pending the resolution of the state case, and the state case is in the pre-trial
stage, and (iv) Envirotest/Synterra Partners ("Envirotest") filed suit against
the Commonwealth asserting that it sustained damages in excess of $350 million,
as a result of investments it made in reliance on a contract to conduct
emissions testing before the emission testing program was suspended. Envirotest
has entered into a Standstill Agreement with the Commonwealth pursuant to which
the parties will attempt to resolve Envirotest's claims.
Although there can be no assurance that such conditions will continue,
the Commonwealth's general obligation bonds are currently rated AA- by S&P and
A1 by Moody's and Philadelphia's and Pittsburgh's general obligation bonds are
currently rated BBB- and BBB+, respectively, by S&P and Baa and Baa1,
respectively, by Moody's.
The City of Philadelphia (the "City") experienced a series of General
Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term solution
for its economic difficulties. The audited balance of the City's General Fund as
of June 30, 1994 was a surplus of $15.4 million, and preliminary unaudited
financial statements as of June 30, 1995 project a surplus of approximately
$59.6 million.
In recent years an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.4
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. As one
of the conditions of issuing bonds on behalf of the City, PICA exercises
oversight of the City's finances. The City is currently operating under a five
year plan approved by PICA in 1995. PICA's power to issue further bonds to
finance capital projects expired on December 31, 1994. PICA may continue to
issue bonds to finance cash flow deficits until December 31, 1996, and its
authority to refund existing debt will not expire.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Trust are sold on a continuous basis by 440 Financial
Distributors, Inc. (the "Distributor"), which has agreed to use appropriate
efforts to solicit all purchase orders. The issuance of shares is recorded on
the books of the Trust. To change the commercial bank or account designated to
receive redemption proceeds, a written request must be sent to National City
Investments Corporation at its principal office. Such requests must be signed by
each shareholder, with each signature guaranteed by a U.S. commercial bank or
trust company or by a member firm of a national securities exchange. Guarantees
must be signed by an authorized signatory and "Signature Guaranteed" must appear
with the signature. National City Investments Corporation may request further
documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the date of
payment for more than seven days for shares during any period when: (a) trading
on the Exchange is restricted by applicable rules and regulations of the SEC;
(b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended April 30, 1996, sales loads paid by
shareholders of the Predecessor Fund totalled $3,469.47.
Automatic investment programs such as the monthly savings program
("Program") described in the Prospectus permit an investor to use "dollar cost
averaging" in making investments. Under this Program, an agreed upon fixed
dollar amount is invested in Fund shares at predetermined intervals. This may
help investors to reduce their average cost per share because the Program
results in more shares being purchased during periods of lower share prices and
fewer shares during periods of higher share prices. In order to be effective,
dollar cost averaging should usually be followed on a sustained, consistent
basis. Investors should be aware, however, that dollar cost averaging results in
purchases of shares regardless of their price on the day of investment or market
trends and does not ensure a profit, protect against losses in a declining
market, or prevent a loss if an investor ultimately redeems his shares at a
price which is lower than their purchase price. An investor may want to consider
his financial ability to continue purchases through periods of low price levels.
From time to time, in advertisements, sales literature, communications to
shareholders and other materials ("Materials"), the Trust may illustrate the
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effects of dollar cost averaging through use of or comparison to an index such
as the Lehman Five-Year Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUND
Illustrations of the computation of the offering price per Retail share
of the Fund, based on the value of the Predecessor Fund's net assets and number
of outstanding shares on April 30, 1996, are as follows:
PENNSYLVANIA MUNICIPAL FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares....................................... $38,809,244
Outstanding Retail Shares......................................... 3,835,561
Net Asset Value Per Share
($38,809,244 divided by 3,835,561)................................ $ 10.12
Sales Charge, 3.00% of
offering price (3.08% of net
asset value per share)............................................ $ 0.42
Offering to Public................................................ $ 10.54
</TABLE>
EXCHANGE PRIVILEGE
Investors may exchange all or part of their Retail shares as described
in the Prospectus. Any rights an Investor may have (or have waived) to reduce
the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the Trust's
Transfer Agent or his financial institution to act on telephonic or written
instructions from any person representing himself to be the shareholder and
believed by the Transfer Agent or the financial institution to be genuine. The
Investor or his financial institution must notify the Transfer Agent of his
prior ownership of Retail shares and account number. The Transfer Agent's
records of such instructions are binding.
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's Declaration of
Trust authorizes the Board of Trustees to issue an unlimited number of shares of
beneficial interest and to classify
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or reclassify any unissued shares of the Trust into one or more additional
classes or series by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption. Pursuant to such authority, the Board of Trustees has authorized the
issuance of 32 classes or series of shares. Two of these classes or series,
which represent interests in the Pennsylvania Municipal Fund (Class T and Class
T-Special Series 1), are described in this Statement of Additional Information
and the related Prospectus.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectus, the Trust's shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of the Trust or
an individual Fund, shareholders of a Fund are entitled to receive the assets
available for distribution belonging to the particular Fund, and a proportionate
distribution, based upon the relative asset values of the respective Fund, of
any general assets of the Trust not belonging to any particular Fund which are
available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required by the
1940 Act, applicable state law, or otherwise, to be submitted to the holders of
the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each investment fund affected
by such matter. Rule 18f-2 further provides that an investment fund is affected
by a matter unless the interests of each fund in the matter are substantially
identical or the matter does not affect any interest of the fund. Under the
Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment fund only if approved by a majority of the outstanding shares of such
fund. However, the Rule also provides that the ratification of the appointment
of independent public accountants, the approval of principal underwriting
contracts, and the election of trustees may be effectively acted upon by
shareholders of the Trust voting together in the aggregate without regard to a
particular fund. In addition, shareholders of each class in a particular
investment fund have equal voting rights except that only Retail shares of an
investment fund will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing fees that are allocable
to such shares.
Although the following types of transactions are normally subject to
shareholder approval, the Board of Trustees may, under certain limited
circumstances, (a) sell and convey the assets of an investment fund to another
management investment company for
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consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of such fund involved to
be redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert an investment fund's
assets into money and, in connection therewith, to cause all outstanding shares
of such fund involved to be redeemed at their net asset value; or (c) combine
the assets belonging to an investment fund with the assets belonging to another
investment fund of the Trust, if the Board of Trustees reasonably determines
that such combination will not have a material adverse effect on shareholders of
any fund participating in such combination, and, in connection therewith, to
cause all outstanding shares of any fund to be redeemed at their net asset value
or converted into shares of another class of the Trust's shares at net asset
value. In the event that shares are redeemed in cash at their net asset value, a
shareholder may receive in payment for such shares an amount that is more or
less than his original investment due to changes in the market prices of the
Fund's securities. The exercise of such authority by the Board of Trustees will
be subject to the provisions of the 1940 Act, and the Board of Trustees will not
take any action described in this paragraph unless the proposed action has been
disclosed in writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
As described above and in the Prospectus, the Fund is designed to
provide investors with tax-exempt interest income. The Fund is not intended to
constitute a balanced investment program and is not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and IRAs, because such plans and
accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the Fund's dividends being tax-exempt.
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The policy of the Fund is to pay each year as federal exempt-interest
dividends substantially all the Fund's Municipal Bond interest income net of
certain deductions. In order for the Fund to pay federal exempt-interest
dividends with respect to any taxable year, at the close of each taxable quarter
at least 50% of the aggregate value of its portfolio must consist of tax-exempt
obligations. An exempt-interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by a Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by a Fund with respect to any taxable year which qualifies as federal exempt-
interest dividends will be the same for all shareholders receiving dividends
from the Fund with respect to such year.
The Fund does not expect to realize long-term capital gains and,
therefore, does not expect to distribute any capital gain dividends.
Shareholders are advised to consult their tax advisers with respect to
whether exempt-interest dividends would retain the exclusion under Section
103(a) if the shareholder would be treated as a "substantial user" or a "related
person" to such user with respect to facilities financed through any of the
tax-exempt obligations held by the Fund. A "substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. A "related person" includes certain related natural persons,
affiliated corporations, partners and partnerships, and S corporations and their
shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
Fund shares generally is not deductible for federal income tax purposes if the
Fund distributes exempt-interest dividends during the shareholder's taxable
year. In addition, if a shareholder holds Fund shares for six months or less,
any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six months holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the
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investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
The Fund will be treated as a separate corporate entity under the Code
and intends to qualify as a regulated investment company. In order to qualify
for tax treatment as a regulated investment company under the Code, the Fund
must satisfy, in addition to the distribution requirement described in the
Prospectus and above, certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of the Fund must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived from the Fund's business of investing in
such stock, securities or currencies. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to the Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. Any income derived by
the Fund from a partnership or trust is treated for this purpose as derived from
the Fund's business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust.
Another requirement for qualification as a regulated investment company
under the Code is that less than 30% of the Fund's gross income for a taxable
year must be derived from gains realized on the sale or other disposition of the
following investments held for less than three months: (1) stock and securities
(as defined in Section 2(a)(36) of the 1940 Act); (2) options, futures and
forward contracts other than those on foreign currencies; and (3) foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are not directly related to the Fund's principal business of investing in
stock and securities (and options and futures with respect to stocks and
securities). Interest (including original issue discount and accrued market
discount) received by a Fund upon maturity or disposition of a security held for
less than three months will not be treated as gross income derived from the sale
or other disposition of such security within the meaning of this requirement.
However, any other income which is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of securities
for this purpose.
The Trust will designate any distribution of long-term capital gains of
the Fund as a capital gain dividend in a written notice mailed to shareholders
within 60 days after the close of the Trust's taxable year. Shareholders should
note that, upon the sale
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or exchange of the Fund's shares, if the shareholder has not held such shares
for more than six months, any loss on the sale or exchange of those shares will
be treated as long-term capital loss to the extent of the capital gain dividends
received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
If for any taxable year the Fund does not qualify for federal tax
treatment as a regulated investment company, all of the Fund's taxable income
will be subject to federal income tax at regular corporate rates without any
deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits and would be eligible for
the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross proceeds realized upon
sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so that they are not subject to backup withholding or
that they are "exempt recipients."
Depending upon the extent of the Fund's activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
TRUSTEES AND OFFICERS
The Prospectus includes a description of the trustees and certain
executive officers of the Trust, their addresses, principal occupations during
the past five years, and other affiliations. Mr. W. Bruce McConnel, III,
Secretary of the Trust, is a partner of
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the law firm of Drinker Biddle & Reath, which receives fees as counsel to the
Trust. Mr. John J. Burke, Assistant Treasurer of the Trust, is employed by
First Data Investor Services Group, Inc. (formerly, The Shareholder Services
Group, Inc., d/b/a 440 Financial), which receives fees as Transfer Agent to the
Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for each
Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1996, the
Trust's trustees and officers as a group received aggregate fees of $69,875. The
trustees and officers of the Trust own less than 1% of the shares of the Trust.
The following table summarizes the compensation for each of the
Trustees of the Trust for the fiscal year ended May 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated Total
Aggregate as Part of Approval Compensation
Name of Compensation the Trust's Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., Trustee $11,375 $0 $0 $11,375
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $0 $0 $0 $0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Trust's Declaration of Trust provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder and
not because of
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his acts or omissions or some other reason. The Declaration of Trust also
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no trustee, officer, or
agent of the Trust shall be personally liable for or on account of any contract,
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust estate or the conduct of any
business of the Trust; nor shall any trustee be personally liable to any person
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as trustee.
The Declaration of Trust also provides that all persons having any claim against
the trustees or the Trust shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a trustee is
entitled to be indemnified against all liabilities and expense, reasonably
incurred by him in connection with the defense or disposition of any proceeding
in which he may be involved or with which he may be threatened by reason of his
being or having been a trustee, and that the trustees, have the power, but not
the duty, to indemnify officers and employees of the Trust unless any such
person would not be entitled to indemnification had he been a trustee.
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS
National City serves as investment adviser to the Fund, as described in
the Prospectus. The adviser is an affiliate of National City Corporation, a bank
holding company with $32 billion in assets, and headquarters in Cleveland, Ohio
and nearly 600 branch offices in three states. Through its subsidiaries,
National City Corporation has been managing investments for individuals, pension
and profit-sharing plans and other institutional investors for over 75 years and
currently manages over $30 billion in assets. From time to time, the advisers
may voluntarily waive fees or reimburse the Trust for expenses.
For the fiscal year ended April 30, 1996 and 1995, Integra Trust
Company ("Integra"), the investment adviser to the Predecessor Fund, earned
advisory fees of $264,836 and $128,093, and Integra waived fees in the amount of
$44,126 and $39,805, respectively.
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The Advisory Agreement provides that the adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. In addition, the adviser has undertaken in the Advisory Agreement to
maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
The Advisory Agreement was approved by the sole shareholder prior to
the commencement of operations. Unless sooner terminated, the Advisory Agreement
will continue in effect until September 30, 1997 and from year to year
thereafter, subject to annual approval by the Trust's Board of Trustees, or by a
vote of a majority of the outstanding shares of the Fund (as defined in the
Prospectus) and a majority of the trustees who are not parties to the Agreement
or interested persons (as defined in the 1940 Act) of any party by votes cast in
person at a meeting called for such purpose. The Advisory Agreement may be
terminated by the Trust or the advisers on 60 days written notice, and will
terminate immediately in the event of its assignment.
Weiss, Peck & Greer, L.L.C. (the "Sub-Adviser"), with principal offices
at One New York Plaza, New York, New York 10004, serves as Sub-Adviser to the
Fund. The Sub-Adviser is a professional investment counselling firm that
provides investment services to investment companies and other entities.
If expenses borne by the Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Fund's
adviser will reimburse the Trust for any such excess to the extent described in
any written undertaking provided by the advisers to such state. To the Trust's
knowledge, as of the date of this Statement of Additional Information, the most
restrictive expense limitation applicable to the Trust provides that annual
expenses (as defined by statute) may not exceed 2.5% of the first $30 million,
2% of the next $70 million and 1.5% of the remaining average net assets of the
Fund. Such amount, if any, will be estimated, reconciled and paid on a monthly
basis. The fees banks may charge to customers for services provided in
connection with their investments in the Trust are not covered by the state
securities expense limitations described above.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
PFPC serves as the administrator and accounting agent to the Trust. The
services provided as administrator and accounting
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agent and current fees are described in the Prospectus. For the fiscal years
ended April 30, 1996 and 1995, SEI Financial Management Corporation, a
wholly-owned subsidiary of SEI Corporation, served as administrator to the
Predecessor Fund and earned the following fees: $88,101 and $23,985,
respectively, and waived fees of $(9,681) and $19,188, respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENT
The Distributor acts as distributor of the Fund's shares pursuant to
its Distribution Agreement with the Trust as described in the Prospectus. Shares
are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a
Distribution Plan (the "Plan") which permits the Trust to bear certain expenses
in connection with the distribution of its shares. As required by Rule 12b-1,
the Trust's 12b-1 Plan and related distribution agreement have been approved,
and are subject to annual approval, by a majority of the Trust's Board of
Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement relating to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to make an informed determination of whether the Plan and
related agreement should be implemented, and concluded, in the exercise of their
reasonable business judgment and in light of their fiduciary duties, that there
is a reasonable likelihood that the Plan and related agreement will benefit the
Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the distribution
expenses of the Fund requires approval by its shareholders, but otherwise, the
Plan may be amended by the trustees, including a majority of the disinterested
trustees who do not have any direct or indirect financial interest in the Plan
or related agreement. The Plan and related agreement may be terminated by a vote
of the Trust's disinterested trustees or by vote of the shareholders of the
Fund, on not more than 60 days written notice. The selection and nomination of
disinterested trustees has been committed to the discretion of such
disinterested trustees as required by the Rule.
The Trust's Plan provides that each Fund will reimburse the Distributor
for distribution expenses in an amount not to
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exceed .10% of such fund's average net assets. Distribution expenses payable by
the Distributor pursuant to the Plan include direct and indirect costs and
expenses incurred in connection with advertising and marketing a fund's shares,
and direct and indirect costs and expenses of preparing, printing and
distributing its prospectuses to other than current shareholders. In addition,
the Plan provides that the Trust will pay the Distributor an annual distribution
fee of $250,000 payable monthly and accrued daily by all of the Trust's
investment funds with respect to which the Distributor is distributing shares.
The Plan has been approved, and will continue in effect for successive
one year periods provided that such continuance is specifically approved by (1)
the vote of a majority of the trustees who are not parties to the Plan or
interested persons of any such party and who have no direct or indirect
financial interest in the Plan and (2) the vote of a majority of the entire
Board of Trustees.
Class A Shares of the Predecessor Fund were subject to a plan adopted
pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan provided for
reimbursement to the Predecessor Fund's distributor of the Fund's distribution
expenses, including (1) the cost of prospectuses, reports to shareholders, sales
literature and other materials for potential investors; (2) advertising; (3)
expenses incurred in connection with the promotion and sale of Inventor's shares
including the distributor's expenses for travel, communication compensation and
benefits for sales personnel; and (4) any other expenses reasonably incurred in
connection with the distribution and marketing of Class A shares subject to
approval by a majority of disinterested directors of Inventor. For the years
ended April 30, 1996 and 1995, the Fund paid $0 and $0 in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank also serves as the Trust's custodian with respect to
the Fund. Under its Custodian Services Agreement, National City Bank has agreed
to: (i) maintain a separate account or accounts in the name of the Fund; (ii)
hold and disburse portfolio securities on account of the Fund; (iii) collect and
make disbursements of money on behalf of the Fund; (iv) collect and receive all
income and other payments and distributions on account of the Fund's portfolio
securities; (v) respond to correspondence by security brokers and others
relating to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Fund's operations. National City Bank is authorized to select one
or more banks or trust companies to serve as sub-custodian on behalf of the
Fund, provided that it shall remain responsible for the performance of all of
its duties under the Custodian Services Agreement and shall hold the Fund
harmless from the acts and omissions of any bank or trust company serving as
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sub-custodian. The Fund reimburses National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by the Fund in any year may not exceed $.225
for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly, The Shareholder
Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent") serves as the
Trust's transfer agent and dividend disbursing agent with respect to the Fund.
Under its Transfer Agency Agreement, it has agreed to: (i) issue and redeem
shares of the Fund; (ii) transmit all communications by the Fund to its
shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Fund's operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the Shareholder
Services Plan (the "Services Plan") with respect to the Retail shares in the
Fund. Pursuant to the Services Plan, the Trust may enter into agreements with
financial institutions pertaining to the provision of administrative services to
their customers who are the beneficial owners of Retail shares in consideration
for the payment of up to .10% (on an annualized basis) of the net asset value of
such shares. Such services may include: (i) aggregating and processing purchase
and redemption requests from customers; (ii) providing customers with a service
that invests the assets of their accounts in Retail shares; (iii) processing
dividend payments from the Fund; (iv) providing information periodically to
customers showing their position in Retail shares; (v) arranging for bank wires;
(vi) responding to customer inquiries relating to the services performed with
respect to Retail shares beneficially owned by customers; (vii) forwarding
shareholder communications; and (viii) other similar services requested by the
Trust. Agreements between the Trust and financial institutions will be
terminable at any time by the Trust without penalty.
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<PAGE> 225
PORTFOLIO TRANSACTIONS
Pursuant to the Sub-Advisory Agreement with National City, the
Sub-Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of portfolio securities for the Fund. The
Sub-Adviser purchases portfolio securities either directly from the issuer or
from an underwriter or dealer making a market in the securities involved.
Purchases from an underwriter of portfolio securities include a commission or
concession paid by the issuer to the underwriter and purchases from dealers
serving as market makers may include the spread between the bid and asked price.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter market, but the price includes an undisclosed
commission or mark-up.
For the fiscal year ended April 30, 1996, the Predecessor Fund did not
pay any brokerage commissions.
While the Sub-Adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Sub-Adviser in its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to the
Sub-Adviser may receive orders for transactions by the Fund. Information so
received is in addition to and not in lieu of services required to be performed
by the Sub-Adviser and does not reduce the fees payable to it by the Fund. Such
information may be useful to the Sub-Adviser in serving both the Trust and other
clients, and, similarly, supplemental information obtained by the placement of
business of other clients may be useful to the Sub-Adviser in carrying out its
obligations to the Trust.
Fund securities will not be purchased from or sold to the Fund's
adviser, Sub-Adviser, the Distributor, or any "affiliated person" (as such term
is defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its Sub-Adviser's or adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements and reverse repurchase
agreements.
While serving as adviser to the Trust, National City has agreed to
maintain its policy and practice of conducting its Trust department
independently of its Commercial Department. In making investment recommendations
for the Trust, Trust Department
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<PAGE> 226
personnel will not inquire or take into consideration whether the issuer of
securities proposed for purchase or sale for the Trust's account are customers
of the Commercial Department. In dealing with commercial customers, the
Commercial Department will not inquire or take into consideration whether
securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from those for
the other funds of the Trust and for other investment companies and accounts
advised or managed by the adviser and Sub-Adviser. Such other funds, investment
companies and accounts may also invest in the same securities as the Fund. When
a purchase or sale of the same security is made at substantially the same time
on behalf of the Fund and another investment company or account, the transaction
will be averaged as to price, and available investments allocated as to amount,
in a manner which the Sub-Adviser believes to be equitable to the Fund and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund. To the extent permitted by
law, the Sub-Advisers may aggregate the securities to be sold or purchased for
the Fund with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two Commerce
Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, serve
as independent auditors of the Trust.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the Trust,
is a partner), with offices at 1345 Chestnut Street, Philadelphia, Pennsylvania
19107, are counsel to the Trust and will pass upon the legality of the shares
offered hereby.
YIELD AND PERFORMANCE INFORMATION
The Fund's "yield" described in the Prospectus is calculated by
dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during
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<PAGE> 227
the period entitled to receive dividends and includes dividends and interest
earned during the period minus expenses accrued for the period, net of
reimbursements. This calculation can be expressed as follows:
a-b 6
Yield = 2 [(----) - 1]
cd+1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
The Fund calculates interest earned on debt obligations held in its
portfolio by computing the yield to maturity of each obligation held by it based
on the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each 30-day period, or, with
respect to obligations purchased during the 30-day period, the purchase price
(plus actual accrued interest) and dividing the result by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent 30-day period that the obligation is in the Fund. The
maturity of an obligation with a call provision is the next call date on which
the obligation reasonably may be expected to be called or, if none, the maturity
date.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
-27-
<PAGE> 228
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Fund to all shareholder accounts in proportion
to the length of the base period and the Fund's mean (or median) account size.
Undeclared earned income will be subtracted from the net asset value per share
(variable "d" in the formula). Undeclared earned income is the net investment
income which, at the end of the 30-day base period, has not been declared as a
dividend, but is reasonably expected to be and is declared as a dividend shortly
thereafter. For applicable sales charges, see "How to Purchase and Redeem Shares
- -- Sales Charges Applicable to Purchases of Retail Shares" in the Prospectus.
The "tax-equivalent yield" is computed by dividing the portion of its
yield (calculated as above) that is exempt from federal income tax by one minus
a stated federal income tax rate and adding that figure to that portion, if any,
of the Fund's yield that is not exempt from federal income tax.
For the 30-day period ended April 30, 1996, the yield of the
Predecessor Fund was 4.10%. The tax equivalent yield (assuming a 39.6% federal
tax rate and a 2.8% Pennsylvania tax rate) for the same period was 6.19%.
The Fund computes the average annual total returns by determining the
average annual compounded rate of return during specified periods that would
equate the initial amount invested to the ending redeemable value of such
investment by dividing the ending redeemable value of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed in terms of
years
The Fund computes its aggregate total returns by determining its
aggregate rates of return during specified periods
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<PAGE> 229
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
ERV
(-----) -1
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period and include all recurring fees
charged to all shareholder accounts, assuming an account size equal to the
Fund's mean (or median) account size for any fees that vary with the size of the
account. The maximum sales load and other charges deducted from payments are
deducted from the initial $1,000 payment (variable "P" in the formula). The
ending redeemable value (variable "ERV" in each formula) is determined by
assuming complete redemption of the hypothetical investment and the deduction of
all nonrecurring charges at the end of the measuring period covered by the
computation.
The average annual total returns for the one-year period ending April
30, 1996 for the Predecessor Fund were 0.84% (after taking into account the
sales load) and 5.06% (without taking into account any sales load). The average
annual total returns since the Fund's commencement of operations through April
30, 1996 were 2.44% (after taking into account the sales load) and 4.92%
(without taking into account any sales load). The Fund commenced investment
operations on August 10, 1994.
The Fund may also from time to time include in Materials a total return
figure that is not calculated according to the formulas set forth above in order
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of an index,
the Fund may calculate its aggregate total return for the period of time
specified in the advertisement or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. The Fund does
not, for these purposes, deduct from the initial value invested any amount
representing sales charges. The Fund will, however, disclose the maximum sales
charge and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
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<PAGE> 230
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on the Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may include in Materials discussions and/or
illustrations of the potential investment goals of a prospective investor,
investment management strategies, techniques, policies or investment suitability
of the Fund, high-quality investments, economic conditions, the relationship
between sectors of the economy and the economy as a whole, various securities
markets, the effects of inflation and historical performance of various asset
classes, including but not limited to, stocks, bonds and Treasury securities.
From time to time, Materials may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund), as well as the views of the adviser and Sub-Adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in Materials charts, graphs or
drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Fund and/or other mutual funds, or
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury securities and
shares of the Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in the Fund
and/or other mutual funds (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternatives to certificates of deposit and other financial
instruments. Such Materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
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<PAGE> 231
MISCELLANEOUS
The Trust bears all costs in connection with its organization,
including the fees of registering and qualifying its shares for distribution
under federal and state securities regulations. All organizational expenses are
amortized on the straight-line method over a period of five years from the date
of the commencement of operations.
As used in the Prospectus, "assets belonging to the Fund" means the
consideration received by the Trust upon the issuance of shares in the Fund,
together with all income, earnings, profits, and proceeds derived from the
investment thereof, including any proceeds from the sale of such investments,
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Trust not belonging to a particular Fund.
In determining the Fund's net asset value, assets belonging to the Fund are
charged with the respective liabilities.
The following shareholders owned beneficially or of record 5% or more
of the outstanding Retail shares of the Predecessor Fund as of June 21, 1996:
<TABLE>
<CAPTION>
Number of Percentage of
Predecessor Fund Retail Outstanding Retail
- ---------------- Shares Shares
--------- ------------------
<S> <C> <C>
Sheldon & Co.(Integra-49) 3,797,103.287 99.46%
c/o National City
Attn: Trust Mutual Funds
P.O. Box 94777, Loc. 5312
Cleveland, OH 44101-4777
</TABLE>
No Institutional shares of the Predecessor Fund had been issued as of
June 21, 1996.
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the fiscal year
ended April 30, 1996 and the periods prior thereto are contained in the
Predecessor Fund's Annual Report to Shareholders (the "Financial Statements")
which has been filed with the Securities and Exchange Commission and is
incorporated into this Statement of Additional Information by reference. The
Financial Statements and the information included in the Financial Highlights
tables for the same periods which appear in the Fund's prospectus have been
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Fund, whose report thereon appears in such Annual Reports. The Financial
Statements in such Annual
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<PAGE> 232
Reports have been incorporated herein and in the Fund's Prospectus in reliance
upon the report of said firm of independent accountants given upon their
authority as experts in accounting and auditing.
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<PAGE> 233
APPENDIX A
DESCRIPTION OF RATINGS
Bond Ratings
The following summarizes the three highest rating categories used by
Standard & Poor's Ratings Group ("S&P") for bonds:
"AAA" - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay
principal.
"AA" - Debt rated "AA" is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues only to
a small degree.
"A" - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "A" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the three highest rating categories used by
Moody's Investors Service, Inc. ("Moody's") for bonds:
"Aaa" - Bonds that 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 edged." 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 that 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
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<PAGE> 234
present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Debt which is rated "A" possesses many favorable investment
attributes and is to be considered as an upper medium grade obligation.
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.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" and "A". The modifier 1 indicates that the bond being rated ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
The following summarizes the three highest rating categories used by
Duff & Phelps Credit Rating Co. ("Duff & Phelps") for bonds:
"AAA" - Bonds that are rated "AAA" are of the highest credit quality.
The risk factors are considered to be negligible, being only slightly
more than for risk-free U.S. Treasury debt.
"AA" - Bonds that are rated "AA" are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Bonds rated "A" have average but adequate protection factors. The
risk factors are more variable and greater in periods of economic
stress.
To provide more detailed indications of credit quality, the "AA" and
"A" ratings may be modified by the addition of a plus (+) or minus (-) sign to
show relative standing within these major categories.
A-2
<PAGE> 235
The following summarizes the three highest rating categories used by
Fitch Investors Service, Inc. ("Fitch") for bonds:
"AAA" - Bonds are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA" - Bonds are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
"AAA". Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated "F-1+."
"A" - Bonds that are rated "A" are considered to be investment grade
and of high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds
with higher ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" and "A" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
The following summarizes the three highest rating categories used by
IBCA Inc. ("IBCA") for bonds:
"AAA" - Bonds rated "AAA" are considered to have an extremely strong
capacity for repayment of debt obligations.
"AA" - Bonds rated "AA" are considered to have a very strong capacity
for timely repayment of debt, although margins of protection may not be
as large as for "AAA" issues, or protection elements may be subject to
greater fluctuation.
"A" - The bond rating "A" indicates a strong capacity to meet debt
obligations in a timely manner, although the bonds may be more
susceptible to adverse changes in the environment, or margins of
protection for the lender may be lower than for more highly rated
issues.
A-3
<PAGE> 236
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Tax-Exempt Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the two highest rating categories used by S&P
for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated
"A-1."
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 9 months. The following summarizes the two highest rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory
obligations. Principal repayment capacity will normally 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 well
established access to a range of financial markets and assured sources
of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity 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 alternative liquidity is
maintained.
The following summarizes the two highest rating categories used by Duff
& Phelps for commercial paper:
A-4
<PAGE> 237
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
The following summarizes the two highest rating categories used by
Fitch for commercial paper:
"F-1+" - Instruments assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
"F-1" - Instruments assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated "F-1+."
"F-2" - Instruments assigned this rating have satisfactory degree of
assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" and "F-1" ratings.
IBCA uses the short-term ratings described under Municipal Notes
Ratings for Commercial Paper.
Municipal Notes Ratings
An S&P rating reflects the liquidity concerns and market access risks
unique to notes due in three years or less. The following summarizes the two
highest rating categories used by S&P for municipal notes:
A-5
<PAGE> 238
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
The following summarizes the two highest rating categories used by
Moody's for short-term notes and variable rate demand obligations:
"MIG-1"/"VMIG-1" - Obligations bearing these designations are of the
best quality, enjoying strong protection by established cash flows,
superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the
preceding group.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
IBCA uses the following two highest rating categories for short-term
notes (including commercial paper):
"A1+" - These issues display the very highest quality borrowing
characteristics and are of undoubted or prime creditworthiness.
"A1" - These issues display very strong borrowing characteristics.
"A2" - These issues have high quality borrowing characteristics
although their ability to repay is considered to be less than those
issues rated "A1."
A-6
<PAGE> 239
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 9, 1996
PENNSYLVANIA TAX EXEMPT FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated September 9, 1996 (the
"Prospectus"). A copy of the Prospectus may be obtained by calling or writing
the Trust at 1-800-622-FUND, 4400 Computer Drive, Westborough, Massachusetts
01581.
<PAGE> 240
TABLE OF CONTENTS
<TABLE>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION....................................... 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES.......................... 1
NET ASSET VALUE........................................................... 12
DIVIDENDS................................................................. 13
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 13
DESCRIPTION OF SHARES..................................................... 14
ADDITIONAL INFORMATION CONCERNING TAXES................................... 16
TRUSTEES AND OFFICERS..................................................... 19
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS................ 21
SHAREHOLDER SERVICES PLAN................................................. 25
PORTFOLIO TRANSACTIONS.................................................... 25
AUDITORS.................................................................. 27
COUNSEL................................................................... 27
STANDARDIZED YIELD QUOTATIONS............................................. 27
MISCELLANEOUS............................................................. 29
FINANCIAL STATEMENTS...................................................... 30
APPENDIX A................................................................ A-1
</TABLE>
-i-
<PAGE> 241
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction
with the Prospectus of Armada Funds (the "Trust") that describes the
Pennsylvania Tax Exempt Fund (the "Fund"). The information contained in this
Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus.
The Pennsylvania Tax-Exempt Fund commenced operations on August 8, 1994
as a separate investment portfolio (the "Predecessor Fund") of Inventor Funds,
Inc., which was organized as a Maryland corporation. On September 9, 1996, the
Predecessor Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold shares of stock that were
similar to the Trust's Retail Shares of beneficial interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the advisers' investment management strategies,
techniques, policies and related matters may be included from time to time in
advertisements, sales literature, communications to shareholders and other
materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is Appendix A
which contains descriptions of the rating symbols used by S&P, Fitch, Duff, IBCA
and Moody's for Municipal Bonds and other securities which may be held by the
Fund.
ELIGIBLE SECURITIES
The Fund may purchase "eligible securities" that present minimal credit
risks as determined by the Sub-Adviser pursuant to guidelines established by the
Trust's Board of Trustees. Eligible securities generally include: (1) securities
that are rated by two or more Rating Agencies (or the only Rating Agency which
has issued a rating) in one of the two highest rating categories for short term
debt securities; (2) securities that have no short term rating, if the issuer
has other outstanding short term obligations that are comparable in priority and
security as determined by the advisers ("Comparable Obligations") and that have
been rated in accordance with (1) above; (3) securities that have no short term
rating, but are determined to be of comparable quality to a security satisfying
(1) or (2) above, and the issuer does not have Comparable Obligations rated by a
Rating Agency; and (4) obligations that carry a demand feature (which will be
required to satisfy provision of applicable regulations and Fund procedures)
-1-
<PAGE> 242
that complies with (1), (2) or (3) above, and are unconditional (i.e., readily
exercisable in the event of default) or, if conditional, either they or the long
term obligations of the issuer of the demand obligation are (a) rated by two or
more Rating Agencies (or the only Rating Agency which has issued a rating) in
one of the three highest categories for long term debt obligations, or (b)
determined by the Sub-Adviser to be of comparable quality to securities which
are so rated. The Board of Trustees will approve or ratify any purchases by the
Fund of securities that are rated by only one Rating Agency or that qualify
under (3) above for so long as required by applicable law or Fund procedures.
MUNICIPAL BONDS
As described in the Prospectus, the two principal classifications of
Municipal Bonds consist of "general obligation" and "revenue" issues, and the
Fund may include "moral obligation" issues, which are normally issued by special
purpose authorities. Municipal Bonds include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities. Municipal Bonds in which the Fund
invests must be rated A or better by S&P or Fitch or A or better by Moody's at
the time of investment or, if unrated must be deemed by the Sub-Adviser to have
essentially the same characteristics and quality as bonds having the above
ratings. The Sub-Adviser may purchase private activity bonds if the interest
paid is excludable from federal income tax. Private activity bonds are issued by
or on behalf of states or political subdivisions thereof to finance privately
owned or operated facilities for business and manufacturing, housing, sports,
and pollution control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public facilities
such as airports, mass transit systems, ports, parking and low income housing.
The payment of the principal and interest on private activity bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and may be secured by a pledge of real and personal property so financed.
Pennsylvania municipal securities which are payable only from the
revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest and principal,
including, among others, laws and regulations which limit the amount of fees,
rates or other charges which may be imposed for use of the facility or which
increase competition among facilities of that type or which limit or otherwise
have the effect of reducing the use of such facilities generally, thereby
reducing the revenues generated by the particular facility. Pennsylvania
municipal securities, the
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payment of interest and principal on which is insured in whole or in part by a
Pennsylvania governmentally created fund, may be adversely affected by
Pennsylvania laws or regulations which restrict the aggregate proceeds available
for payment of principal and interest in the event of a default on such
municipal securities. Similarly, Pennsylvania municipal securities, the payment
of interest and principal on which is secured, in whole or in part, by an
interest in real property may be adversely affected by Pennsylvania laws which
limit the availability of remedies or the scope of remedies available in the
event of a default on such municipal securities. Because of the diverse nature
of such laws and regulations and the impossibility of either predicting in which
specific Pennsylvania municipal securities the Fund will invest from time to
time or predicting the nature or extent of future changes in existing laws or
regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such laws
and regulations on the securities in which the Fund may invest and, therefore,
on the shares of the Fund.
There are, of course, variations in the quality of Municipal Bonds both
within a particular classification and between classifications, and the yields
on Municipal Bonds depend upon a variety of factors, including the financial
condition of the issuer, the general conditions of the municipal bond market,
the size of a particular offering, the maturity of the obligation and the rating
of the issue. The ratings of Rating Agencies represent their opinions as to the
quality of Municipal Bonds. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Municipal Bonds with the
same maturity, interest rate and rating may have different yields while
Municipal Bonds of the same maturity and interest rate with different ratings
may have the same yield. Subsequent to its purchase by the Fund, an issue of
Municipal Bonds may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. The Fund's advisers will
consider such an event in determining whether the Fund should continue to hold
the obligation.
The payment of principal and interest on most Municipal Bonds purchased
by the Fund will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its Municipal Bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on the principal of its Municipal Bonds may be materially adversely
affected by litigation or other conditions.
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Certain Municipal Bonds held by the Fund may be insured at the time of
issuance as to the timely payment of principal and interest. The insurance
policies will usually be obtained by the issuer of the Municipal Bond at the
time of its original issuance. In the event that the issuer defaults on interest
or principal payments, the insurer of the bond is required to make payment to
the bondholders upon proper notification. There is, however, no guarantee that
the insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors. The Fund may, from time to time, invest more than 25% of its
assets in Municipal Bonds covered by insurance policies.
Municipal notes in which the Fund may invest include, but are not
limited to, general obligation notes, tax anticipation notes (notes sold to
finance working capital needs of the issuer in anticipation of receiving taxes
on a future date), revenue anticipation notes (notes sold to provide needed cash
prior to receipt of expected non-tax revenues from a specific source), bond
anticipation notes, certificates of indebtedness, demand notes and construction
loan notes. The Fund's investments in any of the notes described above will be
limited to those obligations (i) where both principal and interest are backed by
the full faith and credit of the United States, (ii) which are rated MIG-2 or
V-MIG-2 or better at the time of investment by Moody's, (iii) which are rated
SP-2 or better at the time of investment by S&P, (iv) which are rated F-1 at the
time of investment by Fitch, or (v) which, if not rated, are of equivalent
quality in the Sub-Adviser's judgment.
OTHER TAX-EXEMPT INSTRUMENTS
Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 by S&P, F-2 by Fitch or Prime-2 by
Moody's at the time of investment or which are of equivalent quality as
determined by the Sub-Adviser. Other types of tax-exempt instruments which are
permissible investments for the Fund include floating rate notes. Investments in
such floating rate instruments will normally involve industrial development or
revenue bonds which provide that the rate of interest is set as a specific
percentage of a designated base rate (such as the prime rate) at a major
commercial bank, and that the Fund can demand payment of the obligation at all
times or at stipulated dates on short notice (not to exceed 30 days) at par plus
accrued interest. The Fund must use the shorter of the period required before a
Fund is entitled to prepayment under such obligations or the period remaining
until the next interest rate adjustment date for purposes of determining the
maturity. Such obligations are frequently secured by letters of credit or other
credit support arrangements provided by banks. The quality of the underlying
credit or of the bank, as the case may be, must, in the Sub-Adviser's opinion be
equivalent to the long-term bond or commercial paper ratings stated above. The
Sub-Adviser will
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monitor the earning power, cash flow and liquidity ratios of the issuers of such
instruments and the ability of an issuer of a demand instrument to pay principal
and interest on demand. The Sub-Adviser may purchase other types of tax-exempt
instruments as long as they are of a quality equivalent to the bond or
commercial paper ratings stated above.
STAND-BY COMMITMENTS
The Fund may acquire stand-by commitments (also known as put options)
with respect to Municipal Bonds held in its portfolio. It expects that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, the Fund may pay for
a stand-by commitment either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus reducing
the yield to maturity otherwise available for the same securities). The Fund
will not acquire a stand-by commitment unless immediately after the acquisition,
not more than 5% of its total assets will be invested in instruments subject to
a demand feature, or in stand-by commitments, with the same institution.
The Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will be transferable by the Fund only
with the underlying Municipal Bonds which may be sold to a third party at any
time. Until the Fund exercises its stand-by commitment, it owns the securities
in its portfolio which are subject to the commitment.
The amount payable to the Fund upon its exercise of a stand-by
commitment will normally be (i) the Fund's acquisition cost of the Municipal
Bonds (excluding any accrued interest which the Fund paid on its acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period. Under normal market conditions, in determining net asset value, the Fund
values the underlying Municipal Bonds on an amortized cost basis. Accordingly,
the amount payable by a dealer upon exercise of a stand-by commitment will
normally be substantially the same as the portfolio value of the underlying
Municipal Bonds.
The Fund intends to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Sub-Adviser's opinion, present minimal
credit risks. The Fund's reliance upon the credit of these dealers, banks and
broker-dealers will be secured by the value of the underlying Municipal Bonds
that are subject to the commitment. Thus, the risk of loss to the Fund in
connection with a stand-by commitment will not be qualitatively different from
the risk of loss faced by a person that is holding
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securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
WHEN-ISSUED SECURITIES
The Fund may purchase Municipal Bonds on a "when-issued" basis (i.e.,
for delivery beyond the normal settlement date at a stated price and yield).
When the Fund agrees to purchase when- issued securities, the custodian sets
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Fund may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitment, marked to market daily. It is likely that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because the Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When the Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in securities issued by other investment companies
(including other investment companies advised by the adviser and Sub-Adviser)
which invest in high quality, short term debt securities and which determine
their net asset value per share based on the amortized cost or penny-rounding
method. The Fund currently intends to limit such investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund; and (d) not more than 10% of the outstanding
voting stock of any one investment company will be owned in the aggregate by the
Fund and other investment companies advised by the adviser and Sub-Adviser. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in
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connection with its own operations. Investment companies in which a Fund may
invest may also impose a sales or distribution charge in connection with the
purchase or redemption of their shares and other types of commissions or
charges. Such charges will be payable by the Fund and, therefore, will be borne
indirectly by its shareholders.
TAXABLE MONEY MARKET INSTRUMENTS
The Fund may invest in various Taxable Money Market Instruments such as
bank obligations, commercial paper, repurchase agreements and U.S. Government
Obligations.
Bank obligations include bankers' acceptances generally having a
maturity of six months or less and negotiable certificates of deposit. Bank
obligations also include U.S. dollar denominated bankers' acceptances and
certificates of deposit. Investment in bank obligations is limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase.
Investments include commercial paper and other short term promissory
notes issued by corporations, municipalities and other entities (including
variable and floating rate instruments).
Securities held by the Fund may be subject to repurchase agreements.
Under the terms of a repurchase agreement, the Fund purchases securities from
financial institutions such as banks and broker-dealers which the Fund's
Sub-Adviser deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
its repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Although there is no controlling legal
precedent confirming that a Fund would be entitled, as against a claim by such
seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody of a Fund's securities subject to
repurchase agreements and under federal laws, a court of competent jurisdiction
would rule in favor of the Trust if presented with the question. Securities
subject to repurchase agreements will be held
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by the Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
The Fund may purchase obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some of these obligations are
supported by the full faith and credit of the U.S. Treasury, such as obligations
issued by the Government National Mortgage Association. Others, such as those of
the Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the agency or instrumentality issuing the obligation. No assurance can
be given that the U.S. Government would provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when the advisers believe that the credit risk with
respect thereto is minimal.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Fund may purchase variable rate and floating rate obligations as
described in the Prospectus. The Trust's Sub-Adviser will consider the earning
power, cash flows and other liquidity ratios of the issuers and guarantors of
such notes and will continuously monitor their financial status to meet payment
on demand. In determining average weighted portfolio maturity, a variable or
floating rate instrument issued or guaranteed by the U.S. Government or an
agency or instrumentality thereof will be deemed to have a maturity equal to the
period remaining until the obligation's next interest rate adjustment. Other
variable and floating rate obligations will be deemed to have a maturity equal
to the longer or shorter of the periods remaining to the next interest rate
adjustment or the demand notice period, in accordance with applicable Fund
procedures.
Variable and floating rate obligations held by the Fund may have
maturities of more than 397 days, provided: (a) (i) the Fund is entitled to
payment of principal and accrued interest upon not more than 30 days' notice or
at specified intervals not exceeding one year (upon not more than 30 days'
notice) and (ii) the rate of interest on such instrument is adjusted
automatically at periodic intervals which normally will not exceed 31 days, but
may extend up to one year, or (b) if the obligation is an asset-backed
security, the security has a feature permitting the holder unconditionally to
receive principal and interest within 13 months of making demand.
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ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the Prospectus,
the Fund is subject to the following investment limitations which may be changed
only by a vote of the holders of a majority of the Fund's outstanding shares (as
defined under "Miscellaneous" in the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities on margin,
except to obtain short-term credits as necessary for the clearance of security
transactions in accordance with its investment objective.
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of certain portfolio securities acquired within the limitation
on purchases of restricted securities.
3. Purchase or sell real estate or real estate limited partnership
interests, except to invest in securities or interests of companies which invest
in real estate.
4. Purchase or sell commodities or commodity contracts or invest in
oil, gas, or other mineral exploration or development programs and oil, gas and
mineral leases, except to the extent appropriate to its investment objective,
invest in securities issued by companies which purchase or sell financial
commodity contracts or invest in real estate.
5. Invest in any issuer for the purpose of exercising control.
6. Pledge, mortgage or hypothecate assets, except to secure borrowings
permitted by the Fund's investment limitations in aggregate amounts not to
exceed 331/3% of the Fund's total assets taken at current value at the time of
the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any one issuer,
provided that this limitation shall apply only as to 75% of the Fund's net
assets.
8. Purchase securities of other investment companies, except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
9. Issue senior securities (as defined in the Investment Company Act of
1940), except in connection with permitted borrowings as described above or as
permitted by rule, regulation or order of the Securities and Exchange
Commission.
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The following limitations are considered non-fundamental and therefore
may be changed without a shareholder vote. The Fund may not purchase puts,
calls, options or combinations thereof, except that the Fund may purchase puts
as described in its prospectus.
The Fund may not invest in illiquid securities in an amount exceeding,
in the aggregate, 10% of its net assets.
The Fund may not purchase securities of any company which has (with
predecessors) a record of less than three years continuing operations, if, as a
result, more than 5% of the total assets of the Fund (taken at current value)
would be invested in such securities.
The foregoing percentages will apply at the time of purchase of a
security. If the Fund exceeds the limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes that it is in the best interests of
the Fund to do so.
* * * * *
In addition, so long as the Fund is offering and selling its shares in
the State of Texas , it may not: (i) invest more than 5% of its net assets in
warrants (including within that amount but not to exceed 2%, warrants that are
not listed on the New York or American Stock Exchange), (ii) invest in oil, gas
or other mineral leases, or (iii) invest in real estate limited partnership
interests.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
Potential shareholders should consider the fact that the Fund's
portfolio consists primarily of securities issued by the Commonwealth of
Pennsylvania (the "Commonwealth"), its municipalities and authorities and should
realize that the Fund's performance is closely tied to general economic
conditions within the Commonwealth as a whole and to economic conditions within
particular industries and geographic areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal operating
fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax
increases and spending deceases have resulted in surpluses the last four years;
as of June 30, 1994, the General Fund had a surplus of $892.9 million. The
deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994.
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Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly into
medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suit relating to the following matters: (i) the American
Civil Liberties Union ("ACLU") filed suit in federal court demanding additional
funding for child welfare services; the Commonwealth settled a similar suit in
the Commonwealth Court of Pennsylvania and is seeking the dismissal of the
federal suit, among other things, because of that settlement. After its earlier
denial of class certification was reversed by the Third Circuit Court of
Appeals, the district court granted class certification to the ACLU and the
parties are proceeding with discovery; (ii) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for country funding of the judicial
system to be in conflict with the constitution of the Commonwealth, but it
stayed judgment pending enactment by the legislature of funding consistent with
the opinion, and the legislature has yet to consider legislation implementing
the judgment. In 1992, a new action in mandamus was filed seeking to compel the
Commonwealth to comply with the original decision; (iii) litigation was filed in
both state and federal court by an association of rural and small schools and
several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts -- the federal case has been stayed pending the resolution of the
state case, and the state case is in the pre-trial stage, and (iv)
Envirotest/Synterra Partners ("Envirotest") filed suit against the Commonwealth
asserting that it sustained damages in excess of $350 million, as a result of
investments it made in reliance on a contract to conduct emissions testing
before the emission testing program was suspended. Envirotest entered into a
Standstill Agreement with the Commonwealth pursuant to which the parties will
attempt to resolve Envirotest's claims.
Although there can be no assurance that such conditions will continue,
the Commonwealth's general obligation bonds are currently rated AA- by S&P and
A1 by Moody's and Philadelphia's and
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Pittsburgh's general obligation bonds are currently rated BBB- and BBB+,
respectively, by S&P and Baa and Baa1, respectively, by Moody's.
The City of Philadelphia (the "City") experienced a series of General
Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term solution
for its economic difficulties. The audited balance of the City's General Fund as
of June 30, 1994 was a surplus of $15.4 million, and preliminary unaudited
financial statements as of June 30, 1995 project a surplus of approximately
$59.6 million.
In recent years, an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.4
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. As one
of the conditions of issuing bonds on behalf of the City, PICA exercises
oversight of the City's finances. The City is currently operating under a five
year plan approved by PICA in 1995. PICA's power to issue further bonds to
finance capital projects expired on December 31, 1994. PICA may continue to
issue bonds to finance cash flow deficits until December 31, 1996, and its
authority to refund existing debt will not expire.
NET ASSET VALUE
The Trust uses the amortized cost method to value shares in the Fund.
Pursuant to this method, a security is valued at its cost initially and
thereafter a constant amortization to maturity of any discount or premium is
assumed, regardless of the impact of fluctuating interest rates on the market
value of the security. Where it is not appropriate to value a security by the
amortized cost method, the security will be valued either by market quotations,
or by fair value as determined by the Board of Trustees. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the security. The value of the portfolio securities held by
the Fund will vary inversely to changes in prevailing interest rates. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its purchase cost. In
either instance, if the security is held to maturity, no gain or loss will be
realized.
The Fund invests only in high-quality instruments and maintains a
dollar-weighted average portfolio maturity appropriate
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to its objective of maintaining a stable net asset value per share, provided
that the Fund will neither purchase any security deemed to have a remaining
maturity of more than 397 calendar days within the meaning of the 1940 Act nor
maintain a dollar-weighted average portfolio maturity which exceeds 90 days. The
Trust's Board of Trustees has established procedures pursuant to rules
promulgated by the SEC, that are intended to help stabilize the net asset value
per share of the Fund for purposes of sales and redemptions at $1.00. These
procedures include review by the Board of Trustees, at such intervals as it
deems appropriate, to determine the extent, if any, to which the net asset value
per share of the Fund calculated by using available market quotations deviates
from $1.00 per share. In the event such deviation exceeds one-half of one
percent, the Board of Trustees will promptly consider what action, if any,
should be initiated. If the Board of Trustees believes that the extent of any
deviation from a Fund's $1.00 amortized cost price per share may result in
material dilution or other unfair results to investors or existing shareholders,
it has agreed to take such steps as it considers appropriate to eliminate or
reduce, to the extent reasonably practicable, any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity; shortening the average portfolio maturity; withholding or reducing
dividends; redeeming shares in kind; reducing the number of the Fund's
outstanding shares without monetary consideration; or utilizing a net asset
value per share determined by using available market quotations.
DIVIDENDS
As stated, the Trust uses its best efforts to maintain the net asset
value per share of the Fund at $1.00. As a result of a significant expense or
realized or unrealized loss incurred by the Fund, it is possible that the Fund's
net asset value per share may fall below $1.00. Should the Trust incur or
anticipate any unusual or unexpected significant expense or loss which would
affect disproportionately the income of the Fund for a particular period, the
Board of Trustees would at that time consider whether to adhere to the present
dividend policy with respect to the Fund or to revise it in order to address to
the extent possible the disproportionate effect of such expense or loss on the
income of the Fund. Such expense or loss may result in a shareholder's receiving
no dividends for the period in which he holds shares of the Fund and/or in his
receiving upon redemption a price per share lower than the price he paid.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Trust are sold on a continuous basis by 440 Financial
Distributors, Inc. (the "Distributor"), which has agreed to use appropriate
efforts to solicit all purchase orders. The
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issuance of shares is recorded on the books of the Trust. To change the
commercial bank or account designated to receive redemption proceeds, a written
request must be sent to an investor's financial institution at its principal
office. Such requests must be signed by each shareholder, with each signature
guaranteed by a U.S. commercial bank or trust company or by a member firm of a
national securities exchange. Guarantees must be signed by an authorized
signatory and "Signature Guaranteed" must appear with the signature. An
investor's financial institution may request further documentation from
corporations, executors, administrators, trustees or guardians, and will accept
other suitable verification arrangements from foreign investors, such as
consular verification.
The Trust may suspend the right of redemption or postpone the date of
payment for more than seven days for shares during any period when (a) trading
on the Exchange is restricted by applicable rules and regulations of the SEC;
(b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
EXCHANGE PRIVILEGE
Investors may exchange all or part of their Retail shares as described
in the Prospectus. Any rights an Investor may have (or have waived) to reduce
the sales load applicable to an exchange, as may be provided in the Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the Trust's
Transfer Agent or his financial institution to act on telephonic or written
instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's Declaration of
Trust authorizes the Board of Trustees to issue an unlimited number of shares of
beneficial interest and to classify or reclassify any unissued shares of the
Trust into one or more additional classes or series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption. Pursuant
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to such authority, the Board of Trustees has authorized the issuance of 32
classes or series of shares. Two of these classes or series, which represent
interests in the Pennsylvania Tax Exempt Fund (Class Q and Class Q - Special
Series 1) are described in this Statement of Additional Information and the
related Prospectus.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectus, the Trust's shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of the Trust or
an individual Fund, shareholders of a Fund are entitled to receive the assets
available for distribution belonging to the particular Fund, and a proportionate
distribution, based upon the relative asset values of the respective Funds, of
any general assets of the Trust not belonging to any particular Fund which are
available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required by the
1940 Act, applicable state law, or otherwise, to be submitted to the holders of
the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each investment fund affected
by such matter. Rule 18f-2 further provides that an investment fund is affected
by a matter unless the interests of each fund in the matter are substantially
identical or the matter does not affect any interest of the fund. Under the
Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment fund only if approved by a majority of the outstanding shares of such
fund. However, the Rule also provides that the ratification of the appointment
of independent public accountants, the approval of principal underwriting
contracts, and the election of trustees may be effectively acted upon by
shareholders of the Trust voting without regard to a particular fund. In
addition, shareholders of each class in a particular investment fund have equal
voting rights except that only Retail shares of an investment fund will be
entitled to vote on matters submitted to a vote of shareholders (if any)
relating to shareholder servicing fees that are allocable to such shares.
Although the following types of transactions are normally subject to
shareholder approval, the Board of Trustees may, under certain limited
circumstances, (a) sell and convey the assets of an investment fund to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such fund involved to be redeemed at a price which is equal to their
net asset value and which may be paid in cash or by distribution of the
securities or other consideration received from the sale and conveyance; (b)
sell and convert an investment fund's
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assets into money and, in connection therewith, to cause all outstanding shares
of such fund involved to be redeemed at their net asset value; or (c) combine
the assets belonging to an investment fund with the assets belonging to another
investment fund of the Trust, if the Board of Trustees reasonably determines
that such combination will not have a material adverse effect on shareholders of
any fund participating in such combination, and, in connection therewith, to
cause all outstanding shares of any fund to be redeemed at their net asset value
or converted into shares of another class of the Trust shares at net asset
value. In the event that shares are redeemed in cash at their net asset value, a
shareholder may receive in payment for such shares an amount that is more or
less than his original investment due to changes in the market prices of the
fund's securities. The exercise of such authority by the Board of Trustees will
be subject to the provisions of the 1940 Act, and the Board of Trustees will not
take any action described in this paragraph unless the proposed action has been
disclosed in writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
As described above and in the Prospectus, the Fund is designed to
provide investors with tax-exempt interest income. The Fund is not intended to
constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and IRAs because such plans and
accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the Fund's dividends being tax-exempt.
The policy of the Fund is to pay each year as federal exempt-interest
dividends substantially all the Fund's Municipal Bond interest income net of
certain deductions. In order for the Fund to pay federal exempt-interest
dividends with respect to any taxable year, at the close of each taxable quarter
at least 50% of the aggregate value of its portfolio must consist of tax-exempt
obligations. An exempt-interest dividend is any dividend or part
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thereof (other than a capital gain dividend) paid by the Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by the Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by the Fund with respect to any taxable year which qualifies as federal exempt-
interest dividends will be the same for all shareholders receiving dividends
from the Fund with respect to such year.
The Fund does not expect to realize long-term capital gains and,
therefore, does not expect to distribute any capital gain dividends.
Shareholders are advised to consult their tax advisers with respect to
whether exempt-interest dividends would retain the exclusion under Section
103(a) if the shareholder would be treated as a "substantial user" or a "related
person" to such user with respect to facilities financed through any of the
tax-exempt obligations held by the Fund. A "substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. A "related person" includes certain related natural persons,
affiliated corporations, partners and partnerships, and S corporations and their
shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
Fund shares generally is not deductible for federal income tax purposes if the
Fund distributes exempt-interest dividends during the shareholder's taxable
year. In addition, if a shareholder holds Fund shares for six months or less,
any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six months holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
The Fund will be treated as a separate corporate entity under the Code
and intends to qualify as a regulated investment company. In order to qualify
for tax treatment as a regulated
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investment company under the Code, each Fund must satisfy, in addition to the
distribution requirement described in the Prospectus, certain requirements with
respect to the source of its income during a taxable year. At least 90% of the
gross income of each Fund must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including, but not
limited to, gains from options, futures, or forward contracts) derived from the
Fund's business of investing in such stock, securities or currencies. The
Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to the Fund's principal business
of investing in stock or securities, or options and futures with respect to
stock or securities. Any income derived by the Fund from a partnership or trust
is treated for this purpose as derived from the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust.
Another requirement for qualification as a regulated investment company
under the Code is that less than 30% of a Fund's gross income for a taxable year
must be derived from gains realized on the sale or other disposition of the
following investments held for less than three months: (1) stock and securities
(as defined in Section 2(a)(36) of the 1940 Act); (2) options, futures and
forward contracts other than those on foreign currencies; and (3) foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are not directly related to the Fund's principal business of investing in
stock and securities (and options and futures with respect to stocks and
securities). Interest (including original issue discount and accrued market
discount) received by the Fund upon maturity or disposition of a security held
for less than three months will not be treated as gross income derived from the
sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income each calendar year to avoid liability for this excise
tax.
If for any taxable year the Fund does not qualify for federal tax
treatment as a regulated investment company, all of the
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Fund's taxable income will be subject to federal income tax at regular corporate
rates without any deduction for distributions to its shareholders. In such
event, dividend distributions (including amounts derived from interest on
Municipal Bonds with respect to the Fund) would be taxable as ordinary income to
the Fund's shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
for corporations.
The Fund may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so that they are not subject to backup withholding or that they are
"exempt recipients."
Depending upon the extent of the Fund's activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Under state or local law,
distributions of net investment income may be taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
TRUSTEES AND OFFICERS
The Prospectus includes a description of the trustees and certain
executive officers of the Trust, their addresses, principal occupations during
the past five years, and other affiliations. Mr. W. Bruce McConnel, III,
Secretary of the Trust, is a partner of the law firm of Drinker Biddle & Reath,
which receives fees as counsel to the Trust. Mr. John J. Burke, Assistant
Treasurer of the Trust, is employed by First Data Investor Services Group, Inc.
(formerly, The Shareholder Services Group, Inc., d/b/a 440 Financial), which
receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for each
Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in
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such capacity. For the year ended May 31, 1996, the Trust's trustees and
officers as a group received aggregate fees of $69,875. The trustees and
officers of the Trust own less than 1% of the shares of the Trust.
The following table summarizes the compensation for each of the
Trustees of the Trust for the fiscal year ended May 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Total
Compensation as Part of Approval Compensation
Name of from the Trust's Benefits from the
Person, Position the Trust Expenses Upon Retirement Trust
---------------- ------------ -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., $11,375 $0 $0 $11,375
Trustee
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $0 $0 $0 $0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Trust's Declaration of Trust provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder and
not because of his acts or omissions or some other reason. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust,
and shall satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
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The Declaration of Trust states further that no trustee, officer, or
agent of the Trust shall be personally liable for or on account of any contract,
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust estate or the conduct of any
business of the Trust; nor shall any trustee be personally liable to any person
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as trustee.
The Declaration of Trust also provides that all persons having any claim against
the trustees or the Trust shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a trustee is
entitled to be indemnified against all liabilities and expense, reasonably
incurred by him in connection with the defense or disposition of any proceeding
in which he may be involved or with which he may be threatened by reason of his
being or having been a trustee, and that the trustees, have the power, but not
the duty, to indemnify officers and employees of the Trust unless any such
person would not be entitled to indemnification had he been a trustee.
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS
National City serves as investment adviser to the Fund, as described in
the Prospectus. The adviser is affiliate of National City Corporation, a bank
holding company with $32 billion in assets, and headquarters in Cleveland, Ohio
and nearly 600 branch offices in three states. Through its subsidiaries,
National City Corporation has been managing investments for individuals, pension
and profit-sharing plans and other institutional investors for over 75 years and
currently manages over $30 billion in assets. From time to time, the advisers
may voluntarily waive fees or reimburse the Trust for expenses.
For the fiscal years ended April 30, 1996 and 1995, Integra Trust
Company ("Integra"), the investment adviser to the Predecessor Fund, earned
advisory fees of $310,912 and $76,582, respectively, and Integra waived fees in
the amount of $110,272 and $84,075, respectively.
The Advisory Agreement provides that the adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by it of its duties and
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obligations thereunder. In addition, the adviser has undertaken in the Advisory
Agreement to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
The Advisory Agreement was approved by the sole shareholder prior to
the Fund's commencement of operations. Unless sooner terminated, the Advisory
Agreement will continue in effect until September 30, 1997, and from year to
year thereafter, subject to annual approval by the Trust's Board of Trustees, or
by a vote of a majority of the outstanding shares of the Fund (as defined in the
Fund's Prospectus) and a majority of the trustees who are not parties to the
Agreement or interested persons (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement may be terminated by the Trust or the adviser on 60 days written
notice, and will terminate immediately in the event of its assignment.
Weiss, Peck & Greer, L.L.C. (the "Sub-Adviser"), with principal offices
at One New York Plaza, New York, New York 10004, serves as Sub-Adviser to the
Fund. The Sub-Adviser is a professional investment counselling firm that
provides investment services to investment companies and other entities.
If expenses borne by the Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the adviser will
reimburse the Trust for any such excess with respect to the Fund to the extent
described in any written undertaking provided by the adviser to such state. To
the Trust's knowledge, as of the date of this Statement of Additional
Information, the most restrictive expense limitation applicable to the Trust
provides that annual expenses (as defined by statute) may not exceed 2.5% of the
first $30 million, 2% of the next $70 million and 1.5% of the remaining average
net assets of the Fund. Such amount, if any, will be estimated, reconciled and
paid on a monthly basis. The fees banks may charge to customers for services
provided in connection with their investments in the Trust are not covered by
the state securities expense limitations described above.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
PFPC serves as the administrator and accounting agent to the Trust. The
services provided as administrator and accounting agent and current fees are
described in the Prospectus. For the fiscal years ended April 30, 1996 and April
30, 1995, SEI Financial Management Corporation, a wholly-owned subsidiary of SEI
Corporation, served as administrator to the Predecessor Fund and earned the
following fees: $103,634 and $53,552, respectively.
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DISTRIBUTION PLAN AND RELATED AGREEMENTS
The Distributor acts as distributor of the Fund's shares pursuant to
its Distribution Agreement with the Trust as described in the Prospectus. Shares
are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a
Distribution Plan (the "Plan") which permits the Trust to bear certain expenses
in connection with the distribution of its shares. As required by Rule 12b-1,
the Trust's 12b-1 Plan and related agreement have been approved, and are subject
to annual approval by, a majority of the Trust's Board of Trustees, and by a
majority of the trustees who are not interested persons of the Trust and have no
direct or indirect interest in the operation of the Plan or any agreement
related to the Plan, by vote cast in person at a meeting called for the purpose
of voting on the Plan and related agreement. In compliance with the Rule, the
trustees requested and evaluated information they thought necessary to make an
informed determination of whether the Plan and related agreement should be
implemented, and concluded, in the exercise of reasonable business judgment and
in light of their fiduciary duties, that there is a reasonable likelihood that
the Plan and related agreement will benefit the Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the distribution
expenses of a Fund requires approval by its shareholders, but otherwise, the
Plan may be amended by the trustees, including a majority of the disinterested
trustees who do not have any direct or indirect financial interest in the Plan
or related agreement. The Plan and related agreement may be terminated as to a
particular Fund by a vote of the Trust's disinterested trustees or by a vote of
the shareholders of the Fund, on not more than 60 days written notice. The
selection and nomination of disinterested trustees has been committed to the
discretion of such disinterested trustees as required by the Rule.
The Trust's Plan provides that the Fund will reimburse the Distributor
for distribution expenses in an amount not to exceed .10% of the fund's average
net assets. Distribution expenses payable by the Distributor pursuant to the
Plan include direct and indirect costs and expenses incurred in connection with
advertising and marketing the fund's shares, and direct and indirect costs and
expenses of preparing, printing and distributing its prospectuses to other than
current shareholders. In addition, the Plan provides that the Trust will pay the
Distributor an annual distribution fee of $250,000, payable monthly and accrued
daily by
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all of the Trust's investment funds with respect to which the Distributor is
distributing shares.
The Plan has been approved, and will continue in effect for successive
one year periods provided that such continuance is specifically approved by (1)
the vote of a majority of the trustees who are not parties to the Plan or
interested persons of any such party and who have no direct or indirect
financial interest in the Plan and (2) the vote of a majority of the entire
Board of Trustees.
Class A Shares of the Predecessor Fund were subject to a Plan adopted
pursuant to rule 12b-1 under the 1940 Act (the "Plan"). The Plan provided for
reimbursement to the Predecessor Fund's distributor of the Predecessor Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares including the distributor's expenses for travel,
communication, compensation and benefits for sales personnel; and (4) any other
expenses reasonably incurred in connection with the distribution and marketing
of Class A shares subject to approval by a majority of disinterested directors
of Inventor. For the years ended April 30, 1996 and 1995, the Fund paid $0 and
$0, respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with respect to the
Funds. Under its Custodian Services Agreement, National City Bank has agreed to:
(i) maintain a separate account or accounts in the name of the Fund; (ii) hold
and disburse portfolio securities on account of the Fund; (iii) collect and make
disbursements of money on behalf of the Fund; (iv) collect and receive all
income and other payments and distributions on account of the Fund's portfolio
securities; (v) respond to correspondence by security brokers and others
relating to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Fund's operations. National City Bank is authorized to select one
or more banks or trust companies to serve as sub-custodian on behalf of the
Fund, provided that it shall remain responsible for the performance of all of
its duties under the Custodian Services Agreement and shall hold the Fund
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian. The Fund reimburses National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by the Fund in any year may not exceed $.225
for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly, The Shareholder
Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent") serves as the
Trust's transfer agent and dividend
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disbursing agent with respect to the Fund. Under its Transfer Agency Agreement,
it has agreed to: (i) issue and redeem shares of the Fund; (ii) transmit all
communications by the Fund to its shareholders of record, including reports to
shareholders, dividend and distribution notices and proxy materials for meetings
of shareholders; (iii) respond to correspondence by security brokers and others
relating to its duties; (iv) maintain shareholder accounts; and (v) make
periodic reports to the Board of Trustees concerning the Fund's operations. The
Transfer Agent sends each shareholder of record a monthly statement showing the
total number of shares owned as of the last business day of the month (as well
as the dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented a Shareholder
Services Plan (the "Services Plan") with respect to Retail shares in the Fund.
Pursuant to the Services Plan, the Trust may enter into agreements with
financial institutions pertaining to the provision of administrative services to
their customers who are the beneficial owners of Retail shares in consideration
for the payment of up to .10% (on an annualized basis) of the net asset value of
such shares. Such services may include: (i) aggregating and processing purchase
and redemption requests from customers; (ii) providing customers with a service
that invests the assets of their accounts in Retail shares; (iii) processing
dividend payments from the Fund; (iv) providing information periodically to
customers showing their position in Retail shares; (v) arranging for bank wires;
(vi) responding to customer inquiries relating to the services performed with
respect to Retail shares beneficially owned by customers; (vii) forwarding
shareholder communications; and (viii) other similar services requested by the
Trust. Agreements between the Trust and financial institutions will be
terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
Pursuant to the Sub-Advisory Agreement with National City, Weiss, Peck
& Greer, L.L.C. (the "Sub-Adviser"), is responsible for, makes decisions with
respect to and places orders for all purchases and sales of portfolio securities
for the Fund. The Sub-Adviser purchases portfolio securities either directly
from the issuer or from an underwriter or dealer making a market in the
securities involved. Purchases from an underwriter of portfolio securities
include a commission or concession paid by the issuer to the underwriter and
purchases from dealers serving as market makers
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may include the spread between the bid and asked price. Transactions on stock
exchanges involve the payment of negotiated brokerage commissions. There is
generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up.
While the Sub-Adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Sub-Adviser in its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to the
Sub-Adviser may receive orders for transactions by the Fund. Information so
received is in addition to and not in lieu of services required to be performed
by the Sub-Adviser and does not reduce the fees payable to it by the Fund. Such
information may be useful to the Sub-Adviser in serving both the Trust and other
clients, and, conversely, supplemental information obtained by the placement of
business of other clients may be useful to the Sub-Adviser in carrying out its
obligations to the Trust.
Fund securities will not be purchased from or sold to the Trust's
adviser, Sub-Adviser, the Distributor, or any "affiliated person" (as such term
is defined under the 1940 Act) or any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Trust will not give preference to
its adviser's or Sub-Adviser's correspondents with respect to such transactions,
securities, savings deposits and repurchase agreements. Under certain
circumstances, the Trust may be at a disadvantage because of these limitations
compared with the portfolios of other investment companies with similar
objectives that are not subject to such limitations.
While serving as adviser to the Trust, National City has agreed to
maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department. In making investment recommendations
for the Trust, Trust Department personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Trust's account are customers of the Commercial Department. In dealing with
commercial customers, the Commercial Department will not inquire or take into
consideration whether securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from those for
other funds of the Trust and for other investment companies and accounts advised
or managed by the adviser and Sub-Adviser. Such other funds, investment
companies and accounts may
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also invest in the same securities as the Fund. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another investment company or account, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Sub-Adviser believes to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or sold by the Fund. To the extent permitted by law, the Sub-Adviser
may aggregate the securities to be sold or purchased for the Fund with those to
be sold or purchased for other investment companies or accounts in order to
obtain best execution.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two Commerce
Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, serve
as independent auditors of the Trust.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the Trust,
is a partner), with offices at 1345 Chestnut Street, Philadelphia, Pennsylvania
19107, are counsel to the Trust and will pass upon the legality of the shares
offered hereby.
STANDARDIZED YIELD QUOTATIONS
"Yields," as described in the Prospectus, are calculated according to
formulas prescribed by the SEC. The standardized seven-day yield for a class of
Fund shares is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the class having
a balance of one share at the beginning of the period, subtracting a
hypothetical charge reflecting deductions from shareholder accounts, dividing
the difference by the value of the account at the beginning of the base period
to obtain the base period return, and then multiplying the base period return by
(365/7). The net change in the value of an account in a class includes the value
of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares,
net of all fees, other than nonrecurring account or sales charges, that are
charged to all shareholder accounts in proportion to the length of the base
period and the class' mean or median account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The "effective yield" for a class of Fund shares
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is computed by compounding the unannualized base period return (calculated as
above) by adding 1 to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.
The Fund's "tax-equivalent yield" is computed by dividing the portion
of the Fund's yield (calculated as above) that is exempt from federal and state
income tax by one minus a stated federal and state income tax rate (using a
39.6% and 2.8% tax bracket, respectively) and adding that figure to that
portion, if any, of the Fund's yield that is not exempt from federal and state
income tax.
For the seven-day period ended April 30, 1996, the yield of the
Predecessor Fund was 3.32%, and its effective yield was 3.38%.
The Predecessor Fund's tax-equivalent yield (assuming 39.6% federal and
2.8% state tax rates) for the fiscal year ended April 30, 1996 was 5.02%.
The current yield for each class of shares in the Fund may be obtained
by calling the Trust at the telephone number provided on the cover page. Quoted
yields are not indicative of future yields. Yields will depend upon factors such
as fund maturity, the Fund's expenses and the types of instruments held by the
Fund.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials discussions and/or
illustrations of the potential investment goals of a prospective investor,
investment management strategies, techniques, policies or investment suitability
of the Fund, high-quality investments, economic conditions, the relationship
between sectors of the economy and the economy as a whole, various securities
markets, the effects of inflation and historical performance of various asset
classes, including but not limited to, stocks, bonds and Treasury securities.
From time to time, Materials may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the views of the adviser or as to current market, economic,
trade and interest rate trends, legislative, regulatory
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<PAGE> 269
and monetary developments, investment strategies and related matters believed to
be of relevance to the Fund. The Fund may also include in Materials charts,
graphs or drawings which compare the investment objective, return potential,
relative stability and/or growth possibilities of the Fund and/or other mutual
funds, or illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, Treasury
securities and shares of the Fund and/or other mutual funds. Materials may
include a discussion of certain attributes or benefits to be derived by an
investment in the Fund and/or other mutual funds (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic accounting rebalancing, the advantages and disadvantages of investing
in tax-deferred and taxable investments), shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and investment alternatives to certificates of deposit and
other financial instruments. Such Materials may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
MISCELLANEOUS
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund" means the
consideration received by the Trust upon the issuance of shares in the Fund,
together with all income, earnings, profits, and proceeds derived from the
investment thereof, including any proceeds from the sale of such investments,
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Trust not belonging to the Fund. In
determining a Fund's net asset value, assets belonging to the Fund are charged
with the respective liabilities.
The following shareholders owned beneficially or of record 5% or more
of the outstanding shares of the Predecessor Fund as of June 21, 1996:
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<TABLE>
<CAPTION>
Percentage of
Number of Retail Outstanding Retail
Predecessor Fund Shares Shares
- ---------------- ---------------- ------------------
<S> <C> <C>
Integra Trust Co., N.A. 60,770,399.65 86.88%
300 Fourth Avenue
Pittsburgh, PA 15278-0001
Integra Financial 7,211,000.00 10.31%
Corporation
Omnibus Account for
Integra Bank Pittsburgh
300 Fourth Avenue 2-191
Pittsburgh, PA 15278-0001
</TABLE>
No Institutional Shares of the Predecessor Fund had been issued as of June
21, 1996.
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the fiscal year
ended April 30, 1996 and the periods prior thereto are contained in the
Predecessor Fund's Annual Report to Shareholders (the "Financial Statements"),
which has been filed with the Securities and Exchange Commission and is
incorporated into this Statement of Additional Information by reference. The
Financial Statements and the information included in the Financial Highlights
tables for the same periods which appear in the Fund's prospectus have been
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Fund, whose report thereon appears in such Annual Reports. The Financial
Statements in such Annual Reports have been incorporated herein and in the
Fund's Prospectus in reliance upon the report of said firm of independent
accountants given upon their authority as experts in accounting and auditing.
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<PAGE> 271
APPENDIX A
DESCRIPTION OF RATINGS
Bond Ratings
The following summarizes the three highest rating categories used by
Standard & Poor's Ratings Group ("S&P") for bonds:
"AAA" - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay
principal.
"AA" - Debt rated "AA" is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues only to
a small degree.
"A" - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "A" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the three highest rating categories used by
Moody's Investors Service, Inc. ("Moody's") for bonds:
"Aaa" - Bonds that 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 edged." 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 that 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
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present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Debt which is rated "A" possesses many favorable investment
attributes and is to be considered as an upper medium grade obligation.
Factors giving security to principal and interest are considered
adequate but elements but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" and "A". The modifier 1 indicates that the bond being rated ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category. With regard to municipal bonds, those bonds
in the "Aa" group that Moody's believes possess the strongest investment
attributes are designated by the symbols "AA1" or "A1".
The following summarizes the three highest rating categories used by
Duff & Phelps Credit Rating Co. ("Duff & Phelps") for corporate and municipal
long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt has average but adequate protection factors. The risk
factors are more variable and greater in periods of economic stress.
To provide more detailed indications of credit quality, the "AA" and
"A" ratings may be modified by the addition of a plus (+) or minus (-) sign to
show relative standing within these categories.
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<PAGE> 273
The following summarizes the three highest rating categories used by
Fitch Investors Service, Inc. ("Fitch") for bonds:
"AAA" - Bonds are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA" - Bonds are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
"AAA."
Because bonds are rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short term
debt of these issuers is generally rated "F-1".
"A" - Bonds are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" and "A" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the three highest rating categories used by
IBCA Inc. ("IBCA") for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic
or financial conditions are unlikely to increase investment risk
significantly.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
"A" - A strong capacity to meet debt obligations in a timely manner,
although the bonds may be more susceptible
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to adverse changes in the environment, or margins of protection for the
lender may be lower than for more highly rated issues.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short term in the relevant market. The
following summarizes the two highest rating categories used by S&P for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated
"A-1."
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 9 months. The following summarizes the two highest rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short term promissory
obligations. Principal repayment capacity will normally 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 well
established access to a range of financial markets and assured sources
of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity 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,
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<PAGE> 275
may be more affected by external conditions. Ample alternative
liquidity is maintained.
The following summarizes the two highest rating categories used by Duff
& Phelps for short term debt obligations with an initial maturity of less than
one year:
"Duff 1" - Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor. Duff has incorporated gradations of "1+" and "1-" to
assist investors in recognizing quality differences that exist within
this rating tier.
"Duff 2" - Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge, total financing requirements and access to capital markets are
good. Risk factors are small.
Fitch short term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the two highest rating categories used by Fitch for commercial paper:
"F-1+" - Instruments assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
"F-1" - Instruments assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+.
"F-2" - Instruments assigned this rating have satisfactory degree of
assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
Fitch may also use the symbol "LOC" with its short term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
The following summarizes the two highest rating categories used by IBCA
for short term unsecured debt obligations with an original maturity of less than
one year:
"A1+" - Issues which display the very highest quality borrowing
characteristics and are of undoubted or prime creditworthiness.
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<PAGE> 276
"A1" - Issues which display very strong borrowing characteristics.
"A2" - These issues have high quality borrowing characteristics
although their ability to repay is considered to be less than those
issues rated "A1."
Short term Municipal Notes and Variable Rate Demand Obligations
The following summarizes the two highest rating categories used by
Moody's for short term municipal notes and variable rate demand obligations:
"MIG 1"/"VMIG 1" - Obligations bearing these designations are of the
best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broadbased access to
the market for refinancing.
"MIG 2"/"VMIG 2" - Obligations bearing these designations are of high
quality. Margins of protection are ample although not so large as in
the preceding group.
Fitch uses the short term ratings described under Commercial Paper
Ratings for Municipal Notes.
A-6
<PAGE> 277
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 9, 1996
GNMA FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated September 9, 1996 (the
"Prospectus"). A copy of the Prospectus may be obtained by calling or writing
the Trust at 1-800-622-FUND, 4400 Computer Drive, Westborough, Massachusetts
01581.
<PAGE> 278
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION................... 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES...... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........ 8
DESCRIPTION OF SHARES................................. 10
ADDITIONAL INFORMATION CONCERNING TAXES............... 11
TRUSTEES AND OFFICERS................................. 13
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS...... 15
SHAREHOLDER SERVICES PLAN............................. 19
PORTFOLIO TRANSACTIONS................................ 19
AUDITORS.............................................. 21
COUNSEL............................................... 21
YIELD AND PERFORMANCE INFORMATION..................... 21
MISCELLANEOUS......................................... 25
FINANCIAL STATEMENTS.................................. 26
APPENDIX A............................................ A-1
APPENDIX B............................................ B-1
</TABLE>
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<PAGE> 279
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
GNMA Fund (the "Fund"). The information contained in this Statement of
Additional Information expands upon matters discussed in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Prospectus.
The GNMA Fund commenced operations on August 10, 1994 as a
separate investment portfolio (the "Predecessor Fund") of Inventor Funds, Inc.
which was organized as a Maryland corporation. On September 9, 1996, the
Predecessor Fund was reorganized as a new portfolio of Armada. Prior to the
reorganization, the Predecessor Fund offered and sold shares of stock that were
similar to Armada's Retail Shares of beneficial interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for securities which may be held by the Funds.
GNMA SECURITIES
The Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to predict
accurately the average maturity of a particular GNMA pool. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. The scheduled
<PAGE> 280
monthly interest and principal payments relating to mortgages in the pool are
"passed through" to investors. In addition, there may be unscheduled principal
payments representing prepayments on the underlying mortgages. Although GNMA
certificates may offer yields higher than those available from other types of
U.S. Government securities, GNMA certificates may be less effective than other
types of securities as a means of "locking in" attractive long-term rates
because of the prepayment feature. For instance, when interest rates decline,
the value of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities, which are
securities backed by mortgages. Mortgage-backed securities represent interests
in "pools" of assets in which payments of both interest and principal on the
securities are made monthly, thus in effect "passing through" monthly payments
made by the individual borrowers on the assets that underlie the securities, net
of any fees paid to the issuer or guarantor of the securities. The average life
of mortgage-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, a mortgage-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely. Mortgage-backed securities acquired by the Fund may include
collateralized mortgage obligations ("CMOs") issued by private companies.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related securities
guaranteed by the GNMA include GNMA Mortgage Pass-Through Certificates (also
known as "Ginnie Maes"), which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by the FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes"),
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States, but are supported by the
right of the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of the principal and interest by FNMA. Mortgage-related
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<PAGE> 281
securities issued by the FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
INTEREST RATE SWAPS
The Fund may enter into interest rate swaps for hedging
purposes and not for speculation. The Fund will typically use interest rate
swaps to preserve a return on a particular investment or portion of its
investments or to shorten the effective duration of Fund investments. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments.
The Fund will only enter into interest rate swaps on a net
basis, (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). Inasmuch
as these transactions are entered into for good faith hedging purposes, the Fund
and its adviser believe that such obligations do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an amount of liquid
assets, such as cash, U.S. Government securities or other liquid high grade debt
securities, having an aggregate net asset value at least equal to such accrued
excess will be maintained in a segregated account by the Fund's custodian.
If there is a default by the other party to an interest rate
swap transaction, the Fund involved will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with markets for other similar instruments which are traded in the
Interbank market.
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<PAGE> 282
FUTURE CONTRACTS AND RELATED OPTIONS
The Fund may purchase and sell futures contracts on U.S.
Treasury obligations. For a detailed description of futures contracts, see
Appendix B to this Statement of Additional Information.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When the Fund agrees to purchase when-issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment, marked to market daily. It is likely that the
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolios might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its total
assets.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
The Fund may purchase variable and floating rate obligations
(including adjustable rate mortgages) which are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Because variable and floating rate obligations are direct
lending arrangements between the Fund and the issuer, they are not normally
traded although certain variable and floating rate obligations, such as Student
Loan Marketing Association variable rate obligations, may have a more active
secondary market because they are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. Even though there may be no active secondary
market in such instruments, the Fund may demand payment of principal and accrued
interest at a time specified in the instrument or may resell them to a third
party. Such obligations may be backed by bank letters of credit or guarantees
issued by banks, other financial institutions or the U.S. Government, its
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<PAGE> 283
agencies or instrumentalities. The quality of any letter of credit or guarantee
will be rated high quality or, if unrated, will be determined to be of
comparable quality by the adviser. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Fund might be
unable to dispose of the instrument because of the absence of a secondary market
and could, for this or other reasons, suffer a loss to the extent of the
default.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's adviser deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying fund
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
its repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying fund securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Although there is no controlling legal
precedent confirming that the Fund would be entitled, as against a claim by such
seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody of a Trust's securities subject to
repurchase agreements and under federal laws, a court of competent jurisdiction
would rule in favor of the Trust if presented with the question. Securities
subject to repurchase agreements will be held by the Trust's custodian or
another qualified custodian or in the Federal Reserve/Treasury book-entry
system. Repurchase agreements are considered to be loans by the Fund under the
1940 Act.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any
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one investment company will be owned by the Fund or by the Trust as a whole.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making fund decisions.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed with respect to the Fund only by a vote of the holders of a
majority of the Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities on
margin, except that the Fund (i) may obtain short term credits as necessary for
the clearance of securities transactions; and (ii) make short sales "against the
box" as described in the Prospectus.
2. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities.
3. Purchase or sell real estate, or real estate limited
partnerships, except that the Fund may invest in securities issued by companies
which invest in real estate.
4. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs and
oil, gas or mineral leases, except that the Fund may: (a) to the extent
appropriate to its investment objective, invest in securities issued by
companies which invest in financial commodities contracts; and (b) purchase and
sell futures contracts in accordance with its investment objective.
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5. Invest in any issuer for the purpose of exercising control.
6. Pledge, mortgage or hypothecate assets, except to secure
borrowings permitted by the Fund's investment limitations in aggregate amounts
not to exceed 33 1/3% of the Fund's total assets taken at current value at the
time of the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any one
issuer, provided that this limitation shall apply only as to 75% of the Fund's
net assets.
8. Purchase securities of other investment companies, except
as permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
9. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described in the Prospectus or as permitted by rule, regulation or order of the
Securities and Exchange Commission.
The following are considered non-fundamental investment
limitations and therefore may be changed without a shareholder vote.
The Fund may not write or purchase put options, call options,
straddles, spreads, or any combination thereof, except that the Fund may
purchase and sell futures contracts in accordance with its investment objective.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 15% of its net assets.
The Fund may not purchase securities of any company which has
(with predecessors) a record of less than three years continuing operations, if,
as a result, more than 5% of the total assets of the Fund (taken at current
value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase
of a security. If the Fund exceeds the limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes that it is in the best interests of
the Fund to do so.
* * * * *
In addition, so long as the Fund is offering and selling its
shares in the State of Texas the Fund may not (i) invest more than 5.0% of its
net assets in warrants (including within that amount, but not to exceed 2.0%,
may be warrants that are not listed
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of the New York or American Stock Exchange; (ii) invest in oil, gas, or other
mineral leases; and (iii) invest in real estate limited partnership interests.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Fund are sold on a continuous basis by 440
Financial Distributors, Inc. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must be
signed by each shareholder, with each signature guaranteed by a U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended April 30, 1996, sales loads paid by
shareholders of the Predecessor Fund totalled $________.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Fund permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
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protect against losses in a declining market, or prevent a loss if an investor
ultimately redeems his shares at a price which is lower than their purchase
price. An investor may want to consider his financial ability to continue
purchases through periods of low price levels. From time to time, in
advertisements, sales literature, communications to shareholders and other
materials ("Materials"), the Trust may illustrate the effects of dollar cost
averaging through use of or comparison to an index such as the Lehman GNMA
Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUND
Illustrations of the computation of the offering price per
Retail share of the Fund, based on the value of the Predecessor Fund's net
assets and number of outstanding shares on April 30, 1996 are as follows:
GNMA FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares................................. $62,160,843
Outstanding Retail Share.................................... 6,142,810
Net Asset Value Per Share
($__________ divided by _________ .......................... $ 10.12
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share).................................. $ 0.42
Offering to Public.......................................... $ 10.54
</TABLE>
EXCHANGE PRIVILEGE
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived) to
reduce the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
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DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 32 classes
or series of shares. Two of these classes or series, which represent interests
in the GNMA Fund (Class S and Class S - Special Series 1), are described in this
Statement of Additional Information and the related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
class in a particular investment fund have equal voting rights except that only
Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
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Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
qualify for tax treatment as a regulated investment company under the Code, the
Fund must satisfy, in addition to the distribution requirement described in the
Prospectus, certain requirements with respect to the source of its income during
a taxable year. At least 90% of the gross income of the Fund must be derived
from dividends, interest, payments with respect to securities loans, gains from
the sale or other
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disposition of stocks, securities or foreign currencies, and other income
(including, but not limited to, gains from options, futures, or forward
contracts) derived with respect to the Fund's business of investing in such
stock, securities or currencies. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to the Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. Any income derived by
the Fund from a partnership or trust is treated for this purpose as derived from
the Fund's business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust. Some of the investments that the Fund may make (such as
equipment lease and trust certificates) may not be securities or may not produce
qualifying income. Therefore, it may be necessary for the adviser to restrict
the investments of the Fund to ensure that nonqualifying income does not exceed
10% of its total gross income for a taxable year.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of the Fund's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three months:
(1) stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by the Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income which is attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
The Trust will designate any distribution of long-term capital
gains of the Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of the Fund's shares,
if the shareholder has not held such shares for more than six months, any loss
on the sale or exchange of those shares will be treated as long-term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount
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equal to specified percentages of their ordinary taxable income and capital gain
net income (excess of capital gains over capital losses). The Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and capital gain net income each calendar year to avoid liability for
this excise tax.
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits and would be eligible for
the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so that they are not subject to backup withholding or
that they are "exempt recipients."
TRUSTEES AND OFFICERS
The Prospectus includes a description of the trustees and
certain executive officers of the Trust, their addresses, principal occupations
during the past five years, and other affiliations. Mr. W. Bruce McConnel, III,
Secretary of the Trust, is a partner of the law firm of Drinker Biddle & Reath,
which receives fees as counsel to the Trust. Mr. John J. Burke, Assistant
Treasurer of the Trust, is employed by First Data Investor Services Group, Inc.
(formerly The Shareholder Services Group, Inc., d/b/a 440 Financial) which
receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1996, the
Trust's trustees and officers as a group received aggregate fees of $69,875. The
trustees and officers of the Trust own less than 1% of the shares of the Trust.
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1996:
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<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Approval Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., $11,375 $0 $0 $11,375
Trustee
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $ 0 $0 $0 $ 0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder and
not because of his acts or omissions or some other reason. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust,
and shall satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person
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for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as trustee.
The Declaration of Trust also provides that all persons having any claim against
the trustees or the Trust shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a trustee is
entitled to be indemnified against all liabilities and expense, reasonably
incurred by him in connection with the defense or disposition of any proceeding
in which he may be involved or with which he may be threatened by reason of his
being or having been a trustee, and that the trustees, have the power, but not
the duty, to indemnify officers and employees of the Trust unless any such
person would not be entitled to indemnification had he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AGREEMENT
As described in the Prospectus, National City serves as
investment adviser to the Fund. The adviser is an affiliate of National City
Corporation, a bank holding company with $32 billion in assets, and headquarters
in Cleveland, Ohio and nearly 600 branch offices in three states. Through its
subsidiaries, National City Corporation has been managing investments for
individuals, pension and profit-sharing plans and other institutional investors
for over 75 years and currently manages over $30 billion in assets. From time to
time, the adviser may voluntarily waive fees or reimburse the Trust for
expenses.
For the fiscal years ended April 30, 1996 and 1995, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $385,463 and $132,372, respectively. Integra waived
advisory fees during the same period in the amounts of $107,340 and $72,352,
respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by them of its duties and obligations
thereunder. In addition, the adviser has undertaken in its Advisory Agreement to
maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
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The Advisory Agreement was approved by the sole shareholder of
the Fund prior to the Fund's commencement of operations. Unless sooner
terminated, the Advisory Agreement will continue in effect until September 30,
1997 and from year to year thereafter, subject to annual approval by the Trust's
Board of Trustees, or by a vote of a majority of the outstanding shares of the
Fund (as defined in the Fund's Prospectus) and a majority of the trustees who
are not parties to the Agreement or interested persons (as defined in the 1940
Act) of any party by votes cast in person at a meeting called for such purpose.
The Advisory Agreement may be terminated by the Trust or the adviser on 60 days
written notice, and will terminate immediately in the event of its assignment.
If expenses borne by the Fund in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Fund's adviser will reimburse the Trust for any such excess with respect to the
Fund to the extent described in any written undertaking provided by the adviser
to such state. To the Trust's knowledge, as of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Trust provides that annual expenses (as defined by statute) may not exceed
2.5% of the first $30 million, 2% of the next $70 million and 1.5% of the
remaining average net assets of the Fund. Such amount, if any, will be
estimated, reconciled and paid on a monthly basis. The fees banks may charge to
Customers for services provided in connection with their investments in the
Trust are not covered by the state securities expense limitations described
above.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. For the fiscal years ended April 30, 1996
and 1995, SEI Financial Management Corporation, a wholly-owned subsidiary of SEI
Corporation, served as administrator to the Predecessor Fund and earned the
following fees: $99,119 and $52,643, respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENT
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by Rule
12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's Board
of Trustees,
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and by a majority of the trustees who are not interested persons of the Trust
and have no direct or indirect interest in the operation of the Plan or any
agreement relating to the Plan, by vote cast in person at a meeting called for
the purpose of voting on the Plan and related agreement. In compliance with the
Rule, the trustees requested and evaluated information they thought necessary to
an informed determination of whether the Plan and related agreement should be
implemented, and concluded, in the exercise of reasonable business judgment and
in light of their fiduciary duties, that there is a reasonable likelihood that
the Plan and related agreement will benefit the Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial interest
in the Plan or related agreement. The Plan and related agreement may be
terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has been
committed to the discretion of such disinterested trustees as required by the
Rule.
The Trust's Plan provides that each fund will reimburse the
Distributor for distribution expenses in an amount not to exceed .10% of such
fund's average net assets. Distribution expenses payable by the Distributor
pursuant to the Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a fund's shares, and direct and
indirect costs and expenses of preparing, printing and distributing its
prospectuses to other than current shareholders. In addition, the Plan provides
that the Trust will pay the Distributor an annual distribution fee of $250,000
payable monthly and accrued daily by all of the Trust's investment funds with
respect to which the Distributor is distributing shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
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Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares including the distributor's expenses for travel, communication
compensation and benefits for sales personnel; and (4) any other expenses
reasonably incurred in connection with the distribution and marketing of Class A
shares subject to approval by a majority of disinterested directors of Integra.
For the fiscal years ended April 30, 1996 and 1995, the Fund paid $0 and $0,
respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with
respect to the Fund. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of the
Fund; (ii) hold and disburse fund securities on account of the Fund; (iii)
collect and make disbursements of money on behalf of the Fund; (iv) collect and
receive all income and other payments and distributions on account of the Fund's
securities; (v) respond to correspondence by security brokers and others
relating to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Fund's operations. National City Bank is authorized to select one
or more banks or trust companies to serve as sub-custodian on behalf of the
Fund, provided that it shall remain responsible for the performance of all of
its duties under the Custodian Services Agreement and shall hold the Fund
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian. The Fund reimburses National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by the Fund in any year may not exceed $.225
for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly, The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Fund. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of the Fund; (ii) transmit all communications by the Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Fund's operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well
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as the dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan (the "Services Plan") with respect to Retail shares of
the Fund. Pursuant to the Services Plan, the Trust may enter into agreements
with financial institutions pertaining to the provision of administrative
services to their customers who are the beneficial owners of Retail shares in
consideration for the payment of up to .25% (on an annualized basis) of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase and redemption requests from customers; (ii) providing
customers with a service that invests the assets of their accounts in Retail
shares; (iii) processing dividend payments from the Fund; (iv) providing
information periodically to customers showing their position in Retail shares;
(v) arranging for bank wires; (vi) responding to customer inquiries relating to
the services performed with respect to Retail shares beneficially owned by
customers; (vii) forwarding shareholder communications; and (viii) other similar
services requested by the Trust. Agreements between the Trust and financial
institutions will be terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
Pursuant to its Advisory Agreement with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of fund securities for the Fund. The adviser purchases
Fund securities either directly from the issuer or from an underwriter or dealer
making a market in the securities involved. Purchases from an underwriter of
fund securities include a commission or concession paid by the issuer to the
underwriter and purchases from dealers serving as market makers may include the
spread between the bid and asked price. Transactions on stock exchanges involve
the payment of negotiated brokerage commissions. There is generally no stated
commission in the case of securities traded in the over-the-counter market, but
the price includes an undisclosed commission or mark-up.
For the fiscal year ended April 30, 1996, the Predecessor Fund
did not pay any brokerage commissions.
While the adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to
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the underwriter or dealer charging the lowest spread or commission available on
the transaction. Allocation of transactions, including their frequency, to
various dealers is determined by the adviser in its best judgment and in a
manner deemed fair and reasonable to shareholders. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the adviser may receive orders for transactions by the Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the adviser and does not reduce the fees payable to it by the
Fund. Such information may be useful to the adviser in serving both the Trust
and other clients, and, similarly, supplemental information obtained by the
placement of business of other clients may be useful to the adviser in carrying
out its obligations to the Trust.
Fund securities will not be purchased from or sold to the
Fund's adviser, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust department
independently of its Commercial Department. In making investment recommendations
for the Trust, personnel will not inquire or take into consideration whether the
issuer of securities proposed for purchase or sale for the Trust's account are
customers of the Commercial Department. In dealing with commercial customers,
the Commercial Department will not inquire or take into consideration whether
securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from
those for each other fund of the Trust and for other investment companies and
accounts advised or managed by the adviser. Such other funds, investment
companies and accounts may also invest in the same securities as the Fund. When
a purchase or sale of the same security is made at substantially the same time
on behalf of the Fund and another investment company or account, the transaction
will be averaged as to price, and available investments allocated as to amount,
in a manner which the adviser believes to be equitable to the Fund and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund. To the extent permitted by
law, the adviser may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
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AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
The Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b (6)
Yield = 2 [(------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last
day of the period.
The Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation
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(including actual accrued interest) at the close of business on the last
business day of each 30-day period, or, with respect to obligations purchased
during the 30-day period, the purchase price (plus actual accrued interest) and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent 30-day period
that the obligation is in the Fund. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased by the Fund at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by the Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" in
the Prospectus.
For the 30-day period ended April 30, 1996, the yield of the
Predecessor Fund was 6.21%.
The Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
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ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total returns for the Predecessor Fund's
one year period ending April 30, 1996 was 3.68% (after taking the sales load
into account) and 7.97% (without taking into account any sales load). The
average annual total returns since the Predecessor Fund's commencement of
operations through April 30, 1996 was 5.95% (after taking into account the sales
load) and 8.52% (without taking into account any sales load). The Fund commenced
operations on August 10, 1994.
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the
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formulas set forth above in order to compare more accurately the Fund's
performance with other measures of investment return. For example, in comparing
the Fund's total return with data published by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of an index, the Fund may calculate its aggregate total
return for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however, disclose
the maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sale charges would reduce the
performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as a
whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in Materials
charts, graphs or drawings which compare the investment objective, return
potential, relative stability and/or growth possibilities of the Fund and/or
other mutual funds, or illustrate the potential risks and rewards of investment
in various investment vehicles, including but not limited to, stocks, bonds,
Treasury securities and shares of the Fund and/or other mutual funds. Materials
may include a discussion of certain attributes or benefits to be derived by an
investment in the Fund and/or other
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<PAGE> 303
mutual funds (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organizational
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in the
Fund, together with all income, earnings, profits, and proceeds derived from the
investment thereof, including any proceeds from the sale of such investments,
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Trust not belonging to the Fund. In
determining the Fund's net asset value, assets belonging to the Fund are charged
with the liabilities in respect of the Fund.
The following shareholders owned beneficially or of record 5%
or more of the outstanding shares of the Predecessor Fund as of June 21, 1996:
<TABLE>
<CAPTION>
Number of Percentage
Outstanding of
Retail Retail
Predecessor Fund Shares Shares
- ---------------- ----------- ----------
<S> <C> <C>
Sheldon & Co. (Integra-49) 5,863,084.654 97.14%
c/o National City
Attn: Trust Mutual Funds
P.O. Box 94777, Loc. 5312
Cleveland, OH 44101-4777
</TABLE>
No Institutional shares of the Predecessor Fund had been
issued as of June 21, 1996.
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<PAGE> 304
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the
fiscal year ended April 30, 1996 and the periods prior thereto are contained in
the Predecessor Fund's Annual Report to Shareholders (the "Financial
Statements") which has been filed with the Securities and Exchange Commission
and is incorporated into this Statement of Additional Information by reference.
The financial Statements and the information included in the Financial
Highlights tables for the same periods which appear in the Fund's prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon appears in such Annual Reports. The
Financial Statements in such Annual Reports have been incorporated herein and in
the Fund's Prospectus in reliance upon the report of said firm of independent
accountants given upon their authority as experts in accounting and auditing.
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<PAGE> 305
APPENDIX A
DESCRIPTION OF RATINGS
Corporate Long-Term Debt Ratings
The following summarizes the rating categories used by
Standard & Poor's Ratings Group ("S&P") for corporate debt:
"AAA" - This designation represents the highest rating
assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues
only to a small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt that possesses one of
these ratings is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
"CI" - this rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in default, and payment of interest and/or
repayment of principal is in arrears.
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PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
The following summarizes the rating categories used by Moody's
Investors Service, Inc. ("Moody's") for corporate debt:
"Aaa" - Bonds 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 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 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 considered medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the
present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and
principal ("Ba" indicates some speculative elements; "B"
indicates a general lack of characteristics of desirable
investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and
"C" bonds may be in default.
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Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" through "B" in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the rating categories used by Duff &
Phelps Credit Rating Co. ("Duff & Phelps") for corporate debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for
prudent investment. Considerable variability in risk is
present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade.
Although below investment grade, debt rated "BB" is deemed
likely to meet obligations when due. Debt rated "B" possesses
the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or
preferred dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
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To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the rating categories used by
Fitch Investors Service, Inc. ("Fitch") for corporate bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent
Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted
bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation.
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To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA Inc. ("IBCA") assesses the investment quality of
unsecured debt with an original maturity of more than one year which is issued
by bank holding companies and their principal bank subsidiaries. The following
summarizes the rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to
increase investment risk significantly.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk
albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal
and interest is strong, although adverse changes in business,
economic or financial conditions may lead to increased
investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment
of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative
characteristics are present. "BB" represents the lowest degree
of speculation and indicates a possibility of investment risk
developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
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Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by S&P for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment
is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects
of changes and circumstances than an obligation carrying a
higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
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 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of
short-term promissory obligations. Principal repayment
capacity will normally 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 well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity 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,
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while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity 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 in the level
of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate
liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors
are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
"Duff 4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure
against disruption in debt service. Operating factors
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and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal
and/or interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having
the strongest degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great
as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be
rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
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"A1+" - Obligations are supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a good capacity for
timely repayment.
"A3" - Obligations are supported by a satisfactory
capacity for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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APPENDIX B
As stated in its Prospectus, the Fund may enter into certain futures
transactions for hedging purposes. Such transactions are described in this
Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have tended to move generally in the aggregate in concert
with the cash market prices and have maintained fairly predictable
relationships. Accordingly, the Fund may use interest rate futures contracts as
a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected by
the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Fund would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and Notes
and three-month United States Treasury Bills. The Fund may trade in any interest
rate futures contracts for which there exists a public market, including,
without limitation, the foregoing instruments.
EXAMPLE OF FUTURES CONTRACT SALE. The Fund may engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by the Fund
tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The adviser wishes to fix the current
market value of this fund security until some point in the future. Assume the
fund security has a market value of 100, and the adviser believes that because
of an anticipated rise in interest rates, the value will decline to 95. The Fund
might enter into futures contract sales of Treasury bonds for a equivalent of
98. If the market value of the fund security does indeed decline from 100 to 95,
the equivalent futures market price for the Treasury bonds might also decline
from 98 to 93.
In that case, the five point loss in the market value of the Fund
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures
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market price of Treasury bonds might well decline to more than 93 or to less
than 93 because of the imperfect correlation between cash and futures prices
mentioned below.
The adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the Fund securities, including the fund security being protected, would
increase. The benefit of this increase would be reduced by the loss realized on
closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss (which might be reduced by a offsetting transaction prior to
the settlement date). In each transaction, transaction expenses would also be
incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Fund may engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of a
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the 5
point increase in the price that the Fund pays for the long-term bond would be
offset by the 5 point gain realized by closing out the futures contract
purchase.
The adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the
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equivalent futures market price could fall below 98. If short-term rates at the
same time fall to 10% or below, it is possible that the Fund would continue with
its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the fund, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued incremental
income will be reduced by the loss realized on closing out the futures contract
purchase. In each transaction, expenses would also be incurred.
II. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian or a subcustodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when the Fund has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the adviser may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination
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of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Fund as hedging devices. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may move
more than or less than the price of the instruments being hedged. If the price
of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the instruments being hedged has moved in a favorable direction, this advantage
will be partially offset by the loss on the futures. If the price of the futures
move more than the price of the hedged instruments, the Fund will experience
either a loss or gain on the futures which will not be completely offset by
movements in the price of the instruments which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by the adviser. Conversely, the Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by the
adviser.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin
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deposit requirements, investors may close futures contracts through off-setting
transactions which could distort the normal relationship between the cash and
futures markets. Second, with respect to financial futures contracts, the
liquidity of the futures market depends on participants entering into
off-setting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced thus producing distortions. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the adviser may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge fund securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a 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 futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
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Successful use of futures by the Fund is also subject to the adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
IV. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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