<PAGE> 1
As filed with the Securities and Exchange Commission on July 10, 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. 29 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 28 /x/
Armada Funds (formerly known as "NCC Funds")
(Exact Name of Registrant as Specified in Charter)
4400 Computer Drive
Westbourough, 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):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] on July 29, 1996 pursuant to paragraph (b)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
=============================
<PAGE> 2
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 will be
filed on or before July 30, 1996.
-2-
<PAGE> 3
THE PURPOSE OF THIS POST-EFFECTIVE AMENDMENT IS TO INCLUDE FINANCIAL INFORMATION
FOR THE PENNSYLVANIA TAX EXEMPT, PENNSYLVANIA MUNICIPAL, INTERMEDIATE
GOVERNMENT, AND GNMA FUNDS.
THE CURRENTLY EFFECTIVE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION
FOR REGISTRANT'S MONEY MARKET, GOVERNMENT, TREASURY, TAX EXEMPT, OHIO TAX
EXEMPT, FIXED INCOME, ENHANCED INCOME, TOTAL RETURN ADVANTAGE, EQUITY, EQUITY
INCOME, MID CAP REGIONAL AND NATIONAL TAX EXEMPT FUNDS ARE CONTAINED IN
POST-EFFECTIVE AMENDMENT NO. 24 AS FILED ON SEPTEMBER 21, 1995.
-3-
<PAGE> 4
CROSS REFERENCE SHEET
---------------------
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <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;
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
</TABLE>
-4-
<PAGE> 5
CROSS REFERENCE SHEET
---------------------
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional Information Caption
- --------------------- -------------------------------------------
<S> <C> <C>
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 and
of Securities Being Offered 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
</TABLE>
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.
-5-
<PAGE> 6
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
<TABLE>
<CAPTION>
ARMADA FUNDS
_________________________________________________________________________________________________
<S> <C>
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City Investments
Corporation, please call your
Investment Consultant for information.
For current performance, fund
information, and to purchase shares,
please call 1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
</TABLE>
This Prospectus describes shares in the following investment fund (the
"Fund") of Armada Funds (the "Trust") and its own investment objective and
policies:
GNMA FUND'S investment objective is to seek the highest level of current
income consistent with preservation of capital and a high degree of liquidity
by investing primarily in mortgage pass-through securities guaranteed by the
Government National Mortgage Association. The Fund invests primarily in
mortgage pass-through securities guaranteed by the Government National
Mortgage Association.
The net asset value per share of the Fund will fluctuate as the value
of its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to
the Fund (the "adviser").
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp. (the "Distributor"), serves as the Trust's sponsor and distributor.
The Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears
the same date as this Prospectus and is incorporated by reference in its
entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS
PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
-1-
<PAGE> 7
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.
____________, 1996
-2-
<PAGE> 8
The classes or series which represent interests in the Funds
are described in this Prospectus. Class S shares constitute the Institutional
class or series of shares (herein referred to as the "Institutional shares") of
the Fund. Class S - Special Series 1 shares constitute the Retail class or
series of shares (herein referred to as the "Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and customers
of National Asset Management Corporation ("NAM"), a registered investment
adviser. Retail shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
GNMA GNMA
FUND FUND
RETAIL INSTITUTIONAL
SHARES1 SHARES
------ -------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . . . . . . . . . . . . . . 3.75% None
Sales Charge Imposed
on Reinvested Dividends . . . . . . . . . . . . . . . . None None
Deferred Sales Charge . . . . . . . . . . . . . . . . . . None None
Redemption Fee . . . . . . . . . . . . . . . . . . . . . . None None
Exchange Fee . . . . . . . . . . . . . . . . . . . . . . . None None
FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees . . . . . . . . . . . . . . . . . . . . . .55% .55%
12b-1 Fees2 . . . . . . . . . . . . . . . . . . . . . . . .05% .05%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . .49% .24%
---- ----
TOTAL FUND OPERATING
EXPENSES . . . . . . . . . . . . . . . . . . . . . . 1.09% .84%
- --------------------------- ===== ====
<FN>
1 The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Fund. Pursuant to the
Services Plan, the Trust may enter into shareholder servicing
agreements with certain financial institutions under which they agree
to provide shareholder administrative services to their customers who
beneficially own Retail shares in consideration for the payment of up
to .25% (on an annualized basis) of the net asset value of such
shares.
2 As a result of the payment of sales charges and 12b-1 and certain
other related fees, long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc. ("NASD"). The
NASD has adopted rules which generally limit the aggregate sales
charges and payments under the Trust's Service and Distribution Plan
("Distribution Plan") and Services Plan to a certain percentage of
total new gross share sales, plus interest. The Trust would stop
accruing 12b-1 and related fees if, to the extent, and for as long as,
such limit would otherwise be exceeded.
</TABLE>
___________________________
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required
by SEC regulations); (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee); and (3) the
imposition of the maximum sales charge at the beginning of the period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GNMA Retail Shares . . . . . . . . . . . . . . . . $48 $71 $95 $165
GNMA Institutional Shares . . . . . . . . . . . . . $ 9 $27 $47 $104
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
-3-
<PAGE> 9
related notes incorporated by reference into the Statement of Additional
Information for the Fund.
-4-
<PAGE> 10
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR GNMA FUND
The Fund commenced operations on August 10, 1994 as a separate
investment portfolio (the "Predecessor GNMA Fund") of Inventor Funds, Inc.,
which was organized as a Maryland corporation. On_______________, 1996 the
Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold Retail Shares that were
similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain
information concerning the investment results of the Predecessor Fund's Retail
Shares (the series that is similar to the Retail Shares of the GNMA Fund) for
the fiscal year ended April 30, 1996 and the fiscal period ended April 30,
1995. The information was derived from financial statements audited by Coopers
& Lybrand L.L.P., independent accountants for the Predecessor Fund, whose report
thereon is contained in Inventor Funds' Annual Report to Shareholders for the
fiscal year ended April 30, 1996. Such financial highlights should be read in
conjuction with the financial statements and notes thereto contained in
Inventor Funds' Annual Report to Shareholders and incorporated by reference
into the Statement of Additional Information relating to the GNMA Fund.
Additional information about the performance of the Predecessor Fund is
contained in Inventor Funds' Annual Report to Shareholders, which may be
obtained without charge by contacting the Trust at its telephone numbers or
address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, April 30,
1996 1995(2)
---------- ---------
<S> <C> <C>
Net Asset Value, Beginning of Period . . . . $10.16 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . 0.66 0.48
Net Realized and Unrealized Gains on
Securities . . . . . . . . . . . . . . . . 0.14 0.16
Total from Investment Operations . . . . . .
LESS DISTRIBUTIONS
Distributions from Net Investment Income . (0.66) (0.48)
Distributions from Realized Capital Gains . (0.18) --
Total Distributions (0.84) (0.48)
Net Asset Value End of Period . . . . . . . . $10.12 $10.16
Total Return (4) . . . . . . . . . . . . . . 7.97% 6.61%
Net Assets End of Period (000) . . . . . . . $62,161 $42,212
Ratio of Expenses to Average Net Assets . . . 0.85%(1) 0.85%(1,3)
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . . 6.30%(1) 6.68%(1,3)
Portfolio Turnover Rate . . . . . . . . . . . 149% 226%
<FN>
1. The operating expense ratio and the net investment income ratio before fee waivers by the Investment Adviser and custodian
for the year ended April 30, 1996 and for the period ended April 30, 1995 would have been 1.29% and 5.86% and 1.40%
and 6.13%, respectively.
2. Commenced operations on August 10, 1994. The Fund did not offer Institutional shares during the period
covered by the Financial Highlights.
3. Annualized.
4. Total Return does not reflect the sales charge. Not annualized.
</TABLE>
-5-
<PAGE> 11
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund consists of a pool of assets with investment objectives and
policies as described below under "Risk Factors, Investment Objectives and
Policies." The Fund is classified as a diversified investment fund under the
1940 Act.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except
that, as described more fully below under "Shareholder Services Plan," (the
"Services Plan") the Trust has implemented the Services Plan with respect to
Retail shares of the Fund. Under the Services Plan, only the beneficial owners
of Retail shares bear the expenses of shareholder administrative services which
are provided by financial institutions for their benefit (estimated not to
exceed 25% annually). See "Shareholder Services Plan," "Dividends and
Distributions" and "Description of the Trust and Its Shares" for a description
of the impact that the Services Plan may have on holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. In addition, the Fund may sell portfolio securities
shortly after they are purchased, which may result in higher transaction costs
and taxable gains for the Fund. There can be no assurance that the Fund will
achieve its objective.
The investment objective of the Fund is to provide the highest
level of current income consistent with preservation of capital and a high
degree of liquidity.
The Fund invests primarily (at least 65% of its total assets
under normal conditions) in mortgage pass-through securities guaranteed by the
Government National Mortgage Association ("GNMA"). Any remaining assets may
consist of: (i) obligations of the U.S. Treasury; (ii) obligations issued or
guaranteed as to principal and interest by agencies and instrumentalities of
the U.S. Government; (iii) mortgage-backed securities issued by other
government agencies and privately issued mortgage-backed securities rated at
least A by a Nationally Recognized Security Rating Organization ("NRSRO"); (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.
-6-
<PAGE> 12
In order to meet liquidity needs and for temporary purposes,
the Fund may hold cash reserves, and may invest up to 100% of its assets in
Money Market Instruments (as defined below).
The Fund may purchase securities on a when-issued basis.
The Fund reserves the right to engage in securities lending,
although the Fund does not have the present intent of doing so. The Fund may
also borrow money in amounts up to 33-1/3% of its net assets.
OTHER INVESTMENT POLICIES
Debt Securities
Fund appreciation may result from an improvement in the credit
standing of an issuer whose securities are held or a general decline in the
level of interest rates or a combination of both. An increase in the level of
interest rates may generally reduce the value of the fixed rate debt
instruments held by the Fund; conversely, a decline in the level of interest
rates may generally increase the value of such investments. An increase in the
level of interest rates may temporarily reduce the value of the floating rate
debt instruments held by the Fund; conversely, a decline in the level of
interest rates may temporarily increase the value of those investments.
Mortgage-Backed Securities
The Fund may purchase securities that are secured or backed by
mortgages and are issued by entities such as the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), commercial banks, savings and loan
associations, mortgage banks and investment banks.
The yield characteristics of mortgage-backed securities differ
from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying
assets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-backed security is purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Conversely, if a mortgage-backed security is purchased at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will decrease, yield to maturity. In calculating the
average weighted maturity of the Fund, the maturity of mortgage-backed
securities will be based on estimates of average life.
Prepayments on mortgage-backed securities generally increase
with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and
social factors. Like other fixed income securities, when interest rates rise,
the value of a mortgage-backed security generally will decline; however, when
interest rates decline, the value of a mortgage-backed security with prepayment
features may not increase as much as that of other fixed income securities,
and, as noted above, changes in market rates of interest may accelerate or
retard prepayments and thus affect maturities. For further information, see
"Risk Factors, Investment Objectives and Policies" in the Statement of
Additional Information.
These characteristics may result in a higher level of price
volatility for these assets under certain market conditions. In addition,
while the trading market for short-term mortgages and Mortgage-Backed
-7-
<PAGE> 13
Securities is ordinarily quite liquid, in times of financial stress the trading
market for these securities sometimes becomes restricted.
Presently there are several types of mortgage-backed
securities that may be acquired by the Fund, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. These multiple class securities may be issued or
guaranteed by U.S. Government agencies or instrumentalities, including GNMA,
FNMA and FHLMC, or issued by trusts formed by private originators of, or
investors in, mortgage loans. Classes in CMOs which the Fund may hold are
known as "regular" interests. CMOs also issue "residual" interests, which are
a form of beneficial interest in a CMO that permit the purchaser to receive the
net cash flow remaining after payment of liabilities and expenses associated
with the collateral underlying the CMO. Residual interests generally are
junior to and more volatile than regular interests. The Fund will not purchase
"residual" CMO interests, which normally exhibit a high degree of price
volatility. FHLMC has in the past guaranteed only the ultimate collection of
principal of the underlying mortgage loan; however, FHLMC now issues
mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely payment
of monthly principal reductions. Government and private guarantees do not
extend to the securities' value, which is likely to vary inversely with
fluctuations in interest rates.
Mortgage pass-through certificates provide the holder with a
pro rata interest in the underlying mortgages. One type of such certificate in
which the Fund may invest is a GNMA Certificate which is backed as to the
timely payment of principal and interest by the full faith and credit of the
U.S. Government. Another type is a FNMA Certificate, the principal and
interest of which are guaranteed only by FNMA itself, not by the full faith and
credit of the U.S. Government. Another type is a FHLMC Participation
Certificate which is guaranteed by FHLMC as to timely payment of principal and
interest. However, like a FNMA security it is not guaranteed by the full faith
and credit of the U.S. Government.
Private Mortgage-Backed Securities: These are mortgage-backed
securities issued by a non-governmental entity, such as a trust. These
securities include CMOs and REMICs that are rated in one of the top three
rating categories, or if unrated, will be in the adviser's opinion equivalent
in credit quality to such rating. While they are generally structured with one
or more types of credit enhancement, private pass-through securities typically
lack a guarantee by an entity having the credit status of a governmental agency
or instrumentality. Mortgage-backed securities issued by private issuers,
whether or not such obligations are subject to guarantees by the private
issuer, may entail greater risk than obligations directly or indirectly
guaranteed by the U.S. Government.
Stripped Mortgage-Backed Securities ("SMBs"): SMBs are
usually structured with two classes that receive specified proportions of the
monthly interest and principal payments from a pool of mortgage securities.
One class may receive all of the interest payments and is thus termed an
interest-only class ("IO"), while the other class may receive all of the
principal payments and is thus termed the principal- only class ("PO"). The
value of IOs tends to increase as rates rise and decrease as rates fall; the
opposite is true of
-8-
<PAGE> 14
POs. SMBs are extremely sensitive to changes in interest rates because of the
impact thereon of prepayment of principal on the underlying mortgage
securities. The market for SMBs is not as fully developed as other markets;
SMBs therefore may be illiquid.
REITs
REITs are trusts that invest primarily in commercial real estate or real
estate-related loans. The value of interests in REITs may be affected by the
value of the property owned or the quality of the mortgages held by the trust.
Interest Rate Swaps
In order to protect its value from interest rate fluctuations,
the Fund may enter into interest rate swaps. The Fund expects to enter into
these hedging transactions primarily to preserve a return or spread of a
particular investment or portion of their holdings and to protect against an
increase in the price of securities the Fund anticipates purchasing at a later
date. Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest (i.e., an exchange
of floating rate payments for fixed rate payments). The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an amount of
liquid assets, such as cash, U.S. Government securities or other liquid high
grade debt securities, having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Fund's
custodian. The Fund will not enter into any interest rate swap unless the
unsecured commercial paper, senior debt, or claims paying ability of the other
party is deemed to be creditworthy and any such obligation the Fund may have
under such an arrangement will be covered by setting aside liquid high grade
securities in a segregated account. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Futures Contracts
The Fund may invest in futures contracts on U.S. Treasury
Obligations in order to offset an expected decrease in the value of its fund
that might otherwise result from a market decline. The Fund may do so either
to hedge the value of its portfolio securities as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, the Fund may utilize futures contracts in
anticipation of changes in the composition of its holdings for hedging purposes
or to maintain liquidity.
Futures contracts obligate the Fund, at maturity, to take or
make delivery of certain securities or the cash value of a contract or
securities index. When interest rates are rising, futures contracts can offset
a decline in value of the securities held by the Fund. When rates are falling
or prices of securities are rising, these contracts can secure higher yields or
lower prices for securities the Fund intends to purchase. In addition, the
Fund may utilize futures contracts in anticipation of changes in the
composition of its fund holdings.
The Fund intends to comply with the regulations of the
Commodity Futures Trading Commission ("CFTC") exempting the Fund from
registration as a "commodity pool operator." The Fund's commodities
transactions must constitute bona fide hedging or other permissible
transactions pursuant to such regulations. In addition, the Fund may not
engage in such transactions if the sum of the amount of initial margin
deposits, other than for bona fide
-9-
<PAGE> 15
hedging transactions, would exceed 5% of the liquidation value of its assets,
after taking into account unrealized profits and unrealized losses on such
contracts it has entered into. In connection with the Fund's position in a
futures contract, the Fund will create a segregated account of liquid assets,
such as cash, U.S. Government securities or other liquid high grade debt
obligations, or will otherwise cover its position in accordance with applicable
requirements of the SEC.
Risk Factors Associated with Futures
To the extent the Fund is engaging in a futures transaction as
a hedging device, due to the risk of an imperfect correlation between
securities in its funds that are the subject of a hedging transaction and the
futures contract used as a hedging device, it is possible that the hedge will
not be fully effective in that, for example, losses on the portfolio securities
may be in excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the portfolio securities that were the
subject of the hedge. In futures contracts based on indices, the risk of
imperfect correlation increases as the composition of the Fund varies from the
composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of futures contracts, the Fund may buy or sell futures
contracts in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Fund's net investment results if
market movements are not as anticipated when the hedge is established.
Successful use of futures by the Fund is also subject to the
adviser's ability to predict correctly movements in the direction of securities
prices, interest rates and other economic factors. For example, if the Fund
has hedged against the possibility of a decline in the market adversely
affecting the value of securities held in its funds and prices increase
instead, the Fund will lose part or all of the benefit of the increased value
of securities which it has hedged because they will have offsetting losses in
their futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Although the Fund intends to enter into futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
See "Illiquid Securities" below. Many futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit or
trading may be suspended for specified periods during the trading day. Futures
contracts prices could move to the limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Fund to substantial losses. If it is
not possible, or the Fund determines not, to close a futures position in
anticipation of adverse price movements, it will be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value
of the portion of the Fund being hedged, if any, may offset partially or
completely losses on the futures contract.
The primary risks associated with the use of futures contracts
are: (i) the imperfect correlation between the change in market value of the
-10-
<PAGE> 16
securities held by the Fund and the price of the futures contract; (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (iii) losses due
to unanticipated market movements which are potentially unlimited; and (iv) the
adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. For a further discussion see "Risk
Factors, Investment Objectives and Policies -- Futures Contracts and Options"
and Appendix B in the Statement of Additional Information.
U.S. Treasury Obligations
The Fund may invest in U.S. Treasury obligations consisting of
bills, notes and bonds issued by the U.S. Treasury, and separately traded
interest and principal component parts of such obligations that are
transferable through the Federal book-entry system known as Separately Traded
Registered Interest and Principal Securities ("STRIPS").
U.S. Government Obligations
The Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the GNMA. Others, such as those of the Export-Import
Bank of the United States, are supported by the right of the issuer to borrow
from the U.S. Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will invest
in the obligations of such agencies or instrumentalities only when the adviser
believes that the credit risk with respect thereto is minimal.
Short Sales
The Fund may engage in short sales of its securities. Selling
securities short involves selling securities the seller does not own (but has
borrowed) in anticipation of a decline in the market price of such securities.
To deliver the securities to the buyer, the seller must arrange through a
broker to borrow the securities and, in so doing, the seller becomes obligated
to replace the securities borrowed at their market price at the time of
replacement. In a short sale, the proceeds the seller receives from the sale
are retained by a broker until the seller replaces the borrowed securities.
The seller may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Fund may only sell securities short "against the box." A short
sale is "against the box" if, at all times during which the short position is
open, the Fund owns at least an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issuer as the securities that are sold short.
-11-
<PAGE> 17
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time.
These transactions involve the risk that the price or yield obtained may be
less favorable than the price or yield available when delivery takes place.
The Fund expects that commitments to purchase when-issued securities will not
exceed 25% of the value of its total assets under normal market conditions.
The Fund does not intend to purchase when-issued securities for speculative
purposes but only for the purpose of acquiring portfolio securities. In
when-issued and delayed delivery transactions, a Fund relies on the seller to
complete the transaction; its failure to do so may cause the Fund to miss a
price or yield considered to be attractive. One form of when-issued or delayed
delivery security that the Fund may purchase is a "to be announced" ("TBA")
mortgage-backed security. A TBA transaction arises when a mortgage-backed
security, such as a GNMA pass-through security, is purchased or sold with the
specific pools that will constitute that GNMA pass-through security to be
announced on a future settlement date. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Variable and Floating Rate Obligations
The Fund may purchase rated and unrated variable and floating
rate instruments. These instruments may include adjustable rate mortgages that
permit the indebtedness thereunder to vary in addition to providing for
periodic adjustments in the interest rate. The absence of an active secondary
market with respect to particular variable and floating rate instruments could,
however, make it difficult for the Fund to dispose of instruments if the issuer
defaulted on its payment obligation or during periods that the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss with respect to such instruments. For a further
description, see "Risk Factors, Objectives and Policies" in the Statement of
Additional Information.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to
the seller's agreement to repurchase them at a mutually agreed- upon date and
price ("repurchase agreements"). The Fund may enter into repurchase agreements
only with financial institutions such as banks and broker-dealers which are
deemed to be creditworthy by the sub-adviser, pursuant to guidelines approved
by the Trust's Board of Trustees. The Fund is not permitted to enter into
repurchase agreements with the adviser, sub-adviser, Distributor, or any of
their affiliates. Although the securities subject to repurchase agreements may
bear maturities exceeding 397 days, the Fund presently intends to enter only
into repurchase agreements which terminate within seven days after notice by
the Fund. If a Fund were to enter into repurchase agreements which provide for
a notice period greater than seven days in the future, the Fund would do so
only 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 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
-12-
<PAGE> 18
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 Fund may invest in repurchase agreements in the form of
Dollar Rolls. Dollar Rolls are transactions in which securities are sold for
delivery in the current month and the seller 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 Fund will place U.S.
Government or other liquid, high grade assets in a segregated account in an
amount sufficient to cover its repurchase obligation.
Lending Portfolio Securities
In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. The Fund must receive 100% collateral in the form of
cash or U.S. Government securities. This collateral must be valued daily by
the Fund's adviser, and the borrower will be required to provide additional
collateral should the market value of the loaned securities increase. During
the time portfolio securities are on loan, the borrower pays the Fund involved
any dividends or interest paid on such securities. Loans are subject to
termination by the Fund or the borrower at any time. While the Fund does not
have the right to vote securities on loan, it intends to terminate the loan and
regain the right to vote if this is considered important with respect to the
investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which its adviser has determined
are creditworthy under guidelines established by the Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high quality, short-term debt securities and which determine their
net asset value per share based on the amortized cost or penny-rounding method.
As a shareholder of another investment company, the Fund would bear, along with
other shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
-13-
<PAGE> 19
Illiquid Securities
The Fund will not knowingly invest more than 15% of its net
assets in securities that are illiquid. Illiquid securities would generally
include repurchase agreements and interest rate swaps with notice/termination
dates in excess of seven days and certain securities which are subject to
trading restrictions because they are not registered under the Securities Act
of 1933, as amended (the "1933 Act").
The Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser, acting under guidelines approved and monitored by the Board,
that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board will carefully
monitor any investment by the Fund in these securities.
Risk Factors Associated with Derivative Instruments
The Fund may purchase certain "derivative" instruments.
"Derivative" instruments are instruments that derive value from the performance
of underlying securities, interest or currency exchange rates, or indices, and
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 adviser has determined that the risk features that most
distinguish derivatives from other investment instruments (and which heavily
influence the market, volatility and leveraging, liquidity, and pricing risks
referred to above) can be described generally as"structural risk." Structural
risk refers to the contractual features of an investment that can cause its
total return to vary with changes in interest rates or other variables.
Structural risk is not unique to derivatives, but because derivatives often are
created through the intricate division of the cash flows of the underlying
security, they can (but do not necessarily) present a high degree of
-14-
<PAGE> 20
structural risk. Structural risk can arise from variations in coupon levels,
principal, and/or average life.
The adviser has adopted the following internal policy
concerning management of the structural risk inherent in derivative instruments
on behalf of the Fund:
The adviser does not presently intend to invest in the
following types of derivatives on behalf of the Fund:
- exchange rate-related securities;
- forward currency exchange contracts; and
- structured instruments, such as range notes, dual index notes,
leveraged or deleveraged bonds, inverse floaters, index
amortizing notes and other structured instruments having
similar cash flow characteristics.
Portfolio Turnover
The Fund may engage in short term trading and may sell
securities which have been held for periods ranging from several months to less
than a day. The object of such short-term trading is to increase the potential
for capital appreciation and/or income by making fund changes in anticipation
of expected movements in interest rates or fixed income security prices or in
order to take advantage of what the adviser believes is a temporary disparity
in the normal yield relationship between two securities. Any such trading
would increase the Fund's turnover rate and its transaction costs.
The Fund's annual portfolio turnover is not expected to exceed
250% under normal market conditions. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations.
The following investment limitations are matters of fundamental policy and may
not be changed with respect to a particular Fund without the affirmative vote
of the Fund's outstanding shares (as defined under "Miscellaneous"). (Other
investment limitations that also cannot be changed without a vote of
shareholders are contained in the Statement of Additional Information under
"Risk Factors, Investment Objectives and Policies.")
The Fund may not:
1. Make loans, except that the Fund may purchase or hold
debt instruments, lend portfolio securities and enter into repurchase
agreements in accordance with its investment objective and policies.
2. Borrow money or issue senior securities, except that
the Fund may borrow from anyone for temporary purposes in amounts not in excess
of 5% of the value of its total assets at the time of such borrowing; or the
Fund may borrow from a bank for non-temporary purposes, provided that the
borrowing does not exceed 33-1/3% of the Fund's net assets. To the extent a
bank borrowing exceeds 5% of the Fund's total assets, asset coverage of at
least 300% is required. The Fund will not purchase securities while
outstanding borrowings equal or exceed 5% of its total assets.
3. Purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
-15-
<PAGE> 21
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, and
(d) there is no limit with respect to securities issued by state and local
governments.
4. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, except that
up to 25% of the value of the Fund's total assets may be invested without
regard to such limitations. This investment limitation No. 4 does not apply to
repurchase agreements involving securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities.
For purposes of investment limitation No. 2 above, "asset
coverage" means that the Fund would be required to set aside assets valued in
an amount that is at least 300% of the amount borrowed.
For purposes of investment limitation No. 4, a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of the Fund's securities will not constitute a violation of
such limitation for purposes of the 1940 Act.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's yield and total return data for its
Institutional shares and Retail shares. The "yield" quoted in advertisements
refers to the income generated by an investment in a class of shares of the
Fund over a 30-day period identified in the advertisement. This income is then
"annualized." The amount of income so generated by the investment during the
30-day period is assumed to be earned and reinvested at a constant rate and
compounded semi-annually; the annualized income is then shown as a percentage
of the investment.
The Fund calculates its total return for each class of shares
on an "average annual total return" basis for various periods from the date of
commencement of investment operations and for other periods as permitted under
the rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
-16-
<PAGE> 22
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
class. When considering average total return figures for periods longer than
one year, it is important to note that the annual total return of a class for
any one year in the period might have been greater or less than the average for
the entire period. The Fund may also advertise, from time to time, the total
returns of one or more classes of shares on a year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
Shareholders should note that the yield and total return of
Retail shares will be reduced by the amount of shareholder servicing fees that
are payable under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares
of the Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the Lehman GNMA
Index, and to data or rankings prepared by independent services such as Lipper
Analytical Services, Inc. or other financial or industry publications that
monitor the performance of mutual funds. Comparisons may also be made to
indices or data published in Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, U.S.A. Today, CDA/Weisenberger, The
American Banker, Morningstar, Incorporated and other publications of a local,
regional or financial industry nature.
The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate
future performance. The investment return and principal value of an investment
in a class will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide
a basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value of a
class should be considered in ascertaining the total return to shareholders for
a given period. Yield and total return data should also be considered in light
of the risks associated with the Fund's portfolio composition, quality,
maturity, operating expenses and market conditions. Any fees charged by
financial institutions (as described in "How to Purchase and Redeem Shares")
are not included in the computation of performance data but will reduce a
shareholder's net return on an investment in the Fund.
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling
1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the
net asset value per share of the Fund is calculated as of the close of trading
on the New York Stock Exchange (the "Exchange") (generally, 4:00 p.m. Eastern
Time). Net asset value per share is determined on each business day, except
those holidays which the Exchange, or banks and trust companies which are
affiliated with National City Corporation (the "Banks"), observe (currently New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day)
("Business Day"). Net asset value per share of a particular class in the Fund
is calculated by dividing the value of all securities and other assets
belonging to the Fund allocable to such class, less the liabilities charged to
that class, by the number of the outstanding shares of that class.
-17-
<PAGE> 23
The Fund's investments in securities for which market
quotations are readily available are valued at their market values determined
on the basis of the mean between their current available bid and asked prices
in the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities and other
assets for which quotations are not readily available are valued at their fair
value under procedures approved by the Board of Trustees. Absent unusual
circumstances, short-term investments having maturities of 60 days or less are
valued on the basis of amortized cost unless the Trust's Board of Trustees
determines that this does not represent fair value. The net asset value per
share of each class of shares of the Fund will fluctuate as the value of its
investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards, to National City Investments Corporation.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors
may purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. (For information on such fees, the Investor should review his
agreement with the institution or contact it directly.) In addition, certain
financial institutions may enter into shareholder servicing agreements with the
Trust whereby a financial institution would perform various administrative
support services for its customers who are the beneficial owners of Retail
shares and would receive fees from the Fund for such services of up to .25% (on
an annualized basis) of the average daily net asset value of such shares. See
"Shareholder Services Plan." To purchase shares, Investors should call
1-800-622-FUND(3863) or visit their local National City Investments Corporation
office: Cleveland (1-800-624-6450), Columbus (1-800-345-0278), Dayton
(1-800-755-8723), Akron (1-800-229-0295), Louisville (1-800-727-5656),
Indianapolis (1-800-826-2868), Toledo (1-800-331-8275) or Youngstown
(1-800-742-4098).
Shares may be purchased in conjunction with an individual
retirement account ("IRA") and rollover IRAs where a designated custodian acts
as custodian. Investors should contact National City Investments Corporation,
the Distributor or their financial institutions for information as to
applications and annual fees. Investors should also consult their tax advisers
to determine whether the benefits of an IRA are available or appropriate.
-18-
<PAGE> 24
The minimum investment for the initial purchase of Retail
shares in each Fund is $2,500, except for purchases for an IRA or other
retirement plan in which event the minimum initial investment is $500. All
subsequent investments for Retail shares and IRAs are subject to a minimum
investment of $250. Investments made in Retail shares through a monthly
savings program described below are not subject to the minimum initial and
subsequent investment requirements or any minimum account balance requirements
described in "Other Redemption Information" below. Purchases for an IRA
through the monthly savings program will be considered as contributions for the
year in which the purchases are made.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of a Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional Retail shares at
the Public Offering Price next determined after an order is received by the
Trust. An Investor may apply for participation in a monthly program through a
financial institution, such as banks, brokers, or dealers selling Retail shares
of the Funds, by completing an application. The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any
time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent,
First Data Investor Services Group, Inc. (formerly The Shareholder Services
Group, Inc., d/b/a "440 Financial") (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000 . . . . . . . 3.75 3.90 3.75
$100,000 but less
than $250,000 . . . . . . . . . 2.75 2.83 2.75
$250,000 but less
than $500,000 . . . . . . . . . 2.00 2.04 2.00
$500,000 but less
than $1,000,000 . . . . . . . . 1.25 1.27 1.25
$1,000,000 or more . . . . . . . 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons who offer or sell
for an issuer in connection with the distribution of a security or have a
direct or indirect participation in such undertaking, but excludes persons
whose interest is limited to a commission from an underwriter or dealer not in
excess of the usual and customary distributors' or sellers' commission. The
-19-
<PAGE> 25
Staff of the SEC has expressed the view that persons who receive 90% or more of
a sales load may be deemed to be underwriters within the meaning of this
definition. The Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of Retail shares
made by: (a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b) above; (d)
qualified retirement plans purchasing shares through National City Investments
Corporation or NatCity Investments, Inc.; (e) individuals investing in the Fund
by way of a direct transfer or a rollover from a qualified plan distribution
and subsequent transactions into the same account where affiliates of National
City Corporation are serving as a trustee or agent; (f) Investors purchasing
Fund shares through a payroll deduction plan; and (g) individuals investing in
the Fund by way of an asset allocation program sponsored by financial
institutions, although certain account level fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of the Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions at the time of purchase. Reduced
sales charges may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings.
Right of Accumulation. Investors may use their aggregate
investments in Retail shares in determining the applicable sales charge. An
Investor's aggregate investment in Retail shares is the total value (based on
the higher of current net asset value or any Public Offering Price originally
paid) of: (a) current purchases; (b) Retail shares that are already
beneficially owned by the Investor for which a sales charge has been paid; (c)
Retail shares that are already beneficially owned by the Investor which were
purchased prior to July 22, 1990; and (d) Retail shares purchased by dividends
or capital gains that are reinvested. If, for example, an Investor
beneficially owns Retail shares of the Fund with an aggregate current value of
$90,000 and subsequently purchases Retail shares of the Fund having a current
value of $10,000, the sales charge applicable to the subsequent purchase would
be reduced to 2.75% of the Public Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales
charge immediately upon signing a nonbinding Letter of Intent stating the
Investor's intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge. A Letter
of Intent form may be obtained from the Investor's financial institution. If
an Investor so elects, the 13-month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the
Letter of Intent must be equal to at least 4.0% of the amount indicated in the
Letter of Intent. During the term of a Letter of Intent, the Transfer Agent
will hold Retail shares representing 4.0% of the amount indicated in the Letter
of Intent in escrow for payment of a higher sales charge if the entire amount
is not purchased. Upon completing the purchase of the entire amount indicated
in the Letter of Intent, the escrowed shares will be released. If the entire
amount is not purchased within the 13-month period, the Investor will be
required to pay an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the Investor would have had
to pay on the aggregate purchases if the total of such purchases had been made
at a single time.
-20-
<PAGE> 26
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM
customers ("Customers"). Institutional shares are sold without a sales charge
imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his investment in the Fund. There is
no minimum investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should
obtain information relating to the requirements of such accounts from their
Banks.
If participating in an Asset Diversification Account,
Customers may purchase Institutional shares under a monthly savings program.
Customers may add to their investment in the Institutional shares of a Fund, in
a consistent manner each month, with a minimum amount of $50. Monies may be
automatically withdrawn from a shareholder's checking or savings account
available through a Customer's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. A Customer may apply for participation in a monthly
program through the Customer's Bank by completing an application. The program
may be modified or terminated by an Investor on 30 days written notice or by
the Trust at any time.
It is the responsibility of the Banks to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above.
Institutional shares will normally be held of record by the Banks.
Confirmations of share purchases and redemptions will be sent to the Banks.
Beneficial ownership of Institutional shares will be recorded by the Banks and
reflected in the account statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by
the Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are
priced according to the net asset value per share determined on that day plus
any applicable sales charge (the "Public Offering Price"). Immediately
available funds must be received by the Trust's custodian prior to 2:00 p.m.
(Eastern Time) on the third Business Day following the receipt of such order,
at which time the order will be executed. If funds are not received by such
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.
-21-
<PAGE> 27
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a
minimum balance in his account at the Bank and the balance in such account
falls below that minimum, the Customer may be obliged to redeem all or part of
his Institutional shares to the extent necessary to maintain the required
minimum balance. Customers who have instructed that automatic purchases and
redemptions be made for their accounts receive monthly confirmations of share
transactions.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
calling 1-800-628-0523 (provided he has made the appropriate election in his
account application) or 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.
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
-22-
<PAGE> 28
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 wire or telephone redemption if it believes it is advisable
to do so. Procedures for redeeming Retail shares by wire or telephone may be
modified or terminated at any time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of any fund of the Trust held on the
Transfer Agent's system. The Plan allows the shareholder to have a fixed
minimum sum of $250 distributed at regular intervals. The shareholder's
account must have a minimum value of $5,000 to be eligible for the Plan.
Additional information regarding this service may be obtained from an
Investor's financial institution or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts,
the Trust reserves the right to redeem, at net asset value, any account
maintained by a shareholder that has a value of less than $1,000 due to
redemptions where the shareholder does not increase the amount in the account
to at least $1,000 upon 60 days' notice.
If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay
payment of the redemption proceeds until the Transfer Agent is reasonably
satisfied that the check has been collected, which could take up to 10 days
from the date of purchase. A shareholder who anticipates the need for more
immediate access to his investment should purchase shares by federal funds,
bank wire, certified or cashier's check. Financial institutions normally
impose a charge in connection with the use of bank wires, as well as certified
checks, cashier's checks and federal funds.
Payment to shareholders for shares redeemed will be made
within the time period prescribed by the settlement requirements of the
Securities Exchange Act of 1934, after receipt of the request for redemption.
-23-
<PAGE> 29
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 the Fund or another
investment portfolio of the Trust (each a "load Fund") may exchange those
Retail shares for Retail shares of another load Fund offered by the Trust, or
another investment fund offered by the Trust without the imposition of a sales
charge (each a "no load Fund") at the net asset value per share on the date of
exchange, provided that such other Retail shares may be legally sold in the
state of the shareholder's residence. As a result, no additional sales charge
will be incurred with respect to such an exchange. Shareholders may also
exchange Retail shares of a no load Fund for Retail shares of another no load
Fund at the net asset value per share without payment of a sales charge. In
addition, shareholders of a no load Fund may exchange Retail shares for Retail
shares of a load Fund subject to payment of the applicable sales charge.
However, shareholders exchanging Retail shares of a no load Fund which were
received in a previous exchange transaction involving Retail shares of a load
Fund will not be required to pay an additional sales charge upon notification
of the reinvestment of the equivalent amount into the Retail shares of a load
Fund. Shareholders contemplating an exchange should carefully review the
Prospectus of the fund into which the exchange is being considered. An Armada
Funds Prospectus may be obtained from National City Investments Corporation or
an Investor's financial institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal
to the minimum initial investment required by the particular investment fund
into which the exchange is being made. Investors should make their exchange
requests in writing or by telephone to the financial institutions through which
they purchased their original Retail shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) will be processed as of the
close of business on the day of receipt; requests received by the Transfer
Agent after 4:00 p.m. (Eastern Time) will be processed on the next Business
Day. The Trust reserves the right to reject any exchange request. During
periods of unusual economic or market changes, telephone exchanges may be
difficult to implement. In such event, an Investor should mail the exchange
request to his financial institution, and an Investor who directly purchased
shares from the Trust should mail the exchange request to the 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 the Fund. Pursuant to the Services Plan, the Trust enters
into shareholder servicing agreements with certain financial institutions
pursuant
-24-
<PAGE> 30
to which the institutions render shareholder administrative services to their
customers who are the beneficial owners of Retail shares of the Fund in
consideration for the payment of up to .25% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation
with respect to those shares than with respect to Institutional shares in the
same Fund. Shareholder administrative services may include aggregating and
processing purchase and redemption orders, processing dividend payments from
the Trust on behalf of customers, providing information periodically to
customers showing their position in Retail shares, and providing sub-transfer
agent services or the information necessary for subaccounting, with respect to
Retail shares beneficially owned by customers. Since financial institutions
may charge their customers fees depending on the type of customer account the
Investor has established, beneficial owners of Retail shares should read this
Prospectus in light of the terms and fees governing their accounts with
financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are
declared daily and paid monthly. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce the
Fund's net asset value per share by the per share amount thereof.
Net income for dividend purposes consists of interest accrued
and any dividend or distribution income on the Fund's assets, less amortization
of premium on such assets and the accrued expenses of the Fund. Fund shares
begin earning dividends on the day the purchase order is settled and continue
earning dividends through and including the day before the redemption order for
the shares is executed.
Shareholders may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class or series at the
net asset value of such shares on the payment date. Shareholders must make
such election, or any revocation thereof, in writing to their Bank or financial
institution. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of each Fund's net
investment income available for distribution to the holders of Retail shares is
reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
The Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Such qualification generally relieves the Fund of liability for federal income
taxes to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income (if any) net
of certain deductions for such year. In general, the Fund's investment company
taxable income will be its taxable income (including interest and short-term
capital gains) subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The Fund intends to
-25-
<PAGE> 31
distribute substantially all of its investment company taxable income and net
tax-exempt income each taxable year. Such distributions by the Fund will be
taxable as ordinary income to its shareholders who are not currently exempt
from federal income taxes, whether such income is received in cash or
reinvested in additional shares. (Federal income taxes for distributions to an
IRA or to a qualified retirement plan are deferred under the Code.) Because
all of the Fund's net investment income is expected to be derived from earned
interest, it is anticipated that no part of any distribution will be eligible
for the dividends received deduction for corporations.
Substantially all of the Fund's net realized long-term capital
gains, if any, will be distributed at least annually to Fund shareholders. The
Fund generally will have no tax liability with respect to such gains, and the
distributions will be taxable to Fund shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long
the shareholders have held Fund shares and whether such gains are received in
cash or reinvested in additional shares.
Dividends declared in December of any year payable to
shareholders of record on a specified date in such month will be deemed to have
been received by shareholders and paid by the Fund on December 31 of such year
in the event such dividends are actually paid during January of the following
year.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution paid
shortly after a purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of the
dividend or distribution. All or a portion of such dividend or distribution,
although in effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of Fund shares depending upon the tax
basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received a distribution taxable as a long-term capital gain, then any
loss the shareholder might realize on the sale of those shares will be treated
as a long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Fund shares in his tax basis for such shares for the purpose of determining
gain or loss on a redemption, transfer or exchange of such shares. However, if
the shareholder effects an exchange of such shares for shares of another Fund
within 90 days of the purchase and is able to reduce the sales charges
applicable to the new shares (by virtue of the Trust's exchange privilege), the
amount equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares, but may be included (subject to this
limitation) in the tax basis of the new shares.
Shareholders of the Fund will be advised at least annually as
to the federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute
-26-
<PAGE> 32
for careful tax planning. Accordingly, potential investors should consult
their tax advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction
of the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Richard B. Tullis Chairman of the Board Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, OH 44124 communication and information
processing equipment), since
October 1985; Director, NACCO
Materials Handling Group, Inc.
(manufacturer of industrial fork
lift trucks), since 1984; Director,
Hamilton Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990; Director,
Waste-Quip, Inc. (waste handling
equipment), since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO Manufacturing
564 Hackberry Drive Company and subsidiaries
Westerville, OH 43081 (manufacture, sale and financing of
water coolers and dehumidifiers),
since January 1996 and President,
January 1987 to January 1996; Vice
President and Executive Committee
Member of Ebtech Corp., since March
1991.
Leigh Carter* Trustee, President Retired President and Chief
13901 Shaker Blvd., #6B and Treasurer Operating Officer, BFGoodrich
Cleveland, OH 44120 Company, August 1986 to September
1990; Director, Adams Express
Company, since April 1982;
Director, Centerior Energy Corp.,
since April 1986;
</TABLE>
-27-
<PAGE> 33
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Director, Lamson &
Sessions Co., since April 1991;
Director, Petroleum & Resources
Corp., since April 1987; Director,
Morrison Products, 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;
partner, Kittle's Bloomington
Property Company, since January
1981; partner, KK&D (Affiliated
Real Estate Companies of Kittle's
Home Furnishings Center), since
January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and Dean,
Carol Martin Gatton Carol Martin Gatton, College of
College of Business and Business and Economics, University
Economics of Kentucky, since 1981; Director,
University of Kentucky Studio Plus Hotels, Inc., since
Lexington, KY 40506-0034 1994.
Robert D. Neary Trustee Retired Co-Chairman of Ernst &
2000 National City Center Young, April 1984-September 1993;
1900 E. 9th Street Director, Cold Metal Products,
Cleveland, OH 44114 Inc., since March 1994; Director,
Zurn Industries, Inc., 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
Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
- --------------------
<FN>
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
</TABLE>
-28-
<PAGE> 34
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Fund.
National City is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate
trust and agency, and personal and corporate banking. National City is a
member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and approximately $32
billion in total assets. National City has its principal offices at 1900 Ninth
Street, Cleveland, Ohio 44114.
-29-
<PAGE> 35
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, National City
has agreed to manage the Fund, make decisions with respect to and place orders
for all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales. The Fixed Income Team of
National City's Asset Management Group assumed responsibility for the
day-to-day management of the Fund upon commencement of operations of the Fund.
Members of the team make decisions for the Fund. No person is primarily
responsible for making recommendations. Members of the team are:
- Donald L. Ross, Director of the Fixed Income Team,
has been with National City since 1985. He
specializes in the overall duration and yield curve
decisions.
- Michael E. Santelli, Vice President, joined National
City in 1995. He specializes in the mortgage and
asset-backed markets.
- Alex L. Vallecillo, Assistant Vice President, joined
National City in 1996. He specializes in the
analysis of the corporate bond sector.
- Stephen P. Carpenter, Vice President, joined National
City in 1988. He has more than 21 years of
investment experience with expertise in the area of
municipal bonds -- taxable as well as tax-free -- and
money market instruments.
- John H. Lockhart, Vice President, has been with
National City since 1988. He focuses on the national
tax-exempt market.
- Douglas J. Carey, Fixed Income Analyst, joined
National City in 1995. He is responsible for the
development of econometric models used in economic
and interest rate forecasting, as well as fixed
income sector relative valuation.
- Marilou C. Hitt, Assistant Vice President, has worked
in National City's Funds Management Trading
Department since 1984. Her responsibilities include
fixed income trading of government and corporate
securities as well as short-term taxable and tax-free
money market instruments.
For the services provided and expenses assumed pursuant to the
Advisory Agreement relating to the Fund, National City is entitled to receive
an advisory fee, computed daily and payable monthly, at the annual rate of .55%
of the average net assets of the Fund. The adviser may from time to time waive
all or a portion of its advisory fees to increase the net income of the Fund
available for distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISER
-30-
<PAGE> 36
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 adviser
believes that it may perform the services for the Fund contemplated by the
Advisory Agreement with the Trust as described in the Agreement 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 adviser from continuing to perform services for the Trust. If the
adviser was to be prohibited from providing services to the Fund, 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 adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Fund
shares, the adviser and its affiliated and correspondent banks might be
required to alter materially or discontinue the services offered 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 adviser, or an affiliate of the adviser,
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
adviser, or any of its affiliates, might offer to provide such services.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Fund. PFPC is
an indirect, wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation
of the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive
with respect to the Fund an administrative fee, computed daily and paid
monthly, at the annual rate of .10% of the first $200,000,000 of its net
assets, .075% of the next $200,000,000 of its net assets, .05% of the next
$200,000,000 of its net assets and .03% of its net assets over $600,000,000 and
is entitled to be reimbursed for its out-of-pocket expenses incurred on behalf
of the Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
-31-
<PAGE> 37
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 36 separate
classes or series of shares of beneficial interest ("shares"). Two of these
classes or series, which represent interests in the Fund (Class S and Class S -
Special Series 1) are described in this Prospectus. Class S shares constitute
the Institutional class or series of shares; and Class S - Special Series 1
shares constitute the Retail class or series of shares. The other Funds of the
Trust are: Money Market Fund (Class A and Class A-Special Series 1),
Government Fund (Class B and Class B-Special Series 1), Treasury Fund (Class C
and Class C-Special Series 1), Tax Exempt Fund (Class D and Class D-Special
Series 1), Equity Fund (Class H and Class H-Special Series 1), Fixed Income
Fund (Class I and Class I-Special Series 1), Ohio Tax Exempt Fund (Class K and
Class K-Special Series 1), National Tax Exempt Fund (Class L and Class L-
Special Series 1), Equity Income Fund (Class M and Class M-Special Series 1),
Mid Cap Regional Fund (Class N and Class N-Special Series 1), Enhanced Income
Fund (Class O and Class O-Special Series 1), Total Return Advantage Fund (Class
P and Class P-Special Series 1), Pennsylvania Tax Exempt Fund (Class Q and
Class Q-Special Series 1), Intermediate Government Fund (Class R and Class
R-Special Series 1) and the Pennsylvania Municipal Fund (Class T and Class
T-Special Series 1). Each share has no par value, represents an equal
proportionate interest in the investment fund with other shares of the same
class or series outstanding, and is entitled to such dividends and
distributions out of the income earned on the assets belonging to such fund as
are declared in the discretion of the Trust's Board of Trustees. The Trust's
Declaration of Trust authorizes the Board of Trustees to classify or reclassify
any unissued shares into any number of additional classes of shares and to
classify or reclassify any class of shares into one or more series of shares.
Shareholders are entitled to one vote for each full share
held, and a proportionate fractional vote for each fractional share held.
Shareholders will vote in the aggregate and not by investment fund, except as
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
-32-
<PAGE> 38
be called by shareholders to consider the removal of one or more trustees.
Shareholders will receive shareholder communication assistance with respect
to such matter as required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P. O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses
in connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees
(including fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings;
and any extraordinary expenses. The Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Fund also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as
both the custodian and an investment adviser, a procedure has been established
requiring three annual verifications, two of which are to be unannounced, of
all investments held pursuant to the Custodian Services Agreement, to be
conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or a particular investment
fund means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
the Trust or such fund or (b) 67% or more of the shares of the Trust or such
fund present at a meeting if more than 50% of the outstanding shares of the
Trust or such fund are represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
-33-
<PAGE> 39
ARMADA FUNDS
INVESTMENT ADVISER
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLE . . . . . . . . . . . . . . . . . . . . . 3
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . 6
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . 15
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . 16
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . 17
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . 18
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . 24
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . 24
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . 24
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 25
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . 26
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . 30
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . 31
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 31
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
-----------------------------------------------------------
o SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL
CITY BANK ITS PARENT ANY OF ITS AFFILIATES OR ANY BANK.
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.
-34-
<PAGE> 40
ARMADA FUNDS
PROSPECTUS
_______________________, 1996
GNMA Fund
-35-
<PAGE> 41
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of
National City
Corporation
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
-36-
<PAGE> 42
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commision. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawfull
prior to registration or qualification under the securities laws of any such
State
SUBJECT TO COMPLETION, DATED JULY 10, 1996
<TABLE>
<CAPTION>
ARMADA FUNDS
_____________________________________________________________________________________________________
<S> <C>
400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City Investments
Corporation, please call your Investment
Consultant for information.
For current performance, fund
information, and to purchase shares,
please call 1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
</TABLE>
This Prospectus describes shares in the following investment fund (the
"Fund") of Armada Funds (the "Trust") and its investment objective and
policies:
PENNSYLVANIA MUNICIPAL FUND'S investment objective is to provide current
income exempt from both regular federal income and Pennsylvania personal
income taxes while preserving capital. The Fund invests primarily in
investment grade, high quality debt obligations issued by or on behalf of the
Commonwealth of Pennsylvania.
The net asset value per share of the Fund will fluctuate as the value
of its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to
the Fund (the "adviser"). Weiss, Peck & Greer, L.L.C. ("WPG") serves as
sub-investment adviser to the Fund (the "sub-adviser").
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp. (the "Distributor"), serves as the Trust's sponsor and distributor.
The Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears
the same date as this Prospectus and is incorporated by reference in its
entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS
PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
____________, 1996
-1-
<PAGE> 43
The classes or series which represent interests in the Fund
are described in this Prospectus. Class T shares constitute the Institutional
class or series of shares (herein referred to as the "Institutional shares") of
the Fund. Class T - Special Series 1 shares constitute the Retail class or
series of shares (herein referred to as the "Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and National
Asset Management Corporation ("NAM") customers. Retail shares are sold to the
public primarily through financial institutions such as banks, brokers and
dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
PENNSYLVANIA PENNSYLVANIA
MUNICIPAL FUND MUNICIPAL FUND
RETAIL INSTITUTIONAL
SHARES1 SHARES
------ -------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . 3.00% None
Sales Charge Imposed
on Reinvested Dividends . . . None None
Deferred Sales Charge . . . . . None None
Redemption Fee . . . . . . . . . None None
Exchange Fee . . . . . . . . . . None None
FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (after fee
waivers)2 . . . . . . . . . . .54% .54%
12b-1 Fees3 . . . . . . . . . . .01% .01%
Other Expenses . . . . . . . . . .39% .29%
---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER FEE WAIVERS)2 .94% .84%
- --------------------------- ==== ====
<FN>
1 The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Fund. Under the Services
Plan, the Trust may enter into shareholder servicing agreements with
certain financial institutions pursuant to which they would agree to
provide shareholder administrative services to their customers who
beneficially own Retail shares in consideration for the payment of up
to .10% (on an annualized basis) of the net asset value of such
shares.
2 The expense information in the table relating to the Fund has been
restated to reflect current fees. Management fees (before waivers)
would be .55%. Total Fund Operating Expenses (before waivers) would
be .95% for the Retail shares and .85% for the Institutional shares.
3 As a result of the payment of sales charges and 12b-1 and certain
other related fees, long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc. ("NASD"). The
NASD has adopted rules which generally limit the aggregate sales
charges and payments under the Trust's Service and Distribution Plan
("Distribution Plan") and Services Plan to a certain percentage of
total new gross share sales, plus interest. The Trust would stop
accruing 12b-1 and related fees if, to the extent, and for as long as,
such limit would otherwise be exceeded.
</TABLE>
_______________________
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required
by SEC regulations); (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee); and (3) the
imposition of the maximum sales charge at the beginning of the period:
-2-
<PAGE> 44
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Pennsylvania Municipal Fund
Retail Shares . . . . . . . . . . . . . . $39 $59 $80 $142
Pennsylvania Municipal Fund
Institutional Shares . . . . . . . . . . $ 9 $27 $47 $104
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Fund.
-3-
<PAGE> 45
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PREDECESSOR PENNSYLVANIA MUNICIPAL FUND
The Fund commenced operations on August 10, 1994 as a separate
investment portfolio ( the "Predecessor Pennsylvania Municipal Fund") of
Inventor Funds, Inc., which was organized as a Maryland corporation. On
, 1996, the Fund was reorganized as a new portfolio of the Trust.
Prior to the reorganization, the Predecessor Fund offered and sold Retail
Shares that were similar to the Fund's Retail Shares
The financial highlights presented below set forth certain
information concerning the investment results of the Predecessor Fund's Retail
Shares (the series that is similar to the Retail Shares of the Pennsylvania
Municipal Fund) for the fiscal year ended April 30, 1996 and the fiscal period
ended April 30, 1995. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon is contained in Inventor Funds' Annual
Report to Shareholders for the fiscal year ended April 30, 1996. Such financial
highlights should be read in conjuction with the financial statements and notes
thereto contained in Inventor Funds' Annual Report to Shareholders and
incorporated by reference into the Statement of Additional Information relating
to the Pennsylvania Municipal Fund. Additional information about the
performance of the Predecessor Fund is contained in Inventor Funds' Annual
Report to Shareholders, which may be obtained without charge by contacting the
Trust at its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
1996 1995(2)
---- ----
<S> <C> <C>
Net Asset Value, Beginning of Period $10.04 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized . . . . . . . . . . . . . . . 0.43 0.29
Gains on Securities . . . . . . . . . . . . . . . . . 0.08 0.04
Total from Investment Operations
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.43) (0.29)
Distributions from Realized
Capital Gains. . . . . . . . . . . . . . . . . . . . -- --
Total Distributions . . . . . . . . . . . . . . . . . . . . . (0.43) (0.29)
Net Asset Value, End of Period. . . . . . . . . . . . . . . . $10.12 $10.04
Total Return(4) . . . . . . . . . . . . . . . . . . . . . . . 5.06% 3.38%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000). . . . . . . . . . . . . $38,809 $34,638
Ratio of Expenses to Average
Net Assets. . . . . . . . . . . . . . . . . . . . . . 0.85%(1) 0.85(1,3)
Ratio of Net Investment Income
to Average Net Assets . . . . . . . . . . . . . . . . 4.16%(1) 4.05%(1,3)
Portfolio Turnover Rate. . . . . . . . . . . . . . . . . 22% 4%
<FN>
1. The operating expense ratio and the net investment income ratio before fee waivers by the investment adviser,
administrator and custodian for the year ended April 30, 1996 and for the period ended April 30, 1995 would
have been 1.24% and 3.77% and 1.36% and 3.54%, respectively.
2. Commenced operations on August 10, 1994. The Fund did not offer Institutional shares during
the period covered by the Financial Highlights.
3. Annualized.
4. Total return does not reflect the sales charge.
Not annualized.
</TABLE>
-4-
<PAGE> 46
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act").
The Fund consists of a pool of assets with investment objective and policies,
as described below under "Risk Factors, Investment Objective and Policies."
Under the 1940 Act, the Fund is classified as a non-diversified investment
fund.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except
that, as described more fully below under "Shareholder Services Plan" (the
"Services Plan"), the Trust has implemented the Services Plan with respect to
the Retail shares of the Fund. Under the Services Plan, only the beneficial
owners of Retail shares would bear the expenses of shareholder administrative
services which are provided by financial institutions for their benefit
(estimated not to exceed .10% annually). See "Shareholder Services Plan,"
"Dividends and Distributions" and "Description of the Trust and Its Shares" for
a description of the impact that the Services Plan may have on holders of
Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVE AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. There can be no assurance that the Fund will achieve its
objective.
The investment objective of the Fund is to provide current
income exempt from both regular federal income and Pennsylvania personal income
tax while preserving capital. The Fund seeks to achieve its objective by
investing primarily in investment grade Pennsylvania Municipal Securities.
Pennsylvania Municipal Securities are debt obligations and municipal lease
obligations issued by or on behalf of the Commonwealth of Pennsylvania and its
political subdivisions and financing authorities, 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").
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.
-5-
<PAGE> 47
For temporary defensive purposes when, in the opinion of the
sub-adviser, Pennsylvania Municipal Securities of sufficient quality are not
readily available, the Fund may invest up to 100% of its assets in securities
which pay interest exempt only from federal income taxes and in taxable
securities. Dividends paid by the Fund which are derived from interest
properly attributable to Pennsylvania Municipal Securities will be exempt from
regular federal income tax and Pennsylvania personal income tax. Dividends
derived from interest on Municipal Securities of other governmental issuers
will be exempt from regular federal income tax but may be subject to
Pennsylvania personal income tax. See "Taxes."
The Fund may hold uninvested cash reserves, pending
investment, during temporary defensive periods. There is no percentage
limitation on the amount of assets which may be held uninvested during
temporary defensive periods; however, uninvested cash reserves will not earn
income. See "Other Investment Policies of the Fund." The Fund may invest in
variable and floating rate obligations, may purchase zero coupon bonds and
securities on a "when-issued" basis, and reserves the right to engage in
transactions involving standby commitments and repurchase agreements.
Although the Fund's average weighted maturity will vary in
light of current market and economic conditions, the comparative yields on
instruments with different maturities, and other factors, the Fund anticipates
that it will maintain a dollar-weighted average portfolio maturity of seven
years or less. Each security purchased by the Fund will have a maximum
maturity of fifteen years.
Special Considerations
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and livestock
products, but substantial economic activity in agribusiness and food-related
industries. Service industries currently employ the greatest share of
non-agricultural 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 Pennsylvania Trust or the ability of the respective obligors to make
payments of interest and principal due on such Bonds. Rising unemployment, a
relatively high proportion of persons 65 and older in the Commonwealth of
Pennsylvania and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its
municipalities. The Commonwealth has sold a substantial amount of bonds over
the past several years, but the debt burden remains moderate. The recession
has affected Pennsylvania's economic base, with income and job growth at levels
below national averages. Employment growth has shifted to the trade and
service sectors, with losses in more high-paid manufacturing positions. A new
governor took office in January 1995, but the Commonwealth has continued to
show fiscal restraint.
OTHER INVESTMENT POLICIES
Types of Municipal Bonds
The two principal classifications of Municipal Bonds which may
be held by the Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest.
-6-
<PAGE> 48
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. Any private activity bonds
(including industrial development bonds) held by the Fund are in most cases
revenue securities and are not payable from revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate or other user of the facility
involved. Private activity bonds are included in the term "Municipal Bonds"
only if the interest paid thereon is exempt from regular federal income tax and
not treated as a specific tax preference item under the federal alternative
minimum tax. See "Taxes."
The Fund may also invest in "moral obligation" bonds, which
are ordinarily issued by special purpose public authorities in certain states.
If the issuer of moral obligation bonds is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
The Fund may also purchase municipal leases. Municipal leases
are obligations issued by state and local governments or authorities to finance
the acquisition of equipment and facilities and may be considered to be
illiquid. They may take the form of a lease, an installment purchase contract,
a conditional sales contract, or a participation certificate in any of the
above.
Municipal lease obligations typically are not backed by the
municipality's credit, and their interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease
payments, a lease may terminate, with a possibility of default on the lease
obligation and significant loss to the Fund. Under guidelines established by
the Board of Directors, the credit quality of municipal leases will be
determined on an ongoing basis, including an assessment of the likelihood that
a lease will be canceled.
The Fund may also invest in unsecured short-term promissory
notes issued by municipalities and other entities.
Ratings Criteria
The Fund invests in Municipal Bonds which at the time of
purchase are rated the following or higher: "BBB" by Standard and Poor's
Ratings Group ("S&P"), or Fitch Investors Service, Inc. ("Fitch"), "Baa" by
Moody's Investors Service, Inc. ("Moody's"), or "A" by Duff & Phelps Credit
Rating Co. ("Duff") in the case of bonds; "SP-2" by S&P, "F-2" by Fitch, "Duff
2" by Duff, or "MIG-2" ("VMIG-2" for variable rate demand notes) by Moody's in
the case of notes; or "A-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, Baa or
"Prime-2" by Moody's in the case of tax-exempt commercial paper. Securities
that are unrated at the time of purchase will be determined to be of comparable
quality by the Fund's adviser pursuant to guidelines approved by the Trust's
Board of Trustees. The applicable ratings are more fully described in the
Appendix to the Statement of Additional Information.
-7-
<PAGE> 49
Stand-by Commitments
The Fund may acquire stand-by commitments with respect to
Municipal Securities held in its fund. Under a stand-by commitment, a dealer
agrees to purchase at the Fund's option specified Municipal Bonds at a
specified price. Stand-by commitments acquired by the Fund must be of high
quality as determined by any Rating Agency, or, if not rated, must be of
comparable quality as determined by the Fund's adviser. The Fund acquires
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes.
Variable and Floating Rate Obligations
The Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate
obligations are direct lending arrangements between the Fund and the issuer,
they are not normally traded. Although there may be no active secondary market
in such instruments, the Fund may demand payment of principal and accrued
interest at a time specified in the instrument or may resell them to a third
party. Such obligations may be backed by bank letters of credit or guarantees
issued by banks, other financial institutions or the U.S. Government, its
agencies or instrumentalities. The quality of any letter of credit or
guarantee will be rated high quality or, if unrated, will be determined to be
of comparable quality by the Fund's sub-adviser. In the event an issuer of a
variable or floating rate obligation defaulted on its payment obligation, the
Fund might be unable to dispose of the instrument because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
Certificates of Participation
The Fund may purchase Municipal Securities in the form of
"certificates of participation" which represent undivided proportional
interests in lease payments by a governmental or nonprofit entity. The
municipal leases underlying the certificates of participation in which the Fund
invests will be subject to the same quality rating standards applicable to
Municipal Securities. The lease payments and other rights under the lease
provide for and secure the payments on the certificates. Lease obligations may
be limited by law, municipal charter or the duration or nature of the
appropriation for the lease and may be subject to periodic appropriation. If
the entity does not appropriate funds for future lease payments, the entity
cannot be compelled to make such payments. Furthermore, a lease may provide
that the certificate trustee cannot accelerate lease obligations upon default;
in such event, the trustee would only be able to enforce lease payments as they
became due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable substitute
source of payment. In addition, certificates of participation are less liquid
than other bonds because there is a limited secondary trading market for such
obligations. To alleviate potential liquidity problems with respect to these
investments, the Fund may enter into remarketing agreements which may provide
that the seller or a third party will repurchase the obligation within seven
days after demand by the Fund and upon certain conditions (such as the Fund's
payment of a fee).
-8-
<PAGE> 50
Zero Coupon Bonds
Zero coupon obligations are discount debt obligations that do
not make periodic interest payments although income is generally imputed to the
holder on a current basis. Such obligations may have higher price volatility
than those which require the payment of interest periodically. The adviser and
sub-adviser will consider the liquidity needs of the Fund when any investment
in zero coupon obligations is made.
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time.
These transactions involve the risk that the price or yield obtained may be
less favorable than the price or yield available when delivery takes place.
The Fund does not intend to purchase when issued securities for speculative
purposes but only for the purpose of acquiring portfolio securities. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction; its failure to do so may cause the Fund to miss a
price or yield considered to be attractive. For further information, see "Risk
Factors, Investment Objective, and Policies" in the Statement of Additional
Information.
Illiquid Securities
The Fund will not knowingly invest more than 15% of the value
of its net assets in securities that are illiquid. Illiquid securities would
generally include repurchase agreements with notice/termination dates in excess
of seven days and certain securities which are subject to trading restrictions
because they are not registered under the Securities Act of 1933, as amended
(the "1933 Act").
The Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser, acting under guidelines approved and monitored by the Board,
that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board will carefully
monitor any investment by the Fund in these securities.
Taxable Money Market Instruments
The Fund may invest, from time to time, a portion of its
assets for temporary defensive or other purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. Government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the highest rating categories of S&P, Fitch,
Duff or Moody's or unrated instruments of comparable quality; certificates of
deposit; bankers' acceptances; and repurchase agreements with respect to such
obligations.
-9-
<PAGE> 51
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the advisers) which
invest in high quality, short-term debt securities and which determine their
net asset value per share based on the amortized cost or penny-rounding method.
As a shareholder of another investment company, the Fund would bear, along with
other shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed without the affirmative vote of the Fund's outstanding shares (as
defined under "Miscellaneous"). (Other investment limitations that also cannot
be changed without a vote of shareholders are contained in the Statement of
Additional Information under "Risk Factors, Investment Objective and
Policies.")
The Fund may not:
1. Make loans, except that the Fund may purchase or hold
debt instruments in accordance with its investment objective and policies, and
the Fund may enter into repurchase agreements in accordance with its investment
objective and policies.
2. Borrow money or issue senior securities, except that
the Fund may borrow from anyone for temporary purposes in amounts not in excess
of 5% of the value of its total assets at the time of such borrowing; or the
Fund may borrow from a bank for non-temporary purposes, provided that the
borrowing does not exceed 33 1/3% of the Fund's net assets. To the extent that
a bank borrowing exceeds 5% of the Fund's total assets, asset coverage of at
least 300% is required. The Fund will not purchase securities while
outstanding borrowings equal or exceed 5% of the Fund's total assets.
4. Purchase any securities (except securities issued or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions) which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry.
5. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of such purchase, (i)
more than 5% of the value of its total assets would be invested in such issuer,
or (ii) more than 10% of the outstanding voting securities of such issuer would
be held by the Fund, except that up to 50% of the value of its total assets may
be invested without regard to these 5% and 10% limitations,
-10-
<PAGE> 52
respectively, provided that no more than 25% of the value of the Fund's total
assets may be invested in the securities of any one issuer.
For purposes of investment limitation No. 4, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to a private activity bond
that is backed only by the assets and revenues of a nongovernmental user, a
security is considered to be issued by such nongovernmental user.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of the Fund's securities will not constitute a violation of
such limitation for purposes of the 1940 Act.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
Opinions relating to the validity of Municipal Securities and
to the exemption of interest thereon from federal income tax (and, with respect
to Pennsylvania Municipal Securities, to the exemption of interest from
Pennsylvania income tax) are rendered by bond counsel to the respective issuers
at the time of issuance. Neither the Fund nor its advisers will review the
proceedings relating to the issuance of Municipal Bonds or the basis for such
opinions.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's yield, tax-equivalent yield and total return
data for its Institutional shares and Retail shares. The "yield" quoted in
advertisements refers to the income generated by an investment in a class of
shares over a 30-day period identified in the advertisement. This income is
then "annualized." The amount of income generated by an investment during a
30-day period is assumed to be earned and reinvested at a constant rate and
compounded semi-annually; the annualized income is then shown as a percentage
of the investment. The Fund's "tax-equivalent" yield for a class of shares,
which shows the level of taxable yield necessary to produce an after-tax
equivalent to the Fund's tax-free yield for that class, may also be quoted from
time to time. It is calculated by increasing the yield (calculated as above)
for a class of shares by the amount necessary to reflect the payment of federal
and Pennsylvania income tax at stated tax rates. The Fund's tax-equivalent
yield for a class of shares will always be higher than its yield.
The Fund calculates its total returns for each class of shares
on an "average annual total return" basis for various periods from the date of
commencement of investment operations and for other periods as permitted under
the rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
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
-11-
<PAGE> 53
any one year in the period might have been greater or less than the average for
the entire period. The Fund may also advertise, from time to time, the total
returns of one or more classes of shares on a year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
Shareholders should note that the yield and total return on
Retail shares will be reduced by the amount of shareholder servicing fees that
are payable under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares
of the Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the Lehman
Five-Year Index and to data or rankings prepared by independent services such
as Lipper Analytical Services, Inc. or other financial or industry publications
that monitor the performance of mutual funds. Comparisons may also be made to
indices or data published in Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, U.S.A. Today, CDA/Weisenberger, The
American Banker, Morningstar, Incorporated and other publications of a local,
regional or financial industry nature.
The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate
future performance. The investment return and principal value of an investment
in a class will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide
a basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value of a
class should be considered in ascertaining the total return to shareholders for
a given period. Yield and total return data should also be considered in light
of the risks associated with the Fund's portfolio composition, quality,
maturity, operating expenses and market conditions. Any fees charged by
financial institutions (as described in "How to Purchase and Redeem Shares")
are not included in the computation of performance data but will reduce a
shareholder's net return on his investment in the Fund.
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling
1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the
net asset value per share of the Fund is calculated as of the close of the New
York Stock Exchange (the "Exchange") (generally, 4:00 p.m., Eastern Time). Net
asset value per share is determined on each business day, except those holidays
which the Exchange, or banks and trust companies which are affiliated with
National City Corporation (the "Banks"), observe (currently New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day) ("Business
Day"). Net asset value per share of a particular class in the Fund is
calculated by dividing the value of all securities and other assets belonging
to the Fund allocable to such class, less the liabilities charged to that
class, by the number of the outstanding shares of that class.
The Fund's investments in securities for which market
quotations are readily available are valued at their market values determined
on the basis of the mean between their current available bid and asked prices
in the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities and other
assets for
-12-
<PAGE> 54
which quotations are not readily available are valued at their fair value under
procedures approved by the Board of Trustees. Absent unusual circumstances,
short-term investments having maturities of 60 days or less are valued on the
basis of amortized cost unless the Trust's Board of Trustees determines that
this does not represent fair value. The net asset value per share of each
class of shares of the Fund will fluctuate as the value of its investment fund
changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards to National City Investments Corporation.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors
may purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. (For information on such fees, the Investor should review his
agreement with the institution or contact it directly.) In addition, certain
financial institutions may enter into shareholder servicing agreements with the
Trust whereby a financial institution would perform various administrative
support services for its customers who are the beneficial owners of Retail
shares and would receive fees from the Fund for such services of up to .10% (on
an annualized basis) of the average daily net asset value of such shares. See
"Shareholder Services Plan." To purchase shares, Investors should call
1-800-622-FUND(3863) or visit their local National City Investments Corporation
office: Cleveland (1-800-624-6450), Columbus (1-800-345-0278), Dayton
(1-800-755-8723), Akron (1-800-229-0295), Louisville (1-800-727-5656),
Indianapolis (1-800-826-2868), Toledo (1-800-331-8275) or Youngstown
(1-800-742-4098).
The minimum investment is $2,500 for the initial purchase of
Retail shares in the Fund. All subsequent investments for Retail shares are
subject to a minimum investment of $250. Investments made in Retail shares of
the Fund through a monthly savings program described below are not subject to
the minimum initial and subsequent investment requirements or any minimum
account balance requirements described in "Other Redemption Information" below.
Under a monthly savings program, Investors may add to their
investment in Retail shares of the Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional Retail shares at
the Public Offering Price next determined after an order is received by the
Trust. An Investor may apply for participation in a monthly program through a
-13-
<PAGE> 55
financial institution, such as banks, brokers, or dealers selling Retail shares
of the Fund, by completing an application. The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any
time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent,
First Data Investor Services Group, Inc. (formerly The Shareholder Services
Group, Inc. d/b/a "440 Financial") (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000 . . . . . . . 3.00 3.09 3.00
$100,000 but less
than $250,000 . . . . . . . . . 2.00 2.04 2.00
$250,000 but less
than $500,000 . . . . . . . . . 1.50 1.52 1.50
$500,000 but less
than $1,000,000 . . . . . . . . 1.00 1.01 1.00
$1,000,000 or more . . . . . . . 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons
who offer or sell for an issuer in connection with the distribution of a
security or have a direct or indirect participation in such undertaking, but
excludes persons whose interest is limited to a commission from an underwriter
or dealer not in excess of the usual and customary distributors' or sellers'
commission. The Staff of the SEC has expressed the view that persons who
receive 90% or more of a sales load may be deemed to be underwriters within the
meaning of this definition. The Dealers' Reallowance may be changed from time
to time.
No sales charge will be assessed on purchases of Retail shares
made by: (a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b) above; (d)
qualified retirement plans purchasing shares through National City Investments
Corporation or NatCity Investments, Inc.; (e) individuals investing in the Fund
by way of a direct transfer or a rollover from a qualified plan distribution
and subsequent transactions into the same account where affiliates of National
City Corporation are serving as a trustee or agent; (f) investors purchasing
Fund shares through a payroll deduction plan; and (g) individuals investing in
the Fund by way of an asset allocation
-14-
<PAGE> 56
program sponsored by financial institutions, although certain account level
fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of the Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions at the time of purchase. Reduced
sales charges may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings.
Right of Accumulation. Investors may use their aggregate
investments in Retail shares in determining the applicable sales charge. An
Investor's aggregate investment in Retail shares is the total value (based on
the higher of current net asset value or any Public Offering Price originally
paid) of: (a) current purchases; (b) Retail shares that are already
beneficially owned by the Investor for which a sales charge has been paid; (c)
Retail shares that are already beneficially owned by the Investor which were
purchased prior to July 22, 1990; and (d) Retail shares purchased by dividends
or capital gains that are reinvested. If, for example, an Investor
beneficially owns Retail shares of the Fund with an aggregate current value of
$90,000 and subsequently purchases Retail shares of the Fund having a current
value of $10,000, the sales charge applicable to the subsequent purchase would
be reduced to 2.0% of the Public Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales
charge immediately upon signing a nonbinding Letter of Intent stating the
Investor's intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge. A Letter
of Intent form may be obtained from the Investor's financial institution. If
an Investor so elects, the 13-month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the
Letter of Intent must be equal to at least 4.0% of the amount indicated in the
Letter of Intent. During the term of a Letter of Intent, the Transfer Agent
will hold Retail shares representing 4.0% of the amount indicated in the Letter
of Intent in escrow for payment of a higher sales charge if the entire amount
is not purchased. Upon completing the purchase of the entire amount indicated
in the Letter of Intent, the escrowed shares will be released. If the entire
amount is not purchased within the 13-month period, the Investor will be
required to pay an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the Investor would have had
to pay on the aggregate purchases if the total of such purchases had been made
at a single time.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM
customers ("Customers"). Institutional shares are sold without a sales charge
imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his investment in the Fund. There is
no minimum investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should
-15-
<PAGE> 57
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 the Fund,
in a consistent manner each month, with a minimum amount of $50. Monies may be
automatically withdrawn from a shareholder's checking or savings account
available through a Customer's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. A Customer may apply for participation in a monthly
program through a financial institution, such as banks or brokers, by
completing an authorization form. The program may be modified or terminated by
an Investor on 30 days written notice or by the Trust at any time.
It is the responsibility of the Banks to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above.
Institutional shares will normally be held of record by the Banks.
Confirmations of share purchases and redemptions will be sent to the Banks.
Beneficial ownership of Institutional shares will be recorded by the Banks and
reflected in the account statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by
the Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are
priced according to the net asset value per share determined on that day plus
any applicable sales charge (the "Public Offering Price"). Immediately
available funds must be received by the Trust's custodian prior to 2:00 p.m.
(Eastern Time) on the third Business Day following the receipt of such order,
at which time the order will be executed. If funds are not received by such
date, the order will not be accepted and notice thereof will be given to the
Bank or financial institution placing the order. Purchase orders for which
payment has not been received or accepted will be returned after prompt inquiry
to the sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the 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.
-16-
<PAGE> 58
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.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
calling 1-800-628-0523 (provided he has made the appropriate election in his
account application) or 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.
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 wire or telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail Shares by wire or
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).
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
-17-
<PAGE> 59
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 the time period prescribed by the settlement requirements of the
Securities Exchange Act of 1934, 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 the Fund or another
investment portfolio of the Trust (each a "load Fund") may exchange those
Retail shares for Retail shares of another load Fund offered by the Trust, or
another investment fund offered by the Trust without the imposition of a sales
charge (a "no load Fund") at the net asset value per share on the date of
exchange, provided that such other Retail shares may be legally sold in the
state of the shareholder's residence. As a result, no additional sales charge
will be incurred with respect to such an exchange. Shareholders may also
exchange Retail shares of a no load Fund for Retail shares of another no load
Fund at the net asset value per share without payment of a sales charge. In
addition, shareholders of a no load Fund may exchange Retail shares for Retail
shares of the Fund or another load Fund subject to payment of the applicable
sales charge. However, shareholders exchanging Retail shares of a no load Fund
which were received in a previous exchange transaction involving Retail shares
of a load Fund will not be required to pay an additional sales charge upon
notification of the reinvestment of the equivalent amount into the Retail
shares of a load Fund. Shareholders contemplating an exchange should carefully
review the Prospectus of the Trust into which the exchange is being considered.
An Armada Funds Prospectus may be obtained from National City Investments
Corporation or an Investor's financial institution or by calling 1-800-622-FUND
(3863).
Any Retail shares exchanged must have a value at least equal
to the minimum initial investment required by the particular investment fund
into which the exchange is being made. Investors should make their exchange
requests in writing or by telephone to the financial institutions through which
they purchased their original Retail shares. It is the responsibility 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.
-18-
<PAGE> 60
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act, each
investment fund of the Trust reimburses the Distributor monthly for the direct
and indirect expenses incurred by the Distributor in providing such fund
advertising, marketing, prospectus printing and other distribution services up
to a maximum of .10% per annum of the average net assets of the fund, inclusive
of an annual distribution fee of $250,000 payable monthly and accrued daily
among the investment funds with respect to which the Distributor is
distributing shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to
Retail shares. Pursuant to the Services Plan, the Trust may enter into
shareholder servicing agreements with certain financial institutions pursuant
to which the institutions render shareholder administrative services to their
customers who are the beneficial owners of Retail shares of the Fund in
consideration for the payment of up to .10% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation
with respect to those shares than with respect to Institutional shares in the
Fund. Shareholder administrative services may include aggregating and
processing purchase and redemption orders, processing dividend payments from
the Trust on behalf of customers, providing information periodically to
customers showing their position in Retail shares, and providing sub-transfer
agent services or the information necessary for sub-transfer agent services,
with respect to Retail shares beneficially owned by customers. Since financial
institutions may charge their customers fees depending on the type of customer
account the Investor has established, beneficial owners of Retail shares should
read this Prospectus in light of the terms and fees governing their accounts
with financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are
declared daily and paid monthly. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce the
Fund's net asset value per share by the per share amount thereof.
Net income for dividend purposes consists of interest accrued
and any dividend or distribution income on the Fund's assets, less amortization
of premium on such assets and the accrued expenses of the Fund. Fund shares
begin earning dividends on the day the purchase order is settled and continue
earning dividends through and including the day before the redemption order for
the shares is executed.
Shareholders may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class or series at the
net asset value of such shares on the payment date. Shareholders must make
such election, or any revocation thereof, in writing to his Bank or financial
institution. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of the Fund's net
investment income available for distribution to the holders of Retail shares
may be reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
-19-
<PAGE> 61
TAXES
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Such qualification generally relieves the Fund of liability for federal income
tax to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distribute to
its shareholders an amount equal to at least the sum of 90% of its tax-exempt
interest income net of certain deductions and 90% of its investment company
taxable income (if any) for such year. The Fund intends to distribute
substantially all of its net tax-exempt income (such distributions are known as
"exempt-interest dividends") and investment company taxable income (if any)
each taxable year. Exempt- interest dividends may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. See the Statement of Additional
Information under "Additional Information Concerning Taxes." To the extent, if
any, dividends paid to shareholders are derived from taxable income or from net
long-term capital gains, such dividends will not be exempt from federal income
tax and may also be subject to state and local taxes. The Fund does not intend
to earn any investment company taxable income or net long-term capital gains.
Because all of the Fund's net investment income is expected to be derived from
earned interest, it is anticipated that no part of any distribution will be
eligible for the dividends received deduction for corporations.
Dividends declared in December of any year payable to
shareholders of record on a specified date in such month will be deemed to have
been received by shareholders and paid by the Fund on December 31 of such year
in the event such dividends are actually paid during January of the following
year.
If the Fund should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the alternative minimum tax applicable to
individuals and corporations and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. Shareholders receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of shares of the Fund depending upon the
tax basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include
sales charges incurred upon the purchase of Fund shares in his tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of such shares for shares of another Fund within 90 days of the
purchase and is able to reduce the sales charges applicable to the new shares
(by virtue of the Trust's exchange privilege), the amount equal to such
-20-
<PAGE> 62
reduction may not be included in the tax basis of the shareholder's exchanged
shares, but may be included (subject to this limitation) in the tax basis of
the new shares.
PENNSYLVANIA TAXES
Under current Pennsylvania law, Shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Fund attributable to
interest income from obligations of the State of Pennsylvania or its political
subdivisions, the United States, its territories or certain of its agencies and
instrumentalities ("Exempt Securities"). However, Pennsylvania Personal Income
Tax will apply to distributions from the Fund attributable to gain realized on
the disposition of any investment, including Exempt Securities, or to interest
income from investments other than Exempt Securities. Shareholders also will
be subject to the Pennsylvania Personal Income tax on any gain they realize on
the disposition of Shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities
are subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of Shares in the
Fund that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended to the extent that the Fund is comprised of Exempt Securities.
MISCELLANEOUS
Shareholders of the Fund will be advised at least annually as
to the federal income tax and Pennsylvania income tax consequences of
distributions made to them each year. Shareholders are advised to consult
their tax advisers concerning the application of state and local taxes, other
than Pennsylvania taxes, which may differ from tax consequences described
above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors should consult their
tax advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the
direction of the Trust's Board of Trustees. The trustees of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
-21-
<PAGE> 63
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Richard B. Tullis Chairman of the Board Chairman Emeritus, Harris Corporation
5150 Three Village Drive (electronic communication and
Lyndhurst, OH 44124 information processing equipment),
since 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
dehumidifiers), since January 1996 and
President, January 1987 to January
1996; Vice President and Executive
Committee Member of Ebtech Corp.,
since March 1991.
Leigh Carter* Trustee, President Retired President and Chief Operating
18901 Shaker Blvd., #6B and Treasurer Officer, BFGoodrich Company, August
Cleveland, OH 44120 1986 to September 1990; Director,
Adams Express Company, since April
1982; Director, Lamson & Sessions Co.,
since April 1991; Director, Petroleum
& Resources Corp., since April 1987;
Director, Morrison Products, since
April 1983.
John F. Durkott Trustee President and Chief Operating Officer,
8600 Allisonville Road Kittle's Home Furnishings Center,
Indianapolis, IN 46250 Inc., since January 1982; partner,
Kittle's Bloomington Property Company,
since January 1981; partner, KK&D
(Affiliated Real Estate Companies of
Kittle's Home Furnishings Center),
since January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol
Carol Martin Gatton Martin Gatton, College of Business and
College of Business and Economics, University of Kentucky,
Economics since 1981; Director, Studio Plus
University of Kentucky
</TABLE>
-22-
<PAGE> 64
<TABLE>
<S> <C> <C>
Lexington, KY 40506-0034 Hotels, Inc., since 1994.
Robert D. Neary Trustee Retired Co-Chairman of Ernst & Young,
2000 National City Center March 1984-September 1993; Director,
1900 E. 9th Street Cold Metal Products, Inc., since March
Cleveland, OH 44114 1994; Director, Zurn Industries, Inc.,
since June 1995.
J. William Pullen Trustee President and Chief Executive Officer,
Whayne Supply Company Whayne Supply Co. (engine and heavy
1400 Cecil Avenue equipment distribution), since 1986;
P.O. Box 35900 President and Chief Executive Officer,
Louisville, KY 40232-5900 American Contractors Rentals & Sales
(rental subsidiary of Whayne Supply
Co.), since 1988.
</TABLE>
-23-
<PAGE> 65
__________________________
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Fund. The
adviser is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate
trust and agency, and personal and corporate banking. The adviser is a member
bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and approximately $32
billion in total assets. National City has its principal offices at 1900 East
Ninth Street, Cleveland, Ohio 44114
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, National City
has agreed to manage the Fund, make decisions with respect to and place orders
for all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales. The Fixed Income Team of
National City's Asset Management Group assumed responsibility for the
day-to-day management of the Fund upon commencement of operations of the Fund.
Members of the team make decisions for the Fund. No person is primarily
responsible for making recommendations. Members of the team are:
- Donald L. Ross, Director of the Fixed Income Team,
has been with National City since 1985. He
specializes in the overall duration and yield curve
decisions.
- Michael E. Santelli, Vice President, joined National
City in 1995. Previously, he was associated with
Donaldson, Lufkin and Jenrette's mortgage research
department since at least 1991. He specializes in
the mortgage and asset-backed markets.
- Alex L. Vallecillo, Assistant Vice President, joined
National City in 1996. He traded corporate
structured securities for Merrill Lynch in 1993, and
was associated with EDS from September 1990 through
July 1992. He specializes in the analysis of the
corporate bond sector.
- Stephen P. Carpenter, Vice President, joined National
City in 1988. He has more than 21 years of
investment experience with expertise in the area of
municipal bonds -- taxable as well as tax-free -- and
money market instruments.
- John H. Lockhart, Vice President, has been with
National City since 1988. He focuses on the national
tax-exempt market.
- 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.
-24-
<PAGE> 66
For the services provided and expenses assumed pursuant to the
Advisory Agreement, the adviser is entitled to receive an advisory fee,
computed daily and payable monthly, at the annual rate of .55% of the average
net assets of the Fund. The adviser may, from time to time, waive all or a
portion of its advisory fees to increase the net income of the Fund available
for distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISER
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 adviser
believes that it may perform the services for the Fund contemplated by the
Advisory Agreement with the Trust as described in such Agreement 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 adviser from continuing to perform services for the Trust. If the
adviser was to be prohibited from providing services to the Fund, 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 adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Trust
shares, the adviser and its affiliated and correspondent banks might be
required to alter materially or discontinue the services offered 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
adviser, or any of its affiliates, might offer to provide such services.
SUB-ADVISER
Weiss, Peck & Greer, L.L.C. serves as the investment
sub-adviser to the Fund under a sub-advisory agreement (the "Sub-Advisory
Agreement") with the adviser. WPG is a limited liability company founded in
1970. WPG engages in investment management, venture capital management and
management buyouts. WPG has been active since its founding in managing
portfolios of tax exempt securities. On March 31, 1996, total assets under
management were approximately $12.2 billion. The principal business address of
WPG is One New York Plaza, New York, New York 10004.
Pursuant to the Sub-Advisory Agreement and subject to the
supervision of the adviser and of the Trust's Board of Trustees and in
accordance with the Fund's investment policies, the sub-adviser has agreed to
assist the Adviser in providing a continuous investment program for the Fund
and in determining investments for the Fund. The sub-adviser will maintain the
Trust's records relating to purchases and sales effected by it. For the
services provided and expenses assumed pursuant to the Sub-Advisory Agreement,
the sub-adviser is entitled to an advisory fee, payable by the adviser,
calculated daily and payable monthly, at the annual rate of .18% of the average
daily net assets of the Fund. The sub-adviser may from time-to-time waive all
or a portion of its fee from the adviser.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Fund. PFPC is
an indirect, wholly owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
-25-
<PAGE> 67
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation
of the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive
an administrative fee, computed daily and paid monthly, at the annual rate of
.10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .05% of the next $200,000,000 of its net assets
and .03% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of the Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 36 separate
classes or series of shares of beneficial interest ("shares"). Two of these
classes or series, which represent interests in the Fund (Class T and Class T -
Special Series 1) are described in this Prospectus. Class T shares constitute
the Institutional class or series of shares; and Class T - Special Series 1
shares constitute the Retail class or series of shares. The other investment
funds of the Trust are: Money Market Fund (Class A and Class A-Special Series
1), Government Fund (Class B and Class B-Special Series 1), Treasury Fund
(Class C and Class C-Special Series 1), Tax Exempt Fund (Class D and Class
D-Special Series 1), Equity Fund (Class H and Class H-Special Series 1), Fixed
Income Fund (Class I and Class I-Special Series 1), Ohio Tax Exempt Fund (Class
K and Class K-Special Series 1), National Tax Exempt Fund (Class L and Class
L-Special Series 1), Equity Income Fund (Class M and Class M-Special Series 1),
Mid Cap Regional Fund (Class N and Class N- Special Series 1), Enhanced Income
Fund (Class O and Class O-Special Series 1), Total Return Advantage Fund (Class
P and Class P-Special Series 1), Pennsylvania Tax Exempt Fund (Class Q and
Class Q-Special Series 1), Intermediate Government Fund (Class R and Class
R-Special Series 1) and the GNMA Fund (Class S and Class S-Special Series 1).
Each share has no par value, represents an equal proportionate interest in the
investment fund with other shares of the same class or series outstanding, and
is entitled to such dividends and distributions out of the income earned on the
assets belonging to such fund as are declared in the discretion of the Trust's
Board of Trustees. The Trust's Declaration of Trust authorizes the Board of
Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share
held, and a proportionate fractional vote for each fractional share held.
Shareholders will vote in the aggregate and not by investment fund, except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular investment fund. The Statement of Additional Information gives
examples of situations in which the law requires voting by investment fund. In
addition, shareholders of each of the investment funds will vote in the
aggregate and not by class or series, except as otherwise expressly required by
law or when the Board of Trustees determines the matter to be voted on affects
only the interests of the holders of a particular class or series of shares.
Under the Services Plan, only the holders of Retail shares in an investment
fund are, or would be entitled to vote on matters submitted to a vote of
shareholders (if any) concerning the Services Plan. Voting rights are not
cumulative, and accordingly, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the trustees irrespective of the vote of
the other shareholders.
As stated above, the Trust is organized as a trust under the
laws of Massachusetts. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
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
-26-
<PAGE> 68
such meeting. Such meeting may be called by shareholders to consider the
removal of one or more trustees. Shareholders will receive shareholder
communication assistance with respect to such matter as required by the 1940
Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc. serves as the Trust's transfer and
dividend disbursing agent. Communications to the Transfer Agent should be
directed to P.O. Box 5109, Westborough, Massachusetts 01581-5109. The fees
payable by the Trust for these services are described in the Statement of
Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses
in connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees
(including fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings;
and any extraordinary expenses. The Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Fund also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as
both the custodian and an investment adviser, a procedure has been established
requiring three annual verifications, two of which are to be unannounced, of
all investments held pursuant to the Custodian Services Agreement, to be
conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or a particular investment
fund means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
the Trust or such fund or (b) 67% or more of the shares of the Trust or such
fund present at a meeting if more than 50% of the outstanding shares of the
Trust or such fund are represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
-27-
<PAGE> 69
ARMADA FUNDS
INVESTMENT ADVISER
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
SUB-INVESTMENT ADVISER
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLE . . . . . . . . . . . . . . . . . . . . . 2
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . 4
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 5
RISK FACTORS, INVESTMENT OBJECTIVE AND POLICIES . . . . 5
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . 10
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . 11
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . 12
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . 12
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . 18
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . 18
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . 19
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 19
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . 21
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . 26
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . 27
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 27
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
---------------------------------------------------------------------
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, COLUMBUS; NATIONAL CITY BANK,
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 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.
-28-
<PAGE> 70
ARMADA FUNDS
PROSPECTUS
_______________, 1996
Pennsylvania Municipal Fund
-29-
<PAGE> 71
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of
National City
Corporation
National City Bank
1900 East Ninth Street
Cleveland, OH 44114
Investment Sub-Adviser
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
-30-
<PAGE> 72
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commision. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawfull
prior to registration or qualification under the securities laws of any such
State
SUBJECT TO COMPLETION, DATED JULY 10, 1996
ARMADA FUNDS
________________________________________________________________________________
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City Investments
Corporation, please call your
Investment Consultant for
information.
For current performance, fund
information, and to purchase shares,
please call 1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
This Prospectus describes shares in the following investment
fund (the "Fund") of Armada Funds (the "Trust") and its investment objective
and policies:
PENNSYLVANIA TAX EXEMPT FUND'S objective is to provide current income
exempt from regular federal income and Pennsylvania personal income
taxes, consistent with stability of principal. The Fund invests
primarily in high quality debt obligations issued by or on behalf of
the Commonwealth of Pennsylvania and its political subdivisions and
financing authorities.
All securities or instruments in which the Fund invests have
remaining maturities of 397 calendar days or less, although variable and
floating rate instruments and securities underlying certain repurchase
agreements may bear longer maturities.
National City Bank ("National City") serves as investment
adviser (the "adviser") to the Fund. Weiss, Peck & Greer, L.L.C. ("WPG")
serves as the sub-investment adviser to the Fund (the "sub-adviser").
440 Financial Distributors, Inc., a wholly-owned subsidiary
of First Data Corp. (the "Distributor"), serves as the Trust's sponsor and
distributor. The Fund pays a fee to the Distributor for distributing its
shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the
Fund that a prospective investor should consider before investing. Investors
should carefully read this Prospectus and retain it for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information, has been filed with the Securities and Exchange Commission ("SEC")
and is available upon request without charge by contacting the Trust at its
telephone number or address shown above. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference in its entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS
PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
-1-
<PAGE> 73
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.
_________________, 1996
-2-
<PAGE> 74
The classes or series which represent interests in the Fund
are described in this Prospectus. Class Q shares constitute the Institutional
class or series of shares (herein referred to as the "Institutional shares") of
the Fund. Class Q - Special Series 1 shares constitute the Retail class or
series of shares (herein referred to as the "Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and National
Asset Management Corporation ("NAM") customers. Retail shares are sold to the
public primarily through financial institutions such as banks, brokers and
dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
Pennsylvania Pennsylvania
Tax Exempt Fund Tax Exempt Fund
Retail Institutional
Shares(1) Shares
-------------- --------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases None None
Sales Charge Imposed on Reinvested
Dividends . . . . . . . . . . . None None
Deferred Sales Charge . . . . . . None None
Exchange Fee . . . . . . . . . . None None
FUND OPERATING EXPENSES
(as a percentage of average daily
net assets)
Management Fees (after fee
waivers)(2) . . . . . . . . . . .15% .15%
12b-1 Fees(3) . . . . . . . . . . .05% .05%
Other Expenses . . . . . . . . . .24% .14%
----
TOTAL FUND OPERATING EXPENSES
(AFTER FEE WAIVERS)(2) . . . .44% .34%
==== ====
</TABLE>
___________________________
1 The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Fund. Pursuant to the
Services Plan, the Trust enters into shareholder servicing agreements
with certain financial institutions under which they agree to provide
shareholder administrative services to their customers who
beneficially own Retail shares in consideration for the payment of up
to 10% (on an annualized basis) of the net asset value of such shares.
2 The expense information in the table relating to each Fund has been
restated to reflect current fees. Management fees (before waivers)
would be .40%. Total Fund Operating Expenses (before waivers) would
be .69% for the Retail shares and .59% for the Institutional shares.
3 As a result of the payment of 12b-1 and certain other related fees,
long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. ("NASD"). The NASD has
adopted rules which generally limit the aggregate payments under the
Trust's Service and Distribution Plan ("Distribution Plan") and
Services Plan to a certain percentage of total new gross share sales,
plus interest. The Trust would stop accruing 12b-1 and related fees
if, to the extent, and for as long as, such limit would otherwise be
exceeded.
_______________________
-3-
<PAGE> 75
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Pennsylvania Tax Exempt Retail Shares . . . . . . . . . . . . . . . . $5 $14 $25 $55
Pennsylvania Tax Exempt Institutional Shares . . . . . . . . . . . . $3 $11 $19 $43
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Fund.
-4-
<PAGE> 76
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_______,
1996, the Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold Retail Shares that were
similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain
information concerning the investment results of the Predecessor Fund's Retail
Shares (the series that is similar to the Retail Shares of the Pennsylvania Tax
Exempt Fund) for the fiscal year ended April 30, 1996 and the fiscal period
ended April 30, 1995. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon is contained in Inventor Funds' Annual
Report to Shareholders for the fiscal year ended April 30, 1996. Such financial
highlights should be read in conjuction with the financial statements and notes
thereto contained in Inventor Funds' Annual Report to Shareholders and
incorporated by reference into the Statement of Additional Information relating
to the Pennsylvania Tax Exempt Fund.
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, 1996 April 30, 1995(2)
-------------- -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period......... $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................ 0.03 0.02
LESS DISTRIBUTIONS
Distributions from Net Investment Income..... (0.03) (0.02)
Net Asset Value, End of Period............... $1.00 $1.00
Total Return(4).............................. 3.36% 2.32%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000)...... $70,422 $56,668
Ratio of Expenses to Average Net Assets...... 0.55%(1) 0.55% (1,3)
Ratio of Net Investment Income to
Average Net Assets........................ 3.29%(1) 3.21% (1,3)
</TABLE>
___________________
1. The operating expense ratio and the net investment income ratio
before fee waivers by the investment adviser for the year
ended April 30, 1996 and for the period ended April 30, 1995
would have been 0.96% and 2.88%, and 1.04% and 2.72%, respectively.
2. Commenced operations on August 8, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
3. Annualized.
4. Not annualized.
-5-
<PAGE> 77
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund consists of a pool of assets with separate investment
objectives and policies as described below under "Risk Factors, Investment
Objectives and Policies." The Fund is deemed to be a diversified investment
fund under the 1940 Act, as it satisfies the diversification requirements
applicable to funds that hold themselves out as primarily distributing income
that is exempt from income taxes of a specific state.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except
that, as described more fully below under "Shareholder Services Plan," the
Trust has implemented the Services Plan with respect to Retail shares of the
Fund. Under the Services Plan, only the beneficial owners of Retail shares
bear the expenses of shareholder administrative services which are provided by
financial institutions for their benefit (estimated not to exceed .10%
annually). See "Shareholder Services Plan," "Dividends and Distributions" and
"Description of the Trust and Its Shares" for a description of the impact that
the Services Plan may have on holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. There can be no assurance that the Fund will achieve its
objective.
The investment objective of the Fund is to provide current
income exempt from regular federal income tax and Pennsylvania personal income
taxes, consistent with stability of principal. It is a fundamental policy of
the Fund to use its best efforts to maintain a constant net asset value of
$1.00 per share. The Fund intends to comply with regulations of the Securities
and Exchange Commission ("SEC") applicable to money market funds. These
regulations impose certain quality, maturity and diversification restraints on
investments by the Fund.
The Fund invests primarily in debt obligations issued by or on
behalf of the Commonwealth of Pennsylvania and its political subdivisions and
financing authorities, and obligations of the United States, including
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.
-6-
<PAGE> 78
The Fund is concentrated on securities issued by the
Commonwealth of Pennsylvania or entities within the Commonwealth of
Pennsylvania, and therefore investment in the Fund may be riskier than an
investment in other types of money market funds.
The Fund will only purchase "eligible securities" that present
minimal credit risks as determined by the adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities generally
include (i) U.S. Government Obligations, (ii) securities that are rated (at the
time of purchase) by nationally recognized statistical rating organizations
("Rating Agencies") in the two highest rating categories for such securities,
and (iii) certain securities that are not so rated but are of comparable
quality to rated eligible securities as determined by the adviser. See "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information for a more complete description of eligible securities. A
description of ratings is also contained in the Statement of Additional
Information.
The Fund's assets have remaining maturities of 397 calendar
days or less (except for certain variable and floating rate instruments and
securities underlying certain repurchase agreements) as defined by the SEC and
the Fund's dollar-weighted average portfolio maturity may not exceed 90 days.
The Fund may invest in variable and floating rate obligations,
may purchase securities on a "when-issued" basis and reserves the right to
engage in transactions involving standby commitments and repurchase agreements.
The Fund may invest up to 100% of its assets in securities which pay interest
exempt only from federal taxes and in taxable securities, during temporary
defensive periods when, in the opinion of the sub-adviser, Pennsylvania
Municipal Securities of sufficient quality are unavailable. There is no
percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods; however, uninvested cash reserves will not
earn income. See "Other Investment Policies."
Special Considerations
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and livestock
products, but substantial economic activity in agribusiness and food-related
industries. Service industries currently employ the greatest share of
non-agricultural workers, followed by the categories of trade and
manufacturing. Future economic difficulties in any of these industries could
have an adverse impact on the finances of the Commonwealth or its
municipalities, and could adversely affect the market value of the Bonds in the
Pennsylvania Trust or the ability of the respective obligors to make payments
of interest and principal due on such Bonds. Rising unemployment, a relatively
high proportion of persons 65 and older in the Commonwealth of Pennsylvania and
court ordered increases in healthcare reimbursement rates place increased
pressures on the tax resources of the Commonwealth and its municipalities. The
Commonwealth has sold a substantial amount of bonds over the past several
years, but the debt burden remains moderate. The recession has 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.
-7-
<PAGE> 79
OTHER INVESTMENT POLICIES
Types of Municipal Bonds
The two principal classifications of Pennsylvania Municipal
Securities which may be held by the Fund are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue or "special obligation" securities are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a specific excise tax or
other specific revenue source such as the user of the facility being financed.
Any private activity bonds (including industrial development bonds) held by the
Fund are in most cases revenue securities and are not payable from revenues of
the issuer. Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate or other user
of the facility involved. Private activity bonds are included in the term
"Pennsylvania Municipal Securities" only if the interest paid thereon is exempt
from regular federal income tax and not treated as a specific tax preference
item under the federal alternative minimum tax. See "Taxes."
Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund
typically evaluates the credit quality and ratings of credit enhanced
securities based upon the financial condition and ratings of the party
providing the credit enhancement (the "credit enhancer"), in addition to the
issuer. The bankruptcy, receivership or default of the credit enhancer will
adversely affect the quality and marketability of the underlying security.
The Fund may also invest in "moral obligation" bonds, which
are ordinarily issued by special purpose public authorities in certain states.
If the issuer of moral obligation bonds is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid. They may take the form of a
lease, an installment purchase contract, a conditional sales contract, or a
participation certificate in any of the above. Municipal lease obligations
typically are not backed by the municipality's credit, and their interest may
become taxable if the lease is assigned. Under guidelines established by the
Board of Directors, the credit quality of municipal leases will be determined
on an ongoing basis, including an assessment of the likelihood that a lease
will be canceled.
Participation interests are interests in Municipal Securities
from financial institutions such as commercial and investment banks, savings
and loan associations and insurance companies. These interests may take the
form of participations, beneficial interests in a trust, partnership interests
or any other form of indirect ownership that allows the Fund to treat the
income from the investment as exempt from federal income tax. The Fund invests
in these participation interests in order to obtain credit enhancement or
demand features that would not be available through direct ownership of the
underlying Municipal Securities.
A participation interest may be in the form of a "certificates of
participation" which represents undivided proportional interests in lease
payments by a governmental or nonprofit entity. The municipal leases
underlying the certificates of participation in which the Fund invests will be
subject to the same quality rating standards applicable to Municipal Bonds.
-8-
<PAGE> 80
The lease payments and other rights under the lease provide for and secure the
payments on the certificates. Lease obligations may be limited by law,
municipal charter or the duration or nature of the appropriation for the lease
and may be subject to appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may provide that the certificate trustee cannot
accelerate lease obligations upon default; in such event, the trustee would
only be able to enforce lease payments as they become due. In the event of a
default or failure of appropriation, it is unlikely that the trustee would be
able to obtain an acceptable substitute source of payment. In addition,
certificates of participation are less liquid than other bonds because there is
a limited secondary trading market for such obligations. To alleviate
potential liquidity problems with respect to these investments, the Fund may
enter into remarketing agreements which may provide that the seller or a third
party will repurchase the obligation within seven days after demand by the Fund
and upon certain conditions (such as the Fund's payment of a fee). Investments
in certificates of participation will not exceed 5% of the Fund's net assets.
The Fund may also invest in unsecured short-term promissory
notes issued by municipalities and other entities.
Taxable Money Market Instruments
The Fund may invest, from time to time, a portion of its
assets for temporary defensive or other purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. Government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the two highest rating categories of S&P,
Fitch, Duff or Moody's or unrated instruments of comparable quality;
certificates of deposit; bankers' acceptances; and repurchase agreements with
respect to such obligations.
Illiquid Securities
The Fund will not knowingly invest more than 10% of the value
of its net assets in securities that are illiquid. The Fund may purchase
securities which are not registered under the Securities Act of 1933, as
amended (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. Any such security
will not be considered illiquid so long as it is determined by the Board of
Trustees or the sub-adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of
illiquidity in the Fund during any period that qualified institutional buyers
become uninterested in purchasing these restricted securities. The ability to
sell to qualified institutional buyers under Rule 144A is a recent development,
and it is not possible to predict how this market will develop. The Board will
carefully monitor any investment by the Fund in these securities.
Variable and Floating Rate Obligations
The Fund may purchase variable and floating rate demand
obligations (including variable amount master demand notes) which are unsecured
instruments that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate. The Fund, however, may invest in
such obligations which have a stated maturity in excess of one year only if the
Fund may demand repayment of the principal at least once a year upon not more
than thirty days notice (unless the obligation is guaranteed by
-9-
<PAGE> 81
the U.S. Government or any agency or instrumentality thereof). Because
variable and floating rate obligations are direct lending arrangements between
the purchasing Fund and the issuer, they are not normally traded. Although
there may be no active secondary market in such instruments, the Fund may
demand payment of principal and accrued interest at a time specified in the
instrument or may resell them to a third party. Such obligations may be backed
by bank letters of credit or guarantees issued by banks, other financial
institutions or the U.S. Government, its agencies or instrumentalities. The
quality of any letter of credit or guarantee will be rated high quality or, if
unrated, will be determined to be of comparable quality by the sub-adviser. In
the event an issuer of a variable or floating rate obligation defaulted on its
payment obligation, the Fund might be unable to dispose of the instrument
because of the absence of a secondary market and could, for this or other
reasons, suffer a loss to the extent of the default.
Stand-by Commitments
The Fund may acquire stand-by commitments with respect to
Pennsylvania Municipal Securities or other securities held in its fund. Under
a stand-by commitment, a dealer agrees to purchase at the Fund's option
specified securities at a specified price. Stand-by commitments acquired by
the Fund must be of high quality as determined by any Rating Agency, or, if not
rated, must be of comparable quality as determined by the Fund's adviser. The
Fund acquires stand-by commitments solely to facilitate fund liquidity and does
not intend to exercise its rights thereunder for trading purposes.
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time.
These transactions involve the risk that the price or yield obtained may be
less favorable than the price or yield available when delivery takes place.
The Fund does not intend to purchase when-issued securities for speculative
purposes but only for the purpose of acquiring portfolio securities. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction; its failure to do so may cause the Fund to miss a
price or yield considered to be attractive. For further information, see "Risk
Factors, Investment Objectives, and Policies" in the Statement of Additional
Information.
Derivatives and Other Municipal Bonds
The Fund may invest in tax-exempt derivative securities relating to
Municipal Securities, including tender option bonds, participations, beneficial
interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Fund from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and its investment adviser
and sub-investment adviser will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Securities, the creation of any tax-exempt derivative securities, or the bases
for such opinions.
The adviser and sub-investment adviser will evaluate the risks
presented by the derivative instruments purchased by the Fund, and will
determine, in connection with their day-to-day management of the Fund, how they
will be used in furtherance of the Fund's investment objective.
-10-
<PAGE> 82
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high quality, short-term debt securities and which determine their
net asset value per share based on the amortized cost or penny-rounding method.
As a shareholder of another investment company, the Fund would bear, along with
other shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations.
The following investment limitations are matters of fundamental policy and may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding shares (as defined under "Miscellaneous"). (Other
investment limitations that also cannot be changed without a vote of
shareholders are contained in the Statement of Additional Information under
"Risk Factors, Investment Objectives and Policies.")
The Fund may not:
1. Make loans, except that the Fund may purchase or hold
debt instruments in accordance with its investment objective and policies, and
the Fund may enter into repurchase agreements in accordance with its investment
objective and policies.
2. Borrow money or issue senior securities, except that
the Fund may borrow from anyone for temporary purposes in amounts not in excess
of 51% of the value of its total assets at the time of such borrowing; or the
Fund may borrow from a bank for non-temporary purposes, provided that the
borrowing does not exceed 33-1/3% of the Fund's net assets. To the extent that
a bank borrowing exceeds 5% of the Fund's total assets, asset coverage of at
least 300% is required. The Fund will not purchase securities while
outstanding borrowings equal or exceed 5% of the Fund's total assets.
3. Purchase securities of other investment companies
except as permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
4. Purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry, provided, that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities or by domestic branches of U.S. banks and
repurchase agreements secured by such obligations, (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents,
(c) utilities will be classified according to their services, for example, gas,
gas transmission, electric and gas, electric, and telephone each will be
considered a separate industry, and (d) there is no limitation with respect to
securities issued by state and local governments.
-11-
<PAGE> 83
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of the Fund's securities will not constitute a violation of
such limitation for purposes of the 1940 Act.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's "yield," "effective yield" and
"tax-equivalent yield" for Institutional shares and Retail shares. The "yield"
quoted in advertisements refers to the income generated by an investment in a
class of shares of the Fund over a seven-day period identified in the
advertisement. This income is then "annualized." The amount of income so
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" for a class of shares is calculated similarly but, when
annualized, the income earned by an investment in the class is assumed to be
reinvested. An effective yield for a class of shares will be slightly higher
than its yield because of the compounding effect of the assumed reinvestment.
The "tax-equivalent yield" for a class of shares, which shows the level of
taxable yield necessary to produce an after-tax equivalent to the Fund's
tax-free yield for that class, may also be quoted from time to time. It is
calculated by increasing the yield (calculated as above) for a class of shares
by the amount necessary to reflect the payment of federal income tax at stated
tax rates. The Fund's tax-equivalent yield for a class of shares will always
be higher than its yield.
Investors may compare the performance of each class of shares
of a Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the IBC/Donoghue
Pennsylvania Tax Exempt Index, and to data or rankings prepared by independent
services such as Lipper Analytical Services, Inc. or other financial or
industry publications that monitor the performance of mutual funds.
The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate
future performance. Performance data may not provide a basis for comparison
with bank deposits and other investments which provide a fixed yield for a
stated period of time. Yield will be affected by fund quality, composition,
maturity, market conditions and the level of operating expenses for the class
of shares. From time to time, the adviser and/or the sub-adviser may
voluntarily waive their investment advisory fees in order to reduce such
operating expenses, which will have the effect of enhancing the yield. Any
fees charged by financial institutions (as described in "How to Purchase and
Redeem Shares") are not included in the computation of performance data but
will reduce a shareholder's net return on an investment in a Fund.
Shareholders should note that the yield of the Retail shares
will be reduced by the amount of the shareholder servicing fees that are
payable under the Services Plan. See "Shareholder Services Plan."
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may
-12-
<PAGE> 84
obtain these materials from the Trust free of charge by calling
1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the
net asset value per share of the Fund is calculated as of 2:00 p.m. and 4:00
p.m. (Eastern Time) on each business day as described below. Net asset value
per share is determined on each business day, except those holidays which the
Exchange, or banks and trust companies which are affiliated with National City
Corporation (the "Banks"), observe (currently New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans'
Day, Thanksgiving Day and Christmas Day) ("Business Day"). Net asset value per
share of a particular class in the Fund is calculated by dividing the value of
all securities and other assets belonging to the Fund allocable to such class,
less the liabilities charged to that class, by the number of the outstanding
shares of that class.
The assets in the Fund are valued based upon the amortized
cost method, which has been determined by the Trust's Board of Trustees to
represent the fair value of the Fund's investments. Amortized cost valuation
involves valuing an instrument at its cost initially and, thereafter, assuming
a constant amortization to maturity of any discount or premium. Although the
Trust seeks to maintain the net asset value per share of the Fund at $1.00,
there can be no assurance that the net asset value will not vary.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards to National City Investments Corporation
and NatCity Investments, Inc.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors
may purchase Retail shares directly in accordance with the procedures set
forth below or through procedures established by their financial institutions
in connection with the requirements of their accounts. Financial institutions
may charge certain account fees depending on the type of account the Investor
has established with the institution. (For information on such fees, the
Investor should review his agreement with the institution or contact it
directly.) In addition, certain financial institutions may enter into
shareholder servicing agreements with the Trust whereby a financial institution
would perform various administrative support services for its customers who are
the beneficial owners of Retail shares and would receive fees from the Fund for
such services of up to .10% (on an annualized basis) of the average daily net
asset value of such shares. See "Shareholder Services Plan." To purchase
shares, Investors should call 1-800-622-FUND(3863) or visit their local
National City Investments Corporation office: Cleveland (1-800-624-6450),
Columbus (1-800-345-0278), Dayton (1-800-755-8723), Akron (1-
-13-
<PAGE> 85
800-229-0295), Louisville (1-800-727-5656), Indianapolis (1-800-826-2868),
Toledo (1-800-331-8275), or Youngstown (1-800-742-4098).
The minimum investment for the initial purchase of Retail
shares in a Fund is $2,500. All subsequent investments for Retail shares are
subject to a minimum investment of $250. Investments made in Retail shares by
a sweep program described below or through a monthly savings program described
below are not subject to the minimum initial and subsequent investment
requirements or any minimum account balance requirements described in "Other
Redemption Information" below.
Customers of Banks may purchase Retail shares through
procedures established by the Banks or their financial institutions in
connection with the requirements of their customer accounts. These procedures
may include instructions under which a Bank or financial institution may
automatically "sweep" a customer account and invest amounts agreed to by the
Bank or financial institution and the customer in additional Retail shares of
the Fund. Customers may obtain information relating to the requirements of
such accounts from their Banks or financial institutions.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of the Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Funds may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional shares at the net
asset value per share next determined after an order is received by the Trust.
An Investor may apply for participation in a monthly program through a
financial institution, such as banks, brokers or dealers selling Retail shares
of the Fund, by completing an application. The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any
time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent,
First Data Investor Services Group, Inc. (formerly, The Shareholder Services
Group, Inc. d/b/a "440 Financial") (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM
customers ("Customers"). Depending on the terms governing the particular
account, the Banks may impose account charges such as account maintenance fees,
compensating balance requirements or other charges based upon account
transactions, assets or income which will have the effect of reducing the net
return on a shareholder's investment in the Fund. There is no minimum
investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should
obtain information relating to the requirements of such accounts from their
Banks.
If participating in an Asset Diversification Account, under a
monthly savings program, Customers may add to their investment in the
Institutional shares of the Fund, in a consistent manner each month, with a
-14-
<PAGE> 86
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 Fund which are received by
the Transfer Agent on any Business Day prior to 2:00 p.m. (Eastern Time) are
priced at the net asset value per share next determined after receipt of the
order by the Transfer Agent. Purchase orders received between 2:00 p.m. and
4:00 p.m. (Eastern Time) are priced at the net asset value per share determined
at the close of trading on the New York Stock Exchange. Purchase orders
received before 2:00 p.m. (Eastern Time) are processed on the day of receipt.
Purchase orders received by the Transfer Agent after 2:00 p.m. and before 4:00
p.m. (Eastern Time) will be executed on the following Business Day at the
previous day's net asset value per share.
Purchases will be effected only when Federal funds or other
funds are immediately available to the Trust's custodian to make the purchase
on the day the Transfer Agent receives the purchase order. Orders for which
funds have not been received by the Transfer Agent by the prescribed deadline
on a given day will not be accepted and notice thereof will be given promptly
to the Bank or financial institution. In accordance with this policy, purchase
orders which are accompanied by a check will be executed on the second Business
Day following receipt of the order at the previous day's net asset value per
share.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services.
-15-
<PAGE> 87
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.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
calling 1-800-628-0523 (provided he has made the appropriate election in his
account application) or 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.
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 wire or telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares by wire or
telephone may be modified or terminated at any time by the Trust or the
Transfer Agent.
CHECKWRITING SERVICE
You may redeem Shares by writing checks on your Pennsylvania
Tax-Exempt Money Market Fund account for $250 or more per check. Once you have
signed and returned a signature card, you will receive a supply of checks. The
check may be made payable to any person, and your account will continue to earn
dividends until the check clears. Because of the difficulty of determining in
advance the exact value of a Fund account, you may not use a check to close
your account. These checks are free, but your account will be charged a fee of
$10 on stopping payment of a check upon your request or if the check cannot be
honored because of insufficient funds or other valid reasons.
-16-
<PAGE> 88
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of any fund of the Trust held on the
Transfer Agent's system. The Plan allows the shareholder to have a fixed
minimum sum of $250 distributed at regular intervals. The shareholder's
account must have a minimum value of $5,000 to be eligible for the Plan.
Additional information regarding this service may be obtained from an
Investor's financial institution or the Transfer Agent at 1-800-628-FUND(0523).
OTHER REDEMPTION INFORMATION
Redemption orders are effected at the net asset value per
share next determined after acceptance of the order by the Transfer Agent.
Payment for redemption orders received by the Transfer Agent on a Business Day
before 12:00 noon (Eastern Time) will be wired the same day to the Bank or
financial institution placing the order. Payment for redemption orders which
are received between 12:00 noon (Eastern Time) and the close of business or on
a non-Business Day will normally be wired to the Bank or financial institution
on the next Business Day, provided that the Trust reserves the right to wire
redemption proceeds within seven days after receiving the redemption orders if,
in the judgment of the sub-adviser, an earlier payment could adversely affect
the Trust.
Due to the relatively high cost of maintaining small accounts,
the Trust reserves the right to redeem, at net asset value, any account
maintained by a shareholder that has a value of less than $1,000 due to
redemptions where the shareholder does not increase the amount in the account
to at least $1,000 upon 60 days' notice.
If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay
payment of the redemption proceeds until the Transfer Agent is reasonably
satisfied that the check has been collected, which could take up to 10 days
from the date of purchase. A shareholder who anticipates the need for more
immediate access to his investment should purchase shares by Federal funds,
bank wire, or by certified or cashier's check. Financial institutions 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 the time period prescribed by the settlement requirements of the
Securities Exchange Act of 1934, 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 Fund or another investment portfolio of the Trust which
was purchased without a sales charge (each a "no load Fund") may exchange those
Retail shares for Retail shares of an investment fund offered by the Trust
which is sold with a sales charge (each a "load Fund") subject to payment of
the applicable sales charge, provided that such other Retail shares may be
legally sold in the state of the shareholder's residence. (However,
shareholders exchanging Retail shares of a no load Fund which were received in
a previous exchange transaction involving Retail shares of a load Fund will not
be required to pay an additional sales charge upon the reinvestment of the
-17-
<PAGE> 89
equivalent amount into the Retail shares of a load Fund.) Shareholders may
also exchange Retail shares of a no load Fund for Retail shares of another no
load Fund at the net asset value per share without payment of a sales charge.
Shareholders contemplating an exchange should carefully review the Prospectus
of the Fund into which the exchange is being considered. An Armada Funds
Prospectus may be obtained from National City Investments Corporation or an
Investor's financial institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal
to the minimum initial investment required by the particular investment fund
into which the exchange is being made. Investors should make their exchange
requests in writing or by telephone to the financial institutions through which
they purchased their original Retail shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests for the Fund
received by the Transfer Agent prior to 12:00 noon (Eastern Time) will be
processed as of the close of business on the day of receipt; such requests
received by the Transfer Agent after 12:00 noon (Eastern Time) will be
processed on the next Business Day. The Trust reserves the right to reject any
exchange request. During periods of unusual economic or market changes,
telephone exchanges may be difficult to implement. In such event, an Investor
should mail the exchange request to his financial institution, and an Investor
who directly purchased shares from the Trust should mail the exchange request
to the Transfer Agent. The exchange privilege may be modified or terminated at
any time upon 60 days' notice to shareholders.
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act, each
investment fund of the Trust reimburses the Distributor monthly for the direct
and indirect expenses incurred by the Distributor in providing such fund
advertising, marketing, prospectus printing and other distribution services up
to a maximum of .10% per annum of the average net assets of the fund, inclusive
of an annual distribution fee of $250,000 payable monthly and accrued daily
among the investment funds with respect to which the Distributor is
distributing shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to
Retail shares in the Fund. Pursuant to the Services Plan, the Trust enters
into shareholder servicing agreements with certain financial institutions
pursuant to which the institutions render shareholder administrative services
to their customers who are the beneficial owners of Retail shares in
consideration for the payment of up to .10% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation
with respect to those shares than with respect to Institutional shares in the
Fund. Shareholder administrative services may include aggregating and
processing purchase and redemption orders, processing dividend payments from
the Funds on behalf of customers, providing information periodically to
customers showing their position in Retail shares, and providing sub-transfer
agent services or the information necessary for sub-transfer agent services
with respect to Retail shares beneficially owned by customers. Since financial
institutions may charge their customers fees depending on the type of customer
account the Investor has established, beneficial owners of Retail shares should
read this Prospectus in light of the terms and fees governing their accounts
with financial institutions.
-18-
<PAGE> 90
DIVIDENDS AND DISTRIBUTIONS
On each day that the net asset values per share of the Fund
are determined, the Fund declares a dividend from net investment income as of
the close of business on the day of declaration. Net investment income for
dividend purposes consists of (i) interest accrued and discount earned
(including both original issue and market discount) on the Fund's assets, (ii)
less amortization of market premium on such assets, and the accrued expenses of
the Fund. Fund shares begin earning dividends on the day the purchase order is
executed and continue earning dividends through and including the day before
the redemption order for the shares is executed.
Dividends are paid monthly by check, or by wire transfer if
requested in writing by the shareholder to his Bank or financial institution,
within five Business Days after the end of each calendar month or within five
Business Days after a shareholder's complete redemption of his shares in the
Fund.
Shareholders of the Fund may elect to have their dividends
reinvested in additional full and fractional Fund shares of the same class or
series at the net asset value of such shares on the payment date. Shareholders
must make such election, or any revocation thereof, in writing to his Bank or
financial institution. The election will become effective with respect to
dividends paid after its receipt.
Under the Services Plan, the amount of the Fund's net
investment income available for distribution to the holders of Retail shares is
reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Such qualification generally relieves each Fund of liability for federal income
tax to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distributes to
its shareholders an amount equal to at least the sum of 90% of its tax-exempt
interest income net of certain deductions and 90% of its investment company
taxable income (if any) for such year. The Fund intends to distribute
substantially all of its net tax-exempt income (such distributions are known as
"exempt-interest dividends") and investment company taxable income (if any)
each taxable year. Exempt- interest dividends may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. See the Statement of Additional
Information under "Additional Information Concerning Taxes." To the extent, if
any, dividends paid to shareholders of the Fund are derived from taxable income
or from net long-term capital gains, such dividends will not be exempt from
federal income tax and may also be subject to state and local taxes. The Fund
does not intend to earn any investment company taxable income or net long-term
capital gains. Because all of the Fund's net investment income is expected to
be derived from earned interest, it is anticipated that no part of any
distribution will be eligible for the dividends received deduction for
corporations.
-19-
<PAGE> 91
Dividends declared in December of any year payable to
shareholders of record on a specified date in such month will be deemed to have
been received by shareholders and paid by a Fund on December 31 of such year in
the event such dividends are actually paid during January of the following
year.
If the Fund should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the alternative minimum tax applicable to
individuals and corporations and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. Shareholders receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of shares of the Fund depending upon the
tax basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include
sales charges incurred upon the purchase of Fund shares in his tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of such shares for shares of another Fund within 90 days of the
purchase and is able to reduce the sales charges applicable to the new shares
(by virtue of the Trust's exchange privilege), the amount equal to such
reduction may not be included in the tax basis of the shareholder's exchanged
shares, but may be included (subject to this limitation) in the tax basis of
the new shares.
PENNSYLVANIA TAXES
Under current Pennsylvania law, Shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Fund attributable to
interest income from obligations of the State of Pennsylvania or its political
subdivisions, the United States, its territories or certain of its agencies and
instrumentalities ("Exempt Securities"). However, Pennsylvania Personal Income
Tax will apply to distributions from the Fund attributable to gain realized on
the disposition of any investment, including Exempt Securities, or to interest
income from investments other than Exempt Securities. Shareholders also will
be subject to the Pennsylvania Personal Income tax on any gain they realize on
the disposition of Shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities
are subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
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.
-20-
<PAGE> 92
MISCELLANEOUS
Shareholders of the Fund will be advised at least annually as
to the federal income tax and Pennsylvania income tax consequences of
distributions made to them each year. Shareholders are advised to consult
their tax advisers concerning the application of state and local taxes, other
than Pennsylvania taxes, which may differ from the tax consequences described
above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the
direction of the Trust's Board of Trustees. The trustees of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Richard B. Tullis Chairman of the Board Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, OH 44124 communication and information
processing equipment), since
October 1985; Director, NACCO
Materials Handling Group, Inc.
(manufacturer of industrial fork
lift trucks), since 1984; Director,
Hamilton Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990; Director,
Waste-Quip, Inc. (waste handling
equipment), since 1989.
</TABLE>
-21-
<PAGE> 93
<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
564 Hackberry Drive Company and subsidiaries
Westerville, OH 43081 (manufacture, sale and financing of
water coolers and dehumidifiers),
since January 1996 and President,
January 1987 to January 1996; Vice
President and Executive Committee
Member of Ebtech Corp., since March
1991.
Leigh Carter* Trustee, President and Retired President and Chief
13901 Shaker Blvd., #6B Treasurer Operating Officer, BFGoodrich
Cleveland, OH 44120 Company, August 1986 to September
1990; Director, Adams Express
Company, since April 1982;
Director, Lamson & Sessions Co.,
since April 1991; Director,
Petroleum & Resources Corp., since
April 1987; Director, Morrison
Products, 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;
partner, Kittle's Bloomington
Property Company, since January
1981; partner, KK&D (Affiliated
Real Estate Companies of Kittle's
Home Furnishings Center), since
January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and Dean,
Carol Martin Gatton Carol Martin Gatton College of
College of Business and Business and Economics, University
Economics of Kentucky, since 1981; Director,
University of Kentucky Studio Plus Hotels, Inc., since
Lexington, KY 40506-0034 1994.
Robert D. Neary Trustee Retired Co-Chairman of Ernst &
2000 National City Center Young March 1984-September 1993;
1900 E. 9th Street Director, Cold Metal Products,
Cleveland, OH 44114 Inc., since March 1994; Director,
Zurn Industries, Inc., since June
1995.
</TABLE>
-22-
<PAGE> 94
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
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
Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
</TABLE>
____________________
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Fund. The
adviser is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate
trust and agency, and personal and corporate banking. The adviser is a member
bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and approximately $32
billion in total assets. National City has its principal offices at 1900 East
Ninth Street, Cleveland, Ohio 44114.
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, the adviser has
agreed to manage the Fund, make decisions with respect to and place orders for
all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales. For the services provided and
expenses assumed pursuant to the Advisory Agreement, the adviser is entitled to
receive an advisory fee, computed daily and payable monthly, at the annual rate
of .40% of the average net assets of the Fund. The adviser may from time to
time waive all or a portion of the advisory fee payable by the Fund.
AUTHORITY TO ACT AS INVESTMENT ADVISER
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 adviser
believes that it may perform the services contemplated by the Advisory
Agreement with the Trust as described in the Agreement and this Prospectus
without violation of applicable
-23-
<PAGE> 95
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, could prevent the adviser from continuing to
perform services for the Trust. If the adviser was to be prohibited from
providing services to the Fund, 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 adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Fund
shares, the adviser and its affiliated and correspondent banks might be
required to alter materially or discontinue the services offered 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 adviser, or an affiliate of the adviser,
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
adviser, or any of its affiliates, might offer to provide such services.
SUB-ADVISER
Weiss, Peck & Greer, L.L.C. serves as the investment
sub-adviser to the Fund under a sub-advisory agreement (the "Sub-Advisory
Agreement") with the adviser. WPG is a limited liability company founded in
1970. WPG engages in investment management, venture capital management and
management buyouts. WPG has been active since its founding in managing
portfolios of tax exempt securities. On March 31, 1996, total assets under
management were approximately $12.2 billion, over $3.9 billion of which were
tax-free money market instruments. The principal business address of WPG is
One New York Plaza, New York, New York 10004.
Pursuant to the Sub-Advisory Agreement and subject to the
supervision of the adviser and of the Trust's Board of Trustees and in
accordance with the Fund's investment policies, the sub-adviser has agreed to
assist the Adviser in providing a continuous investment program for the Fund
and in determining investments for the Fund, the sub-adviser will maintain the
Trust's records relating to purchases and sales effected by it. For the
services provided and expenses assumed pursuant to the Sub-Advisory Agreement,
the sub-adviser is entitled to an advisory fee, payable by the adviser,
calculated daily and payable monthly, at the annual rate of .05% of the average
daily net assets of the Fund. The sub-adviser may from time-to-time waive all
or a portion of its fee from the adviser.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Fund. PFPC is
an indirect, wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation
-24-
<PAGE> 96
of the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset values per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive
an administration fee, accrued daily and paid monthly, computed separately for
the Fund at an annual rate of .10% of the first $200,000,000 of its net assets,
.075% of the next $200,000,000 of its net assets, .05% of the next $200,000,000
of its net assets and .03% of its net assets over $600,000,000. PFPC is also
entitled to be reimbursed for its out-of-pocket expenses incurred on behalf of
the Trust.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 36 separate
classes or series of shares of beneficial interest ("shares"). Two of these
classes or series, which represent interests in the Fund (Class Q and Class
Q-Special Series 1) are described in this Prospectus. Class Q shares
constitute the Institutional class or series of shares; and Class Q-Special
Series 1 shares constitute the Retail class or series of shares. The other
Funds of the Trust are: Money Market Fund (Class A and Class A-Special Series
1), Government Fund (Class B and Class B-Special Series 1), Treasury Fund
(Class C and Class C-Special Series 1), Tax Exempt Fund (Class D and Class
D-Special Series 1), Equity Fund (Class H and Class H-Special Series 1), Fixed
Income Fund (Class I and Class I-Special Series 1), Ohio Tax Exempt Fund (Class
K and Class K-Special Series 1), National Tax Exempt Fund (Class L and Class L-
Special Series 1), Equity Income Fund (Class M and Class M-Special Series 1),
Mid Cap Regional Equity Fund (Class N and Class N-Special Series 1), Enhanced
Income Fund (Class O and Class O-Special Series 1), Total Return Advantage Fund
(Class P and Class P-Special Series 1), Intermediate Government Fund (Class R
and Class R-Special Series 1), GNMA Fund (Class S and Class S-Special Series 1)
and the Pennsylvania Municipal Fund (Class T and Class T-Special Series 1).
Each share has no par value, represents an equal proportionate interest in the
investment fund with other shares of the same class or series outstanding, and
is entitled to such dividends and distributions out of the income earned on the
assets belonging to such class or series as are declared in the discretion of
the Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the
Board of Trustees to classify or reclassify any unissued shares into any number
of additional classes of shares and to classify or reclassify any class of
shares into one or more series of shares.
Shareholders are entitled to one vote for each full share
held, and a proportionate fractional vote for each fractional share held.
Shareholders will vote in the aggregate and not by investment fund, except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular investment fund. The Statement of Additional Information gives
examples of situations in which the law requires voting by investment fund. In
addition, shareholders of each of the investment funds will vote in the
aggregate and not by class or series, except as otherwise expressly required by
law or when the Board of Trustees determines that the matter to be voted on
affects only the interests of the holders of a particular class or series of
shares. Under the Services Plan, only the holders of Retail shares in an
investment fund are entitled to vote on matters submitted to a vote of
shareholders (if any) concerning the Services Plan. Voting rights are not
cumulative, and accordingly the holders of more than 50% of the aggregate
shares of the Trust may elect all of the trustees irrespective of the vote of
the other shareholders.
As stated above, the Trust is organized as a trust under the
laws of Massachusetts. Shareholders of such a trust may, under certain
-25-
<PAGE> 97
circumstances, be held personally liable (as if they were partners) for the
obligations of the trust. The Declaration of Trust of the Trust provides for
indemnification out of the Trust property for any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes entitled to be cast at such meeting. Such meeting may
be called by shareholders to consider the removal of one or more trustees.
Shareholders will receive shareholder communication assistance with respect to
such matter as required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P.O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses
in connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses relating to
the Distribution Plan; advisory fees; administration fees and expenses; charges
of the custodian and Transfer Agent; certain insurance premiums; outside
auditing and legal expenses; costs of shareholders' reports and shareholder
meetings; and any extraordinary expenses. The Fund also pays for brokerage
fees and commissions (if any) in connection with the purchase of its portfolio
securities. Under the Services Plan, the Retail shares in the Fund also bear
the expense of shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as
both the custodian and as investment adviser, a procedure has been established
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.
-26-
<PAGE> 98
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
-27-
<PAGE> 99
ARMADA FUNDS
Investment Adviser
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
Sub-Investment Adviser
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXPENSE TABLE . . . . . . . . . . . . . . . . . . . . . 3
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . 6
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . 11
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . 12
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . 13
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . 14
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . 19
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . 19
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . 19
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 20
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . 21
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . 25
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . 26
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 26
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
o Shares of the Armada Funds are not bank deposits or obligations
of, or guaranteed or endorsed or otherwise supported by, National
City Bank, its parent company or any of its affiliates or any bank.
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.
There can be no assurances the Armada Pennsylvania Tax Exempt Fund
will be able to maintain a stable net asset value of $1 per share.
An investment in the Fund is neither insured nor guaranteed by the
U.S. Government.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 100
ARMADA FUNDS
PROSPECTUS
________________, 1996
Pennsylvania Tax Exempt Fund
<PAGE> 101
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of
National City
Corporation
National City Bank
1900 East Ninth Street
Cleveland, OH 44114
Sub-Investment Adviser
Weiss, Peck & Greer, L.L.C.
One New York Plaza
New York, NY 10004
<PAGE> 102
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
<TABLE>
<CAPTION>
ARMADA FUNDS
______________________________________________________________________________________________________
<S> <C>
4400 Computer Drive If you purchased your shares
Westborough, Massachusetts 01581 through National City Investments
Corporation, please call your Investment
Consultant for information.
For current performance, fund
information, and to purchase shares,
please call 1-800-622-FUND(3863).
For account redemption information,
please call 1-800-628-0523.
</TABLE>
This Prospectus describes shares in the following investment fund (the
"Fund") of Armada Funds (the "Trust") and its investment objective and
policies:
INTERMEDIATE GOVERNMENT FUND'S investment objective is to seek
preservation of capital and a high degree of liquidity while providing
current income. The Fund invests premarily in obligations issued or
guaranteed as to principal and interest by the U.S. Government and its
agencies and instrumentalities.
The net asset value per share of the Fund will fluctuate as the value
of its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to
the Fund (the "adviser").
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp., (the "Distributor") serves as the Trust's sponsor and distributor.
The Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears
the same date as this Prospectus and is incorporated by reference in its
entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS
PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
-1-
<PAGE> 103
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.
______________, 1996
-2-
<PAGE> 104
The classes or series which represent interests in the Fund
are described in this Prospectus. Class R shares constitute the Institutional
class or series of shares (herein referred to as the "Institutional shares") of
the Fund. Class R - Special Series 1 constitute the Retail class or series of
shares (herein referred to as the "Retail shares") of the Fund.
Institutional shares are sold primarily to Banks and customers
of National Asset Management Corporation ("NAM") customers. Retail shares are
sold to the public primarily through financial institutions such as banks,
brokers and dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
GOVERNMENT GOVERNMENT
FUND FUND
RETAIL INSTITUTIONAL
SHARES(1) SHARES
--------- -------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . . . . . . . . . 3.75% None
Sales Charge Imposed
on Reinvested Dividends . . . . . . . . . . . None None
Deferred Sales Charge . . . . . . . . . . . . . None None
Redemption Fee . . . . . . . . . . . . . . . . . None None
Exchange Fee . . . . . . . . . . . . . . . . . . None None
FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees . . . . . . . . . . . . . . . . .55% .55%
12b-1 Fees2 . . . . . . . . . . . . . . . . . . .05% .05%
Other Expenses . . . . . . . . . . . . . . . . . .46% .21%
---- ----
TOTAL FUND OPERATING
EXPENSES . . . . . . . . . . . . . . . . . . 1.06% .81%
- --------------------------- ===== ====
<FN>
1 The Trust has implemented a Shareholder Services Plan (the "Services Plan")
with respect to Retail shares of the Fund. Pursuant to the Services Plan,
the Trust may enter into shareholder servicing agreements with certain
financial institutions under which they agree to provide shareholder
administrative services to their customers who beneficially own Retail
shares in consideration for the payment of up to .25% (on an annualized
basis) of the net asset value of Retail shares.
2 As a result of the payment of sales charges and 12b-1 and certain other
related fees, long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. ("NASD"). The NASD has adopted
rules which generally limit the aggregate sales charges and payments under
the Trust's Service and Distribution Plan ("Distribution Plan") and Services
Plan to a certain percentage of total new gross share sales, plus interest.
The Trust would stop accruing 12b-1 and related fees if, to the extent, and
for as long as, such limit would otherwise be exceeded.
</TABLE>
___________________________
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required
by SEC regulations); (2) the redemption of your investment at the end of the
following time periods (the Fund does not charge a redemption fee); and (3) the
imposition of the maximum sales charge at the beginning of the period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Intermediate Government Fund
Retail Shares . . . . . . . . . . . . . . . . . $48 $70 $94 $162
Intermediate Government Fund
Institutional Shares . . . . . . . . . . . . . . $ 8 $26 $45 $100
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
-3-
<PAGE> 105
related notes incorporated by reference into the Statement of Additional
Information for the Fund.
-4-
<PAGE> 106
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR INTERMEDIATE GOVERNMENT FUND
The Fund commenced operations on August 10, 1994 as a separate
investment portfolio (the "Predecessor Intermediate Government Fund" ) of
Inventor Funds, Inc., which was organized as a Maryland corporation. On_______
1996, the Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold Retail Shares that were
similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Fund's Retail Shares (the
series that is similar to the Retail Shares of the Intermediate Government
Fund) for the fiscal year ended April 30, 1996 and the fiscal period ended
April 30, 1995. The information was derived from financial statements audited
by Coopers & Lybrand L.L.P., independent accountants for the Predecessor Fund,
whose report thereon is contained in Inventor Funds' Annual Report to
Shareholders for the fiscal year ended April 30, 1996. Such financial
highlights should be read in conjunction with the financial statements and notes
thereto contained in Inventor Funds' Annual Report to Shareholders and
incorporated by reference into the Statement of Additional Information relating
to the Intermediate Government Fund. Additional information about the
performance of the Predecessor Fund is contained in Inventor Funds' Annual
Report to Shareholders, which may be obtained by contacting the Trust at its
telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, April 30,
1996 1995(2)
---------- ---------
<S> <C> <C>
Net Asset Value, Beginning of Period . . . . $10.02 $10.00
Income from Investment Operations
Net Investment Income . . . . . . . . . . . 0.64 0.44
Net Realized and Unrealized Gains on
Securities . . . . . . . . . . . . . . . . 0.07 0.02
Total from Investment Operations . . . . . .
LESS DISTRIBUTIONS
Distributions from Net Investment Income . (0.64) (0.44)
Distributions from Realized Capital Gains . (0.05) --
Total Distributions . . . . . . . . . . . . . (0.69) (0.44)
Net Asset Value End of Period . . . . . . . . $10.04 $10.02
Total Return (4) . . . . . . . . . . . . . . 7.09% 4.75%
RATIO/SUPPLEMENTAL DATA
Net Assets End of Period (000) . . . . . . . $89,901 $53,316
Ratio of Expenses to Average Net Assets . . . 0.85% 1 0.85% 1,3
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . . 6.20% 1 6.17% 1,3
Portfolio Turnover Rate . . . . . . . . . . . 94% 172%
<FN>
(1) The operating expense ratio and the net investment income ratio before fee waivers by the investment
adviser and custodian for the year ended April 30, 1996 and for the period ended April 30, 1995 would have
been 1.25% and 5.80% and 1.33% and 5.69%, respectively.
(2) Commenced operations on August 10, 1994. The Fund did not offer Institutional shares during the period
covered by the Financial Highlights.
(3) Annualized.
(4) Total Return does not reflect sales charge. Not annualized.
</TABLE>
-5-
<PAGE> 107
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund consists of a pool of assets with investment objectives and
policies as described below under "Risk Factors, Investment Objectives and
Policies." The Fund is classified as a diversified investment fund under the
1940 Act.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except
that, as described more fully below under "Shareholder Services Plan," the
Trust has implemented the Services Plan with respect to Retail shares of the
Fund. Under the Services Plan, only the beneficial owners of Retail shares
bear the expenses of shareholder administrative services which are provided by
financial institutions for their benefit (estimated not to exceed .25%
annually). See "Shareholder Services Plan," "Dividends and Distributions" and
"Description of the Trust and Its Shares" for a description of the impact that
the Services Plan may have on holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve the Fund's investment objective. The
investments and investment techniques utilized by the Fund are described below.
Prior to making an investment decision, an investor should consider whether the
Fund best meets an investor's investment objectives and review carefully the
risks involved in Fund investments described below.
The investment objective of the Fund may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined in "Miscellaneous"). Except as noted below under "Investment
Limitations," the Fund's investment policies, however, may be changed without a
vote of shareholders. In addition, the Fund may sell portfolio securities
shortly after they are purchased, which may result in higher transaction costs
and taxable gains for the Fund. There can be no assurance that the Fund will
achieve its objective.
The investment objective of the Fund is to preserve capital
and maintain a high degree of liquidity while providing current income. The
Fund seeks to achieve this objective by investing primarily in obligations
issued or guaranteed as to principal and interest by the U.S. Government and
its agencies and instrumentalities. The Fund invests in U.S. Treasury
obligations and futures on U.S. Treasury obligations. The Fund's
dollar-weighted average maturity will ordinarily 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 the liquidity needs and for temporary
purposes, the Fund may hold cash reserves, and may 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 have the present interest of doing so. The Fund may also
borrow money in amounts up to 33-1/3% of its net assets.
-6-
<PAGE> 108
OTHER INVESTMENT POLICIES
U.S. Treasury Obligations
The Fund may invest in U.S. Treasury obligations consisting of
bills, notes and bonds issued by the U.S. Treasury, and separately traded
interest and principal component parts of such obligations that are
transferable through the Federal book-entry system known as Separately Traded
Registered Interest and Principal Securities ("STRIPS").
Debt Securities
The Fund may invest in debt securities which may include
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Certain federal agencies such as the Government National
Mortgage Association ("GNMA") have been established as instrumentalities of the
United States Government to supervise and finance certain types of activities.
Issues of these agencies, while not direct obligations of the United States
Government, are either backed by the full faith and credit of the United States
(e.g. GNMA) or supported by the issuing agencies' right to borrow from the
Treasury. The issues of other agencies are supported by the credit of the
instrumentality (e.g., Federal National Mortgage Association). Fund
appreciation may result from an improvement in the credit standing of an issuer
whose securities are held or a general decline in the level of interest rates
or a combination of both. An increase in the level of interest rates may
generally reduce the value of the fixed rate debt instruments held by the Fund;
conversely, a decline in the level of interest rates may generally increase the
value of such investments. An increase in the level of interest rates may
temporarily reduce the value of the floating rate debt instruments held by the
Fund; conversely, a decline in the level of interest rates may temporarily
increase the value of those investments.
Futures Contracts
The Fund may invest in futures contracts on U.S. Treasury
obligations in order to offset an expected decrease in the value of its fund
that might otherwise result from a market decline. The Fund may do so either
to hedge the value of its portfolio securities as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, the Fund may utilize futures contracts in
anticipation of changes in the composition of its holdings for hedging purposes
or to maintain liquidity.
Futures contracts obligate a Fund, at maturity, to take or
make delivery of certain securities or the cash value of a contract or
securities index. When interest rates are rising, futures contracts can offset
a decline in value of the securities held by the Fund. When rates are falling,
these contracts can secure higher yields for securities the Fund intends to
purchase. In addition, the Fund may utilize futures contracts in anticipation
of changes in the composition of its fund holdings.
The Fund intends to comply with the regulations of the
Commodity Futures Trading Commission ("CFTC") exempting the Fund from
registration as a "commodity pool operator." The Fund's commodities
transactions must constitute bona fide hedging or other permissible
transactions pursuant to such regulations. In addition, the Fund may not
engage in such transactions if the sum of the amount of initial margin
deposits, other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into. In connection
with the Fund's position in a futures contract, the Fund will create a
segregated account of liquid assets,
-7-
<PAGE> 109
such as cash, U.S. Government securities or other liquid high grade debt
obligations, or will otherwise cover its position in accordance with applicable
requirements of the SEC.
Risk Factors Associated with Futures
To the extent the Fund is engaging in a futures transaction as
a hedging device, due to the risk of an imperfect correlation between
securities in its funds that are the subject of a hedging transaction and the
futures contract used as a hedging device, it is possible that the hedge will
not be fully effective in that, for example, losses on the portfolio securities
may be in excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the portfolio securities that were the
subject of the hedge. In futures contracts based on indices, the risk of
imperfect correlation increases as the composition of the Fund varies from the
composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of futures contracts, the Fund may buy or sell futures
contracts in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Fund's net investment results if
market movements are not as anticipated when the hedge is established.
Successful use of futures by the Fund is also subject to the
adviser's ability to predict correctly movements in the direction of securities
prices, interest rates and other economic factors. For example, if the Fund
has hedged against the possibility of a decline in the market adversely
affecting the value of securities held in its funds and prices increase
instead, the Fund will lose part or all of the benefit of the increased value
of securities which it has hedged because they will have offsetting losses in
their futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Although the Fund intends to enter into futures contracts
transactions only if there is an active market for such contracts, no assurance
can be given that a liquid market will exist for any particular contract at any
particular time. See "Illiquid Securities" below. Many futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit or trading may be suspended for specified periods during the trading day.
Futures contracts prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of futures positions and potentially subjecting the Fund to substantial losses.
If it is not possible, or the Fund determines not, to close a futures position
in anticipation of adverse price movements, it will be required to make daily
cash payments of variation margin. In such circumstances, an increase in the
value of the portion of the Fund being hedged, if any, may offset partially or
completely losses on the futures contract.
The primary risks associated with the use of futures contracts
are: (i) the imperfect correlation between the change in market value of the
securities held by the Fund and the price of the futures contract; (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (iii) losses due
to unanticipated market movements which are potentially unlimited; and (iv)
-8-
<PAGE> 110
the adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. For a further discussion see "Risk
Factors, Investment Objectives and Policies -- Futures Contracts and Options"
and Appendix B in the Statement of Additional Information.
Mortgage-Backed Securities
The Fund may purchase securities that are secured or backed by
mortgages and are issued by entities such as the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC").
The yield characteristics of mortgage-backed securities differ
from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying
assets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-backed security is purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Conversely, if a mortgage-backed security is purchased at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will decrease, yield to maturity. In calculating the
average weighted maturity of the Fund, the maturity of mortgage-backed
securities will be based on estimates of average life.
Prepayments on mortgage-backed securities generally increase
with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and
social factors. Like other fixed income securities, when interest rates rise,
the value of a mortgage-backed security generally will decline; however, when
interest rates decline, the value of a mortgage-backed security with prepayment
features may not increase as much as that of other fixed income securities,
and, as noted above, changes in market rates of interest may accelerate or
retard prepayments and thus affect maturities. For further information, see
"Risk Factors, Investment Objectives and Policies" in the Statement of
Additional Information.
These characteristics may result in a higher level of price
volatility for these assets under certain market conditions. In addition,
while the trading market for short-term mortgages and Mortgage-Backed
Securities is ordinarily quite liquid, in times of financial stress the trading
market for these securities sometimes becomes restricted.
Presently there are several types of mortgage-backed
securities that may be acquired by the Fund, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. These multiple class securities may be issued or
guaranteed by U.S. Government agencies or instrumentalities, including GNMA,
FNMA and FHLMC, or issued by trusts formed by private originators of, or
investors in, mortgage loans. Classes in CMOs which the Fund may hold are
known as "regular" interests. CMOs also issue "residual" interests, which are
a form of beneficial interest in a CMO that permit the purchaser to receive the
net cash flow remaining after payment of liabilities and expenses associated
with the collateral underlying the CMO. Residual interests generally are
junior to and more volatile than regular interests.
-9-
<PAGE> 111
The Fund will not purchase "residual" CMO interests, which normally exhibit a
high degree of price volatility. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however,
FHLMC now issues mortgage-backed securities (FHLMC Gold PCs) which also
guarantee timely payment of monthly principal reductions. Government and
private guarantees do not extend to the securities' value, which is likely to
vary inversely with fluctuations in interest rates.
Mortgage pass-through certificates provide the holder with a
pro rata interest in the underlying mortgages. One type of such certificate in
which the Fund may invest is a GNMA Certificate which is backed as to the
timely payment of principal and interest by the full faith and credit of the
U.S. Government. Another type is a FNMA Certificate, the principal and
interest of which are guaranteed only by FNMA itself, not by the full faith and
credit of the U.S. Government. Another type is a FHLMC Participation
Certificate which is guaranteed by FHLMC as to timely payment of principal and
interest. However, like a FNMA security it is not guaranteed by the full faith
and credit of the U.S. Government.
Risk Factors Associated with Derivative Instruments
The 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, and structured debt
obligations (including collateralized mortgage obligations, various floating
rate instruments and other types of securities).
Like all investments, derivative instruments involve several
basic types of risks which must be managed in order to meet investment
objectives. The specific risks presented by derivatives include, to varying
degrees, market risk in the form of underperformance of the underlying
securities, exchange rates or indices; credit risk that the dealer or other
counterparty to the transaction will fail to pay its obligations; volatility
and leveraging risk that, if interest or exchange rates change adversely, the
value of the derivative instrument will decline more than the securities, rates
or indices on which it is based; liquidity risk that the Fund will be unable to
sell a derivative instrument when it wants because of lack of market depth or
market disruption; pricing risk that the value of a derivative instrument (such
as an option) will not correlate exactly to the value of the underlying
securities, rates or indices on which it is based; and operations risk that
loss will occur as a result of inadequate systems and controls, human error or
otherwise. Some derivative instruments are more complex than others, and for
those instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The adviser has determined that the risk features that most
distinguish derivatives from other investment instruments (and which heavily
influence the market, volatility and leveraging, liquidity, and pricing risks
referred to above) can be described generally as"structural risk." Structural
risk refers to the contractual features of an investment that can cause its
total return to vary with changes in interest rates or other variables.
Structural risk is not unique to derivatives, but because derivatives often are
created through the intricate division of the cash flows of the underlying
security, they can (but do not necessarily) present a high degree of structural
risk. Structural risk can arise from variations in coupon levels, principal,
and/or average life.
The adviser has adopted the following internal policies
concerning management of the structural risk inherent in derivative instruments
on behalf of the Fund:
-10-
<PAGE> 112
The adviser does not presently intend to invest in the
following types of derivatives which are structured instruments, such as range
notes, dual index notes, leveraged or deleveraged bonds, inverse floaters,
index amortizing notes and other structured instruments having similar cash
flow characteristics.
Receipts
The Fund may invest in separately traded interest and
principal component parts of the U.S. Treasury obligations that are issued by
banks or brokerage firms and are created by depositing U.S. Treasury
obligations into a special account at a custodian bank. The custodian holds
the interest and principal payments for the benefit of the registered owners of
the certificates of receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register.
Receipts include "Treasury Receipts" ("TR's"), "Treasury Investment Growth
Receipts" ("TIGR's"), "Liquid Yield Option Notes" ("LYON's"), and "Certificates
of Accrual on Treasury Securities" ("CATS"). TIGR's, LYON's and CATS are
interests in private proprietary accounts while TR's are interests in accounts
sponsored by the U.S. Treasury.
Securities denominated as TR's, TIGR's, LYON's and CATS are
sold as zero coupon securities which means that they are sold at a substantial
discount and redeemed at face value at their maturity date without interim cash
payments of interest or principal. This discount is accreted over the life of
the security, and such accretion will constitute the income earned on the
security for both accounting and tax purposes. Because of these features, such
securities may be subject to greater interest rate volatility than interest
paying Permitted Investments.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to
the seller's agreement to repurchase them at a mutually agreed- upon date and
price ("repurchase agreements"). The Fund may enter into repurchase agreements
only with financial institutions such as banks and broker-dealers which are
deemed to be creditworthy by the adviser, pursuant to guidelines approved by
the Trust's Board of Trustees. The Fund is not permitted to enter into
repurchase agreements with the adviser, Distributor, or any of their
affiliates. Although the securities subject to repurchase agreements may bear
maturities exceeding 397 days, the Fund presently intends to enter only into
repurchase agreements which terminate within seven days after notice by the
Fund. If a Fund were to enter into repurchase agreements which provide for a
notice period greater than seven days in the future, the Fund would do so only
if such investment, together with other illiquid securities, did not exceed 10%
of the Fund's net assets.
The seller under a repurchase agreement will be required to
maintain the value of the securities which the Fund holds subject to the
agreement at not less than the repurchase price, marked to market daily, by
providing additional securities or other collateral to the Fund if necessary.
If the seller defaulted on its repurchase obligation, the Fund would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. Further, it is uncertain
whether the Trust would be entitled, as against a claim by such seller or its
receiver or trustee in bankruptcy, to retain the underlying securities.
-11-
<PAGE> 113
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time.
These transactions involve the risk that the price or yield obtained may be
less favorable than the price or yield available when delivery takes place.
The Fund does not intend to purchase when- issued securities for speculative
purposes but only for the purpose of acquiring portfolio securities. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction; its failure to do so may cause the Fund to miss a
price or yield considered to be attractive. One form of when-issued or delayed
delivery security that the Fund may purchase is a "to be announced" ("TBA")
mortgage-backed security. A TBA transaction arises when a mortgage-backed
security, such as a GNMA pass-through security, is purchased or sold with the
specific pools that will constitute that GNMA pass-through security to be
announced on a future settlement date. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Variable and Floating Rate Obligations
The Fund may purchase rated and unrated variable and floating
rate instruments. These instruments may include adjustable rate mortgages
("ARMs') that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. The absence of an
active secondary market with respect to particular variable and floating rate
instruments could, however, make it difficult for the Fund to dispose of
instruments if the issuer defaulted on its payment obligation or during periods
that the Fund is not entitled to exercise its demand rights, and the Fund
could, for these or other reasons, suffer a loss with respect to such
instruments. For a further description, see "Risk Factors, Objectives and
Policies" in the Statement of Additional Information.
Lending Portfolio Securities
In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. The Fund must receive 100% collateral in the form of
cash or U.S. Government securities. This collateral must be valued daily by
the Fund's adviser, and the borrower will be required to provide additional
collateral should the market value of the loaned securities increase. During
the time portfolio securities are on loan, the borrower pays the Fund involved
any dividends or interest paid on such securities. Loans are subject to
termination by the Fund or the borrower at any time. While 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. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which its adviser has determined
are creditworthy under guidelines established by the Trust's Board of Trustees.
-12-
<PAGE> 114
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high quality, short-term debt securities and which determine their
net asset value per share based on the amortized cost or penny-rounding method.
As a shareholder of another investment company, the Fund would bear, along with
other shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
Illiquid Securities
The Fund will not knowingly invest more than 15% of its net
assets in securities that are illiquid. Illiquid securities would generally
include repurchase agreements with notice/termination dates in excess of seven
days and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933, as amended (the "1933
Act").
The Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser, acting under guidelines approved and monitored by the Board,
that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board will carefully
monitor any investment by the Fund in these securities.
Portfolio Turnover
The Fund may engage in short term trading and may sell
securities which have been held for periods ranging from several months to less
than a day. The object of such short-term trading is to increase the potential
for capital appreciation and/or income by making fund changes in anticipation
of expected movements in interest rates or fixed income security prices or in
order to take advantage of what the Fund's adviser believes is a temporary
disparity in the normal yield relationship between two securities. Any such
trading would increase the Fund's turnover rate and its transaction costs.
The Fund's annual portfolio turnover is not expected to exceed
250% under normal market conditions. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
-13-
<PAGE> 115
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations.
The following investment limitations are matters of fundamental policy and may
not be changed without the affirmative vote of the Fund's outstanding shares
(as defined under "Miscellaneous"). (Other investment limitations that also
cannot be changed without a vote of shareholders are contained in the Statement
of Additional Information under "Risk Factors, Investment Objectives and
Policies.")
The Fund may not:
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 anyone for temporary purposes in amounts not in
excess of 5% of the value of its total assets at the time of such borrowing; or
the Fund may borrow from a bank for non- temporary purposes, provided that the
borrowing does not exceed 33-1/3% of the Fund's net assets. To the extent a
bank borrowing exceeds 5% of the Fund's total assets, assets coverage of at
least 300% is required. The Fund will not purchase securities while
outstanding borrowings equal or exceed 5% of its total assets.
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 agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, except that
up to 25% of the value of the Fund's total assets may be invested without
regard to such limitations. This investment limitation No. 4 does not apply to
repurchase agreements involving securities issued by the U.S. Government or its
agencies or instrumentalities.
For purposes of investment limitations No. 3 and 4, a security
is considered to be issued by the government entity (or entities) whose assets
and revenues back the security.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of the Fund's securities will not constitute a violation of
such limitation for purposes of the 1940 Act.
In order to permit the sale of the Fund's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the Fund's best interests, it will revoke the
-14-
<PAGE> 116
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's yield and total return data for its
Institutional shares and Retail shares. The "yield" quoted in advertisements
refers to the income generated by an investment in a class of shares of the
Fund over a 30-day period identified in the advertisement. This income is then
"annualized." The amount of income so generated by the investment during the
30-day period is assumed to be earned and reinvested at a constant rate and
compounded semi-annually; the annualized income is then shown as a percentage
of the investment.
The Fund calculates its total return for each class of shares
on an "average annual total return" basis for various periods from the date of
commencement of investment operations and for other periods as permitted under
the rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
class. When considering average total return figures for periods longer than
one year, it is important to note that the annual total return of a class for
any one year in the period might have been greater or less than the average for
the entire period. The Fund may also advertise, from time to time, the total
returns of one or more classes of shares on a year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
Investors may compare the performance of each class of shares
of the Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the Lehman
Intermediate Government Index and to data or rankings prepared by independent
services such as Lipper Analytical Services, Inc. or other financial or
industry publications that monitor the performance of mutual funds.
Comparisons may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar, Incorporated
and other publications of a local, regional or financial industry nature.
The performance of each class of shares of the Fund is based
on historical earnings and will fluctuate and is not intended to indicate
future performance. The investment return and principal value of an investment
in a class will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide
a basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value of a
class should be considered in ascertaining the total return to shareholders for
a given period. Yield and total return data should also be considered in light
of the risks associated with the Fund's portfolio composition, quality,
maturity, operating expenses and market conditions. Any fees charged by
financial institutions (as described in "How to Purchase and Redeem Shares")
are not included in the computation of performance data but will reduce a
shareholder's net return on an investment in the Fund.
-15-
<PAGE> 117
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling
1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchases and redemption orders, the
net asset value per share of the Fund is calculated as of the close of trading
on the New York Stock Exchange (the "Exchange") (generally, 4:00 p.m. Eastern
Time). Net asset value per share is determined on each business day, except
those holidays which the Exchange, or banks and trust companies which are
affiliated with National City Corporation (the "Banks"), observe (currently New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day)
("Business Day"). Net asset value per share of a particular class in the Fund
is calculated by dividing the value of all securities and other assets
belonging to the Fund allocable to such class, less the liabilities charged to
that class, by the number of the outstanding shares of that class.
The Fund's investments in securities for which market
quotations are readily available are valued at their market values determined
on the basis of the mean between their current available bid and asked prices
in the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities and other
assets for which quotations are not readily available are valued at their fair
value under procedures approved by the Board of Trustees. Absent unusual
circumstances, short-term investments having maturities of 60 days or less are
valued on the basis of amortized cost unless the Trust's Board of Trustees
determines that this does not represent fair value. The net asset value per
share of each class of shares of the Fund will fluctuate as the value of its
investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives to dealers,
including trips and monetary awards, to National City Investments Corporation.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors
may purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. (For information on such fees, the Investor should review his
agreement with the institution or contact it directly.) In addition, certain
financial institutions may enter into shareholder servicing agreements with the
Trust
-16-
<PAGE> 118
whereby a financial institution would perform various administrative support
services for its customers who are the beneficial owners of Retail shares and
would receive fees from the Fund for such services of up to .25% (on an
annualized basis) of the average daily net asset value of such shares. See
"Shareholder Services Plan." To purchase shares, Investors should call
1-800-622-FUND(3863) or visit their local National City Investments Corporation
office: Cleveland (1-800-624-6450), Columbus (1-800-345-0278), Dayton
(1-800-755-8723), Akron (1-800-229-0295), Louisville (1-800-727-5656),
Indianapolis (1-800-826-2868), Toledo (1-800-331-8275) or Youngstown
(1-800-742-4098).
Shares may be purchased in conjunction with an individual
retirement account ("IRA") and rollover IRAs where a designated custodian acts
as custodian. Investors should contact National City Investments Corporation,
the Distributor or their financial institutions for information as to
applications and annual fees. Investors should also consult their tax advisers
to determine whether the benefits of an IRA are available or appropriate.
The minimum investment for the initial purchase of Retail
shares in each Fund is $2,500, except for purchases for an IRA or other
retirement plan in which event the minimum initial investment is $500. All
subsequent investments for Retail shares and IRAs are subject to a minimum
investment of $250. Investments made in Retail shares through a monthly
savings program described below are not subject to the minimum initial and
subsequent investment requirements or any minimum account balance requirements
described in "Other Redemption Information" below. Purchases for an IRA
through the monthly savings program will be considered as contributions for the
year in which the purchases are made.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of a Fund, in a consistent manner twice each
month, with a minimum amount of $50 per month. Monies may be automatically
withdrawn from a shareholder's checking or savings account available through an
Investor's financial institution and invested in additional Retail shares at
the Public Offering Price next determined after an order is received by the
Trust. An Investor may apply for participation in a monthly program through a
financial institution, such as banks, brokers, or dealers selling Retail shares
of the Funds, by completing an application. The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any
time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent,
First Data Investor Services Group, Inc. (the "Transfer Agent"), on a timely
basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, which is assessed as follows:
-17-
<PAGE> 119
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000 . . . . . . . 3.75 3.90 3.75
$100,000 but less
than $250,000 . . . . . . . . . 2.75 2.83 2.75
$250,000 but less
than $500,000 . . . . . . . . . 2.00 2.04 2.00
$500,000 but less
than $1,000,000 . . . . . . . . 1.25 1.27 1.25
$1,000,000 or more . . . . . . . 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons
who offer or sell for an issuer in connection with the distribution of a
security or have a direct or indirect participation in such undertaking, but
excludes persons whose interest is limited to a commission from an underwriter
or dealer not in excess of the usual and customary distributors' or sellers'
commission. The Staff of the SEC has expressed the view that persons who
receive 90% or more of a sales load may be deemed to be underwriters within the
meaning of this definition. The Dealers' Reallowance may be changed from time
to time.
No sales charge will be assessed on purchases of Retail shares
made by: (a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b) above; (d)
qualified retirement plans purchasing shares through National City Investments
Corporation or NatCity Investments, Inc.; (e) individuals investing in the Fund
by way of a direct transfer or a rollover from a qualified plan distribution
and subsequent transactions into the same account where affiliates of National
City Corporation are serving as a trustee or agent; (f) Investors purchasing
Fund shares through a payroll deduction plan; and (g) individuals investing in
the Fund by way of an asset allocation program sponsored by financial
institutions, although certain account level fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of the Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions at the time of purchase. Reduced
sales charges may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings.
Right of Accumulation. Investors may use their aggregate
investments in Retail shares in determining the applicable sales charge. An
Investor's aggregate investment in Retail shares is the total value (based on
the higher of current net asset value or any Public Offering Price originally
paid) of: (a) current purchases; (b) Retail shares that are already
beneficially owned by the Investor for which a sales charge has been paid; (c)
Retail shares that are already beneficially owned by the Investor which were
purchased prior to July 22, 1990; and (d) Retail shares purchased by dividends
or capital gains that are reinvested. If, for example, an Investor
beneficially owns Retail shares of the Fund with an aggregate current value of
-18-
<PAGE> 120
$90,000 and subsequently purchases Retail shares of the Fund having a current
value of $10,000, the sales charge applicable to the subsequent purchase would
be reduced to 2.75% of the Public Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales
charge immediately upon signing a nonbinding Letter of Intent stating the
Investor's intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge. A Letter
of Intent form may be obtained from the Investor's financial institution. If
an Investor so elects, the 13-month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the
Letter of Intent must be equal to at least 4.0% of the amount indicated in the
Letter of Intent. During the term of a Letter of Intent, the Transfer Agent
will hold Retail shares representing 4.0% of the amount indicated in the Letter
of Intent in escrow for payment of a higher sales charge if the entire amount
is not purchased. Upon completing the purchase of the entire amount indicated
in the Letter of Intent, the escrowed shares will be released. If the entire
amount is not purchased within the 13-month period, the Investor will be
required to pay an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the Investor would have had
to pay on the aggregate purchases if the total of such purchases had been made
at a single time.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks and NAM
customers ("Customers"). Institutional shares are sold without a sales charge
imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his investment in the Fund. There is
no minimum investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of the Fund. Customers should
obtain information relating to the requirements of such accounts from their
Banks.
If participating in an Asset Diversification Account,
Customers may purchase Institutional shares under a monthly savings program.
Customers may add to their investment in the Institutional shares of a Fund, in
a consistent manner each month, with a minimum amount of $50. Monies may be
automatically withdrawn from a shareholder's checking or savings account
available through a Customer's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. A Customer may apply for participation in a monthly
program through the Customer's Bank by completing an application. The program
may be modified or terminated by an Investor on 30 days written notice or by
the Trust at any time.
It is the responsibility of the Banks to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above.
Institutional shares will normally be held of record by the Banks.
Confirmations of share purchases and redemptions will be sent to the Banks.
Beneficial ownership of Institutional shares will be recorded by the Banks and
reflected in the account statements provided by them to their Customers.
-19-
<PAGE> 121
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by
the Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are
priced according to the net asset value per share determined on that day plus
any applicable sales charge (the "Public Offering Price"). Immediately
available funds must be received by the Trust's custodian prior to 2:00 p.m.
(Eastern Time) on the third Business Day following the receipt of such order,
at which time the order will be executed. If funds are not received by such
date, the order will not be accepted and notice thereof will be given to the
Bank or financial institution placing the order. Purchase orders for which
payment has not been received or accepted will be returned after prompt inquiry
to the sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the 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.
-20-
<PAGE> 122
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
calling 1-800-628-0523 (provided he has made the appropriate election in his
account application) or 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.
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 wire or telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares by wire or
telephone may be modified or terminated at any time by the Trust or the
Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of any fund of the Trust held on the
Transfer Agent's system. The Plan allows the shareholder to have a fixed
minimum sum of $250 distributed at regular intervals. The shareholder's
account must have a minimum value of $5,000 to be eligible for the Plan.
Additional information regarding this service may be obtained from an
Investor's financial institution or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts,
the Trust reserves the right to redeem, at net asset value, any account
maintained by a shareholder that has a value of less than $1,000 due to
redemptions where the shareholder does not increase the amount in the account
to at least $1,000 upon 60 days' notice.
If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay
payment of the redemption proceeds until the Transfer Agent is reasonably
-21-
<PAGE> 123
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 the time period prescribed by the settlement requirements of the
Securities Exchange Act of 1934, 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 the Fund or another
investment portfolio of the Trust (each a "load Fund") may exchange those
Retail shares for Retail shares of another load Fund offered by the Trust, or
another investment fund offered by the Trust without the imposition of a sales
charge (each a "no load Fund") at the net asset value per share on the date of
exchange, provided that such other Retail shares may be legally sold in the
state of the shareholder's residence. As a result, no additional sales charge
will be incurred with respect to such an exchange. Shareholders may also
exchange Retail shares of a no load Fund for Retail shares of another no load
Fund at the net asset value per share without payment of a sales charge. In
addition, shareholders of a no load Fund may exchange Retail shares for Retail
shares of a load Fund subject to payment of the applicable sales charge.
However, shareholders exchanging Retail shares of a no load Fund which were
received in a previous exchange transaction involving Retail shares of a load
Fund will not be required to pay an additional sales charge upon notification
of the reinvestment of the equivalent amount into the Retail shares of a load
Fund. Shareholders contemplating an exchange should carefully review the
Prospectus of the fund into which the exchange is being considered. An Armada
Funds Prospectus may be obtained from National City Investments Corporation or
an Investor's financial institution or by calling 1-800-622-FUND (3863).
Any Retail shares exchanged must have a value at least equal
to the minimum initial investment required by the particular investment fund
into which the exchange is being made. Investors should make their exchange
requests in writing or by telephone to the financial institutions through which
they purchased their original Retail shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) will be processed as of the
close of business on the day of receipt; requests received by the Transfer
Agent after 4:00 p.m. (Eastern Time) will be processed on the next Business
Day. The Trust reserves the right to reject any exchange request. During
periods of unusual economic or market changes, telephone exchanges may be
difficult to implement. In such event, an Investor should mail the exchange
request to his financial institution, and an Investor who directly purchased
shares from the Trust should mail the exchange request to the Transfer Agent.
The exchange privilege may be modified or terminated at any time upon 60 days'
notice to shareholders.
-22-
<PAGE> 124
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 of the Fund. Pursuant to the Services Plan, the Trust enters
into shareholder servicing agreements with certain financial institutions
pursuant to which the institutions render shareholder administrative services
to their customers who are the beneficial owners of Retail shares of the Fund
in consideration for the payment of up to .25% (on an annualized basis) of the
average daily net asset value of such shares. Persons entitled to receive
compensation for servicing Retail shares may receive different compensation
with respect to those shares than with respect to Institutional shares in the
same Fund. Shareholder administrative services may include aggregating and
processing purchase and redemption orders, processing dividend payments from
the Trust on behalf of customers, providing information periodically to
customers showing their position in Retail shares, and providing sub-transfer
agent services or the information necessary for subaccounting, with respect to
Retail shares beneficially owned by customers. Since financial institutions
may charge their customers fees depending on the type of customer account the
Investor has established, beneficial owners of Retail shares should read this
Prospectus in light of the terms and fees governing their accounts with
financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are
declared daily and paid monthly. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce the
Fund's net asset value per share by the per share amount thereof.
Net income for dividend purposes consists of interest accrued
and any dividend or distribution income on the Fund's assets, less amortization
of premium on assets and the accrued expenses of the Fund. Fund shares begin
earning dividends on the day the purchase order is settled and continues
earning dividends through and including the day before the redemption order for
the shares is executed.
Shareholders may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class or series at the
net asset value of such shares on the payment date. Shareholders must make
such election, or any revocation thereof, in writing to his Bank or financial
institution. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of the Fund's net
investment income available for distribution to the holders of Retail shares is
reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
-23-
<PAGE> 125
TAXES
The Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Such qualification generally relieves the Fund of liability for federal income
taxes to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income (if any) net
of certain deductions for such year. In general, the Fund's investment company
taxable income will be its taxable income (including interest and short-term
capital gains) subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The Fund intends to distribute substantially all
of its investment company taxable income and net tax-exempt income each taxable
year. Such distributions by the Fund will be taxable as ordinary income to its
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or to a qualified retirement plan are
deferred under the Code.) Because all of the Fund's net investment income is
expected to be derived from earned interest, it is anticipated that no part of
any distribution will be eligible for the dividends received deduction for
corporations.
Substantially all of the Fund's net realized long-term capital
gains, if any, will be distributed at least annually to Fund shareholders. The
Fund generally will have no tax liability with respect to such gains, and the
distributions will be taxable to Fund shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long
the shareholders have held Fund shares and whether such gains are received in
cash or reinvested in additional shares.
Dividends declared in December of any year payable to
shareholders of record on a specified date in such month will be deemed to have
been received by shareholders and paid by the Fund on December 31 of such year
in the event such dividends are actually paid during January of the following
year.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution paid
shortly after a purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of the
dividend or distribution. All or a portion of such dividend or distribution,
although in effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of Fund shares depending upon the tax
basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received a distribution taxable as a long-term capital gain, then any
loss the shareholder might realize on the sale of those shares will be treated
as a long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Fund shares in his tax basis for such shares for the purpose of determining
gain or loss on a redemption, transfer or exchange of such shares. However, if
the shareholder effects an exchange of such shares for shares of another Fund
within 90 days of the purchase and is able to
-24-
<PAGE> 126
reduce the sales charges applicable to the new shares (by virtue of the Trust's
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged shares, but may be included
(subject to this limitation) in the tax basis of the new shares.
Shareholders of the Fund will be advised at least annually as
to the federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors should consult their
tax advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction
of the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Richard B. Tullis Chairman of the Board Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, OH 44124 communication and information
processing equipment), since
October 1985; Director, NACCO
Materials Handling Group, Inc.
(manufacturer of industrial fork
lift trucks), since 1984; Director,
Hamilton Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990; Director,
Waste-Quip, Inc. (waste handling
equipment), since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO Manufacturing
564 Hackberry Drive Company and subsidiaries
Westerville, OH 43081 (manufacture, sale and financing of
water coolers and dehumidifiers),
since January 1996 and President,
January 1987 to January 1996; Vice
</TABLE>
-25-
<PAGE> 127
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
President and Executive Committee
Member of Ebtech Corp., since March
1991.
Leigh Carter* Trustee, President Retired President and Chief
13901 Shaker Blvd., #6B and Treasurer Operating Officer, BFGoodrich
Cleveland, OH 44120 Company, August 1986 to September
1990; Director, Adams Express
Company, since April 1982;
Director, Lamson & Sessions Co.,
since April 1991; Director,
Petroleum & Resources Corp., since
April 1987; Director, Morrison
Products, 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;
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 Martin Gatton Carol Martin Gatton, College of
College of Business and Business and Economics, University
Economics of Kentucky, since 1981; Director,
University of Kentucky Studio Plus Hotels, Inc., since
Lexington, KY 40506-0034 1994.
Robert D. Neary Trustee Retired Co-Chairman of Ernst &
2000 National City Center Young April 1984-September 1993;
1900 E. 9th Street Director, Cold Metal Products,
Cleveland, OH 44114 Inc., since March 1994; Director,
Zurn Industries, Inc., since June
1995.
</TABLE>
-26-
<PAGE> 128
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
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
Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
<FN>
____________________
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
</TABLE>
The trustees of the Trust receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees they
attend. Additional information on the compensation paid by the Trust to its
trustees and officers and their background is included in the Statement of
Additional Information.
INVESTMENT ADVISER
National City serves as the investment adviser to the Fund.
National City is a wholly owned subsidiary of National City Corporation, which
provides trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate
trust and agency, and personal and corporate banking. National City is a
member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On March 31, 1996, the Trust Department of National City had
approximately $30 billion in assets under management and had approximately $32
billion in total assets. National City has its principal offices at 1900 East
Ninth Street, Cleveland, Ohio 44114.
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, National City
has agreed to manage the Fund, make decisions with respect to and place orders
for all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales. The Fixed Income Team of
National City's Asset Management Group assumed responsibility for the
day-to-day management of the Fund upon the commencement of operations of the
Fund. Members of the team make decisions for the Fund. No person is primarily
responsible for making recommendations. Members of the team are:
- Donald L. Ross, Director of the Fixed Income Team,
has been with National City since 1985. He
specializes in the overall duration and yield curve
decisions.
- Michael E. Santelli, Vice President, joined National
City in 1995. Previously, he was associated with
Donaldson, Lufkin and Jenrette's Mortgage research
department since at least 1991. He specializes in
the mortgage and asset-backed markets.
-27-
<PAGE> 129
- 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.
- John H. Lockhart, Vice President, has been with
National City since 1988. He focuses on the national
tax-exempt market.
- 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.
For the services provided and expenses assumed pursuant to the
Advisory Agreement, National City is entitled to receive an advisory fee,
computed daily and payable monthly, at the annual rate .55% of the average net
assets of the Fund. The adviser may from time to time waive all or a portion
of its advisory fees to increase the net income of the Fund available for
distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISER
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 adviser
believes that it may perform the services for the Fund contemplated by the
Advisory Agreement with the Trust as described in the Agreement 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 adviser from continuing to perform services for the Trust. If the
adviser was to be prohibited from providing services to the Fund, 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 adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Fund
shares, the adviser and its affiliated and correspondent banks might be
required to alter materially or discontinue the services offered to
-28-
<PAGE> 130
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 adviser, or an affiliate of the adviser,
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
adviser, or any of its affiliates, might offer to provide such services.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Fund. PFPC is
an indirect, wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation
of the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive
with respect to the Fund an administrative fee, computed daily and paid
monthly, at the annual rate of .10% of the first $200,000,000 of its net
assets, 0.75% of the next $200,000,000 of its net assets, .05% of the next
$200,000,000 of its net assets and .03% of its net assets over $600,000,000 and
is entitled to be reimbursed for its out-of-pocket expenses incurred on behalf
of the Fund.
-29-
<PAGE> 131
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 35 separate
classes or series of shares of beneficial interest ("shares"). Two of these
classes or series, which represent interests in the Fund (Class R and Class R -
Special Series 1) are described in this Prospectus. Class R shares constitute
the Institutional class or series of shares; and Class R - Special Series 1
shares constitute the Retail class or series of shares. The other Funds of the
Trust are: Money Market Fund (Class A and Class A - Special Series 1),
Government Fund (Class B and Class B - Special Series 1), Treasury Fund (Class
C and Class C - Special Series 1), Tax Exempt Fund (Class D and Class D -
Special Series 1), Equity Fund (Class H and Class H - Special Series 1), Fixed
Income Fund (Class I and Class I - Special Series 1), Ohio Tax Exempt Fund
(Class K and Class K - Special Series 1), National Tax Exempt Fund (Class L and
Class L - Special Series 1), Equity Income Fund (Class M and Class M - Special
Series 1), Mid Cap Regional Fund (Class N and Class N - Special Series 1),
Enhanced Income Fund (Class O and Class O - Special Series 1), Total Return
Advantage Fund (Class P and Class P - Special Series 1), Pennsylvania
Tax-Exempt Fund (Class Q and Class Q - Special Series 1), GNMA Fund (Class S
and Class S - Special Series 1) and the Pennsylvania Municipal Fund (Class T
and Class T - Special Series 1). Each share has no par value, represents an
equal proportionate interest in the investment fund with other shares of the
same class or series outstanding, and is entitled to such dividends and
distributions out of the income earned on the assets belonging to such fund as
are declared in the discretion of the Trust's Board of Trustees. The Trust's
Declaration of Trust authorizes the Board of Trustees to classify or reclassify
any unissued shares into any number of additional classes of shares and to
classify or reclassify any class of shares into one or more series of shares.
Shareholders are entitled to one vote for each full share
held, and a proportionate fractional vote for each fractional share held.
Shareholders will vote in the aggregate and not by investment fund, except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular investment fund. The Statement of Additional Information gives
examples of situations in which the law requires voting by investment fund. In
addition, shareholders of each of the investment funds will vote in the
aggregate and not by class or series, except as otherwise expressly required by
law or when the Board of Trustees determines the matter to be voted on affects
only the interests of the holders of a particular class or series of shares.
Under the Services Plan, only the holders of Retail shares in an investment
fund are, or would be entitled to vote on matters submitted to a vote of
shareholders (if any) concerning the Services Plan. Voting rights are not
cumulative, and accordingly, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the trustees irrespective of the vote of
the other shareholders.
As stated above, the Trust is organized as a trust under the
laws of Massachusetts. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
obligations of the Trust. The Declaration of Trust of the Trust provides for
indemnification out of the Trust property for any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders
shall be called at the written request of shareholders entitled to cast at
-30-
<PAGE> 132
least 10% of the votes entitled to be cast at such meeting. Such meeting may
be called by shareholders to consider the removal of one or more trustees.
Shareholders will receive shareholder communication assistance with respect to
such matter as required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P. O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses
in connection with the performance of its services. The Fund must bear its own
expenses incurred in its operations including: taxes; interest; fees
(including fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings;
and any extraordinary expenses. The Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Fund also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City serves the Trust as
both the custodian and an investment adviser, a procedure has been established
requiring three annual verifications, two of which are to be unannounced, of
all investments held pursuant to the Custodian Services Agreement, to be
conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or the Fund means, with
respect to the approval of an investment advisory agreement, a distribution
plan or a change in a fundamental investment policy, the affirmative vote of
the lesser of (a) 50% or more of the outstanding shares of the Trust or the
fund or (b) 67% or more of the shares of the Trust or the fund present at a
meeting if more than 50% of the outstanding shares of the Trust or the fund are
represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
-31-
<PAGE> 133
ARMADA FUNDS
INVESTMENT ADVISER
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLE . . . . . . . . . . . . . . . . . . . . . 3
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . 6
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . 13
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . 14
PRICING OF SHARES . . . . . . . . . . . . . . . . . . . 15
HOW TO PURCHASE AND REDEEM SHARES . . . . . . . . . . . 16
DISTRIBUTION AGREEMENT . . . . . . . . . . . . . . . . 22
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . 22
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . 22
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 23
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . 24
DESCRIPTION OF THE TRUST AND ITS SHARES . . . . . . . . 29
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . 30
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 30
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
--------------------------------------------------------------------
o SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL
CITY BANK, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES OR ANY BANK.
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.
-32-
<PAGE> 134
ARMADA FUNDS
PROSPECTUS
____________, 1996
Intermediate Government Fund
-33-
<PAGE> 135
ARMADA FUNDS
4400 Computer Drive
Westborough, MA 01581
ARMADA FUNDS
Investment Adviser
Affiliate of National City Corporation
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
-34-
<PAGE> 136
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
___________, 1996
GNMA FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated _____________, 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> 137
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
-i-
<PAGE> 138
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes
the GNMA Fund (the "Fund"). The information contained in this Statement of
Additional Information expands upon matters discussed in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Prospectus.
The GNMA Fund commenced operations on August 10, 1994 as a
separate investment portfolio (the "Predecessor Fund") of Inventor Funds, Inc.
which was organized as a Maryland corporation. On ___________, 1996, the
Predecessor Fund was reorganized as a new portfolio of Armada. Prior to the
reorganization, the Predecessor Fund offered and sold shares of stock that were
similar to Armada's Retail Shares of beneficial interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
------------------------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P,
Fitch, Duff, IBCA and Moody's for securities which may be held by the Funds.
GNMA SECURITIES
- ---------------
The Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations
and early prepayments of underlying mortgages. These securities represent
ownership in a pool of federally insured mortgage loans. GNMA certificates
consist of underlying mortgages with a maximum maturity of 30 years. However,
due to scheduled and unscheduled principal payments, GNMA certificates have a
shorter average maturity and, therefore, less principal volatility than a
comparable 30-year bond. Since prepayment rates vary widely, it is not
possible to predict accurately the average maturity of a particular GNMA pool.
GNMA securities differ from conventional bonds in that principal is paid back
to the certificate holders over the life of the loan rather than at maturity.
The scheduled
<PAGE> 139
monthly interest and principal payments relating to mortgages in the pool are
"passed through" to investors. In addition, there may be unscheduled principal
payments representing prepayments on the underlying mortgages. Although GNMA
certificates may offer yields higher than those available from other types of
U.S. Government securities, GNMA certificates may be less effective than other
types of securities as a means of "locking in" attractive long-term rates
because of the prepayment feature. For instance, when interest rates decline,
the value of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
MORTGAGE-BACKED SECURITIES
- --------------------------
The Fund may purchase mortgage-backed securities, which are
securities backed by mortgages. Mortgage-backed securities represent interests
in "pools" of assets in which payments of both interest and principal on the
securities are made monthly, thus in effect "passing through" monthly payments
made by the individual borrowers on the assets that underlie the securities,
net of any fees paid to the issuer or guarantor of the securities. The average
life of mortgage-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities as a result of mortgage
prepayments. For this and other reasons, a mortgage-backed security's stated
maturity may be shortened, and the security's total return may be difficult to
predict precisely. Mortgage-backed securities acquired by the Fund may include
collateralized mortgage obligations ("CMOs") issued by private companies.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related
securities guaranteed by the GNMA include GNMA Mortgage Pass-Through
Certificates (also known as "Ginnie Maes"), which are guaranteed as to the
timely payment of principal and interest by GNMA and such guarantee is backed
by the full faith and credit of the United States. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the
FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes"), which are solely the obligations of the FNMA and are not backed
by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to timely payment of the principal and interest
by FNMA. Mortgage-related
-2-
<PAGE> 140
securities issued by the FHLMC include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate
instrumentality of the United States, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Bank and do not
constitute a debt or obligation of the United States or of any Federal Home
Loan Bank. Freddie Macs entitle the holder to timely payment of interest,
which is guaranteed by the FHLMC. FHLMC guarantees either ultimate collection
or timely payment of all principal payments on the underlying mortgage loans.
When FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
INTEREST RATE SWAPS
- -------------------
The Fund may enter into interest rate swaps for hedging
purposes and not for speculation. The Fund will typically use interest rate
swaps to preserve a return on a particular investment or portion of its
investments or to shorten the effective duration of Fund investments. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments.
The Fund will only enter into interest rate swaps on a net
basis, (i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments).
Inasmuch as these transactions are entered into for good faith hedging
purposes, the Fund and its adviser believe that such obligations do not
constitute senior securities as defined in the 1940 Act and, accordingly, will
not treat them as being subject to the Fund's borrowing restrictions. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and an
amount of liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt securities, having an aggregate net asset value at least
equal to such accrued excess will be maintained in a segregated account by the
Fund's custodian.
If there is a default by the other party to an interest rate
swap transaction, the Fund involved will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
in comparison with markets for other similar instruments which are traded in
the Interbank market.
-3-
<PAGE> 141
FUTURE CONTRACTS AND RELATED OPTIONS
- ------------------------------------
The Fund may purchase and sell futures contracts on U.S.
Treasury obligations. For a detailed description of futures contracts, see
Appendix B to this Statement of Additional Information.
WHEN-ISSUED SECURITIES
- ----------------------
The Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When the Fund agrees to purchase when-issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment, marked to market daily. It is likely that the
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolios might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its total
assets.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
The Fund may purchase variable and floating rate obligations
(including adjustable rate mortgages) which are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Because variable and floating rate obligations are
direct lending arrangements between the Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such
as Student Loan Marketing Association variable rate obligations, may have a
more active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, the Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters
of credit or guarantees issued by banks, other financial institutions or the
U.S. Government, its
-4-
<PAGE> 142
agencies or instrumentalities. The quality of any letter of credit or
guarantee will be rated high quality or, if unrated, will be determined to be
of comparable quality by the adviser. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Fund might be
unable to dispose of the instrument because of the absence of a secondary
market and could, for this or other reasons, suffer a loss to the extent of the
default.
REPURCHASE AGREEMENTS
- ---------------------
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's adviser deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying fund
securities. The seller under a repurchase agreement will be required to
maintain the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, the Fund holding such
obligation would suffer a loss to the extent that the proceeds from a sale of
the underlying fund securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Although there is no controlling legal
precedent confirming that the Fund would be entitled, as against a claim by
such seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody of a Trust's securities subject to
repurchase agreements and under federal laws, a court of competent jurisdiction
would rule in favor of the Trust if presented with the question. Securities
subject to repurchase agreements will be held by the Trust's custodian or
another qualified custodian or in the Federal Reserve/Treasury book-entry
system. Repurchase agreements are considered to be loans by the Fund under the
1940 Act.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5%
of the value of the Fund's total assets will be invested in the securities of
any one investment company; (ii) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (iii) not more than 3% of the outstanding voting stock of any
-5-
<PAGE> 143
one investment company will be owned by the Fund or by the Trust as a whole.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for the Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making fund decisions.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed with respect to the Fund only by a vote of the holders of a
majority of the Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities
on margin, except that the Fund (i) may obtain short term credits as necessary
for the clearance of securities transactions; and (ii) make short sales
"against the box" as described in the Prospectus.
2. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities.
3. Purchase or sell real estate, or real estate limited
partnerships, except that the Fund may invest in securities issued by companies
which invest in real estate.
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs and
oil, gas or mineral leases, except that the Fund may: (a) to the extent
appropriate to its investment objective, invest in securities issued by
companies which invest in financial commodities contracts; and (b) purchase and
sell futures contracts in accordance with its investment objective.
-6-
<PAGE> 144
5. Invest in any issuer for the purpose of exercising
control.
6. Pledge, mortgage or hypothecate assets, except to
secure borrowings permitted by the Fund's investment limitations in aggregate
amounts not to exceed 33 1/3% of the Fund's total assets taken at current value
at the time of the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any
one issuer, provided that this limitation shall apply only as to 75% of the
Fund's net assets.
8. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
9. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described in the Prospectus or as permitted by rule, regulation or order of the
Securities and Exchange Commission.
The following are considered non-fundamental investment
limitations and therefore may be changed without a shareholder vote.
The Fund may not write or purchase put options, call options,
straddles, spreads, or any combination thereof, except that the Fund may
purchase and sell futures contracts in accordance with its investment
objective.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 15% of its net assets.
The Fund may not purchase securities of any company which has
(with predecessors) a record of less than three years continuing operations,
if, as a result, more than 5% of the total assets of the Fund (taken at current
value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase
of a security.
* * * * *
In addition, so long as the Fund is offering and selling its
shares in the State of Texas the Fund may not (i) invest more than 5.0% of its
net assets in warrants (including within that amount, but not to exceed 2.0%,
may be warrants that are not listed of the New York or American Stock Exchange;
(ii) invest in oil, gas, or other mineral leases; and (iii) invest in real
estate limited partnership interests.
-7-
<PAGE> 145
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Fund are sold on a continuous basis by 440
Financial Distributors, Inc. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must
be signed by each shareholder, with each signature guaranteed by a U.S.
commercial bank or trust company or by a member firm of a national securities
exchange. Guarantees must be signed by an authorized signatory and "Signature
Guaranteed" must appear with the signature. An investor's financial
institution may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular
verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended April 30, 1996, sales loads paid by
shareholders of the Predecessor Fund totalled $8,175.50 .
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Fund permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
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
-8-
<PAGE> 146
price levels. From time to time, in advertisements, sales literature,
communications to shareholders and other materials ("Materials"), the Trust may
illustrate the effects of dollar cost averaging through use of or comparison to
an index such as the Lehman GNMA Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUND
- -------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Fund, based on the value of the Predecessor Fund's net
assets and number of outstanding shares on April 30, 1996 are as follows:
GNMA FUND
---------
<TABLE>
<S> <C>
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . . . . $ 62,160,843
Outstanding Retail Share . . . . . . . . . . . . . . . . . . . . . . . 6,142,810
Net Asset Value Per Share
($62,160,843 divided by 6,142,810 . . . . . . . . . . . . . . . . . . . $ 10.12
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . . . . . $ 0.42
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.54
</TABLE>
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived)
to reduce the sales load applicable to an exchange, as may be provided in a
Fund Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
-9-
<PAGE> 147
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 32 classes
or series of shares. Two of these classes or series, which represent interests
in the GNMA Fund (Class S and Class S - Special Series 1), are described in
this Statement of Additional Information and the related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in
the matter are substantially identical or the matter does not affect any
interest of the fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to an investment fund only if approved by a majority of
the outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of
each class in a particular investment fund have equal voting rights except that
only Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
-10-
<PAGE> 148
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund
to another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Trust or its shareholders or possible legislative changes,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisers with specific reference to their own tax situation.
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
qualify for tax treatment as a regulated investment company under the Code, the
Fund must satisfy, in addition to the distribution requirement described in the
Prospectus, certain requirements with respect to the source of its income
during a taxable year. At least 90% of the gross income of the Fund must be
derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other
-11-
<PAGE> 149
disposition of stocks, securities or foreign currencies, and other income
(including, but not limited to, gains from options, futures, or forward
contracts) derived with respect to the Fund's business of investing in such
stock, securities or currencies. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to the Fund's principal business of investing in stock or securities,
or options and futures with respect to stock or securities. Any income derived
by the Fund from a partnership or trust is treated for this purpose as derived
from the Fund's business of investing in stock, securities or currencies only
to the extent that such income is attributable to items of income which would
have been qualifying income if realized by the Fund in the same manner as by
the partnership or trust. Some of the investments that the Fund may make (such
as equipment lease and trust certificates) may not be securities or may not
produce qualifying income. Therefore, it may be necessary for the adviser to
restrict the investments of the Fund to ensure that nonqualifying income does
not exceed 10% of its total gross income for a taxable year.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of the Fund's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three months:
(1) stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by the Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose.
The Trust will designate any distribution of long-term capital
gains of the Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of the Fund's shares,
if the shareholder has not held such shares for more than six months, any loss
on the sale or exchange of those shares will be treated as long-term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount
-12-
<PAGE> 150
equal to specified percentages of their ordinary taxable income and capital
gain net income (excess of capital gains over capital losses). The Fund
intends to make sufficient distributions or deemed distributions of its
ordinary taxable income and capital gain net income each calendar year to avoid
liability for this excise tax.
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so that they are not subject to backup withholding or
that they are "exempt recipients."
TRUSTEES AND OFFICERS
---------------------
The Prospectus includes a description of the trustees and
certain executive officers of the Trust, their addresses, principal occupations
during the past five years, and other affiliations. Mr. W. Bruce McConnel,
III, Secretary of the Trust, is a partner of the law firm of Drinker Biddle &
Reath, which receives fees as counsel to the Trust. Mr. John J. Burke,
Assistant Treasurer of the Trust, is employed by First Data Investor Services
Group, Inc. (formerly The Shareholder Services Group, Inc., d/b/a 440
Financial) which receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional
$2,500 per annum for services in such capacity. For the year ended May 31,
1996, the Trust's trustees and officers as a group received aggregate fees of
$69,875. The trustees and officers of the Trust own less than 1% of the shares
of the Trust.
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1996:
-13-
<PAGE> 151
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued
Aggregate as Part of Estimated Total
Name of Compensation the Trust's Approval Benefits Compensation
Person, Position from the Trust Expenses Upon Retirement from the
---------------- -------------- -------- --------------- Trust
-----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., $11,375 $0 $0 $11,375
Trustee
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $0 $0 $0 $0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts
or obligations of the Trust, and that every note, bond, contract, order, or
other undertaking made by the Trust shall contain a provision to the effect
that the shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the trust property of any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of his acts or omissions or some other reason. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally
liable to any person
-14-
<PAGE> 152
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as trustee.
The Declaration of Trust also provides that all persons having any claim
against the trustees or the Trust shall look solely to the trust property for
payment. With the exceptions stated, the Declaration of Trust provides that a
trustee is entitled to be indemnified against all liabilities and expense,
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his being or having been a trustee, and that the trustees, have the
power, but not the duty, to indemnify officers and employees of the Trust
unless any such person would not be entitled to indemnification had he been a
trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
-------------------------------------------------
ADVISORY AGREEMENT
- ------------------
As described in the Prospectus, National City serves as
investment adviser to the Fund. The adviser is an affiliate of National City
Corporation, a bank holding company with $32 billion in assets, and
headquarters in Cleveland, Ohio and nearly 600 branch offices in three states.
Through its subsidiaries, National City Corporation has been managing
investments for individuals, pension and profit-sharing plans and other
institutional investors for over 75 years and currently manages over $30
billion in assets. From time to time, the adviser may voluntarily waive fees
or reimburse the Trust for expenses.
For the fiscal years ended April 30, 1996 and 1995, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $385,463 and $132,372, respectively. Integra
waived advisory fees during the same period in the amounts of $107,340 and
$72,352, respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by them of its duties and obligations
thereunder. In addition, the adviser has undertaken in its Advisory Agreement
to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
-15-
<PAGE> 153
The Advisory Agreement was approved by the sole shareholder of
the Fund prior to the Fund's commencement of operations. Unless sooner
terminated, the Advisory Agreement will continue in effect until September 30,
1997 and from year to year thereafter, subject to annual approval by the
Trust's Board of Trustees, or by a vote of a majority of the outstanding shares
of the Fund (as defined in the Fund's Prospectus) and a majority of the
trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. The Advisory Agreement may be terminated by the Trust or the
adviser on 60 days written notice, and will terminate immediately in the event
of its assignment.
If expenses borne by the Fund in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Fund's adviser will reimburse the Trust for any such excess with respect to the
Fund to the extent described in any written undertaking provided by the adviser
to such state. To the Trust's knowledge, as of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Trust provides that annual expenses (as defined by statute) may not exceed
2.5% of the first $30 million, 2% of the next $70 million and 1.5% of the
remaining average net assets of the Fund. Such amount, if any, will be
estimated, reconciled and paid on a monthly basis. The fees banks may charge
to Customers for services provided in connection with their investments in the
Trust are not covered by the state securities expense limitations described
above.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
- -----------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. For the fiscal years ended April 30,
1996 and 1995, SEI Financial Management Corporation, a wholly-owned subsidiary
of SEI Corporation, served as administrator to the Predecessor Fund and earned
the following fees: $99,119 and $52,643, respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by
Rule 12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's
Board of Trustees,
-16-
<PAGE> 154
and by a majority of the trustees who are not interested persons of the Trust
and have no direct or indirect interest in the operation of the Plan or any
agreement relating to the Plan, by vote cast in person at a meeting called for
the purpose of voting on the Plan and related agreement. In compliance with
the Rule, the trustees requested and evaluated information they thought
necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the
Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial
interest in the Plan or related agreement. The Plan and related agreement may
be terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has
been committed to the discretion of such disinterested trustees as required by
the Rule.
The Trust's Plan provides that each fund will reimburse the
Distributor for distribution expenses in an amount not to exceed .10% of such
fund's average net assets. Distribution expenses payable by the Distributor
pursuant to the Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a fund's shares, and direct and
indirect costs and expenses of preparing, printing and distributing its
prospectuses to other than current shareholders. In addition, the Plan
provides that the Trust will pay the Distributor an annual distribution fee of
$250,000 payable monthly and accrued daily by all of the Trust's investment
funds with respect to which the Distributor is distributing shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
-17-
<PAGE> 155
Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares including the distributor's expenses for travel,
communication compensation and benefits for sales personnel; and (4) any other
expenses reasonably incurred in connection with the distribution and marketing
of Class A shares subject to approval by a majority of disinterested directors
of Integra. For the fiscal years ended April 30, 1996 and 1995, the Fund paid
$0 and $0, respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Fund. Under its Custodian Services Agreement, National City
Bank has agreed to: (i) maintain a separate account or accounts in the name of
the Fund; (ii) hold and disburse fund securities on account of the Fund;
(iii) collect and make disbursements of money on behalf of the Fund; (iv)
collect and receive all income and other payments and distributions on account
of the Fund's securities; (v) respond to correspondence by security brokers and
others relating to its duties; and (vi) make periodic reports to the Board of
Trustees concerning the Fund's operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Fund, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Fund harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Fund reimburses National City Bank for
its direct and indirect costs and expenses incurred in rendering custodial
services, except that the costs and expenses borne by the Fund in any year may
not exceed $.225 for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly, The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Fund. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of the Fund; (ii) transmit all communications by the Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
the Board of Trustees concerning the Fund's operations. The Transfer Agent
sends each shareholder of record a monthly statement showing the total number
of shares owned as of the last business day of the month (as well
-18-
<PAGE> 156
as the dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan (the "Services Plan") with respect to Retail shares
of the Fund. Pursuant to the Services Plan, the Trust may enter into
agreements with financial institutions pertaining to the provision of
administrative services to their customers who are the beneficial owners of
Retail shares in consideration for the payment of up to .25% (on an annualized
basis) of the net asset value of such shares. Such services may include: (i)
aggregating and processing purchase and redemption requests from customers;
(ii) providing customers with a service that invests the assets of their
accounts in Retail shares; (iii) processing dividend payments from the Fund;
(iv) providing information periodically to customers showing their position in
Retail shares; (v) arranging for bank wires; (vi) responding to customer
inquiries relating to the services performed with respect to Retail shares
beneficially owned by customers; (vii) forwarding shareholder communications;
and (viii) other similar services requested by the Trust. Agreements between
the Trust and financial institutions will be terminable at any time by the
Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to its Advisory Agreement with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of fund securities for the Fund. The adviser
purchases Fund securities either directly from the issuer or from an
underwriter or dealer making a market in the securities involved. Purchases
from an underwriter of fund securities include a commission or concession paid
by the issuer to the underwriter and purchases from dealers serving as market
makers may include the spread between the bid and asked price. Transactions on
stock exchanges involve the payment of negotiated brokerage commissions. There
is generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up.
For the fiscal year ended April 30, 1996, the Predecessor Fund
did not pay any brokerage commissions.
While the adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to
-19-
<PAGE> 157
the underwriter or dealer charging the lowest spread or commission available on
the transaction. Allocation of transactions, including their frequency, to
various dealers is determined by the adviser in its best judgment and in a
manner deemed fair and reasonable to shareholders. The primary consideration
is prompt execution of orders in an effective manner at the most favorable
price. Subject to this consideration, dealers who provide supplemental
investment research to the adviser may receive orders for transactions by the
Fund. Information so received is in addition to and not in lieu of services
required to be performed by the adviser and does not reduce the fees payable to
it by the Fund. Such information may be useful to the adviser in serving both
the Trust and other clients, and, similarly, supplemental information obtained
by the placement of business of other clients may be useful to the adviser in
carrying out its obligations to the Trust.
Fund securities will not be purchased from or sold to the
Fund's adviser, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust department
independently of its Commercial Department. In making investment
recommendations for the Trust, personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale
for the Trust's account are customers of the Commercial Department. In dealing
with commercial customers, the Commercial Department will not inquire or take
into consideration whether securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from
those for each other fund of the Trust and for other investment companies and
accounts advised or managed by the adviser. Such other funds, investment
companies and accounts may also invest in the same securities as the Fund.
When a purchase or sale of the same security is made at substantially the same
time on behalf of the Fund and another investment company or account, the
transaction will be averaged as to price, and available investments allocated
as to amount, in a manner which the adviser believes to be equitable to the
Fund and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or sold by the Fund. To the extent
permitted by law, the adviser may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in order to obtain best execution.
-20-
<PAGE> 158
AUDITORS
--------
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
---------------------------------
The Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power
of six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, net of reimbursements. This calculation
can be expressed as follows:
a-b (6)
Yield = 2 [(------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last
day of the period.
The Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation
-21-
<PAGE> 159
(including actual accrued interest) at the close of business on the last
business day of each 30-day period, or, with respect to obligations purchased
during the 30-day period, the purchase price (plus actual accrued interest) and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent 30-day period
that the obligation is in the Fund. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased by the Fund at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by the Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of Retail
Shares" in the Prospectus.
For the 30-day period ended April 30, 1996, the yield of the
Predecessor Fund was 6.21%.
The Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
-22-
<PAGE> 160
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted
from payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total returns for the Predecessor Fund's
one year period ending April 30, 1996 was 3.68% (after taking the sales load
into account) and 7.97% (without taking into account any sales load). The
average annual total returns since the Predecessor Fund's commencement of
operations through April 30, 1996 was 5.95% (after taking into account the
sales load) and 8.52% (without taking into account any sales load). The Fund
commenced operations on August 10, 1994.
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the
-23-
<PAGE> 161
formulas set forth above in order to compare more accurately the Fund's
performance with other measures of investment return. For example, in
comparing the Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of an index, the Fund may calculate
its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. The Fund will, however, disclose the maximum sales charge and will
also disclose that the performance data do not reflect sales charges and that
inclusion of sale charges would reduce the performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or
capital appreciation of the Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Fund may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as
a whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in
Materials charts, graphs or drawings which compare the investment objective,
return potential, relative stability and/or growth possibilities of the Fund
and/or other mutual funds, or illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to,
stocks, bonds, Treasury securities and shares of the Fund and/or other
-24-
<PAGE> 162
mutual funds. Materials may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
-------------
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All
organizational expenses are amortized on the straight-line method over a period
of five years from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
the Fund, together with all income, earnings, profits, and proceeds derived
from the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to the
Fund. In determining the Fund's net asset value, assets belonging to the Fund
are charged with the liabilities in respect of the Fund.
The following shareholders owned beneficially or of record
5% or more of the outstanding shares of the Predecessor Fund as of June 21,
1996:
<TABLE>
<CAPTION>
Number of Percentage
Outstanding of
Retail Retail
Predecessor Fund Shares Shares
---------------- ------------ -------------
<S> <C> <C>
Sheldon & Co. (Integra-49) 5,863,084.654 97.14%
c/o National City
Attn: Trust Mutual Funds
P.O. Box 94777, Loc. 5312
Cleveland, OH 44101-4777
</TABLE>
No Institutional shares of the Predecessor Fund had been issued as of
June 21, 1996.
-25-
<PAGE> 163
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the
fiscal year ended April 30, 1996 and the periods prior thereto are contained in
the Predecessor Fund's Annual Report to Shareholders (the "Financial
Statements") which has been filed with the Securities and Exchange Commission
and is incorporated into this Statement of Additional Information by reference.
The financial Statements and the information included in the Financial
Highlights tables for the same periods which appear in the Fund's prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon appears in such Annual Reports. The
Financial Statements in such Annual Reports have been incorporated herein and
in the Fund's Prospectus in reliance upon the report of said firm of independent
accountants given upon their authority as experts in accounting and auditing.
-26-
<PAGE> 164
APPENDIX A
----------
DESCRIPTION OF RATINGS
Corporate Long-Term Debt Ratings
- --------------------------------
The following summarizes the rating categories used by
Standard & Poor's Ratings Group ("S&P") for corporate debt:
"AAA" - This designation represents the highest rating
assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues
only to a small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt that possesses one of
these ratings is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
"CI" - this rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in default, and payment of interest and/or
repayment of principal is in arrears.
A-1
<PAGE> 165
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
The following summarizes the rating categories used by Moody's
Investors Service, Inc. ("Moody's") for corporate debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal
is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are
considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the
present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and
principal ("Ba" indicates some speculative elements; "B"
indicates a general lack of characteristics of desirable
investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and
"C" bonds may be in default.
A-2
<PAGE> 166
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" through "B" in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the rating categories used by Duff &
Phelps Credit Rating Co. ("Duff & Phelps") for corporate debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for
prudent investment. Considerable variability in risk is
present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade.
Although below investment grade, debt rated "BB" is deemed
likely to meet obligations when due. Debt rated "B" possesses
the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has
considerable uncertainty as to timely payment of principal,
interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
A-3
<PAGE> 167
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the rating categories used by Fitch
Investors Service, Inc. ("Fitch") for corporate bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as
strong as bonds rated "AAA." Because bonds rated in the "AAA"
and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent
Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted
bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation.
A-4
<PAGE> 168
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA Inc. ("IBCA") assesses the investment quality of
unsecured debt with an original maturity of more than one year which is issued
by bank holding companies and their principal bank subsidiaries. The following
summarizes the rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse
changes in business, economic or financial conditions are
unlikely to increase investment risk significantly.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal
and interest is strong, although adverse changes in business,
economic or financial conditions may lead to increased
investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment
of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative
characteristics are present. "BB" represents the lowest
degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are
currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
A-5
<PAGE> 169
Commercial Paper Ratings
- ------------------------
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by S&P for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong
safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects
of changes and circumstances than an obligation carrying a
higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of
short-term promissory obligations. Principal repayment
capacity will normally be evidenced by the following
characteristics: leading market positions in well established
industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance
on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash
generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios,
A-6
<PAGE> 170
while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may
be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory
obligations. The effects of industry characteristics and
market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level
of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate
liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors
are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
"Duff 4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure
against disruption in debt service. Operating factors
A-7
<PAGE> 171
and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal
and/or interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having
the strongest degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great
as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be
rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
A-8
<PAGE> 172
"A1+" - Obligations are supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
A-9
<PAGE> 173
APPENDIX B
----------
As stated in its Prospectus, the Fund may enter into certain futures
transactions for hedging purposes. Such transactions are described in this
Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have tended to move generally in the aggregate in
concert with the cash market prices and have maintained fairly predictable
relationships. Accordingly, the Fund may use interest rate futures contracts
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures
market, the protection is more likely to be achieved, perhaps at a lower cost
and without changing the rate of interest being earned by the Fund, through
using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase
would create an obligation by the Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
B-1
<PAGE> 174
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes and three-month United States Treasury Bills. The Fund may trade in any
interest rate futures contracts for which there exists a public market,
including, without limitation, the foregoing instruments.
EXAMPLE OF FUTURES CONTRACT SALE. The Fund may engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security held by
the Fund tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The adviser wishes to fix the
current market value of this fund security until some point in the future.
Assume the fund security has a market value of 100, and the adviser believes
that because of an anticipated rise in interest rates, the value will decline
to 95. The Fund might enter into futures contract sales of Treasury bonds for
a equivalent of 98. If the market value of the fund security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five point loss in the market value of the Fund
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures
B-2
<PAGE> 175
market price of Treasury bonds might well decline to more than 93 or to less
than 93 because of the imperfect correlation between cash and futures prices
mentioned below.
The adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the Fund securities, including the fund security being protected,
would increase. The benefit of this increase would be reduced by the loss
realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss (which might be reduced by a offsetting transaction prior to
the settlement date). In each transaction, transaction expenses would also be
incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Fund may engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of a
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The adviser wishes to fix the current
market price (and thus 10% yield) of the long-term bond until the time (four
months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the adviser believes that,
because of an anticipated fall in interest rates, the price will have risen to
105 (and the yield will have dropped to about 9 1/2%) in four months. The Fund
might enter into futures contracts purchases of Treasury bonds for an
equivalent price of 98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise
from 98 to 103. In that case, the 5 point increase in the price that the Fund
pays for the long-term bond would be offset by the 5 point gain realized by
closing out the futures contract purchase.
The adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the
B-3
<PAGE> 176
equivalent futures market price could fall below 98. If short-term rates at
the same time fall to 10% or below, it is possible that the Fund would continue
with its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the fund, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.
II. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian or a subcustodian an amount of cash or
cash equivalents, known as initial margin, based on the value of the contract.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-the-market. For example, when the Fund
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where
the Fund has purchased a futures contract and the price of the future contract
has declined in response to a decrease in the underlying instruments, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the broker. At any time prior to expiration of the
futures contract, the adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Fund's position in the futures contract. A final
determination
B-4
<PAGE> 177
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Fund as hedging devices. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may
move more than or less than the price of the instruments being hedged. If the
price of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price
of the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price
of the instruments being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the futures. If the price of
the futures move more than the price of the hedged instruments, the Fund will
experience either a loss or gain on the futures which will not be completely
offset by movements in the price of the instruments which are the subject of
the hedge. To compensate for the imperfect correlation of movements in the
price of instruments being hedged and movements in the price of futures
contracts, the Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility
over a particular time period of the prices of such instruments has been
greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the adviser. Conversely, the Fund may
buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by the adviser.
Where futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the
Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin
B-5
<PAGE> 178
deposit requirements, investors may close futures contracts through off-setting
transactions which could distort the normal relationship between the cash and
futures markets. Second, with respect to financial futures contracts, the
liquidity of the futures market depends on participants entering into
off-setting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced thus producing distortions. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge fund securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at
a price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.
B-6
<PAGE> 179
Successful use of futures by the Fund is also subject to the adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value
of its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
IV. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-7
<PAGE> 180
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
____________________, 1996
PENNSYLVANIA MUNICIPAL FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated _______________, 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> 181
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 11
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 15
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 18
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS . . . .. . . 20
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 24
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 24
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 26
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 26
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 26
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 31
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 31
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . A-1
</TABLE>
-i-
<PAGE> 182
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes
the Pennsylvania Municipal Fund (the "Fund"). The information contained in
this Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus.
The Pennsylvania Municipal Fund commenced operations on August
10, 1994 as a separate investment portfolio (the "Predecessor Fund") of
Inventor Funds, Inc., which was organized as a Maryland corporation. On
__________________, 1996, the Predecessor Fund was reorganized as a new
portfolio of the Trust. Prior to the reorganization, the Predecessor Fund
offered and sold shares of stock that were similar to the Trust's Retail Shares
of beneficial interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
------------------------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P,
Fitch, Duff, IBCA and Moody's for Municipal Bonds and other securities which
may be held by the Fund.
MUNICIPAL BONDS
- ---------------
As described in the Prospectus, the two principal
classifications of Municipal Bonds consist of "general obligation" and
"revenue" issues, and the Fund may include "moral obligation" issues, which are
normally issued by special purpose authorities. Municipal Bonds include debt
obligations issued by governmental entities to obtain funds for various public
purposes, including the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general operating expenses
and the extension of loans to public institutions and facilities. Municipal
Bonds in which the Fund invests must be rated BBB or better by S&P or Fitch or
Baa or better by Moody's, or, if unrated must be deemed by the Sub-Adviser to
have essentially the same characteristics and quality as bonds having the above
ratings. The Sub-Adviser may purchase private activity bonds if the interest
paid is excludable from federal
-1-
<PAGE> 183
income tax. Private activity bonds are issued by or on behalf of states or
political subdivisions thereof to finance privately owned or operated
facilities for business and manufacturing, housing, sports, and pollution
control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public
facilities such as airports, mass transit systems, ports, parking and low
income housing. The payment of the principal and interest on private activity
bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and may be secured by a pledge of real and personal
property so financed.
Pennsylvania municipal securities that are payable only from
the revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the
particular facility to generate revenues sufficient to pay such interest and
principal, including, among others, laws and regulations which limit the amount
fees, rates or other charges which may be imposed for use of the facility or
which increase competition among facilities of that type or which limit or
otherwise have the effect of reducing the use of such facilities generally,
thereby reducing the revenues generated by the particular facility.
Pennsylvania municipal securities, the payment of interest and principal on
which is insured in whole or in part by a Pennsylvania governmentally created
fund, may be adversely affected by Pennsylvania laws or regulations which
restrict the aggregate proceeds available for payment of principal and interest
in the event of a default on such municipal securities. Similarly,
Pennsylvania municipal securities, the payment of interest and principal on
which is secured, in whole or in part, by an interest in real property may be
adversely affected by Pennsylvania laws which limit the availability of
remedies or the scope of remedies available in the event of a default on such
municipal securities. Because of the diverse nature of such laws and
regulations and the impossibility of either predicting in which specific
Pennsylvania municipal securities the Fund will invest from time to time or
predicting the nature or extent of future changes in existing laws or
regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such laws
and regulations on the securities in which the Fund may invest and, therefore,
on the shares of the Fund.
There are, of course, variations in the quality of Municipal
Bonds both within a particular classification and between classifications, and
the yields on Municipal Bonds depend upon a variety of factors, including the
financial condition of the issuer, the general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of Rating Agencies represent their
opinions as to the quality of Municipal Bonds. It should be emphasized,
however, that ratings are general and are not absolute
-2-
<PAGE> 184
standards of quality, and Municipal Bonds with the same maturity, interest rate
and rating may have different yields while Municipal Bonds of the same maturity
and interest rate with different ratings may have the same yield. Subsequent
to its purchase by the Fund, an issue of Municipal Bonds may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
the Fund. The Fund's Sub-Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation.
The payment of principal and interest on most Municipal Bonds
purchased by the Fund will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its Municipal Bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on the principal of its Municipal Bonds may be materially
adversely affected by litigation or other conditions.
Certain Municipal Bonds held by the Fund may be insured at the
time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal Bond
at the time of its original issuance. In the event that the issuer defaults on
interest or principal payments, the insurer of the bond is required to make
payment to the bondholders upon proper notification. There is, however, no
guarantee that the insurer will meet its obligations. In addition, such
insurance will not protect against market fluctuations caused by changes in
interest rates and other factors. The Fund may, from time to time, invest
more than 25% of its assets in Municipal Bonds covered by insurance policies.
Municipal notes in which the Fund may invest include, but are
not limited to, general obligation notes, tax anticipation notes (notes sold to
finance working capital needs of the issuer in anticipation of receiving taxes
on a future date), revenue anticipation notes (notes sold to provide needed
cash prior to receipt of expected non-tax revenues from a specific source),
bond anticipation notes, certificates of indebtedness, demand notes and
construction loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
- ----------------------------
Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 by S&P, F-2 by Fitch or Prime-2 by
Moody's at the time of investment or which are of equivalent quality as
determined by the Sub-Adviser. Other
-3-
<PAGE> 185
types of tax-exempt instruments which are permissible investments for the Fund
including floating rate notes. Investments in such floating rate instruments
will normally involve industrial development or revenue bonds which provide
that the rate of interest is set as a specific percentage of a designated base
rate (such as the prime rate) at a major commercial bank, and that the Fund can
demand payment of the obligation at all times or at stipulated dates on short
notice (not to exceed 30 days) at par plus accrued interest. The Fund must use
the shorter of the period required before the Fund is entitled to prepayment
under such obligations or the period remaining until the next interest rate
adjustment date for purposes of determining the maturity. Such obligations are
frequently secured by letters of credit or other credit support arrangements
provided by banks. The quality of the underlying credit or of the bank, as the
case may be, must, in the Sub-Adviser's opinion be equivalent to the long-term
bond or commercial paper ratings stated above. The Sub-Adviser will monitor
the earning power, cash flow and liquidity ratios of the issuers of such
instruments and the ability of an issuer of a demand instrument to pay
principal and interest on demand. The Sub-Adviser may purchase other types of
tax-exempt instruments as long as they are of a quality equivalent to the bond
or commercial paper ratings stated above.
STAND-BY COMMITMENTS
- --------------------
The Fund may acquire stand-by commitments (also known as put
options) with respect to Municipal Bonds held in its portfolio. It expects
that stand-by commitments will generally be available without the payment of
any direct or indirect consideration. However, if necessary or advisable, the
Fund may pay for a stand-by commitment either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the
same securities). The Fund will not acquire a stand-by commitment unless
immediately after the acquisition, not more than 5% of its total assets will
be invested in instruments subject to a demand feature, or in stand-by
commitments, with the same institution.
The Fund's right to exercise stand-by commitments will be
unconditional and unqualified. A stand-by commitment will be transferable by
the Fund only with the underlying Municipal Bonds which may be sold to a third
party at any time. Until the Fund exercises its stand-by commitment, it owns
the securities in its portfolio which are subject to the commitment.
The amount payable to the Fund upon its exercise of a
stand-by commitment will normally be (i) the Fund's acquisition cost of the
Municipal Bonds (excluding any accrued interest which the Fund paid on its
acquisition), less any amortized market
-4-
<PAGE> 186
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Under
normal market conditions, in determining net asset value, the Fund values the
underlying Municipal Bonds on an amortized cost basis. Accordingly, the amount
payable by a dealer upon exercise of a stand-by commitment will normally be
substantially the same as the portfolio value of the underlying Municipal
Bonds.
The Fund intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Sub-adviser's opinion, present
minimal credit risks. The Fund's reliance upon the credit of these dealers,
banks and broker-dealers will be secured by the value of the underlying
Municipal Bonds that are subject to the commitment. Thus, the risk of loss to
the Fund in connection with a stand-by commitment will not be qualitatively
different from the risk of loss faced by a person that is holding securities
pending settlement after having agreed to sell the securities in the ordinary
course of business.
WHEN-ISSUED SECURITIES
- ----------------------
The Fund may purchase Municipal Bonds on a "when-issued"
basis (i.e., for delivery beyond the normal settlement date at a stated price
and yield). When the Fund agrees to purchase when-issued securities, the
custodian sets aside cash or liquid portfolio securities equal to the amount of
the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment, marked to market daily. It is likely that
the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its total
assets.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The Fund may invest in securities issued by other investment
companies (including other investment companies advised
-5-
<PAGE> 187
by the adviser and Sub-Adviser) which invest in high quality, short term debt
securities and which determine their net asset value per share based on the
amortized cost or penny-rounding method. The Fund currently intends to limit
such investments so that, as determined immediately after a securities purchase
is made: (a) not more than 5% of the value of its total assets will be invested
in the securities of any one investment company; (b) not more than 10% of the
value of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding voting
stock of any one investment company will be owned by the Fund; and (d) not more
than 10% of the outstanding voting stock of any one investment company will be
owned in the aggregate by the Fund and other investment companies advised by
the adviser.
TAXABLE MONEY MARKET INSTRUMENTS
- --------------------------------
The Fund may invest in various Taxable Money Market
Instruments such as bank obligations, commercial paper, repurchase agreements
and U.S. Government Obligations.
Bank obligations include bankers' acceptances generally having
a maturity of six months or less and negotiable certificates of deposit. Bank
obligations also include U.S. dollar denominated bankers' acceptances and
certificates of deposit. Investment in bank obligations is limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase.
Investments include commercial paper and other short term
promissory notes issued by corporations, municipalities and other entities
(including variable and floating rate instruments). The Fund may also acquire
zero coupon obligations, which have greater price volatility than coupon
obligations and which will not result in the payment of interest until
maturity.
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's Sub-Adviser deems creditworthy under guidelines approved by the
Board of Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short term rates, which may be more or less than the rate on
the underlying portfolio securities. The seller under a repurchase agreement
will be required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
the Fund holding such obligation would suffer a loss to the extent that the
proceeds from a sale of the underlying portfolio securities
-6-
<PAGE> 188
were less than the repurchase price under the agreement, or to the extent that
the disposition of such securities by the Fund were delayed pending court
action. Although there is no controlling legal precedent confirming that a
Fund would be entitled, as against a claim by such seller or its receiver or
trustee in bankruptcy, to retain the underlying securities, the Board of
Trustees of the Trust believes that, under the regular procedures normally in
effect for custody of a Fund's securities subject to repurchase agreements and
under federal laws, a court of competent jurisdiction would rule in favor of
the Trust if presented with the question. Securities subject to repurchase
agreements will be held by the Trust's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system. Repurchase agreements
are considered to be loans by a Fund under the 1940 Act.
The Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others,
such as those of the Export-Import Bank of the United States, are supported by
the right of the issuer to borrow from the U.S. Treasury; others, such as those
of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will invest
in the obligations of such agencies or instrumentalities only when the advisers
believe that the credit risk with respect thereto is minimal.
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
The Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate
obligations are direct lending arrangements between the Fund and the issuer,
they are not normally traded although certain variable and floating rate
obligations, such as Student Loan Marketing Association variable rate
obligations, may have a more active secondary market because they are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. Even
though there may be no active secondary market in such instruments, the Fund
may demand payment of principal and accrued interest at a time specified in the
instrument or may resell them to a third party. Such obligations may be backed
by bank letters of credit or guarantees issued by banks, other financial
institutions or the U.S. Government, its
-7-
<PAGE> 189
agencies or instrumentalities. The quality of any letter of credit or
guarantee will be rated high quality or, if unrated, will be determined to be
of comparable quality by the adviser. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Fund might be
unable to dispose of the instrument because of the absence of a secondary
market and could, for this or other reasons, suffer a loss to the extent of the
default.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for the Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making decisions.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed only by a vote of the holders of a majority of the Fund's
outstanding shares (as defined under "Miscellaneous" in the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities
on margin, except to obtain short-term credits as necessary for the clearance
of security transactions in accordance with its investment objective.
2. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities.
3. Purchase or sell real estate or real estate limited
partnership interests, except to invest in securities or interests of companies
which invest in real estate.
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs and
oil, gas and mineral leases, except to the extent appropriate to its investment
objective, invest in securities
-8-
<PAGE> 190
issued by companies which purchase or sell financial commodity contracts or
invest in real estate.
5. Invest in any issuer for the purpose of exercising
control.
6. Pledge, mortgage or hypothecate assets, except to
secure borrowings permitted by the Fund's investment limitations in aggregate
amounts not to exceed 33-1/3% of the Fund's total assets taken at current value
at the time of the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any
one issuer, provided that this limitation shall apply only as to 75% of the
Fund's net assets.
8. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
9. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described above or as permitted by rule, regulation or order of the Securities
and Exchange Commission.
The following limitations are considered non-fundamental and
therefore may be changed without a shareholder vote.
The Fund may not purchase puts, calls, options or combinations
thereof, except that the Fund may purchase puts as described in its prospectus.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 15% of its net assets.
The Fund may not purchase securities of any company which has
(with predecessors) a record of less than three years continuing operations,
if, as a result, more than 5% of the total assets of the Fund (taken at current
value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase
of a security.
* * * * *
In addition, so long as the Fund is offering and selling its
shares in the State of Texas , it may not: (i) invest more than 5% of its net
assets in warrants (including within that amount but not to exceed 2%,
warrants that are not listed on the New York or American Stock Exchange), (ii)
invest in oil, gas or other mineral leases, or (iii) invest in real estate
limited partnership interests.
-9-
<PAGE> 191
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
- -----------------------------------------------------------------
Potential shareholders should consider the fact that the
Fund's portfolio consists primarily of securities issued by the Commonwealth of
Pennsylvania (the "Commonwealth"), its municipalities and authorities and
should realize that the Fund's performance is closely tied to general economic
conditions within the Commonwealth as a whole and to economic conditions within
particular industries and geographic areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending deceases have resulted in surpluses the last
four years; as of June 30, 1994, the General Fund had a surplus of $892.9
million. The deficit in the Commonwealth's unreserved/undesignated funds also
has been eliminated, and there was a surplus of $79.2 million as of June 30,
1994.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and livestock
products, but substantial economic activity in agribusiness and food-related
industries. Service industries currently employ the greatest share of
non-agricultural workers, followed by the categories of trade and
manufacturing. Future economic difficulties in any of these industries could
have an adverse impact on the finances of the Commonwealth or its
municipalities, and could adversely affect the market value of the Bonds in the
Pennsylvania Trust or the ability of the respective obligors to make payments
of interest and principal due on such Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU and the parties are proceeding with discovery; (ii) in 1987, the Supreme
Court of Pennsylvania held the 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
-10-
<PAGE> 192
legislation implementing the judgment. In 1992, a new action in mandamus was
filed seeking to compel the Commonwealth to comply with the original decision;
(iii) litigation was filed in both state and federal court by an association of
rural and small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for funding
local school districts -- the federal case has been stayed pending the
resolution of the state case, and the state case is in the pre-trial stage, and
(iv) Envirotest/Synterra Partners ("Envirotest") filed suit against the
Commonwealth asserting that it sustained damages in excess of $350 million, as
a result of investments it made in reliance on a contract to conduct emissions
testing before the emission testing program was suspended. Envirotest has
entered into a Standstill Agreement with the Commonwealth pursuant to which the
parties will attempt to resolve Envirotest's claims.
Although there can be no assurance that such conditions will
continue, the Commonwealth's general obligation bonds are currently rated AA-
by S&P and A1 by Moody's and Philadelphia's and Pittsburgh's general obligation
bonds are currently rated BBB- and BBB+, respectively, by S&P and Baa and Baa1,
respectively, by Moody's.
The City of Philadelphia (the "City") experienced a series of
General Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term
solution for its economic difficulties. The audited balance of the City's
General Fund as of June 30, 1994 was a surplus of $15.4 million, and
preliminary unaudited financial statements as of June 30, 1995 project a
surplus of approximately $59.6 million.
In recent years an authority of the Commonwealth, the
Pennsylvania Intergovernmental Cooperation Authority ("PICA"), has issued
approximately $1.4 billion of Special Revenue Bonds on behalf of the City to
cover budget shortfalls, to eliminate projected deficits and to fund capital
spending. As one of the conditions of issuing bonds on behalf of the City,
PICA exercises oversight of the City's finances. The City is currently
operating under a five year plan approved by PICA in 1995. PICA's power to
issue further bonds to finance capital projects expired on December 31, 1994.
PICA may continue to issue bonds to finance cash flow deficits until December
31, 1996, and its authority to refund existing debt will not expire.
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
-11-
<PAGE> 193
issuance of shares is recorded on the books of the Trust. To change the
commercial bank or account designated to receive redemption proceeds, a written
request must be sent to National City Investments Corporation at its principal
office. Such requests must be signed by each shareholder, with each signature
guaranteed by a U.S. commercial bank or trust company or by a member firm of a
national securities exchange. Guarantees must be signed by an authorized
signatory and "Signature Guaranteed" must appear with the signature. National
City Investments Corporation may request further documentation from
corporations, executors, administrators, trustees or guardians, and will accept
other suitable verification arrangements from foreign investors, such as
consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when:
(a) trading on the Exchange is restricted by applicable rules and regulations
of the SEC; (b) the Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended April 30, 1996, sales loads paid by
shareholders of the Predecessor Fund totalled $3,469.47.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus permit an investor to use
"dollar cost averaging" in making investments. Under this Program, an agreed
upon fixed dollar amount is invested in Fund shares at predetermined intervals.
This may help investors to reduce their average cost per share because the
Program results in more shares being purchased during periods of lower share
prices and fewer shares during periods of higher share prices. In order to be
effective, dollar cost averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that dollar cost
averaging results in purchases of shares regardless of their price on the day
of investment or market trends and does not ensure a profit, protect against
losses in a declining market, or prevent a loss if an investor ultimately
redeems his shares at a price which is lower than their purchase price. An
investor may want to consider his financial ability to continue purchases
through periods of low price levels. From time to time, in advertisements,
sales literature, communications to shareholders and other materials
("Materials"), the Trust may illustrate the effects of dollar cost averaging
through use of or comparison to an index such as the Lehman Five-Year Index
-12-
<PAGE> 194
OFFERING PRICE PER RETAIL SHARE OF THE FUND
Illustrations of the computation of the offering price per
Retail share of the Fund, based on the value of the Predecessor Fund's net
assets and number of outstanding shares on April 30, 1996, are as follows:
PENNSYLVANIA MUNICIPAL FUND
---------------------------
<TABLE>
<S> <C>
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . $38,809,244
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . . . . . . 3,835,561
Net Asset Value Per Share
($38,809,244 divided by 3,835,561) . . . . . . . . . . . . . . . . . . . . $ 10.12
Sales Charge, 3.00% of
offering price (3.08% of net
asset value per share) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.42
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.54
</TABLE>
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived)
to reduce the sales load applicable to an exchange, as may be provided in a
Fund Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself to be the shareholder
and believed by the Transfer Agent or the financial institution to be genuine.
The Investor or his financial institution must notify the Transfer Agent of his
prior ownership of Retail shares and account number. The Transfer Agent's
records of such instructions are binding.
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify 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
-13-
<PAGE> 195
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption. Pursuant to such
authority, the Board of Trustees has authorized the issuance of 32 classes or
series of shares. Two of these classes or series, which represent interests in
the Pennsylvania Municipal Fund (Class T and Class T-Special Series 1), are
described in this Statement of Additional Information and the related
Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Fund, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in
the matter are substantially identical or the matter does not affect any
interest of the fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to an investment fund only if approved by a majority of
the outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of
each class in a particular investment fund have equal voting rights except that
only Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for 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
-14-
<PAGE> 196
their net asset value and which may be paid in cash or by distribution of the
securities or other consideration received from the sale and conveyance; (b)
sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust's shares at net asset value. In the event that
shares are redeemed in cash at their net asset value, a shareholder may receive
in payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the Fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Trust or its shareholders or possible legislative changes,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisers with specific reference to their own tax situation.
As described above and in the Prospectus, the Fund is designed
to provide investors with tax-exempt interest income. The Fund is not intended
to constitute a balanced investment program and is not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and IRAs, because such plans and
accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the Fund's dividends being tax-exempt.
The policy of the Fund is to pay each year as federal
exempt-interest dividends substantially all the Fund's Municipal Bond interest
income net of certain deductions. In order for the Fund to pay federal
exempt-interest dividends with respect to any
-15-
<PAGE> 197
taxable year, at the close of each taxable quarter at least 50% of the
aggregate value of its portfolio must consist of tax-exempt obligations. An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by a Fund and designated as an exempt-interest dividend in
a written notice mailed to shareholders not later than 60 days after the close
of the Fund's taxable year. However, the aggregate amount of dividends so
designated by a Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by the Fund during the taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. The percentage of total dividends paid by a Fund with respect to
any taxable year which qualifies as federal exempt-interest dividends will be
the same for all shareholders receiving dividends from the Fund with respect to
such year.
The Fund does not expect to realize long-term capital gains
and, therefore, does not expect to distribute any capital gain dividends.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any
of the tax-exempt obligations held by the Fund. A "substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who
regularly uses a part of such facilities in his trade or business and whose
gross revenues derived with respect to the facilities financed by the issuance
of bonds are more than 5% of the total revenues derived by all users of such
facilities, who occupies more than 5% of the usable area of such facilities or
for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. A "related person" includes certain related natural
persons, affiliated corporations, partners and partnerships, and S corporations
and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase
or carry Fund shares generally is not deductible for federal income tax
purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year. In addition, if a shareholder holds Fund shares
for six months or less, any loss on the sale or exchange of those shares will
be disallowed to the extent of the amount of exempt-interest dividends received
with respect to the shares. The Treasury Department, however, is authorized to
issue regulations reducing the six months holding requirement to a period of
not less than the greater of 31 days or the period between regular dividend
distributions where the 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.
-16-
<PAGE> 198
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
qualify for tax treatment as a regulated investment company under the Code,
the Fund must satisfy, in addition to the distribution requirement described in
the Prospectus and above, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of the
Fund must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks,
securities or foreign currencies, and other income (including, but not limited
to, gains from options, futures, or forward contracts) derived from the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to the Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by the Fund from a partnership or trust is
treated for this purpose as derived from the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of the Fund's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three months:
(1) stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by a Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose.
The Trust will designate any distribution of long-term capital
gains of the Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of the Fund's shares,
if the shareholder has not held such shares for more than six months, any loss
on the sale or exchange of those shares will be treated as long-term capital
loss
-17-
<PAGE> 199
to the extent of the capital gain dividends received with respect to the
shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and capital gain net income each calendar year to avoid liability for
this excise tax.
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or gross proceeds
realized upon sale paid to shareholders who have failed to provide a correct
tax identification number in the manner required, who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends, or who have failed to
certify to the Fund when required to do so that they are not subject to backup
withholding or that they are "exempt recipients."
Depending upon the extent of the Fund's activities in states
and localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Shareholders are advised
to consult their tax advisers concerning the application of state and local
taxes.
TRUSTEES AND OFFICERS
---------------------
The Prospectus includes a description of the trustees and
certain executive officers of the Trust, their addresses, principal occupations
during the past five years, and other affiliations. Mr. W. Bruce McConnel,
III, Secretary of the Trust, is a partner of the law firm of Drinker Biddle &
Reath, which receives fees as counsel to the Trust. Mr. John J. Burke,
Assistant Treasurer of the Trust, is employed by First Data Investor Services
Group, Inc.
-18-
<PAGE> 200
(formerly, The Shareholder Services Group, Inc., d/b/a 440 Financial), which
receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional
$2,500 per annum for services in such capacity. For the year ended May 31,
1996, the Trust's trustees and officers as a group received aggregate fees of
$69,875. The trustees and officers of the Trust own less than 1% of the shares
of the Trust.
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated Total
Aggregate as Part of Approval Compensation
Name of Compensation the Trust's Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., Trustee $11,375 $0 $0 $11,375
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $0 $0 $0 $0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts
or obligations of the Trust, and that every note, bond, contract, order, or
other undertaking made by the Trust shall contain a provision to the effect
that the shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the trust property of any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of 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
-19-
<PAGE> 201
obligation of the Trust, and shall satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally
liable to any person for any action or failure to act except by reason of his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of
Trust provides that a trustee is entitled to be indemnified against all
liabilities and expense, reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the trustees, have the power, but not the duty, to indemnify officers and
employees of the Trust unless any such person would not be entitled to
indemnification had he been a trustee.
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
-----------------------------------------------------
ADVISORY AND SUB-ADVISORY AGREEMENTS
- ------------------------------------
National City serves as investment adviser to the Fund, as
described in the Prospectus. The adviser is an affiliate of National City
Corporation, a bank holding company with $32 billion in assets, and
headquarters in Cleveland, Ohio and nearly 600 branch offices in three states.
Through its subsidiaries, National City Corporation has been managing
investments for individuals, pension and profit-sharing plans and other
institutional investors for over 75 years and currently manages over $30
billion in assets. From time to time, the advisers may voluntarily waive fees
or reimburse the Trust for expenses.
For the fiscal year ended April 30, 1996 and 1995, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $264,836 and $128,093, and Integra waived fees in the
amount of $44,126 and $39,805, respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance
-20-
<PAGE> 202
of the Advisory Agreement, except a loss resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services or a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of the adviser in the performance of its duties or from reckless disregard by
it of its duties and obligations thereunder. In addition, the adviser has
undertaken in the Advisory Agreement to maintain its policy and practice of
conducting its Trust Department independently of its Commercial Department.
The Advisory Agreement was approved by the sole shareholder
prior to the commencement of operations. Unless sooner terminated, the
Advisory Agreement will continue in effect until September 30, 1997 and from
year to year thereafter, subject to annual approval by the Trust's Board of
Trustees, or by a vote of a majority of the outstanding shares of the Fund (as
defined in the Prospectus) and a majority of the trustees who are not parties
to the Agreement or interested persons (as defined in the 1940 Act) of any
party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement may be terminated by the Trust or the advisers on 60 days
written notice, and will terminate immediately in the event of its assignment.
Weiss, Peck & Greer, L.L.C. (the "Sub-Adviser"), with
principal offices at One New York Plaza, New York, New York 10004, serves as
Sub-Adviser to the Fund. The Sub-Adviser is a professional investment
counselling firm that provides investment services to investment companies and
other entities.
If expenses borne by the Fund in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Fund's adviser will reimburse the Trust for any such excess to the extent
described in any written undertaking provided by the advisers to such state.
To the Trust's knowledge, as of the date of this Statement of Additional
Information, the most restrictive expense limitation applicable to the Trust
provides that annual expenses (as defined by statute) may not exceed 2.5% of
the first $30 million, 2% of the next $70 million and 1.5% of the remaining
average net assets of the Fund. Such amount, if any, will be estimated,
reconciled and paid on a monthly basis. The fees banks may charge to customers
for services provided in connection with their investments in the Trust are not
covered by the state securities expense limitations described above.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
- ------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. For the fiscal years ended April 30,
1996 and 1995, SEI Financial Management Corporation, a wholly-owned subsidiary
of SEI
-21-
<PAGE> 203
Corporation, served as administrator to the Predecessor Fund and earned the
following fees: $68,101 and $23,985, respectively, and waived fees of $9,681
and $19,188, respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Fund's shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by
Rule 12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval, by a majority of the Trust's
Board of Trustees, and by a majority of the trustees who are not interested
persons of the Trust and have no direct or indirect interest in the operation
of the Plan or any agreement relating to the Plan, by vote cast in person at a
meeting called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to make an informed determination of whether the Plan and
related agreement should be implemented, and concluded, in the exercise of
their reasonable business judgment and in light of their fiduciary duties, that
there is a reasonable likelihood that the Plan and related agreement will
benefit the Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of the Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial
interest in the Plan or related agreement. The Plan and related agreement may
be terminated by a vote of the Trust's disinterested trustees or by vote of
the shareholders of the Fund, on not more than 60 days written notice. The
selection and nomination of disinterested trustees has been committed to the
discretion of such disinterested trustees as required by the Rule.
The Trust's Plan provides that each Fund will reimburse the
Distributor for distribution expenses in an amount not to 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
-22-
<PAGE> 204
advertising and marketing a fund's shares, and direct and indirect costs and
expenses of preparing, printing and distributing its prospectuses to other than
current shareholders. In addition, the Plan provides that the Trust will pay
the Distributor an annual distribution fee of $250,000 payable monthly and
accrued daily by all of the Trust's investment funds with respect to which the
Distributor is distributing shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares including the distributor's expenses for travel,
communication compensation and benefits for sales personnel; and (4) any other
expenses reasonably incurred in connection with the distribution and marketing
of Class A shares subject to approval by a majority of disinterested directors
of Inventor. For the years ended April 30, 1996 and 1995, the Fund paid
$0 and $0 in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank also serves as the Trust's custodian with
respect to the Fund. Under its Custodian Services Agreement, National City
Bank has agreed to: (i) maintain a separate account or accounts in the name of
the Fund; (ii) hold and disburse portfolio securities on account of the Fund;
(iii) collect and make disbursements of money on behalf of the Fund; (iv)
collect and receive all income and other payments and distributions on account
of the Fund's portfolio securities; (v) respond to correspondence by security
brokers and others relating to its duties; and (vi) make periodic reports to
the Board of Trustees concerning the Fund's operations. National City Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services
Agreement and shall hold the Fund harmless from the acts and omissions of any
bank or trust company serving as sub-custodian. The Fund reimburses National
City Bank for its direct and indirect costs and expenses incurred in rendering
custodial services, except that the costs and expenses borne by the
-23-
<PAGE> 205
Fund in any year may not exceed $.225 for each $1,000 of average gross assets
of the Fund.
First Data Investor Services Group, Inc. (formerly, The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Fund. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of the Fund; (ii) transmit all communications by the Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
the Board of Trustees concerning the Fund's operations. The Transfer Agent
sends each shareholder of record a monthly statement showing the total number
of shares owned as of the last business day of the month (as well as the
dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan (the "Services Plan") with respect to the Retail
shares in the Fund. Pursuant to the Services Plan, the Trust may enter into
agreements with financial institutions pertaining to the provision of
administrative services to their customers who are the beneficial owners of
Retail shares in consideration for the payment of up to .10% (on an annualized
basis) of the net asset value of such shares. Such services may include: (i)
aggregating and processing purchase and redemption requests from customers;
(ii) providing customers with a service that invests the assets of their
accounts in Retail shares; (iii) processing dividend payments from the Fund;
(iv) providing information periodically to customers showing their position in
Retail shares; (v) arranging for bank wires; (vi) responding to customer
inquiries relating to the services performed with respect to Retail shares
beneficially owned by customers; (vii) forwarding shareholder communications;
and (viii) other similar services requested by the Trust. Agreements between
the Trust and financial institutions will be terminable at any time by the
Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to the Sub-Advisory Agreement with National City, the
Sub-Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of
-24-
<PAGE> 206
portfolio securities for the Fund. The Sub-Adviser purchases portfolio
securities either directly from the issuer or from an underwriter or dealer
making a market in the securities involved. Purchases from an underwriter of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and purchases from dealers serving as market makers may include
the spread between the bid and asked price. Transactions on stock exchanges
involve the payment of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market, but the price includes an undisclosed commission or mark-up.
For the fiscal year ended April 30, 1996, the Predecessor Fund
did not pay any brokerage commissions.
While the Sub-Adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the Sub-Adviser in its best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the Sub-Adviser may receive orders for transactions by the Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the Sub-Adviser and does not reduce the fees payable to it
by the Fund. Such information may be useful to the Sub-Adviser in serving both
the Trust and other clients, and, similarly, supplemental information obtained
by the placement of business of other clients may be useful to the Sub-Adviser
in carrying out its obligations to the Trust.
Fund securities will not be purchased from or sold to the
Fund's adviser, Sub-Adviser, the Distributor, or any "affiliated person" (as
such term is defined under the 1940 Act) of any of them acting as principal,
except to the extent permitted by the SEC. In addition, the Fund will not give
preference to its Sub-Adviser's or adviser's correspondents with respect to
such transactions, securities, savings deposits, repurchase agreements and
reverse repurchase agreements.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust department
independently of its Commercial Department. In making investment
recommendations for the Trust, Trust Department 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
-25-
<PAGE> 207
inquire or take into consideration whether securities of those customers are
held by the Trust.
Investment decisions for the Fund are made independently from
those for the other funds of the Trust and for other investment companies and
accounts advised or managed by the adviser and Sub-Adviser. Such other funds,
investment companies and accounts may also invest in the same securities as the
Fund. When a purchase or sale of the same security is made at substantially
the same time on behalf of the Fund and another investment company or account,
the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which the Sub-Adviser believes to be
equitable to the Fund and such other investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or sold by the Fund.
To the extent permitted by law, the Sub-Advisers may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other investment companies or accounts in order to obtain best execution.
AUDITORS
--------
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
---------------------------------
The Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power
of six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during 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:
-26-
<PAGE> 208
a-b (6)
Yield = 2 [(----) - 1]
cd+1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last
day of the period.
The Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each 30-day
period, or, with respect to obligations purchased during the 30-day period, the
purchase price (plus actual accrued interest) and dividing the result by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest) in order to determine the interest income on the
obligation for each day of the subsequent 30-day period that the obligation is
in the Fund. The maturity of an obligation with a call provision is the next
call date on which the obligation reasonably may be expected to be called or,
if none, the maturity date.
Interest earned on tax-exempt obligations that are issued
without original issue discount and have a current market discount is
calculated by using the coupon rate of interest instead of the yield to
maturity. In the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that
exceed the then-remaining portion of the original issue discount (market
discount), the yield to maturity is the imputed rate based on the original
issue discount calculation. On the other hand, in the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that are less than the then-remaining
portion of the original issue discount (market premium), the yield to maturity
is based on the market value.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by the Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share
-27-
<PAGE> 209
(variable "d" in the formula). Undeclared earned income is the net investment
income which, at the end of the 30-day base period, has not been declared as a
dividend, but is reasonably expected to be and is declared as a dividend
shortly thereafter. For applicable sales charges, see "How to Purchase and
Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" in the
Prospectus.
The "tax-equivalent yield" is computed by dividing the
portion of its yield (calculated as above) that is exempt from federal income
tax by one minus a stated federal income tax rate and adding that figure to
that portion, if any, of the Fund's yield that is not exempt from federal
income tax.
For the 30-day period ended April 30, 1996, the yield of the
Predecessor Fund was 4.10%. The tax equivalent yield (assuming a 39.6% federal
tax rate and a 2.8% Pennsylvania tax rate) for the same period was 6.19%.
The Fund computes the average annual total returns by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
The Fund computes its aggregate total returns by determining
its aggregate rates of return during specified periods 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:
-28-
<PAGE> 210
ERV
(-----) -1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted
from payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total returns for the one-year period
ending April 30, 1996 for the Predecessor Fund were 0.84% (after taking into
account the sales load) and 5.06% (without taking into account any sales load).
The average annual total returns since the Fund's commencement of operations
through April 30, 1996 were 2.44% (after taking into account the sales load)
and 4.92% (without taking into account any sales load). The Fund commenced
investment operations on August 10, 1994.
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its aggregate total return for
the period of time specified in the advertisement or communication by assuming
the investment of $10,000 in shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however,
disclose the maximum sales charge and will also disclose that the performance
data do not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other
-29-
<PAGE> 211
distributions on the Fund investment are reinvested by being paid in
additional Fund shares, any future income or capital appreciation of the Fund
would increase the value, not only of the original Fund investment, but also of
the additional Fund shares received through reinvestment. As a result, the
value of the Fund investment would increase more quickly than if dividends or
other distributions had been paid in cash.
In addition, the Fund may include in Materials discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund, high-quality investments, economic conditions, the
relationship between sectors of the economy and the economy as a whole, various
securities markets, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of the Fund), as well as the views of the adviser and Sub-Adviser
as to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in
Materials charts, graphs or drawings which compare the investment objective,
return potential, relative stability and/or growth possibilities of the Fund
and/or other mutual funds, or illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to,
stocks, bonds, Treasury securities and shares of the Fund and/or other mutual
funds. Materials may include a discussion of certain attributes or benefits
to be derived by an investment in the Fund and/or other mutual funds (such as
value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable investments),
shareholder profiles and hypothetical investor scenarios, timely information
on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
-30-
<PAGE> 212
MISCELLANEOUS
-------------
The Trust bears all costs in connection with its organization,
including the fees of registering and qualifying its shares for distribution
under federal and state securities regulations. All organizational expenses
are amortized on the straight-line method over a period of five years from the
date of the commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
the Fund, together with all income, earnings, profits, and proceeds derived
from the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining the Fund's net asset value, assets belonging
to the Fund are charged with the respective liabilities.
The following shareholders owned beneficially or of record 5%
or more of the outstanding Retail shares of the Predecessor Fund as of June 21,
1996:
<TABLE>
<CAPTION>
Number of Percentage of
Predecessor Fund Retail Outstanding Retail
---------------- Shares Shares
---------- -------------------
<S> <C> <C>
Sheldon & Co.(Integra-49) c/o National City 3,797,103.287 99.46%
Attn: Trust Mutual Funds
P.O. Box 94777, Loc. 5312
Cleveland, OH 44101-4777
</TABLE>
No Institutional shares of the Predecessor Fund had been
issued as of June 21, 1996.
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the
fiscal year ended April 30, 1996 and the periods prior thereto are contained in
the Predecessor Fund's Annual Report to Shareholders (the "Financial
Statements") which has been filed with the Securities and Exchange Commission
and is incorporated into this Statement of Additional Information by reference.
The Financial Statements and the information included in the Financial
Highlights tables for the same periods which appear in the Fund's prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon appears in such Annual
-31-
<PAGE> 213
Reports. The Financial Statements in such Annual Reports have been
incorporated herein and in the Fund's Prospectus in reliance upon the report of
said firm of independent accountants given upon their authority as experts in
accounting and auditing.
-32-
<PAGE> 214
APPENDIX A
----------
DESCRIPTION OF RATINGS
Bond Ratings
- ------------
The following summarizes the three highest rating categories
used by Standard & Poor's Ratings Group ("S&P") for bonds:
"AAA" - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
interest and repay principal.
"AA" - Debt rated "AA" is considered to have a very strong
capacity to pay interest and repay principal and differs from
"AAA" issues only to a small degree.
"A" - Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "A" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the three highest rating categories
used by Moody's Investors Service, Inc. ("Moody's") for bonds:
"Aaa" - Bonds that are rated "Aaa" are judged to be of the
best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
"Aa" - Bonds that are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group they
comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude
or there may be other elements
A-1
<PAGE> 215
present which make the long-term risks appear somewhat larger
than in "Aaa" securities.
"A" - Debt which is rated "A" possesses many favorable
investment attributes and is to be considered as an upper
medium grade obligation. Factors giving security to principal
and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime
in the future.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to bonds rated "Aa" and "A". The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category.
The following summarizes the three highest rating categories
used by Duff & Phelps Credit Rating Co. ("Duff & Phelps") for bonds:
"AAA" - Bonds that are rated "AAA" are of the highest credit
quality. The risk factors are considered to be negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
"AA" - Bonds that are rated "AA" are of high credit quality.
Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
"A" - Bonds rated "A" have average but adequate protection
factors. The risk factors are more variable and greater in
periods of economic stress.
To provide more detailed indications of credit quality, the
"AA" and "A" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.
A-2
<PAGE> 216
The following summarizes the three highest rating categories
used by Fitch Investors Service, Inc. ("Fitch") for bonds:
"AAA" - Bonds are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as
strong as bonds rated "AAA". Because bonds rated in the "AAA"
and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
"A" - Bonds that are rated "A" are considered to be investment
grade and of high credit quality. The obligor's ability to
pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" and "A" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
The following summarizes the three highest rating categories
used by IBCA Inc. ("IBCA") for bonds:
"AAA" - Bonds rated "AAA" are considered to have an extremely
strong capacity for repayment of debt obligations.
"AA" - Bonds rated "AA" are considered to have a very strong
capacity for timely repayment of debt, although margins of
protection may not be as large as for "AAA" issues, or
protection elements may be subject to greater fluctuation.
"A" - The bond rating "A" indicates a strong capacity to meet
debt obligations in a timely manner, although the bonds may be
more susceptible to adverse changes in the environment, or
margins of protection for the lender may be lower than for
more highly rated issues.
A-3
<PAGE> 217
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Tax-Exempt Commercial Paper Ratings
- -----------------------------------
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the two highest rating categories used by S&P
for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong
safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for
issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the two highest
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of
short-term promissory obligations. Principal repayment
capacity will normally be evidenced by the following
characteristics: leading market positions in well established
industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance
on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash
generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is
maintained.
The following summarizes the two highest rating categories
used by Duff & Phelps for commercial paper:
A-4
<PAGE> 218
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors
are small.
The following summarizes the two highest rating categories
used by Fitch for commercial paper:
"F-1+" - Instruments assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
"F-1" - Instruments assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues
rated "F-1+."
"F-2" - Instruments assigned this rating have satisfactory
degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned "F-1+" and "F-1"
ratings.
IBCA uses the short-term ratings described under Municipal
Notes Ratings for Commercial Paper.
Municipal Notes Ratings
- -----------------------
An S&P rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the two highest rating categories used by S&P for municipal notes:
A-5
<PAGE> 219
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
The following summarizes the two highest rating categories
used by Moody's for short-term notes and variable rate demand obligations:
"MIG-1"/"VMIG-1" - Obligations bearing these designations are
of the best quality, enjoying strong protection by established
cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so
large as in the preceding group.
Fitch uses the short-term ratings described under Commercial
Paper Ratings for municipal notes.
IBCA uses the following two highest rating categories for
short-term notes (including commercial paper):
"A1+" - These issues display the very highest quality
borrowing characteristics and are of undoubted or prime
creditworthiness.
"A1" - These issues display very strong borrowing
characteristics.
"A2" - These issues have high quality borrowing
characteristics although their ability to repay is considered
to be less than those issues rated "A1."
A-6
<PAGE> 220
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
____________, 1996
PENNSYLVANIA TAX EXEMPT FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated ____________, 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> 221
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 21
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
STANDARDIZED YIELD QUOTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
-i-
<PAGE> 222
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes
the Pennsylvania Tax Exempt Fund (the "Fund"). The information contained in
this Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus.
The Pennsylvania Tax-Exempt Fund commenced operations on
August 8, 1994 as a separate investment portfolio (the "Predecessor Fund") of
Inventor Funds, Inc., which was organized as a Maryland corporation. On
_______________, 1996, the Predecessor Fund was reorganized as a new portfolio
of the Trust. Prior to the reorganization, the Predecessor Fund offered and
sold shares of stock that were similar to the Trust's Retail Shares of
beneficial interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
------------------------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the advisers' investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P,
Fitch, Duff, IBCA and Moody's for Municipal Bonds and other securities which
may be held by the Fund.
ELIGIBLE SECURITIES
- -------------------
The Fund may purchase "eligible securities" that present
minimal credit risks as determined by the Sub-Adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities generally
include: (1) securities that are rated by two or more Rating Agencies (or the
only Rating Agency which has issued a rating) in one of the two highest rating
categories for short term debt securities; (2) securities that have no short
term rating, if the issuer has other outstanding short term obligations that
are comparable in priority and security as determined by the advisers
("Comparable Obligations") and that have been rated in accordance with (1)
above; (3) securities that have no short term rating, but are determined to be
of comparable quality to a security satisfying (1) or (2) above, and the issuer
does not have Comparable Obligations rated by a Rating Agency; and (4)
obligations that carry a demand feature (which will be required to satisfy
provision of applicable regulations and Fund procedures)
-1-
<PAGE> 223
that complies with (1), (2) or (3) above, and are unconditional (i.e., readily
exercisable in the event of default) or, if conditional, either they or the
long term obligations of the issuer of the demand obligation are (a) rated by
two or more Rating Agencies (or the only Rating Agency which has issued a
rating) in one of the three highest categories for long term debt obligations,
or (b) determined by the Sub-Adviser to be of comparable quality to securities
which are so rated. The Board of Trustees will approve or ratify any purchases
by the Fund of securities that are rated by only one Rating Agency or that
qualify under (3) above for so long as required by applicable law or Fund
procedures.
MUNICIPAL BONDS
- ---------------
As described in the Prospectus, the two principal
classifications of Municipal Bonds consist of "general obligation" and
"revenue" issues, and the Fund may include "moral obligation" issues, which are
normally issued by special purpose authorities. Municipal Bonds include debt
obligations issued by governmental entities to obtain funds for various public
purposes, including the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general operating expenses
and the extension of loans to public institutions and facilities. Municipal
Bonds in which the Fund invests must be rated A or better by S&P or Fitch or A
or better by Moody's at the time of investment or, if unrated must be deemed by
the Sub-Adviser to have essentially the same characteristics and quality as
bonds having the above ratings. The Sub-Adviser may purchase private activity
bonds if the interest paid is excludable from federal income tax. Private
activity bonds are issued by or on behalf of states or political subdivisions
thereof to finance privately owned or operated facilities for business and
manufacturing, housing, sports, and pollution control and to finance activities
of and facilities for charitable institutions. Private activity bonds are also
used to finance public facilities such as airports, mass transit systems,
ports, parking and low income housing. The payment of the principal and
interest on private activity bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and may be secured by a
pledge of real and personal property so financed.
Pennsylvania municipal securities which are payable only from
the revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the
particular facility to generate revenues sufficient to pay such interest and
principal, including, among others, laws and regulations which limit the amount
of fees, rates or other charges which may be imposed for use of the facility or
which increase competition among facilities of that type or which limit or
otherwise have the effect of reducing the use of such facilities generally,
thereby reducing the revenues generated by the particular facility.
Pennsylvania municipal securities, the
-2-
<PAGE> 224
payment of interest and principal on which is insured in whole or in part by a
Pennsylvania governmentally created fund, may be adversely affected by
Pennsylvania laws or regulations which restrict the aggregate proceeds
available for payment of principal and interest in the event of a default on
such municipal securities. Similarly, Pennsylvania municipal securities, the
payment of interest and principal on which is secured, in whole or in part, by
an interest in real property may be adversely affected by Pennsylvania laws
which limit the availability of remedies or the scope of remedies available in
the event of a default on such municipal securities. Because of the diverse
nature of such laws and regulations and the impossibility of either predicting
in which specific Pennsylvania municipal securities the Fund will invest from
time to time or predicting the nature or extent of future changes in existing
laws or regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such laws
and regulations on the securities in which the Fund may invest and, therefore,
on the shares of the Fund.
There are, of course, variations in the quality of Municipal
Bonds both within a particular classification and between classifications, and
the yields on Municipal Bonds depend upon a variety of factors, including the
financial condition of the issuer, the general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of Rating Agencies represent their
opinions as to the quality of Municipal Bonds. It should be emphasized,
however, that ratings are general and are not absolute standards of quality,
and Municipal Bonds with the same maturity, interest rate and rating may have
different yields while Municipal Bonds of the same maturity and interest rate
with different ratings may have the same yield. Subsequent to its purchase by
the Fund, an issue of Municipal Bonds may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Fund. The
Fund's advisers will consider such an event in determining whether the Fund
should continue to hold the obligation.
The payment of principal and interest on most Municipal Bonds
purchased by the Fund will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its Municipal Bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on the principal of its Municipal Bonds may be materially
adversely affected by litigation or other conditions.
-3-
<PAGE> 225
Certain Municipal Bonds held by the Fund may be insured at the
time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal Bond
at the time of its original issuance. In the event that the issuer defaults on
interest or principal payments, the insurer of the bond is required to make
payment to the bondholders upon proper notification. There is, however, no
guarantee that the insurer will meet its obligations. In addition, such
insurance will not protect against market fluctuations caused by changes in
interest rates and other factors. The Fund may, from time to time, invest
more than 25% of its assets in Municipal Bonds covered by insurance policies.
Municipal notes in which the Fund may invest include, but are
not limited to, general obligation notes, tax anticipation notes (notes sold to
finance working capital needs of the issuer in anticipation of receiving taxes
on a future date), revenue anticipation notes (notes sold to provide needed
cash prior to receipt of expected non-tax revenues from a specific source),
bond anticipation notes, certificates of indebtedness, demand notes and
construction loan notes. The Fund's investments in any of the notes described
above will be limited to those obligations (i) where both principal and
interest are backed by the full faith and credit of the United States, (ii)
which are rated MIG-2 or V-MIG-2 or better at the time of investment by
Moody's, (iii) which are rated SP-2 or better at the time of investment by S&P,
(iv) which are rated F-1 at the time of investment by Fitch, or (v) which, if
not rated, are of equivalent quality in the Sub-Adviser's judgment.
OTHER TAX-EXEMPT INSTRUMENTS
- ----------------------------
Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 by S&P, F-2 by Fitch or Prime-2 by
Moody's at the time of investment or which are of equivalent quality as
determined by the Sub-Adviser. Other types of tax-exempt instruments which are
permissible investments for the Fund include floating rate notes. Investments
in such floating rate instruments will normally involve industrial development
or revenue bonds which provide that the rate of interest is set as a specific
percentage of a designated base rate (such as the prime rate) at a major
commercial bank, and that the Fund can demand payment of the obligation at all
times or at stipulated dates on short notice (not to exceed 30 days) at par
plus accrued interest. The Fund must use the shorter of the period required
before a Fund is entitled to prepayment under such obligations or the period
remaining until the next interest rate adjustment date for purposes of
determining the maturity. Such obligations are frequently secured by letters
of credit or other credit support arrangements provided by banks. The quality
of the underlying credit or of the bank, as the case may be, must, in the
Sub-Adviser's opinion be equivalent to the long-term bond or commercial paper
ratings stated above. The Sub-Adviser will
-4-
<PAGE> 226
monitor the earning power, cash flow and liquidity ratios of the issuers of
such instruments and the ability of an issuer of a demand instrument to pay
principal and interest on demand. The Sub-Adviser may purchase other types of
tax-exempt instruments as long as they are of a quality equivalent to the bond
or commercial paper ratings stated above.
STAND-BY COMMITMENTS
- --------------------
The Fund may acquire stand-by commitments (also known as put
options) with respect to Municipal Bonds held in its portfolio. It expects
that stand-by commitments will generally be available without the payment of
any direct or indirect consideration. However, if necessary or advisable, the
Fund may pay for a stand-by commitment either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the
same securities). The Fund will not acquire a stand-by commitment unless
immediately after the acquisition, not more than 5% of its total assets will
be invested in instruments subject to a demand feature, or in stand-by
commitments, with the same institution.
The Fund's right to exercise stand-by commitments will be
unconditional and unqualified. A stand-by commitment will be transferable by
the Fund only with the underlying Municipal Bonds which may be sold to a third
party at any time. Until the Fund exercises its stand-by commitment, it owns
the securities in its portfolio which are subject to the commitment.
The amount payable to the Fund upon its exercise of a
stand-by commitment will normally be (i) the Fund's acquisition cost of the
Municipal Bonds (excluding any accrued interest which the Fund paid on its
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date during that period. Under normal market conditions, in determining net
asset value, the Fund values the underlying Municipal Bonds on an amortized
cost basis. Accordingly, the amount payable by a dealer upon exercise of a
stand-by commitment will normally be substantially the same as the portfolio
value of the underlying Municipal Bonds.
The Fund intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Sub-Adviser's opinion, present
minimal credit risks. The Fund's reliance upon the credit of these dealers,
banks and broker-dealers will be secured by the value of the underlying
Municipal Bonds that are subject to the commitment. Thus, the risk of loss to
the Fund in connection with a stand-by commitment will not be qualitatively
different from the risk of loss faced by a person that is holding
-5-
<PAGE> 227
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
WHEN-ISSUED SECURITIES
- ----------------------
The Fund may purchase Municipal Bonds on a "when-issued"
basis (i.e., for delivery beyond the normal settlement date at a stated price
and yield). When the Fund agrees to purchase when-issued securities, the
custodian sets aside cash or liquid portfolio securities equal to the amount of
the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment, marked to market daily. It is likely that
the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its total
assets.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser and
Sub-Adviser) which invest in high quality, short term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. The Fund currently intends to limit such investments
so that, as determined immediately after a securities purchase is made: (a) not
more than 5% of the value of its total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; (c) not more than 3% of the outstanding voting stock of
any one investment company will be owned by the Fund; and (d) not more than 10%
of the outstanding voting stock of any one investment company will be owned in
the aggregate by the Fund and other investment companies advised by the adviser
and Sub-Adviser. As a shareholder of another investment company, a Fund would
bear, along with other shareholders, its pro rata portion of that company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that a Fund bears directly in
-6-
<PAGE> 228
connection with its own operations. Investment companies in which a Fund may
invest may also impose a sales or distribution charge in connection with the
purchase or redemption of their shares and other types of commissions or
charges. Such charges will be payable by the Fund and, therefore, will be
borne indirectly by its shareholders.
TAXABLE MONEY MARKET INSTRUMENTS
- --------------------------------
The Fund may invest in various Taxable Money Market
Instruments such as bank obligations, commercial paper, repurchase agreements
and U.S. Government Obligations.
Bank obligations include bankers' acceptances generally having
a maturity of six months or less and negotiable certificates of deposit. Bank
obligations also include U.S. dollar denominated bankers' acceptances and
certificates of deposit. Investment in bank obligations is limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase.
Investments include commercial paper and other short term
promissory notes issued by corporations, municipalities and other entities
(including variable and floating rate instruments).
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's Sub-Adviser deems creditworthy under guidelines approved by the
Board of Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short term rates, which may be more or less than the rate on
the underlying portfolio securities. The seller under a repurchase agreement
will be required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
the Fund holding such obligation would suffer a loss to the extent that the
proceeds from a sale of the underlying portfolio securities were less than the
repurchase price under the agreement, or to the extent that the disposition of
such securities by the Fund were delayed pending court action. Although there
is no controlling legal precedent confirming that a Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, the Board of Trustees of the Trust believes
that, under the regular procedures normally in effect for custody of a Fund's
securities subject to repurchase agreements and under federal laws, a court of
competent jurisdiction would rule in favor of the Trust if presented with the
question. Securities subject to repurchase agreements will be held
-7-
<PAGE> 229
by the Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
The Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others,
such as those of the Export-Import Bank of the United States, are supported by
the right of the issuer to borrow from the U.S. Treasury; others, such as those
of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will invest
in the obligations of such agencies or instrumentalities only when the advisers
believe that the credit risk with respect thereto is minimal.
VARIABLE AND FLOATING RATE INSTRUMENTS
- --------------------------------------
The Fund may purchase variable rate and floating rate
obligations as described in the Prospectus. The Trust's Sub-Adviser will
consider the earning power, cash flows and other liquidity ratios of the
issuers and guarantors of such notes and will continuously monitor their
financial status to meet payment on demand. In determining average weighted
portfolio maturity, a variable or floating rate instrument issued or guaranteed
by the U.S. Government or an agency or instrumentality thereof will be deemed
to have a maturity equal to the period remaining until the obligation's next
interest rate adjustment. Other variable and floating rate obligations will be
deemed to have a maturity equal to the longer or shorter of the periods
remaining to the next interest rate adjustment or the demand notice period, in
accordance with applicable Fund procedures.
Variable and floating rate obligations held by the Fund may
have maturities of more than 397 days, provided: (a) (i) the Fund is entitled
to payment of principal and accrued interest upon not more than 30 days' notice
or at specified intervals not exceeding one year (upon not more than 30 days'
notice) and (ii) the rate of interest on such instrument is adjusted
automatically at periodic intervals which normally will not exceed 31 days, but
may extend up to one year, or (b) if the obligation is an asset-backed
security, the security has a feature permitting the holder unconditionally to
receive principal and interest within 13 months of making demand.
-8-
<PAGE> 230
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed only by a vote of the holders of a majority of the Fund's
outstanding shares (as defined under "Miscellaneous" in the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities
on margin, except to obtain short-term credits as necessary for the clearance
of security transactions in accordance with its investment objective.
2. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities.
3. Purchase or sell real estate or real estate limited
partnership interests, except to invest in securities or interests of
companies which invest in real estate.
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs and
oil, gas and mineral leases, except to the extent appropriate to its investment
objective, invest in securities issued by companies which purchase or sell
financial commodity contracts or invest in real estate.
5. Invest in any issuer for the purpose of exercising
control.
6. Pledge, mortgage or hypothecate assets, except to
secure borrowings permitted by the Fund's investment limitations in aggregate
amounts not to exceed 33 1/3% of the Fund's total assets taken at current value
at the time of the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any
one issuer, provided that this limitation shall apply only as to 75% of the
Fund's net assets.
8. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
9. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described above or as permitted by rule, regulation or order of the Securities
and Exchange Commission.
-9-
<PAGE> 231
The following limitations are considered non-fundamental and
therefore may be changed without a shareholder vote. The Fund may not purchase
puts, calls, options or combinations thereof, except that the Fund may purchase
puts as described in its prospectus.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 10% of its net assets.
The Fund may not purchase securities of any company which has
(with predecessors) a record of less than three years continuing operations,
if, as a result, more than 5% of the total assets of the Fund (taken at current
value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase
of a security.
* * * * *
In addition, so long as the Fund is offering and selling its
shares in the State of Texas , it may not: (i) invest more than 5% of its net
assets in warrants (including within that amount but not to exceed 2%,
warrants that are not listed on the New York or American Stock Exchange), (ii)
invest in oil, gas or other mineral leases, or (iii) invest in real estate
limited partnership interests.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
- -----------------------------------------------------------------
Potential shareholders should consider the fact that the
Fund's portfolio consists primarily of securities issued by the Commonwealth of
Pennsylvania (the "Commonwealth"), its municipalities and authorities and
should realize that the Fund's performance is closely tied to general economic
conditions within the Commonwealth as a whole and to economic conditions within
particular industries and geographic areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending deceases have resulted in surpluses the last
four years; as of June 30, 1994, the General Fund had a surplus of $892.9
million. The deficit in the Commonwealth's unreserved/undesignated funds also
has been eliminated, and there was a surplus of $79.2 million as of June 30,
1994.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education
-10-
<PAGE> 232
and financial services. Agricultural industries continue to be an important
part of the economy, including not only the production of diversified food and
livestock products, but substantial economic activity in agribusiness and
food-related industries. Service industries currently employ the greatest
share of non-agricultural workers, followed by the categories of trade and
manufacturing. Future economic difficulties in any of these industries could
have an adverse impact on the finances of the Commonwealth or its
municipalities, and could adversely affect the market value of the Bonds in the
Pennsylvania Trust or the ability of the respective obligors to make payments
of interest and principal due on such Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU and the parties are proceeding with discovery; (ii) in 1987, the Supreme
Court of Pennsylvania held the statutory scheme for country funding of the
judicial system to be in conflict with the constitution of the Commonwealth,
but it stayed judgment pending enactment by the legislature of funding
consistent with the opinion, and the legislature has yet to consider
legislation implementing the judgment. In 1992, a new action in mandamus was
filed seeking to compel the Commonwealth to comply with the original decision;
(iii) litigation was filed in both state and federal court by an association of
rural and small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for funding
local school districts -- the federal case has been stayed pending the
resolution of the state case, and the state case is in the pre-trial stage, and
(iv) Envirotest/Synterra Partners ("Envirotest") filed suit against the
Commonwealth asserting that it sustained damages in excess of $350 million, as
a result of investments it made in reliance on a contract to conduct emissions
testing before the emission testing program was suspended. Envirotest entered
into a Standstill Agreement with the Commonwealth pursuant to which the parties
will attempt to resolve Envirotest's claims.
Although there can be no assurance that such conditions will
continue, the Commonwealth's general obligation bonds are currently rated AA-
by S&P and A1 by Moody's and Philadelphia's and Pittsburgh's general obligation
bonds are currently rated BBB- and BBB+, respectively, by S&P and Baa and Baa1,
respectively, by Moody's.
-11-
<PAGE> 233
The City of Philadelphia (the "City") experienced a series of
General Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term
solution for its economic difficulties. The audited balance of the City's
General Fund as of June 30, 1994 was a surplus of $15.4 million, and
preliminary unaudited financial statements as of June 30, 1995 project a
surplus of approximately $59.6 million.
In recent years, an authority of the Commonwealth, the
Pennsylvania Intergovernmental Cooperation Authority ("PICA"), has issued
approximately $1.4 billion of Special Revenue Bonds on behalf of the City to
cover budget shortfalls, to eliminate projected deficits and to fund capital
spending. As one of the conditions of issuing bonds on behalf of the City,
PICA exercises oversight of the City's finances. The City is currently
operating under a five year plan approved by PICA in 1995. PICA's power to
issue further bonds to finance capital projects expired on December 31, 1994.
PICA may continue to issue bonds to finance cash flow deficits until December
31, 1996, and its authority to refund existing debt will not expire.
NET ASSET VALUE
---------------
The Trust uses the amortized cost method to value shares in
the Fund. Pursuant to this method, a security is valued at its cost initially
and thereafter a constant amortization to maturity of any discount or premium
is assumed, regardless of the impact of fluctuating interest rates on the
market value of the security. Where it is not appropriate to value a security
by the amortized cost method, the security will be valued either by market
quotations, or by fair value as determined by the Board of Trustees. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Fund would receive if it sold the security. The value of the portfolio
securities held by the Fund will vary inversely to changes in prevailing
interest rates. Thus, if interest rates have increased from the time a
security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price
greater than its purchase cost. In either instance, if the security is held to
maturity, no gain or loss will be realized.
The Fund invests only in high-quality instruments and
maintains a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that the
Fund will neither purchase any security deemed to have a remaining maturity of
more than 397 calendar days within the meaning of the 1940 Act nor maintain a
dollar-weighted average
-12-
<PAGE> 234
portfolio maturity which exceeds 90 days. The Trust's Board of Trustees has
established procedures pursuant to rules promulgated by the SEC, that are
intended to help stabilize the net asset value per share of the Fund for
purposes of sales and redemptions at $1.00. These procedures include review by
the Board of Trustees, at such intervals as it deems appropriate, to determine
the extent, if any, to which the net asset value per share of the Fund
calculated by using available market quotations deviates from $1.00 per share.
In the event such deviation exceeds one-half of one percent, the Board of
Trustees will promptly consider what action, if any, should be initiated. If
the Board of Trustees believes that the extent of any deviation from a Fund's
$1.00 amortized cost price per share may result in material dilution or other
unfair results to investors or existing shareholders, it has agreed to take
such steps as it considers appropriate to eliminate or reduce, to the extent
reasonably practicable, any such dilution or unfair results. These steps may
include selling portfolio instruments prior to maturity; shortening the average
portfolio maturity; withholding or reducing dividends; redeeming shares in
kind; reducing the number of the Fund's outstanding shares without monetary
consideration; or utilizing a net asset value per share determined by using
available market quotations.
DIVIDENDS
---------
As stated, the Trust uses its best efforts to maintain the net
asset value per share of the Fund at $1.00. As a result of a significant
expense or realized or unrealized loss incurred by the Fund, it is possible
that the Fund's net asset value per share may fall below $1.00. Should the
Trust incur or anticipate any unusual or unexpected significant expense or loss
which would affect disproportionately the income of the Fund for a particular
period, the Board of Trustees would at that time consider whether to adhere to
the present dividend policy with respect to the Fund or to revise it in order
to address to the extent possible the disproportionate effect of such expense
or loss on the income of the Fund. Such expense or loss may result in a
shareholder's receiving no dividends for the period in which he holds shares of
the Fund and/or in his receiving upon redemption a price per share lower than
the price he paid.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by 440
Financial Distributors, Inc. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The 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
-13-
<PAGE> 235
requests must be signed by each shareholder, with each signature guaranteed by
a U.S. commercial bank or trust company or by a member firm of a national
securities exchange. Guarantees must be signed by an authorized signatory and
"Signature Guaranteed" must appear with the signature. An investor's financial
institution may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular
verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived)
to reduce the sales load applicable to an exchange, as may be provided in the
Fund Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 32 classes
or series of shares. Two of these classes or series, which represent interests
in the Pennsylvania Tax Exempt
-14-
<PAGE> 236
Fund (Class Q and Class Q - Special Series 1) are described in this Statement
of Additional Information and the related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in
the matter are substantially identical or the matter does not affect any
interest of the fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to an investment fund only if approved by a majority of
the outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting without regard to a
particular fund. In addition, shareholders of each class in a particular
investment fund have equal voting rights except that only Retail shares of an
investment fund will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing fees that are allocable
to such shares.
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's 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
-15-
<PAGE> 237
investment fund with the assets belonging to another investment fund of the
Trust, if the Board of Trustees reasonably determines that such combination
will not have a material adverse effect on shareholders of any fund
participating in such combination, and, in connection therewith, to cause all
outstanding shares of any fund to be redeemed at their net asset value or
converted into shares of another class of the Trust shares at net asset value.
In the event that shares are redeemed in cash at their net asset value, a
shareholder may receive in payment for such shares an amount that is more or
less than his original investment due to changes in the market prices of the
fund's securities. The exercise of such authority by the Board of Trustees
will be subject to the provisions of the 1940 Act, and the Board of Trustees
will not take any action described in this paragraph unless the proposed action
has been disclosed in writing to the fund's shareholders at least 30 days prior
thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Trust or its shareholders or possible legislative changes,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisers with specific reference to their own tax situation.
As described above and in the Prospectus, the Fund is designed
to provide investors with tax-exempt interest income. The Fund is not intended
to constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and IRAs because such plans and
accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the Fund's dividends being tax-exempt.
The policy of the Fund is to pay each year as federal
exempt-interest dividends substantially all the Fund's Municipal Bond interest
income net of certain deductions. In order for the Fund to pay federal
exempt-interest dividends with respect to any taxable year, at the close of
each taxable quarter at least 50% of the aggregate value of its portfolio must
consist of tax-exempt obligations. An exempt-interest dividend is any
dividend or part thereof (other than a capital gain dividend) paid by the Fund
and designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than 60 days after the close of
-16-
<PAGE> 238
the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Fund cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by the Fund during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code. The percentage of total dividends paid by the Fund with
respect to any taxable year which qualifies as federal exempt-interest
dividends will be the same for all shareholders receiving dividends from the
Fund with respect to such year.
The Fund does not expect to realize long-term capital gains
and, therefore, does not expect to distribute any capital gain dividends.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any
of the tax-exempt obligations held by the Fund. A "substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who
regularly uses a part of such facilities in his trade or business and whose
gross revenues derived with respect to the facilities financed by the issuance
of bonds are more than 5% of the total revenues derived by all users of such
facilities, who occupies more than 5% of the usable area of such facilities or
for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. A "related person" includes certain related natural
persons, affiliated corporations, partners and partnerships, and S corporations
and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase
or carry Fund shares generally is not deductible for federal income tax
purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year. In addition, if a shareholder holds Fund shares
for six months or less, any loss on the sale or exchange of those shares will
be disallowed to the extent of the amount of exempt-interest dividends received
with respect to the shares. The Treasury Department, however, is authorized to
issue regulations reducing the six months holding requirement to a period of
not less than the greater of 31 days or the period between regular dividend
distributions where the investment company regularly distributes at least 90%
of its net tax-exempt interest. No such regulations had been issued as of the
date of this Statement of Additional Information.
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
qualify for tax treatment as a regulated 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
-17-
<PAGE> 239
income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or
foreign currencies, and other income (including, but not limited to, gains from
options, futures, or forward contracts) derived from the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by the Fund from a partnership or trust is treated for this
purpose as derived from the Fund's business of investing in stock, securities
or currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three months:
(1) stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by the Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the 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
-18-
<PAGE> 240
amounts derived from interest on Municipal Bonds with respect to the Fund)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so that they are not subject to backup withholding or
that they are "exempt recipients."
Depending upon the extent of the Fund's activities in states
and localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Under state or local law,
distributions of net investment income may be taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
TRUSTEES AND OFFICERS
---------------------
The Prospectus includes a description of the trustees and
certain executive officers of the Trust, their addresses, principal occupations
during the past five years, and other affiliations. Mr. W. Bruce McConnel,
III, Secretary of the Trust, is a partner of the law firm of Drinker Biddle &
Reath, which receives fees as counsel to the Trust. Mr. John J. Burke,
Assistant Treasurer of the Trust, is employed by First Data Investor Services
Group, Inc. (formerly, The Shareholder Services Group, Inc., d/b/a 440
Financial), which receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional
$2,500 per annum for services in such capacity. For the year ended May 31,
1996, the Trust's trustees and officers as a group received aggregate fees of
-19-
<PAGE> 241
$69,875. The trustees and officers of the Trust own less than 1% of the shares
of the Trust.
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Total
Compensation as Part of Approval Compensation
Name of from the Trust's Benefits from the
Person, Position the Trust Expenses Upon Retirement Trust
---------------- ------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., $11,375 $0 $0 $11,375
Trustee
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $0 $0 $0 $0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts
or obligations of the Trust, and that every note, bond, contract, order, or
other undertaking made by the Trust shall contain a provision to the effect
that the shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the trust property of any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of his acts or omissions or some other reason. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on
-20-
<PAGE> 242
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust estate
or the conduct of any business of the Trust; nor shall any trustee be
personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his duties as trustee. The Declaration of Trust also provides
that all persons having any claim against the trustees or the Trust shall look
solely to the trust property for payment. With the exceptions stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expense, reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved
or with which he may be threatened by reason of his being or having been a
trustee, and that the trustees, have the power, but not the duty, to indemnify
officers and employees of the Trust unless any such person would not be
entitled to indemnification had he been a trustee.
ADVISORY, SUB-ADVISORY, ADMINISTRATION, DISTRIBUTION,
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
-----------------------------------------------------
ADVISORY AND SUB-ADVISORY AGREEMENTS
- ------------------------------------
National City serves as investment adviser to the Fund, as
described in the Prospectus. The adviser is affiliate of National City
Corporation, a bank holding company with $32 billion in assets, and
headquarters in Cleveland, Ohio and nearly 600 branch offices in three states.
Through its subsidiaries, National City Corporation has been managing
investments for individuals, pension and profit-sharing plans and other
institutional investors for over 75 years and currently manages over $30
billion in assets. From time to time, the advisers may voluntarily waive fees
or reimburse the Trust for expenses.
For the fiscal years ended April 30, 1996 and 1995, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $310,912 and $76,582, respectively, and Integra
waived fees in the amount of $110,272 and $84,075, respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. In addition, the adviser has undertaken in the Advisory Agreement
to maintain its policy and practice of
-21-
<PAGE> 243
conducting its Trust Department independently of its Commercial Department.
The Advisory Agreement was approved by the sole shareholder
prior to the Fund's commencement of operations. Unless sooner terminated, the
Advisory Agreement will continue in effect until September 30, 1997, and from
year to year thereafter, subject to annual approval by the Trust's Board of
Trustees, or by a vote of a majority of the outstanding shares of the Fund (as
defined in the Fund's Prospectus) and a majority of the trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement may be terminated by the Trust or the adviser on 60 days
written notice, and will terminate immediately in the event of its assignment.
Weiss, Peck & Greer, L.L.C. (the "Sub-Adviser"), with
principal offices at One New York Plaza, New York, New York 10004, serves as
Sub-Adviser to the Fund. The Sub-Adviser is a professional investment
counselling firm that provides investment services to investment companies and
other entities.
If expenses borne by the Fund in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
adviser will reimburse the Trust for any such excess with respect to the Fund
to the extent described in any written undertaking provided by the adviser to
such state. To the Trust's knowledge, as of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Trust provides that annual expenses (as defined by statute) may not exceed
2.5% of the first $30 million, 2% of the next $70 million and 1.5% of the
remaining average net assets of the Fund. Such amount, if any, will be
estimated, reconciled and paid on a monthly basis. The fees banks may charge
to customers for services provided in connection with their investments in the
Trust are not covered by the state securities expense limitations described
above.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
- ------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. For the fiscal years ended April 30,
1996 and April 30, 1995, SEI Financial Management Corporation, a wholly-owned
subsidiary of SEI Corporation, served as administrator to the Predecessor Fund
and earned the following fees: $103,634 and $53,552, respectively.
-22-
<PAGE> 244
DISTRIBUTION PLAN AND RELATED AGREEMENTS
- ----------------------------------------
The Distributor acts as distributor of the Fund's shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by
Rule 12b-1, the Trust's 12b-1 Plan and related agreement have been approved,
and are subject to annual approval by, a majority of the Trust's Board of
Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement related to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to make an informed determination of whether the Plan and
related agreement should be implemented, and concluded, in the exercise of
reasonable business judgment and in light of their fiduciary duties, that there
is a reasonable likelihood that the Plan and related agreement will benefit the
Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial
interest in the Plan or related agreement. The Plan and related agreement may
be terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by a vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has
been committed to the discretion of such disinterested trustees as required by
the Rule.
The Trust's Plan provides that the Fund will reimburse the
Distributor for distribution expenses in an amount not to exceed .10% of the
fund's average net assets. Distribution expenses payable by the Distributor
pursuant to the Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing the fund's shares, and direct and
indirect costs and expenses of preparing, printing and distributing its
prospectuses to other than current shareholders. In addition, the Plan
provides that the Trust will pay the Distributor an annual distribution fee of
$250,000, payable monthly and accrued daily by
-23-
<PAGE> 245
all of the Trust's investment funds with respect to which the Distributor is
distributing shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
Class A Shares of the Predecessor Fund were subject to a Plan
adopted pursuant to rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the
Predecessor Fund's distribution expenses, including (1) the cost of
prospectuses, reports to shareholders, sales literature and other materials for
potential investors; (2) advertising; (3) expenses incurred in connection with
the promotion and sale of Inventor's shares including the distributor's
expenses for travel, communication, compensation and benefits for sales
personnel; and (4) any other expenses reasonably incurred in connection with
the distribution and marketing of Class A shares subject to approval by a
majority of disinterested directors of Inventor. For the years ended April 30,
1996 and 1995, the Fund paid $0 and $0, respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City
Bank has agreed to: (i) maintain a separate account or accounts in the name of
the Fund; (ii) hold and disburse portfolio securities on account of the Fund;
(iii) collect and make disbursements of money on behalf of the Fund; (iv)
collect and receive all income and other payments and distributions on account
of the Fund's portfolio securities; (v) respond to correspondence by security
brokers and others relating to its duties; and (vi) make periodic reports to
the Board of Trustees concerning the Fund's operations. National City Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services Agreement
and shall hold the Fund harmless from the acts and omissions of any bank or
trust company serving as sub-custodian. The Fund reimburses National City Bank
for its direct and indirect costs and expenses incurred in rendering custodial
services, except that the costs and expenses borne by the Fund in any year may
not exceed $.225 for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly, The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent")
serves as the Trust's transfer agent and dividend
-24-
<PAGE> 246
disbursing agent with respect to the Fund. Under its Transfer Agency
Agreement, it has agreed to: (i) issue and redeem shares of the Fund; (ii)
transmit all communications by the Fund to its shareholders of record,
including reports to shareholders, dividend and distribution notices and proxy
materials for meetings of shareholders; (iii) respond to correspondence by
security brokers and others relating to its duties; (iv) maintain shareholder
accounts; and (v) make periodic reports to the Board of Trustees concerning the
Fund's operations. The Transfer Agent sends each shareholder of record a
monthly statement showing the total number of shares owned as of the last
business day of the month (as well as the dividends paid during the current
month and year), and provides each shareholder of record with a daily
transaction report for each day on which a transaction occurs in the
shareholder's account with the Fund.
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented a
Shareholder Services Plan (the "Services Plan") with respect to Retail shares
in the Fund. Pursuant to the Services Plan, the Trust may enter into
agreements with financial institutions pertaining to the provision of
administrative services to their customers who are the beneficial owners of
Retail shares in consideration for the payment of up to .10% (on an annualized
basis) of the net asset value of such shares. Such services may include: (i)
aggregating and processing purchase and redemption requests from customers;
(ii) providing customers with a service that invests the assets of their
accounts in Retail shares; (iii) processing dividend payments from the Fund;
(iv) providing information periodically to customers showing their position in
Retail shares; (v) arranging for bank wires; (vi) responding to customer
inquiries relating to the services performed with respect to Retail shares
beneficially owned by customers; (vii) forwarding shareholder communications;
and (viii) other similar services requested by the Trust. Agreements between
the Trust and financial institutions will be terminable at any time by the
Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to the Sub-Advisory Agreement with National City,
Weiss, Peck & Greer, L.L.C. (the "Sub-Adviser"), is responsible for, makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Fund. The Sub-Adviser purchases portfolio
securities either directly from the issuer or from an underwriter or dealer
making a market in the securities involved. Purchases from an underwriter of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and purchases from dealers serving as market makers
-25-
<PAGE> 247
may include the spread between the bid and asked price. Transactions on stock
exchanges involve the payment of negotiated brokerage commissions. There is
generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up.
While the Sub-Adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the Sub-Adviser in its best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the Sub-Adviser may receive orders for transactions by the Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the Sub-Adviser and does not reduce the fees payable to it
by the Fund. Such information may be useful to the Sub-Adviser in serving both
the Trust and other clients, and, conversely, supplemental information obtained
by the placement of business of other clients may be useful to the Sub-Adviser
in carrying out its obligations to the Trust.
Fund securities will not be purchased from or sold to the
Trust's adviser, Sub-Adviser, the Distributor, or any "affiliated person" (as
such term is defined under the 1940 Act) or any of them acting as principal,
except to the extent permitted by the SEC. In addition, the Trust will not
give preference to its adviser's or Sub-Adviser's correspondents with respect
to such transactions, securities, savings deposits and repurchase agreements.
Under certain circumstances, the Trust may be at a disadvantage because of
these limitations compared with the portfolios of other investment companies
with similar objectives that are not subject to such limitations.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department. In making investment
recommendations for the Trust, Trust Department personnel will not inquire or
take into consideration whether the issuer of securities proposed for purchase
or sale for the Trust's account are customers of the Commercial Department. In
dealing with commercial customers, the Commercial Department will not inquire
or take into consideration whether securities of those customers are held by
the Trust.
Investment decisions for the Fund are made independently from
those for other funds of the Trust and for other investment companies and
accounts advised or managed by the adviser and Sub-Adviser. Such other funds,
investment companies and accounts may
-26-
<PAGE> 248
also invest in the same securities as the Fund. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another investment company or account, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Sub-Adviser believes to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or sold by the Fund. To the extent permitted by law, the Sub-Adviser
may aggregate the securities to be sold or purchased for the Fund with those to
be sold or purchased for other investment companies or accounts in order to
obtain best execution.
AUDITORS
--------
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
STANDARDIZED YIELD QUOTATIONS
-----------------------------
"Yields," as described in the Prospectus, are calculated
according to formulas prescribed by the SEC. The standardized seven-day yield
for a class of Fund shares is computed by determining the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account in the
class having a balance of one share at the beginning of the period, subtracting
a hypothetical charge reflecting deductions from shareholder accounts, dividing
the difference by the value of the account at the beginning of the base period
to obtain the base period return, and then multiplying the base period return
by (365/7). The net change in the value of an account in a class includes the
value of additional shares purchased with dividends from the original share,
and dividends declared on both the original share and any such additional
shares, net of all fees, other than nonrecurring account or sales charges, that
are charged to all shareholder accounts in proportion to the length of the base
period and the class' mean or median account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The "effective yield" for a class of Fund shares
-27-
<PAGE> 249
is computed by compounding the unannualized base period return (calculated as
above) by adding 1 to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.
The Fund's "tax-equivalent yield" is computed by dividing the
portion of the Fund's yield (calculated as above) that is exempt from federal
and state income tax by one minus a stated federal and state income tax rate
(using a 39.6% and 2.8% tax bracket, respectively) and adding that figure to
that portion, if any, of the Fund's yield that is not exempt from federal and
state income tax.
For the seven-day period ended April 30, 1996, the yield of
the Predecessor Fund was 3.32%, and its effective yield was 3.38%.
The Predecessor Fund's tax-equivalent yield (assuming 39.6%
federal and 2.8% state tax rates) for the fiscal year ended April 30, 1996
was 5.02%.
The current yield for each class of shares in the Fund may be
obtained by calling the Trust at the telephone number provided on the cover
page. Quoted yields are not indicative of future yields. Yields will depend
upon factors such as fund maturity, the Fund's expenses and the types of
instruments held by the Fund.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or
capital appreciation of the Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Fund may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as
a whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the adviser or as to
current market, economic, trade and interest rate trends, legislative,
regulatory
-28-
<PAGE> 250
and monetary developments, investment strategies and related matters believed
to be of relevance to the Fund. The Fund may also include in Materials charts,
graphs or drawings which compare the investment objective, return potential,
relative stability and/or growth possibilities of the Fund and/or other mutual
funds, or illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, Treasury
securities and shares of the Fund and/or other mutual funds. Materials may
include a discussion of certain attributes or benefits to be derived by an
investment in the Fund and/or other mutual funds (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio
transfer, automatic accounting rebalancing, the advantages and disadvantages of
investing in tax-deferred and taxable investments), shareholder profiles and
hypothetical investor scenarios, timely information on financial management,
tax and retirement planning and investment alternatives to certificates of
deposit and other financial instruments. Such Materials may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail therein.
MISCELLANEOUS
-------------
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
the Fund, together with all income, earnings, profits, and proceeds derived
from the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to the
Fund. In determining a Fund's net asset value, assets belonging to the Fund
are charged with the respective liabilities.
The following shareholders owned beneficially or of record
5% or more of the outstanding shares of the Predecessor Fund as of June 21,
1996:
-29-
<PAGE> 251
<TABLE>
<CAPTION>
Percentage of
Predecessor Number of Retail Outstanding Retail
Fund Shares Shares
--------------- ---------------- ------------------
<S> <C> <C>
Integra Trust Co., N.A. 60,770,399.65 86.88%
300 Fourth Avenue
Pittsburgh, PA 15278-0001
Integra Financial Corporation 7,211,000.00 10.31%
Omnibus Account for Integra Bank Pittsburgh
300 Fourth Avenue 2-191
Pittsburgh, PA 15278-0001
</TABLE>
No Institutional Shares of the Predecessor Fund had been issued as of
June 21, 1996.
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the fiscal year ended
April 30, 1996 and the periods prior thereto are contained in the Predecessor
Fund's Annual Report to Shareholders (the "Financial Statements"), which has
been filed with the Securities and Exchange Commission and is incorporated into
this Statement of Additional Information by reference. The Financial
Statements and the information included in the Financial Highlights tables for
the same periods which appear in the Fund's prospectus have been audited by
Cooper & Lybrand L.L.P., independent accountants for the Predecessor Fund, whose
report thereon appears in such Annual Reports. The Financial Statements in such
Annual Reports have been incorporated herein and in the Fund's Prospectus in
reliance upon the report of said firm of independent accountants given upon
their authority as experts in accounting and auditing.
-30-
<PAGE> 252
APPENDIX A
----------
DESCRIPTION OF RATINGS
Bond Ratings
- ------------
The following summarizes the three highest rating categories
used by Standard & Poor's Ratings Group ("S&P") for bonds:
"AAA" - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
interest and repay principal.
"AA" - Debt rated "AA" is considered to have a very strong
capacity to pay interest and repay principal and differs from
"AAA" issues only to a small degree.
"A" - Debt rated "A" has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "A" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the three highest rating categories
used by Moody's Investors Service, Inc. ("Moody's") for bonds:
"Aaa" - Bonds that are rated "Aaa" are judged to be of the
best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
"Aa" - Bonds that are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group they
comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude
or there may be other elements
A-1
<PAGE> 253
present which make the long-term risks appear somewhat larger
than in "Aaa" securities.
"A" - Debt which is rated "A" possesses many favorable
investment attributes and is to be considered as an upper
medium grade obligation. Factors giving security to principal
and interest are considered adequate but elements but elements
may be present which suggest a susceptibility to impairment
sometime in the future.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to bonds rated "Aa" and "A". The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category. With regard to municipal
bonds, those bonds in the "Aa" group that Moody's believes possess the
strongest investment attributes are designated by the symbols "AA1" or "A1".
The following summarizes the three highest rating categories
used by Duff & Phelps Credit Rating Co. ("Duff & Phelps") for corporate and
municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt has average but adequate protection factors. The
risk factors are more variable and greater in periods of economic stress.
To provide more detailed indications of credit quality, the
"AA" and "A" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these categories.
A-2
<PAGE> 254
The following summarizes the three highest rating categories
used by Fitch Investors Service, Inc. ("Fitch") for bonds:
"AAA" - Bonds are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated "AAA."
Because bonds are rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally
rated "F-1".
"A" - Bonds are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" and "A" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the three highest rating categories
used by IBCA Inc. ("IBCA") for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse
changes in business, economic or financial conditions are
unlikely to increase investment risk significantly.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - A strong capacity to meet debt obligations in a timely
manner, although the bonds may be more susceptible
A-3
<PAGE> 255
to adverse changes in the environment, or margins of
protection for the lender may be lower than for more highly
rated issues.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Commercial Paper Ratings
- ------------------------
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short term in the relevant
market. The following summarizes the two highest rating categories used by S&P
for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong
safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for
issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the two highest
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short
term promissory obligations. Principal repayment capacity
will normally be evidenced by the following characteristics:
leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well
established access to a range of financial markets and assured
sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization
characteristics, while still appropriate,
A-4
<PAGE> 256
may be more affected by external conditions. Ample
alternative liquidity is maintained.
The following summarizes the two highest rating categories
used by Duff & Phelps for short term debt obligations with an initial maturity
of less than one year:
"Duff 1" - Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor. Duff has
incorporated gradations of "1+" and "1-" to assist investors
in recognizing quality differences that exist within this
rating tier.
"Duff 2" - Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing
funding needs may enlarge, total financing requirements and
access to capital markets are good. Risk factors are small.
Fitch short term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the two highest rating categories used by Fitch for
commercial paper:
"F-1+" - Instruments assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
"F-1" - Instruments assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues
rated F-1+.
"F-2" - Instruments assigned this rating have satisfactory
degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ and F-1
ratings.
Fitch may also use the symbol "LOC" with its short term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
The following summarizes the two highest rating categories
used by IBCA for short term unsecured debt obligations with an original
maturity of less than one year:
"A1+" - Issues which display the very highest quality
borrowing characteristics and are of undoubted or prime
creditworthiness.
A-5
<PAGE> 257
"A1" - Issues which display very strong borrowing
characteristics.
"A2" - These issues have high quality borrowing
characteristics although their ability to repay is considered
to be less than those issues rated "A1."
Short term Municipal Notes and Variable Rate Demand Obligations
- ---------------------------------------------------------------
The following summarizes the two highest rating categories
used by Moody's for short term municipal notes and variable rate demand
obligations:
"MIG 1"/"VMIG 1" - Obligations bearing these designations are
of the best quality. There is present strong protection by
established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
"MIG 2"/"VMIG 2" - Obligations bearing these designations are
of high quality. Margins of protection are ample although not
so large as in the preceding group.
Fitch uses the short term ratings described under Commercial
Paper Ratings for Municipal Notes.
A-6
<PAGE> 258
Information contained herein is subject to completion or amendment. A
registration statement relating to these securites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
_______________, 1996
INTERMEDIATE GOVERNMENT FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Fund of Armada Funds
(formerly "NCC Funds") (the "Trust"), dated _____________, 1996 (the
"Prospectus"). A copy of the Prospectus may be obtained by calling or writing
the Trust at 1-800-622-FUND, 4400 Computer Drive, Westbourough, Massachusetts
01581.
<PAGE> 259
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 8
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 15
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
-i-
<PAGE> 260
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes
the Intermediate Government Fund (the "Fund"). The information contained in
this Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus.
The Intermediate Government Fund commenced operations on
August 10, 1994 as a separate investment portfolio (the "Predecessor Fund") of
Inventor Funds, Inc. which was organized as a Maryland corporation. On
___________, 1996, the Predecessor Fund was reorganized as a new portfolio of
Armada. Prior to the reorganization, the Predecessor Fund offered and sold
shares of stock that were similar to Armada's Retail shares of beneficial
interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
------------------------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P,
Fitch, Duff, IBCA and Moody's for securities which may be held by the Fund.
GNMA SECURITIES
- ---------------
The Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-owned U.S. Government corporation. The
market value and interest yield of these instruments can vary due to market
interest rate fluctuations and early prepayments of underlying mortgages.
These securities represent ownership in a pool of federally insured mortgage
loans. GNMA certificates consist of underlying mortgages with a maximum
maturity of 30 years. However, due to scheduled and unscheduled principal
payments, GNMA certificates have a shorter average maturity and, therefore,
less principal volatility than a comparable 30-year bond. Since prepayment
rates vary widely, it is not possible to predict accurately the average
maturity of a particular GNMA pool. GNMA securities differ from conventional
bonds in that principal is paid back to the certificate holders over the life
of the loan rather than at maturity. The scheduled
<PAGE> 261
monthly interest and principal payments relating to mortgages in the pool are
"passed through" to investors. In addition, there may be unscheduled principal
payments representing prepayments on the underlying mortgages. Although GNMA
certificates may offer yields higher than those available from other types of
U.S. Government securities, GNMA certificates may be less effective than other
types of securities as a means of "locking in" attractive long-term rates
because of the prepayment feature. For instance, when interest rates decline,
the value of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
MORTGAGE-BACKED SECURITIES
- --------------------------
The Fund may purchase securities backed by mortgages.
Mortgage-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly,
thus in effect "passing through" monthly payments made by the individual
borrowers on the assets that underlie the securities, net of any fees paid to
the issuer or guarantor of the securities. The average life of mortgage-backed
securities varies with the maturities of the underlying instruments, and the
average life of a mortgage-backed instrument, in particular, is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as a result of mortgage prepayments. For this and other
reasons, a mortgage-backed security's stated maturity may be shortened, and the
security's total return may be difficult to predict precisely. Mortgage-backed
securities acquired by the Fund may include collateralized mortgage obligations
("CMOs") issued by private companies.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related
securities guaranteed by the GNMA include GNMA Mortgage Pass-Through
Certificates (also known as "Ginnie Maes") which are guaranteed as to the
timely payment of principal and interest by GNMA and such guarantee is backed
by the full faith and credit of the United States. GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA certificates also are supported by the authority of GNMA to borrow funds
from the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by the FNMA include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by
private stockholders. Fannie Maes are guaranteed as to timely payment of the
principal and interest
-2-
<PAGE> 262
by FNMA. Mortgage-related securities issued by the FHLMC include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Macs are not guaranteed by the United States or by any Federal Home
Loan Bank and do not constitute a debt or obligation of the United States or of
any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment
of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
FUTURE CONTRACTS
- ----------------
The Fund may purchase and sell futures contracts on U.S.
Treasury obligations. For a detailed description of futures contracts, see
Appendix B to this Statement of Additional Information.
WHEN-ISSUED SECURITIES
- ----------------------
The Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When the Fund agrees to purchase when-issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment, marked to market daily. It is likely that the
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its fund might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
-3-
<PAGE> 263
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
The Fund may purchase variable and floating rate obligations
(including adjustable rate mortgages) which are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Because variable and floating rate obligations are
direct lending arrangements between a Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such
as Student Loan Marketing Association variable rate obligations, may have a
more active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, the Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters
of credit or guarantees issued by banks, other financial institutions or the
U.S. Government, its agencies or instrumentalities. The quality of any letter
of credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the advisers. In the event an issuer
of a variable or floating rate obligation defaulted on its payment obligation,
the Fund might be unable to dispose of the instrument because of the absence of
a secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
REPURCHASE AGREEMENTS
- ---------------------
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's advisers deem creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying fund
securities. The seller under a repurchase agreement will be required to
maintain the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, the Fund holding such
obligation would suffer a loss to the extent that the proceeds from a sale of
the underlying fund securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Although there is no controlling legal
precedent confirming that a Fund would be entitled, as against a claim by such
seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody
-4-
<PAGE> 264
of a Trust's securities subject to repurchase agreements and under federal
laws, a court of competent jurisdiction would rule in favor of the Trust if
presented with the question. Securities subject to repurchase agreements will
be held by the Trust's custodian or another qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
The Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others,
such as those of the Export-Import Bank of the United States, are supported by
the right of the issuer to borrow from the U.S. Treasury; others, such as those
of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will invest
in the obligations of such agencies or instrumentalities only when the adviser
believes that the credit risk with respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The Fund currently intends to limit its investments in securities
issued by other investment companies so that, as determined immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
The Fund may lend securities pursuant to agreements requiring
that the loans be continuously secured by cash, securities of the U.S.
government or its agencies, or any combination of cash and such securities, as
collateral equal to 100% of the market value at all times of the securities
lent. Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for the Fund exceed one-third of the value of its
total assets taken at fair market value. The Fund
-5-
<PAGE> 265
will continue to receive interest on the securities lent while simultaneously
earning interest on the investment of the cash collateral in U.S. government
securities. However, the Fund will normally pay lending fees to such
broker-dealers and related expenses from the interest earned on invested
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the adviser to be of good standing
and when, in the judgment of the adviser, the consideration which can be earned
currently from such securities loans justifies the attendant risk. Any loan
may be terminated by either party upon reasonable notice to the other party.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for the Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making fund decisions.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed with respect to the Fund only by a vote of the holders of a
majority of the Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
The Fund may not:
1. Make short sales of securities or purchase securities
on margin, except that it may purchase and sell futures contracts in accordance
with its investment objective.
2. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities.
3. Purchase or sell real estate or real estate limited
partnership interests, except that the Fund may invest in securities or
interests of companies which invest in real estate.
-6-
<PAGE> 266
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs and
oil, gas or mineral leases, except that the Fund may: (a) to the extent
appropriate to its investment objective, invest in securities issued by
companies which purchase or sell financial commodity contracts; and (b)
purchase and sell futures contracts in accordance with its investment
objective.
5. Invest in any issuer for the purpose of exercising
control.
6. Pledge, mortgage or hypothecate assets, except to
secure borrowings permitted by the Fund's investment limitations in aggregate
amounts not to exceed 33 1/3% of the Fund's total assets taken at current value
at the time of the incurrence of such loan.
7. Acquire more than 10% of the voting securities of any
one issuer, provided that this limitation shall apply only as to 75% of the
Fund's net assets.
8. Purchase securities of other investment companies,
except as permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
9. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described above or as permitted by rule, regulation or order of the Securities
and Exchange Commission.
The following are considered non-fundamental investment
limitations and therefore may be changed without a shareholder vote.
The Fund may not write or purchase put options, call options,
straddles, spreads, or any combination thereof, except that the Fund may
purchase and sell futures contracts in accordance with its investment
objective.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 15% of its net assets.
The Fund may not purchase securities of any company which has
(with predecessors) a record of less than three years continuing operations,
if, as a result, more than 5% of the total assets of the Fund (taken at current
value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase
of a security.
* * * * *
-7-
<PAGE> 267
In addition, so long as the Fund is offering and selling its
shares in the State of Texas the Fund may not (i) invest more than 5.0% of its
net assets in warrants (including within that amount, but not to exceed 2.0%,
may be warrants that are not listed of the New York or American Stock Exchange;
(ii) invest in oil, gas, or other mineral leases; and (iii) invest in real
estate limited partnership interests.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Fund are sold on a continuous basis by 440
Financial Distributors, Inc. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must
be signed by each shareholder, with each signature guaranteed by a U.S.
commercial bank or trust company or by a member firm of a national securities
exchange. Guarantees must be signed by an authorized signatory and "Signature
Guaranteed" must appear with the signature. An investor's financial
institution may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular
verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended April 30,1996, sales loads paid by
shareholders of the Predecessor Fund totalled $1,391.24.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Fund permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis.
-8-
<PAGE> 268
Investors should be aware, however, that dollar cost averaging results in
purchases of shares regardless of their price on the day of investment or
market trends and does not ensure a profit, protect against losses in a
declining market, or prevent a loss if an investor ultimately redeems his
shares at a price which is lower than their purchase price. An investor may
want to consider his financial ability to continue purchases through periods of
low price levels. From time to time, in advertisements, sales literature,
communications to shareholders and other materials ("Materials"), the Trust may
illustrate the effects of dollar cost averaging through use of or comparison to
an index such as the Lehman Intermediate Government Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUND
- -------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Fund, based on the value of the Predecessor Fund's net
assets and number of outstanding shares on April 30, 1996 are as follows:
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT
FUND
----------------------
<S> <C>
Net Assets of Retail Shares . . . . . . . . . . . . . . . . . . . $ 89,901,309
Outstanding Retail Shares . . . . . . . . . . . . . . . . . . . . $ 8,952,005
Net Asset Value Per Share
($89,901,309 divided by 8,952,005) . . . . . . . . . . . . . . . $ 10.04
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) . . . . . . . . . . . . . . . . . . . $ 0.42
Offering to Public . . . . . . . . . . . . . . . . . . . . . . . $ 10.46
</TABLE>
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived)
to reduce the sales load applicable to an exchange, as may be provided in a
Fund Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the
-9-
<PAGE> 269
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 32 classes
or series of shares. Two of these classes or series, which represent interests
in the Intermediate Government Fund (Class R and Class R - Special Series 1)
are described in this Statement of Additional Information and the related
Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in
the matter are substantially identical or the matter does not affect any
interest of the fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to an investment fund only if approved by a majority of
the outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without
-10-
<PAGE> 270
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 has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Trust or its shareholders or possible legislative changes,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisers with specific reference to their own tax situation.
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment
-11-
<PAGE> 271
company. In order to qualify for tax treatment as a regulated investment
company under the Code, the Fund must satisfy, in addition to the distribution
requirement described in the Prospectus, certain requirements with respect to
the source of its income during a taxable year. At least 90% of the gross
income of the Fund must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including, but not
limited to, gains from options, futures, or forward contracts) derived with
respect to the Fund's business of investing in such stock, securities or
currencies. The Treasury Department may by regulation exclude from qualifying
income foreign currency gains which are not directly related to a Fund's
principal business of investing in stock or securities, or options and futures
with respect to stock or securities. Any income derived by the Fund from a
partnership or trust is treated for this purpose as derived from the Fund's
business of investing in stock, securities or currencies only to the extent
that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust. Some of the investments that the Fund may make (such as
equipment lease and trust certificates) may not be securities or may not
produce qualifying income. Therefore, it may be necessary for the advisers to
restrict the investments of the Fund to ensure that nonqualifying income does
not exceed 10% of its total gross income for a taxable year.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three months:
(1) stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by the Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose.
The Trust will designate any distribution of long-term capital
gains of the Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of the Fund's shares,
if the shareholder has not held
-12-
<PAGE> 272
such shares for more than six months, any loss on the sale or exchange of those
shares will be treated as long-term capital loss to the extent of the capital
gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so that they are not subject to backup withholding or
that they are "exempt recipients."
TRUSTEES AND OFFICERS
---------------------
The Prospectus includes a description of the trustees and
certain executive officers of the Trust, their addresses, principal occupations
during the past five years, and other affiliations. Mr. W. Bruce McConnel,
III, Secretary of the Trust, is a partner of the law firm of Drinker Biddle &
Reath, which receives fees as counsel to the Trust. Mr. John J. Burke,
Assistant Treasurer of the Trust, is employed by First Data Investor Services
Group, Inc. (formerly the Shareholder Services Group, Inc., d/b/a 440
Financial) which receives fees as Transfer Agent to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional
$2,500 per annum for services in such capacity. For the year ended May 31,
1996, the Trust's
-13-
<PAGE> 273
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
Aggregate as Part of Estimated Total
Name of Compensation the Trust's Approval Benefits Compensation
Person, Position from the Trust Expenses Upon Retirement from the
---------------- -------------- -------- --------------- Trust
-----
<S> <C> <C> <C> <C>
Richard B. Tullis, Chairman $13,000 $0 $0 $13,000
Thomas R. Benua, Jr., $11,375 $0 $0 $11,375
Trustee
Leigh Carter, Trustee $11,375 $0 $0 $11,375
John F. Durkott, Trustee $11,375 $0 $0 $11,375
Richard W. Furst, Trustee $11,375 $0 $0 $11,375
J. William Pullen, Trustee $11,375 $0 $0 $11,375
Robert D. Neary, Trustee $0 $0 $0 $0
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts
or obligations of the Trust, and that every note, bond, contract, order, or
other undertaking made by the Trust shall contain a provision to the effect
that the shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the trust property of any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of his acts or omissions or some other reason. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
-14-
<PAGE> 274
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally
liable to any person for any action or failure to act except by reason of his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of
Trust provides that a trustee is entitled to be indemnified against all
liabilities and expense, reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the trustees, have the power, but not the duty, to indemnify officers and
employees of the Trust unless any such person would not be entitled to
indemnification had he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
-------------------------------------------------
ADVISORY AGREEMENT
- ------------------
As described in the Prospectus, National City serves as
investment adviser to the Fund. The adviser is an affiliate of National City
Corporation, a bank holding company with $32 billion in assets, and
headquarters in Cleveland, Ohio and nearly 600 branch offices in three states.
Through its subsidiaries, National City Corporation has been managing
investments for individuals, pension and profit-sharing plans and other
institutional investors for over 75 years and currently manages over $30
billion in assets. From time to time, the advisers may voluntarily waive fees
or reimburse the Trust for expenses.
For the fiscal years ended April 30, 1996 and 1995, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $602,602 and $178,282, respectively. Integra waived
advisory fees during the same period in the amounts of $103,371 and $76,919,
respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the advisers in the performance of
their duties or from reckless disregard by them of its duties and
-15-
<PAGE> 275
obligations thereunder. In addition, the adviser has undertaken in its
Advisory Agreement to maintain its policy and practice of conducting its Trust
Department independently of its Commercial Department.
The Advisory Agreement was approved by its sole shareholder
prior to the Fund's commencement of investment operations. Unless sooner
terminated, the Advisory Agreement will continue in effect until September 30,
1997 and from year to year thereafter, subject to annual approval by the
Trust's Board of Trustees, or by a vote of a majority of the outstanding shares
of the Fund (as defined in the Fund's Prospectus) and a majority of the
trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. The Advisory Agreement may be terminated by the Trust or the
adviser on 60 days written notice, and will terminate immediately in the event
of its assignment.
If expenses borne by the Fund in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Fund's adviser will reimburse the Trust for any such excess with respect to the
Fund to the extent described in any written undertaking provided by the
advisers to such state. To the Trust's knowledge, as of the date of this
Statement of Additional Information, the most restrictive expense limitation
applicable to the Trust provides that annual expenses (as defined by statute)
may not exceed 2.5% of the first $30 million, 2% of the next $70 million and
1.5% of the remaining average net assets of the Fund. Such amount, if any,
will be estimated, reconciled and paid on a monthly basis. The fees banks may
charge to customers for services provided in connection with their investments
in the Trust are not covered by the state securities expense limitations
described above.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
- -----------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. For the fiscal years ended April 30,
1996 and 1995, SEI Financial Management Corporation, a wholly-owned subsidiary
of SEI Corporation, served as administrator to the Predecessor Fund and earned
the following fees: $154,955 and $65,623, respectively.
-16-
<PAGE> 276
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Fund's shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by
Rule 12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's
Board of Trustees, and by a majority of the trustees who are not interested
persons of the Trust and have no direct or indirect interest in the operation
of the Plan or any agreement relating to the Plan, by vote cast in person at a
meeting called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the
Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial
interest in the Plan or related agreement. The Plan and related agreement may
be terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has
been committed to the discretion of such disinterested trustees as required by
the Rule.
The Trust's Plan provides that the fund will reimburse the
Distributor for distribution expenses in an amount not to exceed .10% of the
Fund's average net assets. Distribution expenses payable by the Distributor
pursuant to the Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a fund's shares, and direct and
indirect costs and expenses of preparing, printing and distributing its
prospectuses to other than current shareholders. In addition, the Plan
provides that the Trust will pay the Distributor an annual distribution fee of
$250,000 payable monthly and accrued daily by
-17-
<PAGE> 277
all of the Trust's investment funds with respect to which the Distributor is
distributing shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares excluding the distributor's expenses for travel,
communication, compensation and benefits for sales personnel; and (4) any other
expenses reasonably incurred in connection with the distribution and marketing
of Class A shares subject to approval by a majority of disinterested directors
of Integra. For the fiscal years ended April 30, 1996 and 1995, the
Predecessor Fund paid $0 and $0, respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City
Bank has agreed to: (i) maintain a separate account or accounts in the name of
the Fund; (ii) hold and disburse fund securities on account of the Fund;
(iii) collect and make disbursements of money on behalf of the Fund; (iv)
collect and receive all income and other payments and distributions on account
of the Fund's fund securities; (v) respond to correspondence by security
brokers and others relating to its duties; and (vi) make periodic reports to
the Board of Trustees concerning the Fund's operations. National City Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services
Agreement and shall hold the Fund harmless from the acts and omissions of any
bank or trust company serving as sub-custodian. The Fund reimburses National
City Bank for its direct and indirect costs and expenses incurred in rendering
custodial services, except that the costs and expenses borne by the Fund in any
year may not exceed $.225 for each $1,000 of average gross assets of the Fund.
First Data Investor Services Group, Inc. (formerly The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the
-18-
<PAGE> 278
"Transfer Agent") serves as the Trust's transfer agent and dividend disbursing
agent with respect to the Fund. Under its Transfer Agency Agreement, it has
agreed to: (i) issue and redeem shares of the Fund; (ii) transmit all
communications by the Fund to its shareholders of record, including reports to
shareholders, dividend and distribution notices and proxy materials for
meetings of shareholders; (iii) respond to correspondence by security brokers
and others relating to its duties; (iv) maintain shareholder accounts; and (v)
make periodic reports to the Board of Trustees concerning the Fund's
operations. The Transfer Agent sends each shareholder of record a monthly
statement showing the total number of shares owned as of the last business day
of the month (as well as the dividends paid during the current month and year),
and provides each shareholder of record with a daily transaction report for
each day on which a transaction occurs in the shareholder's account with the
Fund.
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan (the "Services Plan") with respect to Retail shares
of the Fund. Pursuant to the Services Plan, the Trust may enter into
agreements with financial institutions pertaining to the provision of
administrative services to their customers who are the beneficial owners of
Retail shares in consideration for the payment of up to .25% (on an annualized
basis) in the case of the Fund and of the net asset value of such shares. Such
services may include: (i) aggregating and processing purchase and redemption
requests from customers; (ii) providing customers with a service that invests
the assets of their accounts in Retail shares; (iii) processing dividend
payments from the Fund; (iv) providing information periodically to customers
showing their position in Retail shares; (v) arranging for bank wires; (vi)
responding to customer inquiries relating to the services performed with
respect to Retail shares beneficially owned by customers; (vii) forwarding
shareholder communications; and (viii) other similar services requested by the
Trust. Agreements between the Trust and financial institutions will be
terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to their Advisory Agreement with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of fund securities for the Fund. The adviser
purchases fund securities either directly from the issuer or from an
underwriter or dealer making a market in the securities involved. Purchases
from an underwriter of fund securities include a commission or concession paid
by the issuer to the underwriter and purchases from dealers serving as
-19-
<PAGE> 279
market makers may include the spread between the bid and asked price.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter market, but the price includes an undisclosed
commission or mark-up.
For the fiscal year ended April 30, 1996, the Fund did not pay
any brokerage commissions.
While the adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the adviser in its best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the adviser may receive orders for transactions by the Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the adviser and does not reduce the fees payable to it by
the Fund. Such information may be useful to the adviser in serving both the
Trust and other clients, and, similarly, supplemental information obtained by
the placement of business of other clients may be useful to the adviser in
carrying out its obligations to the Trust.
Fund securities will not be purchased from or sold to the
Fund's adviser, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its adviser's correspondents with respect to such transactions, securities,
savings deposits and repurchase agreements.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust department
independently of its Commercial Department. In making investment
recommendations for the Trust, personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale
for the Trust's account are customers of the Commercial Department. In dealing
with commercial customers, the Commercial Department will not inquire or take
into consideration whether securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from
those for the other funds of the Trust and for other investment companies and
accounts advised or managed by the adviser. Such other funds, investment
companies and accounts may also invest in the same securities as the Fund.
When a purchase or
-20-
<PAGE> 280
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
adviser may aggregate the securities to be sold or purchased for the Fund with
those to be sold or purchased for other investment companies or accounts in
order to obtain best execution.
AUDITORS
--------
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
---------------------------------
The Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power
of six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, net of reimbursements. This calculation
can be expressed as follows:
a-b (6)
Yield = 2 [(------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
-21-
<PAGE> 281
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last
day of the period.
The Fund calculates interest earned on debt obligations held
in its fund by computing the yield to maturity of each obligation held by it
based on the market value of the obligation (including actual accrued interest)
at the close of business on the last business day of each 30-day period, or,
with respect to obligations purchased during the 30-day period, the purchase
price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including
actual accrued interest) in order to determine the interest income on the
obligation for each day of the subsequent 30-day period that the obligation is
in the Fund. The maturity of an obligation with a call provision is the next
call date on which the obligation reasonably may be expected to be called or,
if none, the maturity date. With respect to debt obligations purchased by the
Fund at a discount or premium, the formula generally calls for amortization of
the discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of Retail
Shares" in the Prospectus.
For the 30-day period ended April 30, 1996, the yield of the
Predecessor Fund was 5.55%.
The Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
-22-
<PAGE> 282
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted
from payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total return for the Predecessor Fund's one
year period ending April 30, 1996 was 2.78% (after taking the sales load into
account) and 7.09% (without taking into account any sales load). The average
annual total return since the Predecessor Fund's commencement of operations
through April 30, 1996 was 4.38% (after taking into account the sales load)
and 6.91% (without taking into account any sales load). The Fund commenced
operations on August 10, 1994.
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the
-23-
<PAGE> 283
formulas set forth above in order to compare more accurately a Fund's
performance with other measures of investment return. For example, in
comparing a Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of an index, the Fund may calculate
its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. The Fund will, however, disclose the maximum sales charge and will
also disclose that the performance data do not reflect sales charges and that
inclusion of sale charges would reduce the performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on the Fund investment
are reinvested by being paid in additional Fund shares, any future income or
capital appreciation of the Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Fund may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as
a whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Fund), as well as the views of the adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in
Materials charts, graphs or drawings which compare the investment objective,
return potential, relative stability and/or growth possibilities of the Fund
and/or other mutual funds, or illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to,
stocks, bonds, Treasury securities and shares of the Fund and/or other mutual
funds. Materials may include a discussion of certain attributes or benefits
to be derived by an investment in the Fund and/or other
-24-
<PAGE> 284
mutual funds (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic accounting rebalancing,
the advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
-------------
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All
organizational expenses are amortized on the straight-line method over a period
of five years from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
the Fund, together with all income, earnings, profits, and proceeds derived
from the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to the
Fund. In determining the Fund's net asset value, assets belonging to the Fund
are charged with the liabilities in respect of the Fund.
The following shareholders owned beneficially or of record 5%
or more of the outstanding shares of the Predecessor Fund as of June 21, 1996:
<TABLE>
<CAPTION>
Number of Percentage
Outstanding of
Retail Retail
Predecessor Shares Shares
- ----------------------- ----------- --------
Fund
----
<S> <C> <C>
Sheldon & Co (Integra-49) 8,732,394.498 97.66%
c/o National City
Attn: Trust Mutual Funds
P.O. Box 94777, Loc. 5312
Cleveland, OH 44101-4777
</TABLE>
No Institutional shares of the Predecessor Fund had been issued as of
June 21, 1996.
-25-
<PAGE> 285
FINANCIAL STATEMENTS
The financial statements for the Predecessor Fund for the
fiscal year ended April 30, 1996 and the periods prior thereto are contained in
the Predecessor Fund's Annual Report to Shareholders (the "Financial
Statements"), which has been filed with the Securities and Exchange Commission
and is incorporated into this Statement of Additional Information by reference.
The Financial Statements and the information included in the Financial
Highlights tables for the same periods which appear in the Fund's prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants for the
Predecessor Fund, whose report thereon appears in such Annual Reports. The
Financial Statements in such Annual Reports have been incorporated herein and
in the Fund's Prospectus, in reliance upon the report of said firm of
independent accountants given upon their authority as experts in accounting
and auditing.
-26-
<PAGE> 286
APPENDIX A
----------
DESCRIPTION OF RATINGS
Corporate Long-Term Debt Ratings
- --------------------------------
The following summarizes the rating categories used by
Standard & Poor's Ratings Group ("S&P") for corporate debt:
"AAA" - This designation represents the highest rating
assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues
only to a small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt that possesses one of
these ratings is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
"CI" - this rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in default, and payment of interest and/or
repayment of principal is in arrears.
A-1
<PAGE> 287
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
The following summarizes the rating categories used by Moody's
Investors Service, Inc. ("Moody's") for corporate debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal
is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are
considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the
present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and
principal ("Ba" indicates some speculative elements; "B"
indicates a general lack of characteristics of desirable
investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and
"C" bonds may be in default.
A-2
<PAGE> 288
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" through "B" in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the rating categories used by Duff &
Phelps Credit Rating Co. ("Duff & Phelps") for corporate debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for
prudent investment. Considerable variability in risk is
present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade.
Although below investment grade, debt rated "BB" is deemed
likely to meet obligations when due. Debt rated "B" possesses
the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has
considerable uncertainty as to timely payment of principal,
interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
A-3
<PAGE> 289
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the rating categories used by Fitch
Investors Service, Inc. ("Fitch") for corporate bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as
strong as bonds rated "AAA." Because bonds rated in the "AAA"
and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent
Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted
bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation.
A-4
<PAGE> 290
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA Inc. ("IBCA") assesses the investment quality of
unsecured debt with an original maturity of more than one year which is issued
by bank holding companies and their principal bank subsidiaries. The following
summarizes the rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse
changes in business, economic or financial conditions are
unlikely to increase investment risk significantly.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal
and interest is strong, although adverse changes in business,
economic or financial conditions may lead to increased
investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment
of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative
characteristics are present. "BB" represents the lowest
degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are
currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
A-5
<PAGE> 291
Commercial Paper Ratings
- ------------------------
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by S&P for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong
safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects
of changes and circumstances than an obligation carrying a
higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of
short-term promissory obligations. Principal repayment
capacity will normally be evidenced by the following
characteristics: leading market positions in well established
industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance
on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash
generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios,
A-6
<PAGE> 292
while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may
be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory
obligations. The effects of industry characteristics and
market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level
of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate
liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors
are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
"Duff 4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure
against disruption in debt service. Operating factors
A-7
<PAGE> 293
and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal
and/or interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having
the strongest degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great
as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be
rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
A-8
<PAGE> 294
"A1+" - Obligations are supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
A-9
<PAGE> 295
APPENDIX B
----------
As stated in the Prospectus, the Fund may enter into certain futures
transactions for hedging purposes. Such transactions are described in this
Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures
market, the protection is more likely to be achieved, perhaps at a lower cost
and without changing the rate of interest being earned by the Fund, through
using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase
would create an obligation by the Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
B-1
<PAGE> 296
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Fund may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
EXAMPLE OF FUTURES CONTRACT SALE. The Fund may engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security held by
the Fund tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The adviser wishes to fix the
current market value of this Fund security until some point in the future.
Assume the Fund security has a market value of 100, and the adviser believes
that because of an anticipated rise in interest rates, the value will decline
to 95. The Fund might enter into futures contract sales of Treasury bonds for
a equivalent of 98. If the market value of the Fund security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five point loss in the market value of the Fund
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures
B-2
<PAGE> 297
market price of Treasury bonds might well decline to more than 93 or to less
than 93 because of the imperfect correlation between cash and futures prices
mentioned below.
The adviser could be wrong in their forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the Fund securities, including the Fund security being protected,
would increase. The benefit of this increase would be reduced by the loss
realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss (which might be reduced by a offsetting transaction prior to
the settlement date). In each transaction, transaction expenses would also be
incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Fund may engage in a
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. The Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of a
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The adviser wishes to fix the current
market price (and thus 10% yield) of the long-term bond until the time (four
months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the adviser believes that,
because of an anticipated fall in interest rates, the price will have risen to
105 (and the yield will have dropped to about 9 1/2%) in four months. The Fund
might enter into futures contracts purchases of Treasury bonds for an
equivalent price of 98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise
from 98 to 103. In that case, the 5 point increase in the price that the Fund
pays for the long-term bond would be offset by the 5 point gain realized by
closing out the futures contract purchase.
The adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the
B-3
<PAGE> 298
equivalent futures market price could fall below 98. If short-term rates at
the same time fall to 10% or below, it is possible that the Fund would continue
with its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the fund, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.
II. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian or a subcustodian an amount of cash or
cash equivalents, known as initial margin, based on the value of the contract.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-the-market. For example, when the Fund
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where
the Fund has purchased a futures contract and the price of the future contract
has declined in response to a decrease in the underlying instruments, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the broker. At any time prior to expiration of the
futures contract, the adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Fund's position in the futures contract. A final
determination
B-4
<PAGE> 299
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Fund as hedging devices. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may
move more than or less than the price of the instruments being hedged. If the
price of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price
of the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price
of the instruments being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the futures. If the price of
the futures moves more than the price of the hedged instruments, the Fund will
experience either a loss or gain on the futures which will not be completely
offset by movements in the price of the instruments which are the subject of
the hedge. To compensate for the imperfect correlation of movements in the
price of instruments being hedged and movements in the price of futures
contracts, the Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility
over a particular time period of the prices of such instruments has been
greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the advisers. Conversely, the Fund may
buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by the adviser.
Where futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the
Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin
B-5
<PAGE> 300
deposit requirements, investors may close futures contracts through off-setting
transactions which could distort the normal relationship between the cash and
futures markets. Second, with respect to financial futures contracts, the
liquidity of the futures market depends on participants entering into
off-setting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced thus producing distortions. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the advisers may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge fund securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at
a price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.
B-6
<PAGE> 301
Successful use of futures by the Fund is also subject to the adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value
of its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
IV. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-7
<PAGE> 302
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 GNMA Fund for
the period from August 10, 1994 (commencement of
operations) to April 30, 1995 and the Year Ended
April 30, 1996;
(b) Financial Highlights for the Pennsylvania
Municipal Fund for the period from August 10, 1994
(commencement of operations) to April 30, 1995 and
the Year Ended April 30, 1996;
(c) Financial Highlights for the Pennsylvania Tax
Exempt Fund for the period from August 8, 1994
(commencement of operations) to April 30, 1995 and
the Year Ended April 30, 1996; and
(d) Financial Highlights for the Intermediate
Government Fund for the period from August 10, 1994
(commencement of operations) to April 30, 1995 and
the Year Ended April 30, 1996.
(2) Incorporated by reference in Parts B of the Registration
Statement are the following audited financial statements
contained in the Annual Report of the Predecessor Funds for
the fiscal year ended April 30, 1996:
(a) For the Pennsylvania Municipal, Pennsylvania
Tax Exempt, Intermediate Government and GNMA
Funds:
Statements of Net Assets - April 30, 1996.
Statements of Operations - April 30, 1996.
Statements of Changes in Net Assets - April 30, 1996.
Notes to Financial Statements.
Report of Independent Accountants - June 14, 1996.
C-1
<PAGE> 303
(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(b) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement filed on April 17, 1990.
(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(c) to
Post-Effective Amendment No. 13 to Registrant's Registration
Statement filed on July 27, 1990.
(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(d) to
Post-Effective Amendment No. 14 to Registrant's Registration
Statement filed on September 5, 1991.
(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
C-2
<PAGE> 304
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. 21 to Registrant's Registration
Statement filed on August 31, 1994.
(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(g) 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.
(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
C-3
<PAGE> 305
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.
(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.
C-4
<PAGE> 306
(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.
(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-5
<PAGE> 307
(c) Investment Advisory Agreement for the Tax
Exempt Portfolio between Registrant and National City 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 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.
C-6
<PAGE> 308
(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. 27 to Registrant's
Registration Statement filed on May 15, 1996.
(m) Form of Sub-Advisory Agreement for the
Pennsylvania Tax Exempt and Pennsylvania 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. 27 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
C-7
<PAGE> 309
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
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.
(b) Exhibit A to Administration and Accounting
Services Agreement dated March 1, 1993 between Registrant and
PFPC Inc., dated June 1, 1994, 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.
(c) Form of Exhibit A to the Administration and
Accounting Services Agreement dated March 1, 1993
between Registrant and PFPC Inc., dated , 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. 27 to Registrant's Registration
Statement filed on May 15, 1996.
(d) 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.
(e) Shareholder Services Plan and Servicing
Agreement adopted by the Board of Trustees on February
15, 1996 is incorporated herein by reference to Exhibit
C-8
<PAGE> 310
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 Coopers & Lybrand L.L.P.
(12) Investor Funds, Inc. Annual Report to
Shareholders (File No. 811-08486) for 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
Post-Effective Amendment No. 13 to Registrant's
Registration Statement filed on July 27, 1990.
- --------
1 To be filed under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
C-9
<PAGE> 311
(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
Registran 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
Amendment No. 27 to Registrant's Registration Statement
filed on May 15, 1996.
(k) Form of Purchase Agreement between
Registran 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. 27 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
C-10
<PAGE> 312
Exhibit 13(l) to Post-Effective Amendment No. 27 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. 27 to Registrant's Registration Statement
filed on May 15, 1996.
(14) None.
(15) 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.
(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.
(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 April 30, 1996
for the Pennsylvania Municipal Fund.
(b) Financial Data Schedule as of April 30, 1996
for the Pennsylvania Tax Exempt Fund.
(c) Financial Data Schedule as of April 30, 1996
for the Intermediate Government Fund.
(d) Financial Data Schedule as of April 30, 1996
for the GNMA Fund.
C-11
<PAGE> 313
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.
Item 26. NUMBER OF HOLDERS OF SECURITIES. The following
information is as of April 30, 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) 33,599 14,673 18,926
Class B units of
beneficial interest
(Government Fund) 2,636 2,232 404
Class C units of
beneficial interest
(Treasury Fund) 2,374 2,332 42
Class D units of
beneficial interest
(Tax Exempt Fund) 2,600 1,929 671
Class H units of
beneficial interest
(Equity Fund) 2,624 2,118 506
Class I units of
beneficial interest
(Fixed Income
Fund) 2,003 1,803 200
Class K units of
beneficial interest
(Ohio Tax Exempt
Fund) 918 797 121
Class M units of
beneficial interest
(Equity Income
Fund) 1,392 1,343 49
Class N units of
beneficial interest
(Mid Cap Regional
Fund) 1,851 1,249 602
</TABLE>
C-12
<PAGE> 314
<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) 242 214 28
Class P units of
beneficial interest
(Total Return
Advantage Fund) 641 627 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) hereto, and Sections 12 and 17, respectively, of the
Custodian Services and Transfer Agency Agreements, incorporated by reference as
Exhibits (8)(a) and (9)(i) 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 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
C-13
<PAGE> 315
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 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.
C-14
<PAGE> 316
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 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
C-15
<PAGE> 317
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 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
C-16
<PAGE> 318
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.
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-17
<PAGE> 319
<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 Chief Executive Company
of 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,
National City
Bank of Kentucky
Officer and Tractor Sales
Director, Hudson
Tractor Sales,
Inc.
Director,
Student Loan
Marketing
Association
Robert J. Farling Director Chairman, President Electric Utility
and Chief Executive
Officer, Centerior
Energy Corporation
</TABLE>
C-18
<PAGE> 320
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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
Chairman and of 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
Executive National City company
Officer and Corporation
Director
William P. Madar Director President and Manufacturer
Chief Executive of machinery
Officer, Nordson
Corporation
H. Gene Nau Director President and Chief Travel Agency
Executive Offer,
Premier Travel
Partners
William F. Patient Director Chairman, PVC
President and Chief manufacturer
Executive Officer,
The Geon Company
William R. Robertson Director, President Bank holding
Chairman of National City company
Trust Committee, Corporation
Member of
Executive
Committee
</TABLE>
C-19
<PAGE> 321
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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
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>
C-20
<PAGE> 322
(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.
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.
NATIONAL CITY BANK OF COLUMBUS
<TABLE>
<CAPTION>
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, Dayton
Director, Bank
National City
Bank, Northwest
Director, National Bank
City Bank, Indiana
</TABLE>
C-21
<PAGE> 323
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Director, National Bank
City Bank, Cleveland
Director, National Bank
City Bank, 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
Chief Executive General
Officer, Elford, Contractor
Inc.
James H. Gilmour Director Chairman, Credit
National City Card Card
Services company
Gary A. Glaser Director, Executive Vice Bank
President President, holding
and Chief National City Company
Executive Officer Corporation
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.
</TABLE>
C-22
<PAGE> 324
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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 Vice President, None -
Human Resources
Division
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,
C-23
<PAGE> 325
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.
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 and None
Vice Chairman
Morton Boyd Director, Executive Vice Bank holding
Chairman President, company
and Chief National City
Executive Corporation
Officer
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
</TABLE>
C-24
<PAGE> 326
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky 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, Bank
National City
Bank of Indiana
Director, Bank
National City
Bank, Cleveland
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 Secretary to State Government
Executive
Cabinet,
Governor's Office
Leonard V. Hardin Director and None
President
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
</TABLE>
C-25
<PAGE> 327
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Carl F. Pollard Director Hermitage Farm Commercial
Thoroughbred
Breeding
Farm
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
Brown-Forman Products
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
Harvey E. Hensley President, None
Southeast Area
</TABLE>
C-26
<PAGE> 328
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- ---------
<S> <C> <C>
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.
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
</TABLE>
C-27
<PAGE> 329
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------- ------------ ---------
<S> <C> <C> <C>
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
Director, Bank
National City
Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director, National Bank
City Bank
Director, National Bank
City Bank of Kentucky
</TABLE>
C-28
<PAGE> 330
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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, President, Non-Utility
IEI Investments Inc Holding Co.
Director, IGC Energy Non-Utility
Inc. Investments
Director and President, Utility
Richmond Gas Corp.
Director, Terre Utility
Haute Gas Corp.
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.
</TABLE>
C-29
<PAGE> 331
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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.
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
</TABLE>
C-30
<PAGE> 332
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Museum of Art
Director, Indiana
Repertory Theater
John A. Hillenbrand Vice-Chairman of Manufacturing
II Director 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-31
<PAGE> 333
<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
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
</TABLE>
C-32
<PAGE> 334
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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 Comerce
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
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
</TABLE>
C-33
<PAGE> 335
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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
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.
C-34
<PAGE> 336
<TABLE>
<CAPTION>
NATIONAL ASSET MANAGEMENT
-------------------------
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- -------------- ----------- --------
<S> <C> <C> <C>
James R. Bell, III Director
Morton Boyd Director Chairman and Chief Bank
Executive Officer,
National City Bank of
Kentucky
Executive Vice President Bank
National City Holding
Corporation Company
William F. Director, None
Chandler, Jr. Managing Director
and Principal
Leonard V. Hardin Director
William R. Robertson Director
Harold B. Todd, Jr. Director
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
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
C-35
<PAGE> 337
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.
<TABLE>
<CAPTION>
WEISS, PECK & GREER, LLC
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 Director, Life Sciences
Biocircuits
Corporation
Gill Cogan Principal Director, Technology
Harmonic
Lightwaves;
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
</TABLE>
C-36
<PAGE> 338
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ------------- -------------- --------
<S> <C> <C> <C>
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;
Chayron Toys
Corporation;
Director,
Empire of
Carolina
James W. Kiley Principal None
A. Roy Knursen Principal None
Alan D. Kohn Principal None
Wesley W. Lang, Jr.* Principal Director, Technology;
Chayron 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
</TABLE>
C-37
<PAGE> 339
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ------------- -------------- --------
<S> <C> <C>
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
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
4400 Computer Drive, Westborough, Massachusetts 01581.
(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
C-38
<PAGE> 340
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 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., 4400 Computer Drive,
Westborough, Massachusetts 01581 (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, Westborough, Massachusetts 02109 (records relating to
its functions as transfer agent).
(8) First Data Investor Services Group (formerly The
Shareholder Services Group, Inc. d/b/a 440 Financial)
C-39
<PAGE> 341
4400 Computer Drive, Westborough, 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-40
<PAGE> 342
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant 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 10th day of July, 1996.
ARMADA FUNDS
Registrant
/s/ Leigh Carter
------------------
President
Leigh Carter
Pursuant to the requirements of the Securities Act of 1933, this Amendment 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 July 10, 1996
- ------------------
Richard B. Tullis
*Thomas R. Benua, Jr. Trustee July 10, 1996
- ------------------
Thomas R. Benua, Jr.
/s/ Leigh Carter Trustee, President and July 10, 1996
- ------------------ Treasurer (Principal
Leigh Carter Executive, Financial and
Accounting Officer)
*John F. Durkott Trustee July 10, 1996
- ------------------
John F. Durkott
*Richard W. Furst Trustee July 10, 1996
- ------------------
Richard W. Furst
* Robert D. Neary Trustee July 10, 1996
- ------------------
Robert D. Neary
*J. William Pullen Trustee July 10, 1996
- ------------------
J. William Pullen
*By:/s/ Leigh Carter
------------------
Leigh Carter
Attorney-in-Fact
</TABLE>
C-41
<PAGE> 343
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> 344
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> 345
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> 346
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> 347
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> 348
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> 349
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Description Page No.
- ----------- ----------- --------
(11)(a) Consent of Drinker Biddle & Reath.
(11)(b) Consent of Coopers & Lybrand L.L.P.
(27)(a) Financial Data Schedule as of
April 30, 1996 for the
Pennsylvania Municipal Fund.
(b) Financial Data Schedule as of
April 30, 1996 for the
Pennsylvania Tax Exempt Fund.
(c) Financial Data Schedule as of
April 30, 1996 for the
Intermediate Government Fund.
(d) Financial Data Schedule as of
April 30, 1996 for the
GNMA 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 Statement of Additional
Information that is included in Post-Effective Amendment No. 29 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
July 10, 1996
<PAGE> 1
EXHIBIT 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective
Amendment No. 29 to the Registration Statement on Form N-1A (File No. 33-488)
under the Securities Act of 1933 of Armada Funds of our report dated June 14,
1996 relating to the financial statements and financial highlights of Inventor
Funds, Inc. which is incorporated by reference in the Statements of Additional
Information, and to the incorporation by reference of our report into the
Prospectuses which also constitutes parts of the Registration Statement. We
also consent to the reference to our Firm under the caption "Financial
Highlights" in the Prospectuses and "Financial Statements" in the Statements of
Additional Information.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 10, 1996
<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
<INVESTMENTS-AT-COST> 38160
<INVESTMENTS-AT-VALUE> 38543
<RECEIVABLES> 434
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38977
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 168
<TOTAL-LIABILITIES> 168
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38352
<SHARES-COMMON-STOCK> 3836
<SHARES-COMMON-PRIOR> 3451
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 74
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 383
<NET-ASSETS> 38809
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1894
<OTHER-INCOME> 0
<EXPENSES-NET> (321)
<NET-INVESTMENT-INCOME> 1573
<REALIZED-GAINS-CURRENT> 74
<APPREC-INCREASE-CURRENT> 179
<NET-CHANGE-FROM-OPS> 1826
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1573
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 647
<NUMBER-OF-SHARES-REDEEMED> 262
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4174
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 265
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 470
<AVERAGE-NET-ASSETS> 37780
<PER-SHARE-NAV-BEGIN> 10.04
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> .08
<PER-SHARE-DIVIDEND> .43
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</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-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 71438
<INVESTMENTS-AT-VALUE> 71438
<RECEIVABLES> 674
<ASSETS-OTHER> 34
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72146
<PAYABLE-FOR-SECURITIES> 1500
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224
<TOTAL-LIABILITIES> 1724
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 70422
<SHARES-COMMON-STOCK> 70422
<SHARES-COMMON-PRIOR> 56668
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 70422
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2651
<OTHER-INCOME> 0
<EXPENSES-NET> (380)
<NET-INVESTMENT-INCOME> 2271
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2271
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2271
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 148939
<NUMBER-OF-SHARES-REDEEMED> 135236
<SHARES-REINVESTED> 51
<NET-CHANGE-IN-ASSETS> 13754
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 311
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 663
<AVERAGE-NET-ASSETS> 69089
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .00
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<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
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 94262
<INVESTMENTS-AT-VALUE> 93402
<RECEIVABLES> 1075
<ASSETS-OTHER> 15
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94492
<PAYABLE-FOR-SECURITIES> 4061
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 530
<TOTAL-LIABILITIES> 4591
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 90009
<SHARES-COMMON-STOCK> 8952
<SHARES-COMMON-PRIOR> 5319
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 752
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (860)
<NET-ASSETS> 89901
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6072
<OTHER-INCOME> 0
<EXPENSES-NET> (732)
<NET-INVESTMENT-INCOME> 5340
<REALIZED-GAINS-CURRENT> 1517
<APPREC-INCREASE-CURRENT> (1492)
<NET-CHANGE-FROM-OPS> 5365
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5340
<DISTRIBUTIONS-OF-GAINS> 403
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4610
<NUMBER-OF-SHARES-REDEEMED> 983
<SHARES-REINVESTED> 6
<NET-CHANGE-IN-ASSETS> 36585
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (362)
<GROSS-ADVISORY-FEES> 603
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1077
<AVERAGE-NET-ASSETS> 85106
<PER-SHARE-NAV-BEGIN> 10.02
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .07
<PER-SHARE-DIVIDEND> .64
<PER-SHARE-DISTRIBUTIONS> .05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.04
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> INVENTOR FUNDS
<SERIES>
<NUMBER> 061
<NAME> GNMA SECURITIES 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
<INVESTMENTS-AT-COST> 62709
<INVESTMENTS-AT-VALUE> 62105
<RECEIVABLES> 391
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62514
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 353
<TOTAL-LIABILITIES> 353
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62127
<SHARES-COMMON-STOCK> 6143
<SHARES-COMMON-PRIOR> 4154
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 638
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (604)
<NET-ASSETS> 62161
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3937
<OTHER-INCOME> 0
<EXPENSES-NET> (468)
<NET-INVESTMENT-INCOME> 3469
<REALIZED-GAINS-CURRENT> 1611
<APPREC-INCREASE-CURRENT> (1242)
<NET-CHANGE-FROM-OPS> 3838
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3469
<DISTRIBUTIONS-OF-GAINS> 1053
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2341
<NUMBER-OF-SHARES-REDEEMED> 360
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> 19949
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 80
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 385
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 713
<AVERAGE-NET-ASSETS> 54852
<PER-SHARE-NAV-BEGIN> 10.16
<PER-SHARE-NII> .66
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> .66
<PER-SHARE-DISTRIBUTIONS> .18
<RETURNS-OF-CAPITAL> .00
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
