<PAGE> 1
As filed with the Securities and Exchange Commission on September 30, 1996
Registration No. 33-488/811-4416
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
POST-EFFECTIVE AMENDMENT NO. 31 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 30 [x]
Armada Funds
(Exact Name of Registrant as Specified in Charter)
4400 Computer Drive
Westborough, Massachusetts, 01581
(Address of Principal Executive Officers)
Registrant's Telephone Number:
1-800-622-FUND
W. Bruce McConnel, III, Esq.
DRINKER BIDDLE & REATH
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Thomas F. Harvey, Esq.
National City Bank
National City Center
P.O. Box 5756
Cleveland, Ohio 44101-0756
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on date pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (b)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
<PAGE> 2
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
2
<PAGE> 3
The Registrant has previously filed a declaration of indefinite
registration of its shares of beneficial interest pursuant to Rule 24f-2 under
the Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice
with respect to the Money Market, Government, Treasury, Tax Exempt, Equity,
Fixed Income, Ohio Tax Exempt, Equity Income, Mid Cap Regional, Enhanced Income
and Total Return Advantage Funds for the fiscal year ended May 31, 1996 on July
23, 1996.
The Prospectus and Statement of Additional Information for the
National Tax Exempt Fund are incorporated by reference to Post-Effective
Amendment No. 24 filed on September 21, 1995.
3
<PAGE> 4
CROSS REFERENCE SHEET
---------------------
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page.................................. Cover Page
2. Synopsis.................................... Expense Table
3. Condensed Financial Information............. Financial Highlights; Yield
and Performance Information
4. General Description of Registrant........... Risk Factors, Investment
Objectives and Policies;
Investment Limitations;
Description of the Trust
and Its Shares
5. Management of the Trust..................... Management of the Trust;
Custodian and Transfer
Agent; Yield and
Performance Information;
Expenses; Miscellaneous
5A. Management's Discussion of.................. Not Applicable
Registrant's Performance
6. Capital Stock and Other Securities.......... How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes;
Description of the Trust
and Its Shares;
Miscellaneous; Shareholder
Services Plan
7. Purchase of Securities...................... Pricing of Shares; How
Being Offered to Purchase and Redeem
Shares; Distribution
Agreement
8. Redemption or Repurchase.................... How to Purchase and Redeem
Shares
9. Pending Legal Proceedings................... Inapplicable
4
<PAGE> 5
CROSS REFERENCE SHEET
---------------------
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
10. Cover Page.................................. Cover Page
11. Table of Contents........................... Table of Contents
12. General Information and History............. Statement of
Additional Information
13. Investment Objectives and Policies.......... Risk Factors,
Investment Objectives
and Policies
14. Management of Registrant.................... Trustees and Officers
15. Control Persons and Principal............... Description of Shares
Holders of Securities
16. Investment Advisory and Other............... Advisory, Sub-
Advisory, Services
Management,
Administration,
Distribution, Custody
and Transfer Agency
Agreements
17. Brokerage Allocation and Other.............. Risk Factors,
Investment Practices
Objectives and
Policies
18. Capital Stock and Other Securities.......... Additional Purchase
and Redemption
Information
19. Purchase, Redemption and Pricing............ Additional Purchase
of Securities Being Offered................. and Redemption
Information
20. Tax Status.................................. Additional Information
Concerning Taxes
21. Underwriters................................ Not Applicable
22. Calculation of Performance Data............. Yield and Performance
Information
23. Financial Statements........................ Auditors
5
<PAGE> 6
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
6
<PAGE> 7
CROSS REFERENCE SHEET
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Pennsylvania Tax Exempt Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . Financial Highlights; Yield
4. General Description of Registrant . . . . . . . . . . . . . . Risk Factors, Investment Objectives and Policies; Investment
Limitations; Description of the Trust and Its Shares
5. Management of the Trust . . . . . . . . . . . . . . . . . . . Management of the Trust; Custodian and Transfer Agent
6. Capital Stock and Other Securities . . . . . . . . . . . . . How to Purchase and Redeem Shares; Dividends and
Distributions; Taxes; Description of the Trust and Its
Shares; Miscellaneous
7. Purchase of Securities . . . . . . . . . . . . . . . . . . . Pricing of Shares; How
Being Offered to Purchase and Redeem Shares; Distribution Agreement
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . How to Purchase and Redeem Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 8
ARMADA FUNDS
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C>
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through NatCity Investments, Inc. (formerly National City Investments Corporation),
please call your Investment Consultant for information.
For current performance, fund information,account redemption information, and to
purchase shares, please call 1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following five
investment funds (the "Funds") of Armada Funds (the "Trust"), each having its
own investment objective and policies:
MONEY MARKET FUND'S investment objective is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Fund invests in "money market" instruments such as bank
certificates of deposit, bankers' acceptances, and commercial paper (including
variable and floating rate notes) in addition to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements relating to such obligations.
GOVERNMENT FUND'S investment objective is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Fund invests in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
relating to such obligations.
TREASURY FUND'S investment objective is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Fund invests in U.S. Treasury bills and notes and other direct
obligations of the U.S. Treasury.
TAX EXEMPT FUND'S investment objective is to provide as high a
level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. The Fund invests in
tax-exempt obligations having remaining maturities of 397 calendar days or
less, although variable and floating rate instruments may bear longer
maturities.
PENNSYLVANIA TAX EXEMPT FUND'S investment objective is to
provide current income exempt from regular federal income and Pennsylvania
personal income taxes, consistent with stability of
-1-
<PAGE> 9
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 Funds invest have
remaining maturities of 397 calendar days or less, although variable and
floating rate instruments and securities underlying certain repurchase
agreements may bear longer maturities.
National City Bank ("National City"), National City Bank of
Columbus ("National City Columbus") and National City Bank of Kentucky
("National City Kentucky") serve as investment advisers to the Money Market,
Government, Treasury and Tax Exempt Funds; National City serves as investment
adviser to the Pennsylvania Tax Exempt Fund. These investment advisers are
referred to herein individually as an "adviser" and collectively as the
"advisers." Weiss, Peck & Greer, L.L.C. ("sub-adviser") serves as the
investment sub-adviser to the Pennsylvania Tax Exempt Fund.
440 Financial Distributors, Inc., a wholly-owned subsidiary
of First Data Corp. (the "Distributor"), serves as the Trust's sponsor and
distributor. Each Fund pays a fee to the Distributor for distributing its
shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the
Funds that a prospective investor should consider before investing. Investors
should carefully read this Prospectus and retain it for future reference.
Additional information about the Funds, 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,
NATIONAL CITY BANK OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, THEIR PARENT
COMPANY OR ANY OF THEIR 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 FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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<PAGE> 10
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 30, 1996
-3-
<PAGE> 11
The classes which represent interests in the Funds are
described in this Prospectus. Class A, Class B, Class C, Class D, and Class Q
shares constitute the Institutional classes of shares (herein referred to as
the "Institutional shares") of the Money Market Fund, Government Fund, Treasury
Fund, Tax Exempt Fund, and Pennsylvania Tax Exempt Fund, respectively. Class A
- -Special Series 1, Class B - Special Series 1, Class C - Special Series 1,
Class D - Special Series 1, and Class Q - Special Series 1 shares constitute
the Retail classes of shares (herein referred to as the "Retail shares") of
the Money Market Fund, Government Fund, Treasury Fund, Tax Exempt Fund, and
Pennsylvania Tax Exempt Fund, respectively.
Institutional shares are sold primarily to banks and
customers of National Asset Management Corporation ("NAM"), who are large
institutions. Retail shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers.
EXPENSE TABLES
<TABLE>
<CAPTION>
Money Money
Market Market Government Government Treasury
Retail Institutional Retail Institutional Retail
Shares(1) Shares Shares(1) Shares Shares(1)
------ ------------- -------- - ------------- -------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Sales Charge Imposed on Purchases . . . . . . . . . None None None None None
Sales Charge Imposed on Reinvested Dividends . . . None None None None None
Deferred Sales Charge . . . . . . . . . . . . . . . None None None None None
Exchange Fee . . . . . . . . . . . . . . . . . . . None None None None None
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Management Fees (after fee waivers)(2) . . . . . . .25% .25% .25% .25% .25%
12b-1 Fees (after fee waivers)(3) . . . . . . . . . .05% .05% .05% .05% .05%
Other Expenses . . . . . . . . . . . . . . . . . . .18% .08% .20% .10% .24%
---- ---- ---- ---- ----
Total Fund Operating Expenses (after fee
waivers)(2) . . . . . . . . . . . . . . . . . . . .48% .38% .50% .40% .54%
==== ==== ==== ==== ====
</TABLE>
-4-
<PAGE> 12
<TABLE>
<CAPTION>
Pennsylvania Pennsylvania
Treasury Tax Exempt Tax Exempt Tax Exempt Tax Exempt
Institutional Retail Institutional Retail Institutional
Shares Shares(1) Shares Shares(1) Shares
------------- -------- --- ------------- --------- -- -------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Sales Charge Imposed on Purchases . . None None None None None
Sales Charge Imposed on Reinvested None None None None None
Dividends . . . . . . . . . . . . .
Deferred Sales Charge . . . . . . . . None None None None None
Exchange Fee . . . . . . . . . . . . None None None None None
Annual Fund Operating Expenses
(as a percentage of average daily net
assets)
Management Fees (after fee waivers)(2) .25% .15% .15% .15% .15%
12b-1 Fees (after fee waivers)(3) . . .05% .05% .05% .05% .05%
Other Expenses . . . . . . . . . . . .14% .24% .14% .24% .14%
---- ---- ---- ---- ----
Total Fund Operating Expenses (after
fee waivers)(2) . . . . . . . . . . .44% .44% .34% .44% .34%
==== ==== ==== ==== ====
</TABLE>
___________________________
1 The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in each of the Funds. 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. For further information concerning the Services Plan, see
"Shareholder Services Plan."
2 The expense information in the table relating to each Fund has been
restated to reflect current fees. For the current fiscal year, the
Investment Advisers will voluntarily waive fees in the amount of .10%
of the average daily net assets of the Money Market and Government
Funds, .05% of the average daily net assetsof the Treasury Fund, .20%
of the average daily net assets of the Tax Exempt Fund and .25% of the
average daily net assets of the PennsylvaniaTax Exempt Fund (the
Investment Advisers are entitled to receive an advisory fee, computed
daily and payable monthly, at the annual rate of .35% of the average
daily net assets of each of the Money Market, Government and Tax
Exempt Funds, .30% of the average daily net assets of the Treasury
Fund and .40% of the average daily net assets of the Pennsylvania Tax
Exempt Fund pursuant to their Advisory Agreement with the Trust).
Without such fee waivers, Total Fund Operating Expenses would be .58%
and.48% for the Retail and Institutional shares of the Money Market
Fund, respectively, .60% and .50% for the Retail and Institutional
shares of the Government Fund, respectively, .59% and .49% for the
Retail and Institutional Shares of the Treasury Fund,
respectively,.64% and .54% for the Retail and Institutional shares of
the Tax Exempt Fund, respectively, and .69% and .59% for the Retail
and Institutional shares of the Pennsylvania Tax Exempt Fund,
respectively. Additionally, waivers of 12b-1 fees are expected to be
in effect during the current fiscal year. If the maximum distribution
fee permitted under the 12b-1 Plan were imposed, Total Fund Operating
Expenses would be .63% and .53%, .65% and .55%, .64% and .54%, .69%
and .59% and .74% and .64% for the Retail and Institutional shares of
the Money Market Fund, Government Fund, Treasury Fund, Tax Exempt Fund
and Pennsylvania Tax Exempt Fund, respectively.
3 The Funds have in effect 12b-1 Plans pursuant to which each 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.
-5-
<PAGE> 13
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 (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Retail Shares . . . . . . . $ 5 $ 15 $ 27 $ 60
Money Market Institutional Shares . . . . $ 4 $ 12 $ 21 $ 48
Government Retail Shares . . . . . . . . $ 5 $ 16 $ 28 $ 63
Government Institutional Shares . . . . . $ 4 $ 13 $ 22 $ 51
Treasury Retail Shares . . . . . . . . . $ 6 $ 17 $ 30 $ 68
Treasury Institutional Shares . . . . . . $ 5 $ 14 $ 25 $ 55
Tax Exempt Retail Shares . . . . . . . . $ 5 $ 14 $ 25 $ 55
Tax Exempt Institutional Shares . . . . . $ 3 $ 11 $ 19 $ 43
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 Trust 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 Money Market, Government, Treasury, Tax Exempt and
Pennsylvania Tax Exempt Funds. 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 shares of any of the Funds are in addition to and
are not reflected in the fees and expenses described above.
-6-
<PAGE> 14
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
MONEY MARKET FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1995 1994 1994
---- ---- ---- ---- ---- ----
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- -------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . .0532 .0522 .0500 .0490 .0287 .0277
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . . . (.0532) (.0522) (.0500) (.0490) (.0287) (.0277)
---------- -------- ---------- -------- -------- -------
Net Asset Value,
End of Period . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ======== =======
Total Return . . . . . . . . . . . . 5.45% 5.35% 5.11% 5.01% 2.91% 2.81%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000s) . . . . . . . . . . $1,344,414 $343,087 $1,083,243 $175,192 $743,377 $67,229
Ratio of Expenses to
Average Net Assets
(after fee waivers) . . . . . . . .37%(5) .47%(6) .37%(5) .47%(6) .43%(5) .53%(6)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . . . . . 5.30%(5) 5.18%(6) 5.07%(5) 5.12%(6) 2.94%(5) 2.78%(6)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1993 1993 1992 1992 1991 1991(2)
---- ---- ---- ---- ---- -------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- -------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . .0289 .0279 .0451 .0441 .0710 .0092
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . . . (.0289) (.0279) (.0451) (.0441) (.0710) (.0092)
---------- -------- ---------- -------- -------- -------
Net Asset Value,
End of Period . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ======== =======
Total Return . . . . . . . . . . . . 2.93% 2.82% 4.59% 4.50% 7.34% 5.64%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000s) . . . . . . . . . . $ 399,191 $ 57,710 $ 352,578 $ 28,497 $322,943 $22,658
Ratio of Expenses to
Average Net Assets
(after fee waivers) . . . . . . . .43% .53% .43% .53% .42% .52%(3)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . . . . . 2.89% 2.79% 4.51% 4.41% 7.52% 6.03%(3)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1990 1989 1988 1987(1)
---- ---- ---- ------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- --------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . .0836 .0835 .0666 .0429
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . . . (.0836) (.0835) (.0666) (.0429)
---------- -------- ---------- --------
Net Asset Value,
End of Period . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ========
Total Return . . . . . . . . . . . . 8.69% 8.66% 6.87% 5.93%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000s) . . . . . . . . . . $ 365,468 $387,631 $ 370,064 $210,660
Ratio of Expenses to
Average Net Assets
(after fee waivers) . . . . . . . .42% .44% .44%(4) .36%(3),(4)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . . . . . 8.37% 8.35% 6.69% 5.85%(3),(4)
</TABLE>
1 The Money Market Fund commenced operations on September 3, 1986.
2 Retail class commenced operations on April 1, 1991.
3 Annualized.
4 The operating expense ratio and net investment income ratio before fee
waiver by the Investment Advisers for the year ended May 31, 1988 were
.45% and 6.68%, respectively, and for the period ended May 31, 1987 were
.48% and 5.73%, respectively.
5 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Institutional
class for the years ended May 31, 1996 and 1995 would have been .48% and
5.19% and .48% and 4.96%, respectively. The operating expense ratio and
net investment income ratio before fee waivers by the Investment
Advisers for the Institutional class for the year ended May 31, 1994
would have been .45% and 2.92%.
6 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Retail class
for the years ended May 31, 1996 and 1995 would have been .58% and 5.07%
and .58% and 5.01%, respectively. The operating expense ratio and net
investment income ratio before fee waivers by the Investment Advisers
for the Retail class for the year ended May 31, 1994 would have been
.55% and 2.76%.
-7-
<PAGE> 15
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
GOVERNMENT FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1995 1994 1994
---- ---- ---- ---- ---- ----
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- -------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income . . . . . . .0528 .0518 .0486 .0476 .0287 .0277
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . (.0528) (.0518) (.0486) (.0476) (.0287) (.0277)
---------- -------- ---------- -------- -------- -------
Net Asset Value,
End of Period . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ======== =======
Total Return . . . . . . . . . . 5.41% 5.31% 4.97% 4.87% 2.91% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000s) . . . . . . . . $ 741,894 $131,194 $ 618,058 $ 19,174 $768,337 $ 6,945
Ratio of Expenses to
Average Net Assets
(after fee waivers) . . . . . .36%(4) .46%(5) .39%(4) .51%(5) .42%(4) .52%(5)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . . . 5.27%(4) 5.13%(5) 4.83%(4) 5.01%(5) 2.92%(4) 2.75%(5)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1993 1993 1992 1992 1991 1991(2)
---- ---- ---- ---- ---- -------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- ------- -------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income . . . . . . .0287 .0277 .0456 .0446 .0695 .0093
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . (.0287) (.0277) (.0456) (.0446) (.0695) (.0093)
---------- -------- ---------- ------- -------- -------
Net Asset Value,
End of Period . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======= ======== =======
Total Return . . . . . . . . . . 2.91% 2.81% 4.65% 4.55% 7.17% 5.63%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000s) . . . . . . . . $ 272,809 $ 11,050 $ 148,389 $ 2,234 $136,376 $ 3,671
Ratio of Expenses to
Average Net Assets
(after fee waivers) . . . . . .45%(4) .55%(5) .45%(4) .55%(5) .45%(4) .55%(3)(5)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . . . 2.84%(4) 2.74%(5) 4.49%(4) 4.39%(5) 6.81%(4) 5.47%(3)(5)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1990 1989 1988 1987(1)
---- ---- ---- ------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- --------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . .0821 .0807 .0640 .0144
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . . . (.0821) (.0807) (.0640) (.0144)
---------- -------- ---------- --------
Net Asset Value,
End of Period . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ========
Total Return . . . . . . . . . . . . 8.53% 8.38% 6.59% 5.98%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000s) . . . . . . . . . . $ 110,675 $ 74,684 $ 62,963 $ 37,028
Ratio of Expenses to
Average Net Assets
(after fee waivers) . . . . . . . .45%(4) .45%(4) .41%(4) .35%(3),(4)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . . . . . 8.16%(4) 8.20%(4) 6.42%(4) 5.86%(3),(4)
</TABLE>
1 The Government Fund commenced operations on March 3, 1987.
2 Retail class commenced operations on April 1, 1991.
3 Annualized.
4 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Institutional
class for the years ended May 31, 1996 and 1995 would have been .47% and
5.16% and .50% and 4.72%, respectively. The operating expense ratio and
net investment income ratio before fee waivers by the Investment
Advisers for the Institutional class for the years ended May 31, 1994,
1993, 1992, 1991, 1990, 1989, and 1988 and for the period ended 1987
would have been .44% and 2.90%, .46% and 2.82%, .46% and 4.48%, .47% and
6.79%, .46% and 8.15%, .48% and 8.17%, .55% and 6.28%, and .78% and
5.43%, respectively.
-8-
<PAGE> 16
5 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Retail class
for the years ended May 31, 1996 and 1995 would have been .57% and
5.02% and .63% and 4.90%, respectively. The operating expense ratio and
net investment income ratio before fee waivers by the Investment
Advisers for the Retail class for the years ended May 31, 1994, 1993 and
1992 and for the period ended May 31, 1991 would have been .54% and
2.73%, .56% and 2.72%, .56% and 4.38%, and .56% and 5.46%, respectively.
-9-
<PAGE> 17
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
TREASURY FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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 Year Ended Period Ended Period Ended
May 31, May 31, May 31, May 31,
1996 1996 1995 1995
Institutional Retail Institutional(1) Retail(2)
------------- ------ ------------- ------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS .0496 .0486 .0456 .0232
Net Investment Income
LESS DISTRIBUTIONS (.0496) (.0486) (.0456) (.0232)
------- ------- ------- -------
Dividends from Net Investment Income
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return 5.07% 4.97% 4.86%(3) 5.41%(3)
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $312,255 $4,355 $142,877 $366
Ratio of Expenses to Average Net Assets
(after fee waivers) .41%(4) .52%(5) .43%(3),4) .56%(3),(5)
Ratio of Net Investment Income to
Average Net Assets (after fee waivers) 4.88%(4) 4.77%(5) 4.78%(3),4) 5.35%(3),(5)
</TABLE>
___________________________
1 Institutional class commenced operations on June 16, 1994.
2 Retail class commenced operations on December 22, 1994.
3 Annualized.
4 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Institutional
class for the year ended May 31, 1996 and for the period ended May 31,
1995 would have been .47% and 4.82% and .49% and 4.72%, respectively.
5 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Retail class
for the year ended May 31, 1996 and for the period ended May 31, 1995
would have been .58% and 4.71% and .63% and 5.28%, respectively.
-10-
<PAGE> 18
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
TAX EXEMPT FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, whose reports
are 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 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
May 31, May 31, May 31, May 31, May 31, May 31,
1996 1996 1995 1995 1994 1994
Institutional Retail Institutional Retail Institutional Retail
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .0334 .0324 .0309 .0299 .0204 .0194
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.0334) (.0324) (.0309) (.0299) (.0204) (.0194)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total Return 3.40% 3.29% 3.14% 3.04% 2.06% 1.96%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s) $261,808 $85,928 $172,643 $51,916 $139,015 $17,819
Ratio of Expenses to Average
Net Assets (after fee waiver .30%(4) .40%(5) .35%(4) .46%(5) .33%(4) .43%(5)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) 3.33%(4) 3.23%(5) 3.15%(4) 3.17%(5) 2.05%(4) 1.94%(5)
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
May 31, May 31, May 31, May 31, May 31, May 31,
1993 1993 1992 1992 1991 1991(2)
Institutional Retail Institutional Retail Institutional Retail
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .0216 .0206 .0351 .0341 .0517 .0069
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.0216) (.0206) (.0351) (.0341) (.0517) (.0069)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total Return 2.18% 2.07% 3.57% 3.47% 5.29% 4.24%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s) $58,928 $17,791 $60,079 $10,745 $63,559 $4,922
Ratio of Expenses to Average
Net Assets (after fee waiver .36%(4) .46%(5) .28%(4) .38%(5) .20%(4) .28%(3,5)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) 2.16%(4) 2.06%(5) 3.45%(4) 3.35%(5) 5.14%(4) 4.15%(3,5)
<CAPTION>
YEAR ENDED PERIOD ENDED
May 31, May 31,
1990 1989(1)
------------- ------------
<S> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00
----- -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .0581 .0513
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.0581) (.0513)
------ ------
Net Asset Value, End of Period $1.00 $1.00
===== =====
Total Return 5.96% 6.03%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s) $73,265 $87,770
Ratio of Expenses to Average
Net Assets (after fee waiver .21%(4) .31%(3,4)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) 5.82%(4) 5.93%(3,4)
</TABLE>
______________________
1 The Tax Exempt Fund commenced operations on July 20, 1988.
2 Retail class commenced operations on April 1, 1991.
3 Annualized.
4 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Institutional
class for the years ended May 31, 1996 and 1995 would have been .51% and
3.12% and .56% and 2.94%, respectively. The operating expense ratio and
net investment income ratio before fee waivers by the Investment
Advisers for the Institutional class for the years ended May 31, 1994,
1993, 1992, 1991, 1990, and the period ended May 31, 1989 would have
been .53% and 1.85%, .56% and 1.96%, .54% and 3.20%, .55% and 4.79%,
.27% and 5.76%, and .51% and 5.73%, respectively.
5 The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Retail class
for the years ended May 31, 1996 and 1995 would have been .61% and
3.02% and .67% and 2.96%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the Investment
Advisers for the Retail class for the years ended May 31, 1994, 1993,
1992, and for the period ended May 31, 1991 would have been .63% and
1.74%, .66% and 1.86%, .64% and 3.10%, and .63% and 3.80%, respectively.
-11-
<PAGE> 19
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 Pennsylvania Tax Exempt 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 Pennsylvania
Tax Exempt Fund's Retail Shares (the series that is similar to the Retail
Shares of the Pennsylvania Tax Exempt Fund) for the fiscal period from May 1,
1996 to May 31, 1996, the fiscal year ended April 30, 1996 and the fiscal
period ended April 30, 1995. As part of the reorganization, the fiscal year of
the Predecessor Pennsylvania Tax Exempt Fund was changed to coincide with the
Trust's May 31 fiscal year. A one-month financial report representing the
Predecessor Pennsylvania Tax Exempt Fund's operations from May 1, 1996 through
May 31, 1996 is being presented. The information was derived from financial
statements audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Pennsylvania Tax Exempt Fund, whose reports thereon are contained
in Inventor Funds' Annual Reports to Shareholders for the fiscal year ended
April 30, 1996 and the period ended May 31, 1996. Such financial highlights
should be read in conjunction with the financial statements and notes thereto
contained in Inventor Funds' Annual Reports to Shareholders and incorporated by
reference into the Statement of Additional Information relating to the
Pennsylvania Tax Exempt Fund.
-12-
<PAGE> 20
<TABLE>
<CAPTION>
Period of Period
May 1, 1996 Year Ended ended
through April 30, April 30,
May 31, 1996 1996 1995(1)
------------ ---------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period . . . . . . . . . . . $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .00 .03 .02
LESS DISTRIBUTIONS
Distributions from Net Investment Income . . . . . . . . .00 (.03) (.02)
Net Asset Value, End of Period . . . . . . . . . . . . . . $1.00 $1.00 $1.00
TOTAL RETURN(2) . . . . . . . . . . . . . . . . . . . . . . 0.28% 3.36% 2.32%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) . . . . . . . . . . . . . $68,472 $70,422 $56,668
Ratio of Expenses to Average Net Assets
(after fee waivers) . . . . . . . . . . . . . . . . . . .55%(3),(4) .55%(3) .55%(3),(4)
Ratio of Net Investment Income to
Average Net Assets (after fee waivers) . . . . . . . . . 3.24%(3),(4) 3.29%(3) 3.21%(3),(4)
</TABLE>
___________________
1. Commenced operations on August 8, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
2. Not annualized.
3. The operating expense ratio and the net investment income ratio before
fee waivers by the investment adviser for the fiscal period ended May
31, 1996, the year ended April 30, 1996 and for the period ended April
30, 1995 would have been 0.97% and 2.82%, 0.96% and 2.88%, and 1.04%
and 2.72%, respectively.
4. Annualized.
-13-
<PAGE> 21
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Each Fund consists of a separate pool of assets with separate
investment objectives and policies as described below under "Risk Factors,
Investment Objectives and Policies." Each Fund is classified as a diversified
investment company under the 1940 Act.
Shares of each Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in a Fund except that,
as described more fully under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares in the Funds.
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 a Fund's investment objective. The
investments and investment techniques utilized by the Funds are described
below. Prior to making an investment decision, an investor should consider
which Funds best meet an investor's investment objectives and review carefully
the risks involved in Fund investments described below.
The investment objective of a 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," a
Fund's investment policies, however, may be changed without a vote of
shareholders. There can be no assurance that a Fund will achieve its
objective.
Each Fund will only purchase "eligible securities" that
present minimal credit risks as determined by the advisers 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 advisers.
See "Risk Factors,
-14-
<PAGE> 22
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.
Each 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
each Fund's dollar-weighted average portfolio maturity may not exceed 90 days.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek
as high a level of current income as is consistent with liquidity and stability
of principal. The Fund seeks to achieve its objective by investing in "money
market" instruments such as certificates of deposit and other obligations
issued by domestic and foreign banks, and commercial paper (including variable
and floating rate instruments) rated high quality by an unaffiliated Rating
Agency, or determined to be of comparable quality by the advisers. The Money
Market Fund may also invest in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements issued
by financial institutions such as banks and broker-dealers. See "Common
Investment Policies of the Funds - Money Market Instruments."
GOVERNMENT FUND
The investment objective of the Government Fund is to seek as
high a level of current income as is consistent with liquidity and stability of
principal. The Fund seeks to achieve its objective by investing in obligations
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities, and repurchase agreements issued
by financial institutions such as banks and broker-dealers. See "Common
Investment Policies of the Funds - Government Obligations."
TREASURY FUND
The investment objective of the Treasury Fund is to seek as
high a level of current income as is consistent with liquidity and stability of
principal. The Fund seeks to achieve its objective by investing exclusively in
direct obligations of the U.S. Treasury, such as Treasury bills and notes. See
"Common Investment Policies of the Funds."
-15-
<PAGE> 23
TAX EXEMPT FUND
The investment objective of the Tax Exempt Fund is to provide
as high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. The Fund seeks to
achieve its objective by investing substantially all of its assets in a
diversified fund of obligations issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia and their
political subdivisions, agencies, instrumentalities and authorities, the
interest on which, in the opinion of counsel issued on the date of the issuance
thereof, is exempt from regular federal income tax ("Municipal Bonds").
Under normal market conditions, at least 80% of the value of
the Tax Exempt Fund's total assets will be invested in Municipal Bonds. 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 hold uninvested cash reserves pending
investment, during temporary defensive periods or if, in the opinion of the
advisers, desirable tax-exempt obligations 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 "Common Investment Policies of the Funds."
Although the Tax Exempt Fund may invest 25% or more of its net
assets in (i) Municipal Bonds whose issues are in the same state, (ii)
Municipal Bonds the interest on which is paid solely from revenues of similar
projects, and (iii) private activity bonds (described below), it does not
presently intend to do so unless in the opinion of its advisers the investment
is warranted. To the extent that the Fund's assets are invested in Municipal
Bonds that are payable from the revenues of similar projects or are issued by
issuers located in the same state or are invested in private activity bonds,
the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such states, projects and bonds to a greater
extent than it would be if its assets were not so invested.
PENNSYLVANIA TAX EXEMPT FUND
The investment objective of the Pennsylvania Tax Exempt 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.
-16-
<PAGE> 24
The Pennsylvania Tax Exempt 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 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 Pennsylvania Tax Exempt Fund is concentrated in 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 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 stand-by 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 TAX EXEMPT FUND
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 ability of the respective
obligors to make payments of interest and principal due on the obligations held
by the Fund, and the market values of these obligations. Rising unemployment,
a relatively high proportion of persons 65 and older in the Commonwealth of
Pennsylvania and court ordered
-17-
<PAGE> 25
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.
COMMON INVESTMENT POLICIES OF THE FUNDS
Illiquid Securities
The Funds will not knowingly invest more than 10% of the value
of their respective net assets in securities that are illiquid. Each 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 advisers, or sub-adviser in the case of the Pennsylvania Tax
Exempt Fund, 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 a 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 a Fund in these securities.
Risk Factors Associated with Derivative Instruments
Since their inception, the Funds have emphasized safety and
high credit quality. This requires that market risk or interest rate risk, as
well as credit risk, be held to minimal levels. The advisers have determined
that many types of floating rate instruments, commonly referred to as
"derivatives," are considered to be potentially volatile. These derivative
instruments are structured in a way that may not allow them to reset to par at
an interest rate adjustment date. Accordingly, the advisers have adopted the
following policies on behalf of the Funds.
The following types of derivative instruments ARE NOT
permitted investments for the Funds:
-18-
<PAGE> 26
o leveraged or deleveraged floaters (whose interest rate reset
provisions are based on a formula that magnifies the effect of changes
in interest rates);
o range floaters (which do not pay interest if market interest rates
move outside of a specified range);
o dual index floaters (whose interest rate reset provisions are tied to
more than one index so that a change in the relationship between these
indices may result in the value of the instrument falling below face
value);
o inverse floaters (which reset in the opposite direction of their
index); and
o any other structured instruments having cash flow characteristics that
can create potential market volatility similar to the "floaters"
listed above.
Additionally, the Funds may not invest in instruments indexed
to longer than one-year rates, or in instruments whose interest rate reset
provisions are tied to an index that materially lags short-term interest rates,
such as "COFI floaters."
At the present time, the only derivative investments that have
been determined to be suitable for investment by the Funds are:
o securities based on short-term, fixed-rate contracts; and
o floating-rate or variable-rate securities whose interest rates reset
based on changes in standard money market rate indices such as U.S.
government Treasury bills, London Interbank Offered Rate, published
commercial paper rates, or federal funds rates.
The advisers or sub-adviser in the case of the Pennsylvania
Tax Exempt Fund, will evaluate the risks presented by the derivative
instruments purchased by the Funds, and will determine, in connection with
their day-to-day management of the Funds, how they will be used in furtherance
of the Funds' investment objectives.
Repurchase and Reverse Repurchase Agreements
The Money Market and Government Funds 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"). These Funds may
enter into repurchase agreements only with financial institutions such as banks
and broker-dealers which are deemed to be creditworthy by
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the advisers, pursuant to guidelines approved by the Trust's Board of Trustees.
None of the Funds may enter into repurchase agreements with the advisers,
Distributor, or any of their affiliates. Although the securities subject to
repurchase agreements may bear maturities exceeding 397 days, the Funds
presently intend to enter only into repurchase agreements which terminate
within seven days after notice by the Funds. 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 10% of the Fund's net assets.
The seller under a repurchase agreement will be required to
maintain the value of the securities which a 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 holding such
obligation 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.
The Money Market and Government Funds may also borrow funds
for temporary purposes by entering into reverse repurchase agreements.
Pursuant to such agreements the Funds will sell portfolio securities to
financial institutions such as banks and broker-dealers and agree to repurchase
them at a particular date and price. Reverse repurchase agreements involve the
risk that the market value of the securities sold by a Fund may decline below
the price of the securities it is obligated to repurchase.
Lending Portfolio Securities
In order to generate additional income, the Money Market,
Government and Treasury Funds may, from time to time, lend their portfolio
securities to broker-dealers, banks or other institutional borrowers. A Fund
must receive 100% collateral in the form of cash or U.S. government securities.
This collateral must be valued daily by the advisers, 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 Funds or the borrower at
any time. While a Fund does not have the right to vote
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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. A Fund
will only enter into loan arrangements with broker-dealers, banks or other
institutions which the advisers have determined are creditworthy under
guidelines established by the Trust's Board of Trustees.
Variable and Floating Rate Obligations
The Money Market, Government, Tax Exempt and Pennsylvania Tax
Exempt Funds 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. A Fund, however, may invest in such
obligations which have a stated maturity in excess of 397 days only if the Fund
may demand repayment at intervals in accordance with guidelines established by
the Board of Trustees. 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, a 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, or sub-adviser in the case of the Pennsylvania Tax
Exempt Fund. Variable and floating rate obligations entered into by the
Government Fund, 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. In
the event an issuer of a variable or floating rate obligation defaulted on its
payment obligation, a 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.
Money Market Instruments
The Money Market Fund may invest in "money market"
instruments, including bank obligations and commercial paper. The Pennsylvania
Tax Exempt Fund may also invest, from time to time, a portion of its assets for
temporary defensive or other purposes in such taxable money market instruments.
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable time deposits issued for a definite
period of time and earning a
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specified return by a U.S. bank which is a member of the Federal Reserve
System. Bank obligations also include U.S. dollar denominated bankers'
acceptances, certificates of deposit and time deposits issued by foreign
branches of U.S. banks or foreign banks. 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. The Money Market Fund may
also make interest bearing savings deposits in commercial and savings banks not
in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of the Fund's total assets at the time
of purchase.
Investments in commercial paper and other short-term
promissory notes issued by corporations (including variable and floating rate
instruments) must be rated at the time of purchase "A-2" or better by Standard
& Poor's Ratings Group ("S&P"), "Prime-2" or better by Moody's Investors
Service, Inc. ("Moody's"), "F-2" or better by Fitch Investors Service, L.P.
("Fitch"), "Duff 2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or
"A2" or better by IBCA, Inc. or, if not rated, determined by the advisers to be
of comparable quality pursuant to guidelines approved by the Trust's Board of
Trustees. Investments may also include corporate notes. In addition, the
Money Market Fund may invest in Canadian Commercial Paper ("CCP"), which is
U.S. dollar denominated commercial paper issued by a Canadian corporation or a
Canadian counterpart of a U.S. corporation, and in Europaper, which is U.S.
dollar denominated commercial paper of a foreign issuer. The Money Market Fund
may acquire zero coupon obligations, which have greater price volatility than
coupon obligations and which will not result in the payment of interest until
maturity.
Investments in the obligations of foreign branches of U.S.
banks, foreign banks and other foreign issuers may subject the Money Market
Fund to additional investment risks, including future political and economic
developments, the possible imposition of withholding taxes on interest income,
possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks. The Money Market Fund
will invest in the obligations of foreign banks or foreign branches of U.S.
banks only when the advisers believe that the credit risk with respect to the
instrument is minimal.
The Money Market Fund may also make limited investments in
guaranteed investment contracts ("GICs") issued by U.S. insurance companies.
The Fund will purchase a GIC only when the
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advisers have determined, under guidelines established by the Board of
Trustees, that the GIC presents minimal credit risks to the Fund and is of
comparable quality to instruments that are rated high quality by certain
nationally recognized statistical rating organizations.
Government Obligations
The Treasury Fund may only invest in direct obligations of the
U.S. Treasury. The other Funds may invest in these obligations and other
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. government, such as the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; 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 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; still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. Some of these
investments may be variable or floating rate instruments. See "Variable and
Floating Rate Obligations."
Types of Municipal Bonds
The two principal classifications of municipal bonds 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 a 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 terms "Municipal Bonds" and "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."
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The Tax Exempt Fund and Pennsylvania Tax Exempt Fund may also
invest in "moral obligation" bonds, which are ordinarily issued by special
purpose public authorities in states other than Ohio. 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 restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
In addition, the Tax Exempt Fund may purchase short-term Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes, and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax or other funds, the proceeds of
bonds or other revenues. Municipal Bonds purchased by the Tax Exempt Fund may
include variable and floating rate instruments (described below). The Tax
Exempt 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.
Certain municipal obligations may be accompanied by a
guaranty, letter of credit or insurance. The Pennsylvania Tax Exempt Fund
typically evaluates the credit quality and ratings of such "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.
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 Trustees, 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 Pennsylvania Tax Exempt
Fund to treat the income from the investment as exempt from federal income tax.
This Fund invests in these participation interests in order to obtain credit
enhancement or
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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 Pennsylvania Tax
Exempt Fund invests will be subject to the same quality rating standards
applicable to Municipal Bonds.
Stand-by Commitments
The Tax Exempt and Pennsylvania Tax Exempt Funds may acquire
stand-by commitments with respect to Municipal Bonds. 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 must be of high
quality as determined by any Rating Agency, or, if not rated, must be deemed to
be of comparable quality. The Funds acquire stand-by commitments solely to
facilitate fund liquidity and do not intend to exercise their rights thereunder
for trading purposes.
Tax-Exempt Derivatives and Other Municipal Bonds
The Tax Exempt and Pennsylvania Tax Exempt Funds may invest in
tax-exempt derivative securities relating to Municipal Bonds, including tender
option bonds, participations, beneficial interests in trusts and partnership
interests.
Opinions relating to the validity of Municipal Bonds 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 Tax Exempt Fund from tax-exempt derivative securities are rendered by
counsel to the respective sponsors of such securities. The Funds and their
investment advisers, and sub-adviser, will rely on such opinions and will not
review independently the underlying proceedings relating to the issuance of
Municipal Bonds, the creation of any tax-exempt derivative securities, or the
bases for such opinions.
When-Issued Securities
The Tax Exempt and Pennsylvania Tax Exempt Funds may purchase
securities on a "when-issued" or delayed delivery basis. These transactions
are arrangements in which a 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 Funds expect that commitments
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to purchase when-issued securities will not exceed 25% of the value of its
total assets under normal market conditions. The Funds do 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, each 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.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each 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.
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 the Fund bears directly in connection with its own operations.
Investment companies in which the Funds 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.
INVESTMENT LIMITATIONS
Each 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 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.")
No Fund may:
1. Make loans, except that each Fund may purchase or
hold debt instruments in accordance with its investment objective and policies,
and each Fund (other than the Tax Exempt and Pennsylvania Tax Exempt Funds) may
lend portfolio securities and each Fund (other than the Tax Exempt Fund) may
enter into repurchase agreements in accordance with its investment objective
and policies.
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2. (a) This paragraph does not apply to the
Pennsylvania Tax Exempt Fund. Borrow money or issue senior securities, except
that each Fund may borrow from banks for temporary purposes and each Fund
(other than the Tax Exempt Fund) may enter into reverse repurchase agreements
for temporary purposes in amounts not in excess of 10% of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or hypothecate
any assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Fund's total assets at the time of such borrowing (provided that each Fund
other than the Tax Exempt Fund may invest in reverse repurchase agreements in
accordance with its investment objective and policies). Borrowings are
intended solely to facilitate the orderly sale of portfolio securities to
accommodate abnormally heavy redemption requests and not for leverage purposes.
A Fund will not purchase securities while borrowings (including reverse
repurchase agreements) in excess of 5% of the Fund's net assets are
outstanding.
(b) The Pennsylvania Tax Exempt Fund may not
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. Invest more than 10% of the value of its net assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days (other than the Tax Exempt Fund),
non-negotiable time deposits (other than the Tax Exempt Fund), and other
securities which are not readily marketable.
4. Purchase securities of other investment companies
except in connection with a merger, consolidation, acquisition or
reorganization or where otherwise permitted by the 1940 Act (but only in
securities of other investment companies which seek to maintain a constant net
asset value per share and which are permitted themselves to invest only in
securities which may be acquired by the Fund).
Additional investment limitations which are matters of
fundamental policy are as follows:
5. The Money Market, Government and Treasury Funds will
limit their respective purchases of the securities of any
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one issuer (other than U.S. government Obligations and customary demand
deposits) to 5% of their respective total assets, except that each Fund may
invest more than 5% but no more than 25% of its total assets in "First Tier
Securities" of one issuer for a period of up to three business days. First
Tier Securities include "eligible securities" (defined above under "Risk
Factors, Investment Objectives and Policies") that (i) if rated by more than
one Rating Agency, are rated (at the time of purchase) by two or more Rating
Agencies in the highest rating category for such securities, (ii) if rated by
only one Rating Agency, are rated by such Rating Agency in its highest rating
category for such securities, (iii) have no short term rating but have been
issued by an issuer that has other outstanding short term obligations that have
been rated in accordance with (i) or (ii) above and are comparable in priority
and security to such securities, and (iv) are certain unrated securities that
have been determined by the advisers to be of comparable quality to such
securities pursuant to guidelines established by the Trust's Board of Trustees.
6. The Money Market, Government and Treasury Funds will
limit their purchases of "Second Tier Securities," which are eligible
securities other than First Tier Securities, to 5% of their respective total
assets.
7. The Money Market, Government and Treasury Funds will
limit their purchases of Second Tier Securities of one issuer to the greater of
1% of its total assets or $1 million.
8. The Money Market and Pennsylvania Tax Exempt Funds
may not 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 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) with respect to the Pennsylvania Tax Exempt Fund,
there is no limitation with respect to securities issued by state and local
governments.
9. The Government Fund may not purchase securities other
than obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (some of which may be subject to repurchase agreements) and
securities of other
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investment companies as permitted by investment limitation No. 4 above.
10. The Treasury Fund may not purchase securities other
than direct obligations of the U.S. Treasury, such as Treasury bills and notes
and securities of other investment companies as permitted by investment
limitation No. 4 above.
11. The Tax Exempt Fund may not purchase any securities
other than obligations the interest on which is exempt from federal income tax,
stand-by commitments with respect to such obligations, and securities of other
investment companies as permitted by investment limitation No. 4 above.
12. The Tax Exempt Fund may not 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, more than 5% of the value of its total assets would be
invested in such issuer, except that up to 25% of the value of its total assets
may be invested without regard to this 5% limitation.
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 a Fund's securities will not constitute a violation of such
limitation for purposes of the 1940 Act. If a 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 Funds' 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 a 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 each Fund's "yield" and "effective yield" and the Tax
Exempt and Pennsylvania Tax Exempt Funds' "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 a 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
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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 Exempt and Pennsylvania Tax Exempt Funds'
"tax-equivalent yield" for a class of shares, which shows the level of taxable
yield necessary to produce an after-tax equivalent to the Funds' 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 and state income tax at
stated tax rates. The Tax Exempt and Pennsylvania Tax Exempt Funds'
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, 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 IBC's
Money Fund Report, a nationally recognized money market fund reporting service,
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 Funds 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 advisers 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 Funds is
available in the annual and semi-annual reports to
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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 values per share of the Money Market, Government, Treasury and
Pennsylvania Tax Exempt Funds are calculated as of 1:00 p.m. and as of the
close of trading on the New York Stock Exchange (the "Exchange") (generally,
4:00 p.m. Eastern Time) on each business day as described below. The net asset
value per share of the Tax Exempt Fund is calculated as of 12:00 noon and as of
the close of trading on the Exchange (generally, 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, Dr. Martin Luther King, Jr. 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 a Fund is calculated
by dividing the value of all securities and other assets belonging to a 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 all of the Funds 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 Funds' 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 Funds
at $1.00, there can be no assurance that the net asset value will not vary.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds 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, including trips
and monetary awards to NatCity Investments, Inc. and other affiliates of
National City.
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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 Funds
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 NatCity
Investments , Inc. 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),
Youngstown (1-800-742-4098), or Pittsburgh (1-800-282-1078).
With respect to the Money Market, Government and Treasury
Funds, 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 NatCity Investments, Inc., 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 a 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 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.
Purchases for an IRA through the monthly savings program will be considered as
contributions for the year in which the purchases are made.
Customers of Banks may purchase Retail shares through
procedures established by the Banks or their financial
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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 a 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 a Fund, in a consistent manner each month,
with a minimum amount of $50. 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 by completing an application
obtained through a financial institution, such as banks, brokers, or dealers
selling Retail shares of the Funds, or by calling 1-800-622-FUND(3863). 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 Investors 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, who are large institutions, ("Customers"). Depending on the terms
governing the particular account, the Banks or NAM 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 a 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 a Fund.
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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 a 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 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 Money Market, Government and
Treasury Funds which are received by the Transfer Agent on any Business Day
prior to 12:00 noon (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 12:00 noon and 2:00 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. (Eastern Time) will be executed on the following Business
Day at the previous day's net asset value per share.
Purchase orders for shares of the Tax Exempt and Pennsylvania
Tax Exempt Funds which are received by the Transfer Agent on any Business Day
prior to 12:00 noon (Eastern Time) are priced at the net asset value per share
next determined after receipt of the order by the Transfer Agent and processed
that day. Purchase orders received by the Transfer Agent after 12:00 noon
(Eastern Time) will be executed on the following business day at the previous
day's net asset value per share.
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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 1-800-622-FUND(3863). 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 the Trust, 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
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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 1-800-622-FUND(3863) provided the appropriate election was made on
the shareholder's 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 Trust's
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
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investor's financial institution or the Transfer Agent at 1-800-622-FUND(3863).
CHECKWRITING
Checkwriting is available from certain institutions with
respect to the Funds. No charge for the use of the checkwriting privilege is
currently imposed by the Trust, although a charge may be imposed in the future.
With this service, a shareholder may write a check in an amount of $250 or
more. To obtain checks, a shareholder must complete the signature card that
accompanies the account application. To establish this checkwriting service
after opening an account in one or more of the Funds, the shareholder must
contact the Trust by calling 1-800-622-FUND(3863) or by sending a written
request to the Trust, P.O. Box 5109, Westborough, Massachusetts 01581-5109 to
obtain an application. A signature guarantee may be required. A shareholder
will receive daily dividends declared on the shares to be redeemed up to the
day that a check is presented to the Custodian for payment. Upon 30 days
written notice to shareholders, the checkwriting privilege may be modified or
terminated. An investor cannot close an account in a Fund by writing a check.
OTHER REDEMPTION INFORMATION
With respect to the Money Market, Government and Treasury
Funds, 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 1:00
p.m. (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 1:00 p.m. (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 advisers, an earlier payment could adversely affect the
Trust.
With respect to the Tax Exempt and Pennsylvania Tax Exempt
Funds, 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
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proceeds within seven days after receiving the redemption orders if, in the
judgment of the advisers, 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 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.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who own
Retail shares of the Funds (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
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NatCity Investments, Inc., 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 Money
Market, Government and Treasury Funds received by the Transfer Agent prior to
1:00 p.m. (Eastern Time) will be processed as of the close of business on the
day of receipt; such requests received by the Transfer Agent after 1:00 p.m.
(Eastern Time) will be processed on the next Business Day. Exchange requests
for the Tax Exempt and Pennsylvania Tax Exempt Funds 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; 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.
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 each of the Funds. Pursuant to the Services Plan, the Trust
enters into shareholder servicing
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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 same 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 Funds
are determined, each 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 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 a
Fund.
Shareholders of the Funds 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 paid after its receipt.
Under the Services Plan, the amount of each Fund's net
investment income available for distribution to the holders of
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Retail shares is reduced by the amount of shareholder servicing fees payable to
financial institutions under the Services Plan.
TAXES
IN GENERAL
Each of the Funds intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification 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 each 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 net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Since all of each 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.
The Money Market, Government and Treasury Funds intend to
distribute substantially all of their respective investment company taxable
income and net tax-exempt interest income each year. Such dividends will be
taxable as ordinary income to each Fund's 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.)
The Tax Exempt and Pennsylvania Tax Exempt Funds intend to
distribute substantially all of their respective 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 each Fund's 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 Funds do
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not intend to earn any investment company taxable income or net long-term
capital gains.
Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date before the end of
the year 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 Tax Exempt and Pennsylvania Tax Exempt Funds 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 Tax Exempt 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. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum 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.
PENNSYLVANIA TAXES
Under current Pennsylvania law, Shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Pennsylvania Tax
Exempt Fund attributable to interest income from obligations of the
Commonwealth 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 Pennsylvania Tax Exempt 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 in the unlikely
event that they realize any gain 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
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.
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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 Funds 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
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors in the Funds 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, other affiliations
and the compensation paid by the Trust and the fees and reimbursed expenses
they receive in connection with each meeting of the Board of Trustees they
attend are included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Money Market Fund, Government
Fund, Treasury Fund and Tax Exempt Fund. National City serves as investment
adviser to the Pennsylvania Tax Exempt Fund. The advisers are wholly owned
subsidiaries of National City Corporation. The advisers provide 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
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advisers are member banks of the Federal Reserve System and the Federal Deposit
Insurance Corporation.
On June 30, 1996, the Trust Departments of National City,
National City Columbus and National City Kentucky had approximately $8.7
billion, $1.6 billion and $5.1 billion, respectively, in assets under
management, and National City, National City Columbus and National City
Kentucky had approximately $16.8 billion, $10.7 billion and $11.9 billion,
respectively, in total trust assets. National City has its principal offices
at 1900 East Ninth Street, Cleveland, Ohio 44114; National City Columbus has
its principal offices at 155 East Broad Street, Columbus, Ohio 43251; and
National City Kentucky has its principal offices at National City Tower, 101
South Fifth Street, Louisville, Kentucky 40202.
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with each Fund's investment policies, the advisers
have agreed to manage the Funds, make decisions with respect to and place
orders for all purchases and sales of the Funds' securities, and maintain the
Trust's records relating to such purchases and sales. For the services
provided and expenses assumed pursuant to the Advisory Agreement, the advisers
are entitled to receive an advisory fee, computed daily and payable monthly, at
the annual rate of .35% of the average net assets of the Money Market Fund,
.35% of the average net assets of the Government Fund, .30% of the average net
assets of the Treasury Fund, .35% of the average net assets of the Tax Exempt
Fund, and .40% of the average net assets of the Pennsylvania Tax Exempt Fund.
The advisers may from time to time waive all or a portion of the advisory fee
payable by one or more of the Funds.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit
such a bank holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company. The advisers
believe that they may perform the services contemplated by their Advisory
Agreements with the Trust as described in such agreements and this Prospectus
without violation of applicable banking laws or regulations. However, there
are no controlling judicial precedents and future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well
as future interpretations of present and future requirements, that could
prevent the advisers
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from continuing to perform services for the Trust. If the advisers were
prohibited from providing services to the Funds, the Board of Trustees would
consider selecting another qualified firm. Any new investment advisory
agreement would be subject to shareholder approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the advisers, or their
affiliated and correspondent banks in connection with shareholder purchases of
Fund shares, the advisers and their affiliated and correspondent banks might be
required to alter materially or discontinue the services offered by them to
shareholders. It is not anticipated, however, that any resulting change in the
Trust's method of operations would affect its net asset value per share or
result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
Sessions of Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
SUB-ADVISER
Weiss, Peck & Greer, L.L.C. serves as the investment
sub-adviser to the Pennsylvania Tax Exempt Fund under a sub-advisory agreement
(the "Sub-Advisory Agreement") with the adviser. The sub-adviser is a limited
liability company founded in 1970. The sub-adviser engages in investment
management, venture capital management and management buyouts. The sub-adviser
has been active since its founding in managing portfolios of tax exempt
securities. On June 30, 1996, total assets under management were approximately
$12.7 billion, over $3.9 billion of which were tax-free money market
instruments. The principal business address of the sub-adviser 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
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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 Funds. 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 Funds: 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 Funds' net asset values per share, net income, and
realized capital gains (losses); and generally assist the Funds with respect to
all aspects of their administration and operation. PFPC is entitled to receive
an administration fee, accrued daily and paid monthly, computed on a combined
basis for the Tax Exempt and Pennsylvania Tax Exempt Funds and on a combined
basis for all taxable money market funds at an annual rate of .05% of the
first $300,000,000 of aggregate net assets of the Funds, .0325% of the next
$300,000,000, .03% of the next $400,000,000, .025% of the next $500,000,000,
.02% of the next $1 billion of aggregate net assets, and .015% of aggregate net
assets in excess of $2.5 billion. 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"). Ten of these
classes or series, which represent interests in the 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) and Pennsylvania Tax Exempt Fund
(Class Q and Class Q - Special Series 1) are described in this Prospectus.
Class A, Class B, Class C, Class D and Class Q shares constitute the
Institutional class or series of shares; and Class A-Special Series 1, Class
B-Special Series 1, Class C-Special Series 1, Class D-Special Series 1 and
Class Q-Special Series 1 shares constitute the Retail class or series of
shares. The other Funds
-46-
<PAGE> 54
of the Trust are: 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), 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.
As stated previously in the text of this document, 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.
-47-
<PAGE> 55
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.
As of September 10, 1996, nine bank subsidiaries of National
City Corporation held beneficially or of record approximately 95.98%, 98.42%,
99.74% and 100% of the outstanding Institutional shares of the Money Market,
Government , Treasury and Tax Exempt Funds, respectively, and one bank
subsidiary of National City Corporation held of record approximately 62.25% of
the outstanding Institutional shares of the Pennsylvania Tax Exempt Fund.
Neither National City, National City Columbus, nor National City Kentucky have
any economic interest in such shares which are held solely for the benefit of
their customers, but may be deemed to be controlling persons of the Funds
within the meaning of the 1940 Act by reason of their record ownership of such
shares. The names of beneficial owners and record owners who are controlling
shareholders under the 1940 Act may be found in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank 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 advisers bear all expenses
in connection with the performance of their services. Each Fund of the Trust
bears 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
-48-
<PAGE> 56
custodian and Transfer Agent; certain insurance premiums; outside auditing and
legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. Each 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 Funds 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 Bank 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.
The portfolio managers of the Funds and other investment
professionals may from time to time discuss in advertising, sales literature or
other material, including periodic publications, various topics of interest to
shareholders and prospective investors. The topics may include, but are not
limited to, the advantages and disadvantages of investing in tax-deferred and
taxable investments; Fund performance and how such performance may compare to
various market indices; shareholder profiles and hypothetical investor
scenarios; the economy; the financial and capital markets; investment
strategies and techniques; investment products and tax, retirement and
investment planning.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
-49-
<PAGE> 57
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF NATIONAL
CITY CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
<PAGE> 58
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
EXPENSE TABLES . . . . . . . . . . . . . . . . . . . . 4
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . 7
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 13
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . 13
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . 25
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . 28
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . 30
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . 30
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . 38
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . 39
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . 39
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 40
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . 42
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . 45
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . 47
EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . 47
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 48
</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 OF COLUMBUS; NATIONAL CITY BANK OF 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 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 Money Market, Government,
Treasury, Tax Exempt or Pennsylvania Tax Exempt Funds will be able to
maintain a stable net asset value of $1 per share. An investment in
these funds 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.
ARMADA FUNDS
PROSPECTUS
September 30, 1996
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Pennsylvania Tax Exempt Fund
<PAGE> 59
CROSS REFERENCE SHEET
Mid Cap Regional Fund
Equity Fund
Equity Income Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial
Information . . . . . . . . . . . . . . . . . Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant . . . . . . . . . . . . . . . . . . Risk Factors, Investment Objectives and Policies;
Investment Limitations; Description of the Trust
and Its Shares
5. Management of the Trust . . . . . . . . . . . Management of the Trust; Custodian and Transfer Agent
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . How to Purchase and Redeem Shares; Dividends and
Distributions; Taxes; Description of the Trust and
Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered . . . . . . . . . . . . . . . . Pricing of Shares; How to Purchase and Redeem Shares;
Distribution Agreement
8. Redemption Repurchase . . . . . . . . . . . . How to Purchase and Redeem Shares
9. Pending Legal Proceedings . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 60
ARMADA FUNDS
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through NatCity Investments, Inc.
(formerly National City
Investments Corporation), please
call your Investment Consultant
for information.
For current performance, fund
information, account redemption
information, and to purchase
shares, please call 1-800-622-
FUND(3863).
This Prospectus describes shares in the following three investment
funds (the "Funds") of Armada Funds (the "Trust"), each having its own
investment objective and policies:
MID CAP REGIONAL FUND'S investment objective is to seek capital
appreciation by investing in a diversified portfolio of publicly traded equity
securities of issuers which are domiciled primarily in Ohio, Indiana, Kentucky
and Pennsylvania and contiguous states and other states in which National City
Corporation affiliates are located.
EQUITY FUND'S investment objective is to seek a high level of total
return arising out of capital appreciation and income. The Fund invests in
common stocks and securities convertible into common stocks.
EQUITY INCOME FUND'S investment objective is to seek a competitive
total rate of return through investments in equity and equity equivalent
securities which carry premium current yields.
The net asset value per share of each Fund will fluctuate as the value
of its investment portfolio changes in response to changing market prices and
other factors.
National City Bank ("National City"), National City Bank of Columbus
("National City Columbus") and National City Bank of Kentucky ("National City
Kentucky") serve as investment advisers to the Equity Fund and the Equity
Income Fund; National City individually serves as investment adviser to the Mid
Cap Regional Fund (each, an "adviser" and collectively, the "advisers").
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp. (the "Distributor"), serves as the Trust's
<PAGE> 61
sponsor and distributor. Each Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, 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, NATIONAL
CITY BANK OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, THEIR PARENT COMPANY OR
ANY OF THEIR 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 30, 1996
-2-
<PAGE> 62
The classes or series which represent interests in the Funds
are described in this Prospectus. Class H, Class M and Class N shares
constitute the Institutional class or series of shares (herein referred to as
the "Institutional shares") of the Equity Fund, Equity Income Fund and Mid Cap
Regional Fund, respectively. Class H - Special Series 1, Class M - Special
Series 1 and Class N - Special Series 1 shares constitute the Retail class or
series of shares (herein referred to as the "Retail shares") of the Equity
Fund, Equity Income Fund and Mid Cap Regional Fund, respectively.
Institutional shares are sold primarily to Banks and to
customers of National Asset Management Corporation ("NAM"), who are large
institutions. Retail shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
MID CAP MID CAP EQUITY EQUITY
REGIONAL REGIONAL EQUITY EQUITY INCOME INCOME
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES SHARES(1) SHARES SHARES(1) SHARES
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . 3.75% None 3.75% None 3.75% None
Sales Charge Imposed
on Reinvested Dividends . . . . None None None None None None
Deferred Sales Charge . . . . . . None None None None None None
Redemption Fee . . . . . . . . . None None None None None None
Exchange Fee . . . . . . . . . . None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees . . . . . . . . . . .75% .75% .75% .75% .75% .75%
12b-1 Fees2 (after fee waivers) . . .05% .05% .05% .05% .05% .05%
Other Expenses . . . . . . . . . . .50% .25% .45% .20% .50% .25%
--- --- --- --- --- ---
TOTAL FUND OPERATING
EXPENSES3 (after fee waivers) . 1.30% 1.05% 1.25% 1.00% 1.30% 1.05%
==== ==== ==== ==== ==== ====
</TABLE>
___________________________
1 The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in each of the Funds. 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 .25% (on an annualized basis) of the net asset value of such
shares. For further information concerning the Services Plan, see
"Shareholder Services Plan."
2 The Funds have in effect 12b-1 Plans pursuant to which each 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.
3 The expense information in the table relating to each Fund has been
restated to reflect current fees. Waivers of 12b-1 fees are expected
during the current fiscal year. If the maximum distribution fee
permitted under the 12b-1 Plan were imposed, Total Fund Operating
Expenses would be 1.35% and 1.10%, 1.30% and 1.05% and 1.35% and 1.10%
for the Retail and Institutional shares of the Mid Cap Regional Fund,
Equity Fund and Equity Income Fund, respectively.
-3-
<PAGE> 63
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 (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Mid Cap Regional Retail Shares . . . . . . . . $50 $77 $106 $188
Mid Cap Regional Institutional Shares . . . . . $11 $33 $ 58 $128
Equity Retail Shares . . . . . . . . . . . . . $50 $76 $104 $183
Equity Institutional Shares . . . . . . . . . . $10 $32 $ 55 $122
Equity Income Retail Shares . . . . . . . . . . $50 $77 $106 $188
Equity Income Institutional Shares . . . . . . $11 $33 $ 58 $128
</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 Funds 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 Funds. Any fees that are charged by affiliates of the
adviser or other institutions directly to their customer accounts for services
related to investments in shares of the Funds are in addition to and not
reflected in the fees and expenses described above.
-4-
<PAGE> 64
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MID CAP REGIONAL FUND
The following information has been derived from
financial statements audited by Ernst & Young LLP, independent auditors, 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. Additional information about the performance of the Mid Cap
Regional Fund is contained in the Trust's Annual Report to Shareholders, which
may be obtained without charge by contacting the Trust at its telephone number
or address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended Period Ended
May 31, May 31, May 31, May 31,
1996 1996 1995 1995
Institutional Retail Institutional(1) Retail(1)
------------- ------ ---------------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . $11.38 $11.26 $10.00 $10.16
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income . . . . . . . . . . . . . . . .08 .06 .10 .07
Net gains on securities
(realized and unrealized) . . . . . . . . . . . . 2.41 2.37 1.36 1.11
---- ---- ---- ----
Total from investment operations . . . . . . . 2.49 2.43 1.46 1.18
---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . (0.08) (0.06) (.04) (.04)
Dividends in excess of net investment
income . . . . . . . . . . . . . . . . . . . . . (0.02) (0.02) (.00) (.00)
Dividends from net realized capital gains . . . . . (.67) (.67) (.04) (.04)
----- ----- ----- -----
Total distributions . . . . . . . . . . . . . . . (.77) (.75) (.08) (.08)
----- ----- ----- -----
Net asset value, end of period . . . . . . . . . . . $13.10 $12.94 $11.38 $11.26
====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . 22.64% 22.28%3 17.42%2 14.80%2,3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) . . . . . . . $99,294 $4,702 $50,993 $3,567
Ratio of expenses to average net assets
(after fee waivers) . . . . . . . . . . . . . . . 1.05%4 1.30%5 1.01%2,4 1.34%2,5
Ratio of net investment income to
average net assets (after fee waivers) . . . . . .83%4 .58%5 1.31%2,4 1.09%2,5
Portfolio Turnover Rate . . . . . . . . . . . . . . 106% 106% 69% 69%
Average Commission Rate . . . . . . . . . . . . . . $0.06 $0.06 N/A N/A
</TABLE>
1 Institutional and Retail classes commenced operations on July 26, 1994
and August 15, 1994, respectively.
2 Annualized.
3 Total Return excludes sales load.
4 The operating expense ratio and the net investment income ratio before
fee waivers by the Custodian for the Institutional class for the year
ended May 31, 1996 would have been 1.06% and .82%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser, Administrator, and Custodian for
the Institutional class for the period ended May 31, 1995 would have
been 1.15% and 1.17%, respectively.
5 The operating expense ratio and the net investment income ratio before
fee waivers by the Custodian for the Retail class for the year ended
May 31, 1996 would have been 1.32% and .56%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser, Administrator, and Custodian for
the Retail class for the period May 31, 1995 would have been 1.38% and
1.05%, respectively.
-5-
<PAGE> 65
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
EQUITY FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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.
Additional information about the performance of the Equity Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1995 1994 1994
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . . $14.77 $14.79 $13.66 $13.68 $13.78 $13.80
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . .14 .10 .21 .18 .18 .15
Net Gains on Securities . . 3.46 3.47 1.21 1.21 .01 .00
---- ---- ---- ---- --- ---
Total Income from Investment
Operations . . . . . . . . 3.60 3.57 1.42 1.39 .19 .15
---- ---- ---- ---- --- ---
LESS DISTRIBUTIONS
Dividends from Net Investment
Income . . . . . . . . . (.14) (.10) (.20) (.17) (.18) (.15)
Dividends in Excess of Net
Investment Income . . . . (.02) (.02) (.00) (.00) (.01) (.00)
Dividends from Net Realized
Capital Gains . . . . . . (.19) (.19) (.00) (.00) (.11) (.11)
Dividends in excess of
Net Realized Capital Gains (.00) (.00) (.11) (.11) (.01) (.01)
----- ----- ----- ----- ----- -----
Total Distributions . . . . (.35) (.31) (.31) (.28) (.31) (.27)
----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period . . . . . . . . . . $18.02 $18.05 $14.77 $14.79 $13.66 $13.68
===== ===== ====== ====== ====== ======
Total Return . . . . . . . . 24.61% 24.34%(3) 10.62% 10.35%(3) 1.41% 1.12%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000s) . . . . . . . . . . $166,671 $6,013 $119,634 $5,974 $90,446 $7,521
Ratio of Expenses to Average
Net Assets
(after fee waivers) . . . 1.01%(4) 1.26%(5) 1.01%(4) 1.27%(5) 1.07% 1.32%
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . 0.85%(4) .60%(5) 1.53%(4) 1.23%(5) 1.33% 1.08%
Portfolio Turnover Rate . . 74% 74% 17% 17% 15% 15%
Average Commission Rate . . $0.06 $0.06 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 20, 1989
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, (COMMENCEMENT OF
1993 1993 1992 1992 1991 1991 OPERATIONS) TO
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL MAY 31, 1990
------------- ------ ------------- ------ ------------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . . $13.13 $13.13 $12.35 $12.35 $10.77 $12.04 $10.00
------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . .27 .23 .30 .25 .31 .04 .13
Net Gains on Securities . . .67 .68 .78 .78 1.58 .27 .71
--- --- --- --- ---- --- ---
Total Income from Investment
Operations . . . . . . . . .94 .91 1.08 1.03 1.89 .31 .84
---- --- ---- ---- ---- --- ---
LESS DISTRIBUTIONS
Dividends from Net Investment
Income . . . . . . . . . (.27) (.23) (.30) (.25) (.31) (.00) (.07)
Dividends in Excess of Net
Investment Income . . . . (.02) (.01) (.00) (.00) (.00) (.00) (.00)
Dividends from Net Realized
Capital Gains . . . . . . (.00) (.00) (.00) (.00) (.00) (.00) (.00)
Dividends in excess of
Net Realized Capital Gains (.00) (.00) (.00) (.00) (.00) (.00) (.00)
----- ----- ----- ----- ----- ----- -----
Total Distributions . . . . (.29) (0.24) (.30) (.25) (.31) (.00) (.07)
----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period . . . . . . . . . . $13.78 $13.80 $13.13 $13.13 $12.35 $12.35 $10.77
====== ====== ====== ====== ====== ====== ======
Total Return . . . . . . . . 7.20% 7.00%(3) 8.90% 8.48%(3) 18.10% 21.82%(1)(2)(3) 20.09%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000s) . . . . . . . . . . $85,256 $7,707 $48,673 $2,767 $42,112 $1,389 $34,034
Ratio of Expenses to Average
Net Assets
(after fee waivers) . . . .34%(4) .59%(5) .26%(4) .51%(5) .31%(4) .53%(2)(5) .36%(2,4)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . 2.13%(4) 1.88%(5) 2.36%(4) 2.15%(5) 2.90%(4) 2.94%(2)(5) 3.30%(2,4)
Portfolio Turnover Rate . . 15% 15% 9% 9% 11% 11% 5%
Average Commission Rate . . N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------
1 Retail class commenced operations on April 15, 1991.
2 Annualized.
3 Total Return excludes sales load.
4 The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Institutional class for the years ended May
31, 1996 and 1995 would have been 1.03% and .83% and 1.02% and 1.51%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Advisers for the Institutional
class for the years ended May 31, 1993, 1992 and 1991 and for the period
ended May 31, 1990 would have been 1.01% and 1.46%, 1.02% and 1.62%, 1.06%
and 2.15%, and 1.11% and 2.55%, respectively.
5 The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the years ended May 31,
1996 and 1995 would have been 1.28% and .58% and 1.28% and 1.22%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Advisers for the Retail class for
the years ended May 31, 1993 and 1992 and for the period ended May 31, 1991
would have been 1.26% and 1.21%, 1.27% and 1.40%, and 1.28% and 2.19%,
respectively.
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<PAGE> 66
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
EQUITY INCOME FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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.
Additional information about the performance of the Equity Income Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended Period Ended
May 31, May 31, May 31, May 31
1996 1996 1995 1995
Institutional Retail Institutional(1) Retail(1)
------------- ------ ---------------- ---------
<S> <C> <C> <C> <C>
Net asset value beginning of period . . . . . . . . . . $11.01 $11.01 $10.00 $10.26
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income . . . . . . . . . . . . . . . . .34 .33 .34 .26
Net gains on securities
(realized and unrealized) . . . . . . . . . . . . . 1.79 1.77 .94 .75
---- ---- --- ---
Total from investment operations . . . . . . . . . . 2.13 2.10 1.28 1.01
---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . (.34) (.32) (.27) (.26)
----- -----
Dividends from net realized capital gains . . . . (.14) (.14) (.00) (.00)
----- ----- ----- -----
Total distributions . . . . . . . . . . . . . . . . . (.48) (.46) (.27) (.26)
----- ----- ----- -----
Net asset value, end of period . . . . . . . . . . . . $12.66 $12.65 $11.01 $11.01
====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . 19.72% 19.37%(3) 14.34%(2) 13.18%(2)(3)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) . . . . . . . . $61,978 $263 $36,194 $125
Ratio of expenses to average net assets
(after fee waivers) . . . . . . . . . . . . . . . . 1.06%(4) 1.31%(5) .99%(2)(4) 1.41%(2)(5)
Ratio of net investment income to
average net assets (after fee waivers) . . . . . . 3.02%(4) 2.75%(5) 3.87%(2)(4) 3.45%(2)(5)
Portfolio Turnover Rate . . . . . . . . . . . . . . . 53% 53% 12% 12%
Average Commission Rate . . . . . . . . . . . . . . . $0.07 $0.07 N/A N/A
</TABLE>
1 Institutional and Retail classes commenced operations on July 1, 1994 and
August 22, 1994, respectively.
2 Annualized.
3 Total Return excludes sales load.
4 The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Institutional class for the year ended
May 31, 1996 would have been 1.08% and 3.00%, respectively. The operating
expense ratio and the net investment income ratio before fee waivers by
the Investment Advisers, Administrator, and Custodian for the
Institutional class for the period ended May 31, 1995 would have been
1.21% and 3.66%, respectively.
5 The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the year ended May 31,
1996 would have been 1.32% and 2.74%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the
Investment Advisers, Administrator, and Custodian for the Retail class for
the period ended May 31, 1995 would have been 1.45% and 3.40%,
respectively.
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<PAGE> 67
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act").
Each Fund consists of a separate pool of assets with separate investment
objectives and policies, as described below under "Investment Objectives and
Policies." Each Fund is classified as a diversified investment fund under the
1940 Act.
Shares of each Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in a Fund except that,
as described more fully below under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares in the Funds.
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 a Fund's investment objective. The
investments and investment techniques utilized by the Funds are described
below. Prior to making an investment decision, an investor should consider
which Fund or Funds best meet an investor's investment objectives and review
carefully the risks involved in Fund investments as described below.
The investment objective of a 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," a
Fund's investment policies, however, may be changed without a vote of
shareholders. In addition, each 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 a Fund will achieve
its objective.
MID CAP REGIONAL FUND
The investment objective of the Mid Cap Regional Fund is to
seek capital appreciation by investing in a diversified portfolio of publicly
traded equity securities of issuers which are domiciled primarily in Ohio,
Indiana, Kentucky and Pennsylvania and contiguous states and other states in
which National City Corporation affiliates are located. Under normal
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<PAGE> 68
conditions, at least 65% of the value of the Fund's total assets will be
invested in equity securities of companies with market capitalizations ranging
from $100 million to $2 billion ("Mid Cap Companies").
Because the Fund will invest in the securities of issuers
which are domiciled primarily in Ohio, Indiana, Kentucky and Pennsylvania,
investment return on the Mid Cap Regional Fund is dependant on the performance
of a smaller number of securities relative to the number held in other equity
portfolios. Consequently, the change in value of any one security may affect
the overall value of the Fund more than it would in another equity portfolio,
and thereby subject the market-based net asset value per share of the Fund to
greater fluctuations. In addition, the Fund is likely to be more susceptible
to regional economic, political and regulatory developments than other equity
portfolios.
EQUITY FUND
The investment objective of the Equity Fund is to seek a high
level of total return arising out of capital appreciation and income. The Fund
seeks to achieve its objective by investing substantially all of its assets in
a diversified portfolio of common stocks and securities convertible into common
stocks. Under normal conditions, at least 80% of the Fund's total assets will
be invested in common stocks and securities convertible into common stocks.
The Fund's advisers select common stocks based on a number of factors,
including historical and projected earnings growth, earnings quality and
liquidity, each in relation to the market price of the stock. Stocks purchased
for the Fund generally will be listed on a national securities exchange or will
be unlisted securities with an established over-the-counter market. The Fund
may also invest up to 20% of its total assets at the time of purchase in
American Depository Receipts ("ADRs") and securities issued by foreign issuers.
During temporary defensive periods the Fund may invest in
various short term obligations described below under "Common Investment
Policies of the Funds."
EQUITY INCOME FUND
The investment objective of the Equity Income Fund is to seek
a competitive total rate of return through investments in equity and equity
equivalent securities which carry premium current yields. Under normal
conditions, at least 65% of the value of the Fund's total assets will be
invested in income-producing common stocks and securities convertible into
common stocks having a rating from Standard & Poor's Ratings Group of BB or
higher.
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<PAGE> 69
The Fund's advisers will generally try to select securities
that provide a higher yield than the general market and will generally dispose
of those securities as their yield approaches a market yield or they no longer
meet purchase criteria in other respects.
Exchange Rate-Related Securities. The Equity Income Fund may
invest in securities for which the principal repayment at maturity, while paid
in U.S. dollars, is determined by reference to the exchange rate between the
U.S. dollar and the currency of one or more foreign countries ("Exchange
Rate-Related Securities"). The interest payable on these securities is
denominated in U.S. dollars and is not subject to foreign currency risk and, in
most cases, is paid at rates higher than most other similarly rated securities
in recognition of the foreign currency risk component of Exchange Rate-Related
Securities.
Investments in Exchange Rate-Related Securities entail certain
risks. There is the possibility of significant changes in rates of exchange
between the U.S. dollar and any foreign currency to which an Exchange
Rate-Related Security is linked. In addition, there is no assurance that
sufficient trading interest to create a liquid secondary market will exist for
a particular Exchange Rate-Related Security due to conditions in the debt and
foreign currency markets. Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may from time to time
combine to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
Forward Currency Exchange Contracts. The Equity Income Fund
may enter into forward currency exchange contracts in an effort to reduce the
level of volatility caused by changes in foreign currency exchange rates or
where such transactions are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund. The Fund may not enter into
such contracts for speculative purposes. A forward currency exchange contract
is an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of contract. Although such
contracts tend to minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit any potential gain
that might be realized should the value of such currency increase.
Consequently, the Fund may choose to refrain from entering into such contracts.
In connection with forward currency exchange contracts, 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.
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<PAGE> 70
During temporary defensive periods the Fund may invest in
various short term obligations described below under "Common Investment
Policies of the Funds."
COMMON INVESTMENT POLICIES OF THE FUNDS
Futures Contracts and Related Options
Each Fund may invest in futures contracts and options on
futures contracts for hedging purposes or to maintain liquidity.
Futures contracts obligate the Funds, at maturity, to take or
make delivery of certain securities or the cash value of a securities index. A
Fund may sell a futures contract in order to offset a decrease in the market
value of its portfolio securities that might otherwise result from a market
decline. The Funds may do so either to hedge the value of its portfolio of
securities as a whole or to protect against declines occurring prior to sales
of securities in the value of the securities to be sold. Conversely, the Funds
may purchase a futures contract in anticipation of purchases of securities. In
addition, the Funds may utilize futures contracts in anticipation of changes in
the composition of its holdings.
Each Fund may purchase and sell call and put options on
futures contracts traded on an exchange or board of trade. When a Fund
purchases an option on a futures contract, it has the right to assume a
position as a purchaser or seller of a futures contract at a specified exercise
price at any time during the option period. When the Fund sells an option on a
futures contract, it becomes obligated to purchase or sell a futures contract
if the option is exercised. In anticipation of a market advance, the Fund may
purchase call options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Fund intends to purchase. Similarly, if the value of the
Fund's securities is expected to decline, the Fund might purchase put options
or sell call options on futures contracts rather than sell futures contracts.
Each Fund intends to comply with the regulations of the
Commodity Futures Trading Commission ("CFTC") exempting it from registration as
a "commodity pool operator." The Funds' commodities transactions must
constitute bona fide hedging or other permissible transactions pursuant to such
regulations. In addition, the Funds may not engage in such transactions if the
sum of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5% of the liquidation value of its
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<PAGE> 71
assets, after taking into account unrealized profits and unrealized losses on
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the percentage limitation. In connection with a
Fund's position in a futures contract or option thereon, it 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.
The primary risks associated with the use of futures contracts
and options are: (i) an imperfect correlation between the change in market
value of the securities held by the Funds and the price of the futures
contracts and options; (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
further information, see "Risk Factors, Investment Objectives and Policies --
Futures Contracts and Options" and Appendix B in the Statement of Additional
Information.
Options
Each Fund may write covered call options, buy put options, buy
call options and sell or "write" secured put options on a national securities
exchange and issued by the Options Clearing Corporation for hedging purposes.
Such transactions may be effected on a principal basis with primary reporting
dealers in U.S. Government securities in an amount not exceeding 5% of a Fund's
net assets, as described further in the Statement of Additional Information.
Such options may relate to particular securities or to various stock indices or
bond indices. Purchasing options is a specialized investment technique which
entails a substantial risk of a complete loss of the amounts paid as premiums
to the writer of the option.
A call option for a particular security gives the purchaser of
the option the right to buy, and a writer the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is the consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell the underlying security at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security. In contrast to an option on a particular
security, an option on a securities index provides the
-12-
<PAGE> 72
holder with the right to make or receive a cash settlement upon exercise of the
option.
Each Fund may purchase and sell put options on portfolio
securities at or about the same time that it purchases the underlying security
or at a later time. By buying a put, the Fund limits its risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by the Fund in order to acquire the underlying security at a later
date at a price that avoids any additional cost that would result from an
increase in the market value of the security. Each Fund may also purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying
security. Prior to its expiration, a purchased put or call option may be sold
in a closing sale transaction (a sale by the Fund, prior to the exercise of an
option that it has purchased, of an option of the same series), and profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the option plus the related transaction costs.
In addition, each Fund may write covered call and secured put
options. A covered call option means that the Fund owns or has the right to
acquire the underlying security subject to call at all times during the option
period. A secured put option means that the Fund maintains in a segregated
account with its custodian cash or U.S. Government securities in an amount not
less than the exercise price of the option at all times during the option
period. Such options will be listed on a national securities exchange and
issued by the Options Clearing Corporation and may be effected on a principal
basis with primary reporting dealers in the U.S.
The aggregate value of the securities subject to options
written by the Fund will not exceed 25% of the value of its net assets. In
order to close out an option position prior to maturity, the Fund may enter
into a "closing purchase transaction" by purchasing a call or put option
(depending upon the position being closed out) on the same security with the
same exercise price and expiration date as the option which it previously
wrote.
Options trading is a highly specialized activity and carries
greater than ordinary investment risk. Purchasing options may result in the
complete loss of the amounts paid as premiums to the writer of the option. In
writing a covered call option, the Fund gives up the opportunity to profit from
an increase in the market price of the underlying security above the
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<PAGE> 73
exercise price (except to the extent the premium represents such a profit).
Moreover, it will not be able to sell the underlying security until the covered
call option expires or is exercised or the Fund closes out the option. In
writing a secured put option, the Fund assumes the risk that the market value
of the security will decline below the exercise price of the option. The use
of covered call and secured put options will not be a primary investment
technique of the Fund.
During temporary defensive periods the Fund may invest in
various short term obligations described below.
Foreign Securities and American Depository Receipts
Each Fund may invest in securities issued by foreign issuers
either directly or indirectly through investments in ADRs. ADRs are receipts
issued by an American bank or trust company evidencing ownership of underlying
securities issued by foreign issuers. ADRs may be listed on a national
securities exchange or may be traded in the over-the-counter market. ADR
prices are denominated in U.S. dollars; the underlying security may be
denominated in a foreign currency.
Investments in foreign securities involve certain inherent
risks, such as political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns, changes in
exchange rates of foreign currencies and the possibility of adverse changes in
investment or exchange control regulations. There may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. Further, foreign stock markets are generally not as developed or
efficient as those in the U.S., and in most foreign markets volume and
liquidity are less than in the U.S. Fixed commissions on foreign stock
exchanges are generally higher than the negotiated commissions on U.S.
exchanges, and there is generally less government supervision and regulation of
foreign stock exchanges, brokers and companies than in the U.S. With respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets, or
diplomatic developments that could affect investment within those countries.
Because of these and other factors, securities of foreign companies acquired by
the Funds may be subject to greater fluctuation in price than securities of
domestic companies. For further information, see "Risk Factors, Investment
Objectives and Policies" in the Statement of Additional Information.
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<PAGE> 74
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or
delayed delivery basis. These transactions are arrangements in which a 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.
Each 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 Funds do 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. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Short Term Obligations
During temporary defensive periods each Fund may hold up to
100% of its total assets in short term obligations (with maturities of 18
months or less) such as domestic and foreign commercial paper, bankers'
acceptances, certificates of deposit and demand and time deposits of domestic
and foreign branches of U.S. banks and foreign banks, U.S. Government
securities, repurchase agreements and guaranteed investment contracts ("GICs").
In the case of repurchase agreements, default or bankruptcy of the seller may
expose a Fund to possible loss because of adverse market action or delays
connected with the disposition of the underlying obligations. Further, it is
uncertain whether the Fund would be entitled, as against a claim by such seller
or its receiver or trustee in bankruptcy, to retain the underlying securities.
Reverse repurchase agreements involve the risk that the market value of the
securities held by a Fund may decline below the price of the securities it is
obligated to repurchase. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
Lending Portfolio Securities
In order to generate additional income, each Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. A 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 or advisers 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
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<PAGE> 75
interest paid on such securities. Loans are subject to termination by the Fund
or the borrower at any time. While a Fund does not 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. A Fund
will only enter into loan arrangements with broker-dealers, banks or other
institutions which its adviser or advisers have 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, each 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.
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 the Fund bears directly in 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. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Illiquid Securities
The Equity Fund will not knowingly invest more than 10% of its
net assets and the Equity Income and Mid Cap Regional Funds will not knowingly
invest more than 15% of their respective net assets in securities that are
illiquid. Illiquid securities would generally include repurchase agreements
and GICs 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").
Each 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 or advisers, 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 a Fund during
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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 a Fund in these securities.
Risk Factors Associated with Derivative Instruments
The Mid Cap Regional Fund may purchase certain "derivative"
instruments. Derivative instruments are instruments that derive value from the
performance of underlying securities, interest or currency exchange rates, or
indices, and include (but are not limited to) futures contracts.
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 will evaluate the risks presented by the
derivative instruments purchased by the Fund, and will determine, in connection
with its day-to-day management of the Fund, how they will be used in
furtherance of the Fund's investment objective.
Portfolio Turnover
Portfolio turnover will tend to rise during periods of
economic turbulence and decline during periods of stable growth. Each Fund's
annual portfolio turnover is not expected to exceed 100% under normal market
conditions. For further information, see "Risk Factors, Investment Objective
and Policies" in the Statement of Additional Information. Higher portfolio
turnover may result in increased taxable gains to shareholders (see
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"Taxes" below) and increased expenses paid by the Fund due to transaction
costs.
INVESTMENT LIMITATIONS
Each 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.")
No Fund may:
1. 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.
2. Borrow money or issue senior securities, except that
each Fund may borrow from banks and enter into reverse repurchase agreements
for temporary purposes in amounts not in excess of 10% of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or hypothecate
any assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Fund's total assets at the time of such borrowing. A Fund will not purchase
securities while borrowings (including reverse repurchase agreements) in excess
of 5% of its total assets are outstanding.
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
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.
4. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government or its
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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 or
the Fund would hold more than 10% of any class of securities of the issuer or
more than 10% of the outstanding voting securities of the issuer, except that
up to 25% of the value of the Fund's total assets may be invested without
regard to such limitations.
Additional investment limitations which are matters of
fundamental policy are as follows:
5. The Equity Fund may invest no more than 10% of the
value of its net assets in illiquid securities, including repurchase agreements
with remaining maturities in excess of seven days, non-negotiable time
deposits, certificates of participation without corresponding remarketing
agreements, and other securities which are not readily marketable.
6. Neither the Equity Income Fund nor the Mid Cap
Regional Fund may invest more than 15% of the value of its net assets in
illiquid securities. See "Illiquid Securities" under "Investment Objectives
and Policies -- Common Investment Policies of the Funds."
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 a Fund's securities will not constitute a violation of such
limitation for purposes of the 1940 Act. If a Fund exceeds the limitation on
the holding of illiquid securities, it will sell illiquid securities as
necessary to maintain the required liquidity when the advisers believe that it
is in the best interests of the Fund to do so.
In order to permit the sale of the Funds' 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 a 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 each Fund's total return data for its Institutional
shares and Retail shares. The Funds calculate their total returns for each
class of shares on
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an "average annual total return" basis for various periods from the date they
commenced 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 a 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 Funds 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.
The "yield" quoted in advertisements of the Equity Income Fund
refers to the income generated by an investment in a class of shares of 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.
Shareholders should note that the total return and yield 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 a Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices 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 Funds 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
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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 net asset value of a class should be considered in
ascertaining the total return to shareholders for a given period. Total return
data should also be considered in light of the risks associated with a Fund's
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 a Fund.
Further information about the performance of the Funds 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 each Fund is calculated as of the close of trading
on the New York Stock Exchange (the "Exchange") (generally, 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, Dr. Martin Luther King, Jr.
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 a 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.
With respect to each Fund, investments in securities traded on
an exchange are valued at the last quoted sale price for a given day, or if a
sale is not reported for that day, at the mean between the most recent quoted
bid and asked prices. Unlisted securities and securities traded on a national
securities market for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities and other
assets for which no quotations are 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
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not represent fair value. The net asset value per share of each class of
shares of each Fund will fluctuate as the value of its investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds 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, including trips
and monetary awards, to NatCity Investments, Inc. and other affiliates of
National City.
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 Funds 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 NatCity Investments, Inc. 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), Youngstown (1-800-742-4098), or
Pittsburgh (1-800-282-1078).
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 NatCity Investments, Inc., the
Distributor or their financial
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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 is $2,500 for the initial purchase of
Retail shares in a Fund, 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 each month,
with a minimum amount of $50. 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. (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 each Fund is
the sum of the net asset value of the shares being purchased plus any
applicable sales charge per account, per Fund, 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 . . . . . . . 3.75 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 NatCity Investments, Inc.;
(e) individuals investing in a 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 a 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 each 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
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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 a Fund with an aggregate current value of
$90,000 and subsequently purchases Retail shares of that 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, who are large institutions, ("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 or NAM may
impose account charges such as account maintenance fees, compensating balance
requirements or other charges based upon account
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transactions, assets or income which will have the effect of reducing the
shareholder's net return on his investment in a 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 a 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 a financial institution, such as banks or brokers, 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 Funds 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
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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 1-800-622-FUND(3863). 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
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<PAGE> 87
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 may redeem shares in any amount by
calling 1-800-622-FUND(3863) (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> 88
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.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who
have paid a sales charge to purchase Retail shares of one or more of the Funds
(each a "load Fund") may exchange those Retail shares for Retail shares of
another load Fund, 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 load. 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 NatCity
Investments, Inc., an Investor's financial institution or by calling 1-800-622-
FUND(3863).
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<PAGE> 89
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.
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 each of the Funds. 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 .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,
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processing dividend payments from the Fund 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
Dividends from the net investment income of the Equity and
Equity Income Funds are declared and paid quarterly; dividends from the net
investment income of the Mid Cap Regional Fund are declared and paid annually.
With respect to each Fund, net income for dividend purposes consists of
dividends, distributions and other income on the Fund's assets, less the
accrued expenses of the Fund. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce the
Funds' 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 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
Each of the Funds intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification relieves a 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 a 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 net tax- exempt interest income, if any,
for such year.
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In general, a Fund's investment company taxable income will be the sum of its
net investment income and the excess of any net short-term capital gain for the
taxable year over the net long-term capital loss, if any, for such year. Each
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 their respective 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.) For corporate shareholders, the dividends received deduction will
apply to such distributions to the extent of the gross amount of qualifying
dividends received by the distributing Fund from domestic corporations for the
taxable year.
Substantially all of each Fund's net realized long-term
capital gains, if any, will be distributed at least annually to Fund
shareholders. A Fund will generally 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 October, November or December of any
year payable to shareholders of record on a specified date in such months 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.
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 declared
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
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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 Funds 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 Funds and their 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, other affiliations
and the compensation paid by the Trust and the fees and reimbursed expenses
they receive in connection with each meeting of the Board of Trustees they
attend are included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Equity and Equity Income Funds and
National City serves as the investment adviser to the Mid Cap Regional Fund.
The advisers are wholly owned subsidiaries of National City Corporation. The
advisers provide trust and banking services to individuals, corporations, and
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institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate
trust and agency, and personal and corporate banking. The advisers are member
banks of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On June 30, 1996, the Trust Departments of National City,
National City Columbus and National City Kentucky had approximately $8.7
billion, $1.6 billion and $5.1 billion, respectively, in assets under
management, and National City, National City Columbus and National City
Kentucky had approximately $16.8 billion, $10.7 billion and $11.9 billion,
respectively, in total trust assets. National City has its principal offices
at 1900 East Ninth Street, Cleveland, Ohio 44114; National City Columbus has
its principal offices at 155 East Broad Street, Columbus, Ohio 43251; and
National City Kentucky has its principal offices at National City Tower, 101
South Fifth Street, Louisville, Kentucky 40202.
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Mid Cap Regional, Equity and Equity Income
Funds' investment policies, the advisers have agreed to manage such Funds, make
decisions with respect to and place orders for all purchases and sales of such
Funds' securities, and maintain such Funds' records relating to such purchases
and sales. Lawrence E. Baumgartner is the person primarily responsible for
the day to day management of the Mid Cap Regional Fund. Mr. Baumgartner,
employed by National City as President of Broad Street Asset Management Co.
since July 1994, had been managing assets for The State Teachers Retirement
System of Ohio since 1987 and has been the Asset Manager of the Mid Cap
Regional Fund since its inception.
The Equity Fund is managed by the Equity Growth Style Team of
National City's Asset Management Group. Members of the team are Robert M.
Leggett, Eric S. Fuchs and Paul F. Rodgers.
Robert M. Leggett, a Vice President at National City, is the
Asset Management Group's Director of Equities. Mr. Leggett is a Chartered
Financial Analyst and joined the fund management team September 28, 1995. His
20 years of investment management includes a 17-year tenure at State Teachers
Retirement System of Ohio and positions in research and as head of equities.
Prior to joining National City, Mr. Leggett was Director of Investments at the
Ohio Bureau of Workers Compensation.
Eric S. Fuchs, a Vice President at National City, joined the
Equity Growth Team July 1, 1996. His 20 years of equity investment experience
encompasses research and money management. After co-managing several equity
funds at Twentieth Century, he was an equity growth pension manager at Waddell
& Reed Asset Management.
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Paul F. Rodgers, a Chartered Financial Analyst and Vice
President at National City, has eight years of investment experience with the
bank as a research analyst and portfolio manager. He joined the Equity Growth
Team May 22, 1996.
The Equity Income Fund is managed by the Equity Value Style
Team of National City's Asset Management Group. Members of the team are James
R. Kirk, David Cooley and Mary Jane Matts.
A Chartered Financial Analyst, James R. Kirk heads the
management team. He is a Vice President and Chief Investment Strategist at
National City and has been part of the management team since September 28,
1995. Mr. Kirk's investment experience includes a broad background in
research, portfolio management and general investment management. Prior to
joining National City, he was Chief Investment Officer at Society Asset
Management.
David Cooley, a Vice President at National City, has eight
years of investment experience including fixed income research, equity research
and internal equities management. Mr. Cooley is a Chartered Financial Analyst
and has been a member of the Equity Value Team since April 19, 1996. Prior to
that time, he was with Key Corp.
Mary Jane Matts is a Chartered Financial Analyst and a Vice
President at National City. She has eight years of investment experience
including positions in research, portfolio management and performance
measurement. Prior to joining the Equity Value Team on August 19, 1996, Ms.
Matts was the Director of Equity Research for Key Corp.
For the services provided and expenses assumed pursuant to the
Advisory Agreements relating to the Equity, Equity Income and Mid Cap Regional
Funds, the advisers are entitled to receive an advisory fee, computed daily and
payable monthly, at the annual rate of .75% of the average net assets of each
of these Funds. Shareholders should note that these fees are higher than those
payable by other investment companies. However, the Trust believes that the
fees are within the range of fees payable by investment funds with comparable
investment objectives and policies. The advisers may from time to time waive
all or a portion of their advisory fees to increase the net income of the Funds
available for distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
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continuously engaged in the issuance of its shares, but (b) do not prohibit
such a bank holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company. The advisers
believe that they may perform the services for the Funds contemplated by their
Advisory Agreements with the Trust as described in such agreements and this
Prospectus without violation of applicable banking laws or regulations.
However, there are no controlling judicial precedents and future changes in
legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the advisers from continuing to perform services for the Trust. If the
advisers were prohibited from providing services to the Funds, the Board of
Trustees would consider selecting another qualified firm. Any new investment
advisory agreement would be subject to shareholder approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the advisers, or their
affiliated and correspondent banks in connection with shareholder purchases of
Fund shares, the advisers and their affiliated and correspondent banks might be
required to alter materially or discontinue the services offered by them to
shareholders. It is not anticipated, however, that any resulting change in the
Trust's method of operations would affect its net asset value per share or
result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Funds. 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 Funds: 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
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preparation of the Trust's registration statement; maintain the required
fidelity bond coverage; calculate each Fund's net asset value per share, net
income, and realized capital gains (losses); and generally assist the Funds
with respect to all aspects of their administration and operation. PFPC is
entitled to receive with respect to each 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, .045% of the
next $200,000,000 of its net assets and .02% of its net assets over
$600,000,000 and is entitled to be reimbursed for its out-of-pocket expenses
incurred on behalf of each 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"). Six of these
classes or series, which represent interests in the Equity Fund (Class H and
Class H -Special Series 1), Equity Income Fund (Class M and Class M -Special
Series 1) and Mid Cap Regional Fund (Class N and Class N - Special Series 1)
are described in this Prospectus. Class H, Class M, and Class N shares
constitute the Institutional class or series of shares; and Class H - Special
Series 1, Class M -Special Series 1, and Class N - 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),
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), 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), GNMA
Fund (Class S and Class S - Special Series 1) and 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.
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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.
As of September 9, 1996, National City, National City
Columbus, and National City Kentucky held beneficially or of record
approximately 18.63%, 17.51% and 3.55%, respectively, of the outstanding
Institutional shares of the Equity Fund. As of the same date, National City,
National City Columbus and National City Kentucky held beneficially or of
record approximately 56.43%, 3.08% and 3.50%, respectively, of the outstanding
Institutional shares of the Equity Income Fund and approximately 60.33%, 13.54%
and 6.74%, respectively, of the outstanding Institutional shares of the Mid Cap
Regional Fund. Neither National City, National City Columbus, nor National
City
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Kentucky have any economic interest in such shares which are held solely for
the benefit of their customers, but may be deemed to be controlling persons of
the Funds within the meaning of the 1940 Act by reason of their record
ownership of such shares. The names of beneficial owners and record owners who
are controlling shareholders under the 1940 Act may be found in the Statement
of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank 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 advisers bear all expenses
in connection with the performance of their services. Each Fund of the Trust
bears 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. Each 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 Funds
also bear the expense of shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent accountants.
Pursuant to Rule 17f-2, as National City Bank 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
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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.
The portfolio managers of the Funds and other investment
professionals may from time to time discuss in advertising, sales literature or
other material, including periodic publications, various topics of interest to
shareholders and prospective investors. The topics may include, but are not
limited to, the advantages and disadvantages of investing in tax-deferred and
taxable investments; Fund performance and how such performance may compare to
various market indices; shareholder profiles and hypothetical investor
scenarios; the economy; the financial and capital markets; investment
strategies and techniques; investment products and tax, retirement and
investment planning.
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 ADVISERS
AFFILIATES OF NATIONAL
CITY CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
ARMADA FUNDS
PROSPECTUS
September 30, 1996
Mid Cap Regional Fund
Equity Fund
Equity Income Fund
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o 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 of Columbus; National City Bank of Kentucky;
National Asset Management Corporation, their parent company or any of
their affiliates or any bank.
o Shares of the Armada Funds are not insured or guaranteed by the
U.S. Government, FDIC, or any governmental agency or state.
o 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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CROSS REFERENCE SHEET
Total Return Advantage Fund
Fixed Income Fund
Enhanced Income Fund
GNMA Fund
Intermediate Government Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . Expense Table
3. Condensed Financial
Information . . . . . . . . Financial Highlights; Yield and
Performance Information
4. General Description of
Registrant . . . . . . . . . Risk Factors, Investment
Objectives and Policies;
Investment Limitations;
Description of the Trust and Its
Shares
5. Management of the Trust . . Management of the Trust; Custodian
and Transfer Agent
6. Capital Stock and Other
Securities . . . . . . . . . How to Purchase and Redeem Shares;
Dividends and Distributions;
Taxes; Description of the Trust
and Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered . . . . . . . Pricing of Shares; How to Purchase
and Redeem Shares; Distribution
Agreement
8. Redemption Repurchase . . . How to Purchase and Redeem Shares
9. Pending Legal Proceedings . Inapplicable
</TABLE>
<PAGE> 103
ARMADA FUNDS
_______________________________________________________________________________
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through NatCity Investments, Inc.
(formerly National City Investments
Corporation), please call
your Investment Consultant for
information.
For current performance, fund
information, account redemption
information, and to purchase shares,
please call 1-800-622-FUND(3863).
This Prospectus describes shares in the following five investment
funds (the "Funds") of Armada Funds (the "Trust"), each having its own
investment objective and policies:
TOTAL RETURN ADVANTAGE FUND'S investment objective is to provide a
total rate of return, income and price appreciation greater than that of
popular market indices with similar maturity and quality characteristics.
Under normal market conditions, the Fund maintains an average dollar-weighted
portfolio maturity of two years above or below the average maturity of the
Lehman Brothers Government/Corporate Bond Index.
FIXED INCOME FUND'S investment objective is to provide as high a level
of current income as is consistent with prudent investment risk. The Fund
invests in high and medium grade bonds and other fixed income securities.
Under normal market conditions, the Fund maintains an average dollar-weighted
portfolio maturity of ten years or less.
ENHANCED INCOME FUND'S investment objective is to seek a total rate of
return greater than that of the Merrill Lynch 1-3 year Treasury Index. The
Fund will normally invest at least 80% of the value of its total assets in
investment grade debt securities of all types. However, up to 20% of the value
of its total assets may be invested in preferred stocks and other investments.
Under normal market conditions, the Fund intends to maintain an average
dollar-weighted portfolio maturity for its debt securities of from 1-1/2 to 4
years.
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 by investing primarily in mortgage pass-through securities guaranteed
by the Government National Mortgage Association. The Fund invests primarily in
mortgage
-1-
<PAGE> 104
pass-through securities guaranteed by the Government National Mortgage
Association.
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 each 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"), National City Bank of Columbus
("National City Columbus") and National City Bank of Kentucky ("National City
Kentucky") serve as investment advisers to the Fixed Income Fund; National
Asset Management Corporation ("NAM") serves as investment adviser to the
Enhanced Income Fund and Total Return Advantage Fund; and National City serves
as investment adviser to the GNMA Fund and Intermediate Government Fund. These
investment advisers are referred to herein individually as an "adviser" and
collectively as the "advisers."
440 Financial Distributors, Inc., a wholly-owned subsidiary of
First Data Corp. (the "Distributor"), serves as the Trust's sponsor and
distributor. Each Fund pays a fee to the Distributor for distributing its
shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, 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, NATIONAL
CITY BANK OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR 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.
-2-
<PAGE> 105
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 30, 1996
-3-
<PAGE> 106
The classes which represent interests in the Funds are
described in this Prospectus. Class I, Class O, Class P, Class R and Class S
shares constitute the Institutional class of shares (herein referred to as the
"Institutional shares") of the Fixed Income Fund, Enhanced Income Fund, Total
Return Advantage Fund, Intermediate Government Fund and GNMA Fund,
respectively. Class I - Special Series 1, Class O - Special Series 1, Class P
- - Special Series 1, Class R - Special Series 1 and Class S - Special Series 1
shares constitute the Retail class of shares (herein referred to as the "Retail
shares") of the Fixed Income, Enhanced Income, Total Return Advantage,
Intermediate Government and GNMA Funds, respectively.
Institutional shares are sold primarily to Banks and customers
of NAM, who are large institutions. Retail shares are sold to the public
primarily through financial institutions such as banks, brokers and dealers.
EXPENSE TABLES
<TABLE>
<CAPTION>
Total Return Total Return Fixed Fixed Enhanced Enhanced
Advantage Advantage Income Income Income Income
Retail Institutional Retail Institutional Retail Institutional
Shares(1) Shares Shares(1) Shares Shares(1) Shares
------ ------------- -------- - ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases 3.75% None 3.75% None 2.75% None
Sales Charge Imposed
on Reinvested
Dividends . . . . . . . None None None None None None
Deferred Sales Charge . . None None None None None None
Redemption Fee . . . . . None None None None None None
Exchange Fee . . . . . . None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees (after
fee waivers) . . . . 0%(2) 0%(2) .40%(2) .40%(2) 0%(2) 0%(2)
12b-1 Fees (after fee
waivers)(3) . . . . . .01% .01% .05% .05% .01% .01%
Other Expenses . . . . .42% .17% .47% .22% .34% .24%
--- --- --- --- --- ---
TOTAL FUND OPERATING
EXPENSES (AFTER
FEE WAIVERS)(3) . . .43% .18% .92% .67% .35% .25%
=== === === === === ===
</TABLE>
-4-
<PAGE> 107
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
GNMA GNMA GOVERNMENT GOVERNMENT
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES SHARES(1) SHARES
--------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . . 3.75% None 3.75% None
Sales Charge Imposed
on Reinvested Dividends . . . . . None None None None
Deferred Sales Charge . . . . . . . None None None None
Redemption Fee . . . . . . . . . . None None None None
Exchange Fee . . . . . . . . . . . None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets) . . . . . . . . . . . . .
Management Fees . . . . . . . . . . .55% .55% .55% .55%
12b-1 Fees (after fee waivers)(3) . .05% .05% .05% .05%
Other Expenses . . . . . . . . . . .49% .24% .46% .21%
--- --- --- ---
TOTAL FUND OPERATING
EXPENSES (after fee waivers)(2) 1.09% .84% 1.06% .81%
==== === ==== ===
<FN>
___________________________
(1) The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in each of the Funds. 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 .25% (on an annualized basis) of the net asset value of Retail
shares of the Total Return Advantage Fund, Fixed Income Fund, GNMA Fund
and Intermediate Government Fund and/or up to .10% (on an annualized
basis) of the net asset value of Retail shares of the Enhanced Income
Fund. For further information concerning the Services Plan, see
"Shareholder Services Plan."
(2) The expense information in the table relating to each Fund has been
restated to reflect current fees. For the current fiscal year, NAM
will waive its entire advisory fee of .55% and .45% of the average
daily net assets of the Total Return Advantage and Enhanced Income
Funds, respectively and the advisers will voluntarily waive fees in the
amount of .15% of the average daily net assets of the Fixed Income
Fund. Without such fee waivers, Total Fund Operating Expenses would be
.98% and .73% for the Retail and Institutional shares of the Total
Return Advantage Fund, respectively, .80% and .70% for the Retail and
Institutional shares of the Enhanced Income Fund, respectively, and
1.07% and .82% for the Retail and Institutional shares of the Fixed
Income Fund, respectively. Additionally, waivers of 12b-1 fees are
expected to be in effect during the current fiscal year. If the
maximum distribution fee permitted under the 12b-1 Plan were imposed,
Total Fund Operating Expenses would be 1.07% and .82%, 1.12% and .87%,
.89% and .79%, 1.14% and .89% and 1.11% and .86% for the Retail and
Institutional shares of the Total Return Advantage Fund, Fixed Income
Fund, Enhanced Income Fund, GNMA Fund and Intermediate Government Fund,
respectively.
(3) The Funds have in effect 12b-1 Plans pursuant to which each 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.
___________________________
</TABLE>
-5-
<PAGE> 108
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 (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total Return Advantage Retail Shares . . . . . . . $42 $51 $61 $ 90
Total Return Advantage Institutional Shares . . . . $ 2 $ 6 $10 $ 23
Fixed Income Retail Shares . . . . . . . . . . . . $47 $66 $87 $146
Fixed Income Institutional Shares . . . . . . . . . $ 7 $21 $37 $ 83
Enhanced Income Retail Shares . . . . . . . . . . . $31 $38 $47 $ 71
Enhanced Income Institutional Shares . . . . . . . $ 3 $ 8 $14 $ 32
GNMA Fund Retail Shares . . . . . . . . . . . . . . $48 $71 $95 $165
GNMA Fund Institutional Shares . . . . . . . . . . $ 9 $27 $47 $104
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 Funds 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 Funds. 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 shares of any of the Funds are in addition to and
are not reflected in the fees and expenses described above.
-6-
<PAGE> 109
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
TOTAL RETURN ADVANTAGE FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, 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.
Additional information about the performance of the Total Return Advantage Fund
is contained in the Trust's 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 Year Ended Period Ended Period Ended
May 31, 1996 May 31, 1996 May 31, 1995 May 31, 1995
Institutional Retail Institutional(1) Retail(1)
------------- ------ ------------- ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . . $10.55 $10.54 $10.00 $10.16
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .70(2) .62(2) .65(2) .49(2)
Net Gains (Losses) on Securities
(Realized and Unrealized) . . . . . . (.24) (.22) .43 .40
------ ------ ------ ------
Total from Investment Operations . . . . .46 .40 1.08 .89
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income . (.70) (.62) (.53) (.49)
Dividends in Excess of Net
Investment Income . . . . . . . . . . (.12) (.14) (.00) (.02)
Dividends from Net Realized
Capital Gains . . . . . . . . . . . . ( .31) (.31) (.00) (.00)
------ ------ ------ ------
Total distributions . . . . . . . . (1.13) (1.07) (.53) (.51)
------ ------ ------ ------
Net Asset Value, End of Period . . . . . $9.88 $9.87 $10.55 $10.54
====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . 4.22% 3.74%(4) 12.52%(3,5) 12.65%(3,4,5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) . $280,401 $2,040 $261,403 $106
Ratio of Expenses to Average Net
Assets (after fee waivers) . . . . . .13%(6) .36%(7) .18%(3,6) .31%(3,7)
Ratio of Net Investment Income to
Average Net Assets (after fee
waivers) . . . . . . . . . . . . . . 6.67%(6) 6.12%(7) 7.23%(3,6) 6.92%(3,7)
Portfolio Turnover Rate . . . . . . . . 268% 268% 166% 166%
<FN>
(1) Institutional and Retail classes commenced operations on July 7, 1994 and
September 6, 1994, respectively.
(2) Calculated based upon average shares outstanding.
(3) Annualized.
(4) Total Return excludes sales load.
(5) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the
Institutional and Retail classes for the period were 11.22% and 9.14%,
respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Institutional class
for the year ended May 31, 1996 would have been .69% and 6.11%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Adviser, Administrator and
Custodian for the Institutional class for the period ended May 31, 1995
would have been .77% and 6.64%, respectively.
(7) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Retail class for
the year ended May 31, 1996 would have been .89% and 5.59%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser, Administrator and Custodian for the
Retail class for the period ended May 31, 1995 would have been .87% and
6.36%, respectively.
</TABLE>
-7-
<PAGE> 110
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FIXED INCOME FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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.
Additional information about the performance of the Fixed Income Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1.
<TABLE>
<CAPTION>
For the Period
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
May 31, May 31, May 31, May 31, May 31, May 31,
1996 1996 1995 1995 1994 1994
Institutional Retail Institutional Retail Institutional Retail
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . $10.54 $10.60 $10.24 $10.30 $10.93 $10.98
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . .61 .59 .63 .61 .61 .58
Net Gains (Losses) on Securities
Realized and Unrealized (.22) (.23) .30 .30 (.59) (.58)
---- ---- --- --- ---- ----
Total from Investment
Operations . . . . . . . . .39 .36 .93 .91 .02 .00
---- ---- --- --- ---- ----
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . (.61) (.59) (.63) (.61) (.61) (.58)
Dividends in Excess of Net
Investment Income . . . . . . . (.00) (.00) (.00) (.00) (.05) (.05)
Dividends from Net Realized
Capital Gains . . . . . . . . . (.00) (.00) (.00) (.00) (.03) (.03)
Dividends in Excess of Net Realized
Capital Gains . . . . . . . . . (.02) (.02) (.00) (.00) (.02) (.02)
---- ---- ---- ---- ---- ----
Total Distributions . . . . . (.63) (.61) (.63) (.61) (.71) (.68)
---- ---- ---- ---- ---- ----
Net Asset Value,
End of Period . . . . . . . . . . $10.30 $10.35 $10.54 $10.60 $10.24 $10.30
====== ====== ====== ====== ====== ======
Total Return . . . . . . . . . . . 3.79% 3.44%(3) 9.55% 9.26%(3) 0.00% (0.23%)(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets,
End of Period (000s) . . . . . . . $111,240 $6,216 $88,047 $5,527 $95,907 $5,480
Ratio of Expenses to Average
Net Assets (after fee
waivers) . . . . . . . . . . .80%(4) 1.04%(5) 0.85%(4) 1.09%(5) 0.83% 1.08%
Ratio of Net Investment
Income to Average Net
Assets (after fee waivers) 5.78%(4) 5.50%(5) 6.24%(4) 5.95%(5) 5.59% 5.34%
Portfolio Turnover Rate . . . . . 45% 45% 42% 42% 34% 34%
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
May 31, May 31, May 31, May 31,
1993 1993 1992 1992
Institutional Retail Institutional Retail
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . $10.60 $10.63 $10.15 $10.15
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . .70 .65 .81 .79
Net Gains (Losses) on Securities
Realized and Unrealized .46 .48 .45 .45
---- ---- ---- ----
Total from Investment
Operations . . . . . . . . 1.16 1.13 1.26 1.24
---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . (.70) (.65) (.81) (.76)
Dividends in Excess of Net
Investment Income . . . . . . . (.02) (.02) (.00) (.00)
Dividends from Net Realized
Capital Gains . . . . . . . . . (.11) (.11) (.00) (.00)
Dividends in Excess of Net Realized
Capital Gains . . . . . . . . . (.00) (.00) (.00) (.00)
---- ---- ---- ----
Total Distributions . . . . . (.83) (.78) (.81) (.76)
---- ---- ---- ----
Net Asset Value,
End of Period . . . . . . . . . . $10.93 $10.98 $10.60 $10.63
====== ====== ====== ======
Total Return . . . . . . . . . . . 11.32% 11.03%(3) 12.96% 12.64%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets,
End of Period (000s) . . . . . . . $95,246 $5,208 $40,414 $1,033
Ratio of Expenses to Average
Net Assets (after fee
waivers) . . . . . . . . . . .32%(4) .57%(5) .30%(4) .55%(5)
Ratio of Net Investment
Income to Average Net
Assets (after fee waivers) 6.46%(4) 6.21%(5) 7.84%(4) 7.57%(5)
Portfolio Turnover Rate . . . . . 33% 33% 13% 13%
YEAR ENDED YEAR ENDED December 20, 1989
May 31, May 31, (Commencement of
1991 1991 operations) to
Institutional Retail May 3, 1990
------------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period . . . . . . . . $9.83 $10.11 $10.00
----- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . .76 .10 .33
Net Gains (Losses) on Securities
Realized and Unrealized .39 .01 (.24)
---- ---- ----
Total from Investment
Operations . . . . . . . . 1.15 .11 .09
---- --- ---
LESS DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . (.76) (.07) (.26)
Dividends in Excess of Net
Investment Income . . . . . . . (.07) (.00) (.00)
Dividends from Net Realized
Capital Gains . . . . . . . . . (.00) (.00) (.00)
Dividends in Excess of Net Realized
Capital Gains . . . . . . . . . (.00) (.00) (.00)
---- ---- ----
Total Distributions . . . . . (.83) (.07) (.26)
---- ---- ----
Net Asset Value,
End of Period . . . . . . . . . . $10.15 $10.15 $9.83
====== ====== =====
Total Return . . . . . . . . . . . 12.20% 8.45%(2,3) 2.21%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets,
End of Period (000s) . . . . . . . $34,664 $284 $30,699
Ratio of Expenses to Average
Net Assets (after fee
waivers) . . . . . . . . . . .33%(4) .56%(2,5) .37%(2)
Ratio of Net Investment
Income to Average Net
Assets (after fee waivers) 8.34%(4) 7.89%(2,5) 8.34%(2)
Portfolio Turnover Rate . . . . . 0% 0% 20%
<FN>
- ----------------------------
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total return excludes sales load.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the Custodian for the Institutional class for the years ended May
31, 1996 and 1995 would have been .82% and 5.76%, and .86% and 6.23%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the Investment Advisers for the Institutional class
for the years ended May 31, 1993, 1992 and 1991 would have been .80% and
5.98%, .85% and 7.29%, and .88% and 7.79%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the years ended May 31,
1996 and 1995 would have been 1.06% and 5.48%, and 1.10% and 5.94%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the Investment Advisers for the Retail class for the
years ended May 31, 1993 and 1992 and for the period ended May 31, 1991
would have been 1.05% and 5.73%, 1.10% and 7.02%, and 1.11% and 7.34%,
respectively.
</TABLE>
-8-
<PAGE> 111
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
ENHANCED INCOME FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, 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.
Additional information about the performance of the Enhanced Income Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended Period Ended
May 31, 1996 May 31, 1996 May 31, 1995 May 31, 1995
Institutional Retail Institutional(1) Retail(1)
------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . . $10.16 $10.18 $10.00 $10.10
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .58 .56 .51(2) .43(2)
Net Gains (Losses) on Securities
(Realized and Unrealized) . . . . . . (.05) (.05) .06 .06
----- ----- --- ---
Total from Investment
Operations . . . . . . . . . . . .53 .51 .57 .49
---- ---- --- ---
LESS DISTRIBUTIONS
Dividends from Net Investment Income . (.58) (.56) (.41) (.41)
Dividends in Excess of Net
Investment Income . . . . . . . . . . (.10) (.11) (.00) (.00)
----- ----- ----- -----
Total Distributions . . . . . . . . (.68) (.67) (.41) (.41)
----- ----- ----- -----
Net Asset Value, End of Period . . . . . $10.01 $10.02 $10.16 $10.18
===== ===== ===== =====
TOTAL RETURN . . . . . . . . . . . . . . 5.36% 5.13%(4) 6.54%(3,5) 6.84%(3,4,5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) . $66,918 $1,718 $60,467 $2,547
Ratio of Expenses to Average Net
Assets (after fee waivers) . . . . . .23%(6) .33%(7) .21%(3,6) .32%(3,7)
Ratio of Net Investment Income to
Average Net Assets (after fee
waivers) . . . . . . . . . . . . . . 5.72%(6) 5.55%(7) 5.70%(3,6) 5.89%(3,7)
Portfolio Turnover Rate . . . . . . . . 98% 98% 36% 36%
</TABLE>
(1) Institutional and Retail classes commenced operations on July 7, 1994 and
September 9, 1994, respectively.
(2) Calculated based upon average shares outstanding.
(3) Annualized.
(4) Total Return excludes sales load.
(5) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the
Institutional and Retail classes for the period were 5.87% and 4.92%,
respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Institutional class
for the year ended May 31, 1996 would have been .70% and 5.25%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Adviser, Administrator and
Custodian for the Institutional class for the period ended May 31, 1995
would have been .71% and 5.20%, respectively.
(7) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Retail class for
the year ended May 31, 1996 would have been .80% and 5.08%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser, Administrator and Custodian for the
Retail class for the period ended May 31, 1995 would have been .79% and
5.42%, respectively.
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<PAGE> 112
FINANCIAL HIGHLIGHTS
The GNMA Fund and Intermediate Government Fund commenced operations on
August 10, 1994 as separate investment portfolios (the "Predecessor GNMA Fund"
and the "Predecessor Intermediate Government Fund," respectively, and
collectively, the "Predecessor Funds") of Inventor Funds, Inc., which was
organized as a Maryland corporation. On September 9, 1996, the Funds were
reorganized as new portfolios of the Trust. Prior to the reorganization, the
Predecessor Funds offered and sold Retail Shares that were similar to the
Funds' Retail Shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Funds' Retail Shares (the
series that is similar to the Retail Shares of the GNMA and Intermediate
Government Funds) for the fiscal period from May 1, 1996 to May 31, 1996, the
fiscal year ended April 30, 1996 and the fiscal period ended April 30, 1995.
As part of the reorganization, the fiscal year of the Predecessor Funds was
changed to coincide with the Trust's May 31 fiscal year. A one-month financial
report representing the Predecessor Funds' operations from May 1, 1996 through
May 31, 1996 is being presented. The information was audited by Coopers &
Lybrand L.L.P., independent accountants for the Predecessor Funds, whose
reports thereon are contained in Inventor Funds' Annual Reports to Shareholders
for the fiscal year ended April 30, 1996 and the period ended May 31, 1996.
Such financial highlights should be read in conjunction with the financial
statements and notes thereto contained in Inventor Funds' Annual Reports to
Shareholders and incorporated by reference into the Statement of Additional
Information relating to the GNMA Fund and Intermediate Government Fund.
Additional information about the performance of the Predecessor Funds is
contained in Inventor Funds' Annual Reports to Shareholders, which may be
obtained without charge by contacting the Trust at its telephone numbers or
address provided on page 1.
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<PAGE> 113
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR GNMA FUND
<TABLE>
<CAPTION>
Period From
May 1, 1996 Year Ended Period Ended
through April 30, April 30,
May 31, 1996 1996 1995(1)
------------ ---------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period . . . . $10.12 $10.16 $10.00
------ ------ ------
Income from Investment Operations
Net Investment Income . . . . . . . . . . . .05 .66 .48
Net Realized and Unrealized Gains (Losses)
on Securities . . . . . . . . . . . . . . . (.09) .14 .16
------ ---- ----
Total from Investment Operations . . . . . . (.04) (.80) .64
------ ------ ----
LESS DISTRIBUTIONS
Distributions from Net Investment Income . (.05) (.66) (.48)
Distributions from Realized Capital Gains . .00 (0.18) .00
------ ------- ------
Total Distributions . . . . . . . . . . . (.05) (.84) (.48)
------ ------ ------
Net Asset Value, End of Period . . . . . . . $10.03 $10.12 $10.16
====== ====== ======
TOTAL RETURN(2) . . . . . . . . . . . . . . . (0.35)%(3) 7.97% 6.61%(3)
RATIO/SUPPLEMENTAL DATA
Net Assets End of Period (000) . . . . . . $60,532 $62,161 $42,212
Ratio of Expenses to Average Net Assets .85%(4,5) .85%(5) .85%(4,5)
(after fee waivers) . . . . . . . . . . .
Ratio of Net Investment Income to Average
Net Assets (after fee waivers) . . . . . . 6.33%(4,5) 6.30%(5) 6.68%(4,5)
Portfolio Turnover Rate . . . . . . . . . . 1% 149% 226%
</TABLE>
1 Commenced operations on August 10, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
2 Total Return does not reflect the sales charge.
3 Not annualized.
4 Annualized.
5 The operating expense ratio and the net investment income ratio before
fee waivers for the period ended May 31, 1996, the year ended April
30, 1996 and for the period ended April 30, 1995 would have been 1.28%
and 5.90%, 1.29% and 5.86% and 1.40% and 6.13%, respectively.
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<PAGE> 114
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
Period From
May 1, 1996 Year Ended Period Ended
through April 30, April 30,
May 31, 1996 1996 1995(1)
------------ ---------- ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period . . . . $10.04 $10.02 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .05 .64 .44
Net Realized and Unrealized Gains (Losses)
on Securities . . . . . . . . . . . . . . . (.07) .07 .02
------ ---- ----
Total from Investment Operations . . . . . . (.02) .71 .46
------ ---- ----
LESS DISTRIBUTIONS
Distributions from Net Investment Income . (.05) (.64) (.44)
Distributions from Realized Capital Gains . .00 (.05) .00
----- ------ ------
Total Distributions . . . . . . . . . . . (.05) (.69) (.44)
----- ------ ------
Net Asset Value, End of Period . . . . . . . . $9.97 $10.04 $10.02
===== ====== ======
TOTAL RETURN(2) . . . . . . . . . . . . . . . (0.19)%(3) 7.09% 4.75%(3)
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) . . . . . . . $88,829 $89,901 $53,316
Ratio of Expenses to Average Net Assets
(after fee waivers) . . . . . . . . . . . . . .85%(4,5) .85%(5) .85%(4,5)
Ratio of Net Investment Income to Average
Net Assets (after fee waivers) . . . . . . . 5.88%(4,5) 6.20%(5) 6.17%(4,5)
Portfolio Turnover Rate . . . . . . . . . . . 2% 94% 172%
</TABLE>
___________________________________
1 Commenced operations on August 10, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
2 Total Return does not reflect sales charge.
3 Not annualized.
4 Annualized.
5 The operating expense ratio and the net investment income ratio before
fee waivers for the period ended May 31, 1996, the year ended April
30, 1996 and for the period ended April 30, 1995 would have been 1.25%
and 5.48%, 1.25% and 5.80% and 1.33% and 5.69%, respectively.
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<PAGE> 115
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Each Fund consists of a separate pool of assets with separate
investment objectives and policies as described below under "Risk Factors,
Investment Objectives and Policies." Each Fund is classified as a diversified
investment fund under the 1940 Act.
Shares of each Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in a Fund except that,
as described more fully below under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares in the Funds.
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 with respect to the
Total Return Advantage, Fixed Income, GNMA and Intermediate Government Funds,
and .10% annually with respect to the Enhanced Income Fund). 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 a Fund's investment objective. The
investments and investment techniques utilized by the Funds are described
below. Prior to making an investment decision, an investor should consider
which Fund or Funds best meet an investor's investment objectives and review
carefully the risks involved in Fund investments described below.
The investment objective of a 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," a
Fund's investment policies, however, may be changed without a vote of
shareholders. In addition, each 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 a Fund will achieve
its objective.
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<PAGE> 116
TOTAL RETURN ADVANTAGE FUND
The investment objective of the Total Return Advantage Fund is
to provide a total rate of return, income and price appreciation greater than
that of popular market indices with similar maturity and quality
characteristics. One such index is the Lehman Brothers Government/Corporate
Bond Index which is composed of government securities and investment grade
corporate securities with an average maturity of approximately ten years and an
average rating in the highest rating category assigned by Moody's, S&P, Fitch,
Duff or IBCA (defined below under "Ratings Criteria"). The Fund will normally
invest at least 80% of the value of its total assets in debt securities of all
types, although up to 20% of the value of its total assets may be invested in
preferred stocks and other investments. Under normal market conditions, the
Fund maintains an average dollar-weighted portfolio maturity of two years above
or below the average maturity of the Lehman Brothers Government/Corporate Bond
Index.
Although the Total Return Advantage Fund normally invests
substantially all of its assets in investment grade debt securities, it may
invest up to 15% of its net assets in non-rated securities and securities rated
below investment grade (commonly referred to as "junk bonds"). For a
discussion of risk factors relating to such securities, see "Risks Related to
Lower Rated Securities."
FIXED INCOME FUND
The investment objective of the Fixed Income Fund is to
provide as high a level of current income as is consistent with prudent
investment risk. The Fund seeks to achieve its objective by investing
substantially all of its assets in a fund of high and medium grade bonds and
other fixed income securities. The Fund normally invests at least 80% of the
value of its total assets in debt securities of all types, although up to 20%
of the value of its total assets may be invested in preferred stocks and other
investments. In making investment decisions, the Fund's advisers will consider
such factors as current yield, preservation of capital, maturity, yield to
maturity, and the potential for realizing capital appreciation. Under normal
market conditions, the Fund maintains an average dollar-weighted portfolio
maturity of ten years or less.
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<PAGE> 117
ENHANCED INCOME FUND
The investment objective of the Enhanced Income Fund is to
seek a total rate of return greater than that of the Merrill Lynch 1-3 year
Treasury Index. The Fund will normally invest at least 80% of the value of its
total assets in investment grade debt securities of all types. However, up to
20% of the value of its total assets may be invested in preferred stocks and
other investments. In making investment decisions, the Fund's adviser will
focus on a number of factors, including yield to maturity, maturity, quality
and the outlook for specific issuers and market sectors. Under normal market
conditions, the Fund intends to maintain an average dollar-weighted portfolio
maturity for its debt securities of from 1-1/2 to 4 years. The two components
of total rate of return are current income and change in the value of portfolio
securities. The Merrill Lynch 1-3 Year Treasury Index is composed of Treasury
Securities that mature in one to three years. The average dollar-weighted
maturity of the Index is generally from 2-1/2 to 3 years. The Index is
unmanaged, and its total rate of return does not reflect the expenses that a
mutual fund normally incurs. The Fund's objective refers to a return after
deduction of Fund expenses.
GNMA FUND
The investment objective of the GNMA 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 ("Rating
Agency"); (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.
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<PAGE> 118
In order to meet liquidity needs, the GNMA 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 it does not presently intend to do so during the current fiscal year.
The Fund may also borrow money in amounts up to 33-1/3% of its net assets.
INTERMEDIATE GOVERNMENT FUND
The investment objective of the Intermediate Government 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 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.
In order to meet liquidity needs, the Intermediate Government
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 intend to do so. The Fund may also borrow money
in amounts up to 33-1/3% of its net assets.
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<PAGE> 119
COMMON INVESTMENT POLICIES OF THE FUNDS
Debt Securities
The Total Return Advantage, Fixed Income and Enhanced Income
Funds may invest in debt securities which may include: equipment lease and
trust certificates; corporate issues; collateralized mortgage obligations;
state, municipal and private activity bonds; obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities; securities of
supranational organizations such as the World Bank; participation certificates
in pools of mortgages, including mortgages issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; asset-backed securities such as
mortgage backed securities, Certificates of Automobile Receivables ("CARS") and
Certificates of Amortizing Revolving Debts ("CARDS"); private placements; and
income participation loans. Each Fund normally limits investments in asset-
backed securities to under 50% of its net assets. The Total Return Advantage
Fund, Fixed Income Fund and Enhanced Income Fund normally limit investments in
income participation loans to under 10%, 5% and 20% of their respective net
assets. Some of the securities in which the Funds invest may have warrants or
options attached. Recognizing the increasing globalization of the securities
markets, each Fund may also invest in foreign securities, currencies, securities
of domestic issuers denominated in foreign currencies and related investments
described below.
The Intermediate Government 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 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 U.S. 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 ("FNMA").
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 a 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 a Fund; conversely,
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<PAGE> 120
a decline in the level of interest rates may temporarily increase the value of
those investments.
Ratings Criteria
The Fixed Income Fund invests only in debt securities which
are rated at the time of purchase within the three highest rating groups
assigned by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa and A),
Standard & Poor's Ratings Group ("S&P") (AAA, AA and A), Fitch Investors
Service, Inc. ("Fitch") (AAA, AA and A), Duff & Phelps Credit Rating Co.
("Duff") (AAA, AA and A) or IBCA, Inc. ("IBCA") (AAA, AA and A), or, if
unrated, which are determined by the Fund's adviser or advisers to be of
comparable quality pursuant to guidelines approved by the Trust's Board of
Trustees.
The Enhanced Income Fund invests only in, and the Total Return
Advantage Fund invests substantially all of its assets in investment grade debt
securities which are rated at the time of purchase within the four highest
rating groups assigned by Moody's (Aaa, Aa, A and Baa), S&P (AAA, AA, A and
BBB), Fitch (AAA, AA, A and BBB), Duff (AAA, AA, A and BBB), or IBCA (AAA, AA,
A and BBB), or, if unrated, which are determined by the Funds' adviser to be of
comparable quality pursuant to guidelines approved by the Trust's Board of
Trustees. Each of the Enhanced Income Fund and Total Return Advantage Fund
normally maintains a minimum, dollar-weighted average quality rating for its
portfolio of securities within the two highest rating categories assigned by
one or more rating agencies. Debt securities rated in the lowest investment
grade debt category (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) may
have speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. In the
event that subsequent to its purchase by a Fund, a rated security ceases to be
rated or its rating is reduced below investment grade, its adviser will
consider whether the Fund should continue to hold the security. The adviser
expects, however, to sell promptly any securities that are non-investment grade
as a result of such events that exceed 5% of a Fund's net assets where the
adviser has determined that such sale is in the best interest of the Fund.
Rating symbols are more fully described in Appendix A of the
Statement of Additional Information.
Risks Related to Lower Rated Securities Which May be Purchased by the
Total Return Advantage Fund
While any investment carries some risk, certain risks
associated with lower rated securities (commonly referred to as "junk bonds")
are different than those for investment grade
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<PAGE> 121
securities. The risk of loss through default is greater because lower rated
securities are usually unsecured and are often subordinate to an issuer's other
obligations. Additionally, the issuers of these securities frequently have
high debt levels and are thus more sensitive to difficult economic conditions,
individual corporate developments and rising interest rates. Consequently, the
market price of these securities may be quite volatile and may result in wider
fluctuations in the Total Return Advantage Fund's net asset value per share.
In addition, an economic downturn or increase in interest
rates could have a negative impact on both the markets for lower rated
securities (resulting in a greater number of bond defaults) and the value of
lower rated securities held by the Total Return Advantage Fund. Current laws,
such as those requiring federally insured savings and loan associations to
remove investments in lower rated securities from their funds, as well as other
pending proposals, may also have a material adverse effect on the market for
lower rated securities.
The economy and interest rates may affect lower rated
securities differently than other securities. For example, the prices of lower
rated securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security held by the Total Return Advantage
Fund defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty would likely result in increased
volatility for the market prices of lower rated securities as well as the
Fund's net asset value. In general, both the prices and yields of lower rated
securities will fluctuate.
In certain circumstances it may be difficult to determine a
security's fair value due to a lack of reliable objective information. Such
instances occur where there is no established secondary market for the security
or the security is lightly traded. As a result, the Total Return Advantage
Fund's valuation of a security and the price it is actually able to obtain when
it sells the security could differ.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the value and liquidity of lower
rated securities held by the Total Return Advantage Fund, especially in a
thinly traded market. Illiquid
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<PAGE> 122
or restricted securities held by the Fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
The ratings of Moody's, S&P, Fitch, Duff and IBCA evaluate the
safety of a lower rated security's principal and interest payments, but do not
address market value risk. Because the ratings of the rating agencies may not
always reflect current conditions and events, in addition to using recognized
rating agencies and other sources, the Fund's adviser performs its own analysis
of the issuers of lower rated securities purchased by the Fund. Because of
this, the Fund's performance may depend more on its own credit analysis than is
the case for mutual funds investing in higher rated securities.
The Total Return Advantage Fund's adviser continuously
monitors the issuers of lower rated securities held by the Fund for their
ability to make required principal and interest payments, as well as in an
effort to control the liquidity of the Fund so that it can meet redemption
requests.
Asset-Backed Securities
The Total Return Advantage, Fixed Income and Enhanced Income
Funds may purchase securities that are secured or backed by mortgages or other
assets (i.e., automobile loans and credit card receivables) and are issued by
entities such as GNMA, FNMA, Federal Home Loan Mortgage Corporation ("FHLMC"),
commercial banks, financial companies, finance subsidiaries of industrial
companies, savings and loan associations, mortgage banks and investment banks.
Mortgage-Backed Securities. Asset-Backed Securities acquired
by the Total Return Advantage, Fixed Income and Enhanced Income Funds consist
of both mortgage and non-mortgage-backed securities. Mortgage-backed
securities represent an ownership interest in a pool of mortgages, the interest
on which is in most cases issued and guaranteed by an agency or instrumentality
of the U.S. government, although not necessarily by the U.S. government itself.
Mortgage-backed securities include collateralized mortgage obligations and
mortgage pass-through certificates. The GNMA and Intermediate Government Funds
may purchase securities that are secured or backed by mortgages and are issued
by entities such as GNMA, FNMA and FHLMC, and the GNMA Fund may also purchase
securities issued by commercial banks, savings and loan associations, mortgage
banks and investment banks.
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
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<PAGE> 123
certificate in which the Funds 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. Privately issued mortgage backed securities
will carry a rating at the time of purchase of at least A by S&P or by Moody's
or, if unrated, will be in the adviser's opinion equivalent in credit quality
to such rating. 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.
The yield characteristics of asset-backed and 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 an asset-backed or 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 an
asset-backed or 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 Funds, the maturity of asset-backed and mortgage-backed securities will
be based on estimates of average life.
Prepayments on asset-backed and 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. In general, the collateral supporting
non-mortgage, asset-backed securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments. Like other
fixed income securities, when interest rates rise, the value of an asset-backed
or mortgage-backed security generally will decline; however, when interest
rates decline, the value of an asset-backed or 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.
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<PAGE> 124
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 asset-backed and
mortgage-backed securities is ordinarily quite liquid, in times of financial
stress the trading market for these securities sometimes becomes restricted.
Non-Mortgage-Backed Securities. The Funds may also invest in
non-mortgage-backed securities including interests in pools of receivables,
such as motor vehicle installment purchase obligations and credit card
receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities may also be debt instruments,
which are also known as collateralized obligations and are generally issued as
the debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Non-mortgage backed securities are not
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
Non-mortgage-backed securities involve certain risks that are
not presented by mortgage backed securities. Primarily, these securities do
not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws. Most issuers of motor vehicle receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related motor vehicle
receivables. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
REITs
The GNMA Fund may also invest in real estate investment trusts
("REITs") which 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.
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Foreign Securities, American Depository Receipts ("ADRs") and Foreign
Currencies
The Total Return Advantage, Fixed Income and Enhanced Income
Funds may invest in foreign securities including ADRs, securities of domestic
issuers denominated in foreign currencies, securities of foreign issuers
denominated in foreign currencies, securities of foreign issuers denominated in
U.S. dollars, and foreign currencies. ADRs are receipts issued by an American
bank or trust company evidencing ownership of underlying securities issued by
foreign issuers. ADRs may be listed on a national securities exchange or may be
traded in the over-the-counter market. ADR prices are denominated in U.S.
dollars; the underlying security may be denominated in a foreign currency.
Investments in foreign securities involve certain inherent risks,
such as political or economic instability of the issuer or the country of issue,
the difficulty of predicting international trade patterns, changes in exchange
rates of foreign currencies and the possibility of adverse changes in investment
or exchange control regulations. There may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets, or diplomatic developments that could affect investment within
those countries. Because of these and other factors, securities of foreign
companies acquired by the Funds may be subject to greater fluctuation in price
than securities of domestic companies. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Exchange Rate-Related Securities
The Total Return Advantage and Enhanced Income Funds may each
invest in securities for which the principal repayment at maturity, while paid
in U.S. dollars, is determined by reference to the exchange rate between the
U.S. dollar and the currency of one or more foreign countries ("Exchange
Rate-Related Securities"). The interest payable on these securities is
denominated in U.S. dollars and is not subject to foreign currency risk and, in
most cases, is paid at rates higher than most other similarly rated securities
in recognition of the foreign currency risk component of Exchange Rate-Related
Securities.
Investments in Exchange Rate-Related Securities entail
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certain risks. There is the possibility of significant changes in rates of
exchange between the U.S. dollar and any foreign currency to which an Exchange
Rate-Related Security is linked. In addition, there is no assurance that
sufficient trading interest to create a liquid secondary market will exist for
a particular Exchange Rate-Related Security due to conditions in the debt and
foreign currency markets. Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may, from time to time,
combine to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
Forward Currency Exchange Contracts
The Total Return Advantage and Enhanced Income Funds may enter
into forward currency exchange contracts in an effort to reduce the level of
volatility caused by changes in foreign currency exchange rates or where such
transactions are economically appropriate for the reduction of risks inherent
in the ongoing management of the Funds. The Funds may not enter into such
contracts for speculative purposes. A forward currency exchange contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of contract. Although such contracts tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain that might be
realized should the value of such currency increase. Consequently, a Fund may
choose to refrain from entering into such contracts. In connection with
forward currency exchange contracts, the Funds 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 their position in
accordance with applicable requirements of the SEC.
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Interest Rate Swaps
In order to protect its value from interest rate fluctuations,
each of the Total Return Advantage, Enhanced Income and GNMA Funds may enter
into interest rate swaps. The Funds expect 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 Funds anticipate purchasing at a later date.
Interest rate swaps involve the exchange by a 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 excess,
if any, of a 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. A 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 rated, with respect to the Total Return Advantage and Enhanced Income
Funds, either "A" or "A-1" or better by S&P, Duff or Fitch, or "A" or "P-1" or
better by Moody's or, with respect to the GNMA Fund, the claims paying ability
of the other party is deemed creditworthy and any such obligation the GNMA 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 and Related Options
The Total Return Advantage, Enhanced Income and Intermediate
Government Funds may invest in interest rate and bond index futures contracts
and options on futures contracts and the GNMA and Intermediate Government Funds
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 Funds 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 Funds may utilize futures contracts in anticipation of changes in
the composition of its holdings for hedging purposes or to maintain liquidity.
Futures contracts obligate a Fund, at maturity, to take or
make delivery of certain securities or the cash value of a
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contract or securities index. When interest rates are rising, futures
contracts can offset a decline in value of the securities held by a Fund. When
rates are falling or prices of securities are rising, these contracts can
secure higher yields for securities a Fund intends to purchase. In addition, a
Fund may utilize futures contracts in anticipation of changes in the
composition of its fund holdings.
The Total Return Advantage and Enhanced Income Funds may
purchase and sell call and put options on futures contracts traded on an
exchange or board of trade. When a Fund purchases an option on a futures
contract, it has the right to assume a position as a purchaser or seller of a
futures contract at a specified exercise price at any time during the option
period. When a Fund sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, a Fund may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the Fund
intends to purchase. Similarly, if the value of a Fund's securities is
expected to decline, the Fund might purchase put options or sell call options
on futures contracts rather than sell futures contracts.
The Total Return Advantage, Enhanced Income, GNMA and
Intermediate Government Funds intend to comply with the regulations of
the Commodity Futures Trading Commission ("CFTC") exempting the Funds from
registration as a "commodity pool operator." A Fund's commodities transactions
must constitute bona fide hedging or other permissible transactions pursuant to
such regulations. In addition, a Fund may not engage in such transactions if
the sum of the amount of initial margin deposits and premiums paid for
unexpired commodity options, 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 a Fund's position in a futures contract or
option thereon, 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.
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Risk Factors Associated with Futures and Related Options
To the extent the Total Return Advantage, Enhanced Income,
GNMA and Intermediate Government Funds are engaging in a futures transaction as
a hedging device, due to the risk of an imperfect correlation between
securities in their 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 Funds 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 Funds 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 a Fund's net investment results if market
movements are not as anticipated when the hedge is established.
Successful use of futures by the Funds also are subject to the
advisers' ability to predict correctly movements in the direction of securities
prices, interest rates and other economic factors. For example, if the Funds
have hedged against the possibility of a decline in the market adversely
affecting the value of securities held in their funds and prices increase
instead, the Funds will lose part or all of the benefit of the increased value
of securities which they have hedged because they will have offsetting losses
in their futures positions. In addition, in such situations, if a 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 Funds may have to
sell securities at a time when it may be disadvantageous to do so.
Although the Total Return Advantage, Enhanced Income, and
Intermediate Government Funds intend to enter into futures contracts and the
Total Return Advantage and Enhanced Income Funds into options 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." Many futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the
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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 Funds to substantial losses. If it is not possible, or a 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
and options are: (i) the imperfect correlation between the change in market
value of the securities held by a Fund and the price of the futures contract or
option; (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.
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When-Issued Securities
Each Fund may purchase securities on a "when-issued" or
delayed delivery basis. These transactions are arrangements in which a 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 Funds do 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 GNMA and Intermediate Government Funds 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. The
Total Return Advantage, Fixed Income, Enhanced Income and GNMA Funds expect
that commitments to purchase when-issued securities will not exceed 25% of the
value of their respective total assets under normal market conditions. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Variable and Floating Rate Obligations
The Funds may purchase rated and unrated variable and floating
rate instruments. These instruments may include variable amount master demand
notes and 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 Funds
to dispose of instruments if the issuer defaulted on its payment obligation or
during periods that the Funds are not entitled to exercise their demand rights,
and the Funds 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.
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Short Term Obligations
The Total Return Advantage, Fixed Income and Enhanced Income
Funds will ordinarily hold some short term obligations (with maturities of 18
months or less) such as domestic and foreign commercial paper, bankers'
acceptances, certificates of deposit and demand and time deposits of domestic
and foreign branches of U.S. banks and foreign banks, reverse repurchase
agreements, U.S. Treasury bills, money market funds, and guaranteed investment
contracts ("GICs"). Reverse repurchase agreements involve the risk that the
market value of the securities held by a Fund may decline below the price of
the securities it is obligated to repurchase.
All Funds may acquire repurchase agreements, which carry the
risk that default or bankruptcy of the seller may expose a Fund to possible
loss because of adverse market action or delays connected with the disposition
of the underlying obligations. Further, it is uncertain whether 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 GNMA Fund may invest in reverse repurchase agreements in
the form of 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 agreement 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 GNMA 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 obligations.
For further information, see "Risk Factors, Investment
Objectives and Policies" in the Statement of Additional
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Information.
Receipts
Receipts are evidence of ownership in specific securities or
their component parts. The Intermediate Government Fund may invest in receipts
representing 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 account
s 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.
U.S. Treasury Obligations
The GNMA 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 STRIPS
(Separately Traded Registered Interest and Principal Securities).
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Repurchase Agreements
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a 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 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.
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Reverse Repurchase Agreements
The Total Return Advantage, Fixed Income and Enhanced Income
Funds may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment
restrictions. Pursuant to such agreements, the Fund would sell Fund securities
to financial institutions such as banks and broker-dealers, and agree to
repurchase them at a mutually agreed-upon date and price. These Funds intend
to enter into reverse repurchase agreements only to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. At the
time a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. government securities or other
liquid, high grade debt securities consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which it is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
U.S. Government Obligations
The GNMA 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.
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Short Sales
The GNMA 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 GNMA 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.
Lending Portfolio Securities
In order to generate additional income, each Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. A 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 or advisers, 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 Funds or the borrower at any time. While a Fund
does not 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. A Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which its adviser or advisers have
determined are creditworthy under guidelines established by the Trust's Board
of Trustees.
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Securities of Other Investment Companies
Subject to 1940 Act limitations, each 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. 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 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. For further
information, see "Risk Factors, Investment Objectives and Policies" in the
Statement of Additional Information.
Illiquid Securities
The Fixed Income Fund will not knowingly invest more than 10%
of its net assets, and the other Funds will not knowingly invest more than 15%
of their respective net assets, in securities that are illiquid. Illiquid
securities would generally include repurchase agreements, interest rate swaps
and GICs 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").
Each 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 or advisers, 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 a 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 a Fund in these securities.
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Risk Factors Associated with Derivative Instruments
The Funds 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 Funds may purchase include (but are not limited
to) futures contracts, options, forward currency 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 advisers have 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 advisers have adopted the following internal policies concerning
management of the structural risk inherent in
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derivative instruments on behalf of the Funds. The advisers will evaluate the
risks presented by the derivative instruments purchased by the Funds, and will
determine, in connection with their day-to-day management of the Funds, how
they will be used in furtherance of the Funds' investment objectives.
Fixed Income Fund. The Fund may invest in moderate structural risk
derivatives containing features which can modestly or moderately alter the
timing and/or amount of principal return and/or amount of income return. This
would include, for example, investments that are subject to normal prepayment
variances experienced in mortgage pass-through securities. Periodic occurrence
of this degree of structural risk would not be expected to materially impact
overall Fund returns relative to its investment objective.
The Fund will not invest in high structural risk derivatives whose
duration (and hence return) can vary widely depending on moves in interest
rates or other contractual variables. Generally, these are instruments which
are deemed to have a high sensitivity to changes in interest rates, which could
materially alter the effective duration or coupon and return of the
instruments.
The Fund may invest in mortgage-backed derivative securities,
including collateralized mortgage obligations ("CMOs"), provided that they are
not identified by the advisers as "high risk securities" by certain
quantitative tests that are generally accepted standards in the investment
industry.
Other derivative instruments that are suitable for investment include:
asset-backed securities such as those backed by automobile loans or credit card
receivables. All such securities, however, must conform to the structural risk
standards stated above (i.e. not present high structural risk).
The advisers do not presently intend to invest in the following types
of derivatives on behalf of the Fund:
! exchange rate-related securities
! forward currency exchange contracts
! interest rate swaps
! futures contracts and related options
! 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.
Total Return Advantage Fund and Enhanced Income Fund. These Funds
may invest in derivative instruments having either moderate structural risk or
high structural risk characteristics
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(as described above in the section pertaining to the Fixed Income Fund). There
are no policy restrictions on specific types of derivative instruments in which
the Funds are permitted to invest. However, structural risk is controlled by
adherence to specific overall Fund parameters. The Funds are managed in
accordance with a policy goal that constrains the potential variability of
overall Fund duration and total return in relation to specified investment
performance benchmarks. Fund exposure to derivative instruments having high
structural risk characteristics is targeted at a maximum of 5.0% of each Fund's
net assets with no individual position greater than 1.0% of each Fund.
Variability in total Fund duration caused by these securities is targeted not
to exceed 0.1 years in any one calendar year.
GNMA Fund. The adviser has adopted the following internal policy
concerning management of the structural risk inherent in derivative instruments
on behalf of the GNMA Fund:
The adviser does not presently intend to invest in the
following types of derivatives on behalf of the GNMA Fund:
o exchange rate-related securities
o forward currency exchange contracts
o 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.
Intermediate Government Fund. The adviser does not presently intend
to invest in the following types of derivatives 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.
Portfolio Turnover
Each 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 Fund's adviser or advisers believe is a
temporary disparity in the normal yield relationship between two securities.
Any such trading would increase a 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.
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Portfolio turnover will tend to rise during periods of
economic turbulence and decline during periods of stable growth. Each Fund's
annual portfolio turnover is not expected to exceed 100% under normal market
conditions. For further information, see "Risk Factors, Investment Objectives
and Policies" in the Statement of Additional Information.
INVESTMENT LIMITATIONS
Each 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.")
No Fund may:
1. 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.
2. (a) This paragraph (a) applies to the
Total Return Advantage, Fixed Income and Enhanced Income Funds. Borrow money
or issue senior securities, except that each Fund may borrow from banks and
enter into reverse repurchase agreements for temporary purposes in amounts not
in excess of 10% of the value of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets except in connection
with any such borrowing and in amounts not in excess of the lesser of the
dollar amounts borrowed or 10% of the value of the Fund's total assets at the
time of such borrowing. A Fund will not purchase securities while borrowings
(including reverse repurchase agreements) in excess of 5% of its total assets
are outstanding.
(b) This paragraph (b) applies to the GNMA and
Intermediate Government Funds. Neither Fund may 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,
asset coverage of at least 300% is required.
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The Fund will not purchase securities while outstanding borrowings equal or
exceed 5% of its total assets. "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.
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
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, (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) with respect to the GNMA Fund, 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 or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of the outstanding voting securities of the issuer, except that up to 25%
of the value of the Fund's total assets may be invested without regard to such
limitations. With respect to the GNMA and Intermediate Government Funds, 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.
Additional investment limitations which are matters of
fundamental policy are as follows:
5. The Fixed Income Fund may invest no more than 10% of
the value of its net assets in illiquid securities, including repurchase
agreements with remaining maturities in excess of seven days, non-negotiable
time deposits, certificates of participation without corresponding remarketing
agreements, and other securities which are not readily marketable.
6. Neither the Total Reurn Fund nor the Enhanced Income
Fund may invest more than 15% of the value of its net assets in illiquid
securities. See "Illiquid Securities" under "Risk Factors, Investment
Objectives and Policies - Common
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Investment Policies of the Funds."
For purposes of investment limitations No. 3 with respect to
the GNMA and Intermediate Government Funds) and 4 (with respect to all Funds),
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 a Fund's securities will not constitute a violation of such
limitation for purposes of the 1940 Act. If the Funds exceed their limitations
on the holding of illiquid securities, they will sell illiquid securities as
necessary to maintain the required liquidity when the adviser believes that it
is in the best interests of the Funds to do so.
In order to permit the sale of the Funds' 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 a 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 each 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 a 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 Funds calculate their total returns for each class of
shares on an "average annual total return" basis for various periods from the
date they commenced 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
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of the shares and assume that any dividends and capital gain distributions made
by a 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 Funds 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 a Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, respectively, 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 Funds 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 a 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 a Fund.
Further information about the performance of the Funds 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).
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PRICING OF SHARES
For purposes of pricing purchases and redemption orders, the
net asset value per share of each 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, Dr. Martin Luther King, Jr. 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 a 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.
With respect to each Fund, 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 each Fund will fluctuate as the
value of its investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds 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, including trips
and monetary awards to NatCity Investments, Inc. and other affiliates of
National City.
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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 Funds for such services of up to .10% (on an
annualized basis) with respect to the Enhanced Income Fund and .25% (on an
annualized basis) with respect to the Total Return advantage Fund, Fixed Income
Fund and Intermediate Government Fund 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 NatCity Investments, Inc.
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), Youngstown
(1-800-742-4098), or Pittsburgh (1-800-282-1078).
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 NatCity Investments, Inc., 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". Purchases for an IRA
through the monthly savings program will be considered as contributions for the
year in which the purchases are made.
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Under a monthly savings program, Investors may add to their
investment in the Retail 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 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 by completing an
application obtained through a financial institution, such as banks, brokers,
or dealers selling Retail shares of the Funds, or by calling 1-800-622-FUND
(3863). 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
Total Return Advantage Fund, Fixed Income Fund, GNMA Fund and Intermediate
Government Fund is the sum of the net asset value of the shares being purchased
plus any applicable sales charge per account, per Fund, 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>
The Public Offering Price for Retail shares of the Enhanced Income
Fund is the sum of the net asset value of the shares being purchased plus any
applicable sales charge per
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account, per Fund, 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 . . . . . . . 2.75 2.83 2.75
$100,000 but less
than $250,000 . . . . . . . . . 1.75 1.78 1.75
$250,000 but less
than $500,000 . . . . . . . . . 1.00 1.01 1.00
$500,000 but less
than $1,000,000 . . . . . . . . 0.50 0.50 0.50
$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 NatCity Investments, Inc.;
(e) individuals investing in a 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 Funds pursuant to an asset allocation
program sponsored by financial institutions, although certain account level
fees may apply.
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REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of each 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 or the Trust directly by calling
1-800-622-FUND(3863) 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 Fixed Income
Fund with an aggregate current value of $90,000 and subsequently purchases
Retail shares of that 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.
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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 or directly from the Trust
by calling 1-800-622-FUND(3863). 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, who are large institutions, ("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 or NAM 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 a 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 a 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
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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 Funds 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 1-800-622-FUND(3863). Redemption
proceeds are paid by check or credited to the Investor's account with his
financial institution.
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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 the Trust, 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 1-800-622-FUND(3863) (provided the appropriate election was made
on the shareholder's account application).
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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 the Trust 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 Trust's
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
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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.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who
have paid a sales charge to purchase Retail shares of one or more of the Funds
(each a "load Fund") may exchange those Retail shares for Retail shares of
another load Fund, 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 NatCity
Investments, Inc. 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
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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.
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 each of the Funds. 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) with respect to the Enhanced Income Fund and up to .25% (on an
annualized basis) with respect to the Fixed Income Fund, Total Return Advantage
Fund, Intermediate Government Fund and GNMA Fund 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.
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DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are
declared daily and paid monthly. With respect to each Fund, net income for
dividend purposes consists of dividends, distributions and other income on the
Fund's assets, less the accrued expenses of the Fund. Any net realized capital
gains will be distributed at least annually. Dividends and distributions will
reduce the Funds' net asset values 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 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
Each of the Funds intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification relieves a 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 a 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 net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by a 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.) Since all of each Fund's net investment income is
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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 each Fund's net realized long-term
capital gains, if any, will be distributed at least annually to Fund
shareholders. A Fund will generally 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 October, November or December of any
year payable to shareholders of record on a specified date before the end of
the year 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.
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 declared
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 Funds will be advised at least
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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 Funds and their 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, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they
receive in connection with each meeting of the Board of Trustees they attend
are included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City, National City Columbus and National City
Kentucky ("National City Banks") serve as investment advisers to the Fixed
Income Fund and NAM serves as the investment adviser to the Total Return
Advatage and Enhanced Income Funds. National City serves as investment
adviser to the GNMA and Intermediate Government Funds. The National City Banks
and NAM are wholly owned subsidiaries of National City Corporation. The
National City Banks provide 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 National
City Banks are member banks of the Federal Reserve System and the Federal
Deposit Insurance Corporation. NAM is a registered investment adviser
providing investment advisory and related services.
On June 30, 1996, the Trust Departments of National City,
National City Columbus and National City Kentucky had approximately $8.7
billion, $1.6 billion and $5.1 billion,
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respectively, in assets under management, and National City, National City
Columbus and National City Kentucky had approximately $16.8 billion, $10.7
billion and $11.9 billion, respectively, in total trust assets. NAM had
approximately $6.2 billion in assets under management. The principal offices
for each of the investment advisers are as follows: National City -1900 East
Ninth Street, Cleveland, Ohio 44114; National City Columbus -155 East Broad
Street, Columbus, Ohio 43251; National City Kentucky -National City Tower, 101
South Fifth Street, Louisville, Kentucky 40202; and NAM -101 South Fifth
Street, Louisville, Kentucky 40202.
NAM manages the Total Return Advantage and Enhanced Income
Funds, makes decisions with respect to and places orders for all purchases and
sales of the Funds' securities and maintains the Funds' records relating to
such purchases and sales. The Investment Management Group of NAM makes the
investment decisions for these Funds. No person is primarily responsible for
making recommendations to the Investment Management Group.
The National City Banks manage the Fixed Income Fund and
National City manages the GNMA and Intermediate Government Funds. The advisers
make decisions with respect to and place orders for all purchases and sales of
the Funds' securities, and maintain the Funds' 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 Funds as of
May 2, 1996, when the shareholders of the Predecessor Funds of the GNMA and
Intermediate Government Funds approved the adviser. Members of the team make
decisions for the Funds. 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 1993. 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
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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.
- - Frederick W. "Ted" Ramsey, Vice President of the Fixed Income Research
Team, oversees the Fixed Income Team's credit and research area. His
experience includes 25 years in corporate banking and credit
administration, including 10 years as senior credit officer. In
addition to his responsibilities as head of credit research, Mr.
Ramsey serves as credit advisor on new investment opportunities and
risk management guildelines.
- - Connie R. Chuhaloff joined National City in 1977. She has held
investment-related responsibilities since 1988. Ms. Chuhaloff also has
a background in both Trust and Branch Operations.
The investment advisers are entitled to receive advisory fees,
computed daily and payable monthly, at the annual rate of .55% of the average
daily net assets of each of the Total Return Advantage, Fixed Income, GNMA
and Intermediate Government Funds, and at the annual rate of .45% of the
average daily net assets of the Enhanced Income Fund. The advisers may from
time to time waive all or a portion of their advisory fees to increase the net
income of the Funds available for distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
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continuously engaged in the issuance of its shares, but (b) do not prohibit
such a bank holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company. The advisers
believe that they may perform the services for the Funds contemplated by their
Advisory Agreements with the Trust as described in such agreements and this
Prospectus without violation of applicable banking laws or regulations.
However, there are no controlling judicial precedents and future changes in
legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the advisers from continuing to perform services for the Trust. If the
advisers were prohibited from providing services to the Funds, the Board of
Trustees would consider selecting another qualified firm. Any new investment
advisory agreement would be subject to shareholder approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the advisers, or their
affiliated and correspondent banks in connection with shareholder purchases of
Fund shares, the advisers and their affiliated and correspondent banks might be
required to alter materially or discontinue the services offered by them to
shareholders. It is not anticipated, however, that any resulting change in the
Trust's method of operations would affect its net asset value per share or
result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Funds. 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 Funds: 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
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required fidelity bond coverage; calculate each Fund's net asset value per
share, net income, and realized capital gains (losses); and generally assist
the Funds with respect to all aspects of their administration and operation.
PFPC is entitled to receive with respect to each 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, .045% of the next $200,000,000 of its net assets and .02% of its net
assets over $600,000,000 and is entitled to be reimbursed for its out-of-pocket
expenses incurred on behalf of each 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"). Ten of these
classes or series, which represent interests in the Fixed Income Fund (Class I
and Class I - 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) and GNMA Fund (Class S and Class S - Special Series 1) are described in this
Prospectus.
Class I, Class O, Class P, Class R and Class S shares constitute
the Institutional class or series of shares; and Class I - Special Series 1,
Class O - Special Series 1, Class P - Special Series 1, Class R - Special
Series 1 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), 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), Pennsylvania Tax Exempt
Fund (Class Q and Class Q - Special Series 1) and 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
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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 previously in the text of this document, 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.
As of September 9, 1996, National City, National City Columbus
and National City Kentucky held beneficially or of record approximately 13.71%,
22.88% and 8.69%, respectively, of the outstanding Institutional shares of the
Fixed Income Fund; National City and National City Kentucky held beneficially
or of record approximately 5.74% and 56.59%, respectively, of the outstanding
Institutional shares of the Enhanced Income Fund; and
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National City, National City Columbus and National City Kentucky held
beneficially or of record approximately 19.54%, 3.56% and 70.32%, respectively,
of the outstanding Institutional shares of the Total Return Advantage Fund.
Neither National City, National City Columbus, nor National City Kentucky have
any economic interest in such shares which are held solely for the benefit of
their customers, but may be deemed to be controlling persons of the Funds
within the meaning of the 1940 Act by reason of their record ownership of such
shares. The names of beneficial owners and record owners who are controlling
shareholders under the 1940 Act may be found in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank 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 advisers bear all expenses
in connection with the performance of their services. Each Fund of the Trust
bears 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. Each 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 Funds
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 Bank 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
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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.
The portfolio managers of the Funds and other investment
professionals may from time to time discuss in advertising, sales literature or
other material, including periodic publications, various topics of interest to
shareholders and prospective investors. The topics may include, but are not
limited to, the advantages and disadvantages of investing in tax-deferred and
taxable investments; Fund performance and how such performance may compare to
various market indices; shareholder profiles and hypothetical investor
scenarios; the economy; the financial and capital markets; investment
strategies and techniques; investment products and tax, retirement and
investment planning.
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 ADVISERS
AFFILIATES OF
NATIONAL CITY CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
National Asset Management
Corporation
101 South Fifth Street
Louisville, Kentucky 40202
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 8
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . 13
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . 36
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . 38
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . . . . . . . . . 41
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 50
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . 50
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 50
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . 53
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . . . . . . . . . 57
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . 59
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
</TABLE>
ARMADA FUNDS
PROSPECTUS
September 30, 1996
Total Return Advantage Fund
Fixed Income Fund
Enhanced Income Fund
GNMA Fund
Intermediate Government Fund
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o 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 OF COLUMBUS; NATIONAL CITY BANK OF KENTUCKY; NATIONAL
ASSET MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR
AFFILIATES OR ANY BANK.
o SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
o 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.
-65-
<PAGE> 168
CROSS REFERENCE SHEET
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial
Information . . . . . . . . . . . . . . . . . Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant . . . . . . . . . . . . . . . . . . Risk Factors, Investment Objectives and Policies;
Investment Limitations;
Description of the Trust and Its Shares
5. Management of the Trust . . . . . . . . . . . Management of the Trust; Custodian and Transfer Agent
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . How to Purchase and Redeem Shares; Dividends and
Distributions; Taxes; Description
of the Trust and Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered . . . . . . . . . . . . . . . . Pricing of Shares; How to Purchase and Redeem Shares;
Distribution Agreement
8. Redemption Repurchase . . . . . . . . . . . . How to Purchase and Redeem Shares
9. Pending Legal Proceedings . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 169
ARMADA FUNDS
________________________________________________________________________________
<TABLE>
<S> <C>
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through NatCity Investments, Inc.
(formerly National City Investments Corporation),
please call your Investment Consultant for information.
For current performance, fund information,account
redemption information, and to
purchase shares, please call 1-800- 622-FUND(3863).
</TABLE>
This Prospectus describes shares in the followingtwo investment funds
(the "Funds") of Armada Funds (the "Trust"), each having its own investment
objective and policies:
OHIO TAX EXEMPT FUND'S investment objective is to provide as high a
level of interest income exempt from federal income tax and, to the extent
possible, from Ohio income tax, as is consistent with conservation of capital.
The Fund normally invests in tax-exempt obligations having average remaining
maturities of two to ten years.
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.
Each Fund's net asset value per share will fluctuate as the value of
its assets changes in response to changing market prices and other factors.
National City Bank ("National City"), National City Bank of Columbus
("National City Columbus") and National City Bank of Kentucky ("National City
Kentucky") serve as investment advisers to the Ohio Tax Exempt Fund; National
City serves as investment adviser to the Pennsylvania Municipal Fund. These
investment advisers are referred to herein individually as an "adviser" and
collectively as the "advisers." Weiss, Peck & Greer, L.L.C. ("sub-adviser")
serves as investment sub-adviser to the Pennsylvania Municipal Fund.
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp. (the "Distributor"), serves as the Trust's
<PAGE> 170
sponsor and distributor. Each Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, 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, NATIONAL
CITY BANK OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, THEIR PARENT COMPANY OR
ANY OF THEIR 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 30, 1996
-2-
<PAGE> 171
The classes which represent interests in the Funds are
described in this Prospectus. Class K and Class T shares constitute the
Institutional class of shares (herein referred to as the "Institutional
shares") of the Ohio Tax Exempt Fund and Pennsylvania Municipal Fund,
respectively. Class K - Special Series 1 and Class T - Special Series 1 shares
constitute the Retail class of shares (herein referred to as the "Retail
shares") of the Ohio Tax Exempt Fund and Pennsylvania Municipal Fund,
respectively.
Institutional shares are sold primarily to Banks and National
Asset Management Corporation ("NAM") customers, who are large institutions.
Retail shares are sold to the public primarily through financial institutions
such as banks, brokers and dealers.
-3-
<PAGE> 172
EXPENSE TABLE
<TABLE>
<CAPTION>
Ohio Ohio Pennsylvania Pennsylvania
Tax Exempt Tax Exempt Municipal Municipal
Retail Institutional Retail Institutional
Shares1 Shares Shares1 Shares
------ ------------- ---------- --- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . 3.00% None 3.00% None
Sales Charge Imposed
on Reinvested Dividends . . . . None None None None
Deferred Sales Charge . . . . . . None None None None
Redemption Fee . . . . . . . . . None None None None
Exchange Fee . . . . . . . . . . None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees (after fee
waivers)2 . . . . . . . . . . . 0% 0% .54% .54%
12b-1 Fees (after fee waivers)3 .05% .05% .01% .01%
Other Expenses . . . . . . . . . .31% .21% .39% .29%
--- --- --- ---
TOTAL FUND OPERATING
EXPENSES (AFTER FEE WAIVERS)2 . .36% .26% .94% .84%
=== === === ===
</TABLE>
___________________________
1 The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Pennsylvania Municipal
Fund and, in the future, may implement the Services Plan with respect
to Retail shares of the Ohio Tax Exempt Fund. Pursuant tothe Services
Plan, the Trust enters into shareholder servicing agreements with
certain financial institutions pursuant 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. For further information concerning the Services Plan, see
"Shareholder Services Plan."
2 The expense information in the table relating to each Fund has been
restated to reflect current fees. The Investment Adviser will waive
its entire fee of .55% of theOhio Tax Exempt Fund's average daily net
assets and .01% of the Pennsylvania Municipal Fund's average daily
net assets. These fee waivers are expected to be in effect during the
current fiscal year. Without such fee waivers, the Total Fund
Operating Expenses would be.91% and .81% and .95% and .85% for the
Retail and Institutional shares of the Ohio Tax Exempt Fund and
Pennsylvania Municipal Fund, respectively. Additionally, waivers of
the 12b-1 fees are expected to be in effect during the current fiscal
year. If the maximum distribution fee permitted under the 12b-1 Plan
were imposed, Total Fund Operating Expenses would be .96% and .86% and
1.04% and .94% for the Retail and Institutional shares of the Ohio Tax
Exempt Fund and Pennsylvania MunicipalFund, respectively.
3 The Funds have in effect 12b-1 Plans pursuant to which each 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.
-4-
<PAGE> 173
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>
Ohio Tax Exempt Fund Retail Shares . . . . $34 $41 $45 $ 74
Ohio Tax Exempt Fund Institutional Shares . $ 3 $ 8 $15 $ 33
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 Funds
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 Funds. 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 shares of any of the Funds are in addition to and
not reflected in the fees and expenses described above.
-5-
<PAGE> 174
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
OHIO TAX EXEMPT FUND
The following information has been derived from financial
statements audited by Ernst & Young LLP, independent auditors, whose reports
are 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.
Additional information about the performance of the Ohio Tax Exempt Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1995 1994 1994
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- --------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.74 $10.70 $ 10.57 $10.53 $ 10.84 $10.80
------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . .50 .50 .50 .50 .52 .52
Net Gains (Losses) on Securities
(Realized and Unrealized) ( .04) ( .04) .17 .17 (.26) (.26)
------- ------ ------- ------ ------- ------
Total from Investment Operations .46 .46 .67 .67 .26 .26
------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.50) (.50) (.50) (.50) (.52) (.52)
Dividends in Excess of Net
Investment Income . . . . (.00) (.00) (.00) (.00) (.00) (.00)
Dividends in Excess of Net Realized
Capital Gains . . . . . . (.00) (.00) (.00) (.00) (.01) (.01)
------- ------ ------- ------ ------- ------
Total Distributions . . . . . (.50) (.50) (.50) (.50) (.53) (.53)
------- ------ ------- ------ ------- ------
Net Asset Value, End of Period $ 10.70 $10.66 $ 10.74 $10.70 $ 10.57 $10.53
======= ====== ======= ====== ======= ======
Total Return . . . . . . 4.36% 4.35%(4) 6.61% 6.64%(4) 2.28% 2.29%(4)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s) $82,886 $2,869 $71,996 $3,168 $63,133 $2,725
Ratio of Expenses to Average
Net Assets (after fee waivers) .26%(5) .26%(6) .24%(5) .24%(6) .33%(5) .33%(6)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . 4.68%(5) 4.68%(6) 4.82%(5) 4.82%(6) 4.54%(5) 4.54%(6)
Portfolio Turnover Rate . . 10% 10% 3% 3% 2% 2%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1993 1993 1992 1992 1991 1990
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- --------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.33 $10.30 $ 10.14 $10.14 $ 9.93 $10.00
------- ------ ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . .51 .51 .19 .46 .50 .13
Net Gains (Losses) on Securities
(Realized and Unrealized) .56 .54 .15 .16 .22 (.11)
------- ------ ------- ------ ------ ------
Total from Investment Operations 1.07 1.05 .34 .62 .72 .02
------- ------ ------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.51) (.51) (.15) (.46) (.50) (.09)
Dividends in Excess of Net
Investment Income . . . . (.05) (.04) (.00) (.00) (.01) (.00)
Dividends in Excess of Net Realized
Capital Gains . . . . . . (.00) (.00) (.00) (.00) (.00) (.00)
------- ------ ------- ------ ------ ------
Total Distributions . . . . . (.56) (.55) (.15) (.46) (.51) (.09)
------- ------ ------- ------ ------ ------
Net Asset Value, End of Period $10.84 $10.80 $10.33 $10.30 $10.14 $9.93
======= ====== ======= ====== ====== ======
Total Return . . . . . . 10.36% 10.27%(4) 8.23% 6.22%(3,4) 7.40% 0.50%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s) $40,080 $1,466 $10,453 $437 $246 $582
Ratio of Expenses to Average
Net Assets (after fee waivers) .09%(5) .09%(6) .73%(5) .93%(3,6) 1.25%(5) 1.20%(3,5)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) . . . 5.00%(5) 5.00%(6) 4.56%(5) 4.49%(3,6) 4.89%(5) 3.82%(3,5)
Portfolio Turnover Rate . . 11% 11% 1% 1% 25% 0%
</TABLE>
(1) The Fund commenced operations on January 5, 1990.
(2) Retail class commenced operations on April 15, 1991.
(3) Annualized.
(4) Total Return excludes sales load.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Institutional
class for the years ended May 31, 1996 and 1995 would have been .83% and
4.11% and .80% and 4.36%, respectively. The operating expense ratio and
the net investment income ratio before fee waivers by the Investment
Advisers for the Institutional clss for the years ended May 31, 1994,
1993, 1992, 1991 and for the period ended 1990 would have been .88% and
3.99%, .64% and 4.45%, 1.28% and 4.01%, 1.80% and 4.34% and 1.75% and
3.72%, respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Advisers and Custodian for the Retail class for
the years ended May 31, 1996 and 1995 would have been .83% and 4.14% and
.78% and 4.27%, respectively. The operating expense ratio and the net
investment income ratio before fee waivers by the Investment Advisers for
the Retail class for the years ended May 31, 1994, 1993 and for the period
ended May 31, 1992 would have been .88% and 3.99%, .64% and 4.45%, and
1.48% and 3.94%, respectively.
-6-
<PAGE> 175
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 Pennsylvania Municipal 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 period from May 1, 1996 to May 31, 1996, the
fiscal year ended April 30, 1996 and the fiscal period ended April 30, 1995.
As part of the reorganization, the fiscal year of the Predecessor Pennsylvania
Municipal Fund was changed to coincide with the Trust's May 31 fiscal year. A
one-month financial report representing the Predecessor Pennsylvania Municipal
Fund's operations from May 1, 1996 through May 31, 1996 is being presented.
The information was audited by Coopers & Lybrand L.L.P., independent
accountants for the Predecessor Fund, whose reports thereon are contained in
Inventor Funds' Annual Report to Shareholders for the fiscal year ended April
30, 1996 and the period ended May 31, 1996. Such financial highlights should
be read in conjunction with the financial statements and notes thereto
contained in Inventor Funds' Annual Reports 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 Pennsylvania Municipal Fund is contained in Inventor Funds'
Annual Reports to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1.
-7-
<PAGE> 176
<TABLE>
<CAPTION>
PERIOD OF
MAY 1, 1996 YEAR ENDED PERIOD ENDED
THROUGH APRIL 30, APRIL 30,
MAY 31, 1996 1996 19951
------------ ---------- -------- ---
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period . . . . . . . . . . . . . . . . . $10.12 $10.04 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .
Net Realized and Unrealized (.04) .43 .29
Gains (Losses) on
Securities . . . . . . . . . . . . .
(.04) .08 .04
------ ----- -----
Total from Investment
Operations . . . . . . . . . . . . . . . (.08) .51 .33
------ ----- -----
LESS DISTRIBUTIONS
Distributions from Net
Investment Income . . . . . . . . . . . (.04) (.43) (.29)
Distributions from Realized
Capital Gains . . . . . . . . . . . . . .00 .00 .00
--- --- ---
Total Distributions . . . . . . . . . . (.04) (.43) (.29)
----- ----- -----
Net Asset Value, End of Period . . . . . . $10.08 $10.12 $10.04
====== ====== ======
TOTAL RETURN 2 . . . . . . . . . . . . . . (0.03)%3 5.06% 3.38%3
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000) . . . . . . . . . . . . . . . . . $38,733 $38,809 $34,638
Ratio of Expenses to Average
Net Assets (after fee
waivers)4 . . . . . . . . . . . . . . .85%5 .85% .85%5
Ratio of Net Investment
Income to Average Net
Assets (after fee waivers)4 . . . . . . 4.32%5 4.16% 4.05%5
Portfolio Turnover Rate . . . . . . . . . 0% 22% 4%
</TABLE>
_____________________________________
1. The Fund commenced operations on August 10, 1994. The Fund did not
offer Institutional shares during the period covered by the Financial
Highlights.
2. Total return does not reflect the sales charge.
3. Not annualized.
4. The operating expense ratio and the net investment income ratio before
fee waivers by the Investment Adviser, Administrator and Custodian for
the period ended May 31, 1996, the year ended April 30, 1996 and for
the period ended April 30, 1995 would have been 1.31% and 3.86%, 1.24%
and 3.77%, and 1.36% and 3.54%, respectively.
5. Annualized.
-8-
<PAGE> 177
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act").
Each Fund consists of a separate pool of assets with separate investment
objectives and policies, as described below under "Risk Factors, Investment
Objective and Policies." Under the 1940 Act, each Fund is classified as a
non-diversified investment fund.
Shares of the Funds have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Funds except
that, as described more fully below under "Shareholder Services Plan," the
Trust may implement the Services Plan with respect to the Retail shares of the
Ohio Tax Exempt Fund. As of the date of this Prospectus, the Trust has not
implemented the Services Plan with respect to the Retail shares of the Funds.
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 OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve a Fund's investment objective. The
investments and investment techniques utilized by the Funds are described
below. Prior to making an investment decision, an investor should consider
which Fund best meets an investor's investment objectives and review carefully
the risks involved in Fund investments described below.
The investment objective of a 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," a
Fund's investment policies, however, may be changed without a vote of
shareholders. There can be no assurance that a Fund will achieve its
objective.
OHIO TAX EXEMPT FUND
The investment objective of the Ohio Tax Exempt Fund is to
provide as high a level of interest income exempt from federal income tax and,
to the extent possible, from Ohio personal income tax, as is consistent with
conservation of capital. The Fund seeks to achieve its objective by investing
substantially all of
-9-
<PAGE> 178
its assets in a diversified fund of obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, agencies, instrumentalities and
authorities, the interest on which, in the opinion of counsel issued on the
date of the issuance thereof, is exempt from regular federal income tax
("Municipal Bonds").
Under normal market conditions, at least 80% of the value of
the Fund's total assets will be invested in Municipal Bonds. 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"). In addition, under normal market conditions, at least 65% of
the value of the Fund's total assets will be invested in Municipal Bonds of the
State of Ohio and its political subdivisions, as well as of certain other
governmental issuers in Ohio ("Ohio Bonds"). Dividends paid by the Fund which
are derived from interest properly attributable to Ohio Bonds will be exempt
from regular federal income tax and Ohio personal income tax. Dividends
derived from interest on Municipal Bonds of other governmental issuers will be
exempt from regular federal income tax but may be subject to Ohio 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 ."
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 Municipal Bonds it acquires will normally have average remaining
maturities of two to ten years.
PENNSYLVANIA MUNICIPAL FUND
The investment objective of the Pennsylvania Municipal 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, 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
-10-
<PAGE> 179
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." 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.
-11-
<PAGE> 180
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.
Ohio Tax Exempt Fund
While diversifying more into the service and other
non-manufacturing areas, the Ohio economy continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture
is an important segment of the economy, with over half the State's area devoted
to farming and approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last five years, the State rates were below the national
rates (4.8% versus 5.6% in 1995).
There can be no assurance that future national, regional or
state-wide economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value of
Ohio Bonds held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those Bonds.
A more detailed summary of the more significant events and conditions affecting
the financial situation in Ohio is contained in the Statement of Additional
Information.
Although the Fund may invest 25% or more of its net assets in
Municipal Bonds the interest on which is paid solely from revenues of similar
projects, and may invest up to 20% of its total assets in private activity
bonds when added together with any taxable investments held by the Fund, it
does not presently intend to do so unless in the opinion of its advisers the
investment is warranted. To the extent that the Fund's assets are invested in
Municipal Bonds that are payable from the
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revenues of similar projects or are invested in private activity bonds, the
Fund will be subject to the peculiar risks presented by the laws and economic
conditions relating to such projects and bonds to a greater extent than it
would be if its assets were not so invested.
Pennsylvania Municipal Fund
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 the obligations held by the Fund. 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 Funds 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
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authorities to finance privately-owned facilities and are backed by private
entities. Any private activity bonds (including industrial development bonds)
held by the Funds 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."
Each Fund may also invest in "moral obligation" bonds, which
are ordinarily issued by special purpose public authorities in states other
than Ohio. 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
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
The Pennsylvania Municipal 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 Pennsylvania Municipal Fund may also invest in unsecured
short-term promissory notes issued by municipalities and other entities.
Ratings Criteria
Each Fund invests in Municipal Bonds which at the time of
purchase are rated the following or higher: (i) for the Ohio Tax Exempt Fund
- - "A" by Standard and Poor's Ratings Group ("S&P"), Fitch Investors Service,
L.P. ("Fitch"), Duff & Phelps Credit Rating Co. ("Duff"), IBCA, Inc. ("IBCA"),
or Moody's Investors Service, Inc. ("Moody's") in the case of bonds; "SP-2" by
S&P, "F-2" by Fitch, "Duff 2" by Duff, "A2" by IBCA, 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
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Duff, "A2" by IBCA, or "Prime-2" by Moody's in the case of tax-exempt
commercial paper; and (ii) for the Pennsylvania Municipal Fund - "BBB" by S&P
or Fitch, "Baa" by Moody's, or "A" by 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 Funds' advisers pursuant to guidelines
approved by the Trust's Board of Trustees. If the rating of an obligation held
by the Funds is reduced below the respective Fund's rating requirements, the
Funds will sell the obligation when the adviser, and in the case of the
Pennsylvania Municipal Fund, sub-adviser, believes that it is in the best
interests of the Funds to do so. The applicable ratings are more fully
described in the Appendix to the Statement of Additional Information.
Stand-by Commitments
Each Fund may acquire stand-by commitments with respect to
Municipal Bonds held in its fund. Under a stand-by commitment, a dealer agrees
to purchase at a Fund's option specified Municipal Bonds at a specified price.
Stand-by commitments acquired by the Funds must be of high quality as
determined by any Rating Agency, or, if not rated, must be of comparable
quality as determined by each Fund's advisers and, in the case of the
Pennsylvania Municipal Fund, sub-adviser. Each Fund acquires stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
Variable and Floating Rate Obligations
Each 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 a Fund and the issuer,
they are not normally traded. Although there may be no active secondary market
in such instruments, a 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 Funds' advisers, or sub-adviser in the case of
the Pennsylvania Municipal Fund. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Funds
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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
Each Fund may purchase Municipal Bonds 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 a Fund
invests will be subject to the same quality rating standards applicable to
Municipal Bonds. Certificates of participation may be purchased from a bank,
broker-dealer or other financial institution. 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. In particular, lease obligations, as is the case with
Ohio entities, 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 Funds 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 a Fund and upon certain conditions (such as a
Fund's payment of a fee). Investments in certificates of participation will
not exceed 5% of the Ohio Tax Exempt Fund's net assets.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or
delayed delivery basis. These transactions are arrangements in which a 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 Funds expect that commitments to purchase when-issued securities will not
exceed 25% of the value of its total assets under normal market conditions.
The Funds do not intend to purchase when-
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issued securities for speculative purposes but only for the purpose of
acquiring portfolio securities. In when-issued and delayed delivery
transactions, the Funds rely on the seller to complete the transaction; its
failure to do so may cause a 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.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Funds 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.
As a shareholder of another investment company, the Funds 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 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 a Fund and, therefore, will be borne indirectly by its
shareholders.
Illiquid Securities
The Ohio Tax Exempt Fund and the Pennsylvania Municipal Fund
will not knowingly invest more than 10% and 15%, respectively, of the value of
their net assets in securities that are illiquid. Illiquid securities would
generally include repurchase agreements and GICs 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 Funds 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
Funds' advisers, or sub-adviser in the case of the Pennsylvania Municipal Fund,
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 Funds 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
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will develop. The Board will carefully monitor any investment by the Funds in
these securities.
Taxable Money Market Instruments
Each 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
category of S&P, Fitch, Duff, IBCA or Moody's; certificates of deposit;
bankers' acceptances; and repurchase agreements with respect to such
obligations. Under normal market conditions, taxable Money Market Instruments
will not exceed 20% of the total assets of the Ohio Tax Exempt Fund. See "Risk
Factors, Investment Objectives and Policies - Taxable Money Market
Instruments" in the Statement of Additional Information for further information
on these instruments.
Zero Coupon Obligations
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
advisers, or sub-adviser in the case of the Pennsylvania Municipal Fund, will
consider the liquidity needs of the Funds when any investment in zero coupon
obligations is made.
Repurchase Agreements
The Pennsylvania Municipal 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 the 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.
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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.
INVESTMENT LIMITATIONS
Each 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 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.")
Neither Fund may :
1. Make loans, except that each Fund may purchase or hold
debt instruments and enter into repurchase agreements in accordance with its
investment objective and policies; and the Ohio Tax Exempt Fund may lend
portfolio securities.
2. 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.
3. 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
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subdivisions) which would cause 25% or more of a 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.
The Ohio Tax Exempt Fund may not:
1. Invest more than 10% of the value of its net assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, non-negotiable time deposits, certificates
of participation without corresponding remarketing agreements, and other
securities which are not readily marketable.
2. Borrow money or issue senior securities, except that
the Fund may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Fund's total assets at the time of such borrowing. Borrowings are intended
solely to facilitate the orderly sale of portfolio securities to accommodate
abnormally heavy redemption requests and not for leverage purposes. The Fund
will not purchase securities while borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding.
The Pennsylvania Municipal Fund may not:
1. 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.
For purposes of investment limitation Nos. 2 and 3, 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 value of a Fund's securities will
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not constitute a violation of such limitation for purposes of the 1940 Act. If
either 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 and, in the case of the Pennsylvania Municipal Fund,
sub-adviser believes that it is in the best interests of the Fund to do so.
In order to permit the sale of each 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 a Fund's best interests, it will revoke the
commitment by terminating sales of such Fund's shares to investors residing in
the state involved.
Opinions relating to the validity of Municipal Bonds and to
the exemption of interest thereon from federal and state income taxes are
rendered by bond counsel to the respective issuers at the time of issuance.
Neither Fund nor its advisers , or sub-adviser in the case of the Pennsylvania
Municipal Fund, 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 each Fund's yield and total return data each 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. Each 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 a 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
Ohio or Pennsylvania income tax at stated tax rates. A Fund's tax-equivalent
yield for a class of shares will always be higher than its yield.
Each Fund calculates its total returns for each class of
shares on an "average annual total return" basis for various periods from the
date they commenced 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
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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. Each 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 each Fund to the performance of other mutual funds with comparable
investment objectives, to various mutual fund or market indices, 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 Funds 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 a 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 a Fund.
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Further information about the performance of each 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 each 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
Day, Dr. Martin Luther King, Jr. 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 each 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.
With respect to each Fund, 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 each Fund will fluctuate as the
value of its investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds 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
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incentives, including trips and monetary awards to NatCity Investments, Inc.
and other affiliates of National City .
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 Funds 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 NatCity Investments, Inc. 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), Youngstown (1-800-742-4098), or
Pittsburgh (1-800-282-1078).
The minimum investment is $2,500 for the initial purchase of
Retail shares in a 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 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 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 by completing an
application obtained through a financial institution, such as banks, brokers,
or dealers selling Retail shares of the Funds, or by calling 1-800-622-FUND
(3863). The
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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 each 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 . . . . . . . 3.00 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
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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 NatCity Investments,
Inc.; (e) individuals investing in a 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 a 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 each 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 or the Trust directly by calling
1-800-622-FUND (3863) 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 a Fund with an
aggregate current value of $90,000 and subsequently purchases Retail shares of
that 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 or directly from the Trust
by calling 1-800-622-FUND (3863). If an Investor so elects, the 13-month
period may begin up to 30 days prior to the
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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, who are large institutions, ("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 or NAM 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 a 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 a 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 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.
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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 a 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 1-800-622-FUND(3863). 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'
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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 1-800-622-FUND(3863) provided the appropriate election was made on
the shareholder's 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 the Trust 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
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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 Trust's
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.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who
have paid a sales charge to purchase Retail shares of one or more of the Funds
(each a "load Fund") may exchange those
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Retail shares for Retail shares of another load Fund, 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 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 NatCity Investments , Inc., 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.
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
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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 Pennsylvania Municipal Fund. Pursuant to the Services
Plan, the Trust will 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 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 same Fund. Shareholder administrative services may include
aggregating and processing purchase and redemption orders, processing dividend
payments from the Fund 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
Dividends from the net investment income of the Funds are
declared daily and paid monthly. With respect to each Fund, net income for
dividend purposes consists of dividends, distributions and other income on the
Fund's assets, less the accrued expenses of the Fund. Any net realized capital
gains will be distributed at least annually. Dividends and distributions will
reduce the Funds' net asset values 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 their Bank or financial
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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
may be reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
FEDERAL TAXES
Each Fund intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification relieves a 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 a Fund distribute to
its shareholders an amount equal to at least the sum of 90% of its net
tax-exempt interest income and 90% of its investment company taxable income,
if any, for such year. Each 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." In general, the Fund's investment
company taxable income will be the sum of its net investment income and the
excess of any net short-term capital gain for the taxable year over the net
long-term capital loss, if any, for such year. 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 Pennsylvania
Municipal 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.
Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date before the end of
the year will be deemed to have been received by shareholders and paid by the
Funds on December 31 of such
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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 declared
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.
If the Funds 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 Funds 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. Corporate shareholders must also take all
exempt-interest dividends into account in determining certain adjustments for
federal alternative minimum 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.
Shareholders of the Funds 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
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and local taxes which may differ from federal tax consequences described above.
STATE AND LOCAL TAXES
Ohio Taxes
Under current Ohio law, individuals and estates that are
subject to the Ohio personal income tax, or municipal or school district income
taxes in Ohio will not be subject to such taxes on distributions with respect
to shares of the Ohio Tax Exempt Fund ("Distributions") to the extent that the
Distributions are properly attributable to interest on obligations of the State
of Ohio or its political subdivisions ("Ohio Obligations") or obligations
issued by the United States Government, its agencies, instrumentalities and
territories (if the interest on such obligations is exempt from state income
taxation under the laws of the United States) ("U.S. Obligations").
Corporations that are subject to the Ohio corporation franchise tax will not
have to include Distributions in their tax base for purposes of calculating the
Ohio corporation franchise tax on the net income basis to the extent that such
Distributions either represent exempt-interest dividends for federal income tax
purposes or are properly attributable to interest on Ohio Obligations or U.S.
Obligations. However, shares of the Fund will be included in a corporation's
tax base for purposes of calculating the Ohio corporation franchise tax on the
net worth basis. Distributions properly attributable to gain on the sale,
exchange or other disposition of Ohio Obligations will not be subject to the
Ohio personal income tax, or municipal or school district income taxes in Ohio,
and will not be included in the net income base of the Ohio corporation
franchise tax. Distributions attributable to other sources generally will not
be exempt from the Ohio personal income tax, municipal or school district
income taxes in Ohio, or the net income base of the Ohio corporation franchise
tax. It is assumed for purposes of this discussion of Ohio state and local
taxes that the Fund will continue to qualify as a regulated investment company
under the Code and that at all times at least 50% of the value of the total
assets of the Fund consists of Ohio Obligations or similar obligations of other
states or their subdivisions.
Pennsylvania Taxes
Under current Pennsylvania law, Shareholders will not be
subject to Pennsylvania Personal Income Tax on distributions from the
Pennsylvania Municipal 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
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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
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
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 Funds and their 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, other
affiliations and the compensation paid by the Trust and the fees and reimbursed
expenses they receive in connection with each meeting of the Board of Trustees
they attend are included in the Statement of Additional Information.
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INVESTMENT ADVISERS
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Ohio Tax Exempt Fund and National
City serves as investment adviser to the Pennsylvania Municipal Fund. The
advisers are wholly owned subsidiaries of National City Corporation. The
advisers provide 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 advisers are member
banks of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On June 30, 1996, the Trust Departments of National City,
National City Columbus and National City Kentucky had approximately $8.7
billion, $1.6 billion and $5.1 billion, respectively, in assets under
management, and National City, National City Columbus and National City
Kentucky had approximately $16.8 billion, $10.7 billion and $11.9 billion,
respectively, in total trust assets. National City has its principal offices
at 1900 East Ninth Street, Cleveland, Ohio 44114; National City Columbus has
its principal offices at 155 East Broad Street, Columbus, Ohio 43251; and
National City Kentucky has its principal offices at National City Tower, 101
South Fifth Street, Louisville, Kentucky 40202.
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Ohio Tax Exempt and Pennsylvania Municipal
Funds' investment policies, the advisers have agreed to manage such Funds,
make decisions with respect to and place orders for all purchases and sales of
such Funds' securities, and maintain 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 Funds as of
May 2, 1996, when the shareholders of the Predecessor Pennsylvania Municipal
Fund approved the adviser. Members of the team make decisions for the Funds.
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 1993. He
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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.
. Frederick W. "Ted" Ramsey, Vice President of the
Fixed Income Research Team, oversees the Fixed Income
Team's credit and research area. His experience
includes 25 years in corporate banking and credit
administration, including 10 years as senior credit
officer. In addition to his responsibilities as head
of credit research, Mr. Ramsey serves as credit
advisor on new investment opportunities and risk
management guidelines.
. Connie R. Chuhaloff joined National City in 1977. She
has held investment-related responsibilities since
1988. Ms. Chuhaloff also has a background in both
Trust and Branch Operations.
For the services provided and expenses assumed pursuant to the
Advisory Agreements relating to the Ohio Tax Exempt and Pennsylvania Municipal
Funds, the advisers are entitled to receive an advisory fee, computed daily and
payable monthly, at the annual rate of .55% of the average net assets of each
of the
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Funds. The advisers may, from time to time, waive all or a portion of their
advisory fees to increase the net income of the Funds available for
distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit
such a bank holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company. The advisers
believe that they may perform the services for the Funds contemplated by their
Advisory Agreement with the Trust as described in such agreements and this
Prospectus without violation of applicable banking laws or regulations.
However, there are no controlling judicial precedents and future changes in
legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the advisers from continuing to perform services for the Trust. If the
advisers were prohibited from providing services to the Funds, the Board of
Trustees would consider selecting another qualified firm. Any new investment
advisory agreement would be subject to shareholder approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the advisers, or their
affiliated and correspondent banks in connection with shareholder purchases of
Trust shares, the advisers and their affiliated and correspondent banks might
be required to alter materially or discontinue the services offered by them to
shareholders. It is not anticipated, however, that any resulting change in the
Trust's method of operations would affect its net asset value per share or
result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
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SUB-ADVISER
Weiss, Peck & Greer, L.L.C. serves as the investment
sub-adviser to the Pennsylvania Municipal Fund under a sub-advisory agreement
(the "Sub-Advisory Agreement") with the adviser. The sub-adviser is a limited
liability company founded in 1970. The sub-adviser engages in investment
management, venture capital management and management buyouts. The sub-adviser
has been active since its founding in managing portfolios of tax exempt
securities. On June 30, 1996, total assets under management were approximately
$12.7 billion. The principal business address of the sub-adviser 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 Funds: 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 each Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Funds with respect
to all aspects of its administration and operation. PFPC is entitled to
receive with respect to each 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, .045% of the next
$200,000,000 of its net assets and .02% of its net assets over $600,000,000 and
is entitled to
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be reimbursed for its out-of-pocket expenses incurred on behalf of each 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"). Four of these
classes or series, which represent interests in the Ohio Tax Exempt Fund (Class
K and Class K - Special Series 1) and Pennsylvania Municipal Fund (Class T and
Class T - Special Series 1) are described in this Prospectus. Class K and
Class T shares constitute the Institutional class or series of shares; and
Class K - Special Series 1 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), 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 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
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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 previously in the text of this document, 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.
As of September 9, 1996, National City and National City
Columbus held beneficially or of record approximately 30.54% and 31.22%,
respectively, of the outstanding Institutional shares of the Ohio Tax Exempt
Fund. Neither National City, National City Columbus, nor National City
Kentucky have any economic interest in such shares which are held solely for
the benefit of their customers, but may be deemed to be controlling persons of
the Funds within the meaning of the 1940 Act by reason of their record
ownership of such shares. The names of beneficial owners and record owners who
are controlling shareholders under the 1940 Act may be found in the Statement
of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank 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.
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<PAGE> 211
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 advisers bear all expenses
in connection with the performance of their services. Each Fund of the Trust
bears 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. Each 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 Funds
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 Bank 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.
The portfolio managers of the Funds and other investment
professionals may from time to time discuss in advertising, sales literature or
other material, including periodic publications, various topics of interest to
shareholders
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and prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
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<PAGE> 213
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
TABLE OF CONTENTS
PAGE
EXPENSE TABLE . . . . . . . . . . . . . . . . . . . . . . . 4
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . 6
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 9
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . 9
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . 19
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . 21
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . . . 23
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . . . 23
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . . . 32
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . 32
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . 32
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . 36
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . . . 41
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . 42
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 43
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 43
ARMADA FUNDS
PROSPECTUS
September 30, 1996
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
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<PAGE> 214
o 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 of Columbu; National City Bank of Kentucky; National Asset Management
Corporation, their parent company or any of their affiliates or any bank.
o Shares of the Armada Funds are not insured or guaranteed by the U.S.
Government, FDIC, or any governmental agency or state.
o 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 HIS 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 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> 215
CROSS REFERENCE SHEET
---------------------
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Pennsylvania Tax Exempt Fund
<TABLE>
<CAPTION>
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
<S> <C>
1. Cover Page ............................................... Cover Page
2. Table of Contents ........................................ Table of Contents
3. General Information and History .......................... Statement of Additional
Information
4. Investment Objectives and Policies ....................... Risk Factors, Investment
Objectives and Policies
5. Management of Registrant ................................. Trustees and Officers
6. Control Persons and Principal ............................ Description of Shares
Holders of Securities
7. Investment Advisory and Other ............................ Advisory, Administration,
Services Management Distribution, Custody and
Transfer Agency Agreements
8. Brokerage Allocation and Other Practices ................. Risk Factors, Investment
Objectives and Policies
9. Capital Stock and Other Securities ....................... Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing ......................... Additional Purchase and
of Securities Being Offered Redemption Information
11. Tax Status ............................................... Additional Information
Concerning Taxes
12. Underwriters ............................................. Not Applicable
13. Calculation of Performance Data .......................... Yield and Performance
Information
14. Financial Statements ..................................... Financial Statements
</TABLE>
<PAGE> 216
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1996
MONEY MARKET FUND
GOVERNMENT FUND
TREASURY FUND
TAX EXEMPT FUND
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 Funds of Armada Funds
(the "Trust"), dated September 30, 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> 217
TABLE OF CONTENTS
-----------------
PAGE
----
STATEMENT OF ADDITIONAL INFORMATION................................1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES...................1
NET ASSET VALUE...................................................15
DIVIDENDS.........................................................16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................16
DESCRIPTION OF SHARES.............................................17
ADDITIONAL INFORMATION CONCERNING TAXES...........................19
TRUSTEES AND OFFICERS.............................................23
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICESAND TRANSFER AGENCY AGREEMENTS...............26
SHAREHOLDER SERVICES PLAN.........................................32
PORTFOLIO TRANSACTIONS............................................32
AUDITORS .........................................................34
COUNSEL .........................................................34
STANDARDIZED YIELD QUOTATIONS.....................................34
MISCELLANEOUS.....................................................37
FINANCIAL STATEMENTS..............................................41
APPENDIX A.........................................................1
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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
Money Market, Government, Treasury, Tax Exempt and Pennsylvania Tax Exempt
Funds. The information contained in this Statement of Additional Information
expands upon matters discussed in the Prospectus. No investment in shares of a
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, "Standardized Yield Quotations" 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, short term notes and other
securities which may be held by the Funds.
ELIGIBLE SECURITIES
- -------------------
The Funds may purchase "eligible securities" that present
minimal credit risks as determined by the advisers 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
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<PAGE> 219
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 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
theobligations 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 two highest categories for long term debt obligations, or (b)
determined by the advisers to be of comparable quality to securities which are
so rated. The Board of Trustees will approve or ratify any purchases by the
Money Market, Government, Treasury , Tax Exempt and Pennsylvania Tax Exempt
Funds of securities that are rated by only one Rating Agency or that qualify
under (3) above as long as required by applicable regulations or Trust
procedures.
VARIABLE AND FLOATING RATE INSTRUMENTS
- --------------------------------------
The Funds may purchase variable rate and floating rate
obligations as described in the Prospectus. The Trust's advisers 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 theperiods remaining to the next interest rate
adjustment or the demand notice period in accordance with applicable regulations
or Trust procedures.
Variable and floating rate obligations held by a 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
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<PAGE> 220
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, and if permitted under Trust procedures and
applicable regulations, the security has a feature permitting the holder
unconditionally to receive principal and interest within 13 months of making
demand.
GUARANTEED INVESTMENT CONTRACTS
- -------------------------------
As stated in the Prospectus, the Money Market Fund may invest
in GICs issued by insurance companies. Pursuant to such contracts, the Fund
makes cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits to the Fund on a monthly basis
guaranteed interest which is based on an index. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. The Fund will only purchase a GIC when the advisers have determined, under
guidelines established by the Board of Trustees, that the GIC presents minimal
credit risks to the Fund and is of comparable quality to instruments that are
rated high quality by Rating Agencies. The Fund's investments in GICs will not
exceed 10% of the Fund's net assets. In addition, because the Fund may not
receive the principal amount of a GIC from the insurance company on seven days'
notice or less, the GIC is considered an illiquid investment, and, together with
other instruments in the Fund which are not readily marketable, will not exceed
10% of the Fund's net assets. The term of a GIC will be one year or less. In
determining average weighted portfolio maturity, a GIC will be deemed to have a
maturity equal to the period of time remaining until the next readjustment of
the guaranteed interest rate.
BANK OBLIGATIONS AND COMMERCIAL PAPER
- -------------------------------------
The Pennsylvania Tax Exempt and Money Market Funds may
invest in bank 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
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<PAGE> 221
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase. For purposes of the Money Market Fund's
investment policy with respect to bank obligations, the assets of a bank or
savings institution will be deemed to include the assets of its domestic and
foreign branches.
Investments by the Pennsylvania Tax Exempt Fund include
commercial paper and other short term promissory notes issued by corporations,
municipalities and other entities (including variable and floating rate
instruments).
REPURCHASE AGREEMENTS; REVERSE REPURCHASE AGREEMENTS;
- -----------------------------------------------------
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Funds purchase
securities from financial institutions such as banks and broker-dealers which
the Funds' 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 bythe Fund plus interest negotiated on the basis of current shortterm
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 by the Trust's custodianor another
qualified custodian or in the Federal Reserve/Treasury book-entry
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<PAGE> 222
system. Repurchase agreements are considered to be loans bya Fund under the
1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Funds under the 1940 Act. Whenever a Fund enters into a reverse
repurchase agreement as described in the Prospectus, it will place in a
segregated custodial account liquid assets at least equal to the repurchase
price marked to market daily (including accrued interest) and will subsequently
monitor the account to ensure such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Portfolio may decline below the price of the securities it is
obligated to repurchase.
With respect to loans by the Government or Treasury Fund of
its portfolio securities as described in the Prospectus, the Fund would continue
to accrue interest on loaned securities and would also earn income on loans. Any
cash collateral received by the Funds in connection with such loans would be
invested in short-term U.S. Government obligations.
GOVERNMENT SECURITIES
- ---------------------
Examples of the types of U.S. Government obligations that may
be held by the Money Market , Government and Pennsylvania Tax Exempt Funds
include, in addition to U.S. Treasury Bills, the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Student Loan Marketing Association, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks and Maritime Administration. 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
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<PAGE> 223
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 Money Market,
Government and Tax Exempt Funds will invest in the obligations of such agencies
or instrumentalities only when the advisers believe that their credit risk with
respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each 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. Each
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 advisers. Not more than 3% of
the outstanding voting stock of any one investment company will be owned by the
Pennsylvania Tax Exempt Fund. 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 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.
MUNICIPAL BONDS
- ---------------
As described in the Prospectus, the Tax Exempt and
Pennsylvania Tax Exempt Funds may purchase Municipal Bonds. The two principal
classifications of Municipal Bonds consist of
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"general obligation" and "revenue" issues though the Tax Exempt Fund may include
"moral obligation" issues though 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 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
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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 Pennsylvania Tax Exempt
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 Pennsylvania
Tax Exempt Fund may invest and, therefore, on the shares of that 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, 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 byeither the Tax
Exempt or Pennsylvania Tax Exempt 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 Tax Exemptor Pennsylvania Tax Exempt Funds. The Tax Exemptand
Pennsylvania Tax Exempt Funds' advisers will consider such an event in
determining whetherthose respective Funds should continue to hold the
obligation.
The payment of principal and interest on most Municipal Bonds
purchased by the Tax Exemptand Pennsylvania Tax Exempt Funds 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
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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 and
principal of its Municipal Bonds may be materially adversely affected by
litigation or other conditions.
Certain Municipal Bonds held by the Tax Exempt or Pennsylvania
Tax Exempt 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 Tax
Exemptand Pennsylvania Tax Exempt Funds may, from time to time, invest more than
25% oftheir assets in Municipal Bonds covered by insurance policies.
Municipal notes in which the Pennsylvania Tax Exempt 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 Pennsylvania Tax Exempt 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
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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 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 Tax Exemptand Pennsylvania Tax Exempt Funds may acquire
stand-by commitments (also known as put options) with respect to Municipal Bonds
held in its portfolio. The Tax Exemptand Pennsylvania Tax Exempt Funds expect
that stand-by commitments will generally be available without the payment of any
direct or indirect consideration. However, if necessary or advisable, the Tax
Exemptand Pennsylvania Tax Exempt Funds 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 Tax Exempt and Pennsylvania
Tax Exempt Funds will not acquirestand-by commitments unless immediately after
the acquisition, not more than 5% oftheir respective total assets will be
invested in instruments subject to a demand feature, or in stand-by commitments,
with the same institution.
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The Tax Exempt and Pennsylvania Tax Exempt Funds' right to
exercise stand-by commitments will be unconditional and unqualified. A stand-by
commitment will be transferable by either of those Funds only with the
underlying Municipal Bonds which may be sold to a third party at any time.
Untileither Fund exercises its stand-by commitment, it owns the securities in
its portfolio which are subject to the commitment.
The amount payable to the Tax Exempt and Pennsylvania Tax
Exempt Funds upon their exercise of a stand-by commitment will normally be (i)
the respective Fund's acquisition cost of the Municipal Bonds (excluding any
accrued interest whichthat Fund paid on its acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period therespective 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 Tax
Exemptand Pennsylvania Tax Exempt Funds value 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 Tax Exempt and Pennsylvania Tax Exempt Funds intend to
enter into stand-by commitments only with dealers, banks and broker-dealers
which, in the advisers' opinion, present minimal credit risks. The Tax Exempt
and Pennsylvania Tax Exempt Funds' 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 Tax Exemptand Pennsylvania Tax Exempt Funds 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 Pennsylvania Tax Exempt 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 Pennsylvania Tax Exempt Fund agrees to
purchase when-issued securities, the custodian sets aside cash or liquid
portfolio
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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 Pennsylvania Tax Exempt 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
that Fund's commitment, marked to market daily. It is likely that the
Pennsylvania Tax Exempt 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 Pennsylvania Tax Exempt Fund will set aside
cash or liquid assets to satisfy its purchase commitments in the manner
described, that 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 Pennsylvania Tax Exempt 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 Pennsylvania Tax Exempt Fund incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of
securities, or maintain a short position, except, in the case of the
Pennsylvania Tax Exempt Fund, 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
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<PAGE> 230
securities acquired within the limitation on purchases of restricted securities.
3. Purchase or sell real estate, except that each Fund may
invest in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests therein.
The Pennsylvania Tax Exempt Fund will not purchase or sell real estate limited
partnership interests.
4. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs,
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. Write or purchase put options except stand-by commitments,
call options, straddles, spreads, or any combination thereof. This fundamental
limitation does not apply to the Pennsylvania Tax Exempt Fund.
6. Invest in any issuer for the purpose of exercising
control or management.
7. Purchase or retain securities of any issuer if the officers
or trustees of the Trust or the officers or directors of its investment advisers
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities. This fundamental
limitation does not apply to the Pennsylvania Tax Exempt Fund.
In addition, the Tax Exempt Fund may not invest in private
activity bonds where the payment of principal and interest are the
responsibility of a company (including its predecessors) with less than three
years of continuous operation and may not purchase common stock or voting
securities, except it may purchase securities of other investment companies
which seek to maintain a constant net asset value per share and which are
permitted themselves to invest only in securities which may be acquired by the
Fund.
In addition, the Pennsylvania Tax Exempt Fund may Not:
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<PAGE> 231
1. 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.
2. 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.
3. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the
rules and regulations thereunder.
4. 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.
* * *
With respect to investment limitation No. 5 in the Prospectus,
the Trust intends to treat unconditional bank letters or lines of credit,
guarantees or commitments to lend as separate securities for purposes of
concentration. Guarantees will only be treated as separate securities for
diversification purposes to the extent required by Rule 5b-2. Letters or lines
of credit and commitments to lend will not be treated as separate securities
with regard to diversification as the Trust does not consider these latter
instruments to be securities.
In addition, the Funds may not purchase common stocks, or
voting securities or state, municipal, or private activity bonds, except each
Fund may purchase securities of other investment companies which seek to
maintain a constant net asset value per share and which are permitted themselves
to invest only in securities which may be acquired by the Fund.
The following limitations, which apply to the Pennsylvania Tax
Exempt Fund, 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.
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<PAGE> 232
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 10% of its net assets. If a Fund exceeds its
limitation on the holding of illiquid securities, it will sell illiquid
securities as necessary to maintain the required liquidity when the advisers
believe that it is in the best interests of the Fund to do so.
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.
So long as a Fund is offering and selling its shares in the
state of Texas, the Fund may not (i) invest more than 5% of its net assets in
warrants (including within that amount, but not to exceed 2%, may be 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.
So long as the Pennsylvania Tax Exempt Fund is offering and
selling its shares in the State of Ohio, the Fund may not (i) purchase or retain
the securities of any issuer if the Trustees and officers of the Trust, the
advisers and the sub-adviser beneficially own more than 5% of that issuer, and
(ii) invest in the securities of other investment companies if the broker's
commission is more than customary.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
- ----------------------------------------------------------------------
Potential shareholders should consider the fact that the
Pennsylvania Tax Exempt Fund's portfolio consists primarily of securities issued
by the Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize that such 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.
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<PAGE> 233
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, 1995, the General Fund had a surplus of $688.3
million. The deficit in the Commonwealth's unreserved/undesignated funds also
has been eliminated as of June 30, 1995.
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
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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, with trial scheduled
to commence in early 1997; (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 will receive
$145 million, with interest at 6 percent per annum; and in 1995, the
Commonwealth, the Governor of Pennsylvania, the City of Philadelphia and the
Mayor of Philadelphia were joined as additional respondents in an enforcement
action commenced in Commonwealth Court in 1973 by the Pennsylvania Human
Relations Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The Commonwealth and the City were joined to
determine their liability, if any, to pay additional costs necessary to remedy
segregation-related conditions found to exist in Philadelphia public schools. In
the fall of 1996, the State Supreme Court stayed the proceedings retained
jurisdiction over the matter.
A disaster emergency was declared by the Governor and a
federal major disaster declaration was made by the President of the United
States for certain counties in the Commonwealth for a blizzard and subsequent
flooding in January 1996. The General Assembly authorized $123 million to
provide for the Commonwealth's share of the required match for federal public
assistance and disaster mitigation funds.
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
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<PAGE> 235
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, 1995 was a surplus of $80.5 million.
In recent years, an authority of the Commonwealth, the
Pennsylvania Intergovernmental Cooperation Authority ("PICA"), has issued
approximately $1.7 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 Funds. 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 priceeach respective
Fund would receive if it sold the security. The value of the portfolio
securities held byeach respective 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.
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Each Fund invests only in high-quality instruments and
maintains a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that a
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
each 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 each 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 a 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 Funds at $1.00. As a result of a significant
expense or realized or unrealized loss incurred by the Funds, it is possible
that such 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 a 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 Funds or to revise it in order
to ameliorate to the extent possible the disproportionate effect of such expense
or loss on the income of
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the Fund experiencing such effect. Such expense or loss may result in a
shareholder's receiving no dividends for the period in which he holds shares of
a 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 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 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.
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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 to
such authority, the Board of Trustees has authorized the issuance of 36 classes
of shares. Ten of these classes, which represent interests in the 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) and 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.
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<PAGE> 239
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 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
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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.
GENERAL
- -------
Each Fund of the Trust 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, each 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
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 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
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<PAGE> 241
respect to stock or securities. Any income derived by a Fund from a partnership
or trust is treated as derived with respect to a 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 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, with
respect to taxable debt securities and non-taxable debt securities acquired
after April 30, 1993, 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.
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). Each 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 a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such 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
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<PAGE> 242
the Tax Exempt and Pennsylvania Tax Exempt Funds) 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.
Each 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, or 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 that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
Depending upon the extent of a 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, such 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 a 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.
TAX EXEMPT FUND AND PENNSYLVANIA TAX EXEMPT FUND
- ------------------------------------------------
As described above and in the Prospectus, the Tax Exempt and
Pennsylvania Tax Exempt Funds is designed to provide investors with tax-exempt
interest income. Neither the Tax Exempt Fund nor the Pennsylvania Tax Exempt
Fund is 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 Tax Exempt 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
since such plans and
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<PAGE> 243
accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the Tax Exempt and Pennsylvania Tax Exempt Funds' dividends being
tax-exempt.
The policy of the Tax Exempt and Pennsylvania Tax Exempt Funds
is to pay each year as federal exempt-interest dividends substantially all the
Tax Exempt and Pennsylvania Tax Exempt Funds' Municipal Bond interest income net
of certain deductions. In order for the Tax Exempt and Pennsylvania Tax Exempt
Funds 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 oftheir
respective portfolios must consist of tax-exempt obligations. An exempt-interest
dividend is any dividend or part thereof (other than a capital gain dividend)
paid by the Tax Exempt or Pennsylvania Tax Exempt 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 Tax Exempt and Pennsylvania Tax Exempt
Funds' taxable year. However, the aggregate amount of dividends so designated
by the Tax Exemptand Pennsylvania Tax Exempt Funds cannot exceed the excess of
the amount of interest exempt from tax under Section 103 of the Code received
by the Tax Exempt and Pennsylvania Tax Exempt Funds 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 Tax Exempt and
Pennsylvania Tax Exempt Funds with respect to any taxable year which qualifies
as federal exempt-interest dividends will be the same for all shareholders
receiving dividends from either Fund with respect to such year.
The Tax Exempt and Pennsylvania Tax Exempt Funds do not expect
to realize long-term capital gains and, therefore, do 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 Tax Exempt and Pennsylvania Tax Exempt
Funds. 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
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<PAGE> 244
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, or 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 is not deductible for federal income tax purposes if the
Tax Exempt and Pennsylvania Tax Exempt Funds distribute 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.
TRUSTEES AND OFFICERS
---------------------
Thetrustees an executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
Richard B. Tullis Trustee and Chairman Chairman Emeritus, Harris
5150 Three Village Drive of the Board Corporation (electronic
Lyndhurst, Ohio 44124 communication and
Age 82 information processing
equipment), since
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<PAGE> 245
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
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 subsidiaries
564 Hackberry Drive (manufacture, sale and financing of water coolers and
Westerville, OH 43081 dehumidifiers), since January 1996 and President, January
Age 51 1987 to January 1996; Vice President and Executive Committee
Member of Ebtech Corp., (market and sell bottled and
point-of-use coolers) since March 1991.
Leigh Carter* Trustee, President Retired President and Chief Operating Officer, BFGoodrich
13901 Shaker Blvd., #6B and Treasurer Company, August 1986 to September 1990; Director, Adams
Cleveland, OH 44120 Express Company (closed-end investment company), since April
Age 71 1982; Director, Lamson & Sessions Co. (producer of
electrical supplies for construction, consumer power and
communications
</TABLE>
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<PAGE> 246
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
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 January 1982; partner, Kittles
8600 Allisonville Road Bloomington Property Company, Operating Officer, since
Indianapolis, IN 46250 January 1981; partner, KK&D (Affiliated Real Estate Kittle's
Age 51 Home Furnishings Companies of Kittle's Home Furnishings
Center), since Center, Inc., since January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol Martin Gatton, College
Carol Martin Gatton of Business and Economics, University of Kentucky, since
College of Business and 1981; Director, Studio Plus Hotels, Inc., since 1994.
Economics
University of Kentucky
Lexington, KY 40506-0034
Age 58
Robert D. Neary Trustee Retired Co-Chairman of Ernst & Young, April 1984-September
32980 Creekside Drive 1993; Director, Cold Metal Products, Inc., since March 1994;
Pepper Pike, OH 44124 Director, Zurn Industries, Inc. (plumbing products and
Age 63 engineering and construction services), since June 1995.
J. William Pullen Trustee President and Chief Executive Officer, Whayne Supply Co.
Whayne Supply Company (engine and heavy equipment distribution), since 1986;
1400 Cecil Avenue President and Chief Executive Officer, American Contractors
P.O. Box 35900 Rentals & Sales (rental subsidiary of Whayne Supply Co.),
Louisville, KY 40232-5900 since 1988.
Age 57
</TABLE>
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<PAGE> 247
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath,
Bank Building Philadelphia, Pennsylvania
Broad & Chestnut Sts.
Philadelphia, PA 19107
Age 52
John J. Burke Assistant Treasurer Client Service Officer,
First Data Investor First Data Investor
Services Group, Inc. Services Group, Inc. since
4400 Computer Drive 1991; prior thereto,
Westborough, MA 01581 Management Associate,
Age 31 Fidelity Investments.
- --------------------
* Mr. Carter is considered by the Trust to be an "interested person" of the
Trust as defined in the 1940 Act.
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
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, Trustee and $13,000 $0 $0 $13,000
Chairman
Thomas R. Benua, Jr., Trustee $11,375 $0 $0 $11,375
Leigh Carter, Trustee , $11,375 $0 $0 $11,375
President and Treasurer
</TABLE>
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<PAGE> 248
<TABLE>
<S> <C> <C> <C> <C>
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 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,
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<PAGE> 249
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, National City Columbus and National City
Kentucky serve as investment advisers to the Money Market, Government, Treasury
and Tax Exempt Funds and National City serves as investment adviser to the
Pennsylvania Tax Exempt Fund, as described in the Prospectus. The advisers are
affiliates of National City Corporation, a bank holding company with$51 billion
in assets, and headquarters in Cleveland, Ohio and nearly 900 branch offices
infour 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 $36 billion
in assets. From time to time, the advisers may voluntarily waive fees or
reimburse the Trust for expenses.
Pursuant to the Advisory Agreement, the Trust incurred
advisory fees in the following amounts for the fiscal years ended May 31,1996,
1995 and 1994: (i) $3,686,919 (after waivers of $1,473,398), $2,827,383 (after
waivers of $1,128,026) and $1,641,794 (after waivers of $93,731) , respectively,
for the Money Market Fund; (ii) $1,654,730 (after waivers of $661,292),
$1,766,159 (after waivers of $706,463) and $1,710,854 (after waivers of
$101,998) , respectively, for the Government Fund, and (iii) $444,402 (after
waivers of $592,531), $307,159 (after waivers of $410,198), and $142,221 (after
waivers of $190,015) , respectively, for the Tax Exempt Fund. Advisory fees in
the amounts of $527,698 (after waivers of $105,510) and $313,967 (after waivers
of $62,648) were incurred for the fiscal year ended May 31, 1996 and for the
period from June 16, 1994 (commencement of operations) through May 31, 1995 with
respect to the Treasury Fund.
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<PAGE> 250
For the one-month period ended May 31, 1996, the fiscal year
ended April 30, 1996 and for the period from August 8, 1994 (commencement of
operations) through April 30, 1995, Integra Trust Company ("Integra"), the
investment adviser to the Predecessor Fund, earned advisory fees of $26,907,
$310,912 and $76,582, respectively, and Integra waived fees in the amount of
$9,868, $110,272 and $84,075, respectively.
Each Advisory Agreement provides that the advisers 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 their duties
and obligations thereunder. In addition, the advisers have undertaken in their
Advisory Agreements to maintain their policy and practice of conducting their
Trust Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Money Market,
Government, Treasury and Tax Exempt Funds was approved by the shareholders of
each Fund on September 26, 1990. The Advisory Agreement relating to the
Pennsylvania Tax Exempt Fund was approved by the sole shareholder prior to that
Fund's commencement of operations. Unless sooner terminated, the Advisory
Agreement will continue in effect with respect to a particular Fund 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 such Fund (as defined in the Funds' 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. Each Advisory Agreement may be terminated by the Trust or the
advisers on 60 days written notice, and the sub-adviser 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 Pennsylvania Tax Exempt Fund. The sub-adviser is a
professional investment counselling firm that
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<PAGE> 251
provides investment services to investment companies and other entities.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the advisers
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 a particular 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. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC for
the fiscal years ended May 31, 1996, 1995 and 1994 : (i) $421,493, $322,722 and
$187,207 , respectively, for the Money Market Fund; (ii) $187,373, $210,983 and
$177,152 , respectively, for the Government Fund; and (iii) $145,303, $102,395
and $40,149 , respectively, for the Tax Exempt Fund. Administration fees in
theamounts of $37,703 and $59,255 were incurred for the fiscal year ended May
31, 1996 and for the period from June 16, 1994 (commencement of operations)
through May 31, 1995 with respect to the Treasury Fund.
For the one-month period ended May 31, 1996, the fiscal year
ended April 30, 1996 and for the period from August 8, 1994 (commencement of
operations) through 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: $8,969, $103,634 and $53,552,
respectively.
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<PAGE> 252
DISTRIBUTION PLAN AND RELATED AGREEMENTS
- ----------------------------------------
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 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
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.
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<PAGE> 253
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. For the fiscalyears
ended May 31, 1996 and 1995, the Trust paid the Distributor $592,599 and
$249,769 with respect to the Money Market Fund, $258,773 and $157,521 with
respect to the Government Fund, $80,068 and $29,798 with respect to the Treasury
Fund, and $123,317 and $60,363 with respect to the Tax Exempt Fund under the
Plan. Of the aggregate amount paid to the Distributor by the Trust with respect
to the Money Market Fund, approximately $19,534 and $7,281 was attributable to
postage, $23,630 and $20,772 was attributable to communications with
shareholders, $441,415 and $129,536 was attributable to advertisement/promotion
and $108,019 and $92,179 was attributable to general compensation to the
Distributor. Of the aggregate amount paid to the Distributor by the Trust with
respect to the Government Fund, approximately $8,885 and $4,745 was attributable
to postage, $10,664 and $14,141 was attributable to communications with
shareholders, $192,064 and $70,661 was attributable to advertisement/ promotion
and $47,160 and $67,974 was attributable to general compensation to the
Distributor. Of the aggregate amount paid to the Distributor by the Trust with
respect to the Treasury Fund, approximately $2,862 and $874 was attributable to
postage, $3,424 and $2,639 was attributable to communications with shareholders,
$58,191 and $13,157 was attributable to advertisement/promotion and $15,591 and
$13,128 was attributable to general compensation to the Distributor. Of the
aggregate amount paid to the Distributor by theTrust with respect to the Tax
Exempt Fund, approximately $3,978 and $1,351 was attributable to postage, $4,800
and $3,832 was attributable to communications with shareholders, $92,674 and
$37,510 was attributable to advertisement/promotion and $21,865 and $17,670 was
attributable to general compensation to the Distributor.
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<PAGE> 254
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.
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.
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 each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
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 Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Funds harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Funds reimburse National City Bank for its
direct and indirect costs and expenses incurred in rendering custodial
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<PAGE> 255
services, except that the costs and expenses borne by each Fund in any year may
not exceed $.225 for each $1,000 of average gross assets of such 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 Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each 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 Funds' 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 pro vides each shareholder of record
with a daily transaction report for each day on which a transaction occurs in
the shareholder's account with each Fund.
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented the
Services Plan with respect to Retail shares in each of the Funds. 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
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<PAGE> 256
between the Trust and financial institutions will be terminable at any time by
the Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to the Advisory Agreement, National City, National
City Columbus and National City Kentucky are responsible for, make decisions
with respect to and place orders for all purchases and sales of portfolio
securities for the Funds. 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
Pennsylvania Tax Exempt Fund. The advisers and the sub-adviser purchase
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.
While the advisers and the sub-adviser generally seek
competitive spreads or commissions, they 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 advisers in their 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 advisers may receive orders for transactions by a
Fund. Information so received is in addition to and not in lieu of services
required to be performed by the advisers and does not reduce the fees payable to
them by the Funds. Such information may be useful to the advisers 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
advisers in carrying out its obligations to the Trust.
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<PAGE> 257
While serving as advisers to the Trust, National City,
National City Columbus and National City Kentucky have agreed to maintain their
policy and practice of conducting their Trust Departments independently of their
Commercial Departments. 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 Departments. In dealing with commercial
customers, the Commercial Departments will not inquire or take into
consideration whether securities of those customers are held by the Trust.
Portfolio securities will not be purchased from or sold to the
Trust's advisers, 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 Trust will not give preference to
its advisers' correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse 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.
The Trust is required to identify any securities of its
"regular brokers or dealers" that it has acquired during its most recent fiscal
year. At May 31, 1996, (a) the Money Market Fund had entered into repurchase
transactions with First Boston Corp. in the amount of $75,171,000 to be
repurchased on June 3, 1996 at $75,204,514; (b) the Government Fund had entered
into two repurchase transactions with Prudential-Bache Securities both in the
amount of $40,000,000 to be repurchased on June 3, 1996 and June 5, 1996 at
$40,017,867 and $40,014,144, respectively, and had entered into repurchase
transactions with Smith Barney Capital Corp. in the amount of $45,000,000 to be
repurchased on June 3, 1996 at 45,020,025. First Boston Corp., Prudential-Bache
Securities and Smith Barney Capital Corp. are considered "regular brokers or
dealers" of the Trust. CS First Boston Corp. and Smith Barney Shearson are the
parents of First Boston Corp. and Smith Barney Capital Corp., respectively.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies
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<PAGE> 258
and accounts advised or managed by the advisers. Such other Funds, investment
companies and accounts may also invest in the same securities as such Fund. When
a purchase or sale of the same security is made at substantially the same time
on behalf of a 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 a Fund or the size
of the position obtained or sold by such Fund. To the extent permitted by law,
the advisers may aggregate the securities to be sold or purchased for a 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. The financial statements, as
of and for the period ended May 31,1996 for the Money Market, Government,
Treasury and Tax Exempt Funds, which are incorporated by reference in this
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report referred to elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
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
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<PAGE> 259
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 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 Tax Exempt and Pennsylvania Tax Exempt Funds'
"tax-equivalent yields" are computed by dividing the portion of those Funds'
yields (calculated as above) that is exempt from federal income tax by one minus
a stated federal income tax rate (using 39.6% tax bracket) and adding that
figure to that portion, if any, of therespective Fund's yield that is not exempt
from federal income tax.
For the seven-day period ended May 31, 1996, the yields of the
Retail and Institutional shares of the Money Market Fund, Government Fund,
Treasury Fund and Tax Exempt Fund were 4.91% and 5.01%, 4.88% and 4.96%, 4.53%
and 4.63%, and 3.22% and 3.32%, respectively, and their respective effective
yields were 5.03% and 5.14%, 4.98% and 5.08%, 4.63% and 4.74%, and 3.27% and
3.37%.
The Tax Exempt Fund's tax-equivalent yields (assuming a 39.6%
federal tax rate) for its Retail and Institutional shares for the fiscal year
ended May 31, 1996 were 5.41% and 5.58%, respectively.
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<PAGE> 260
For the seven-day periods ended May 31, 1996 and April 30,
1996, the yields of the Predecessor Fund were 3.16% and 3.32%, respectively, and
its effective yields were 3.21% and 3.38%, respectively.
The Predecessor Fund's tax-equivalent yields (assuming 39.6%
federal and 2.8% state tax rates) for the one-month fiscal period ended May 31,
1996 and the fiscal year ended April 30, 1996 were 5.48% and 5.02%,
respectively. The Predecessor Fund's tax-equivalent effective yield for the
one-month fiscal period ended May 31, 1996 was 5.57%.
The current yield for each class of shares in a 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 Funds 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 a 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 Funds 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 a 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 advisers as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related
-43-
<PAGE> 261
matters believed to be of relevance to a Fund. The Funds may also include in
Materials charts, graphs or drawings which compare the investment objective,
return potential, relative stability and/or growth possibilities of the Funds
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 a Fund and/or other mutual funds.
Materials may include a discussion of certain attributes or benefits to be
derived by an investment in a 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
-------------
As used in the Prospectus, "assets belonging to a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular 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 a Fund's net asset value, assets belonging to a
particular Fund are charged with the liabilities in respect of that Fund.
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 of September 10, 1996, the following bank subsidiaries of
National City Corporation held of record 5% or more
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<PAGE> 262
<TABLE>
<CAPTION>
of the outstanding Institutional shares of the Money Market, Government,
Treasury , Tax Exempt and Pennsylvania Tax Exempt Funds acting as agent or
custodian for their customers, but did not own such shares beneficially:
Percentage of Outstanding
-------------------------
Institutional Shares
--------------------
Money Tax Pennsylvania
Market Government Treasury Exempt Tax Exempt
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
National City Bank, 5.03% -- 18.38% 7.13% --
Northeast
One Cascade Plaza
Akron, OH 44308
National City Bank of -- -- 7.30% -- --
Dayton
Gem Plaza, 6 N. Main
Dayton, OH 45412
National City Bank 39.09% 26.74% 7.50% 26.71% --
1900 East Ninth Street
Cleveland, OH 44114-3484
National City Bank of -- 6.59% 18.99% 25.38% --
Columbus
155 East Broad Street
Columbus, OH 43251
National City Bank of 14.07% 51.73% -- 16.24% --
Kentucky
National City Tower
101 South Fifth Street
Louisville, KY 40202
National City Bank of 8.67% 5.18% 35.73% 13.57% --
Indiana
101 W. Washington Street
Indianapolis, IN 46255
</TABLE>
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<PAGE> 263
<TABLE>
<CAPTION>
Money Tax Pennsylvania
Market Government Treasury Exempt Tax Exempt
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
National City Bank, 5.48% -- -- -- --
Northwest
405 Madison Avenue
Toledo, OH 43603
National City Bank of 14.91% -- -- -- 86.90%
Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
</TABLE>
To the Trust's knowledge, no shareholder beneficially owned 5% or
more of the outstanding Institutional shares of the Money Market or Pennsylvania
Tax-Exempt Funds as of September 11, 1996.
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Government Fund as of September 11,
1996:
<TABLE>
Percentage of
Number of Outstanding
Institutional Institutional
Government Fund Shares Shares
- --------------- ------ ------
<S> <C> <C>
National City 171,436,586.43 21.69%
Corporation
Anne Ruffing
1900 East Ninth Street
14th Floor
Cleveland, OH 44114
Deloitte Touche & Company 55,637,814.78 7.04%
Attn: Jim Carpenter
220 West Main Street
Suite 2100
Louisville, KY 40202
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Treasury Fund as of September 11, 1996:
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<PAGE> 264
<TABLE>
<CAPTION>
Number of Percentage of
Institutional Outstanding
Treasury Fund Shares Institutional
- ------------- ------ Shares
-------------
<S> <C> <C>
Lincoln National Escrow 20,285,375.02 6.56%
Employers Health
c/o National City Bank of
Indiana
101 West Washington
Street, Suite 600E
Indianapolis, IN 46255
Lincoln National 24,467,618.68 7.91%
Investment Company
Attn: Pat Chasey
1300 SouthClinton Street,
R2-01
Fort Wayne, IN 46802
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Tax Exempt Fund as of September 11,
1996:
Percentage of
Number of Outstanding
Institutional Institutional
Tax Exempt Fund Shares Shares
- --------------- ------ ------
American Electric Power 35,579,075.48 12.14%
Service Corp.
One Riverside Plaza
P. O. Box16631
Columbus, OH 43216-6631
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Money Market Fund as of September 11, 1996:
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<PAGE> 265
<TABLE>
<CAPTION>
Percentage of
Number of Retail Outstanding Retail
Money Market Fund Shares Shares
- ----------------- ------ ------
<S> <C> <C>
John E. Guinness 19,862,228.00 6.29%
3354 Dorchester Road
Shaker Hts., OH 44120-3415
To the Trust's knowledge, no shareholder beneficially owned 5% or
more of the outstanding Retail shares of the Government Fund as of September 11,
1996.
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Treasury Fund as ofSeptember 11, 1996:
Percentage of
Number of Retail Outstanding Retail
Treasury Fund Shares Shares
- -------------- ---------------- ------------
Johnson's Heating and 311,352.950 5.58%
Supplies, Inc.
P. O. Box 175
Norvelt, PA 15674
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Tax Exempt Fund as of September 11, 1996:
Percentage of
Number of Retail Outstanding
Tax Exempt Fund Shares Shares
- -------------- ---------------- ------------
Leon A. Weiss 3,211,556.00 5.26%
113 Saint Clair Avenue
NE #700
Cleveland, OH 44114-1214
</TABLE>
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<PAGE> 266
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of thePennsylvania Tax Exempt Fund as ofSeptember 11,
1996.
<TABLE>
<CAPTION>
Percentage of
Pennsylvania Tax Exempt Number of Retail Outstanding Retail
Fund Shares Shares
---- ------ ------
<S> <C> <C>
Frank's Auto Supply dba 514,000.00 21.47%
Autosupermarket
P. O. Box 1124
Uniontown, PA 15401-1124
John R. Echement 348,707.86 14.57%
102 Dutch Lane
Pittsburgh, PA 15236-4327
Pompei and Sons Inc. 345,000.00 14.41%
One Pompei Lane
Bentleyville, PA 15341
Recmix of Pennsylvania 262,000.00 10.95%
Inc.
586 Plum Run Road
Canonsburg, PA 15317-9773
Green Acreas Contracting 251,000.00 10.49%
Co. Inc.
General Account
P. O. Box 463
Scottsdale, PA 15683-0463
Hartman Personnel Services 247,000.00 10.32%
Inc.
Parent Account
1946 West 26th Street
Erie, PA 16508-1160
Marsula Electric Inc. 164,000.00 6.85%
575 Angew Road
Greensburg, PA 15601-9701
</TABLE>
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<PAGE> 267
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual report
for the fiscal year ended May 31,1996 are hereby incorporated herein by
reference. Copies of the Funds' annual reports may be obtained by calling the
Trust at 1-800-622-FUND or by writing to the Trust at4400 Computer Drive,
Westborough, Massachusetts 01581.
The financial statements for the Predecessor Fund for the fiscal
period May 1, 1996 through May 31, 1996 and for the fiscal year ended April 30,
1996 and the period 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 Report. The Financial Statements in such Annual Report
have been incorporated herein and in the Pennsylvania Tax Exempt 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> 268
APPENDIX A
----------
DESCRIPTION OF RATINGS
BOND RATINGS
- ------------
The following summarizes the three highest ratings used by
Standard & Poor's for bonds.
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's 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 in small
degree.
"A" - Debtis 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.
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.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The following summarizes the three highest ratings used by Moody's for
bonds:
A-1
<PAGE> 269
"Aaa" - Bondsare 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" - Bondsare 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 adequatebut 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.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa and A groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1 and A1.
A-2
<PAGE> 270
The following summarizes the three highest ratings used by
Duff & Phelpsfor 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 possesses protection factors which are average but
adequate . However, 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.
The following summarizes the three highest ratings used by
Fitch for 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.
A-3
<PAGE> 271
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "A" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
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
three highest 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 substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that 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.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
COMMERCIAL PAPER RATINGS
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A Standard & Poor's 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 Standard and Poor's for commercial paper:
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"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. Prime-1 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.
Duff & Phelps employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. 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:
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<PAGE> 273
"D-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.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-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.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the two highest rating categories used by Fitch for
commercial paper.
"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.
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.
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<PAGE> 274
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
two highest rating categories used by IBCA for short-term debt:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity
for timely repayment.
"A2" - Obligations are supported by a satisfactory
capacity for timely repayment.
Municipal Notes and Variable Rate Demand Obligations Ratings
------------------------------------------------------------
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the two highest ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation 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 bearin this designation are of high
quality, with margins of protectionample although not so large as in the
preceding group.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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CROSS REFERENCE SHEET
Mid Cap Regional Fund
Equity Fund
Equity Income Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Table of Contents . . . . . . . . . . . . . . . . . . . . . . Table of Contents
3. General Information and History . . . . . . . . . . . . . . . Statement of Additional Information
4. Investment Objectives and Policies . . . . . . . . . . . . . . . . Risk Factors, Investment Objectives and Policies
5. Management of Registrant . . . . . . . . . . . . . . . . . . . Trustees and Officers
6. Control Persons and Principal . . . . . . . . . . . . . . . . . . . Description of Shares
Holders of Securities
7. Investment Advisory and Other . . . . . . . . . . . . . . . . Advisory, Administra
Services Management tion, Distribution,
Custody and Transfer
Agency Agreements
8. Brokerage Allocation and Other . . . . . . . . . . . . . . . . Risk Factors, Investment Practices
Objectives and Policies
9. Capital Stock and Other Securities . . . . . . . . . . . . . . Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing . . . . . . . . . . . . . . . Additional Purchase
of Securities Being Offered and Redemption Information
11. Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information Concerning Taxes
12. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
13. Calculation of Performance Data . . . . . . . . . . . . . . . Yield and Performance
Information
14. Financial Statements . . . . . . . . . . . . . . . . . . . . . Financial Statements
</TABLE>
<PAGE> 276
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1996
MID CAP REGIONAL FUND
EQUITY FUND
EQUITY INCOME FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 30, 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> 277
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 16
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
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<PAGE> 278
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 Equity, Equity Income and Mid Cap Regional Funds. The information
contained in this Statement of Additional Information expands upon matters
discussed in the Prospectus. No investment in shares of a Fund should be made
without first reading the Prospectus.
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, "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.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments
resulting from a decline or appreciation in the value of a particular foreign
currency against the U.S. dollar or another foreign currency or for other
reasons, the Equity Income Fund is authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell
a specified currency at a future date at a price set at the time of the
contract. Forward currency contracts do not eliminate fluctuations in the
values of portfolio securities but rather allow the Fund to establish a rate of
exchange for a future point in time.
When entering into a contract for the purchase or sale of a
security, the Fund may enter into a forward foreign currency exchange contract
for the amount of the purchase or sale price to protect against variations,
between the date the security is purchased or sold and the date on which
payment is made or received, in the value of the foreign currency relative to
the U.S. dollar or other foreign currency.
When the advisers anticipate that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the Equity Income Fund may enter into a
forward contract to sell, for a fixed
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<PAGE> 279
amount, the amount of foreign currency approximating the value of some or all
of the Fund's securities denominated in such foreign currency. Similarly, when
the obligations held by the Fund create a short position in a foreign currency,
the Fund may enter into a forward contract to buy, for a fixed amount, an
amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is
entered into and the date it matures. In addition, while forward contracts may
offer protection from losses resulting from declines or appreciation in the
value of a particular foreign currency, they also limit potential gains which
might result from changes in the value of such currency. The Fund will also
incur costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
A separate account consisting of liquid assets, such as cash,
U.S. Government securities or other liquid high grade debt obligations equal to
the amount of the Equity Income Fund's assets that could be required to
consummate forward contracts will be established with the Fund's custodian
except to the extent the contracts are otherwise "covered." For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional liquid securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. A forward contract to sell a foreign currency is
"covered" if the Fund owns the currency (or securities denominated in the
currency) underlying the contract, or holds a forward contract (or call option)
permitting the Fund to buy the same currency at a price no higher than the
Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if the Fund holds a forward contract (or call option)
permitting the Fund to sell the same currency at a price as high as or higher
than the Fund's price to buy the currency.
WHEN-ISSUED SECURITIES
Each 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 a 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
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<PAGE> 280
market daily. It is likely that a 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 a 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.
VARIABLE AND FLOATING RATE OBLIGATIONS
Each 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, a 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, a 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.
SHORT TERM OBLIGATIONS
Each Fund may invest in various short term obligations
including those described below.
Investments include commercial paper and other short term
promissory notes issued by corporations (including variable and floating rate
instruments). In addition, each Fund may invest in Canadian Commercial Paper
("CCP"), which is commercial paper issued by a Canadian corporation or a
Canadian counterpart of a U.S.
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<PAGE> 281
corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer. Each 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.
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which
is a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances, certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. 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. Each Fund
may also make interest bearing savings deposits in commercial and savings banks
not in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of a Fund's total assets at the time of
purchase.
Each Fund may also make limited investments in "GICs" issued
by U.S. insurance companies. When investing in GICs, a Fund makes cash
contributions to a deposit fund or an insurance company's general account. The
insurance company then credits to the Fund monthly a guaranteed minimum
interest which is based on an index. The insurance company may assess periodic
charges against a GIC for expense and service costs allocable to it, and the
charges will be deducted from the value of the deposit fund. A Fund will
purchase a GIC only when its advisers have determined, under guidelines
established by the Board of Trustees, that the GIC presents minimal credit
risks to the Fund and is of comparable quality to instruments that are rated
high quality by one or more rating agencies.
REPURCHASE AGREEMENTS
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a 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 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
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<PAGE> 282
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 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.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering
into reverse repurchase agreements in accordance with its investment
restrictions. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and
agree to repurchase them at a mutually agreed-upon date and price. A Fund
intends to enter into reverse repurchase agreements only to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions.
At the time a Fund enters into a reverse repurchase agreement, it will place in
a segregated custodial account assets such as U.S. Government securities or
other liquid, high grade debt securities consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which it is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by the Fund under the
Investment Company Act of 1940.
U.S. GOVERNMENT OBLIGATIONS
Each 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
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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 Funds will invest in the obligations of such agencies or
instrumentalities only when the advisers believe that the credit risk with
respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each 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.
PORTFOLIO TURNOVER
The portfolio turnover rate for each 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 Fund 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 Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of
securities, or maintain a short position, except that each Fund may purchase
and sell futures contracts and options on futures contracts in accordance with
its investment objective.
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<PAGE> 284
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, except that each Fund
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein.
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs,
except that a Fund may: (a) to the extent appropriate to its investment
objective, invest in securities issued by companies which purchase or sell
commodities or commodity contracts or which invest in such programs; and (b)
purchase and sell futures contracts and options on futures contracts in
accordance with its investment objective. In addition, each Fund may enter
into forward currency contracts and other financial instruments in accordance
with its investment objective and policies.
5. Invest in any issuer for the purpose of exercising
control or management.
6. Purchase or retain securities of any issuer if the
officers or trustees of the Trust or the officers or directors of its
investment advisers owning beneficially more than one-half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
In addition, the Equity 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 and options on futures
contracts in accordance with its investment objective.
The Equity Income Fund and Mid Cap Regional Fund may not write
puts, calls or combinations thereof, except for transactions in: options on
securities, financial instruments, currencies and indices of securities;
futures contracts; options on futures contracts; forward currency contracts;
interest rate swaps; and similar instruments.
* * * * *
In addition, so long as a Fund is offering and selling its
shares in the state of Texas the Fund may not (i) invest more than 5% of its
net assets in warrants (included within that amount, but not to exceed 2%, may
be warrants which are not listed on the New York or American Stock Exchange),
(ii) invest in oil, gas or
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<PAGE> 285
other mineral leases, or (iii) invest in real estate limited partnership
interests.
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 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 May 31, 1996, sales loads paid by
shareholders of the Equity, Equity Income and Mid Cap Regional Funds totalled
$9,792, $4,477 and $9,968, respectively.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Funds 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
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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 S&P 500 Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
Illustrations of the computation of the offering price per
Retail share of the Funds, based on the value of the Funds' net assets and
number of outstanding shares on May 31, 1996 are as follows:
TABLE
<TABLE>
<S> <C>
EQUITY FUND
-----------
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . $6,012,523
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,129
Net Asset Value Per Share
($6,012,523 / 333,129) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.05
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . . . . . . . . $0.70
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.75
EQUITY INCOME FUND
------------------
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . $263,139
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,796
Net Asset Value Per Share
($263,139 / 20,796) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.65
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . . . . . . . . $0.49
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.14
</TABLE>
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<TABLE>
<S> <C>
MID CAP REGIONAL FUND
---------------------
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . $4,701,642
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 363,255
Net Asset Value Per Share
($4,701,642 / 363,255) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.94
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . . . . . . . . $0.50
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.44
</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.
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 36 classes
or series of shares. Six of these classes or series, which represent interests
in the Equity Fund (Class H and Class H - Special Series 1), Equity Income Fund
(Class M and Class M - Special Series 1) and Mid Cap Regional Fund (Class N and
Class N - Special Series 1), are described in this Statement of Additional
Information and the related Prospectus.
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<PAGE> 288
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.
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
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<PAGE> 289
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.
Each Fund of the Trust 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, 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 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 a Fund from a partnership or trust
is treated as derived with respect to 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.
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<PAGE> 290
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, with respect to taxable debt securities and non taxable debt securities
acquired after April 30, 1993, 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.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar.
The types of transactions covered by the special rules include the following:
(1) the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations,
preferred stock); (2) the accruing of certain trade receivables and payables;
and (3) the entering into or acquisition of any forward contract, futures
contract, option and similar financial instrument. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and
is normally taxable as ordinary gain or loss. The Treasury Department has
issued regulations under which certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" are not
subject to the mark-to-market or loss deferral rules under the Code. Gain or
loss attributable to the foreign currency component of transactions engaged in
by a Fund which are not subject to the special currency rules (such as foreign
equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
The Trust will designate any distribution of long-term capital
gains of a Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the
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<PAGE> 291
Trust's taxable year. Shareholders should note that, upon the sale or exchange
of Fund shares, if the shareholder has not held such shares for at least 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). Each 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 a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such 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.
Each 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, or 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 that they are not subject to backup withholding when required to do so or
that they are "exempt recipients".
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
</TABLE>
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<PAGE> 292
<TABLE>
<S> <C> <C>
Richard B. Tullis Trustee and Chairman of the Chairman Emeritus, Harris Corporation
5150 Three Village Drive Board (electronic communication and
Lyndhurst, Ohio 44124 information processing equipment),
Age 82 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 Manufacturing Company
564 Hackberry Drive and subsidiaries (manufacture, sale
Westerville, OH 43081 and 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 coolers) since March
1991.
Leigh Carter* Trustee, President and Retired President and Chief Operating
13901 Shaker Blvd., #6B Treasurer Officer, BFGoodrich Company, August
Cleveland, OH 44120 1986 to September 1990; Director,
Age 71 Adams Express Company (closed-end
investment company), since April 1982; Director,
Lamson & Sessions Co. (producer of electrical
supplies for 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.
</TABLE>
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<PAGE> 293
<TABLE>
<S> <C> <C>
John F. Durkott Trustee President and Chief Operating
8600 Allisonville Road Officer, Kittle's Home Furnishings
Indianapolis, IN 46250 Center, Inc., since January 1982;
Age 51 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 Dean, Carol
Carol Martin Gatton Martin Gatton, College of Business
College of Business and and Economics, University of
Economics Kentucky, since 1981; Director,
University of Kentucky Studio Plus Hotels, Inc., since 1994.
Lexington, KY 40506-0034
Age 58
Robert D. Neary Trustee Retired Co-Chairman of Ernst & Young,
32980 Creekside Drive April 1984-September 1993; Director,
Pepper Pike, OH 44124 Cold Metal Products, Inc., since
Age 63 March 1994; Director, Zurn
Industries, Inc. (plumbing products
and engineering and construction
services), since June 1995.
J. William Pullen Trustee President and Chief Executive
Whayne Supply Company Officer, Whayne Supply Co. (engine
1400 Cecil Avenue and heavy equipment distribution),
P.O. Box 35900 since 1986; President and Chief
Louisville, KY 40232-5900 Executive Officer, American
Age 57 Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath,
Bank Building Philadelphia, Pennsylvania
Broad & Chestnut Sts.
Philadelphia, PA 19107
Age 52
John J. Burke Assistant Treasurer Client Service Officer, First Data
First Data Investor Investor Services Group, Inc. since
Services Group, Inc. 1991; prior thereto, Management
4400 Computer Drive Associate, Fidelity Investments.
Westborough, MA 01581
Age 31
</TABLE>
- -----------------
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<PAGE> 294
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
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 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, Trustee and $13,000 $0 $0 $13,000
Chairman
Thomas R. Benua, Jr., Trustee $11,375 $0 $0 $11,375
Leigh Carter, Trustee, $11,375 $0 $0 $11,375
President and Treasurer
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
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<PAGE> 295
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, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AGREEMENTS
As described in the Prospectus, National City, National City
Columbus and National City Kentucky serve as investment advisers to the Equity
Fund, Equity Income Fund, and National City Bank alone serves as investment
adviser to the Mid Cap Regional Fund. Prior to September 26, 1990, only
National City and National City Columbus served as advisers to the Equity Fund.
The advisers are affiliates of National City Corporation, a bank holding
company with $51 billion in assets, and headquarters in Cleveland, Ohio and
nearly 900 branch offices in four 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 $36 billion in assets. From time to time, the advisers
may voluntarily waive fees or reimburse the Trust for expenses.
Pursuant to the Advisory Agreement, the Trust incurred
advisory fees in the following amounts for (i) the fiscal years ended May 31,
1996, 1995 and 1994: $1,114,914, $814,885 and $724,220 respectively, for the
Equity Fund; (ii) the fiscal years ended May 31, 1996 and 1995: $370,633 and
$131,109 (after waivers of $39,122) with respect to the Equity Income Fund; and
(iii) the
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<PAGE> 296
fiscal years ended May 31, 1996 and 1995: $571,860 and $183,900 (after waivers
of $27,051) with respect to the Mid Cap Regional Fund.
Each Advisory Agreement provides that the advisers 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 their duties
and obligations thereunder. In addition, the advisers have undertaken in the
Advisory Agreements to maintain their policy and practice of conducting their
Trust Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Equity Fund was
approved by the shareholders of such Fund on September 26, 1990. The Advisory
Agreements relating to the Equity Income and Mid Cap Regional Funds were
approved by their sole shareholder prior to the Funds' commencement of
investment operations. Unless sooner terminated, the Advisory Agreements will
continue in effect with respect to a particular Fund 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 such
Fund (as defined in the Funds' 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 Agreements may be terminated by the Trust or the advisers on 60
days written notice, and will terminate immediately in the event of its
assignment.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the advisers
will reimburse the Trust for any such excess with respect to the Funds 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 a particular 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.
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<PAGE> 297
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. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC
for (i) the fiscal years ended May 31, 1996, 1995 and 1994: $148,244, $108,651
and $96,563 respectively, for the Equity Fund; (ii) the fiscal years ended May
31, 1996 and 1995: $49,418 and $17,597 (after waivers of $5,100) with respect
to the Equity Income Fund; and (iii) the fiscal years ended May 31, 1996 and
1995: $76,026 and $23,006 (after waivers of $5,121) with respect to the Mid
Cap Regional Fund.
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, 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
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<PAGE> 298
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 Trusts' 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. For the
fiscal years ended May 31, 1996 and 1995, the Trust paid the Distributor
$106,059 and $67,272 with respect to the Equity Fund, $23,250 and $10,408 with
respect to the Equity Income Fund and $62,220 and $31,486 with respect to the
Mid Cap Regional Fund. Of the aggregate amount paid to the Distributor by the
Trust with respect to the Equity Fund approximately $2,064 and $959 was
attributable to postage, $2,648 and $3,919 was attributable to communications
with shareholders, $82,731 and $51,233 was attributable to
advertisement/promotions and $10,930 and $11,161 was attributable to general
compensation to the Distributor. Of the aggregate amount paid to the
Distributor by the Trust with respect to the Equity Income Fund approximately
$757 and $119 was attributable to postage, $1,130 and $4,192 was attributable
to communications with shareholders, $38,365 and $4,256 was attributable to
advertisement/ promotions and $3,663 and $1,842 was attributable to general
compensation to the Distributor. Of the aggregate amount paid to the
Distributor by the Trust with respect to the Mid Cap Regional Fund
approximately $1,126 and $222 was attributable to postage, $1,458 and $7,132
was attributable to communications with shareholders, $50,190 and $22,263 was
attributable to advertisement/promotions and $5,700 and $1,869 was attributable
to general compensation to the Distributor.
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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<PAGE> 299
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
each Fund; (ii) hold and disburse portfolio securities on account of each Fund;
(iii) collect and make disbursements of money on behalf of each Fund; (iv)
collect and receive all income and other payments and distributions on account
of each 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 Funds' operations. National City Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Funds, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services Agreement
and shall hold the Funds harmless from the acts and omissions of any bank or
trust company serving as sub-custodian. The Funds reimburse National City Bank
for its direct and indirect costs and expenses incurred in rendering custodial
services, except that the costs and expenses borne by each Fund in any year may
not exceed $.225 for each $1,000 of average gross assets of such 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 Funds. Under its Transfer Agency Agreement, it has agreed to: (i)
issue and redeem shares of each Fund; (ii) transmit all communications by each
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 Funds' 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 each Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Services Plan with respect to Retail shares in each of the Funds. 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
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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 Funds; (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 Agreements with the Trust, National
City, National City Columbus and National City Kentucky are responsible for
making decisions with respect to and placing orders for all purchases and sales
of portfolio securities for the Funds. The advisers purchase 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 years ended May 31, 1996 and 1995, the Equity,
Equity Income and Mid Cap Regional Funds paid $265,644 and $80,991, $102,100
and $68,108 and $356,904 and $217,900 in brokerage commissions, respectively.
While the advisers generally seek competitive spreads or
commissions, they 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 advisers in their 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 advisers may receive orders for transactions by a Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the advisers and does not reduce the fees payable to the
advisers by the Fund. Such information may be useful to the advisers in
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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 advisers in carrying out their obligations to the Trust.
Portfolio securities will not be purchased from or sold to the
Fund's advisers, 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, a Fund will not give preference to
its advisers' correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as advisers to the Fund, National City, National
City Columbus and National City Kentucky have agreed to maintain their policy
and practice of conducting their Trust departments independently of their
Commercial Departments. 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 each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the advisers. Such other Funds, investment companies and
accounts may also invest in the same securities as such Fund. When a purchase
or sale of the same security is made at substantially the same time on behalf
of a 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 a Fund or the size of the
position obtained or sold by such Fund. To the extent permitted by law, the
advisers may aggregate the securities to be sold or purchased for a 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. The financial statements,
as of and for the period ended May 31, 1996, which are incorporated by
reference in this Statement of Additional Information, have been audited by
Ernst & Young LLP,
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independent auditors, as set forth in their report referred to elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
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 Equity Income Fund's "yield" described in the Prospectus
is calculated by dividing each 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 Equity Income 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
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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 a 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 May 31, 1996, the yields of the
Retail and Institutional shares of the Equity, Equity Income and Mid Cap
Regional Funds were 0.44% and 0.70%, 1.14% and 2.71% and 0.41% and 0.66%,
respectively.
Each 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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<PAGE> 304
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
Each 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
T = (---) - 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 returns for the one year period
ending May 31, 1996 were 19.65% (after taking the sales load into account) and
24.34% (without taking into account any sales load), for the Equity Fund's
Retail Shares and 24.61% for the Equity Fund's Institutional shares. The
average annual total returns since the Equity Fund's commencement of operations
through May 31, 1996 were 11.22% (after taking into account the sales load) and
11.88% (without taking into account any sales load), for its Retail shares and
12.11% for the Institutional shares.
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<PAGE> 305
The average annual total returns for the one year period ended
May 31, 1996 were 14.88% (after taking the sales load into account) and 19.37%
(without taking into account any sales load), for the Equity Income Fund's
Retail shares and 19.72% for the Equity Income Fund's Institutional shares.
The average annual total returns since the Equity Income Fund's commencement of
operations through May 31, 1996 were 14.12% (after taking into account the
sales load) and 16.60% (without taking into account any sales load), for its
Retail shares and 17.09% for the Institutional shares.
The average annual total returns for the period ended May 31,
1996 were 17.68% (after taking the sales load into account) and 22.28% (without
taking into account any sales load), for the Mid Cap Regional Fund's Retail
shares and 22.64% for the Mid Cap Regional Fund's Institutional shares. The
average annual total returns since the Mid Cap Regional Fund's commencement of
operations through May 31, 1996 were 16.35% (after taking into account the
sales load) and 18.88% (without taking into account any sales load), for its
Retail shares and 20.19% for the Institutional shares.
The Funds 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 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, a 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. A Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. A 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 Funds 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 a 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.
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<PAGE> 306
In addition, the Funds 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 a Fund, high-quality investments (with respect to the
Equity and Equity Income Funds), 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 advisers 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 a Fund. The
Funds may also include in Materials charts, graphs or drawings which compare
the investment objective, return potential, relative stability and/or growth
possibilities of the Funds 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
a Fund and/or other mutual funds. Materials may include a discussion of
certain attributes or benefits to be derived by an investment in a 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 being 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 a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular 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 a Fund's net asset value, assets
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<PAGE> 307
belonging to a particular Fund are charged with the liabilities in respect of
that Fund.
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Equity Income Fund as of September
11, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Equity Income Fund Shares Shares
- ------------------- ------------- ------------
<S> <C> <C>
National City Non Contributory 2,150,975.750 35.27%
Pension Plan
National City Corporation
Attn: Karl A. Johns
Secretary, Pension Committee
1900 E. Ninth Street
Cleveland, Ohio 44114
National City Non-Contributory 2,050,977.907 33.63%
Retirement Trust
Attn: Trust Mutual Funds
P. O. Box 94777
Cleveland, OH 44101
Integra Financial Pension Plan 1,018,297.530 16.70%
National City Bank of Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
National City Savings and 376,104.300 6.17%
Investment Plan
National City Corporation
1900 East Ninth Street
Cleveland, Ohio 44114
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Mid Cap Regional Fund as of
September 11, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Mid Cap Regional Fund Shares Shares
- --------------------- ------------- -------------
<S> <C> <C>
National City 2,144,732.86 25.25%
Non Contributory
Pension Plan
Attn: Karl A. Johns
1900 East Ninth Street
Cleveland, Ohio 44114
</TABLE>
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<PAGE> 308
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Mid Cap Regional Fund Shares Shares
- --------------------- ------------- -------------
<S> <C> <C>
National City Savings & 624,609.450 7.35%
Investment Plan
National City Corporation
1900 East Ninth Street
Cleveland, OH 44101
Integra Financial Pension Plan 528,771.380 6.23%
National City Bank of Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
Dispatch Printing Company 518,032.920 6.10%
c/o National City Bank of
Columbus
155 East Broad Street,
Trust Division
Columbus, OH 43251
Cleveland Foundation 441,605.090 5.20%
c/o National City Bank, 8th Floor
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Equity Fund as of September 11,
1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Equity Fund Shares Shares
- ----------- ------------- -------------
<S> <C> <C>
Integra Financial Pension Plan 2,497,570.460 20.36%
National City Bank of
Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
</TABLE>
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<PAGE> 309
FINANCIAL STATEMENTS
The audited financial statements contained in the annual report for the fiscal
year ended May 31, 1996 are hereby incorporated herein by reference. Copies of
the annual report may be obtained by calling the Trust at 1-800-622-FUND or by
writing to the Trust at 4400 Computer Drive, Westborough, Massachusetts 01581.
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<PAGE> 310
APPENDIX A
DESCRIPTION OF RATINGS
CORPORATE LONG-TERM DEBT RATINGS
The following summarizes the four highest ratings used by
Standard & Poor's for corporate debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's 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 in 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.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "BBB"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an
"r" symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
The following summarizes the four highest ratings used by 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 edged." Interest payments are protected by a
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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.
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.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A and Baa groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1 and A1.
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The following summarizes the four highest ratings used by
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.
To provide more detailed indications of credit quality, the
"AA," "A" and "BBB" 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 four highest ratings used by
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
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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.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "BBB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
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
four highest rating categories used by IBCA for bonds:
"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 substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that 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 other categories.
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 Standard & Poor's 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 highest rating category used
by Standard and Poor's 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+."
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 highest rating
category 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. Prime-1 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.
Duff & Phelps employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. The following summarizes the
highest rating category used by Duff & Phelps for commercial paper:
"D-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.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the highest rating
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category used by Fitch for short-term obligations such as short-term notes,
municipal notes, variable rate demand instruments and commercial paper:
"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+."
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
highest rating category used by IBCA for short-term notes including commercial
paper:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
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APPENDIX B
As stated in the Prospectus, the Mid Cap Regional Fund (the
"Fund") may enter into certain futures transactions and options for hedging
purposes. Such transactions are described in this Appendix.
I. Index Futures Contracts
General. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market
values of the stocks included. Some stock index futures contracts are based on
broad market indexes, such as the Standard & Poor's Ratings Group 500 or the
New York Stock Exchange Composite Index. In contrast, certain exchanges offer
futures contracts on narrower market indexes or indexes based on an industry or
market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges
are cleared through a clearing corporation, which guarantees the performance of
the parties to each contract.
The Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Fund may do so either to hedge the value of
its Fund as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Fund
will purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its Fund holdings. For example,
in the event that the Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. The
Fund may also sell futures contracts in connection with this strategy, in order
to protect against the possibility that the value of the securities to be sold
as part of the restructuring of the Fund will decline prior to the time of
sale.
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II. Margin Payments
Unlike purchases or sales of portfolio 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 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 a particular 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 advisers 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 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 a hedging device. 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
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the price of the futures moves more than the price of the hedged instruments,
the Fund involved 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 advisers. It is also possible
that, where the Fund has sold futures to hedge its Fund against a decline in
the market, the market may advance and the value of instruments held in the
Fund may decline. If this occurred, the Fund would lose money on the futures
and also experience a decline in value in its portfolio securities.
When 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 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
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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 will continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge portfolio 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.
Successful use of futures by the Fund is also subject to the
advisers 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
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have to sell securities at a time when it may be disadvantageous to do so.
IV. Options on Futures Contracts
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for
the premium paid, the right to buy (call) from or sell (put) to the writer of
the option a futures contract at a specified price at any time during the
period of the option. Upon exercise, the writer of the option is obligated to
pay the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing an option of the
same series, at which time the person entering into the closing transaction
will realize a gain or loss. The Fund will be required to deposit initial
margin and variation margin with respect to put and call options on futures
contracts written by it pursuant to brokers' requirements similar to those
described above. Net option premiums received will be included as initial
margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar
to those risks relating to the sale of futures contracts.
V. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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CROSS REFERENCE SHEET
Total Return Advantage Fund
Fixed Income Fund
Enhanced Income Fund
GNMA Fund
Intermediate Government Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial
Information . . . . . . . . . . . . . . . . . Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant . . . . . . . . . . . . . . . . . . Risk Factors, Investment Objectives and Policies;
Investment Limitations; Description of the Trust
and Its Shares
5. Management of the Trust . . . . . . . . . . . Management of the Trust; Custodian and Transfer Agent
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . How to Purchase and Redeem Shares; Dividends and
Distributions; Taxes; Description of the Trust
and Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered . . . . . . . . . . . . . . . . Pricing of Shares; How to Purchase and Redeem Shares;
Distribution Agreement
8. Redemption Repurchase . . . . . . . . . . . . How to Purchase and Redeem Shares
9. Pending Legal Proceedings . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 322
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1996
TOTAL RETURN ADVANTAGE FUND
FIXED INCOME FUND
ENHANCED INCOME FUND
GNMA FUND
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 Funds of Armada Funds
(the "Trust"), dated September 30, 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> 323
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
STATEMENT OF ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</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 Fixed Income, Enhanced Income and Total Return Advantage, Intermediate
Government and GNMA Funds. The information contained in this Statement of
Additional Information expands upon matters discussed in the Prospectus. No
investment in shares of a Fund should be made without first reading the
Prospectus.
The Intermediate Government Fund and GNMA Fund commenced
operations on August 10, 1994 as separate investment portfolios (the
"Predecessor Intermediate Government Fund" and the "Predecessor GNMA Fund",
collectively the "Predecessor Funds") of Inventor Funds, Inc. which was
organized as a Maryland corporation. On September 9, 1996, the Predecessor
Funds were reorganized as new portfolios of Armada. Prior to the
reorganization, the Predecessor Funds 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 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 securities which may be held by the Funds.
ASSET-BACKED SECURITIES
Each Fund may purchase asset-backed securities, which are
securities backed by mortgages, installment contracts, credit card receivables
or other assets. Asset-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
asset-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, an asset-backed security's stated
maturity may be shortened, and the security's total return may be difficult to
<PAGE> 325
predict precisely. Asset-backed securities acquired by a Fund may include
collateralized mortgage obligations ("CMOS") issued by private companies.
Each 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 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.
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
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organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest 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 Banks 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.
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which have given debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the services to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments
resulting from a decline or appreciation in the value of a particular foreign
currency against the U.S. dollar or another foreign currency or for other
reasons, the Enhanced Income and Total Return Advantage Funds are authorized to
enter into forward currency exchange contracts. These contracts involve an
obligation to purchase or sell a specified currency at a future date at a price
set at the time of the contract. Forward currency contracts do not eliminate
fluctuations in the values of fund securities but
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rather allow a Fund to establish a rate of exchange for a future point in time.
When entering into a contract for the purchase or sale of a
security, these Funds may enter into a forward foreign currency exchange
contract for the amount of the purchase or sale price to protect against
variations, between the date the security is purchased or sold and the date on
which payment is made or received, in the value of the foreign currency
relative to the U.S. dollar or other foreign currency.
When the Enhanced Income and Total Return Advantage Funds'
adviser anticipates that a particular foreign currency may decline
substantially relative to the U.S. dollar or other leading currencies, in order
to reduce risk, a Fund may enter into a forward contract to sell, for a fixed
amount, the amount of foreign currency approximating the value of some or all
of the Fund's securities denominated in such foreign currency. Similarly, when
the obligations held by a Fund create a short position in a foreign currency,
the Fund may enter into a forward contract to buy, for a fixed amount, an
amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is
entered into and the date it matures. In addition, while forward contracts may
offer protection from losses resulting from declines or appreciation in the
value of a particular foreign currency, they also limit potential gains which
might result from changes in the value of such currency. A Fund will also
incur costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
A separate account consisting of liquid assets, such as cash,
U.S. Government securities or other liquid high grade debt obligations equal to
the amount of the Enhanced Income and Total Return Advantage Funds' assets that
could be required to consummate forward contracts will be established with the
Funds' Custodian except to the extent the contracts are otherwise "covered."
For the purpose of determining the adequacy of the securities in the account,
the deposited securities will be valued at market or fair value. If the market
or fair value of such securities declines, additional liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Funds. A forward contract to sell a foreign
currency is "covered" if a Fund owns the currency (or securities denominated in
the currency) underlying the contract, or holds a forward contract (or call
option) permitting the Fund to buy the same currency at a price no higher than
the Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if a Fund holds a forward contract (or call option)
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permitting the Fund to sell the same currency at a price as high as or higher
than the Fund's price to buy the currency.
INTEREST RATE SWAPS
The Enhanced Income, Total Return Advantage and GNMA Funds may
enter into interest rate swaps for hedging purposes and not for speculation.
These Funds will typically use interest rate swaps to preserve a return on a
particular investment or portion of its Fund or to shorten the effective
duration of their Fund investments. Interest rate swaps involve the exchange
by a 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 Enhanced Income, Total Return Advantage and GNMA Funds
will only enter into interest rate swaps on a net basis, (i.e., the two payment
streams are netted out, with a 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 Funds and their 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
Funds' borrowing restrictions. The net amount of the excess, if any, of the
Funds' obligations over their 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 Funds' 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.
FUTURES CONTRACTS AND RELATED OPTIONS
The Enhanced Income and Total Return Advantage Funds may
purchase and sell futures contracts and may purchase and sell call and put
options on futures contracts. The GNMA and Intermediate Government Funds may
purchase and sell futures contracts only on U.S. Treasury obligations. For a
detailed description of futures contracts and related options, see Appendix B
to this Statement of Additional Information.
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INCOME PARTICIPATION LOANS
The Fixed Income, Enhanced Income and Total Return Advantage
Funds may make or acquire participations in privately negotiated loans to
borrowers. Frequently, such loans have variable interest rates and may be
backed by a bank letter of credit; in other cases they may be unsecured. Such
transactions may provide an opportunity to achieve higher yields than those
that may be available from other securities offered and sold to the general
public.
Privately arranged loans, however, will generally not be rated
by a credit rating agency and will normally be liquid, if at all, only through
a provision requiring repayment following demand by the lender. Such loans
made by a Fund may have a demand provision permitting the Fund to require
repayment within seven days. Participations in such loans, however, may not
have such a demand provision and may not be otherwise marketable. Recovery of
an investment in any such loan that is illiquid and payable on demand will
depend on the ability of the borrower to meet an obligation for full repayment
of principal and payment of accrued interest within the demand period, normally
seven days or less (unless the Fund determines that a particular loan issue,
unlike most such loans, has a readily available market). As it deems
appropriate, the Board of Trustees of the Trust will establish procedures to
monitor the credit standing of each such borrower, including its ability to
honor contractual payment obligations.
WHEN-ISSUED SECURITIES
Each 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 a 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 a
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 a 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
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missing an opportunity to obtain a price considered to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
Each 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 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, a 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, a 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.
SHORT TERM OBLIGATIONS
The Fixed Income, Enhanced Income and Total Return Advantage
Funds may invest in various short term obligations including those described
below.
Investments include commercial paper and other short term
promissory notes issued by corporations (including variable and floating rate
instruments). In addition, The Fixed Income, Enhanced Income and Total Return
Funds may invest in Canadian Commercial Paper ("CCP"), which is commercial
paper issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer. Each such 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.
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which
is a member of the Federal
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Reserve System. Bank obligations also include U.S. dollar denominated bankers'
acceptances, certificates of deposit and time deposits issued by foreign
branches of U.S. banks or foreign banks. 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. The Fixed Income, Enhanced
Income and Total Return Advantage Funds may also make interest bearing savings
deposits in commercial and savings banks not in excess of 5% of its total
assets. Investment in non-negotiable time deposits is limited to no more than
5% of each such Fund's total assets at the time of purchase.
The Fixed Income, Enhanced Income and Total Return Advantage
Funds may also make limited investments in a Guaranteed Investment Contract
("GIC") issued by U.S. insurance companies. When investing in GICs, a Fund
makes cash contributions to a deposit fund or an insurance company's general
account. The insurance company then credits to that Fund monthly a guaranteed
minimum interest which is based on an index. The insurance company may assess
periodic charges against a GIC for expense and service costs allocable to it,
and the charges will be deducted from the value of the deposit fund. A Fund
will purchase a GIC only when its advisers have determined, under guidelines
established by the Board of Trustees, that the GIC presents minimal credit
risks to the Fund and is of comparable quality to instruments that are rated
high quality by one or more rating agencies.
U.S. GOVERNMENT OBLIGATIONS
The Fixed Income, Enhanced Income, Total Return Advantage and
Intermediate Government Funds 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 Funds will
invest in the obligations of such agencies or instrumentalities only when the
advisers believe that the credit risk with respect thereto is minimal.
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SECURITIES OF OTHER INVESTMENT COMPANIES
Each 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 Intermediate Government 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 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 each 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.
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ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of
securities, or maintain a short position, except that (i) each Fund may
purchase and sell futures contracts and options on futures contracts in
accordance with its investment objective; and (ii) the GNMA Fund may obtain
short term credits as necessary for the clearance of securities transactions
and 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, in the case of the
GNMA and Intermediate Government Funds, real estate limited partnerships,
except that the Fixed Income, Enhanced Income and Total Return Advantage Funds
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein.
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs,
except that a Fund may: (a) to the extent appropriate to its investment
objective, invest in securities issued by companies which purchase or sell
commodities or commodity contracts or which invest in such programs; and (b)
purchase and sell futures contracts and options on futures contracts in
accordance with its investment objective. In addition, the Fixed Income,
Enhanced Income and Total Return Advantage Funds may enter into forward
currency contracts and other financial instruments in accordance with its
investment objective and policies.
5. Invest in any issuer for the purpose of exercising
control or management.
6. Purchase or retain securities of any issuer if the
officers or trustees of the Trust or the officers or directors of its
investment advisers owning beneficially more than one-half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
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7. 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.
8. 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.
9. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
10. 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.
In addition, the Fixed Income, GNMA and Intermediate
Government Funds may not write or purchase put options, call options,
straddles, spreads, or any combination thereof, except that the Funds may
purchase and sell futures contracts and options on futures contracts in
accordance with their investment objectives.
The Enhanced Income Fund and Total Return Advantage Fund may
not write puts, calls or combinations thereof, except for transactions in:
options on securities, financial instruments, currencies and indices of
securities; futures contracts; options on futures contracts; forward currency
contracts; interest rate swaps; and similar instruments.
The GNMA and Intermediate Government Funds may not invest in
illiquid securities in an amount exceeding, in the aggregate, 15% of their
respective net assets.
The GNMA and Intermediate Government Funds 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 each such 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 a Fund exceeds its limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes it is in the best interests of the
Fund to do so.
* * * * *
In addition, so long as a Fund is offering and selling its
shares in the state of Texas the Fund may not (i) invest more
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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 on 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.
So long as the GNMA and Intermediate Government Funds are
offering and selling their respective shares in the State of Ohio, the Funds
may not (i) purchase or retain the securities of any issuer if the Trustees and
officers of the Trust and the advisers beneficially own more than 5% of that
issuer, and (ii) invest in the securities of other investment companies if the
broker's commission is more than customary.
In order to comply with the securities laws of Arkansas, the
GNMA and Intermediate Government Funds will not knowingly invest more than 10%
of their respective net assets in securities that are illiquid. This
limitation is more restrictive than the 15% limit contained in the Prospectus
and supersedes that 15% limit.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each 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.
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For the fiscal year ended May 31, 1996, sales loads paid by
shareholders of the Fixed Income, Enhanced Income and Total Return Advantage
Funds totalled $4,002, $6,935 and $1,240, respectively.
For the one-month fiscal period ended May 31, 1996, no sales
loads were paid by shareholders of the Predecessor GNMA and Intermediate
Government Funds. For the fiscal year ended April 30, 1996, sales loads paid
by shareholders of the Predecessor GNMA and Intermediate Government Funds
totalled $1,391.24 and $8,175.50, respectively.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Funds 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 effects of dollar cost
averaging through use of or comparison to an index such as the S&P 500 Index or
Lehman Intermediate Government Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
Illustrations of the computation of the offering price per
Retail share of the Fixed Income, Enhanced Income and Total Return Advantage
Funds, based on the value of the Funds' net assets and number of outstanding
shares on May 31, 1996 are as follows:
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TABLE
FIXED INCOME FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . $ 6,216,191
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . 600,711
Net Asset Value Per Share
($6,216,191 / 600,771) . . . . . . . . . . . . . . . . . . . . . $ 10.35
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . 0.40
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . $ 10.75
ENHANCED INCOME FUND
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . $ 1,717,579
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . 171,392
Net Asset Value Per Share
($1,717,579 + 171,392) . . . . . . . . . . . . . . . . . . . . . $ 10.02
Sales Charge, 2.75% of
offering price (2.80% of
net asset value per share) . . . . . . . . . . . . . . . . . . . 0.28
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . $ 10.30
</TABLE>
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TOTAL RETURN ADVANTAGE FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . $ 2,040,140
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . 206,613
Net Asset Value Per Share
($2,040,140 / 206,613) . . . . . . . . . . . . . . . . . . . . . $ 9.87
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . 0.38
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . $ 10.25
</TABLE>
Illustrations of the computation of the offering price per Retail share of the
Fund, based on the value of the Predecessor GNMA and Intermediate Government
Funds' 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 / 8,952,005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.04
Sales Charge, 4.00% of
offering price (4.18% of
net asset value per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.42
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.46
GNMA FUND
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,160,843
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,142,810
Net Asset Value Per Share
($62,160,843 / 6,142,810 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.12
Sales Charge, 4.00% of
offering price (4.15% of
net asset value per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.42
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.54
</TABLE>
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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.
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 36 classes
or series of shares. Ten of these classes or series, which represent interests
in the Fixed Income Fund (Class I and Class I - 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), GNMA Fund (Class S and Class S -
Special Series 1) and 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.
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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 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
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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.
Each Fund of the Trust 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, 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 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 a Fund from a partnership or trust is
treated as derived with respect to 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 Funds 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 Funds 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
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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, with respect to
taxable debt securities, 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.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar.
The types of transactions covered by the special rules include the following:
(1) the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations,
preferred stock); (2) the accruing of certain trade receivables and payables;
and (3) the entering into or acquisition of any forward contract, futures
contract, option and similar financial instrument. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and
is normally taxable as ordinary gain or loss. Gain or loss attributable to the
foreign currency component of transactions engaged in by a Fund which are not
subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) will be treated as capital gain or loss and will
not be segregated from the gain or loss on the underlying transaction.
The Trust will designate any distribution of long-term capital
gains of a 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 such Funds' shares,
if the shareholder has not held such shares for at least 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
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losses). Each 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 a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such 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.
Each 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, or 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 that they are not subject to backup withholding when required to do so or
that they are "exempt recipients".
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<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 of the Chairman Emeritus, Harris Corporation
5150 Three Village Drive Board (electronic communication and
Lyndhurst, Ohio 44124 information processing equipment),
Age 82 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.
</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>
Thomas R. Benua, Jr. Trustee Chairman, EBCO Manufacturing Company
564 Hackberry Drive and subsidiaries (manufacture, sale
Westerville, OH 43081 and 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 coolers) since March
1991.
Leigh Carter* Trustee, President and Retired President and Chief Operating
13901 Shaker Blvd., #6B Treasurer Officer, BFGoodrich Company, August
Cleveland, OH 44120 1986 to September 1990; Director,
Age 71 Adams Express Company (closed-end
investment company), since April
1982; Director, Lamson & Sessions Co.
(producer of electrical supplies for
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
8600 Allisonville Road Officer, Kittle's Home Furnishings
Indianapolis, IN 46250 Center, Inc., since January 1982;
Age 51 partner, Kittles Bloomington Property
Company, since January 1981; partner,
KK&D (Affiliated Real Estate
Companies of Kittle's Home
Furnishings Center), since January
1989.
</TABLE>
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<PAGE> 345
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol
Carol Martin Gatton Martin Gatton, College of Business
College of Business and and Economics, University of
Economics Kentucky, since 1981; Director,
University of Kentucky Studio Plus Hotels, Inc., since 1994.
Lexington, KY 40506-0034
Age 58
Robert D. Neary Trustee Retired Co-Chairman of Ernst & Young,
32980 Creekside Drive April 1984-September 1993; Director,
Pepper Pike, OH 44124 Cold Metal Products, Inc., since
Age 63 March 1994; Director, Zurn
Industries, Inc. (plumbing products
and engineering and construction
services), since June 1995.
J. William Pullen Trustee President and Chief Executive
Whayne Supply Company Officer, Whayne Supply Co. (engine
1400 Cecil Avenue and heavy equipment distribution),
P.O. Box 35900 since 1986; President and Chief
Louisville, KY 40232-5900 Executive Officer, American
Age 57 Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath,
Bank Building Philadelphia, Pennsylvania
Broad & Chestnut Sts.
Philadelphia, PA 19107
Age 52
John J. Burke Assistant Treasurer Client Service Officer, First Data
First Data Investor Investor Services Group, Inc. since
Services Group, Inc. 1991; prior thereto, Management
4400 Computer Drive Associate, Fidelity Investments.
Westborough, MA 01581
Age 31
</TABLE>
____________________
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
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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<PAGE> 346
$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, Trustee and 13,000 $0 $0 13,000
Chairman
Thomas R. Benua, Jr., Trustee 11,375 $0 $0 11,375
Leigh Carter, Trustee, President 11,375 $0 $0 11,375
and Treasurer
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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<PAGE> 347
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, National City
Columbus and National City Kentucky serve as investment advisers to the Fixed
Income Fund; and National Asset Management Corporation ("NAM") serves as
investment adviser to the Enhanced Income and Total Return Advantage Funds.
National City alone serves as investment adviser to the GNMA and Intermediate
Government Funds. Prior to September 26, 1990, only National City and National
City Columbus served as advisers to the Fixed Income Fund. The advisers are
affiliates of National City Corporation, a bank holding company with $51
billion in assets, and headquarters in Cleveland, Ohio and nearly 900 branch
offices in four 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 $36
billion in assets. From time to time, the advisers may voluntarily waive fees
or reimburse the Trust for expenses.
Pursuant to the Advisory Agreement, the Trust incurred
advisory fees in the following amounts for (i) the fiscal years ended May 31,
1996, 1995 and 1994: $588,875, $481,437 (after waivers of $12,158) and $601,710
(after waivers of $322,518), respectively, for the Fixed Income Fund; (ii) the
fiscal years ended May 31, 1996 and 1995: $0 (after waivers of $298,505) and $0
(after waivers of $236,026) with respect to the Enhanced Income
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Fund; and (iii) the fiscal years ended May 31, 1996 and 1995: $0 (after waivers
of $1,545,558) and $0 (after waivers of $1,176,389) with respect to the Total
Return Advantage Fund.
For the one-month fiscal period ended May 31, 1996, the
fiscal year ended April 30, 1996 and the period from August 10, 1994
(commencement of operations) through April 30, 1995, Integra Trust Company
("Integra"), the investment adviser to the Predecessor Intermediate Government
and GNMA Funds, earned advisory fees of (i) $53,654 and $36,971; (ii) $602,602
and $385,463; and (iii) $132,372 and 178,282, respectively. Integra waived
advisory fees during the same periods in the amounts of (i) $11,464 and
$9,583; (ii) $130,371 and $107,340; and (iii) $76,919 and $72,352,
respectively.
Each Advisory Agreement provides that the advisers 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 their duties
and obligations thereunder. In addition, the advisers have undertaken in their
Advisory Agreements to maintain their policy and practice of conducting their
Trust Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Fixed Income Fund was
approved by the shareholders of the Fund on September 26, 1990. The Advisory
Agreement with respect to the Enhanced Income and Total Return Advantage Funds
was approved by their sole shareholder prior to the Funds' commencement of
investment operations. The Advisory Agreement with respect to the GNMA and
Intermediate Government Funds was approved by their respective sole
shareholders prior to their commencement of operations. Unless sooner
terminated, each Advisory Agreement will continue in effect with respect to
each Fund to which it relates 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 such 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. Each 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.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Fund's
advisers will reimburse the Trust for any such excess with respect to the Fund
to the extent described in any
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<PAGE> 349
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 a
particular Fund. Such amount, if any, will be estimated, reconciled and paid
on a monthly basis. The fees banks and NAM 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. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC
for (i) the fiscal years ended May 31, 1996, 1995 and 1994: $107,068, $89,856
and $109,402, respectively for the Fixed Income Fund; (ii) the fiscal years
ended May 31, 1996 and 1995: $866,336 and $37,396 (after waivers of $14,882)
with respect to the Enhanced Income Fund; and (iii) the fiscal years ended May
31, 1996 and 1995: $260,951 and $150,557 (after waivers of $55,353) with respect
to the Total Return Advantage Fund.
For the one-month fiscal period ended May 31, 1996, the
fiscal year ended April 30, 1996 and the period from August 10, 1994
(commencement of operations) through April 30, 1995, SEI Financial Management
Corporation, a wholly-owned subsidiary of SEI Corporation, served as
administrator to the Predecessor Intermediate Government and GNMA Funds and
earned the following fees: (i) $13,797 and $9,507; (ii) $154,955 and
$99,119; and (iii) $65,623 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, 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
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<PAGE> 350
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. For the
fiscal years ended May 31, 1996 and 1995, the Trust paid the Distributor a
total of $69,261 and $51,163 with respect to the Fixed Income Fund, $4,453 and
$8,805 with respect to the Enhanced Income Fund and $18,198 and $27,748 with
respect to the Total Return Advantage Fund. Of the aggregate amount paid to
the Distributor by the Trust with respect to the Fixed Income Fund,
approximately $1,517 and $988 was attributable to postage, $2,140 and $3,867
was attributable to communications with shareholders, $57,740 and $36,019 was
attributable to advertisement/promotions and $7,864 and $10,289 was attributable
to general compensation to the Distributor. Of the aggregate amount paid to the
Distributor by the Trust with respect to the Enhanced Income Fund, approximately
$0 and $102 was attributable to postage, $0 and $2,364 was attributable to
communications with shareholders, $0 and $1,088 was
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<PAGE> 351
attributable to advertisement/promotions and $4,453 and $5,251 was attributable
to general compensation to the Distributor. Of the aggregate amount paid to
the Distributor by the Trust with respect to the Total Return Advantage Fund,
approximately $0 and $340 was attributable to postage, $0 and $3,319 was
attributable to communications with shareholders, $0 and $3,801 was
attributable to advertisement/ promotions and $18,798 and $20,289 was
attributable to general compensation to the Distributor.
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 Intermediate Government and
GNMA Funds 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 for the period from August 10, 1994 (commencement of
operations) through April 30, 1995), the Predecessor Intermediate Government
Fund and the Predecessor GNMA 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
each Fund; (ii) hold and disburse fund securities on account of each Fund;
(iii) collect and make disbursements of money on behalf of each Fund; (iv)
collect and receive all income and other payments and distributions on account
of each 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 Funds' operations. National City Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Funds, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services
Agreement and shall hold the Funds harmless from the acts and
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omissions of any bank or trust company serving as sub-custodian. The Funds
reimburse National City Bank for its direct and indirect costs and expenses
incurred in rendering custodial services, except that the costs and expenses
borne by each Fund in any year may not exceed $.225 for each $1,000 of average
gross assets of such 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 Funds. Under its Transfer Agency Agreement, it has agreed to: (i)
issue and redeem shares of each Fund; (ii) transmit all communications by each
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 Funds' 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 each 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 in
each of the Funds. 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 Fixed Income Fund, Total Return Advantage, GNMA and
Intermediate Funds, and .10% (on an annualized basis) in the case of the
Enhanced Income Fund 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
Funds; (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> 353
PORTFOLIO TRANSACTIONS
Pursuant to their Advisory Agreement with the Trust, National
City, National City Columbus and National City Kentucky are responsible for
making decisions with respect to and placing orders for all purchases and sales
of Fund securities for the Fixed Income Fund. Pursuant to its Advisory
Agreement with the Trust, NAM is responsible for making decisions with respect
to and placing orders for all purchases and sales of fund securities for the
Enhanced Income and Total Return Advantage Funds. Pursuant to its Advisory
Agreement with the Trust, National City alone is responsible for making
decisions with respect to and placing orders for all purchases and sales of
fund securities for the GNMA and Intermediate Government Funds. The advisers
purchase 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 years ended May 31, 1996 and 1995, the Fixed
Income and, Enhanced Income Funds did not pay any brokerage commissions. For
the fiscal year ended May 31, 1996, the Total Return Advantage Fund did not pay
any brokerage commissions and for the fiscal year ended 1995, the Fund paid
$14,093 in brokerage commissions.
For the one-month fiscal period ended May 31, 1996 and the
fiscal year ended April 30, 1996, the Predecessor GNMA and Intermediate
Government Funds did not pay any brokerage commissions.
While the advisers generally seek competitive spreads or
commissions, they 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 advisers in their 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 advisers may receive orders for transactions by a Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the advisers and does not reduce the fees payable to them by
the Funds. Such information may be useful to the advisers in serving both the
Trust and other clients, and, similarly, supplemental information
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obtained by the placement of business of other clients may be useful to the
advisers in carrying out their obligations to the Trust.
Fund securities will not be purchased from or sold to the
Funds' advisers, 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, a Fund will not give preference to
its advisers' correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as advisers to the Trust, National City,
National City Columbus and National City Kentucky have agreed to maintain their
policy and practice of conducting their Trust departments independently of
their Commercial Departments. As adviser to the Enhanced Income and Total
Return Advantage Funds, NAM has similarly agreed to maintain its policies and
the practices of conducting its investment management activities independently
of the Commercial Departments of all banking affiliates. 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.
The Trust is required to identify any securities of its
"regular brokers or dealers" during its most recent fiscal year. At May 31,
1996, (a) the Total Return Advantage Fund held Prudential Insurance corporate
bonds with a value of 5,557,838 and maturing on July 15, 2015; (b) the Enhanced
Income Fund held a (i) Merril Lynch Home Equity Loan, Series 1992-1, Class A
security in the amount of $975,519 and maturing on January 1, 1998, (ii) a
Merril Lynch Trust, Series 10, Class B security in the amount of $876,015 and
maturing on November 1, 2000 and (iii) a Prudential Home Mortgage Securities
Co., Series 1993-14, Class A-12 security in the amount of $265,778 and maturing
on May 14, 1997. Prudential Insurance, Prudential Home Mortgage Securities
Co., Merril Lynch and Merril Lynch Trust are considered "regular brokers or
dealers" of the Trust. Prudential-Bache Securities is the parent of Prudential
Insurance and Prudential Home Mortgage Securities Co. and Merril Lynch, Pierce,
Fenner & Smith, Inc. is the parent of Merril Lynch and Merril Lynch Trust.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the advisers. Such other Funds, investment companies and
accounts may also invest in the same securities as such Fund. When a purchase
or sale of the same
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<PAGE> 355
security is made at substantially the same time on behalf of a 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 a Fund or the size of the position obtained or
sold by such Fund. To the extent permitted by law, the advisers may aggregate
the securities to be sold or purchased for a 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. The financial statements,
as of and for the period ended May 31, 1996 for the Fixed Income, Enhanced
Income and Total Return Advantage Funds, which are incorporated by reference in
this Statement of Additional Information, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report referred to elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
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
Each Fund's "yield" described in the Prospectus is calculated
by dividing each 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. Each
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:
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<PAGE> 356
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.
Each 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 a
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 May 31, 1996, the yields of the
Retail and Institutional shares of the Fixed Income Fund,
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<PAGE> 357
Enhanced Income Fund and Total Return Advantage Fund were 5.40% and 5.86%,
5.45% and 5.64%, and 6.43% and 6.93%, respectively.
For the 30-day periods ended May 31, 1996 and April 30, 1996,
the yields of the Predecessor GNMA and Intermediate Government Funds were 5.62%
and 6.05%, and 6.21% and 5.55%, respectively.
Each 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:
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
Each 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
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<PAGE> 358
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 Fixed Income Fund's
one year period ending May 31, 1996 were (0.41)% (after taking the sales load
into account) and 3.44% (without taking into account any sales load), for its
Retail shares and 3.79% for its Institutional shares. The average annual total
returns since the Fixed Income Fund's commencement of operations through May
31, 1996 were 6.90% (after taking into account the sales load) and 7.53%
(without taking into account any sales load), for its Retail shares and 7.77%
for its Institutional shares. The Fixed Income Fund commenced operations on
December 20, 1989.
The average annual total returns for the Enhanced Income
Fund's one year period ending May 31, 1996 were 2.22% (after taking the sales
load into account) and 5.13% (without taking into account any sales load), for
its Retail shares and 5.36% for its Institutional shares. The average annual
total returns since the Enhanced Income Fund's commencement of operations
through May 31, 1996 were 4.12% (after taking into account the sales load) and
5.84% (without taking into account any sales load), for its Retail shares and
5.91% for its Institutional shares. The Retail share class of the Enhanced
Income Fund commenced operations on September 9, 1994 and the Institutional
share class of the Enhanced Income Fund commenced operations on July 7, 1994.
The average annual total returns for the Total Return
Advantage Fund's period ending May 31, 1996 were (0.15)% (after taking the
sales load into account) and 3.74% (without taking into account any sales
load), for its Retail shares and 4.22% for its Institutional shares. The
average annual total returns since the Total Return Advantage Fund's
commencement of operations through May 31, 1996 were 5.05% (after taking into
account the sales load) and 7.41% (without taking into account any sales load),
for its Retail shares and 8.07% for its Institutional shares. The Retail share
class of the Total Return Advantage Fund commenced operations on September 6,
1994 and the Institutional share class of the Total Return Advantage Fund
commenced operations on July 7, 1994.
The average annual total return for the Predecessor
Intermediate Government Fund's one-month fiscal period ending May 31, 1996 and
one year period ending April 30, 1996 were (4.20%) and 2.78% (after taking the
sales load into account) and (0.19%) and 7.09% (without taking into account
any sales load). The average annual total return since the Predecessor
Intermediate Government Fund's commencement of operations through the one-month
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<PAGE> 359
fiscal period ending May 31, 1996 and April 30, 1996 were 4.06% and 4.38%
(after taking into account the sales load) and 6.46% and 6.91% (without taking
into account any sales load). The Predecessor Intermediate Government Fund
commenced operations on August 10, 1994.
The average annual total returns for the Predecessor GNMA
Fund's one-month fiscal period ending May 31, 1996 and one year period ending
April 30, 1996 were (4.32%) and 3.68% (after taking the sales load into
account) and (0.35%) and 7.97% (without taking into account any sales load).
The average annual total returns since the Predecessor GNMA Fund's commencement
of operations through the one-month fiscal period ending May 31, 1996 and April
30, 1996 were 5.46% and 5.95% (after taking into account the sales load) and
7.89% and 8.52% (without taking into account any sales load). The Predecessor
GNMA Fund commenced operations on August 10, 1994.
The Funds 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 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, a 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. A Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. A 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 Funds 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 a 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 Funds may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies,
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<PAGE> 360
techniques, policies or investment suitability of a 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 advisers 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 a Fund. The Funds may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Funds 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 a Fund and/or other mutual
funds. Materials may include a discussion of certain attributes or benefits
to be derived by an investment in a 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
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 a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular 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 a Fund's net asset value, assets belonging to
a particular Fund are charged with the liabilities in respect of that Fund.
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<PAGE> 361
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Enhanced Income Fund as of
September 11, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Enhanced Income Fund Shares Shares
- -------------------- ------------- -------------
<S> <C> <C>
Denison Univeristy Operating
Fund 996,776.640 14.51%
Attn: Seth H. Patton
Granville, OH 43023
Whayne Supply Co. 837,778.770 12.19%
Attn: Ora Nell Burke
P.O. Box 35900
Louisville, KY 40232
Kay Trust Company 553,780.664 8.06%
FBO SLHA Endowment
P.O. Box 94870
Cleveland, OH 44101
Hayes Utley & Associates 463,853.350 6.75%
Insurance Agency
6100 Dutchmans Lane
Louisville, KY 40205
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Total Return Advantage Fund as of
September 11, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Total Return Institutional Institutional
Advantage Fund Shares Shares
- -------------- ------------- -------------
<S> <C> <C>
Applachian Regional Healthcare 2,035,778.450 6.93%
Attn: Frank McCracken
1220 Harrodsburg
Lexington, KY 40533
Ferro Corporation 1,999,764.810 6.80%
Mr. Paul Richard
1000 Lakeside Avenue
Cleveland, OH 44114
</TABLE>
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<PAGE> 362
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Total Return Institutional Institutional
Advantage Fund Shares Shares
-------------- ------------- -------------
<S> <C> <C>
The Community Foundation of 1,889,987.940 6.43%
Louisville
c/o National City Bank of
Kentucky
101 South Fifth Street,
Trust Division
Louisville, KY 40202
University of Louisville 1,803,287.660 6.13%
Attn: Larry Goldstein
Belknap Campus Service
Complex
Louisville, KY 40292
Appalachian Regional Healthcare 1,513,408.980 5.15%
Attn: Paula Eden
P.O. Box 8086
Lexington, KY 40533
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Fixed Income Fund as of September
11, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fixed Income Fund Retail Shares Retail Shares
----------------- ------------- --------------
<S> <C> <C>
Integra Financial Pension 2,497,570.460 20.36%
Plan
National City Bank of
Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the GNMA Fund as of September 11, 1996:
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<PAGE> 363
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
GNMA Fund Retail Shares Retail Shares
--------- ------------- --------------
<S> <C> <C>
Allmerica Trust Company 3,657.602 31.18%
Cust. FBO
IRA A/C Virginia A. Jasek
1701 Iowa Drive
West Mifflin, PA 15122-3931
Allmerica Trust Company 3,119.304 26.59%
Cust.
For the IRA Account
FBO R/O Helen M. Weyer
2600 Mohawk Drive
White Oak, PA 15131-3121
Allmerica Trust Company 2,082.842 17.75%
Cust.
For the IRA Account
FBO R/O William C. Rodgers
177 C Pennwood Avenue
Pittsburgh, PA 15218-1458
June C. Muraco & Joseph E. 1,441.520 12.29%
Muraco JTTEN
116 Patterson Avenue
Carnegie, PA 15106-2827
Edith De Shantz & Herman H. 982.362 8.73%
De Shantz JTTEN
747 Hampshire Avenue
Pittsburgh, PA 15216-3763
Marsula Electric Inc. 164,000.00 6.85%
575 Angew Road
Greensburg, PA 15601-9701
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Intermeidate Government Fund as of
September 11, 1996:
<TABLE>
<CAPTION>
Percentage of
Intermediate Number of Outstanding
Government Fund Retail Shares Retail Shares
---------------- ------------- ---------------
<S> <C> <C>
Allmerica Trust Company 2,206.013 100.00%
Cust.
For the IRA Account
FBO William J. Fortwangler
353 Conniston Avenue
Pittsburgh, PA 15210-3231
</TABLE>
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<PAGE> 364
FINANCIAL STATEMENTS
The audited financial statements contained in the annual
report for the Fixed Income, Enhanced Income and Total Return Advantage Funds
for the fiscal year ended May 31, 1996 are hereby incorporated herein by
reference. Copies of the annual report may be obtained by calling the Trust at
1-800-622-FUND or by writing to the Trust at 440 Computer Drive, Westborough,
Massachusetts 01581.
The financial statements for the Predecessor GNMA and
Intermediate Government Funds for the fiscal period May 1, 1996 through May 31,
1996 and for the fiscal year ended April 30, 1996 and the periods prior thereto
are contained in those Funds' Annual Reports to Shareholders (the "Financial
Statements") which have been filed with the Securities and Exchange Commission
and are 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 Funds'
prospectuses have been audited by Coopers & Lybrand L.L.P., independent
accountants for the Predecessor GNMA and Intermediate Government Funds, whose
reports thereon appear in such Annual Reports. The Financial Statements in
such Annual Reports have been incorporated by reference herein and in the
Funds' Prospectuses in reliance upon the reports of said firm of independent
accountants given upon their authority as experts in accounting and auditing.
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<PAGE> 365
APPENDIX A
DESCRIPTION OF RATINGS
CORPORATE LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard &
Poor's for corporate debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's 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 in 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 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.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt
A-1
<PAGE> 366
subordinated to senior debt that is assigned an actual or implied "BBB-"
rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
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.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an
"r" symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate
long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
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<PAGE> 367
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 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.
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.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
A-3
<PAGE> 368
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Ba1 and B1.
The following summarizes the ratings used by 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.
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 ratings used by 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
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<PAGE> 369
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.
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 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 substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
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"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 other 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.
COMMERCIAL PAPER RATINGS
A Standard & Poor's 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
Standard and Poor's 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 in
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.
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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. Prime-1 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.
"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 three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-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.
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"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-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.
"D-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.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-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 generally 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.
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"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:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory 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 their Prospectuses, the Enhanced Income, Total Return
Advantage, GNMA and Intermediate Government Funds may enter into certain
futures transactions and options 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 Funds 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 Funds 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 Funds, through
using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a 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 a 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.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the
<PAGE> 375
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 a 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 Funds
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; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Funds 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 Funds 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
a particular Fund tends to move in concert with the futures market prices of
long-term United States Treasury bonds ("Treasury bonds"). The advisers wish
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 advisers
believe 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
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closing out the futures contract sale. Of course, the futures 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 advisers 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 Funds may engage in a
interest rate futures contract purchase when they are not fully invested in
long-term bonds but wish 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 advisers wish 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 advisers believe 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.
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The advisers could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the 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. INDEX FUTURES CONTRACTS
GENERAL. A bond index assigns relative values to the bonds included
in the index which fluctuates with changes in the market values of the bonds
included.
A Fund may sell index futures contracts in order to offset a decrease
in market value of its fund securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its fund as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund may purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its fund holdings. For example,
in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A
Fund may also sell futures contracts in connection with this strategy, in order
to protect against the possibility that the value of the securities to be sold
as part of the restructuring of the fund will decline prior to the time of
sale.
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III. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid or
received by a 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 a particular 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 advisers 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 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.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Funds 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
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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 involved 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 Funds 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 advisers.
Where futures are purchased to hedge against a possible increase in
the price of securities before a 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 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.
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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 Funds
intend 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 Funds 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.
Successful use of futures by the Funds is also subject to the
advisers' ability to predict correctly movements in the direction of the
market. For example, if a particular 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 Funds may have to sell securities at a time when it may be
disadvantageous to do so.
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V. OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss. A Fund will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the
purchase or sale of an option also entails the risk that changes in the value
of the underlying futures contract will not correspond to changes in the value
of the option purchased. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts
may frequently involve less potential risk to a Fund because the maximum amount
at risk is the premium paid for the options (plus transaction costs). The
writing of an option on a futures contract involves risks similar to those
risks relating to the sale of futures contracts.
VI. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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CROSS REFERENCE SHEET
---------------------
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
<TABLE>
<CAPTION>
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
<S> <C>
1. Cover Page ............................................... Cover Page
2. Table of Contents ........................................ Table of Contents
3. General Information and History .......................... Statement of Additional
Information
4. Investment Objectives and Policies ....................... Risk Factors, Investment
Objectives and Policies
5. Management of Registrant ................................. Trustees and Officers
6. Control Persons and Principal ............................ Description of Shares
Holders of Securities
7. Investment Advisory and Other ............................ Advisory, Administration,
Services Management Distribution, Custody and
Transfer Agency Agreements
8. Brokerage Allocation and Other Practices ................. Risk Factors, Investment
Objectives and Policies
9. Capital Stock and Other Securities ....................... Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing ......................... Additional Purchase and
of Securities Being Offered Redemption Information
11. Tax Status ............................................... Additional Information
Concerning Taxes
12. Underwriters ............................................. Not Applicable
13. Calculation of Performance Data .......................... Yield and Performance
Information
14. Financial Statements ..................................... Financial Statements
</TABLE>
<PAGE> 383
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1996
OHIO TAX EXEMPT FUND
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 Funds of Armada Funds
(the "Trust"), dated September 30, 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> 384
TABLE OF CONTENTS
-----------------
PAGE
----
STATEMENT OF ADDITIONAL INFORMATION....................................... 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES.......................... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 19
DESCRIPTION OF SHARES.................................................... 21
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 23
TRUSTEES AND OFFICERS.................................................... 27
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS........................................ 31
SHAREHOLDER SERVICES PLAN................................................ 35
PORTFOLIO TRANSACTIONS................................................... 36
AUDITORS ................................................................ 38
COUNSEL ................................................................ 38
YIELD AND PERFORMANCE INFORMATION........................................ 38
MISCELLANEOUS............................................................ 43
FINANCIAL STATEMENTS..................................................... 44
APPENDIX A............................................................... 1
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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
Ohio Tax Exempt and Pennsylvania Municipal Funds (the "Fund"). The information
contained in this Statement of Additional Information expands upon matters
discussed in the Prospectus. No investment in shares of a 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 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 Funds.
MUNICIPAL BONDS
- ---------------
As described in the Prospectus, the two principal
classifications of Municipal Bonds consist of "general obligation" and "revenue"
issues, and the Funds 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,
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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 Pennsylvania Municipal 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 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
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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 Pennsylvania Municipal 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 a 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 Funds. The Funds' advisers, or
sub-adviser in the case of the Pennsylvania Municipal Fund, will consider such
an event in determining whether the Funds should continue to hold the
obligation.
The payment of principal and interest on most Municipal Bonds
purchased by the Funds 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 Funds 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 Funds may, from time to time, invest more
than 25% of their assets in Municipal Bonds covered by insurance policies.
Municipal notes in which the Pennsylvania Municipal 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
- ----------------------------
Investments by the Pennsylvania Municipal Fund in 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 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
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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
- --------------------
Each Fund may acquire stand-by commitments (also known as put
options) with respect to Municipal Bonds held in its portfolio. The Funds expect
that stand-by commitments will generally be available without the payment of any
direct or indirect consideration. However, if necessary or advisable, a 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). A 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 com mitments, with the
same institution.
The Funds' right to exercise stand-by commitments will be
unconditional and unqualified. A stand-by commitment will be transferable by the
Funds only with the underlying Municipal Bonds which may be sold to a third
party at any time. Until a Fund exercises its stand-by commitment, it owns the
securities in its portfolio which are subject to the commitment.
The amount payable to a 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
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will normally be substantially the same as the portfolio value of
the underlying Municipal Bonds.
Each Fund intends to enter into stand-by commitments only
with dealers, banks and broker-dealers which, in the advisers', and sub
adviser's in the case of the Pennsylvania Municipal Fund, 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 Funds 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
- ----------------------
Each 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 a 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 a 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 a 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 a Fund engages in when-issued transactions, they rely 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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SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the advisers, and
sub-adviser in the case of the Pennsylvania Municipal Fund) 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. Each 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 advisers.
TAXABLE MONEY MARKET INSTRUMENTS
- --------------------------------
Each Fund may invest in various Taxable Money Market
Instruments such as bank obligations, commercial paper, repurchase agreements
and U.S. Government Obligations. The Ohio Tax Exempt Fund may also invest in
guaranteed investment contracts ("GICs").
Bank obligations include bankers' acceptances [GENERALLY
HAVING A MATURITY OF SIX MONTHS OR LESS], negotiable certificates of deposit,
[and non-negotiable time deposits issued for a definite period of time and
earning a specified return by a U.S. bank which is a member of the Federal
Reserve System]. Bank obligations also include U.S. dollar denominated bankers'
acceptances, certificates of deposit and, with respect to the Ohio Tax Exempt
Fund, time deposits issued by foreign branches of U.S. banks or foreign banks.
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. The Ohio Tax Exempt Fund may also make interest bearing savings
deposits in commercial and savings banks not in excess of 5% of its total
assets. Investment in non-negotiable time deposits is limited to no more than 5%
of the Fund's total assets at the time of purchase.
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Investments include commercial paper and other short term
promissory notes issued by corporations [, MUNICIPALITIES AND OTHER ENTITIES]
(including variable and floating rate instruments). In addition, the Ohio Tax
Exempt Fund may invest in Canadian Commercial Paper ("CCP"), which is commercial
paper issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and in Europaper, which is U.S. dollar denominated commercial paper
of a foreign issuer. The Ohio Tax Exempt 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.
The Ohio Tax Exempt Fund may make limited investments in GICs
issued by U.S. insurance companies. The Fund will purchase a GIC only when the
advisers have determined, under guidelines established by the Board of Trustees,
that the GIC presents minimal credit risks to the Fund and is of comparable
quality to instruments that are rated high quality by one or more Rating
Agencies.
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Ohio Tax Exempt Fund's advisers, or sub-adviser in the case of the
Pennsylvania Municipal Fund, 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 Funds 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
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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.
Each 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 Funds 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 Pennsylvania Municipal 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
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<PAGE> 394
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 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.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. 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.
2. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs [OR
OIL, GAS AND MINERAL LEASES], except : (a) to the extent appropriate to its
investment objective, invest in securities issued by companies which purchase or
sell commodities or commodity contracts [or which invest in such programs]; and
(b) with respect to the Ohio Tax Exempt Fund to purchase and sell futures
contracts and options on futures contracts in accordance with its investment
objective.
3. Invest in any issuer for the purpose of exercising
control [or management].
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<PAGE> 395
In addition, the Ohio Tax Exempt Fund may not:
1. Purchase securities on margin, make short sales of
securities, or maintain a short position, except to purchase or sell futures
contracts and options on futures contracts in accordance with its investment
objective.
2. Purchase or sell real estate, except to invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
3. Write or purchase put options (except stand-by
commitments), call options, straddles, spreads, or any combination thereof,
except to purchase and sell futures contracts and options on futures contracts
in accordance with its investment objective.
4. Purchase or retain securities of any issuer if the
officers or trustees of the Trust or the officers or directors of its investment
advisers owning beneficially more than one-half of 1% of the securities of such
issuer together own beneficially more than 5% of such securities.
In addition, the Pennsylvania Municipal 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. 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.
3. 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.
4. 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.
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<PAGE> 396
5. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the
rules and regulations thereunder.
6. 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 with respect to the Pennsylvania
Municipal Fund 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.
* * * * *
In addition, so long as each 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.
So long as the Pennsylvania Municipal Fund is offering and
selling its shares in the State of Ohio, the Fund may not (i) purchase or retain
the securities of any issuer if the Trustees and officers of the Trust, the
advisers and sub-adviser beneficially
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<PAGE> 397
own more than 5% of that issuer, and (ii) invest in the securities of other
investment companies if the broker's commission is more than customary.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for each 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.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN OHIO BONDS
- --------------------------------------------------------------
As described in the Prospectus, the Ohio Tax Exempt Fund will
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions (Ohio Obligations). The Fund is
therefore susceptible to general or particular economic, political or regulatory
factors that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connection
with their issuance of securities and from other publicly available information,
and is believed to be accurate. No independent verification has been made of any
of the following information.
Generally, the creditworthiness of Ohio Obligations of local
issuers is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
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There may be specific factors that at particular times apply
in connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio
Obligations has been guaranteed by bond insurance purchased by the issuers, the
Fund or other parties. Those Ohio Obligations may not be subject to the factors
referred to in this section of the Prospectus.
Ohio is the seventh most populous state; the 1990 Census count
of 10,847,000 indicated a 0.5% population increase from 1980.
The Census estimate for 1994 is 11,102,000.
While diversifying more into the service and other
non-manufacturing areas, the Ohio economy continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last four years the State rates were below the national rates
(4.8% versus 5.6% in 1995). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or
state-wide economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value of
Ohio Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
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The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization Fund (BSF, a
cash and budgetary management fund). June 30, 1991 ending fund balances were
$135.3 million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges
to State finances, successfully addressed. To allow time to resolve certain
budget differences an interim appropriations act was enacted effective July 1,
1991; it included GRF debt service and lease rental appropriations for the
entire biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium was passed on
July 11, 1991. $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that
FY , both in light of a continuing uncertain nationwide economic situation,
there was projected, and then timely addressed, an FY 1992 imbalance in GRF
resources and expenditures. In response, the Governor ordered most State
agencies to reduce GRF spending in the last six months of FY 1992 by a total of
approximately $184 million; the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the GRF; and
adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million)
was then projected for FY 1993. It was addressed by appropriate
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<PAGE> 400
legislative and administrative actions, including the Governor's ordering $300
million in selected GRF spending reductions and subsequent executive and
legislative action (a combination of tax revisions and additional spending
reductions). The June 30, 1993 ending GRF fund balance was approximately $111
million, of which, as a first step to BSF replenishment, $21 million was
deposited in the BSF.
None of the spending reductions were applied to
appropriations needed for debt service on or lease rentals relating to any State
obligations.
The 1994-95 biennium presented a more affirmative financial
picture. Based on June 30, 1994 balances, an additional $260 million was
deposited in the BSF. The biennium ended June 30, 1995 with a GRF ending fund
balance of $928 million, of which $535.2 million was transferred into the BSF
(which had a September 16, 1996 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed
on June 28, 1995 and promptly signed (after selective vetoes) by the Governor.
All necessary GRF appropriations for State debt service and lease rental
payments then projected for the biennium were included in that act. In
accordance with the appropriations act, the significant June 30, 1995 GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of
the people is, with limited exceptions, prohibited by current State
constitutional provisions. The State may incur debt, limited in amount to
$750,000, to cover casual deficits or failures in revenues or to meet expenses
not otherwise provided for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. (An exception is made
in both cases for any debt incurred to repel invasion, suppress insurrection or
defend the State in war.)
By 14 constitutional amendments, the last adopted in 1995,
Ohio voters have authorized the incurrence of State debt and the pledge of taxes
or excises to its payment. At September 16,
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<PAGE> 401
1996, $857 million (excluding certain highway bonds payable primarily from
highway use receipts) of this debt was outstanding . The only such State debt at
that date still authorized to be incurred were portions of the highway bonds,
and the following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($34.9 million outstanding); (b)
$240 million of obligations authorized for local infrastructure improvements, no
more than $120 million of which may be issued in any calendar year ($774.7
million outstanding); and (c) up to $200 million in general obligation bonds for
parks, recreation and natural resources purposes which may be outstanding at any
one time ($47.2 million outstanding, with no more than $50 million to be issued
in any one year).
The electors approved in November 1995 a proposed
constitutional amendment that extends the local infrastructure bond program
(authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued over 10 years for the purpose), and authorizes
additional highway bonds (expected to be payable primarily from highway use
receipts). The latter supersedes the prior $500 million highway obligation
authorization, and authorizes not more that $1.2 billion to be outstanding at
any time and not more than $220 million to be issued in a fiscal year.
Common resolutions are pending in both houses of the General
Assembly that would submit a constitutional amendment relating to certain other
aspects of State debt. The proposal would authorize, among other things, the
issuance of State general obligation debt for a variety of purposes, with debt
service on all State general obligation debt and GRF-supported obligations not
to exceed 5% of the preceding fiscal year's GRF expenditures. The deadline has
passed for submission of constitutional amendments at the November 1996
election.
The Constitution also authorizes the issuance of State
obligations for certain purposes, the owners of which do not have the right to
have excises or taxes levied to pay debt service. Those special obligations
include obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer, $4.8
billion of which was outstanding or authorized for sale at September 16, 1996.
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A 1990 constitutional amendment authorizes greater State and
political subdivision participation (including financing) in the provision of
housing. The General Assembly may for that purpose authorize the issuance of
State obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and
credit and taxing power of the State to meeting certain guarantees under the
State's tuition credit program which provides for purchase of tuition credits,
for the benefit of State residents, guaranteed to cover a specified amount when
applied to the cost of higher education tuition. (A 1965 constitutional
provision that authorized student loan guarantees payable from available State
moneys has never been implemented, apart from a "guarantee fund" approach funded
essentially from program revenues.)
State and local agencies issue obligations that are payable
from revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion
(state-wide aggregate approximately 44% in recent years) of their operating
moneys from State subsidies, but are dependent on local property taxes, and in
120 districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, is pending
questioning the constitutionality of Ohio's system of school funding. The trial
court concluded that aspects of the system (including basic operating
assistance) are unconstitutional, and ordered the State to provide for and fund
a system complying with the Ohio Constitution. The State appealed and a court of
appeals has reversed the trial court's findings for plaintiff districts. The
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case is now pending on appeal in the Ohio Supreme Court. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school district cash
need borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
totalled $94.5 million for 27 districts (including $75 million for one) in FY
1993, $41.1 million for 28 districts in FY 1994, $71.1 million for 29 districts
in FY 1995 (including $29.5 million for one), and $87.2 million for 20 districts
in FY 1996 (including $42.1 million for one).
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations. With other
subdivisions, they also receive local government support and property tax relief
moneys distributed by the State. For those few municipalities that on occasion
have faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any defaults.
Since inception in 1979, these procedures have been applied to 23 cities and
villages; for 19 of them the fiscal situation was resolved and the procedures
terminated.
At present the State itself does not levy ad valorem taxes on
real or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since 1934
limited to 1% of true value in money the amount of the aggregate levy (including
a levy for unvoted general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal charter provision,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
- ----------------------------------------------------------------------
Potential shareholders should consider the fact that the
Pennsylvania Municipal Fund's portfolio consists primarily of
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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, 1995, the General Fund had a surplus of $688.3
million. The deficit in the Commonwealth's unreserved/undesignated funds also
has been eliminated as of June 30, 1995.
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, with trial scheduled to commence in early 1997; (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 Envirotest will receive $145
million, with interest at 6 percent per annum; and in 1995, the Commonwealth,
the Governor of Pennsylvania, the City of Philadelphia and the Mayor of
Philadelphia were joined as additional respondents in an enforcement action
commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The Commonwealth and the City were joined to
determine their liability, if any, to pay additional costs necessary to remedy
segregation-related conditions found to exist in Philadelphia public schools. In
the fall of 1996, the State Supreme Court stayed the proceedings retained
jurisdiction over the matter.
A disaster emergency was declared by the Governor and a
federal major disaster declaration was made by the President of the United
States for certain counties in the Commonwealth for a blizzard and subsequent
flooding in January 1996. The General Assembly authorized $123 million to
provide for the Commonwealth's share of the required match for federal public
assistance and disaster mitigation funds.
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, 1995 was a surplus of $80.5 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 $1.7 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 1996. 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.
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 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
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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 May 31, 1996, sales loads paid by
shareholders of the Ohio Tax Exempt Fund totalled $4,640.
For the one-month fiscal period ended May 31, 1996, no sales
loads were paid by shareholders of the Predecessor Fund. 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 effects of dollar cost averaging through use of or comparison to
an index such as the S&P 500 Index.
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OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Funds, based on the value of the Ohio Tax Exempt Fund's net
assets and number of outstanding shares on May 31, 1996, and the Predecessor
Fund's net assets and number of outstanding shares on April 30, 1996, are as
follows:
<TABLE>
<CAPTION>
TABLE
-----
OHIO TAX EXEMPT FUND
--------------------
<S> <C>
Net Assets of Retail Shares............................. $2,869,078
Outstanding Retail Shares............................... 269,252
Net Asset Value Per Share
($2,869,078 / 269,252).................................. $10.66
Sales Charge, 3.00% of
offering price (3.08% of net
asset value per share).................................. $0.33
Offering to Public...................................... $10.99
PENNSYLVANIA MUNICIPAL FUND
---------------------------
Net Assets of Retail Shares............................. $38,809,244
Outstanding Retail Shares............................... 3,835,561
Net Asset Value Per Share
($38,809,244 / 3,835,561)............................... $ 10.12
Sales Charge, 4.00% of
offering price (4.15% of net
asset value per share).................................. $ 0.42
Offering to Public...................................... $ 10.54
</TABLE>
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<PAGE> 409
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 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 36 classes
or series of shares. Four of these classes or series, which represent interests
in the Ohio Tax Exempt Fund (Class K and Class K -Special Series 1) and
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
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<PAGE> 410
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 the 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 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
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<PAGE> 411
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.
FEDERAL TAXES - IN GENERAL
- --------------------------
As described above and in the Prospectus, each Fund is
designed to provide investors with tax-exempt interest income. The Funds are 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 Funds would not be suitable for
tax-exempt institutions and may not be suitable for
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<PAGE> 412
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
IRAs since such plans and accounts are generally tax-exempt and, therefore,
would not gain any additional benefit from the Funds' dividends being
tax-exempt.
The policy of the Funds is to pay each year as federal
exempt-interest dividends substantially all the Funds' Municipal Bond interest
income net of certain deductions. In order for the Funds 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 Pennsylvania Municipal 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 Funds. 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, or
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
-28-
<PAGE> 413
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 shares of the Funds is not deductible for federal income tax purposes
if the Funds distribute 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.
Each Fund of the Trust 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, each 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
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 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 a Fund from a partnership or trust is treated
as derived with respect to 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.
-29-
<PAGE> 414
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, with
respect to taxable debt securities and non-taxable debt securities acquired
after April 30, 1993, 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 a 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 such Fund's shares,
if the shareholder has not held such shares for at least 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). Each 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 a Fund does not qualify for
federal tax treatment as a regulated investment company, all of
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<PAGE> 415
such 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.
Each 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, or 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 that they are not subject to backup withholding when required to do so or
that they are "exempt recipients".
Depending upon the extent of the Funds' 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 Funds 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 Funds and their 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.
STATE AND LOCAL TAXES
- ---------------------
The Ohio Tax Exempt Fund is not subject to the Ohio personal
income tax, school district income taxes in Ohio, the Ohio corporation franchise
tax, or the Ohio dealers in intangibles tax, provided that, with respect to the
Ohio corporation franchise tax and the Ohio dealers in intangibles tax, the Fund
timely files the annual report required by Section 5733.09 of the Ohio Revised
Code.
Shareholders of the Fund who are otherwise subject to the Ohio
personal income tax, or municipal or school district income taxes in Ohio
imposed on individuals and estates will not be subject to such taxes on
distributions with respect to shares of the Fund ("Distributions") to the extent
that such Distributions
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<PAGE> 416
are properly attributable to interest on or gain from the sale of Obligations
issued by or on behalf of the State of Ohio, political subdivisions thereof and
agencies and instrumentalities of the State or its political subdivisions ("Ohio
Obligations").
Shareholders that are otherwise subject to the Ohio
corporation franchise tax will not be required to include Distributions in their
tax base for purposes of calculating the Ohio corporation franchise tax on the
net income basis to the extent that such distributions either (a) are properly
attributable to interest on or gain from the sale of Ohio Obligations, or (b)
represent "exempt-interest dividends" for federal income tax purposes. Shares of
the Fund will be included in a Shareholder's tax base for purposes of computing
the Ohio corporation franchise tax on the net worth basis.
Distributions that consist of interest on obligations of the
United States or its territories or possessions or of any authority, commission,
or instrumentality of the United States that is exempt from state income taxes
under the laws of the United States (including obligations issued by the
governments of Puerto Rico, the Virgin Islands or Guam and their authorities or
municipalities) are exempt from the Ohio personal income tax, and municipal and
school district income taxes in Ohio, and are excluded from the net income base
of the Ohio corporation franchise tax.
It is assumed for purposes of this discussion of State and
Local Taxes that the Fund will continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and that at all
times at least 50% of the value of the total assets of the Fund consists of Ohio
Obligations or similar obligations of other states or their subdivisions.
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
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<PAGE> 417
<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 Corporation (electronic
5150 Three Village Drive of the Board communication and information processing equipment), since
Lyndhurst, Ohio 44124 October 1985; Director, NACCO Materials Handling Group, Inc.
Age 82 (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 subsidiaries
564 Hackberry Drive (manufacture, sale and financing of water coolers and
Westerville, OH 43081 dehumidifiers), since January 1996 and President, January
Age 51 1987 to January 1996; Vice President and Executive Committee
Member of Ebtech Corp., (market and sell bottled and
point-of-use coolers) since March 1991.
</TABLE>
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<PAGE> 418
<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 Operating Officer, BFGoodrich
13901 Shaker Blvd., #6B and Treasurer Company, August 1986 to September 1990; Director, Adams
Cleveland, OH 44120 Express Company (closed-end investment company), since April
Age 71 1982; Director, Lamson & Sessions Co. (producer of
electrical supplies for 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, Kittle's Home
8600 Allisonville Road Furnishings Center, Inc., since January 1982; partner,
Indianapolis, IN 46250 Kittles Bloomington Property Company, since January 1981;
Age 51 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 Martin Gatton, College
Carol Martin Gatton of Business and Economics, University of Kentucky, since
College of Business and 1981; Director, Studio Plus Hotels, Inc., since 1994.
Economics
University of Kentucky
Lexington, KY 40506-0034
Age 58
</TABLE>
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<PAGE> 419
<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, April 1984-September
32980 Creekside Drive 1993; Director, Cold Metal Products, Inc., since March 1994;
Pepper Pike, OH 44124 Director, Zurn Industries, Inc. (plumbing products and
Age 63 engineering and construction services), since June 1995.
J. William Pullen Trustee President and Chief Executive Officer, Whayne Supply Co.
Whayne Supply Company (engine and heavy equipment distribution), since 1986;
1400 Cecil Avenue President and Chief Executive Officer, American Contractors
P.O. Box 35900 Rentals & Sales (rental subsidiary of Whayne Supply Co.),
Louisville, KY 40232-5900 since 1988.
Age 57
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath,
Philadelphia National Philadelphia, Pennsylvania
Bank Building
Broad & Chestnut Sts.
Philadelphia, PA 19107
Age 52
John J. Burke Assistant Treasurer Client Service Officer, First Data Investor
First Data Investor Services Group, Inc. since 1991; prior thereto,
Services Group, Inc. Management Associate, Fidelity Investments.
4400 Computer Drive
Westborough, MA 01581
Age 31
- --------------------
<FN>
* Mr. Carter is considered by the Trust to be an "interested person" of the
Trust as defined in the 1940 Act.
</TABLE>
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
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<PAGE> 420
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 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, Trustee and $13,000 $0 $0 $13,000
Chairman
Thomas R. Benua, Jr.,Trustee $11,375 $0 $0 $11,375
Leigh Carter, Trustee , $11,375 $0 $0 $11,375
President and Treasurer
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
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<PAGE> 421
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, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS
----------------------------------------------------------
ADVISORY AGREEMENT
- ------------------
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Ohio Tax Exempt Fund and National
City serves as investment adviser to the Pennsylvania Municipal Fund, as
described in the Prospectus. Prior to September 26, 1990, only National City and
National City Columbus served as advisers to the Ohio Tax Exempt Fund. The
advisers are affiliates of National City Corporation, a bank holding company
with $51 billion in assets, and headquarters in Cleveland, Ohio and nearly 900
branch offices in four states. Through its subsidiaries, National City
Corporation has been managing investments for
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<PAGE> 422
individuals, pension and profit-sharing plans and other institutional investors
for over 75 years and currently manages over $36 billion in assets. From time to
time, the advisers may voluntarily waive fees or reimburse the Trust for
expenses.
Pursuant to the Advisory Agreement, the Trust incurred the
following advisory fees for the fiscal years ended May 31, 1996, 1995 and 1994:
the advisers waived their entire fees of $443,670, $379,718 and $301,620,
respectively.
For the one-month period ended May 31, 1996, the fiscal year
ended April 30, 1996 and for the period from August 10, 1994 (commencement of
operations) to April 30, 1995, Integra Trust Company ("Integra"), the investment
adviser to the Predecessor Fund, earned advisory fees of $23,057, $264,836 and
$128,093, and Integra waived fees in the amount of $6,792, $44,126 and $39,805,
respectively.
Each Advisory Agreement provides that the advisers 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 their duties
and obligations thereunder. In addition, the advisers have undertaken in their
Advisory Agreements to maintain their policy and practice of conducting their
Trust Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Ohio Tax Exempt Fund
was approved by the shareholders on September 26, 1990. The Advisory Agreement
relating to the Pennsylvania Municipal Fund was approved by the sole shareholder
prior to the commencement of operations. Unless sooner terminated, the Advisory
Agreement will continue in effect with respect to the Fund to which it relates
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 such 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
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<PAGE> 423
called for such purpose. Each 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 Pennsylvania Municipal Fund. The sub-adviser is a
professional investment counselling firm that provides investment services to
investment companies and other entities.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Fund's
advisers 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 a
particular 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. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees for the
fiscal years ended May 31, 1996, 1995 and 1994: $81,680, $70,839 and $26,230,
respectively.
For the one-month fiscal period ended May 31, 1996, the fiscal
year ended April 30, 1996 and for the period from August 10, 1994 (commencement
of operations) to 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: $5,929, $68,101 and $23,985,
respectively, and waived fees of $0, $9,681 and $19,188, respectively.
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<PAGE> 424
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, 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.
-40-
<PAGE> 425
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. For the fiscal years
ended May 31, 1996 and 1995, the Trust paid the Distributor a total of $38,354
and $20,924 for the Fund. Of the aggregate amount paid to the Distributor by the
Trust, approximately $1,181 and $454 was attributable to postage, $2,159 and
$3,114 was attributable to communications with shareholders, $51,940 and $9,008
was attributable to advertisement/promotion and $5,956 and $8,348 was
attributable to general compensation to the Distributor.
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 year ended April 30, 1996 and for the period from August 10, 1994
(commencement of operations) to April 30, 1995, the Predecessor Fund paid $0 and
$0 in 12b-1 fees.
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<PAGE> 426
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank also 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 each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
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 Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Funds harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Funds reimburse National City Bank for its
direct and indirect costs and expenses incurred in rendering custodial services,
except that the costs and expenses borne by each Fund in any year may not exceed
$.225 for each $1,000 of average gross assets of such 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 Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each 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 Funds' 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 pro vides each shareholder of record
with a daily transaction report for each day on which a transaction occurs in
the shareholder's account with each Fund.
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<PAGE> 427
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 each 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 Funds; (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 Advisory Agreement, National City, National
City Columbus and National City Kentucky are responsible for, make decisions
with respect to and place orders for all purchases and sales of portfolio
securities for the Ohio Tax Exempt Fund. 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 Pennsylvania Municipal Fund. The advisers and sub-adviser purchase
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
-43-
<PAGE> 428
market, but the price includes an undisclosed commission or mark-up.
For the fiscal years ended May 31, 1996 and 1995, the Ohio Tax
Exempt Fund did not pay any brokerage commissions.
For the one-month fiscal period ended May 31, 1996, and the
fiscal year ended April 30, 1996, the Predecessor Fund did not pay any brokerage
commissions.
While the advisers and sub-adviser generally seek competitive
spreads or commissions, they 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 advisers in their 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 advisers 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 advisers and does not reduce the fees payable to them by
the Fund. Such information may be useful to the advisers 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 advisers in
carrying out their obligations to the Trust.
Portfolio securities will not be purchased from or sold to the
Fund's advisers, 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 advisers' correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as advisers to the Trust, National City,
National City Columbus and National City Kentucky have agreed to maintain their
policy and practice of conducting their Trust departments independently of their
Commercial Departments. In making investment recommendations for the Trust,
Trust Department
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<PAGE> 429
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 and for other investment companies and accounts
advised or managed by the advisers. Such other Fund 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 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
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. The financial statements, as
of and for the period ended May 31, 1996 for the Ohio Tax Exempt Fund, which are
incorporated by reference in this Statement of Additional Information, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
referred to elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345 Chestnut Street,
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<PAGE> 430
Philadelphia, Pennsylvania 19107, are counsel to the Trust and will pass upon
the legality of the shares offered hereby. Squire, Sanders & Dempsey, with
offices at 4900 Society Center, 127 Public Square, Cleveland, Ohio 44114-1304,
act as special Ohio tax counsel for the Trust and have reviewed the section of
this Statement of Additional Information entitled "Additional Information
Concerning Taxes - State and Local Taxes" and the Prospectus entitled "Taxes
State and Local Taxes."
YIELD AND PERFORMANCE INFORMATION
---------------------------------
Each Fund's "yield" described in the Prospectus is calculated
by dividing each 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.
-46-
<PAGE> 431
Each 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.
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.
-47-
<PAGE> 432
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 May 31, 1996, the yields of the
Retail and Institutional shares of the Ohio Tax Exempt Fund were 4.57% and
4.72%, respectively. The tax equivalents (assuming a 39.6% federal tax rate and
7.5% Ohio tax rate) for its Retail and Institutional shares for the same period
were 8.18% and 8.45%, respectively.
For the 30-day periods ended May 31, 1996 and April 30, 1996,
the yields of the Predecessor Fund were 4.16% and 4.10%, respectively. The tax
equivalent yields (assuming a 39.6% federal tax rate and a 2.8% Pennsylvania tax
rate) for the same periods were 7.22% and 6.19%, respectively.
Each Fund computes its 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:
-48-
<PAGE> 433
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
Each Fund computes its aggregate total returns by determining
its 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 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 Ohio Tax Exempt Fund
for the one year period ending May 31, 1996 were 1.23% (after taking into
account the sales load) and 4.35% (without
-49-
<PAGE> 434
taking into account any sales load) for the Retail shares and 4.36% for the
Institutional shares. The average annual total returns since the Fund's
commencement of operations through May 31, 1996 were ____% (after taking into
account the sales load) and ____% (without taking into account any sales load)
for the Retail shares and ____% for the Institutional shares. The Ohio Tax
Exempt Fund commenced investment operations on January 5, 1990.
The average annual total returns for the one-month fiscal
period ending May 31, 1996, and the one-year fiscal period ending April 30, 1996
for the Predecessor Fund were (4.01)% and 0.84%, respectively, (after taking
into account the sales load) and (0.03)% and 5.06%, respectively (without taking
into account any sales load). The average annual total returns since the Fund's
commencement of operations through the one-month fiscal period ending May 31,
1996, and April 30, 1996 were 2.31% and 2.44% (after taking into account the
sales load) and 4.66% and 4.92% (without taking into account any sales load).
The Predecessor Fund commenced investment operations on August 10, 1994.
The Funds 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 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, a 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. A Fund
does not, for these purposes, deduct from the initial value invested any amount
representing sales charges. A 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.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in
-50-
<PAGE> 435
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 a 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 Funds 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 a 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 advisers 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 a Fund. The Funds may also include in Materials charts, graphs
or drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Funds 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 a Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in a 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.
-51-
<PAGE> 436
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
that particular 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 a Fund's net asset value, assets belonging to a
particular Fund are charged with the respective liabilities in respect of that
Fund.
To the Fund's knowledge, no shareholder beneficially owned 5%
or more of the outstanding Institutional or Retail shares of the Ohio Tax Exempt
Fund as of September 11, 1996.
The following shareholders owned beneficially 5% or more of
the outstanding Retail shares of the Pennsylvania Municipal Fund as of September
11, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Pennsylvania Municipal Retail Retail
Fund Shares Shares
- ----------------------- --------- -------------
<S> <C> <C>
Helen M. Weyer 5,907.372 71.71%
James N. Weyer, Jr. JTTEN
2600 Mohawk Drive
White Oak, PA 15131-3121
Robert H. Rhone 1,049.427 12.74%
172 Davis Street
Bradford, PA 16701-1304
</TABLE>
-52-
<PAGE> 437
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Pennsylvania Municipal Retail Retail
Fund Shares Shares
- ---------------------- ---------- -------
<S> <C> <C>
John E. Bukowski 478.469 5.81%
Box 254-IA Road 1
Clarksville, PA 15322
Rita La Fianza & 471.769 5.73%
Howard H. La Fianza JTTEN
507 Lisa Drive
West Mifflin, PA 15122-
3150
</TABLE>
No Institutional shares of the Pennsylvania Municipal Fund
had been issued as of September 11, 1996.
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1996 are hereby incorporated herein by
reference. Copies of the annual report may be obtained by calling the Trust at
1-800-622-FUND or by writing to the Trust at 4400 Computer Drive, Westborough,
Massachusetts 01581.
The financial statements for the Predecessor Fund for the
fiscal period May 1, 1996 through May 31, 1996 and 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 Report. The Financial Statements in such Annual Report
have been incorporated herein and in the Fund's Prospectus
-53-
<PAGE> 438
in reliance upon the report of said firm of independent accountants given upon
their authority as experts in accounting and auditing.
-54-
<PAGE> 439
APPENDIX A
----------
DESCRIPTION OF RATINGS
BOND RATINGS
- ------------
The following summarizes the three highest ratings used by
Standard & Poor's for bonds:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's 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 in 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.
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.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The following summarizes the three highest ratings used by Moody's for
bonds:
A-1
<PAGE> 440
"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 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 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.
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.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the bonds. The
rating may be revised prior to delivery if changes occur in the legal documents
or the underlying credit quality of the bonds.
Note: Those bonds in the Aa and A groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, ssAa1 and A1.
A-2
<PAGE> 441
The following summarizes the three highest long-term debt
ratings used by Duff & Phelps for bonds:
"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.
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.
The following summarizes the three highest ratings used by
Fitch for 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.
A-3
<PAGE> 442
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "A" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
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
three highest rating categories used by IBCA for bonds:
"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 substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that 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.
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
- -----------------------------------
A Standard & Poor's 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 Standard and Poor's for commercial paper:
A-4
<PAGE> 443
"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. Prime-1 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.
Duff & Phelps employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. The following summarizes the two
highest rating categories used by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
A-5
<PAGE> 444
factors and/or access to alternative sources of funds, is outstanding, and
safety is just below risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-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.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the two highest rating categories used by Fitch for
commercial paper:
"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.
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 uses the short-term ratings described under Municipal
Notes Ratings for commercial paper.
A-6
<PAGE> 445
MUNICIPAL NOTES RATINGS
- -----------------------
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the two highest ratings used by Standard & Poor's Ratings
Group for municipal notes:
"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.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the two highest ratings by Moody's
Investors Service, Inc. for short-term notes and variable rate demand
obligations:
"MIG-1"/"VMIG-1" - Loans bearing this designation 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 and Duff & Phelps use 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):
A-7
<PAGE> 446
"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-8
<PAGE> 447
FORM N-1A
---------
Part C - Other Information
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(A) Financial Statements
--------------------
(1) Included in Parts A of the Registration Statement
are the following audited financial statements:
(a) Financial Highlights for the Money Market Fund
for the Period from September 3, 1986 (commencement of
operations) to May 31, 1987, and the Years Ended May 31, 1988,
1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996;
(b) Financial Highlights for the Government Fund for
the Period from March 3, 1987 (commencement of operations) to
May 31, 1987, and the Years Ended May 31, 1988, 1989, 1990,
1991, 1992, 1993, 1994, 1995 and 1996;
(c) Financial Highlights for the Treasury Fund for
the Period from June 16, 1994 (commencement of operations) to
November 30, 1994, and the Years Ended May 31, 1995 and 1996;
(d) Financial Highlights for the Tax Exempt Fund for
the Period from July 20, 1988 (commencement of operations) to
May 31, 1989, and the Years Ended May 31, 1990, 1991, 1992,
1993, 1994, 1995 and 1996;
(e) Financial Highlights for the Pennsylvania Tax
Exempt Fund for the Period from August 8, 1994 (commencement
of operations) to April 30, 1995, for the Year ended April 30,
1996 and for the Period from May 1, 1996 to May 31, 1996;
(f) Financial Highlights for the Fixed Income
Fund for the Period from December 20, 1989 (commencement of
operations) to May 31, 1990, and the
C-1
<PAGE> 448
Years Ended May 31, 1991, 1992, 1993, 1994, 1995 and
1996;
(g) Financial Highlights for the Total Return
Advantage Fund for the Period July 7, 1994 (commencement of
operations) to November 30, 1994, and the Years Ended May 31,
1995 and 1996;
(h) Financial Highlights for the Enhanced Income Fund
for the Period July 7, 1994 (commencement of operations) to
November 30, 1994, and the Years Ended May 31, 1995 and 1996;
(i) Financial Highlights for the GNMA Fund for the
Period from August 10, 1994 (commencement of operations) to
April 30, 1995, the Year Ended April 30, 1996 and for the
Period from May 1, 1996 to May 31, 1996;
(j) Financial Highlights for the Intermediate
Government Fund for the period from August 10, 1994
(commencement of operations) to April 30, 1995 , the Year
Ended April 30, 1996 and for the Period from May 1, 1996 to
May 31, 1996;
(k) Financial Highlights for the Equity Fund for the
Period from December 20, 1989 (commencement of operations) to
May 31, 1990, and the Years Ended May 31, 1991, 1992, 1993,
1994, 1995 and 1996;
(l) Financial Highlights for the Equity Income Fund
for the Period from July 1, 1994 (commencement of operations)
to November 30, 1994, and the Years Ended May 31, 1995 and
1996;
(m) Financial Highlights for the Mid Cap Regional
Fund for the period from July 26, 1994 (commencement of
operations) to November 30, 1994, and the Years Ended May 31,
1995 and 1996;
(n) Financial Highlights for the Ohio Tax Exempt
Fund for the Period from January 5, 1990 (commencement
C-2
<PAGE> 449
of operations) to May 31, 1990, and the Years Ended
May 31, 1991, 1992, 1993, 1994, 1995 and 1996; and
(o) Financial Highlights for the Pennsylvania
Municipal Fund for the Period from August 10, 1994
(commencement of operations) to April 30, 1995, the Year ended
April 30, 1996 and the Period from May 1, 1996 to May 31,
1996.
(2) Incorporated by reference in Parts B of the Registration
Statement are the following audited financial statements
contained in the Annual Reports of Registrant for the fiscal
year ended May 31, 1996:
(a) For the Money Market, Government, Treasury
and Tax Exempt Funds:
Portfolio of Investments - May 31, 1996. Statement of
Assets and Liabilities - May 31, 1996. Statement of
Operations - for the year ended May 31, 1996.
Statements of Changes in Net Assets - for the year
ended May 31, 1996. Notes to Financial Statements.
(b) For the Equity, Equity Income and Mid Cap
Regional Funds:
Portfolio of Investments - May 31, 1996. Statement of
Assets and Liabilities - May 31, 1996. Statement of
Operations - for the year ended May 31, 1996.
Statements of Changes in Net Assets - for the year
ended May 31, 1996. Notes to Financial Statements.
(c) For the Fixed Income, Enhanced Income and
Total Return Advantage Funds:
Portfolio of Investments - May 31, 1996.
C-3
<PAGE> 450
Statement of Assets and Liabilities - May 31, 1996.
Statement of Operations - for the year ended May 31,
1996. Statements of Changes in Net Assets - for the
year ended May 31, 1996. Notes to Financial
Statements.
(d) For the Ohio Tax Exempt Fund:
Portfolio of Investments - May 31, 1996. Statement of
Assets and Liabilities - May 31, 1996. Statement of
Operations - for the year ended May 31, 1996.
Statements of Changes in Net Assets - for the year
ended May 31, 1996. Notes to Financial Statements.
(e) Incorporated by reference in Parts B of the
Registration Statement are the following audited financial
statements contained in the Annual Report of the Predecessor
Pennsylvania Tax Exempt, Intermediate Government, GNMA and
Pennsylvania Municipal Funds for the fiscal year ended April
30, 1996 and the period ended May 31, 1996:
For the Pennsylvania Tax Exempt, Intermediate
Government, GNMA and Pennsylvania Municipal Funds:
Statements of Net Assets - April 30, 1996 and May 31,
1996.
Statements of Operations - April 30, 1996 and May 31,
1996.
Statements of Changes in Net Assets - April 30, 1996
and May 31, 1996.
Notes to Financial Statements.
Reports of Independent Accountants - June 14, 1996
and July 26, 1996.
C-4
<PAGE> 451
(B) Exhibits
--------
(1) Declaration of Trust dated January 28, 1986 is
incorporated herein by reference to Exhibit 1 to
Post-Effective Amendment No. 1 to Registrant's Registration
Statement filed on December 16, 1986.
(a) Amendment No. 1 to Declaration of Trust is
incorporated herein by reference to Exhibit 1(a) to
Post-Effective Amendment No. 6 to Registrant's
Registration Statement filed on August 1, 1989.
(b) Amendment No. 2 to Declaration of Trust is
incorporated herein by reference to Exhibit 1(b) to
Post-Effective Amendment No. 23 to Registrant's
Registration Statement filed on May 11, 1995.
(c) Certificate of Classification of Shares
reflecting the creation of the Tax Exempt Portfolio (Trust) as
filed with the Office of Secretary of State of Massachusetts
on October 16, 1989 is incorporated herein by reference to
Exhibit 1(c) to Post-Effective Amendment No. 26 to
Registrant's Registration Statement filed on May 15, 1996.
(d) Certificate of Classification of Shares
reflecting the creation of Special Series 1 in the Money
Market, Government, Treasury, Tax Exempt, Equity, Bond and
Ohio Tax Exempt Portfolios as filed with the Office of
Secretary of State of Massachusetts on December 11, 1989 is
incorporated herein by reference to Exhibit 1(d) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
(e) Certificate of Classification of Shares
reflecting the creation of Special Series 1 in the Money
Market, Government, Treasury, Tax Exempt, Equity, Bond and
Ohio Tax Exempt Portfolios as filed with the Office of the
Secretary of State of Massachusetts on September 12, 1990 is
incorporated herein by reference to Exhibit 1(e) to
Post-Effective Amendment No. 26 to
C-5
<PAGE> 452
Registrant's Registration Statement filed on May 15, 1996.
(f) Certificate of Classification of Shares
reflecting the creation of Class L and Class L-Special Series
1 shares, Class M and Class M-Special Series 1, Class N and
Class N-Special Series 1, Class O and Class O-Special Series
1, and Class P and Class P-Special Series 1 representing
interests in the National Tax Exempt Portfolio, Equity Income
Portfolio, Mid Cap Regional Equity Portfolio, Enhanced Income
Fund and Total Return Advantage Fund, respectively, as filed
with the Office of Secretary of State of Massachusetts on June
30, 1994 is incorporated herein by reference to Exhibit 1(e)
to Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996.
(g) Form of Certificate of Classification of
Shares reflecting the creation of Class Q and Class Q-
Special Series 1 shares, Class R and Class R-Special Series 1,
Class S and Class S-Special Series 1, and Class T and Class
T-Special Series 1 representing interests in the Pennsylvania
Tax Exempt, Intermediate Government, GNMA and Pennsylvania
Municipal Funds is incorporated herein by reference to Exhibit
1(e) to Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996.
(2) Code of Regulations as approved and adopted by
Registrant's Board of Trustees on January 28, 1986 is
incorporated herein by reference to Exhibit 2 to Pre-Effective
Amendment No. 2 to Registrant's Registration Statement filed
on January 30, 1986.
(a) Amendment No. 1 to Code of Regulations is
incorporated herein by reference to Exhibit 2(a) to
Post-Effective Amendment No. 6 to Registrant's
Registration Statement filed on August 1, 1989.
(3) None.
C-6
<PAGE> 453
(4) (a) Specimen copy of share certificate for Class A units
of beneficial interest is incorporated herein by reference to
Exhibit 4(a) to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement filed on January 30, 1986.
(b) Specimen copy of share certificate for Class A -
Special Series 1 units of beneficial interest is incorporated
herein by reference to Exhibit 4(b) to Post-Effective
Amendment No. 13 to the Registrant's Registration Statement
filed on July 27, 1990.
(c) Specimen copy of share certificate for Class B
units of beneficial interest is incorporated herein by
reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement filed on January 30, 1986.
(d) Specimen copy of share certificate for Class B -
Special Series 1 units of beneficial interest is incorporated
herein by reference to Exhibit 4(d) to Post-Effective
Amendment No. 13 to the Registrant's Registration Statement
filed on July 27, 1990.
(e) Specimen copy of share certificate for Class C
units of beneficial interest is incorporated herein by
reference to Exhibit 4(c) to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement filed on January 30, 1986.
(f) Specimen copy of share certificate for Class C -
Special Series 1 units of beneficial interest is incorporated
herein by reference to Exhibit 4(f) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement filed
July 27, 1990.
(g) Specimen copy of share certificates for Class D
units of beneficial interest is incorporated herein by
reference to Exhibit 4(d) to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement filed on January 30, 1986.
C-7
<PAGE> 454
(h) Specimen copy of share certificate for Class D -
Special Series 1 units of beneficial interest is incorporated
hereby by reference to Exhibit 4(h) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement filed
July 27, 1990.
(i) Specimen copy of share certificate for Class E
units of beneficial interest is incorporated herein by
reference to Exhibit 4(e) to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement filed on January 30, 1986.
(j) Specimen copy of share certificate for Class F
units of beneficial interest is incorporated herein by
reference to Exhibit 4(f) to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement filed on January 30, 1986.
(k) Specimen copy of share certificate for Class G
units of beneficial interest is incorporated herein by
reference to Exhibit 4(g) to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement filed on January 30, 1986.
(l) Specimen copy of share certificate for Class J
units of beneficial interest is incorporated herein by
reference to Exhibit 4(h) to Post-Effective Amendment No. 6
to Registrant's Registration Statement filed on August 1,
1989.
(m) Specimen copy of share certificate for Class H
units of beneficial interest is incorporated herein by
reference to Exhibit 4(i) to Post-Effective Amendment No. 10
to Registrant's Registration Statement filed on April 17,
1990.
(n) Specimen copy of share certificate for Class H -
Special Series 1 units of beneficial interest is incorporated
herein by reference to Exhibit 4(j) to Post-Effective
Amendment No. 10 to Registrant's Registration Statement filed
on April 17, 1990.
C-8
<PAGE> 455
(o) Specimen copy of share certificate for Class I
units of beneficial interest is incorporated herein by
reference to Exhibit 4(k) to Post-Effective Amendment
No. 10 to Registrant's Registration Statement filed
on April 17, 1990.
(p) Specimen copy of share certificate for Class I -
Special Series 1 units of beneficial interest is incorporated
herein by reference to Exhibit 4(l) to Post-Effective
Amendment No. 10 to Registrant's Registration Statement filed
on April 17, 1990.
(q) Specimen copy of share certificate for Class
K units of beneficial interest is incorporated herein
by reference to Exhibit 4(m) to Post-Effective
Amendment No. 10 to Registrant's Registration Statement
filed on April 17, 1990.
(r) Specimen copy of share certificate for Class K -
Special Series 1 units of beneficial interest is incorporated
herein by reference to Exhibit 4(n) to Post-Effective
Amendment No. 10 to Registrant's Registration Statement filed
on April 17, 1990.
(5) (a) Investment Advisory Agreement for the Money Market
Portfolio, Government Portfolio and Treasury Portfolio among
Registrant and National City Bank and BancOhio National Bank,
dated June 17, 1986 is incorporated herein by reference to
Exhibit 5(a) to Post-Effective Amendment No. 1 to Registrant's
Registration Statement filed on December 16, 1986.
(b) Investment Advisory Agreement for the Money
Market Portfolio (Trust), Government Portfolio (Trust) and
Treasury Portfolio (Trust) among Registrant and National City
Bank and BancOhio National Bank, dated June 17, 1986 is
incorporated herein by reference to Exhibit 5(b) to
Post-Effective Amendment No. 1 to Registrant's Registration
Statement filed on December 16, 1986.
(c) Investment Advisory Agreement for the Tax
Exempt Portfolio between Registrant and National City
C-9
<PAGE> 456
Bank, dated July 11, 1989, is incorporated herein by
reference to Exhibit 5(c) to Post-Effective Amendment
No. 7 to Registrant's Registration Statement filed on
September 28, 1989.
(d) Investment Advisory Agreement for the Tax Exempt
Portfolio (Trust) between Registrant and National City Bank,
dated October 17, 1989 is incorporated herein by reference to
Exhibit 5(d) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement filed April 17, 1990.
(e) Investment Advisory Agreement for the Bond
Portfolio, Equity Portfolio and Ohio Tax Exempt Portfolio
among Registrant and National City Bank and BancOhio National
Bank, dated December 22, 1989 is incorporated herein by
reference to Exhibit 5(e) to Post-Effective Amendment No. 10
to Registrant's Registration Statement filed April 17, 1990.
(f) Investment Advisory Agreement for the Money
Market Portfolio, Government Portfolio, Treasury Portfolio,
Tax Exempt Portfolio, Equity Portfolio, Bond Portfolio and
Ohio Tax Exempt Portfolio among Registrant, National City
Bank, BancOhio National Bank and First National Bank of
Louisville dated September 26, 1990 is incorporated herein by
reference to Exhibit 5(f) to Post-Effective Amendment No. 14
to Registrant's Registration Statement filed on September 5,
1990.
(g) Investment Advisory Agreement for the Money
Market Portfolio (Trust), Government Portfolio (Trust),
Treasury Portfolio (Trust) and Tax Exempt Portfolio (Trust)
among Registrant, National City Bank, BancOhio National Bank
and First National Bank of Louisville dated September 26, 1990
is incorporated herein by reference to Exhibit 5(g) to
Post-Effective Amendment No. 14 to Registrant's Registration
Statement filed on September 5, 1990.
(h) Investment Advisory Agreement for the
Enhanced Income Fund and the Total Return Advantage
Fund between Registrant and National Asset Management
C-10
<PAGE> 457
Corporation dated July 5, 1994, is incorporated herein
by reference to Exhibit 5(h) to Post-Effective
Amendment No. 21 to Registrant's Registration Statement
filed on August 31, 1994.
(i) Investment Advisory Agreement for the Equity
Income Portfolio among Registrant, National City Bank,
National City Bank, Columbus and National City Bank, Kentucky
dated June 30, 1994, is incorporated herein by reference to
Exhibit 5(i) to Post-Effective Amendment No. 21 to
Registrant's Registration Statement filed on August 31, 1994.
(j) Investment Advisory Agreement for the Mid Cap
Regional Equity Portfolio between Registrant and
National City Bank dated July 25, 1994, is incorporated
herein by reference to Exhibit 5(j) to Post-Effective
Amendment No. 21 to Registrant's Registration Statement
filed on August 31, 1994.
(k) Investment Advisory Agreement for the National
Tax Exempt Portfolio among Registrant, National City Bank,
National City Bank, Columbus, National City Bank, Kentucky and
National City Bank, Indiana is incorporated herein by
reference to Exhibit 5(l) to Post-Effective Amendment No. 20
to Registrant's Registration Statement filed on February 11,
1994.
(l) Form of Investment Advisory Agreement for the
Pennsylvania Tax Exempt, Intermediate Government, GNMA and
Pennsylvania Municipal Funds between Registrant and National
City Bank is incorporated herein by reference to Exhibit 5(l)
to Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996.
(m) Form of Sub-Advisory Agreement for the
Pennsylvania Tax Exempt and Pennsylvania
C-11
<PAGE> 458
Municipal Funds between National City Bank and Weiss, Peck &
Greer L.L.C. is incorporated herein by reference to Exhibit
5(m) to Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996.
(6) Distribution Agreement among Registrant, The Shareholder
Services Group, Inc. d/b/a/ 440 Financial and 440 Financial
Distributors, Inc., dated March 31, 1995, is incorporated herein
by reference to Exhibit 6(g) to Post-Effective Amendment No. 23
to Registrant's Registration Statement filed on May 11, 1995.
(7) None.
(8) (a) Custodian Services Agreement between Registrant and
National City Bank, dated November 7, 1994, is incorporated
herein by reference to Exhibit 8(a) to Post-Effective Amendment
No. 22 to Registrant's Registration Statement filed on
December 30, 1994.
(b) Sub-Custodian Agreement between National City
Bank and The Bank of California, National Association, dated
November 7, 1994, is incorporated herein by reference to Exhibit
8(a) to Post-Effective Amendment No. 22 to Registrant's
Registration Statement filed on December 30, 1994.
(c) Form of Exhibit A to the Custodian Services
Agreement between Registrant and National City Bank with
respect to the Pennsylvania Tax Exempt, Intermediate
Government, GNMA and Pennsylvania Municipal Funds is
incorporated herein by reference to Exhibit 8(c) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
(9) (a) Administration and Accounting Services Agreement for
the Money Market Portfolio, Government Portfolio and Treasury
Portfolio between Registrant and
C-12
<PAGE> 459
Provident Financial Processing Corporation, dated September
11, 1987 is incorporated herein by reference to Exhibit 9(a)
to Post-Effective Amendment No. 13 to Registrant's
Registration Statement filed on July 27,
1990.
(b) Administration and Accounting Services Agreement
for the Money Market Portfolio (Trust), Government Portfolio
(Trust) and Treasury Portfolio (Trust) between Registrant and
Provident Financial Processing Corporation, dated September
11, 1987 is incorporated herein by reference to Exhibit 9(b)
to Post-Effective Amendment No. 13 to Registrant's
Registration Statement filed on July 27, 1990.
(c) Administration and Accounting Services Agreement
for Money Market Portfolio, Government Portfolio, Treasury
Portfolio, Tax Exempt Portfolio, Money Market Portfolio
(Trust), Government Portfolio (Trust), Treasury Portfolio
(Trust) and Tax Exempt Portfolio (Trust) between Registrant
and Provident Financial Processing Corporation, dated October
17, 1989 is incorporated herein by reference to Exhibit 9(c)
to Post-Effective Amendment No. 12 to Registrant's
Registration Statement filed on June 25, 1990.
(d) Administration and Accounting Services Agreement
for Equity Portfolio, Bond Portfolio and Ohio Tax Exempt
Portfolio between Registrant and Provident Financial
Processing Corporation, dated December 22, 1989 is
incorporated herein by reference to Exhibit 9(d) to
Post-Effective Amendment No. 12 to Registrant's Registration
Statement filed on June 25, 1990.
(e) Administration and Accounting Services Agreement
between Registrant and PFPC Inc., dated March 1, 1993 is
incorporated by reference to Exhibit 9(l) to Post-Effective
Amendment No. 16 to Registrant's Registration Statement filed
on March 1, 1993.
(f) Exhibit A dated to Administration and Accounting
Services Agreement dated March 1, 1993 between Registrant and
PFPC Inc., dated June 1, 1994,
C-13
<PAGE> 460
is incorporated herein by reference to Exhibit 9(f) to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement filed on August 31, 1994.
(g) Form of Exhibit A to the Administration and
Accounting Services Agreement dated March 1, 1993 between
Registrant and PFPC Inc., dated September 9, 1996 with
respect to the Pennsylvania Tax Exempt, Intermediate
Government, GNMA and Pennsylvania Municipal Funds is
incorporated herein by reference to Exhibit 9(g) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
(h) Transfer Agency Agreement between Registrant,
440 Financial Group of Worcester, Inc. and State Mutual
Life Assurance Company of America, dated March 1, 1993
is incorporated by reference to Exhibit 9(m) to Post-
Effective Amendment No. 16 to Registrant's Registration
Statement filed on March 1, 1993.
(i) Transfer Agency Agreement between Registrant
and The Shareholder Services Group, Inc. d/b/a 440
Financial, dated April 1, 1995, is incorporated herein
by reference to Exhibit 9(h) to Post-Effective
Amendment No. 23 to Registrant's Registration Statement
filed on May 11, 1995.
(j) Shareholder Services Plan and Form of
Servicing Agreement is incorporated herein by reference
to Exhibit 9(g) to Post-Effective Amendment No. 7 to
Registrant's Registration Statement filed on September
28, 1989.
(k) Shareholder Services Plan and Form of Servicing
Agreement adopted by the Board of Trustees on January 9, 1990
is incorporated herein by reference to Exhibit 9(h) to
Post-Effective Amendment No. 10 to Registrant's Registration
Statement filed April 17, 1990.
(l) Shareholder Services Plan and Form of
Servicing Agreement adopted by the Board of Trustees on
C-14
<PAGE> 461
February 14, 1991 is incorporated herein by reference to
Exhibit 9(k) to Post-Effective Amendment No. 14 to
Registrant's Registration Statement filed September 5,
1991.
(m) Shareholder Services Plan and Form of Servicing
Agreement adopted by the Board of Trustees on November 4, 1993
is incorporated herein by reference to Exhibit 9(o) to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement filed February 8, 1994.
(n) Shareholder Services Plan and Servicing Agreement
adopted by the Board of Trustees on April 1, 1995, is
incorporated herein by reference to Exhibit 9(m) to
Post-Effective Amendment No. 23 to Registrant's Registration
Statement filed on May 11, 1995.
(o) Shareholder Services Plan and Servicing
Agreement adopted by the Board of Trustees on February
15, 1996 is incorporated herein by reference to Exhibit 13(o)
to Registrant's Registration Statement on Form N- 14 filed on
May 13, 1996.
1(10) Opinion and consent of counsel.
(11) (a) Consent of Drinker Biddle & Reath.
(b) Consent of Ernst & Young LLP.
(c) Consent of Coopers & Lybrand L.L.P.
(d) Opinion and Consent of Squire, Sanders &
Dempsey
(12) (a) Armada Funds Annual Reports to Shareholders with
respect to the Total Return Advantage, Fixed Income and
Enhanced Income Funds and the Mid Cap Regional, Equity and
Equity Income Funds (File No. 811-
- ---------------------
1. To be filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice.
C-15
<PAGE> 462
4416) for the fiscal year ended May 31, 1996 as filed with
the Commission on July 30, 1996 are incorporated by
reference.
(b) Inventor Funds, Inc. Annual Report to Shareholders
(File No. 811-08486) for the the one-month fiscal period
ended May 31, 1996 and the fiscal year ended April 30, 1996
as filed with the Commission on June 28, 1996 is
incorporated herein by reference.
(13) Purchase Agreements between Registrant and McDonald &
Company Securities, Inc. are incorporated herein by
reference to Exhibit 13 to Post-Effective Amendment No. 1 to
Registrant's Registration Statement filed on December 16,
1986.
(a) Purchase Agreement between Registrant and McDonald
& Company Securities, Inc. with respect to the Tax Exempt
Portfolio dated July 19, 1988 is incorporated by reference
to Exhibit 13(a) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement filed on January 19,
1989.
(b) Purchase Agreement between Registrant and McDonald
& Company Securities, Inc. with respect to the Tax Exempt
Portfolio (Trust) dated October 17, 1989 is incorporated
herein by reference to Exhibit 13(b) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement
filed on July 27, 1990.
(c) Purchase Agreement between Registrant and McDonald
& Company Securities, Inc. with respect to the Equity
Portfolio and Bond Portfolio dated December 20, 1989 is
incorporated herein by reference to Exhibit 13(c) to
Post-Effective Amendment No. 13 to Registrant's Registration
Statement filed on July 27, 1990.
(d) Purchase Agreement between Registrant and McDonald
& Company Securities, Inc. with respect to the Ohio Tax
Exempt Portfolio dated January 5, 1990 is incorporated
herein by reference to Exhibit 13(d) to
C-16
<PAGE> 463
Post-Effective Amendment No. 13 to Registrant's
Registration Statement filed on July 27, 1990.
(e) Purchase Agreement between Registrant and
Allmerica Investments, Inc. with respect to the
Enhanced Income Fund dated July 5, 1994, is
incorporated herein by reference to Exhibit 13(e) to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement filed on August 31, 1994.
(f) Purchase Agreement between Registrant and
Allmerica Investments, Inc. with respect to the Equity
Income Portfolio dated June 30, 1994, is incorporated
herein by reference to Exhibit 13(g) to Post-Effective
Amendment No. 21 to Registrant's Registration Statement
filed on August 31, 1994.
(g) Purchase Agreement between Registrant and
Allmerica Investments, Inc. with respect to the Mid Cap
Regional Equity Portfolio dated July 25, 1994, is
incorporated herein by reference to Exhibit 13(h) to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement filed on August 31, 1994.
(h) Purchase Agreement between Registrant and
Allmerica Investments, Inc. with respect to the Total
Return Advantage Fund dated July 5, 1994 is
incorporated herein by reference to Exhibit 13(f) to
Post Effective Amendment No. 21 to Registrant's
Registration Statement filed on August 31, 1994.
(i) Purchase Agreement between Registrant and
Allmerica Investments, Inc. with respect to the
National Tax Exempt Portfolio is incorporated herein by
reference to Exhibit 13(e) to Post Effective Amendment
No. 20 to Registrant's Registration Statement filed on
February 8, 1994.
(j) Form of Purchase Agreement between Registrant
and 440 Financial Distributors, Inc. with respect to
the Pennsylvania Tax Exempt Fund is incorporated herein
by reference to Exhibit 13(j) to Post-Effective
C-17
<PAGE> 464
Amendment No. 26 to Registrant's Registration Statement
filed on May 15, 1996.
(k) Form of Purchase Agreement between Registrant
and 440 Financial Distributors, Inc. with respect to
the Intermediate Government Fund is incorporated herein
by reference to Exhibit 13(k) to Post-Effective
Amendment No. 26 to Registrant's Registration Statement
filed on May 15, 1996.
(l) Form of Purchase Agreement between Registrant
and 440 Financial Distributors, Inc. with respect to
the GNMA Fund is incorporated herein by reference to
Exhibit 13(l) to Post-Effective Amendment No. 26 to
Registrant's Registration Statement filed on May 15,
1995.
(m) Form of Purchase Agreement between Registrant
and 440 Financial Distributors, Inc. with respect to
the Pennsylvania Municipal Fund is incorporated herein
by reference to Exhibit 13(m) to Post-Effective
Amendment No. 26 to Registrant's Registration Statement
filed on May 15, 1996.
(14) None.
(15) (a) Registrant's 12b-1 Plan is incorporated herein by
reference to Exhibit 15 to Pre-Effective Amendment No. 1
to Registrant's Registration Statement filed on January 13,
1986.
(b) Registrant's Revised Service and Distribution
Plan, dated March 1, 1993 is incorporated herein by
reference to Exhibit 15(b) to Post-Effective Amendment
No. 16 to Registrant's Registration Statement filed on
March 1, 1993.
(16) (a) Schedules for Computation of Performance
Quotations are incorporated herein by reference to
Exhibit 16 to Post-Effective Amendment No. 15 to
Registrant's Registration Statement filed on
September 18, 1992.
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<PAGE> 465
(b) Schedules for Computation of Performance
Quotations for the Treasury, Mid Cap Regional Equity
and Equity Income Portfolios and the Enhanced Income
and Total Return Advantage Funds are incorporated
herein by reference to Exhibit 16 to Post-Effective
Amendment No. 22 to Registrant's Registration Statement
filed on December 30, 1994.
(17) Inapplicable.
(18) Plan Pursuant to Rule 18f-3 for Operation of a
Dual-Class System incorporated herein by
reference to Registrant's Registration Statement on
Form N-14 filed on May 13, 1996.
(27) (a) Financial Data Schedule as of May 31, 1996
for the Money Market Fund (Institutional
Class)
(b) Financial Data Schedule as of May 31, 1996
for the Money Market Fund (Retail Class).
(c) Financial Data Schedule as of May 31, 1996
for the Government Fund (Institutional
Class).
(d) Financial Data Schedule as of May 31, 1996
for the Government Fund (Retail Class).
(e) Financial Data Schedule as of May 31, 1996
for the Treasury Fund (Institutional Class).
(f) Financial Data Schedule as of May 31, 1996
for the Treasury Fund (Retail Class).
(g) Financial Data Schedule as of May 31, 1996
for the Tax Exempt Fund (Institutional
Class).
(h) Financial Data Schedule as of May 31, 1996
for the Tax Exempt Fund (Retail Class).
C-19
<PAGE> 466
(i) Financial Data Schedule as of May 31, 1996
for the Equity Fund (Institutional Class).
(j) Financial Data Schedule as of May 31, 1996
for the Equity Fund (Retail Class).
(k) Financial Data Schedule as of May 31, 1996
for the Fixed Income Fund (Institutional
Class).
(l) Financial Data Schedule as of May 31, 1996
for the Fixed Income Fund (Retail Class).
(m) Financial Data Schedule as of May 31, 1996
for the Equity Income Fund (Institutional
Class).
(n) Financial Data Schedule as of May 31, 1996
for the Equity Income Fund (Retail Class).
(o) Financial Data Schedule as of May 31, 1996
for the Mid Cap Regional Fund (Institutional
Class).
(p) Financial Data Schedule as of May 31, 1996
for the Mid Cap Regional Fund (Retail Class).
(q) Financial Data Schedule as of May 31, 1996
for the Enhanced Income Fund (Institutional
Class).
(r) Financial Data Schedule as of May 31, 1996
for the Enhanced Income Fund (Retail Class).
(s) Financial Data Schedule as of May 31, 1996
for the Total Return Advantage Fund
(Institutional Class).
(t) Financial Data Schedule as of May 31, 1996
for the Total Return Advantage Fund (Retail
Class).
C-20
<PAGE> 467
(u) Financial Data Schedule as of May 31, 1996
for the Ohio Tax Exempt Fund (Institutional
Class).
(v) Financial Data Schedule as of May 31, 1996
for the Ohio Tax Exempt Fund (Retail Class).
(w) Financial Data Schedules as of May 31, 1996
and April 30, 1996 for the GNMA Fund.
(x) Financial Data Schedules as of May 31, 196
and April 30, 1996 for the Intermediate
Government Fund.
(y) Financial Data Schedules of May 31, 1996 and
April 30, 1996 for the Pennsylvania Tax
Exempt Fund.
(z) Financial Data Schedules as of May 31, 1996
and April 30, 1996 for the Pennsylvania
Municipal Fund.
Item 25. Persons Controlled By or Under
Common Control with Registrant
------------------------------
Registrant is controlled by its Board of Trustees.
McDonald & Company Securities, Inc. ("McDonald"), the
former distributor of NCC Funds, provided the initial capitalization of
Registrant.
C-21
<PAGE> 468
Item 26. Number of Holders of Securities. The following
information is as of August 31, 1996:
<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders Institutional
-------------- ------- -------------
Retail
------
<S> <C> <C> <C>
Class A units of
beneficial interest
(Money Market
Fund) 40,786 19,565 21,221
Class B units of
beneficial interest
(Government Fund) 3,368 2,692 676
Class C units of
beneficial interest
(Treasury Fund) 2,642 2,399 243
Class D units of
beneficial interest
(Tax Exempt Fund) 2,685 1,996 689
Class H units of
beneficial interest
(Equity Fund) 2,784 2,322 462
Class I units of
beneficial interest
(Fixed Income
Fund) 2,174 2,005 169
Class K units of
beneficial interest
(Ohio Tax Exempt
Fund) 904 799 105
Class M units of
beneficial interest
(Equity Income
Fund) 1,570 1,523 47
Class N units of
beneficial interest
(Mid Cap Regional
Fund) 1,890 1,315 575
</TABLE>
C-22
<PAGE> 469
<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders Institutional
-------------- ------- -------------
Retail
------
<S> <C> <C> <C>
Class O units of
beneficial interest
(Enhanced Income
Fund) 268 247 21
Class P units of
beneficial interest
(Total Return
Advantage Fund) 715 701 14
Class Q units of
beneficial interest
(Pennsylvania Tax
Exempt Fund) 0 0 0
Class R units of
beneficial interest
(Intermediate
Government Fund) 0 0 0
Class S units of
beneficial interest
(GNMA Fund) 0 0 0
Class T units of
beneficial interest
(Pennsylvania
Municipal Fund) 0 0 0
</TABLE>
Item 27. Indemnification
---------------
Indemnification of Registrant's principal underwriter,
custodian and transfer agent against certain losses is provided for,
respectively, in Section 1.14 of the Distribution Agreement, incorporated by
reference as Exhibit (6)(g) hereto, and Sections 12 and 17, respectively, of the
Custodian Services and Transfer Agency Agreements, incorporated by reference as
Exhibits (8)(a) and (9)(h) hereto. In Section 1.14 of the Distribution
Agreement, the Fund agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from
C-23
<PAGE> 470
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers and directors, or any such controlling person, may incur under the
Securities Act of 1933, as amended, or under common law or otherwise, arising
out of or based upon any untrue statement, or alleged untrue statement, of a
material fact contained in any registration statement or any prospectus or
arising out of or based upon any omission, or alleged omission, to state a
material fact required to be stated in either any registration statement or any
prospectus or necessary to make the statements in either thereof not misleading;
provided, however, that the Trust's agreement to indemnify the Distributor, its
officers or directors, and any such controlling person shall not be deemed to
cover any claims, demands, liabilities or expenses arising out of an untrue
statement or alleged untrue statement or omission or alleged omission made in
any registration statement or prospectus in reliance upon and in conformity with
written information furnished to the Trust or its counsel by the Distributor and
used in the preparation thereof.
In addition, Section 9.3 of Registrant's Declaration of Trust
dated January 28, 1986, incorporated by reference as Exhibit (1) hereto,
provides as follows:
9.3 INDEMNIFICATION OF TRUSTEES, REPRESENTATIVES AND
EMPLOYEES. The Trust shall indemnify each of its Trustees
against all liabilities and expenses (including amounts paid
in satisfaction of judgments, in compromise, as fines and
penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit
or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a
Trustee or thereafter, by reason of his being or having been
such a Trustee EXCEPT with respect to any matter as to which
he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of
his duties, PROVIDED that as to any matter disposed of by a
compromise payment by such person, pursuant to a consent
decree or otherwise, no indemnification either
C-24
<PAGE> 471
for said payment or for any other expenses shall be provided
unless the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of bad
faith had been adjudicated, it would in the opinion of such
counsel have been adjudicated in favor of such person. The
rights accruing to any person under these provisions shall not
exclude any other right to which he may be lawfully entitled,
PROVIDED that no person may satisfy any right of indemnity or
reimbursement hereunder except out of the property of the
Trust. The Trustees may make advance payments in connection
with the indemnification under this Section 9.3, PROVIDED that
the indemnified person shall have provided a secured written
undertaking to reimburse the Trust in the event it is
subsequently determined that he is not entitled to such
indemnification.
The Trustees shall indemnify representatives and employees of
the Trust to the same extent that Trustees are entitled to
indemnification pursuant to this Section 9.3.
Section 12 of Registrant's Custodian Services Agreement
provides as follows:
12. INDEMNIFICATION. The Trust, on behalf of each of
the Funds, agrees to indemnify and hold harmless the
Custodian and its nominees from all taxes, charges,
expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising
under the 1933 Act, the 1934 Act, the 1940 Act, the
CEA, and any state and foreign securities and blue sky
laws, and amendments thereto), and expenses, including
(without limitation) reasonable attorneys' fees and
disbursements, arising directly or indirectly from any
action which the Custodian takes or does not take (i)
at the request or on the direction of or in reliance on
the advice of the Fund or (ii) upon Oral or Written
Instructions. Neither the Custodian, nor any of its
nominees, shall be indemnified against any liability to
C-25
<PAGE> 472
the Trust or to its shareholders (or any expenses incident to
such liability) arising out of the Custodian's or its
nominees' own willful misfeasance, bad faith, negligence or
reckless disregard of its duties and obligations under this
Agreement.
In the event of any advance of cash for any purpose made by
the Custodian resulting from Oral or Written Instructions of
the Trust, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in respect of the Trust or
any Fund in connection with the performance of this Agreement,
except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful
misconduct, any Property at any time held for the account of
the relevant Fund or the Trust shall be security therefor.
Section 17 of Registrant's Transfer Agency Agreement provides
as follows:
17. INDEMNIFICATION. The Trust agrees to indemnify and hold
the Transfer Agent harmless from all taxes, charges, expenses,
assessments, claims and liabilities (including, without
limitation, liabilities arising under the 1933 Act, the
Securities Exchange Act of 1934, the 1940 Act, and any state
and foreign securities and blue sky laws, all as or as to be
amended from time to time) and expenses, including (without
limitation) attorneys' fees and disbursements, arising
directly or indirectly from any action or thing which the
Transfer Agent takes or does or omits to take or do at the
request or on the direction of or in reliance on the advise of
the fund, provided that the Transfer Agent shall not be
indemnified against any liability to the Fund or to its
Shareholders (or any expenses incident to such liability)
arising out of the Transfer Agent's negligent failure to
perform its duties under this Agreement.
Registrant has obtained from a major insurance carrier a
directors' and officers' liability policy covering certain
C-26
<PAGE> 473
types of errors and omissions. In no event will Registrant indemnify any of its
trustees, officers, employees or agents against any liability to which such
person would otherwise be subject by reason of his willful misfeasance, bad
faith or gross negligence in the performance of his duties, or by reason of his
reckless disregard of the duties involved in the conduct of his office or under
his agreement with Registrant. Registrant will comply with Rule 484 under the
Securities Act of 1933 and Release No. 11330 under the Investment Company Act of
1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of Registrant in
the successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections
of Investment Advisers
----------------------
(a) Investment Adviser: National City Bank
National City Bank performs investment advisory services for
Registrant and certain other investment advisory customers. National City Bank
has been in the business of managing the investments of fiduciary and other
accounts throughout Ohio since October 1919. In addition to its trust business,
National City Bank provides commercial banking services.
C-27
<PAGE> 474
To the knowledge of Registrant, none of the directors or
officers of National City Bank, except those set forth below, is or has been, at
any time during the past two calendar years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers also hold various positions with, and engage in business
for, National City Corporation, which owns all the outstanding stock of National
City Bank, or other subsidiaries of National City Corporation. Set forth below
are the names and principal businesses of the directors and certain of the
senior executive officers of National City Bank who are engaged in any other
business, profession, vocation or employment of a substantial nature.
<TABLE>
<CAPTION>
NATIONAL CITY BANK
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- --------- ----------- --------
<S> <C> <C> <C>
Edward B. Brandon Director Retired Chairman, Bank holding
National City company
Corporation
Director, The Automobile parts
Standard Products and supplies
Company
Director, Manufacturer of
RPM, Inc. protective coatings,
roofing materials and
paint
Director, Premier Electronics
Industrial Corp. distribution
John G. Breen Director Chairman and Manufacturer
Chief Executive of paints,
Officer, The coatings, and
Sherwin-Williams containers
Company
Steve D. Bullock Director Chief Executive Non-Profit
Officer and organization
Chapter Manager,
American Red
Cross
</TABLE>
C-28
<PAGE> 475
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- --------- ----------- --------
<S> <C> <C> <C>
Werner F. Bush Director Executive Vice Manufacturer
President and of specialty
and Chief Oper- chemicals
ating Officer,
Ferro Corp.
Duane E. Collins Director President and Manufacturer
Chief Executive of hydraulic and
Officer, Parker and automotive
Hannifin Corp. equipment
David A. Daberko Director, Chairman and Bank holding
Vice Chairman of Chief Executive company
Executive Officer, National
Committee City Corporation
Director, Bank
National City
Bank of Columbus
Director, Bank
National City
Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director,
National City Bank
Bank of Indiana
Director, Bank
National City
Bank of Kentucky
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
</TABLE>
C-29
<PAGE> 476
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- --------- ----------- --------
<S> <C> <C> <C>
Director,
Student Loan
Marketing
Association
Robert J. Farling Director Chairman, President Electric utility
and Chief Executive
Officer, Centerior
Energy Corporation
Russell R. Gifford Director President, CNG Natural gas
Energy Services
Corporation
Henry J. Goodman Director Chairman and Furniture company
Chief Executive
Officer,
H. Goodman, Inc.
Gordon D. Harnett Director President, Manufacturer of
Chairman and engineered
Chief Executive material
Officer, Brush
Wellman, Inc.
Preston B. Director Retired Electronic
Heller, Jr. Chairman and Chief component
Executive Officer, distributor
Pioneer Standard
Electronics, Inc.
Leon J. Hendrix, Director Partner, Private
Jr. Clayton, Dubilier investment
& Rice, Inc. firm
J. Peter Kelly Director President and Manufacturer
Chief Operating of
Officer, LTV Steel steel
Company
William E. Chairman, Director and Execu-
MacDonald III President, Chief tive Vice President,
Bank holding National City
Executive Corporation
company
Officer and
Director
</TABLE>
C-30
<PAGE> 477
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- --------- ----------- --------
<S> <C> <C> <C>
William P. Madar Director Vice Chairman and Manufacturer
Chief Executive of machinery
Officer, Nordson
Corporation
H. Gene Nau Director President and Chief Travel agency
Executive Officer,
Premier Travel
Partners
William F. Patient Director Chairman, PVC manufacturer
President and Chief
Executive Officer,
The Geon Company
William R. Robertson Director, President, Bank holding
Chairman of National City company
Trust Committee, Corporation
Member of
Executive
Committee
Shelley B. Roth Director President, Ice cream
Pierre's French
Ice Cream Company
Thomas C. Sullivan Director Chairman of the Manufacturer
Board and Chief of protective
Executive Officer, coatings, roofing
RPM, Inc. material and paint
Dr. Jerry S. Director President, Education
Thornton Cuyahoga
Community
College
Morry Weiss Director Chairman and Greeting cards
Chief Executive
Officer, American
Greetings
Corporation
</TABLE>
C-31
<PAGE> 478
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- --------- ----------- --------
<S> <C> <C> <C>
Theodore K. Zampetis Director President and Manufacturer of
Chief Operating rubber and plastic
Officer, The parts for automotive
Standard Products original equipment
Co. industry
W. Douglas Bannerman Executive Vice Senior Vice Bank holding
President, Cor- President, company
porate Banking National City
Corporation
Jeffrey M. Biggar Executive Vice Senior Vice Bank holding
President, President, company
Private Client National City
Group Corporation
Jane Grebenc Executive Vice None
President, Retail
Banking
Jeffrey D. Kelly Executive Vice Executive Vice Bank holding
President, President, company
Investments National City
Corporation
Bruce T. Muddell Executive Vice None
President, Credit
Administration
Harold B. Todd, Jr. Executive Vice Executive Vice Bank holding
President, President, company
Institutional National City
Trust and Asset Corporation
Management
</TABLE>
(b) Investment Adviser: National City Bank of Columbus
("National City") performs investment advisory services for Registrant and
certain other investment advisory customers. National City Bank of Columbus has
been in the business of managing the investments of fiduciary and other accounts
throughout Ohio since 1915. In addition to its trust business, National City
provides commercial banking services.
C-32
<PAGE> 479
To the knowledge of Registrant, none of the directors or
officers of National City, except those set forth below, is or has been, at any
time during the past two calendar years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers also hold various positions with, and engage in business
for, National City Corporation, which owns all the outstanding stock of National
City. Set forth below are the names and principal businesses of the directors
and certain of the senior executive officers of National City who are engaged in
any other business, profession, vocation or employment of a substantial nature.
<TABLE>
<CAPTION>
NATIONAL CITY BANK OF COLUMBUS
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Eric D. Chapman, III Director President and Health care
Chief Executive industry consulting
Officer, Chapman
Health International,
Inc.
David A. Daberko Director Chairman and Bank holding
Chief Executive company
Officer, National
City Corporation,
Vice Chairman of
Executive Committee
Director, National Bank
City Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director, National Bank
City Bank of
Indiana
</TABLE>
C-33
<PAGE> 480
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Director, National Bank
City Bank
Director, National Bank
City Bank of
Kentucky
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
Director, Student Loan
Marketing Association
Vincent A. DiGirolamo Director Vice Chairman, Bank holding
National City company
Corporation
Richard E. Disbrow Director Retired, Chairman Electric
and Chief Executive utility
Officer, American
Electric Power
Company, Inc.
Daniel E. Evans Director Chairman, Food proc-
Bob Evans Farms, essing
Inc. wholesale &
retail
Director, National Bank
City Corporation holding company
Thomas J. Fitzpatrick Director Chairman and General
Chief Executive contractor
Officer, Elford,
Inc.
James H. Gilmour Director Chairman, Credit card
National City Card company
Services
Gary A. Glaser Director, Executive Vice Bank holding
President President, company
and Chief National City
Executive Officer Corporation
</TABLE>
C-34
<PAGE> 481
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Director, Bank
National City
Bank, Dayton
Arthur D. Herrmann Director Retired Chairman, Bank
National City Bank
of Columbus
William G. Kelley Director Chairman and Retail
Chief Executive,
Officer, Consoli-
dated Stores Corp.
James H. Miller Director Retired, Tire manu-
Gencorp. Inc. facturer
J. Frederick Reid Director Retired Chairman, Insurance
Grange Insurance
Companies
Carol L. Scott Director Retired, Mid- Governmental
western Regional agency
Neighborhood
Reinvestment Corp.
Dr. K. Wayne Smith Director President and Computerized
Chief Executive library
Officer, OCLC
Online Computer
Library Center, Inc.
William W. Wilkins Director President and Chief Health care
Executive Officer,
U.S. Health
Corporation
Dorothy M. Horvath Executive Vice None -
President,
Credit
Administration
Kelly E. Law Senior Vice None -
President,
Human Resources
Division
</TABLE>
C-35
<PAGE> 482
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Stephen B. McLane Executive Vice None -
President,
Corporate Banking
Richard A. Ray Executive Vice None -
President,
Private Client
Group
Gregory L. Tunis Executive Vice None -
President,
Retail Banking
</TABLE>
(c) Investment Adviser: National City Bank, Kentucky
("National City Kentucky")
National City Kentucky, a member of the $32 billion National
City Corporation holding company, was chartered in 1863 and is the oldest
national bank in the South. National City Kentucky has a long history of
innovative financial services to its clients, including being the first to use
discretionary agency accounts for managing individuals' funds. In addition, it
owned the rights to the name "Master Charge" and its affiliate, National City
Processing Company (one of the largest item processing companies in the world).
The address of National City Kentucky and its affiliates is Box 36000,
Louisville, Kentucky 40233. On July 29, 1988, First Kentucky National
Corporation, which owned all of the stock of National City Kentucky, merged into
a wholly-owned subsidiary of National City Corporation.
To the knowledge of Registrant, none of the directors or
officers of National City Kentucky, except those set forth below, is or has been
at any time during the past two calendar years engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers of National City Kentucky also hold positions with
National City Corporation or its subsidiaries. Set forth below are the names and
principal business of the directors and certain of the senior executive officers
of National City Kentucky who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
C-36
<PAGE> 483
NATIONAL CITY KENTUCKY
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
James R. Bell III Director, Executive Vice Bank holding
President and President, National company
Chief Executive City Corporation
Officer
Morton Boyd Director None
Timothy C. Brown Director Chairman, Manufacturer
President and of lighting and
Chief Executive compressor and
Officer, Thomas vacuum pumps
Industries, Inc.
Robert E. Champagne Director Chairman, Paint and
Courtaulds industrial
United States, Inc. coatings
manufacturer
David A. Daberko Director Chairman and Chief Bank holding
Executive Officer, company
National City
Corporation,
Vice Chairman of
Executive Committee
Director, Bank
National City
Bank of Columbus
Director, Bank
National City
Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director, Bank
National City
Bank of Indiana
</TABLE>
C-37
<PAGE> 484
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Director, Bank
National City
Bank
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
Director,
Student Loan
Marketing Association
Robert R. Dawson, Jr. Director Partner, R.R. Bridge
Dawson Bridge and road
Company construction
Margaret H. Greene Director Vice President Telecommunications
and General
Counsel, BellSouth
Telecommunications
Leonard V. Hardin Director and None
Chairman of
the Board
R. Larry Jones Director Executive Vice Plastic
President, Jones manufacturer
Plastic and
Engineering
Corporation
George N. King, Sr. Director President, Maintenance
King's Management
Group, Inc.
W. Bruce Lunsford Director Chairman, Health service
President & Chief
Executive Officer,
Vencor Incorporated
Carl F. Pollard Director Hermitage Farm Commercial
thoroughbred
breeding
farm
</TABLE>
C-38
<PAGE> 485
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
James L. Rose Director and Former Chairman, Bank holding
Chairman, President and Chief company
Southeast Area Executive Officer,
United Bancorp of
Kentucky, Inc.
President and Real estate
Director, TSR
Investments, Inc.
Director, Tri-State Real estate
Realty, Inc.
Limited Partner, Real estate
Lexington Financial
Center
John H. Schnatter Director Chairman and Food industry
Chief Executive
Officer, Papa
John's
International, Inc.
Dr. John W. Shumaker Director President, Education
University of
Louisville
William M. Street Director Vice Chairman, Consumer products
Brown-Forman
Corporation
James E. Barber President, None
Bowling Green
Area
William I. Executive Vice None
Cornett, Jr. President,
Corporate Banking
Roger M. Dalton President, None
Lexington Area
Robert E. Hawkins Executive Vice None
President,
Credit Admin-
istration
</TABLE>
C-39
<PAGE> 486
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Harvey E. Hensley President, None
Southeast Area
David E. Jones President, None
Ashland Area
Larry R. Mayfield President, None
Owensboro Area
Barbara K. Pence Executive None
Vice President,
Retail Banking
Charles R. Stoess President, None
Crestwood Area
Lawrence A. Warner Executive None
Vice President,
Trust
John W. Woods, III Executive None
Vice President,
Trust
</TABLE>
(d) Investment Adviser: National City Bank of Indiana
("National City Indiana")
On May 2, 1992, National City Corporation acquired
National City Indiana (formerly, Merchants National Bank and Trust Company,
chartered in 1865).
To the knowledge of Registrant, none of the directors or
officers of National City Indiana, except those set forth below, is or has been
at any time during the past two calendar years engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers of National City Indiana also hold positions with
National City Corporation or its subsidiaries. Set forth below are the names and
principal business of the directors and certain of the senior executive officers
of National City Indiana who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
C-40
<PAGE> 487
NATIONAL CITY, INDIANA
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Eleanor F. Bookwalter Director Member, Finance Historical
Committee, Historic landmarks
Landmarks, Indiana
Member, Indiana
State Office
Building Commission
William E. Corley Director President, Community Hospital
Hospitals of Indiana,
Inc.
President, Community Healthcare
Health Services, Inc.
President, Voluntary Healthcare
Enterprises, Inc.
President, Indianapolis Physician
Medical Management, recruitment
Inc.
President, Healthcare
Affiliated Hospitals
Heart Institute of
Indiana, Inc.
Board Member, HMO
ProHealth Network,
President
David A. Daberko Director Chairman and Chief Bank holding
Executive Officer, company
National City
Corporation, Vice
Chairman of Executive
Committee
Director, Bank
National City
Bank of Columbus
</TABLE>
C-41
<PAGE> 488
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Director, Bank
National City
Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director, National City Bank
Bank
Director, National Bank
City Bank of Kentucky
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
Director, Student Loan
Marketing Association
Vincent A. DiGirolamo Director Vice Chairman, Bank holding
National City company
Corporation
Lawrence A. Ferger Director Director, President Utility
and Chief Executive
Officer, Indiana Gas
Company, Inc.
Director and President, Non-utility
IEI Investments Inc holding co.
Director, IGC Energy Non-utility
Investments Inc.
Director and President, Utility
Richmond Gas Corp.
Director, Terre Utility
Haute Gas Corp.
</TABLE>
C-42
<PAGE> 489
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Director and President, Real estate
Energy Realty, Inc. development
Otto N. Frenzel III Director Director, Indianapolis Utility
Power & Light Co.
Director, IPALCO Utility
Enterprises holding
company
Director, Indianapolis Utility
Water Company
Director, IWC Utility
Resources holding
company
Director, Indiana Utility
Gas Company
Director, Indiana Utility
Energy, Inc. holding
company
Director, American Insurance
United Life Insurance
Co.
Director, Baldwin & Insurance
Lyons, Inc.
Director, Indianapolis
Ballet
Director, Indianapolis Art museum
Museum of Art
Director, Indianapolis Non-profit
Humane Society organization
Chairman, Riley
Memorial Association
Inc.
Edwin J. Goss Director Director, American Insurance
States Insurance Co.
</TABLE>
C-43
<PAGE> 490
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Director, American Insurance
Economy Insurance Co.
Director, American Insurance
States Preferred
Insurance Co.
Director, American Insurance
States Insurance
Company of Texas
Director, American Insurance
States Life
Insurance Co.
Director, IPALCO Utility
Enterprises, Inc. holding
co.
Director, Indianapolis Utility
Power & Light Co.
J. Christopher Director, Director, Greater
Graffeo President Indianapolis Progress
and Chief Committee
Executive
Officer
Director, Corporate
Community Council
Director, Indiana
Community Business
Credit Corp.
Director, Community
Hospital Foundation
Board
Director, Indianapolis Art museum
Museum of Art
Director, Indiana
Repertory Theater
</TABLE>
C-44
<PAGE> 491
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
John A. Hillenbrand II Director Vice-Chairman of Manufacturing
Board, Pri-Pak Inc.
Director, Physicians
Practices Management
Director, PSI Energy Utility
Chairman of Board,
Able Body Corp.
Director, Manufacturing
Hillenbrand
Industries, Inc.
President, Director, Investment
and Chief Executive company
Officer ,Glynnadam, Inc.
Chairman of Board, Manufacturing
Nambe Mills, Inc.
Director, Southern Resort
Cross Club
Don E. Marsh Director President, Chief Retail
Executive Officer, grocery
and Chairman, Marsh
Supermarkets, Inc.
Director, Indiana Utility
Energy, Inc.
James D. Massey Director Director, Conseco Insurance
Capital Partners
Insurance, Inc.
James T. Morris Director Director, American Insurance
United Life Insurance
Co.
Director, MSA Realty Real estate
Chairman, Chief Utility
Executive Officer and holding
Director, IWC co.
Resources
</TABLE>
C-45
<PAGE> 492
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Chairman, Chief Utility
Executive Officer and
Director, Indianapolis
Water Company
John M. Mutz Director Director, PSI Utility
Resources, Inc. holding
co.
Director, PSI Utility
Argentina, Inc.
President, PSI Utility
Energy, Inc.
Director, Indianapolis Chamber of
Chamber of Commerce commerce
Director, Integrated Research and
Biotechnology Corp. development
Director, T. M. Venture
Englehart Corp. capital
Director, Security Lock manufac-
Group, Inc. turing and
security services
Director, CCP Insurance
Insurance, Inc. holding company
Director, ADESA Auto auction
Corp.
Director, PSI Utility
Resources, Inc. holding
co.
Stanley K. Paulsen Director Partner, Edinburgh Shopping
Enterprises center
Partner, Restaurant Real
Realty Co. estate
Partner, S & P Investments
Enterprises
</TABLE>
C-46
<PAGE> 493
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
President and Chief Leasing
Executive Officer,
Circle Business
Credit
Director, T. M.
Englehart Co.
Fred A. Poole Director General Manager, Airline company
United Airlines
Indianapolis
N. Clay Robbins Director President, Charitable
Lilly Endowment, Inc. foundation
Dr. Gene E. Sease Director Chairman, Sease, Public
Gerig & Associates relations
Director, Indianapolis Insurance
Life Insurance Co.
Director, Indiana Trains/Rail
Hi-Rail Corp.
Director, Marine
Star, Inc.
Director, Indiana Chamber
Chamber of Commerce of commerce
Director, Chamber
Indianapolis of commerce
Chamber of Commerce
Director, Commission Building
on Downtown commission
Director, Greater
Indianapolis Progress
Committee
Stephen A. Stitle Chairman Director, Indianapolis
of the Board Chamber of Commerce
Director, Indiana
University Foundation
</TABLE>
C-47
<PAGE> 494
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Director, 400 Festival
Director, Indianapolis
Festival, Inc.
Director, Indianapolis
Downtown, Inc.
Director, United Way of
Central Indiana
Director, Center for
Leadership Development
Donald W. Tanselle Director Chairman, MSA Realty Real estate
Inc.
Chairman, Indiana State fair
Fair Commission
Partner, Washington Real estate
Square Associates
Eiteljorg Museum Museum
Childrens Museum Museum
Methodist Hospital Hospital
Partner, L. H. Chaney
Associates
Director, Pooled
Certificates Inc.
Randolph P. Wilson Director None
Michael C. Rechin Executive Vice None
President,
Corporate
Banking
Administration
Janice L. Faherty Executive Vice None
President,
Statewide Bank
Administration
</TABLE>
C-48
<PAGE> 495
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Glenn R. Knific Executive Vice None
President, Credit
Administration
William H. Olds, Jr. Executive Vice None
President, Trust
Administration
John V. White Executive Vice None
President, Retail
Administration
</TABLE>
(e) Investment Adviser: National Asset Management
Corporation ("National Asset Management")
To the knowledge of Registrant, none of the directors or
officers of National Asset Management, except those set forth below, is or has
been at any time during the past two calendar years engaged in any other
business, profession, vocation or employment of a substantial nature, except
that certain directors and officers of National Asset Management also hold
positions with National City Corporation or its subsidiaries. Set forth below
are the names and principal business of the directors and certain of the senior
executive officers of National Asset Management who are engaged in any other
business, profession, vocation, or employment of a substantial nature.
NATIONAL ASSET MANAGEMENT
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
James R. Bell, III Director Director, President Bank
and Chief
Executive Officer,
National City Bank of
Kentucky
</TABLE>
C-49
<PAGE> 496
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
Executive Vice Bank holding
President, company
National City
Corporation
William F. Director, None
Chandler, Jr. Managing Director
and Principal
Leonard V. Hardin Director Director and Bank
Chairman of the
Board, National City
Bank of Kentucky
William R. Robertson Director, President, Bank holding
National City company
Corporation
Director, Chairman of Bank
Trust committee, Member
of Executive committee,
National City Bank
Harold B. Todd, Jr. Director Executive Vice Presi- Bank holding
dent, National City company
Corporation
Executive Vice Presi- Bank
dent, Institutional
Trust and Asset Manage-
ment, National City Bank
Lawrence A. Warner Director Executive Vice Bank
President, National
City Bank of Kentucky
Carl W. Hafele Director, None
Managing Director
and Principal
Michael C. Heyman Principal None
David B. Hiller Managing None
Director
and Principal
Stephen G. Mullins Principal None
</TABLE>
C-50
<PAGE> 497
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
Larry J. Walker Principal None
John W. Ferreby Principal None
Catherine R. Senior None
Stodghill Investment Manager
Erik N. Evans Investment None
Manager
Randall T. Zipfel Manager, None
Information Systems
</TABLE>
(f) Sub-Investment Adviser: Weiss, Peck & Greer, LLC
Weiss, Peck & Greer, LLC performs sub-investment advisory
services for the Registrant's Pennsylvania Tax Exempt and Pennsylvania Municipal
Funds.
To the knowledge of Registrant, none of the principals of
Weiss, Peck & Greer, except as set forth below, is or has been at any time
during the past two calendar years engaged in any other business, profession,
vocation or employment of a substantial nature. Set forth below are the names
and principal businesses of the principals of Weiss, Peck & Greer, if any, who
are engaged in any other business, profession, vocation or employment of a
substantial nature.
WEISS, PECK & GREER, LLC
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
Samuel H. Armacost Principal Director, Oil and gas;
Chevron; scientific
Director, consulting;
Failure Group; technology
Director,
Scios Nova
Annette Bianchi Principal
</TABLE>
C-51
<PAGE> 498
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
Gill Cogan Principal Director, Visogenics
Harmonic Software
Lightwaves; Technology
Director,
Micro Linear;
Director,
Number Nine
Visual
Technology;
Director, P-
COM; Director,
Electronics
for Imaging
Ellen M. Feeney Principal None
Janet Fiorenza Principal None
Margery Z. Flicker Principal None
Anthony J. Giammalva Principal None
Philip Greer* Principal Director, Technology;
Network package
Computing delivery;
Devices; wine
Director,
Federal
Express;
Director,
Robert Mondavi
Ronald M. Hoffner* Principal None
Steven N. Hutchinson Principal Director, Technology;
Chyron Toys
Corporation;
Director,
Empire of
Carolina
James W. Kiley Principal None
A. Roy Knursen Principal None
Alan D. Kohn Principal None
</TABLE>
C-52
<PAGE> 499
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
Wesley W. Lang, Jr.* Principal Director, Technology;
Chyron Manufacturer
Corporation;
Director,
Durakon
Industries
Steven S. Lear Principal None
Gary R. Lisk Principal None
Marvin B. Markowitz Principal None
Howard G. Mattson Principal None
Kathleen A. McCarragher Principal None
Paul M. Morris Principal Director, Technology
Andrea
Electronics
Corp.
Joseph N. Pappo Principal None
Bradford R. Peck Principal None
Peter B. Pfister Principal Director, Toys
Empire of
Carolina
Richard S. Pollack Principal None
Steven Pomerantz Principal None
Lee McGehee Porter, III Principal None
Stuart W. Porter Principal None
Francis H. Powers Principal None
Donald J. Reid Principal None
R. Scott Richter Principal None
Nelson Schaenen, Jr. Principal None
James S. Schainuck Principal None
Gary E. Scheier Principal None
David J. Schilder Principal None
Arthur L. Schwarz Principal None
</TABLE>
C-53
<PAGE> 500
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ------------ ------------- --------
<S> <C> <C> <C>
Adam L. Starr Principal None
Melville Straus* Principal None
Kenneth Jay Tarr Principal None
Bernard J. Tew Principal None
Daniel S. Vandivort Principal None
Roger J. Weiss* Principal None
Stephen H. Weiss** Principal None
Hugh S. Zurkuhlen Principal None
<FN>
* Member - Executive Committee
** Chairman - Executive Committee
</TABLE>
Item 29. Principal Underwriter
---------------------
(a) In addition to Registrant, 440 Financial
Distributors, Inc. (the "Distributor") currently acts as
distributor for The Galaxy Fund, The Galaxy VIP Fund and
Galaxy Fund II; The Kent Funds and The One Group(R). The
Distributor is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National
Association of Securities Dealers. The Distributor, a
wholly-owned subsidiary of First Data Corp., is located at 290
Donald Lynch Boulevard, Marlboro, Massachusetts 01752.
(b) The information required by this Item 29 (b) with
respect to each director, officer, or partner of the
Distributor is incorporated by reference to Schedule A of Form
BD filed by the Distributor with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (File No.
8-45467).
(c) The Distributor is an affiliated person of
First Data Investor Services Group, Inc. (formerly, The
C-54
<PAGE> 501
Shareholder Services Group, Inc., d/b/a 440 Financial), the
Registrant's transfer agent, which receives transfer agency
fees as described in Parts A and B.
Item 30. Location of Accounts and Records
--------------------------------
(1) National City Bank, 1900 East Ninth Street, Cleveland,
Ohio, 44114-3484, National City Bank, Columbus, 155 East Broad
Street, Columbus, Ohio 43251, and National City Bank, Trust
Operations, 4100 West 150th Street, Cleveland, Ohio 44135,
(records relating to their functions as investment advisers
and custodian); National City Bank, Kentucky, 101 South 5th
Street, Louisville, Kentucky 40202; National City Bank,
Indiana, 101 West Washington Street, Suite 645, Indianapolis,
IN 46255; and National Asset Management Corporation, 101 South
Fifth Street, Louisville, KY 40202.
(2) 440 Financial Distributors, Inc., 290 Donald Lynch
Boulevard, Marlboro, Massachusetts 01752 (records relating to
its functions as distributor).
(3) Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653 (records relating to its former
functions as distributor).
(4) Drinker Biddle & Reath, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496 (Registrant's
Declaration of Trust, Code of Regulations, and Minute
Books).
(5) PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 (records relating to its
former functions as custodian).
(6) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809 (records relating to its functions as accounting agent
and administrator).
(7) First Data Investor Services Group, Inc., 4400 Computer
Drive, Westboro, Massachusetts 02109 (records relating to its
functions as transfer agent).
C-55
<PAGE> 502
(8) First Data Investor Services Group (formerly The
Shareholder Services Group, Inc. d/b/a 440 Financial)
4400 Computer Drive, Westboro, Massachusetts 02109
(records relating to its former functions as transfer
agent).
(9)Weiss, Peck & Greer, LLC, One New York Plaza, New
York, New York 10004 (records relating its functions as
sub-adviser).
Item 31. Management Services
-------------------
Inapplicable.
Item 32. Undertakings
------------
Registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's most recent annual report to
shareholders, upon request and without charge.
C-56
<PAGE> 503
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Cleveland, State of Ohio,
on the 27th day of September, 1996.
ARMADA FUNDS
Registrant
/s/Leigh Carter
---------------
President
Leigh Carter
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 31 to the Registration Statement has been signed below by the
following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
Date
----
<S> <C> <C>
*Richard B. Tullis Chairman of the Board September 27,
- --------------------- 1996
Richard B. Tullis
*Thomas R. Benua, Jr. Trustee September 27,
- --------------------- 1996
Thomas R. Benua, Jr.
/s/Leigh Carter Trustee, President and September 27,
- --------------------- Treasurer (Principal 1996
Leigh Carter Executive, Financial and
Accounting Officer)
*John F. Durkott Trustee September 27,
- --------------------- 1996
</TABLE>
C-57
<PAGE> 504
<TABLE>
<S> <C> <C>
John F. Durkott
*Richard W. Furst Trustee September 27,
- --------------------- 1996
Richard W. Furst
*Robert D. Neary Trustee September 27,
- --------------------- 1996
Robert D. Neary
*J. William Pullen Trustee September 27,
- --------------------- 1996
J. William Pullen
*By: /s/Leigh Carter
---------------------
Leigh Carter
Attorney-in-Fact
</TABLE>
C-58
<PAGE> 505
ARMADA FUNDS
POWER OF ATTORNEY
Richard W. Furst, whose signature appears below, does hereby
constitute and appoint Leigh Carter and W. Bruce McConnel, III, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Armada Funds, a
Massachusetts business trust (the "Fund"), to comply with the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended,
("Acts") and any rules, regulations, or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments)
to the Fund's Registration Statement pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Fund any and all such amendments filed with the
Securities and Exchange Commission under said Acts, and any other instruments
or documents related thereto, and the undersigned does hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue thereof.
/s/Richard W. Furst
-------------------------------
Richard W. Furst
Date: May 30, 1996
<PAGE> 506
ARMADA FUNDS
POWER OF ATTORNEY
J. William Pullen, whose signature appears below, does hereby
constitute and appoint Leigh Carter and W. Bruce McConnel, III, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Armada Funds, a
Massachusetts business trust (the "Fund"), to comply with the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended,
("Acts") and any rules, regulations, or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments)
to the Fund's Registration Statement pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Fund any and all such amendments filed with the
Securities and Exchange Commission under said Acts, and any other instruments
or documents related thereto, and the undersigned does hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue thereof.
/s/J. William Pullen
----------------------------
J. William Pullen
Date: May 30, 1996
<PAGE> 507
ARMADA FUNDS
POWER OF ATTORNEY
John F. Durkott, whose signature appears below, does hereby constitute
and appoint Leigh Carter and W. Bruce McConnel, III, and either of them, his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Armada Funds, a
Massachusetts business trust (the "Fund"), to comply with the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended,
("Acts") and any rules, regulations, or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments)
to the Fund's Registration Statement pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Fund any and all such amendments filed with the
Securities and Exchange Commission under said Acts, and any other instruments
or documents related thereto, and the undersigned does hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue thereof.
/s/John F. Durkott
----------------------------
John F. Durkott
Date: May 30, 1996
<PAGE> 508
ARMADA FUNDS
POWER OF ATTORNEY
Robert D. Neary, whose signature appears below, does hereby constitute
and appoint Leigh Carter and W. Bruce McConnel, III, and either of them, his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Armada Funds, a
Massachusetts business trust (the "Fund"), to comply with the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended,
("Acts") and any rules, regulations, or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments)
to the Fund's Registration Statement pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Fund any and all such amendments filed with the
Securities and Exchange Commission under said Acts, and any other instruments
or documents related thereto, and the undersigned does hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue thereof.
/s/Robert D. Neary
----------------------------
Robert D. Neary
Date: May 30, 1996
<PAGE> 509
ARMADA FUNDS
POWER OF ATTORNEY
Richard B. Tullis, whose signature appears below, does hereby
constitute and appoint Leigh Carter and W. Bruce McConnel, III, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Armada Funds, a
Massachusetts business trust (the "Fund"), to comply with the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended,
("Acts") and any rules, regulations, or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments)
to the Fund's Registration Statement pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Fund any and all such amendments filed with the
Securities and Exchange Commission under said Acts, and any other instruments
or documents related thereto, and the undersigned does hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue thereof.
/s/Richard B. Tullis
----------------------------
Richard B. Tullis
Date: May 30, 1996
<PAGE> 510
ARMADA FUNDS
POWER OF ATTORNEY
Thomas R. Benua, Jr., whose signature appears below, does hereby
constitute and appoint Leigh Carter and W. Bruce McConnel, III, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Armada Funds, a
Massachusetts business trust (the "Fund"), to comply with the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended,
("Acts") and any rules, regulations, or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments)
to the Fund's Registration Statement pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Fund any and all such amendments filed with the
Securities and Exchange Commission under said Acts, and any other instruments
or documents related thereto, and the undersigned does hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue thereof.
/s/Thomas R. Benua, Jr.
----------------------------
Thomas R. Benua, Jr.
Date: May 30, 1996
<PAGE> 511
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
(11)(a) Consent of Drinker Biddle and Reath.
(b) Consent of Ernst & Young LLP.
(c) Consent of Coppers & Lybrand L.L.P.
(d) Opinion and Consent of Squire, Sanders & Dempsey.
(27)(a) Financial Data Schedule as of May 31, 1996 for the Money Market Fund
(Institutional Class).
(b) Financial Data Schedule as of May 31, 1996 for the Money Market Fund
(Retail Class).
(c) Financial Data Schedule as of May 31, 1996 for the Government Fund
(Institutional Class).
(d) Financial Data Schedule as of May 31, 1996 for the Government Fund
(Retail Class).
(e) Financial Data Schedule as of May 31, 1996 for the Treasury Fund
(Institutional Class).
(f) Financial Data Schedule as of May 31, 1996 for the Treasury Fund
(Retail Class).
(g) Financial Data Schedule as of May 31, 1996 for the Tax Exempt Fund
(Institutional Class).
(h) Financial Data Schedule as of May 31, 1996 for the Tax Exempt Fund
(Retail Class).
(i) Financial Data Schedule as of May 31, 1996 for the Equity Fund
(Institutional Class).
(j) Financial Data Schedule as of May 31, 1996 for the Equity Fund (Retail Class).
(k) Financial Data Schedule as of May 31, 1996 for the Fixed Income Fund
(Institutional Class).
(l) Financial Data Schedule as of May 31, 1996 for the Fixed Income Fund
(Retail Class).
(m) Financial Data Schedule as of May 31, 1996 for the Equity Income Fund
(Institutional Class).
(n) Financial Data Schedule as of May 31, 1996 for the Equity Income Fund
(Retail Class).
(o) Financial Data Schedule as of May 31, 1996 for the Mid Cap Regional Fund
(Institutional Class).
</TABLE>
<PAGE> 512
<TABLE>
<S> <C>
(p) Financial Data Schedule as of May 31, 1996 for the Mid Cap Regional Fund
(Retail Class).
(q) Financial Data Schedule as of May 31, 1996 for the Enhanced Income Fund
(Institutional Class).
(r) Financial Data Schedule as of May 31, 1996 for the Enhanced Income Fund
(Retail Class).
(s) Financial Data Schedule as of May 31, 1996 for the Total Return Advantage Fund
(Institutional Class).
(t) Financial Data Schedule as of May 31, 1996 for the Total Return Advantage Fund
(Retail Class).
(u) Financial Data Schedule as of May 31, 1996 for the Ohio Tax Exempt Fund
(Institutional Class).
(v) Financial Data Schedule as of May 31, 1996 for the Ohio Tax Exempt Fund
(Retail Class).
(w) Financial Data Schedules as of May 31, 1996 and April 30, 1996 for the GNMA
Fund.
(x) Financial Data Schedules as of May 31, 1996 and April 30, 1996 for the
Intermediate Government Fund.
(y) Financial Data Schedules as of May 31, 1996 and April 30, 1996 for the
Pennsylvania Tax Exempt Fund.
(z) Financial Data Schedules as of May 31, 1996 and April 30, 1996 for the
Pennsylvania Municipal Fund.
</TABLE>
<PAGE> 1
Exhibit 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference
to our Firm under the caption "Counsel" in the Statements of Additional
Information that are included in Post-Effective Amendment No. 31 to the
Registration Statement on Form N-1A under the Investment Company Act of 1940,
as amended, of Armada Funds. This consent does not constitute a consent under
Section 7 of the Securities Act of 1933, and in consenting to the use of our
name and the references to our Firm under such caption we have not certified
any part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under Section 7 or the rules
and regulations of the Securities and Exchange Commission thereunder.
/S/ DRINKER BIDDLE & REATH
--------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
September 27, 1996
<PAGE> 1
Exhibit 11(b)
Consent of Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and "Auditors" in the Statements of Additional
Information for the Money Market Fund, Government Fund, Treasury Fund, Tax
Exempt Fund, Fixed Income Fund, Enhanced Income Fund, Total Return Advantage
Fund, Equity Fund, Equity Income Fund, Mid Cap Regional Fund, and Ohio Tax
Exempt Fund, and to the use of our reports dated July 2, 1996, in
Post-Effective Amendment No. 31 to the Registration Statement (Form N-1A No.
33-448/811-4416) and related Prospectuses of Armada Funds.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 25, 1996
<PAGE> 1
Exhibit 11c
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the following with respect to this Post-Effective Amendment No. 31
under the Securities Act of 1933 to the Registration Statement on Form N-1A
(File No. 33-488) of the Armada Funds:
- The incorporation by reference of our reports dated June 14,
1996 and July 26, 1996 into the applicable Prospectuses of
the Armada Funds.
- The incorporation of our reports dated June 14, 1996 and July
26, 1996 into the Statements of Additional Information.
- The references to our Firm under the captions "Financial
Highlights" in the applicable Prospectuses and "Financial
Statements" in the Statements of Additional Information.
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 27, 1996
<PAGE> 1
Exhibit 11(d)
SQUIRE, SANDERS & DEMPSEY
COUNSELLORS AT LAW
4900 KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114-1304
September 30, 1996
Armada Funds
4400 Computer Drive
Westborough, MA 01581
RE: ARMADA FUNDS (OHIO TAX EXEMPT PORTFOLIO)
Gentlemen:
You have requested our opinion as to the Ohio tax aspects of
the Ohio Tax Exempt Portfolio, which is part of the Armada Funds (the "Fund").
The Fund is an open-end management company organized as a business trust under
the laws of Massachusetts. The Fund's Declaration of Trust (i) authorizes the
Board of Trustees to issue different classes of shares of beneficial interest
("Shares"), two of which are designated Class K and Class K - Special Series 1
representing interests in the Ohio Tax Exempt Portfolio, consisting of an
unlimited number of Shares having no par value; and (ii) provides that all
consideration received by the Fund from the issue or sale of Shares of a
particular class, together with all assets in which such consideration is
invested or reinvested, and all income, earnings and profits thereon, shall
irrevocably belong to such class, subject only to the liabilities of that class
and except as may otherwise be required by applicable tax laws.
The Ohio Tax Exempt Portfolio will invest primarily in
interest-bearing obligations issued by or on behalf of the State of Ohio,
political subdivisions thereof and agencies and instrumentalities of the State
or its political subdivisions ("Ohio Obligations"), and by the governments of
Puerto Rico, the Virgin Islands and Guam and their authorities or
municipalities ("Territorial Obligations"). You have advised us that interest
on each issue of Ohio Obligations and Territorial Obligations will, in the
opinion of bond counsel with respect to each issue, rendered on the date of
issuance, be excluded from gross income
<PAGE> 2
Armada Funds
September 30, 1996
Page 2
for federal income tax purposes under Section 103(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), or other provisions of federal law,
provided that, with respect to certain Ohio Obligations and Territorial
Obligation, certain continuing covenants of the issuer or other borrowers are
satisfied.
The net investment income of the Ohio Tax Exempt Portfolio
will be declared daily and paid monthly, either by reinvestment in additional
Shares of the Ohio Tax Exempt Portfolio on behalf of the shareholders of the
Ohio Tax Exempt Portfolio ("Shareholders") or, at each Shareholder's option,
paid in cash to such Shareholder.
You have advised us that the Ohio Tax Exempt Portfolio intends
to qualify as a "regulated investment company" within the meaning of Section
851 of the Code and will take all other action required to ensure that no
federal income taxes will be payable by it and that it will pay
"exempt-interest dividends" within the meaning of Section 852(b)(5) of the
Code, i.e., dividends that will be excluded from gross income for federal
income tax purposes in the hands of the Shareholders. We have assumed for the
purposes of this opinion that the Ohio Tax Exempt Portfolio will continue to
qualify as a regulated investment company within the meaning of Section 851 of
the Code and that at all times at least 50 percent of the value of the total
assets of the Ohio Tax Exempt Portfolio will consist of Ohio Obligations, or
similar obligations of other states or their subdivisions.
Based upon the foregoing and upon an examination of such
documents and an investigation of such other matters of law as we have deemed
necessary, we are of the opinion that under existing law:
1. The Ohio Tax Exempt Portfolio is not subject to the
Ohio personal income tax, Ohio school district income taxes, the Ohio
corporation franchise tax, or the Ohio dealers in intangibles tax, provided
that, with respect to the Ohio corporation franchise tax and the Ohio dealers
in intangibles tax, the Fund timely files the annual report required by Section
5733.09 ofthe Ohio Revised Code.
2. Shareholders who are otherwise subject to the Ohio
personal income tax, or municipal or school district income taxes in Ohio
imposed on individuals and estates will not be subject to such taxes on
distributions with respect to Shares of the Ohio
<PAGE> 3
Armada Funds
September 30, 1996
Page 3
Tax Exempt Portfolio ("Distributions") to the extent that such Distributions
are properly attributable to interest on or gain from the sale of Ohio
Obligations.
3. Shareholders that are otherwise subject to the Ohio
corporation franchise tax will not be required to include Distributions in
their tax base for purposes of calculating the Ohio corporation franchise tax
on the net income basis to the extent that such Distributions either (a) are
properly attributable to interest on or gain from the sale of Ohio Obligations,
or (b) represent "exempt-interest dividends" for federal income tax purposes.
Shares of the Ohio Tax Exempt Portfolio will be included in a Shareholder's tax
base for purposes of computing the Ohio corporation franchise tax on the net
worth basis.
4. Distributions that consist of interest on obligations
of the United States or its territories or possessions or of any authority,
commission, or instrumentality of the United States that is exempt from state
income taxes under the laws of the United States (including Territorial
Obligations) are exempt from the Ohio personal income tax, and municipal and
school district income taxes in Ohio, and are excluded from the net income base
of the Ohio corporation franchise tax.
5. Distributions that are properly attributable to
proceeds of insurance paid to the Ohio Tax Exempt Portfolio that represent
maturing or matured interest on defaulted obligations held by the Ohio Tax
Exempt Portfolio and that are excluded from gross income for federal income tax
purposes are exempt from the Ohio personal income tax, and school district and
municipal income taxes in Ohio, and are excluded from the net income base of
the Ohio corporation franchise tax.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement relating to the Shares referred to above and to
the reference to our Firm as special
<PAGE> 4
Armada Funds
September 30, 1996
Page 4
Ohio tax counsel in said Registration Statement and in the Statement of
Additional Information contained therein.
Respectfully submitted,
/s/ Squire, Sanders & Dempsey
Squire, Sanders & Dempsey
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<NAME> ARMADA FUNDS
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</TABLE>
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<SERIES>
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<NAME> ARMADA TAX EXEMPT FUND - INSTITUTIONAL CLASS
<S> <C>
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<NUMBER-OF-SHARES-SOLD> 576,468,463
<NUMBER-OF-SHARES-REDEEMED> 487,304,635
<SHARES-REINVESTED> 1,724
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</TABLE>
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<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 042
<NAME> ARMADA TAX EXEMPT FUND - RETAIL CLASS
<S> <C>
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<NAME> ARMADA FUNDS
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<NUMBER> 081
<NAME> ARMADA EQUITY FUND - INSTITUTIONAL CLASS
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<NAME> ARMADA FUNDS
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<NAME> ARMADA EQUITY FUND - RETAIL CLASS
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<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 091
<NAME> ARMADA FIXED INCOME FUND - INSTITUTIONAL CLASS
<S> <C>
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<NAME> ARMADA FUNDS
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<NUMBER> 092
<NAME> ARMADA FIXED INCOME FUND - RETAIL CLASS
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<NAME> ARMADA FUNDS
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<NUMBER> 111
<NAME> ARMADA EQUITY INCOME FUND - INSTITUTIONAL CLASS
<S> <C>
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<NAME> ARMADA FUNDS
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<NAME> ARMADA EQUITY INCOME FUND - RETAIL CLASS
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<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 121
<NAME> ARMADA MID CAP REGIONAL EQUITY FUND - INSTITUTIONAL CLASS
<S> <C>
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<NAME> ARMADA FUNDS
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<NAME> ARMADA MID CAP REGIONAL EQUITY FUND - RETAIL CLASS
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<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 131
<NAME> ARMADA ENHANCED INCOME FUND - INSTITUTIONAL CLASS
<S> <C>
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<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 132
<NAME> ARMADA ENHANCED INCOME FUND - RETAIL CLASS
<S> <C>
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<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> (.05)
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<PER-SHARE-NAV-END> 10.02
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<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 141
<NAME> ARMADA TOTAL RETURN ADVANTAGE FUND - INSTITUTIONAL CLASS
<S> <C>
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<PERIOD-END> MAY-31-1996
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<NET-ASSETS> 280,400,769
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<NET-INVESTMENT-INCOME> 18,744,051
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<PER-SHARE-NII> .70
<PER-SHARE-GAIN-APPREC> (.24)
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<TABLE> <S> <C>
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<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 142
<NAME> ARMADA TOTAL RETURN ADVANTAGE FUND - RETAIL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 101
<NAME> ARMADA OHIO TAX EXEMPT FUND - INSTITUTIONAL CLASS
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 102
<NAME> ARMADA OHIO TAX EXEMPT FUND - RETAIL CLASS
<S> <C>
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000922281
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 061
<NAME> GNMA SECURITIES CLASS A
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<S> <C>
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<FISCAL-YEAR-END> MAY-31-1996
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<CIK> 0000778202
<NAME> INVESTOR FUNDS
<SERIES>
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<NAME> GNMA SECURITIES CLASS A
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<S> <C>
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000922281
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 051
<NAME> INTERMEDIATE GOVERNMENT SECURITIES CLASS A
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<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000778202
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 051
<NAME> INTERMEDIATE GOVERNMENT SECURITIES CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
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<PERIOD-END> APR-30-1996
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000922281
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 031
<NAME> PA TAX EXEMPT MONEY MARKET CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> MAY-31-1996
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 031
<NAME> PA TAX EXEMPT MONEY MARKET CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1996
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<PER-SHARE-NAV-BEGIN> 1.00
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000922281
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 041
<NAME> PA MUNICIPAL BOND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> MAY-31-1996
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<SENIOR-EQUITY> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 041
<NAME> PA MUNICIPAL BOND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
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<EXPENSE-RATIO> .85
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</TABLE>
